Federal Prison Industries, Inc.
Annual Financial Statement
Fiscal Year 2001

Report No. 02-34
September 2002
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 (AFS) of the FPI for the fiscal years (FYs) ended September 30, 2001 and September 30, 2000. Under the oversight of the Office of the Inspector General, Urbach Kahn & Werlin PC (UKW) performed the audit, which resulted in an unqualified opinion on the FY 2001 and FY 2000 financial statements. An unqualified opinion means the financial statements present fairly, in all material respects, the financial position and results of the operating activity of the entity.

The auditors originally issued a qualified opinion on the FPI's FY 2000 financial statements (OIG Report No. 01-27). As a result of costing errors identified in two of the four inventory categories (finished sub-assemblies and work in process) the FPI was unable to substantiate its FY 2000 inventory balance. During FY 2001, the FPI performed corrective actions to identify the factors that contributed to the costing errors and restated the FY 2000 financial statements. As a result of FPI's efforts, the auditors were able to extend their auditing procedures, verify the FY 2000 restated inventory balances, and therefore express an unqualified opinion on the FY 2000 financial statements.

During FY 2001, the FPI made progress in correcting its internal control weaknesses that were reported in FY 2000. FPI management successfully implemented corrective actions to close a material weakness related to cash reconciliations and reportable conditions related to capital leases and property, plant, and equipment. Additionally, as a result of the FPI's corrective actions, the auditors were able to downgrade material weaknesses on financial statement preparation and information security program management to reportable conditions. However, the auditors continued to report material weaknesses due to new and existing internal control weaknesses over inventory and accounts receivable.

In their Report on Compliance with Laws and Regulations, the auditors reported non-compliance with the Debt Collection Act and Federal Financial Management Improvement Act (FFMIA) of 1996. The auditors concluded that the FPI's financial management systems did not substantially comply with federal financial management systems requirements and applicable federal accounting standards as required by the FFMIA.

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 from requirements for 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, 2001 and 2000. Additionally the FPI prepared and submitted government GAAP 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. The OMB 97-01 financial statements and RSI are shown in the "Other Accompanying Information" section of this report.