The long-term cost of a direct loan, however, may be much less than a grant because of loan repayments. Scope and Methodology

To determine whether the CSM complies with applicable laws and accounting standards, provides reliable results, and is maintained and operated under a system of adequate controls, we engaged the independent public accounting firm of Ernst & Young to perform an attestation in accordance with American Institute of Certified Public Accountants (AICPA) attestation standards on OMB management’s assertions regarding the CSM’s capabilities and limitations. To ensure that Ernst & Young complied with contract requirements and applicable auditing standards, we defined the scope of work to be completed by Ernst & Young; met periodically with Ernst & Young during the course of its evaluation and attended key meetings with them, including their initial meeting with OMB staff; reviewed Ernst & Young’s work in accordance with generally accepted performed a limited analysis of the CSM, its assumptions, and mechanics in order to better understand the results of Ernst & Young’s work; analyzed the discounting formulas used by the CSM to discount the cash flows to the time of disbursement; and developed a limited number of test cash flow spreadsheets for use with the CSM to compare its results with those calculated manually and to gain an understanding of the proper use of the CSM. To identify supplemental audit steps that auditors should perform, we reviewed the CSM’s User’s Guide, OMB’s assertions, and Ernst & Young’s report. 2 define the cost of a direct loan or loan guarantee as the net present value of estimated future cash flows at the time when the loan is disbursed. The CSM’s calculation of subsidies complies with this definition in that the CSM computes a subsidy cost by calculating the net present value of agency-generated cash flows of expected payments to and from the government by discounting these cash flows to the fiscal year when they are disbursed. Because of these limitations, the subsidy percentage calculated by the CSM may differ from a “theoretically precise” result. Except for one of the limitations, however, our assessment is that CSM users and their auditors can take steps to minimize or eliminate the impact of the limitations. Of the several limitations OMB included in its assertions, three impact the subsidy cost calculations. In the audits of credit agencies’ financial statements for fiscal year 1995, significant weaknesses were identified with the quality of cash flow estimates and supporting data. 2. Further, OMB staff noted that OMB’s management assertions, which Ernst & Young concluded are “fairly stated in all material respects,” state that the effect of limitations in the current release of the CSM, based on cases reviewed to date, “have not revealed any instance in which such differences were significant.”

	Procedures Auditors Should Perform to Ensure Proper Use of the Credit Subsidy Model

OMB’s assertions and Ernst & Young’s report pointed out that proper use of the CSM is the responsibility of the user agencies. Therefore, to ensure that CSM subsidy calculations are correct, auditors will need to, among other things, obtain assurance that agencies are using the CSM properly. With assistance from the Federal Audit Executive Council, credit agencies’ inspectors general, representatives of the Governmentwide Credit Reform Subgroup, and OMB’s credit reform staff, we identified supplemental audit procedures to be performed in audits of federal credit agencies and subsidy calculations. In addition, we recommend that the Director of OMB ensure that the following steps are taken in developing the next revision to the CSM: revise the discounting equations in the CSM to follow standard finance strengthen controls over the CSM by implementing a VV&T or similar process, improve the CSM documentation to correct for the mistakes and omissions noted in OMB’s assertions and Ernst & Young’s report, and enhance the CSM printout with additional data so that users and auditors are able to specifically identify which data were used by the CSM in the subsidy calculations.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the Office of Management and Budget's (OMB) Credit Management Subsidy Model (CSM), focusing on whether the CSM: (1) conforms with relevant provisions of applicable legislation and accounting standards; (2) provides reliable results; and (3) is maintained and operated under a system of adequate controls. An additional objective was to identify supplemental audit steps that auditors should perform to ensure that federal credit agencies are using the CSM properly. GAO contracted with the independent public accounting firm of Ernst & Young LLP to evaluate OMB's written representations (assertions) about the CSM's capabilities and opine on whether they are fairly stated in all material respects.

What GAO Found

GAO noted that: (1) OMB's assertions on the CSM thoroughly explain the CSM's capabilities, limitations, and user agency responsibilities; (2) Ernst & Young concluded that OMB's assertions on the CSM are fairly stated in all material aspects and recommended several steps OMB should take to improve the reliability of CSM results and controls surrounding it; (3) based on GAO's review of Ernst & Young's work, GAO generally concurs with its conclusion and recommendations; (4) the Federal Credit Reform Act of 1990 and related federal accounting standards define the cost (subsidy) of a direct loan or loan guarantee as the estimated long-term cost to the government on a net present value basis at the time when a loan is disbursed; (5) the operation of the CSM conforms with this definition in that the model computes a subsidy cost by calculating the estimated net present value, at the time of loan disbursement, of agency-generated cash flows over the life of the loan; (6) OMB's assertions state that because of several limitations in the CSM's design, the subsidy cost calculated by the CSM may differ from a theoretically precise result; (7) for all but one of the limitations, credit agencies and their auditors can take steps to minimize or eliminate the impact of the limitations on the subsidy cost calculation; (8) the impact on the subsidy cost calculation of the limitation involving the use of nonstandard equations for discounting certain projected cash flows, however, is more difficult to evaluate and cannot be minimized by credit agencies and their auditors; (9) several weaknesses were identified relating to controls surrounding the development, maintenance, and use of the CSM; (10) GAO believes that if OMB implements a validation, verification, and testing approach (VV&T) or similar process, improves documentation, and provides guidance to credit agencies on controlling access to the CSM, the basic control weaknesses identified by Ernst & Young will be addressed; (11) OMB's assertions also state that user agencies are responsible for properly using the CSM; (12) consequently, when obtaining assurance that CSM subsidy cost calculations are correct, auditors will need to ensure that agencies are properly using the CSM; and (13) to help auditors obtain this assurance, GAO identified, with assistance from OMB staff, a series of supplemental audit procedures for auditors to follow when auditing federal credit agencies' financial statements and subsidy cost calculations.