Objectives, Scope, and Methodology

Our objectives were to determine (1) whether the Authority’s financial information was in the same amounts and consistently presented in the fiscal year 1996 and 1997 audited financial statements of the Authority and the District’s CAFR, (2) why the District’s internal control weakness concerning the Authority was not also included in the audit report on the Authority, (3) the Authority’s use of the escrow accounts’ interest income, (4) the Authority’s purpose for the “Taxable Equipment Lease/Purchase Agreement,” and (5) whether suggestions made to the Authority’s management in our prior letter were implemented. As a result of the widely different annual revenue amounts for the Authority ($8.6 million for fiscal year 1997) and the District ($5.2 billion in fiscal year 1997), the Authority’s account balances, which represent less than .2 percent of the District’s revenue, are summarized in the District’s CAFR instead of being reported in detail, as in the Authority’s financial statements. Reported Internal Control Weakness Concerning the Authority

In the District’s auditors’ Reports on Internal Controls and Compliance for fiscal years 1996 and 1997, an internal control weakness was identified concerning controls over financial reporting involving the Authority’s transactions that relate to the District. The District’s auditors recommended that the District and the Authority jointly develop procedures that would result in the Authority providing to the District the kind of monthly financial information needed for the District to perform a comprehensive reconciliation. They further stated that such information should include the monthly balances and the financial activity for each individual escrow account maintained by the Authority on behalf of the District. The Authority’s auditors stated, and we agree, that this material weakness did not affect the Authority’s internal controls related to preparation of its financial statements. In fiscal years 1997 and 1996, the escrow accounts earned interest of $9.8 million and $5.5 million, respectively. Authority officials stated that the purpose of the agreement was to obtain needed financing by recovering the net cost of assets acquired with fiscal year 1997 and 1996 funds and spreading the cost over a 3-year period and to free-up budget capacity (budget authority). Follow-Up on Prior GAO Letter

Our May 23, 1997, letter identified seven opportunities to improve the Authority’s future financial statements. The Authority implemented all of our prior report’s suggestions, except for the inclusion of an MD&A section as part of its audited financial statements (see appendix I). We continue to believe that our prior suggestion that the Authority include an MD&A section in its audited financial statements is needed and would enhance its financial statements. Authority’s Comments and Our Evaluation

In commenting on a draft of the report, the Authority disagreed with sections in our report concerning the lack of communication between the Authority and the District when transactions involve funds that are held by the Authority on behalf of the District, the Authority’s rights and economic benefits resulting from the agreement called “Taxable Equipment Lease/Purchase Agreement,” and our suggestions to enhance the Authority’s financial statements with an MD&A section. We are also sending a copy to the Chairperson, District of Columbia Financial Responsibility and Management Assistance Authority. Status Of GAO’s Prior Year Suggestions

Include a Management Discussion and Analysis (MD&A) section to enhance the annual report. GAO Comments

1. 7.
Why GAO Did This Study

Pursuant to a congressional request, GAO compared the audited financial statements and management letters of the District of Columbia Financial Responsibility and Management Assistance Authority for fiscal years (FY) 1996 and 1997 to the District's Comprehensive Annual Financial Report (CAFR) to determine: (1) whether there was agreement of amounts and consistency of presentation regarding the Authority's financial information; and (2) why the District's internal control weakness that relates to the Authority was not identified in the audit report on the Authority's financial statements. GAO also provided information on the: (1) Authority's use of interest income from escrow accounts established on behalf of the District; (2) Authority's purpose for the transaction entitled Taxable Equipment Lease/Purchase Agreement; and (3) status of the Authority's implementation of GAO's suggestions for its financial statements for fiscal years 1995 and 1996.

What GAO Found

GAO noted that: (1) the Authority's audited financial statements and the District's audited CAFR for fiscal years 1996 and 1997 revealed that the financial statements included the same amounts for Authority operations; (2) the presentation and categorization of the Authority's amounts were in accordance with the appropriate sections of the Government Accounting Standards Board accounting principles for both sets of financial statements; (3) in the District's auditors' report on internal controls and compliance for FY 1997, they identified a material weakness concerning financial reporting controls over transactions involving the Authority; (4) the District's auditors recommended that the Authority, along with the District, implement procedures to provide monthly balances and the related support for all financial activity each month on behalf of the District; (5) the Authority's auditors stated that this weakness did not affect the Authority's internal controls over financial reporting; (6) while Authority officials stated their belief that there was sufficient documentation available within the District to record financial activity on its books, the Authority's role in District operations and the District's dependence on the Authority for data on certain transactions and balances would necessitate effective communication of financial activity between the two entities; (7) since the Authority established the escrow accounts on behalf of the District, the accounts have earned interest income of $9.8 million and $5.5 million for fiscal years 1997 and 1996; (8) during FY 1997, $5 million was paid directly to vendors, transferred from an escrow account, or used to finance the Authority's operations; (9) the Authority entered into an agreement, entitled Taxable Equipment Lease/Purchase Agreement; (10) Authority officials stated that the purpose of the agreement was to obtain needed financing and to free-up budget capacity; (11) GAO identified seven opportunities for improving the Authority's future financial statements; (12) the Authority has implemented six of GAO's seven suggestions; (13) the one exception was the inclusion of a Management Discussion and Analysis (MD&A) section as part of its audited financial statements; and (14) with the concept of MD&A expanding across all governmental entities and presently a requirement in the federal government and for publicly-traded private sector corporations, GAO believes that including a MD&A section in the Authority's audited financial statements is needed and would enhance its financial statements.