Federal Prison System
Management Letter Report
Fiscal Year 1996

 

Audit Report 98-12, (3/98)

 

 

TABLE OF CONTENTS

 

OFFICE OF THE INSPECTOR GENERAL COMMENTARY AND SUMMARY

MANAGEMENT LETTER REPORT

BOP MAINTENANCE PROGRAMMERS AND SYSTEMS ANALYSTS HAVE ACCESS TO FINANCIAL DATA AND PROGRAMS

CERTAIN EXPENSES AND REVENUES ARE NOT REPORTED IN THE YEAR THEY OCCUR

EMPLOYEE BENEFITS LIABILITY WAS NOT RECOGNIZED

UNRECONCILED FUND BALANCE WITH TREASURY

PRIOR-YEAR TREASURY PAYMENT MODULE DIFFERENCES ARE UNRECONCILED

ACCOUNTS RECEIVABLE BALANCES ARE UNDERSTATED

NO ALLOWANCE FOR CERTAIN DOUBTFUL ACCOUNTS

ALLOCATIONS TO OTHER FEDERAL AGENCIES ACCOUNT WAS NOT PERIODICALLY RECONCILED

REAL PROPERTY DEPRECIATION POLICY INVOLVES DELAYS BEFORE DEPRECIATION COMMENCES

TRUST FUND INVENTORY VALUATION

APPENDIX - AUDIT DIVISION ANALYSIS AND SUMMARY OF ACTIONS NECESSARY TO CLOSE REPORT

 

 

OFFICE OF THE INSPECTOR GENERAL
COMMENTARY AND SUMMARY


The Federal Prison System (FPS) is comprised of the appropriated activities of the Bureau of Prisons (BOP), Federal Prison Industries (FPI) and the Commissary Trust Fund (Commissary). BOP is charged with overseeing the operations of the prison system. Its mission is to protect society by confining offenders in controlled environments of prisons and community based facilities. FPI operates under the trade name UNICOR and is a wholly-owned, self-sustaining, government corporation manufacturing products for sale to federal agencies while providing employment and training to inmates in the prison system. The Commissary, also self-sustaining, provides inmates with access to products and services not provided by the BOP.

Federal prisons have been in existence since 1891 when Congress enacted legislation authorizing the construction of three federal penitentiaries under the authority of the Justice Department's Superintendent of Prisons and Prisoners. In 1930, the BOP was established through Public Law 218-71 to oversee federal prisons. In 1932, Congress approved the operation of Commissaries within federal prisons. Finally, in 1934 the FPI was formed as a component of the FPS. Presently, the FPS includes approximately 105,000 offenders confined in 86 federal facilities and contract facilities throughout the United States.

In FY 1996, FPS received $2.9 billion for its appropriated activities. The Salaries and Expense appropriation was $2.45 billion. The Building and Facilities appropriation was $357 million and $13.5 million was appropriated for Violent Crime Reduction Program (VCRP) activities. In addition, $152 million and $485 million in funds were generated through Commissary and FPI revolving fund activities, respectively.

The OIG contracted with Cotton & Company, Certified Public Accountants (CPA), to perform the FY 1996 audit of the FPS Combined Statement of Financial Position (Report 97-25A) as part of the Department of Justice's (DOJ) effort to implement the Government Management Reform Act of 1994 (GMRA). GMRA requires an annual financial statement audit of the DOJ beginning with FY 1996. The audit was conducted in accordance with Office of Management and Budget Bulletin No. 93-06, "Audit Requirements for Federal Financial Statements." The OIG performs an oversight role in the audit process and ensures compliance with the GMRA by monitoring the progress of the audit, reviewing supporting workpapers, coordinating the issuance of reports, and following up on findings and management letter issues.

The audit of the FPS FY 1996 combined statement of financial position resulted in a disclaimer of opinion. The independent auditors were unable to substantiate a significant portion of real property because the FPS did not maintain appropriate accounting records and relevant documentation beyond the 6 year federal records retention period. The independent auditors also determined that real property was not capitalized or depreciated properly and that construction work in progress and accounts payable may be overstated. The independent auditors were unable to apply audit procedures sufficiently to determine the extent to which the combined statement of financial position may have been affected by these conditions. As a result, the scope of the independent auditors' work was not sufficient for the auditor to express an opinion.

The auditors prepared the management letter as part of their audit of the FY 1996 FPS financial statement. The auditors were not contracted to perform control testing sufficient to enable them to express an opinion on the internal control structure or compliance with laws and regulations. Accordingly they do not express such opinions. However, they did note certain conditions involving the internal control structure and its operations. The management letter presents those internal control weaknesses that, in the independent auditor's opinion, do not have a material effect on the financial statements, but are areas of the management process that could, in some instances, adversely affect the organization's ability to record, process, summarize, and report financial data.

In this management letter, the auditors noted weaknesses in the following areas: (1) information system security, (2) recording of expenses and revenues, (3) recording of Federal Employees' Compensation Act (FECA) liability, (4) Fund Balance with Treasury reconciliation, (5) Treasury payment module reconciliation, (6) accounts receivable, (7) allowance for doubtful accounts, (8) allocations to Other Federal Agencies reconciliation, (9) depreciation for real property, and (10) Trust Fund Inventory Valuation. Strengthening internal controls in these areas is considered to be important and presents an opportunity to improve operating efficiency.

Management Letter Report

BOP maintenance programmers and systems analysts have access to financial data and programs


Certain expenses and revenues are not reported in the year they occur
Employee benefits liability was not recognized

Unreconciled fund balance with treasuryPrior-year treasury payment module differences are unreconciled
Accounts receivable balances are understatedNo allowance for certain doubtful accountsAllocations to other federal agencies account was not periodically reconciledReal property depreciation policy involves delays before depreciation commencesTrust fund inventory valuation

APPENDIX

 

OFFICE OF THE INSPECTOR GENERAL, AUDIT DIVISION
ANALYSIS AND SUMMARY OF ACTIONS NECESSARY
TO CLOSE THE REPORT

Recommendation Number:

  1. Closed. Based on management's assurance that FMS is being phased out, the recommendation is closed. However, management should ensure that the new system includes adequate controls that prevent programmers and analysts from having access to production data.
  2. Closed. The auditors will test implementation of this recommendation during future audits of the financial statements.
  3. Resolved. This recommendation can be closed when management provides a copy of the new policy requiring institutions to determine which projects meet the criteria for capitalization in the year the B&F projects are initiated, so that revenues and expenses for non-capital projects, will be recognized in the year they occur.
  4. Resolved. This recommendation can be closed when BOP management provides documentation that shows they have included in the financial statements, the full portion of the FECA liability previously paid by DOL.
  5. Resolved. This recommendation can be closed when we receive a copy of the new policy requiring BOP Central Office to reconcile the agency-wide Fund Balance with Treasury each month. Also, please provide a copy of the first reconciliation performed after the new policy is in effect.
  6. Resolved. This recommendation can be closed when we receive a copy of the revised institution TPM proofcheck with the added line for prior-year carryovers.
  7. Resolved. This recommendation can be closed when BOP management communicates the results of their year-end assessment of the completeness and accuracy of accounts receivable.
  8. Resolved. This recommendation can be closed when BOP management provides documentation substantiating that an allowance for uncollectible accounts receivable has been set up on the general ledger and included in the financial statements.
  9. Resolved. This recommendation can be closed when BOP identifies the staff assigned responsibility for reconciling general ledger Account 172.0 to ensure that it properly reflects activities reported to the Department of Treasury. Also, please provide a copy of the new proofcheck.
  10. Closed.
  11. Resolved. This recommendation can be closed when BOP management provides documentation of the analysis performed to adjust Commissary Trust Fund inventories as of September 30, 1997 so that the inventory value reported on the financial statements approximates historical costs.

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