Federal Prison System Annual Financial Statement
Fiscal Year 1997

Report No. 98-18
May 1998
Office of the Inspector General

The Federal Prison System (FPS) is comprised of the appropriated activities of the Bureau of Prisons (BOP), the Federal Prison Industries, Inc. (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. Presently, the FPS confines approximately 112,000 offenders in 91 Federal facilities and contract facilities throughout the United States. The FPS' FY 1997 budget was approximately $3.1 billion for its appropriated activities. In addition, $162 million and $534 million in funds were generated by the Commissary and FPI revolving fund activities, respectively.

This audit report contains the Annual Financial Statements of the FPS for the fiscal years ended September 30, 1997 and 1996. The audit was performed by Cotton & Company, Certified Public Accountants, LLP and for FY 1997, resulted in a qualified opinion on the combined statement of financial position and the related combined statement of operations and changes in net position. The qualifications were a result of the following:

• BOP was unable to provide evidence to support approximately $180 million of historical cost valuation for real property recorded in the general ledger prior to September 30, 1989.

• BOP had not yet capitalized an estimated $100 million in real property.

• Adjustments for errors, corrections, and accounting changes BOP made to resolve deficiencies identified during the FY 1996 audit did not always conform with the requirements of Office of Management and Budget Bulletin No. 94-01, Form and Content of Agency Financial Statements, and generally accepted accounting principles. Consequently, material misstatements exist in the line items for depreciation, adjustments, and non-operating changes on the financial statement and the related footnote disclosures.

In FY 1996, the FPS received a disclaimer of opinion on the combined statement of financial position (Office of the Inspector General Report No. 97-25A). The auditors were not contracted to audit the combined statement of operations and changes in net position. The number of conditions reported were reduced from five in FY 1996 to two in FY 1997. The auditors considered four of the five conditions reported in FY 1996 to be material weaknesses, while in FY 1997 none were considered material weaknesses. BOP addressed prior weaknesses pertaining to undelivered orders, depreciation, construction work in process and completed construction projects. Issues related to real property continued to exist; however, according to the auditors, BOP has made substantial progress towards correcting its real property issues.