Federal Prison Industries, Inc.
Annual Financial Statement
Fiscal Year 2000

Report No. 01-27
September 2001
Office of the Inspector General

The Federal Prison Industries, Inc. (FPI) is a wholly-owned government corporation established by Congress on June 23, 1934, to provide job skills training and employment for inmates serving sentences in the Federal Bureau of Prisons' institutions. The FPI is required to contribute to the safety and security of the nation's correctional facilities by keeping inmates constructively occupied and producing market-priced quality goods for sale to the federal government. The FPI, operating under the trade name UNICOR, is a self-sustaining entity that derives the majority of its revenues from the sale of products and services to other federal agencies. Its operating expenses, such as the costs of raw materials and supplies, inmate wages, staff salaries, and capital expenditures are applied against these revenues, resulting in operating income or loss, which is reapplied toward operating costs for future production.

This audit report contains the Annual Financial Statement of the FPI for the fiscal year (FY) ended September 30, 2000. Under the direction of the Office of the Inspector General, Urbach Kahn & Werlin PC (UKW) performed the audit, which resulted in a qualified opinion on the FPI's financial statements. A qualified opinion means that the financial statements are presented fairly in all material respects, except for matters identified in the audit report. The qualification resulted from inventory costing errors that were identified in two of the four inventory categories. As a result of these errors, UKW was unable to form an opinion regarding the work-in-process and finished sub-assembly categories of the inventory account balance. The FPI received an unqualified opinion on its FY 1999 financial statements (Office of the Inspector General Report Number 00-16).

In May 2000, the FPI implemented a new financial system entitled Millennium/SAP that integrated its procurement, personnel, inventory, and accounting systems. The implementation was extremely complex and time consuming, demanding much of the entity's resources. The FPI financial statement audit was significantly impacted by the lack of system knowledge, system downtime during crucial year-end processing and significant data conversion errors. These weaknesses in the control environment resulted in increased audit testing and untimely financial statement preparation and analysis.

In its Report on Internal Controls, UKW reported new material weaknesses in the controls and processes related to inventories, accounts receivable, cash reconciliation and cash transaction processing, financial statement preparation, and information security program management and controls. UKW also identified one new reportable condition regarding the FPI's lack of controls over accounting and reporting for leases and the procuring of property, plant, and equipment.

In their Report on Compliance with Laws and Regulations, the auditors reported instances of non-compliance with the Prompt Payment Act. Additionally, the auditors reported that the FPI's financial management systems did not meet specific federal financial management system requirements defined by OMB Circular A-130, "Management of Federal Information Resources." These issues are described more fully in the Report on Internal Controls.

The FPI has historically prepared its financial statements using private sector generally accepted accounting principles (GAAP). Since the FPI is a profit-driven manufacturing operation, its financial reporting requirements are different than most government reporting entities. This report includes the standard private sector financial statements: Balance Sheet, Statements of Operations and Cumulative Results of Operations, and Statement of Cash Flows as of and for the years ended September 30, 2000 and 1999. Additionally, for Department of Justice consolidating purposes, the FPI prepared and submitted financial statements, footnotes and required supplementary information (RSI) in the format specified by the Office of Management and Budget Bulletin (OMB) 97-01, "Form and Content of Agency Financial Statements," as amended. These financial statements were not audited but were cross-walked from the audited trial balance and private sector GAAP financial statements. With the exception of the Statement of Budgetary Resources, which was not applicable to the FPI, the OMB 97-01 financial statements and RSI are shown in the "Other Accompanying Information" section of this report.