management problems. This act should address many of BIA's trust fund problems, some of which have existed over 100 years. Over the next 2 years, we will continue to monitor the progress of BIA, as well as, the financial condition of TVA and DC, and NASA's system development efforts. Defense Audits During fiscal year 1995, in response to our audit recommendations, DOD continued to implement corrective actions to address accounting and internal control deficiencies. As a result of our work on the Army's military payroll system, during the year the Army recovered $3.7 million of the estimated $7 million we identified in payments made to "ghost" soldiers and deserters. The fiscal year 1995 recoupments bring the total collected to $5.4 million since we first reported this issue in 1993. The Navy, continuing to act upon our report addressing its unmatched disbursements problem, resolved $ 7.6 billion of such disbursements during the first 8 months of fiscal year 1995, according to the latest data available. While unmatched disbursements continue to occur and remain a serious problem throughout DOD, it has committed itself to resolving the underlying deficiencies which permit them to occur. Also, the Navy and DFAS improved accountability and financial reporting by correcting billions of dollars of erroneous data in the Navy's financial records and reports. For example, various naval activities corrected $22 million of errors in their asset accountability records, significantly improving visibility and control over the assets. DFAS corrected a $163 billion error in plant property values presented in the Navy's fiscal year 1993 annual financial reports. During fiscal year 1995, the Army continued to implement improvements to the automated interfaces between its military personnel and payroll systems as a result of deficiencies we first noted in our fiscal year 1992 audit. Further, the Army and DFAS continued system improvements to enhance the efficiency of debt collection efforts. Finally, the Army has significantly improved its procedures and controls used to prepare annual financial statements. Overall, with respect to the objectives of the CFO Act, we continued to achieve significant progress in three major areas during fiscal year 1995. First, DOD devised a comprehensive plan to deal with its extensive and severe financial management problems and obstacles that weaken its financial management operations and prevent preparation auditable financial statements. Such ineffective financial management operations caused us to add DOD financial management to the areas that present especially high-risk to waste, fraud, abuse and mismanagement. Second, in part due to our encouragement and assistance the DOD audit community completed a number of financial audits of departmental entities, including the Departments of the Army and Air Force, the Defense Business Operations Funds, and other sundry funds and activities. While none of the major DOD entities have yet received a favorable audit opinion, the audits continue to identify significant problems requiring resolution and help to focus DOD management's attention on needed corrective actions. Third, we substantially completed our first-ever audit of the Navy's financial operations and shortly after the end of the fiscal year submitted a comprehensive draft report to DOD for comment. That report clearly conveys the need for the Navy and DOD's immediate attention in preparing reliable financial information for managerial control and reporting purposes. Consistent with GAO's high-risk focus, the division's work over the next few years will continue focusing on (1) improvements needed in DOD's financial management operations and systems, (2) opportunities to strengthen control and accountability over both financial and nonfinancial resources, (3) needed enhancements to the DOD Chief Financial Officer organization's financial practices and capabilities of personnel, and (4) overseeing and strengthening the DOD audit community's capabilities to perform financial audits of the DOD's major entities' financial statements (i. e., the military services, DBOF, primary revolving funds). Corporate Audits Government corporations provide trillions of dollars in guarantees and insurance in support of the nation's major financial industries, including banks, savings and loan institutions, credit unions, and pension plans. The financial difficulties experienced by the banking and thrift industries in the last decade demonstrated how rapidly federal deposit insurance funds can be depleted. The condition of the Bank Insurance Fund (BIF) has greatly improved to the point where BIF has met its statutory designated reserve ratio. However, the Savings Association Insurance Fund (SAIF) continues to be significantly undercapitalized, and the thrift industry is facing a competitive disadvantage due to a premium disparity between banks and thrifts. Also, the Resolution Trust Corporation (RTC) is nearing completion of its responsibilities for resolving troubled thrifts, but needs to ensure a smooth transition of those responsibilities to the Federal Deposit Insurance Corporation (FDIC). The Pension Benefit Guaranty Corporation's (PBGC) large unfunded deficit and significant exposure from underfunded pension plans still threaten the insurance program's long-term viability. However, PBGC anticipates that legislation passed in December 1994 to strengthen minimum funding standards will significantly reduce underfunding in the plans that PBGC insures and improve its financial condition. Accounting standards continue to be largely based on historical cost and raise serious questions about their utility in an economy of rapid changes affecting market values. Accounting standards also continue to lag behind business practices in significant areas such as the use of derivatives. To act promptly and minimize the taxpayers' exposure and costs, the Congress and regulators need reliable and informative financial reporting that provides early warning of emerging problems. Therefore, we continue to focus our work on ensuring that corporate entities accurately report their financial condition and performance and that they maintain internal control structures that provide accountability and safeguard assets. We also continue to focus on evaluating whether generally accepted accounting principles and auditing standards provide an adequate basis for fairly and consistently reporting financial condition and operating performance. We have continued to independently assess the reliability of the financial statements of FDIC's three funds-BIF, SAIF, and the Federal Savings and Loan Insurance Corporation Resolution Fund (FRF )--and the financial statements of PBGC, RTC, and the Panama Canal Commission. We have also continued to independently assess these corporations' control structures and worked closely with them to improve their internal control systems and operations. For fiscal year 1994, we issued unqualified opinions on each corporation's financial statements. However, our audits continue to disclose internal control weaknesses of varying significance that if not corrected could affect the reliability of future financial reports and adversely affect corporate operations. In general, the corporations have acted quickly to address the weaknesses we identified although some weaknesses involve systems deficiencies that require longer-term solutions. The progress the BIF, RTC, and PBGC have made in improving internal controls--along with the passage of legislation aimed at protecting the insurance funds, providing funding to RTC to complete its mission, and reducing pension plan underfunding and help PBGC eliminate its deficit--has resulted in these entities' removal from GAO's list of high-risk entities. Our work concerning the conduct of independent audits of the Federal Reserve Banks has led the Board of Governors of the Federal Reserve System to contract for annual external independent audits of the combined financial statements of the 12 Federal Reserve Panks and individual bank audits to be completed over the next 5 years. Our study of the likelihood and probable impact of a significant disparity in premium rates between banks and thrifts has provided policy alternatives for the Congress to consider to prevent cost differences that could threaten the viability of thrifts, especially those that do not meet minimum capital standards. Our reporting and detailed analysis facilitated timely congressional and administration acknowledgement of the seriousness of the problem and focused the policymakers on addressing solutions. Legislation is included in the current Budget Reconciliation Bill to address this issue. management problems. This act should address many of BIA's trust fund problems, some of which have existed over 100 years. Over the next 2 years, we will continue to monitor the progress of BIA, as well as, the financial condition of TVA and DC, and NASA's system development efforts. Defense Audits During fiscal year 1995, in response to our audit recommendations, DOD continued to implement corrective actions to address accounting and internal control deficiencies. As a result of our work on the Army's military payroll system, during the year the Army recovered $3.7 million of the estimated $7 million we identified in payments made to "ghost" soldiers and deserters. The fiscal year 1995 recoupments bring the total collected to $5.4 million since we first reported this issue in 1993. The Navy, continuing to act upon our report addressing its unmatched disbursements problem, resolved $ 7.6 billion of such disbursements during the first 8 months of fiscal year 1995, according to the latest data available. While unmatched disbursements continue to occur and remain a serious problem throughout DOD, it has committed itself to resolving the underlying deficiencies which permit them to occur. Also, the Navy and DFAS improved accountability and financial reporting by correcting billions of dollars of erroneous data in the Navy's financial records and reports. For example, various naval activities corrected $22 million of errors in their asset accountability records, significantly improving visibility and control over the assets. DFAS corrected a $163 billion error in plant property values presented in the Navy's fiscal year 1993 annual financial reports. During fiscal year 1995, the Army continued to implement improvements to the automated interfaces between its military personnel and payroll systems as a result of deficiencies we first noted in our fiscal year 1992 audit. Further, the Army and DFAS continued system improvements to enhance the efficiency of debt collection efforts. Finally, the Army has significantly improved its procedures and controls used to prepare annual financial statements. Overall, with respect to the objectives of the CFO Act, we continued to achieve significant progress in three major areas during fiscal year 1995. First, DOD devised a comprehensive plan to deal with its extensive and severe financial management problems and obstacles that weaken its financial management operations and prevent preparation auditable financial statements. Such ineffective financial management operations caused us to add DOD financial management to the areas that present especially high-risk to waste, fraud, abuse and mismanagement. Second, in part due to our encouragement and assistance the DOD audit community completed a number of financial audits of departmental entities, including the Departments of the Army and Air Force, the Defense Business Operations Funds, and other sundry funds and activities. While none of the major DOD entities have yet received a favorable audit opinion, the audits continue to identify significant problems requiring resolution and help to focus DOD management's attention on needed corrective actions. Third, we substantially completed our first-ever audit of the Navy's financial operations and shortly after the end of the fiscal year submitted a comprehensive draft report to DOD for comment. That report clearly conveys the need for the Navy and DOD's immediate attention in preparing reliable financial information for managerial control and reporting purposes. Consistent with GAO's high-risk focus, the division's work over the next few years will continue focusing on (1) improvements needed in DOD's financial management operations and systems, (2) opportunities to strengthen control and accountability over both financial and nonfinancial resources, (3) needed enhancements to the DOD Chief Financial Officer organization's financial practices and capabilities of personnel, and (4) overseeing and strengthening the DOD audit community's capabilities to perform financial audits of the DOD's major entities' financial statements (i. e., the military services, DBOF, primary revolving funds). Corporate Audits Government corporations provide trillions of dollars in guarantees and insurance in support of the nation's major financial industries, including banks, savings and loan institutions, credit unions, and pension plans. The financial difficulties experienced by the banking and thrift industries in the last decade demonstrated how rapidly federal deposit insurance funds can be depleted. The condition of the Bank Insurance Fund (BIF) has greatly improved to the point where BIF has met its statutory designated reserve ratio. However, the Savings Association Insurance Fund (SAIF) continues to be significantly undercapitalized, and the thrift industry is facing a competitive disadvantage due to a premium disparity between banks and thrifts. Also, the Resolution Trust Corporation (RTC) is nearing completion of its responsibilities for resolving troubled thrifts, but needs to ensure a smooth transition of those responsibilities to the Federal Deposit Insurance Corporation (FDIC). The Pension Benefit Guaranty Corporation's (PBGC) large unfunded deficit and significant exposure from underfunded pension plans still threaten the insurance program's long-term viability. However, PBGC anticipates that legislation passed in December 1994 to strengthen minimum funding standards will significantly reduce underfunding in the plans that PBGC insures and improve its financial condition. Accounting standards continue to be largely based on historical cost and raise serious questions about their utility in an economy of rapid changes affecting market values. Accounting standards also continue to lag behind business practices in significant areas such as the use of derivatives. To act promptly and minimize the taxpayers' exposure and costs, the Congress and regulators need reliable and informative financial reporting that provides early warning of emerging problems. Therefore, we continue to focus our work on ensuring that corporate entities accurately report their financial condition and performance and that they maintain internal control structures that provide accountability and safeguard assets. We also continue to focus on evaluating whether generally accepted accounting principles and auditing standards provide an adequate basis for fairly and consistently reporting financial condition and operating performance. We have continued to independently assess the reliability of the financial statements of FDIC's three funds-BIF, SAIF, and the Federal Savings and Loan Insurance Corporation Resolution Fund (FRF)--and the financial statements of PBGC, RTC, and the Panama Canal Commission. We have also continued to independently assess these corporations' control structures and worked closely with them to improve their internal control systems and operations. For fiscal year 1994, we issued unqualified opinions on each corporation's financial statements. However, our audits continue to disclose internal control weaknesses of varying significance that if not corrected could affect the reliability of future financial reports and adversely affect corporate operations. In general, the corporations have acted quickly to address the weaknesses we identified although some weaknesses involve systems deficiencies that require longer-term solutions. The progress the BIF, RTC, and PBGC have made in improving internal controls--along with the passage of legislation aimed at protecting the insurance funds, providing funding to RTC to complete its mission, and reducing pension plan underfunding and help PBGC eliminate its deficit--has resulted in these entities' removal from GAO's list of high-risk entities. Our work concerning the conduct of independent audits of the Federal Reserve Banks has led the Board of Governors of the Federal Reserve System to contract for annual external independent audits of the combined financial statements of the 12 Federal Reserve Panks and individual bank audits to be completed over the next 5 years. Our study of the likelihood and probable impact of a significant disparity in premium rates between banks and thrifts has provided policy alternatives for the Congress to consider to prevent cost differences that could threaten the viability of thrifts, especially those that do not meet minimum capital standards. Our reporting and detailed analysis facilitated timely congressional and administration acknowledgement of the seriousness of the problem and focused the policymakers on addressing solutions. Legislation is included in the current Budget Reconciliation Bill to address this issue. We are working closely with RTC and FDIC to ensure a smooth transition of RTC operations into FDIC, including the need for any contingent funding for uncertain economic and noneconomic factors that could affect RTC's recoveries from failed thrift assets. We are also working with officials of the Panama Canal Commission and the administration on proposed legislation which would allow the Commission the operational flexibility to aid in insuring a smooth transition of the canal to the Republic of Panama in 1999. This legislation would allow the Commission to operate as a government corporation and to directly contract for independent audits. Our work in reviewing examination policies, procedures, and practices for banks and thrifts resulted in financial institution regulators taking various actions to improve loan sampling methodologies, develop internal control review procedures and guidance, and develop examiners' workingpaper and supervisory review requirements. These actions should enhance examination effectiveness and oversight of banks and thrifts. Our efforts to improve accounting standards focused on issues related to accounting and disclosures for financial derivatives. We also focused on the importance of sound internal controls and risk management policies and procedures for derivatives' activities. With regard to derivative accounting and disclosure issues, the Financial Accounting Standards Board recently issued an accounting standard on disclosure requirements for derivatives. However, the new standard does not establish specific requirements for reporting of quantitative measures of risk and exposure as a result of derivatives activities. FASB plans to reconsider disclosure requirements for derivatives when it completes development of derivative accounting requirements. FASB has not set a definite time for establishing the accounting requirements, but is planning to have a draft proposal for public comment by mid-1996. Also, in connection with our work on derivatives, we reported that (1) strong internal control systems, (2) independent, knowledgeable audit committees, and (3) public reporting on internal controls were critical to firms engaged in complex derivatives activities and should play an important role in ensuring sound financial operations and protecting shareholder interests in these firms. In response to our recommendations, regulators, standard setters, and the financial services industry have issued guidance to aid management in assessing the effectiveness of its risk management policies and procedures for derivatives activities. However, much of this guidance is voluntary, and we are concerned that the widespread growth in the use of derivatives may continue before generally accepted risk management practices are adopted. Accounting Standards and Liaison Activities In the accounting standards area, GAO continues to assist federal agencies in three distinct ways as a result of statutorily mandated responsibilities. First, GAO assists agencies on internal control matters arising from their efforts to streamline operations. In fiscal year 1995, we issued 10 correspondence reports that addressed specific agencies' requests to substantially modify time and attendance processes and systems and travel payment processes and systems. Our assistance was instrumental in ensuring that the government's interest is protected while agencies achieve greater efficiency from their operating processes and systems. Also, GAO provides guidance and interpretation of government accounting standards to CFOs, IGs, and agency financial managers. Major accomplishments this year were the publication of a checklist for preparing or reviewing agency financial statements and the proposed revision to Title 6, "Pay, Leave, and Allowances," of the GAO Policy and Procedures Manual for Guidance of Federal Agencies. In addition, GAO assists and advises the Cost Accounting Standards Board as it develops and issues cost standards and requirements. |