capital fund were approved by the Comptroller General on January 2, 1953, and May 5, 1965, respectively. The Department requested the review and approval of the Foreign Service retirement and disability fund accounting system on April 17, 1968, but it was returned on December 27, 1968, because (1) the system had not yet been fully implemented and documented and these conditions precluded the completion of our review, and (2) certain modifications needed to be made in the system's design.

Our views relative to a number of deficiencies and inadequacies which we have identified in the Department's existing accounting system are presented in the following sections of this report. These matters relate to (1) the accrual basis of accounting, (2) accounting for costs of programs and activities, (3) property accounting, and (4) internal management and accounting controls.

IDENTIFIED PROGRAM AREAS AND INADEQUACIES IN EXISTING ACCOUNTING SYSTEM

The accural basis of accounting

The Department does not maintain its accounts on an accrual basis, as required by law, and much work remains to be done in designing and implementing an accounting system that will provide reasonably accurate and reliable accrued revenue and expenditure data now required to be reported monthly to the Treasury Department, and that will conform, in all material respects, with the principles, standards, and related requirements of the Comptroller General.

In its efforts to comply with the requirements for reporting accrued revenue and expenditure data, the Department has been engaged in developing and implementing procedures for periodically analyzing accounting data recorded on the cash and obligation basis and for converting these data to financial information on an accrual basis to be reported monthly to the Treasury Department. On the basis of our observations of these efforts, we are concerned with (1) the application of the analysis process on a quarterly rather than on a monthly basis, (2) the inadequacy of implementing instructions issued to foreign posts, and (3) the lack of progress in developing procedures and controls for use at the Department's Washington headquarters. Contrary to established requirements that periodic analyses and conversions, if used, be made not less frequently than monthly, the analytical processes being established by the Department are only made at the end of each quarter. Monthly data, required for reporting purposes, is intended to be estimated on the basis of the quarterly results obtained by the analysis.

We recognize that the quarterly analytical techniques intended to be used by the Department in developing and reporting expenditure data on the accrual basis can be considered to be experimental in nature and, as such, are subject to further improvement. However, because the instructions issued to foreign posts for use in making the quarterly analyses are general rather than specific, and because the accuracy and reliability of the amounts to be reported are therefore largely dependent on the quality of the work performed by the individuals making the analyses and compilations, we are concerned that the analytical techniques may not be effective in providing requisite

assurance concerning the reliability of the accrued expenditure data so developed.

A review we made of the procedures actually used by one Embassy in compiling data for inclusion in a fiscal year end report, made under the same general reporting requirements, revealed that a number of errors were included in the reported data. That the Embassy had not identified all advances and prepayments which probably should have been identified for consideration for elimination from accrued expenditures. In our opinion, these errors were made because the Departments instructions were inadequate to assure the reliability of the reported data.

Embassies provide administrative support services to other U.S. Government agencies abroad, some of which are on a reimbursable basis. However, the general accounting system of the Department of State is not designed to provide data on the cost of services rendered to serviced agencies by the embassies such as the Peace Corps (see p. 72) and the U.S. Information Agency (see p. 79).

The Department has not yet prescribed the specific procedures and controls to be used in developing the required accrual data for its Washington operations. Although we have not reviewed the quality of the accrued revenue and expenditures analysis work performed with respect to the Washington operations, we are concerned that results reported might not be reliable principally because specific procedures and controls have not been prescribed for use by personnel peforming the analyses.

We are concerned that accrued expenditure data may not have been properly developed with respect to grants and contracts. We were told that accrued expenditures for grants and contracts were considered to be the same as recorded disbursed amounts, and that no analysis was undertaken to identify the value of services performed by the grantees and contractors.

Accounting for costs of programs and activities

The general accounting system of the Department of State is not designed to provide data on the value of resources consumed (applied cost) with respect to each of the programs and activities carried out by the Department. The system is designed primarily to attain the objectives for the administrative control of funds. Accordingly, the only financial information periodically provided by the system is data on obligations incurred and cash disbursed with respect to apportionments of appropriations made pursuant to law and subdivisions of fund authorization (allotments and operating allowances) made to facilitate their management and compliance with applicable limitations. Except for the working capital fund and the International Boundary and Water Commission operations, the Department has not yet converted to a cost based budget presentation, nor has extensive consideration been given to establishing the use of cost-based budgeting internally. Quarterly financial plans are developed and used internally with respect to each allotment and operating allowance but these reflect only the amounts of obligations authorized to be incurred for the period. The Department has established a target date of July 1970 for using cost-based budgets internally and expects to present its fiscal year 1971 budget based on the use of cost information.

In an attempt to develop cost data for post operations, the Department has designed a reporting format, designated as the Quarterly Post Fund Status/Operating Cost Report, which requires that recorded cash and obligation data be converted to a cost basis. This post report is a part of the form used for reporting accrued expenditure data, and our previous comments concerning the inadequacy of the instructions issued for performing the work and the questionable reliability of data to be reported are also applicable to the reporting of costs.

Also, the prescribed report format provides for dealing only with transactions relating to allotments and operating allowances assigned to the post, and does not provide for including data on costs or expenditures incurred for the benefit of the post reported on but paid for from funds allotted to others. The Quarterly Post Fund Status/ Operating Cost Report is also deficient in that it does not require the development of costs of specific programs and activities which we believe should be developed and reported on separately and individually in order that activity managers and ambassadors might have the information necessary to evaluate and make decisions about particular activities. Rather, it reports totals related to each allotment without further classification as to the numerous post activities which may be funded by the allotment.

In our reviews, we have identified a need to systematically develop and provide management officials with data on the cost of (1) consular program activities, such as processing and issuance of visas, (2) Foreign Service Institute (FSI) operations, (3) motor pool operations, and (4) the maintenance and operation of real property. The Department has agreed to develop improved cost-finding systems for FSI and motor pool operations. We also believe that there is a need for systematically developing, and reporting to other agencies, data on unreimbursed costs incurred by the Department for the benefit of those agencies.

In our review of the accounting system for the Foreign Service Retirement and Disability Fund, which the Department on April 17, 1968, requested that the Comptroller General approve, we found a number of substantive design modifications that needed to be made. The desired modifications related, for the most part, to the need to produce appropriate and reliable data on the cost of operations. Property accounting

The system the Department is now using to account for property resources does not provide appropriate accounting control since information is recorded in the general ledger property accounts only at the end of the fiscal year, and is obtained from (1) summaries of data recorded on detailed nonexpendable property record cards, and (2) estimates, made by the Office of Foreign Buildings, of increases in the cost of real property based on obligations incurred during the year. Agencies are required by law to include adequate monetary property accounting records in their accounting systems.

Our reviews of the management of nonexpendable personal property and of real property at several posts and in Washington have revealed a number of instances where pertinent information has not been entered to the property record cards, information shown on record cards was questionable or incomplete, and quantities shown on property record cards had not been reconciled to the results of physical

inventories. In the absence of properly maintained control accounts as a part of the general accounting system, there are no controls to provide assurance of the accuracy and reliability of the detail property record cards.

We found, in an earlier survey, that the value of the Department's motor vehicles, totaling about $4 million, was not recorded in the accounts and that the property values reported on financial statements prepared from the accounts and issued to the Treasury Department was understated by that amount. We also found, in another review, that the inventory of Government-owned and long-term leased property was overstated by approximately $20.8 million, due primarily, in our opinion, to the inclusion of amounts which had been allotted but not disbursed at that time. As a result of the lack of accounting controls, there is no assurance that managers receive reliable inventory data necessary to permit them to discharge their custodial responsibilities.

The Department's financial systems development staff is working on the development of procedures that are intended to provide the requisite monetary property accounting control. The proposed procedures will require the recording of acquisition and disposal transactions in memorandum control registers by budget and fiscal officers at posts and in the Office of Foreign Buildings. These memorandum control registers will be required to be periodically reconciledquarterly for nonexpendable personal property and annually for real property with individual property record cards. General ledger accounts will be adjusted quarterly on the basis of summaries prepared from the memorandum control register.

These procedures have not yet been implemented. However, we are concerned that all applicable transactions may not be recorded in the memorandum registers. Moreover, since the reconciliations will be required to be made only at infrequent intervals, we believe that excessive, time-consuming, and laborious efforts may have to be made to identify errors in the memorandum registers. We believe that the efforts which may be required to effect the reconciliations can be significantly reduced if transactions were recorded in formal control accounts established as an integral part of the accounting system. Other problems to be resolved by the Department in its efforts to develop and establish appropriate property accounting procedures and controls, concern the need to include in the control accounts and the subsidiary detailed property records (1) transportation costs associated with property acquisitions, and (2) large quantities of nonexpendable property acquisitions with unit costs of less than $200. Internal management and accounting controls

In the development of its accounting system the Department needs to consider the strengthening of its system of internal control. We have observed weaknesses in a number of areas, including (1) automatic data processing, (2) foreign currency bank accounts, (3) local deposit and trust funds, (4) collection of funds, (5) accounts receivable, (5) internal auditing, (7) payrolling, and (8) the Foreign Service Retire-, ment and Disability Fund accounting system.

Our review of the automatic data processing (ADP) system used in accounting and disbursing operations at the regional finance and data processing center (RFDPC) at Paris, France (B-146703) revealed weaknesses in the internal management control system which

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could result in unwarranted or unauthorized use of ADP equipment and endanger the security and integrity of ADP programs and related documentation. While the Department's October 1968 response to our January 1968 report on this subject indicated that corrective action was taken on most of our findings, we continue to be concerned, in the absence of pertinent information in the Department's response, that unsupervised console operators may still have access to ADP equipment and all documentation and materials needed to operate the computer for unauthorized purposes.

On the basis of a review of procedures and controls employed by the U.S. Disbursing Officer (USDO) at the RFDPC and at selected foreign service posts serviced by it, we reported to the Department in January 1968 on the need to (a) perform independent reconciliations of foreign currency bank accounts, (b) improve controls for processing collections, (c) deposit collections of funds promptly, (d) strengthen controls over local deposit and trust funds, including the need to consider requiring that such funds be deposited in official depositories, and (e) obtain Treasury Department concurrence for the continued maintenance of accounts in local banks. The Chief Disbursing Officer, Treasury Department, informed the Department that it could be assumed that the greater portion of Embassy-held local deposit and trust funds had not been deposited in bank accounts. We found this to be the case in another review, where local deposit and trust funds were being held in an Embassy safe.

The details of our findings at RFDPC concerning the USDO's operations and specific recommendations relating thereto were presented to the Deputy Under Secretary for Administration in a report issued in January 1968. The director of the Department's audit program subsequently advised us that future audits of RFDPC would include bank account reconciliations. The other matters are being studied or considered by the Department but corrective action on our recommendations has not yet been completed.

We are concerned that the Department's existing system of accounting for accounts receivable through the medium of memorandum accounts and registers does not provide adequate controls to assure that all amounts owing to the Department are recorded and collected. We believe that a system in which receivables are recorded and controlled in accounts that are an integral part of the general accounting system is essential to assure the proper accounting for all amounts owing to the Department.

Our review of the internal audit activities in the Department showed that audit program staff resources have been insufficient to perform all of the needed audits on a reasonably timely basis. We found that most of the accounting operations conducted in Washington and at 93 of approximately 113 embassies have not been aduited during the 61⁄2 years ending December 31, 1968.

In our review of the Foreign Service Retirement and Disability Fund accounting system we found that appropriate accounting controls had not been established with respect to (1) the cumulative balances of employees' contributions to the fund and (2) amounts owed to the fund by annuitants who, in order to provide widow survivor benefits, elected several years ago to pay back to the fund certain amounts of annuities previously paid to them.