overhead costs. As a result of this error in calculating seigniorage for the gold bullion uncirculated coin program, material costs were overstated by about $525,000.

Correcting this error would have reduced the net reported profit.

The Mint properly accounts for seigniorage as an
adjustment of revenue in its bullion accounting system. Its
revenue and expense reports should also present seigniorage
in the same way, but this was not the case. For the Statue
of Liberty coin program, seigniorage was reported in the
expense category as an adjustment to materials. For the
gold bullion uncirculated coin program, seigniorage was
reported as an adjustment to net profit. Correcting either
report would not have affected the amount of profit
reported for these programs. However, as prepared by the
Mint, these reports reflected inconsistent and incorrect
information regarding seigniorage for these two coin
programs.

ERRONEOUSLY REPORTED EXPENSES

Coin production expenses consist of elements related to manufacturing, materials, and packaging--including expenses for labor, transportation, supplies, and overhead. We found numerous problems with the expense amounts the Mint reported in its June 30, 1987, reports on revenue and expense.

These problems included (1) inconsistencies, exclusions, and undocumented adjustments in calculating and allocating overhead expenses, (2) incorrect methods for reporting some costs, (3) undocumented costs, (4) the exclusion of certain costs, and (5) the use of estimates instead of actual costs. The following examples demonstrate the kind of problems we noted with expense figures reported by the Mint.

-- We found a number of errors related to calculating and allocating overhead costs. First, about $64,000 in annual leave expense was unrecorded for headquarters staff.

Second, the San Francisco Mint recognized that it did not allocate about $5.4 million in overhead costs to coinage programs in fiscal year 1985; through July 1986, an additional $3.2 million in overhead was not allocated. At that time, the San Francisco Mint began allocating overhead to coinage programs. To correct these exclusions, the Mint allocated $8.6 million in overhead costs to the programs.

Documentation was unavailable to determine the accuracy of the amounts involved in the correction, including over $1.65 million to the Statue of Liberty coin program.

Third, field mints used different methods to allocate factory overhead costs to applicable programs. The Philadelphia and Denver Mints used standard rates, and the San Francisco and West Point Mints' method varied from year to year. The Mint's accounting manual prescribed the use of a standard rate and, in a July 1988 letter to field mints, the Mint emphasized its requirement to use standard rates.

Finally, automatic data processing and other general overhead costs were improperly allocated. First, the same ratios (87 percent numismatic programs and 13 percent domestic programs) were used in fiscal years 1986 and 1987 to determine the costs of automatic data processing services to be allocated between numismatic and domestic programs. However, based on direct labor hours, the ratio between these programs varied significantly in these years. For fiscal year 1986, the ratio was about 72 percent for numismatic programs and 28 percent for domestic programs. The ratio for fiscal year 1987 was about 87 percent for numismatic programs and 13 percent for domestic programs. Second, other general overhead costs were improperly allocated to numismatic and domestic programs, based on the number of full-time employees. According to a Mint official, the ratio would have been more appropriate if it had been based on direct labor hours. Using this basis, the ratio would have been 57 percent numismatic programs and 43 percent domestic programs in fiscal year 1986 and 66 percent numismatic programs and 34 percent domestic programs in fiscal year 1987. The net effect of these variances was to understate numismatic program costs by about $175,000 as of June 30, 1987.

In some cases, incorrect methodologies were used to report expenses. For example, when supply orders were received, the San Francisco Mint recorded them as expenses. Based on our accounting requirements, supplies would normally be recorded as part of the inventory and would be recorded as a production expense when they were issued from inventory. Also, headquarters cost accountants charged the total amount of fixed assets, valued at over $567,000, as an overhead expense. To meet our accounting requirements, these items would normally be recorded as assets, and, through a subsequent depreciation expense, a portion of these costs would be charged each year as overhead related to coinage programs. Had this requirement been followed, the costs for the Statue of Liberty coin program would have been $478,000 less than was reported. For the gold

bullion proof and uncirculated coin programs, costs were
overstated by about $54,000. Profits were thereby
understated by the same amounts for these programs.

The Philadelphia Mint did not retain documentation needed
to substantiate labor charges. Computer reports needed to
trace labor charges to time and attendance cards were not
kept. The National Archives and Records Administration's
records retention regulations, which are legally binding
on federal agencies, require that records such as these be
retained for up to 3 years. Because these records were not
retained, we were unable to perform a detailed examination
of labor charges totaling over $14,700 or 16.9 percent of
the costs for the test month we selected to review. At the
West Point Mint, total depreciation expenses of over
$16,400 for the test months we examined were not supported
through documentation showing how the depreciation was
calculated. These situations do not necessarily affect
profits reported for Mint programs. However, they suggest
that the accuracy of labor or depreciation expenses shown
on Mint revenue and expense reports, at least at the
Philadelphia and West Point Mints, may not withstand
scrutiny through independent verification.

-- Due to an accounting error by a headquarters cost accountant, the material costs for the Statue of Liberty coin program excluded the cost of damaged and rejected copper-nickel blanks used in the proof and uncirculated half dollar coins. This exclusion understated material costs by almost $200,000 and, correspondingly, overstated profits by the same amount.

-- Silver costs related to the Statue of Liberty $1 and $5 coins were not recorded at the actual cost of silver used for the coins produced, as was the case for the silver bullion program. Silver costs for these coins were recorded at an average unit cost agreed upon by the Mint and the General Services Administration for quantities ordered. Because headquarters cost accountants did not adjust these costs to actual silver costs based on quantities received until the end of the program, the June 30, 1987, revenue and expense report showed an understatement of about $250,000 in expenses for these coins and a corresponding overstatement of profits.

With regard to the Subcommittee's concern that $5.3 million in advertising expenses may have been improperly charged to the gold bullion coin program, we determined that the program's June 30, 1987, revenue and expense report erroneously reported that amount as an expense. It was actually an amount obligated in anticipation

of future expenses. The error overstated expenses and understated profits.

Raw material in the form of metal is the greatest expense associated with manufacturing coins. Depending on the program involved, these expenses comprised from 57 percent to almost 100 percent of total numismatic program expenses. The dollar amount of errors that we found in this area was relatively small.

Overall, the problems identified in our review of the Mint's reported expenses indicate its need for an improved cost accounting system. We believe that these problems are caused by basic weaknesses in the design and operation of the Mint's cost accounting system, which is decentralized, manual, and fragmented. Because these weaknesses are discussed in more detail in chapter 5, we are not making specific recommendations for improved reporting of expenses in this chapter.

CONCLUSIONS

The amount of profits that the Mint reported for numismatic coin programs varied widely at June 30, 1987. Some coin programs operated near the break-even point, while others showed profits which ranged from almost 13 percent to 50 percent.

There were, however, errors in the amounts which the Mint included on its reports of revenue and expense. For example, the Mint was inconsistent in calculating and reporting seigniorage, a key factor in determining net revenues, for different programs. Likewise, there were inconsistencies and inaccuracies in reporting expenses, which affected the amount of profit reported. In several cases, profits were overstated; in the case of advertising expenses for the gold bullion coin program, profits were understated.

Better cost information would assist the Congress and other decisionmakers who need accurate numismatic coin program profit and loss figures to exercise oversight responsibilities. As discussed in the next chapter, the Mint could improve its reporting of revenue and expense information through an improved cost accounting system.

CHAPTER 5

CRITICAL ELEMENTS OF THE MINT'S

FINANCIAL SYSTEM NEED MODERNIZATION

The Mint's financial management system structure has a number of subsystems, including those for formulating its budget, maintaining its general ledger, and accounting for its collections. Accounting for program costs and controlling funds are critical elements of these subsystems.

In the preceding chapters, we reported problems involving the need for better internal controls over dies and coins and improved cost accounting for numismatic programs. In the next chapter, we discuss the need for a revised funding structure and enhanced financial reporting for numismatic programs. Since problems in these areas strongly indicated the potential for more severe financial management system problems, we further examined two aspects of the Mint's financial management structure--cost reporting and funds control for all of the Mint's operations. selected these aspects because we considered them to be particularly relevant to the Subcommittee's need for reliable cost and funds control information with which to oversee the Mint's programs. In addition, we studied whether mint managers were getting financial information useful to them in managing operations. In both the cost accounting and funds control areas, we found the Mint's financial management system to be in need of modernization.

COST ACCOUNTING SYSTEM

NEEDS TO BE UPDATED

We

In chapter 4, we discussed a number of situations which led to errors in the Mint's accounting for the expenses (costs) of its numismatic programs. These conditions ranged from inconsistent cost allocations, undocumented adjustments, and excluded costs to the use of incorrect cost accounting methodologies.

We believe that these problems stem from fundamental design and operational weaknesses underlying the Mint's cost accounting system for both domestic and numismatic programs. The Mint has known for many years that its cost accounting system needed substantial improvement but only recently began to address its need for complete, reliable, and timely information on the cost of its operations.

Cost Accounting System's Design

and Operation Need Changes

The Mint's cost accounting is a manual, decentralized, and fragmented operation. Various elements of cost related to