This audit report contains the Annual Financial Statement of the Federal Prison Industries, Inc. (FPI) for the fiscal years (FYs) ended September 30, 2003 and September 30, 2002. Under the direction of the Office of the Inspector General (OIG), PricewaterhouseCoopers LLP (PWC) performed the audit, which resulted in an unqualified opinion on the FY 2003 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 FPI FY 2002 financial statements also received an unqualified opinion (OIG Audit Report 03-30).

The FPI internal controls over financial reporting improved considerably in FY 2003. Specifically, FPI management implemented corrective actions that addressed a prior year reportable condition related to improvements needed in their accounting policies to ensure financial statements were prepared in accordance with generally accepted accounting principles. Additionally, FPI management corrected the information security control vulnerabilities that were included in the prior year material weakness on their information security program. However, application control weaknesses were identified in the FPI financial accounting system during the audit and therefore the Report on Internal Controls comprises one related reportable condition. There were no issues reported in the Report on Compliance with Laws and Regulations.

The OIG reviewed PwC's report and related documentation and made necessary inquiries of its representatives. Our review, as differentiated from an audit in accordance with U.S. generally accepted government auditing standards, was not intended to enable us to express, and we do not express, an opinion on the FPI's financial statements, conclusions about the effectiveness of internal control, or conclusions on compliance with laws and regulations. PwC is responsible for the attached auditor's report dated November 11, 2003 and the conclusions expressed in the report. However, our review disclosed no instances where PwC did not comply, in all material respects, with generally accepted government auditing standards.