However, for the two programs we reviewed, SBA initially made errors in the reestimates of its loan program’s costs, which its independent public accountant uncovered, including using incorrect discount rates, which required large adjustments to the draft financial statements. Education’s Financial Statement Estimates Were Reasonable, However Budget Estimates Were Questionable

The Department of Education was able to prepare reasonable credit program estimates for its fiscal year 1997 financial statements, based on information obtained through a significant data gathering effort from its guaranty agencies. However, the audited estimates differed materially from the credit subsidy estimates based on Education’s own database, which raises questions about the validity of Education’s database. Specifically, the IG recommended that Education (1) maintain documentation of the source of the data used in developing assumptions for its cash flow models and the models themselves, (2) validate the data used in the models, (3) update data annually to reflect the current activity, (4) perform and document sensitivity analyses to identify factors that significantly impact the loan estimates or may vary in the future as well as factors that rely on assumptions not based on current data, (5) establish clearly defined roles and responsibilities for staff and groups responsible for developing estimates of Education’s loan programs, (6) develop formalized policies and procedures for estimating the cost of credit programs, and (7) perform quality assurance reviews of loan estimates and document the results of these reviews. Additionally, HUD was unable to provide supporting data for many of the cash flow assumptions in the models. Because HUD received a qualified opinion on its fiscal year 1997 financial statements, it was required by OMB to prepare an action plan to address identified financial management issues related to the loan program cost estimation process. These problems contributed to the qualified audit opinion on VA’s fiscal year 1997 financial statements. Until these basic accounting deficiencies are resolved, VA will continue to have difficulty making reasonable estimates of its loan program costs. USDA Lacks Adequate Systems and Historical Data to Reasonably Estimate the Cost of Its Credit Programs

For fiscal year 1997, USDA was unable to make reasonable cost estimates for its loan programs because it did not maintain the historical data needed to predict future loan performance and used computer systems that were not appropriately configured to capture the data necessary to make such estimates. Addressing the Year 2000 problem is a major challenge for the five key credit agencies, all of which rely on computers to process and update records. According to the agencies, these mission-critical systems that support the loan cost estimation process are either currently Year 2000 compliant or are scheduled to meet the OMB goal to be compliant by March 31, 1999. Objectives, Scope, and Methodology

Our objectives were to assess (1) the ability of agencies’ to reasonably estimate the cost of their loan programs, including whether they used practices identified by the Credit Reform Task Force as being effective in making these estimates and (2) the status of agencies’ efforts to ensure that computer systems used to estimate the cost of credit programs are Year 2000 compliant. Comments From the Department of Housing and Urban Development

Comments From the Department of Veterans Affairs

The following are GAO’s comments on the Department of Veterans Affairs’ January 15, 1999, letter.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO provided information on the Small Business Administration's (SBA), the Department of Education's, the Department of Housing and Urban Development's (HUD), the Department of Veterans Affairs' (VA), and the Department of Agriculture's (USDA) abilities to reasonably estimate the cost of their loan programs, focusing on: (1) whether they used practices identified by the Credit Reform Task Force as being effective in making these estimates; and (2) the status of the agencies' efforts to ensure that computer systems used to estimate the cost of credit programs are year 2000 compliant.

What GAO Found

GAO noted that: (1) the problems agencies faced in making credit subsidy estimates as required by Federal Credit Reform Act and federal accounting standards stemmed largely from their lack of: (a) reliable historical data upon which to base estimates of future loan performance; (b) adequate systems that have the capability to track the required information; (c) sound cash flow models; and (d) appropriate policies and procedures for ensuring the accuracy of data used to generate the estimates; (2) SBA was one of the two agencies able to make reasonable estimates of the cost of its loan programs in its fiscal year (FY) 1997 financial statements, primarily because the agency maintained reliable records of historical loan performance data; (3) however, SBA made significant errors in calculating its reestimates of loan program costs; (4) these errors were adjusted for in SBA's draft financial statements, thereby allowing for an unqualified audit opinion on those statements; (5) Education was able to prepare reasonable credit program estimates for its FY 1997 financial statements based on information obtained through a significant data gathering effort from its guaranty agencies; (6) however, the audited estimates differed significantly from the estimates based on data from Education's database, which raises questions about the validity of Education's database; (7) HUD was unable to provide adequate supporting data for its FY 1997 financial statement estimates of its loan program costs, which resulted in a qualified audit opinion from HUD's Inspector General on those financial statements; (8) HUD has developed an action plan to address identified financial management issues related to the loan cost estimation process; (9) VA faced significant problems performing routine accounting for its loan programs including loss of accountability over certain loans transferred to an outside servicer; (10) USDA was unable to make reasonable financial statement estimates of its loan programs' costs because it had not maintained the necessary historical data and continued to use computer systems that were not appropriately configured to capture the data necessary to make such estimates; (11) the five key credit agencies also face the challenge of addressing the year 2000 problem related to systems used in the loan cost estimation process; and (12) according to agency officials, for the 10 loan programs reviewed, all of the mission critical systems are either year 2000 compliant or are scheduled to be compliant by March 31, 1999.