B-197559.OM, MAY 13, 1980

B-197559.OM: May 13, 1980

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WE IDENTIFIED SEVERAL SIGNIFICANT ACCOUNTING SYSTEM DISCREPANCIES MADE BY THE CENTER WHICH HAVE BEEN DISCUSSED INFORMALLY WITH AMY SHIMAMURA OF YOUR STAFF. THESE DISCREPANCIES AFFECT THE FUNDS STATUS FOR FISCAL 1978 AND 1979 THAT WERE CERTIFIED AS REQUIRED BY SECTION 1311 OF THE SUPPLEMENTAL APPROPRIATIONS ACT. FOLLOWING ARE THE DETAILS OF THE ISSUES INVOLVED AND OUR QUESTIONS. SUCH CERTIFICATIONS SHALL BE SUPPORTED BY RECORDS EVIDENCING THE AMOUNTS WHICH ARE REPORTED THEREIN AS HAVING BEEN OBLIGATED. THE CENTER IS A MULTIBILLION DOLLAR BUSINESS AND PROVIDES ITS CUSTOMERS WITH ABOUT $2 BILLION IN FOOD. THE CENTER IS THE INVENTORY CONTROL POINT FOR MORE THAN 42. A PORTION OF THE DEFENSE LOGISTICS AGENCY STOCK FUND IS ALLOCATED EACH YEAR TO THE CENTER FOR THE PROCUREMENT AND SUPPLY SUPPORT OF SUBSISTENCE.

B-197559.OM, MAY 13, 1980

SUBJECT: REQUEST FOR OPINION ON ISSUES RELATED TO ACCOUNTING SYSTEM DISCREPANCIES AT THE DEFENSE PERSONNEL SUPPORT CENTER (CODE 901310)

GENERAL COUNSEL:

DURING OUR REVIEW OF THE DEFENSE PERSONNEL SUPPORT CENTER'S ACCOUNTING SYSTEMS, WE IDENTIFIED SEVERAL SIGNIFICANT ACCOUNTING SYSTEM DISCREPANCIES MADE BY THE CENTER WHICH HAVE BEEN DISCUSSED INFORMALLY WITH AMY SHIMAMURA OF YOUR STAFF. THESE DISCREPANCIES AFFECT THE FUNDS STATUS FOR FISCAL 1978 AND 1979 THAT WERE CERTIFIED AS REQUIRED BY SECTION 1311 OF THE SUPPLEMENTAL APPROPRIATIONS ACT. WE ANTICIPATE SENDING A REPORT WHICH INCLUDE THESE ISSUES TO DEFENSE FOR COMMENT IN MARCH AND WE WOULD APPRECIATE AN EXPEDITIOUS RESPONSE SO WE CAN INCLUDE LEGAL OPINIONS ON THE ISSUES.

FOLLOWING ARE THE DETAILS OF THE ISSUES INVOLVED AND OUR QUESTIONS.

BACKGROUND

SECTION 1311 OF THE SUPPLEMENTAL APPROPRIATIONS ACT, 1955 (31 U.S.C. 200), ESTABLISHES CERTAIN CRITERIA FOR RECORDING AND REPORTING OBLIGATIONS. SECTION 1311(A) OF THE ACT PROVIDES THAT THE HEAD OF EACH AGENCY SHALL REPORT, IN CONNECTION WITH THE SUBMISSION OF ALL REQUESTS FOR PROPOSED APPROPRIATIONS, THAT ANY STATEMENT OF OBLIGATIONS FURNISHED THEREWITH CONSISTS OF VALID OBLIGATIONS AS DEFINED BY THE ACT. SECTION 1311(C) STATES THAT:

"EACH REPORT MADE PURSUANT TO SUBSECTION (B) SHALL BE SUPPORTED BY CERTIFICATIONS OF THE OFFICIALS DESIGNATED BY THE HEAD OF THE AGENCY, AND SUCH CERTIFICATIONS SHALL BE SUPPORTED BY RECORDS EVIDENCING THE AMOUNTS WHICH ARE REPORTED THEREIN AS HAVING BEEN OBLIGATED. SUCH CERTIFICATIONS AND RECORDS SHALL BE RETAINED IN THE AGENCY IN SUCH FORM AS TO FACILITATE AUDIT AND RECONCILIATION FOR SUCH PERIOD AS MAY BE NECESSARY FOR SUCH PURPOSES. THE OFFICIALS DESIGNATED BY THE HEAD OF THE AGENCY TO MAKE CERTIFICATION MAY NOT REDELEGATE THE RESPONSIBILITY."

THE BUDGET AND ACCOUNTING PROCEDURES ACT OF 1950 (31 U.S.C. 65(A), 66(A)) PLACES THE RESPONSIBILITY FOR FULL DISCLOSURE OF THE RESULTS OF THE FINANCIAL OPERATIONS OF THE GOVERNMENT UPON THE HEAD OF EACH EXECUTIVE AGENCY. SECTION 65(A) OF TITLE 31 PROVIDES THAT:

"THE ACCOUNTING OF THE GOVERNMENT PROVIDES FULL DISCLOSURE OF THE RESULTS OF FINANCIAL OPERATIONS, ADEQUATE FINANCIAL INFORMATION NEEDED IN THE MANAGEMENT OF OPERATIONS AND THE FORMULATION AND EXECUTION OF THE BUDGET, AND EFFECT CONTROL OVER INCOME, EXPENDITURES, FUNDS, PROPERTY, AND OTHER ASSETS."

SECTION 66(A) OF TITLE 31 AUTHORIZES THE COMPTROLLER GENERAL OF THE UNITED STATES TO PRESCRIBE THE PRINCIPLES, STANDARDS, AND RELATED REQUIREMENTS FOR ACCOUNTING TO BE OBSERVED BY EACH EXECUTIVE AGENCY AND STATES THAT:

"*** REQUIREMENTS PRESCRIBED BY THE COMPTROLLER GENERAL SHALL BE DESIGNED TO PERMIT THE EXECUTIVE AGENCIES TO CARRY OUT THEIR RESPONSIBILITIES UNDER SECTION 66(A) OF THIS TITLE, WHILE PROVIDING A BASIS FOR INTERGRATED ACCOUNTING FOR THE GOVERNMENT, FULL DISCLOSURE OF THE RESULTS OF THE FINANCIAL INFORMATION AND CONTROL NECESSARY TO ENABLE THE CONGRESS AND THE PRESIDENT TO DISCHARGE THEIR RESPECTIVE RESPONSIBILITIES."

DEFENSE PERSONNEL SUPPORT CENTER

THE DEFENSE PERSONNEL SUPPORT CENTER, SECOND LARGEST OF SIX DEFENSE LOGISTICS AGENCY SUPPLY CENTERS, DIRECTS ITS WORLDWIDE OPERATIONS FROM PHILADELPHIA, PENNSYLVANIA. IN ITS SUPPLY SUPPORT ROLE, THE CENTER BUYS AND MANAGES SUBSISTENCE, MEDICAL, AND CLOTHING AND TEXTILE ITEMS FOR ALL ARMED SERVICES, SOME FEDERAL AGENCIES AND AUTHORIZED FOREIGN GOVERNMENTS.

THE CENTER IS A MULTIBILLION DOLLAR BUSINESS AND PROVIDES ITS CUSTOMERS WITH ABOUT $2 BILLION IN FOOD, MEDICAL, AND CLOTHING ITEMS EACH YEAR. THE CENTER IS THE INVENTORY CONTROL POINT FOR MORE THAN 42,000 SUBSISTENCE, MEDICAL, AND CLOTHING AND TEXTILE ITEMS. DEPOT STOCK FOR THESE ITEMS REPRESENTS AN INVESTMENT OF ABOUT $1.4 BILLION.

TO CARRY OUT THE SUPPLY SUPPORT ROLE, THE SECRETARY OF DEFENSE, PURSUANT TO THE AUTHORITY CONTAINED IN THE NATIONAL SECURITY ACT OF 1947, AS AMENDED (10 U.S.C. 2208), ESTABLISHED A STOCK FUND (WORKING CAPITAL FUND) IN THE DEFENSE LOGISTICS AGENCY. THE STOCK FUND FINANCES THE PROCUREMENT OF MATERIAL. THE CUSTOMERS REIMBURSE THE STOCK FUND FOR MATERIAL WHEN RECEIVED. THESE REIMBURSEMENTS IN TURN FINANCE THE REPLACEMENT OF THE INVENTORY.

A PORTION OF THE DEFENSE LOGISTICS AGENCY STOCK FUND IS ALLOCATED EACH YEAR TO THE CENTER FOR THE PROCUREMENT AND SUPPLY SUPPORT OF SUBSISTENCE, MEDICAL, AND CLOTHING AND TEXTILE ITEMS. FOLLOWING IS A COMPARISON OF THE CENTER'S STOCK FUND OBLIGATION PROGRAM (AUTHORIZED ALLOTMENT) WITH ACTUAL OBLIGATIONS (PROCUREMENTS) AND NET SALES FOR FISCAL YEARS 1977 THROUGH 1979.

FISCAL PROGRAMMED ACTUAL ACTUAL

YEAR OBLIGATIONS OBLIGATIONS NET SALES

(MILLIONS)

1977 $2,060.0 $1,961.0 $1,850.8

1978 $2,131.3 $2,088.9 $1,809.1

1979 $2,273.0 $2,188.3 $2,073.6

THE ACCOUNT STRUCTURE UTILIZED BY THE CENTER IS A SYSTEM OF GENERAL LEDGER ACCOUNTS AND SUBSIDIARY RECORDS. THE GENERAL LEDGER ACCOUNTS REPRESENT THE ASSET AND LIABILITY ACCOUNTS AND THE SUBSIDIARY RECORDS ARE THE DETAILED RECORDS WHICH SUPPORT AND ARE RECONCILED TO THE BALANCES IN THE GENERAL LEDGER ACCOUNTS. THE GENERAL LEDGER BALANCES ARE USED TO REPORT AND CERTIFY FUND BALANCES AT THE END OF THE ACCOUNTING YEAR.

ACCOUNTING DISCREPANCIES AFFECTING

CERTIFIED FUND BALANCES

FOR FISCAL 1977 THROUGH 1979, THE CENTER'S COMPTROLLER CERTIFIED AS ACCURATE THE UNLIQUIDATED OBLIGATIONS BALANCES REPORTED TO THE DEFENSE LOGISTICS AGENCY IN THE CENTER'S DEFENSE STOCK FUND STATEMENTS OF FINANCIAL CONDITION. THESE CERTIFICATIONS WERE MADE DESPITE KNOWLEDGE OF SERIOUS PROBLEMS IN THE CENTER'S ACCOUNTING SYSTEM.

AT THE END OF FISCAL 1977, THE CENTER'S COMPTROLLER CERTIFIED AS ACCURATE UNLIQUIDATED OBLIGATIONS OF $851.5 MILLION FOR THE THREE COMMODITIES MANAGED BY THE CENTER. HOWEVER, THE CENTER WAS AWARE OF DISCREPANCIES BETWEEN THE SUBSIDIARY RECORDS AND LEDGER ACCOUNTS. WHEN THE DEFENSE AUDIT SERVICE LATER REVIEWED THE CENTER'S ADMINISTRATIVE CONTROL OF FUNDS, THEY REPORTED THAT THE AMOUNT OF UNLIQUIDATED OBLIGATIONS PER THE CENTER'S SUBSIDIARY RECORDS WAS $1,175.3 MILLION AS OF SEPTEMBER 30, 1977, OR $323.8 MILLION GREATER THAN THE AMOUNT CERTIFIED AND REPORTED. THE DIFFERENCE HAD INCREASED TO $399.3 MILLION AS OF DECEMBER 31, 1977. THE FISCAL 1977 CERTIFIED BALANCES WERE NOT ADEQUATELY SUPPORTED AS EVIDENCED BY THE SIGNIFICANT DIFFERENCE BETWEEN THE AMOUNTS CERTIFIED AND THE AMOUNTS RECORDED IN THE CENTER'S SUPPORTING SUBSIDIARY RECORDS. THIS DISPARITY WAS NOT DISCLOSED IN THE FINANCIAL REPORTS.

THE FISCAL 1978 CERTIFIED BALANCES WERE ALSO NOT ACCURATE. DURING FISCAL 1978, A SPECIAL TASK GROUP REVIEWED THE VALIDITY OF UNLIQUIDATED OBLIGATION BALANCES IN SUBSIDIARY RECORDS AND REDUCED THE AMOUNT OF UNLIQUIDATED OBLIGATIONS BY AT LEAST $155.8 MILLION. (SEE APPENDIX I).

IN ADDITION, THE CENTER HAD INFORMATION SHOWING THAT THE BALANCES WERE NOT CORRECT. THE REVIEW OF STATISTICALLY VALID SAMPLES OF BALANCES OF LESS THAN $500,000 RECORDED IN THE SUBSIDIARY RECORDS DISCLOSED SIGNIFICANT ERRORS IN THE AMOUNTS OF RECORDED BALANCES AND INDICATED THAT BALANCES OF MANY OF THE RECORDS NOT INCLUDED IN THE SAMPLES WERE ERRONEOUS. THE CENTER'S FINANCIAL REPORTS DID NOT DISCLOSE THIS INFORMATION.

THE FISCAL 1978 GENERAL LEDGER BALANCES WERE ALSO ADJUSTED AND THE ADJUSTMENTS WERE NOT ALWAYS SUPPORTED BY ADEQUATE DOCUMENTATION. DESPITE THE $155.8 MILLION IN ADJUSTMENTS TO THE SUBSIDIARY LEDGERS DISCUSSED ABOVE, THE GENERAL LEDGER ACCOUNTS STILL HAD $40.8 MILLION LESS IN UNLIQUIDATED OBLIGATION BALANCES. ADJUSTMENTS WERE MADE TO ELIMINATE THIS DISCREPANCY PRIOR TO CERTIFICATION. (SEE APPENDIX II).

IN FISCAL 1979, THE COMPTROLLER'S TASK GROUP MADE A SERIES OF REVIEWS OF RECORDED OPEN OBLIGATIONS WHICH INITIATED ADJUSTMENTS REDUCING THE AMOUNT OF RECORDED UNLIQUIDATED OBLIGATIONS BY ABOUT $151 MILLION. BECAUSE OF THE ABSENCE OF DOCUMENTATION THAT SHOULD HAVE BEEN AVAILABLE BUT COULD NOT BE LOCATED, THE TASK GROUP MADE ASSUMPTIONS CONCERNING THE VALIDITY OF MANY OF THE RECORDED BALANCES. THE SUPPORT FOR MANY ADJUSTMENTS WAS BASED ON THESE ASSUMPTIONS RATHER THAN ON VALID DOCUMENTATION. THE CENTER'S FISCAL YEAR 1979 CERTIFIED STATEMENT OF FINANCIAL CONDITION DID NOT DISCLOSE THE AMOUNT OF THE ADJUSTMENTS THAT WERE MADE, AND THE REASONS WHY SUPPORTING DOCUMENTATION WAS NOT ALWAYS AVAILABLE. (SEE APPENDIX III).

LEGAL QUESTIONS

1. DURING FISCAL 1977 AND 1978, THE CENTER WAS AWARE OF MATERIAL DISCREPANCIES IN THE UNLIQUIDATED OBLIGATION BALANCES BETWEEN THE GENERAL LEDGER ACCOUNTS AND THE SUPPORTING SUBSIDIARY LEDGER ACCOUNTS. DESPITE THIS, A CENTER OFFICIAL CERTIFIED AS ACCURATE THE UNLIQUIDATED OBLIGATION BALANCES RECORDED IN THE GENERAL LEDGER FOR FISCAL 1977 AND THE SUBSIDIARY LEDGER FOR FISCAL 1978. SINCE THE DISCREPANCIES EXISTED IN THE UNLIQUIDATED OBLIGATION BALANCES AND THE CERTIFYING OFFICER WAS AWARE OF THE SITUATION, CAN THE CERTIFICATIONS BE CHARACTERIZED AS ILLEGAL? WHAT ARE THE LEGAL RAMIFICATIONS OF CERTIFYING UNLIQUIDATED OBLIGATION BALANCES KNOWN TO BE INVALID?

2. DURING FISCAL 1978 AND 1979, THE CENTER'S DESIGNATED CERTIFYING OFFICERS APPROVED MANY MILLIONS OF DOLLARS OF ADJUSTMENTS TO SUBSIDIARY RECORDS AND FUNDS CONTROL ACCOUNTS WHICH WERE NOT SUPPORTED BY ADEQUATE DOCUMENTATION. WHAT LEGAL AUTHORITY DOES A CERTIFYING OFFICER HAVE TO MAKE SUCH ADJUSTMENTS?

3. IN SUBMITTING CERTIFIED FINANCIAL REPORTS, ARE THERE PROVISIONS IN THE LAW WHICH REQUIRE FULL DISCLOSURE OF UNSUPPORTED ADJUSTMENTS MADE TO OBLIGATIONS AND EXPENDITURES WHICH AFFECTED THE BALANCES CERTIFIED?

4. WHAT ARE THE LEGAL RAMIFICATIONS OF NOT CERTIFYING THE STATUS OF FUNDS? IF AN AGENCY DOES NOT OR CANNOT CERTIFY ITS FINANCIAL STATEMENTS, WHAT ARE THE LEGAL REQUIREMENTS FOR FULLY DISCLOSING THE REASONS CERTIFICATION IS NOT OR CANNOT BE MADE?

INDORSEMENT

DIRECTOR, FGMSD

RETURNED. YOUR QUESTIONS ARE ANSWERED BELOW IN THE ORDER PRESENTED.

1. AS YOU POINT OUT, UNDER SECTION 1311 OF THE SUPPLEMENTAL APPROPRIATIONS ACT OF 1955, 31 U.S.C. SEC. 200(B) AND (C), AS AMENDED, THE HEAD OF A FEDERAL AGENCY MUST REPORT THAT ANY STATEMENT OF OBLIGATIONS, FURNISHED IN CONNECTION WITH THE SUBMISSION OF A REQUEST FOR PROPOSED APPROPRIATIONS TO OMB, CONSISTS OF VALID OBLIGATIONS (AS DEFINED IN SUBSECTION (A)). (SEE OMB CIR. A-11 SEC. 11.6 IMPLEMENTING THIS PROVISION.) THIS REPORT MUST BE SUPPORTED BY CERTIFICATIONS OF THE OFFICIALS DESIGNATED BY THE HEAD OF THE AGENCY, WHICH IN TURN MUST BE SUPPORTED BY RECORDS EVIDENCING THE AMOUNTS REPORTED AS HAVING BEEN OBLIGATED. FINALLY, THESE CERTIFICATIONS AND RECORDS ARE TO BE RETAINED BY THE AGENCY IN A FORM AND FOR A PERIOD NECESSARY TO FACILITATE AUDIT AND RECONCILIATION.

FURTHERMORE, SECTION 20103 OF THE DEFENSE DEPARTMENT'S ACCOUNTING GUIDANCE HANDBOOK (DOD DIRECTIVE 7220.9H) PROVIDES:

"C. EACH SYSTEM SHALL HAVE BUILT INTO IT ADEQUATE CONTROLS TO PROMOTE THE ACCURACY OF THE ACCOUNTS AND THE DATA PRODUCED FROM THE ACCOUNTS. *** FOR EXAMPLE, PROCEDURES WILL BE ESTABLISHED FOR PERIODIC VERIFICATION OF GENERAL LEDGER BALANCES WITH RELATED BALANCES IN SUBSIDIARY RECORDS, AND FOR PERIODIC VERIFICATION OF THE LATTER WITH RELATED DOCUMENT FILES OR THE ASSIGNED VALUE OF RELATED ASSETS ON HAND. FOR PURPOSES OF SUPPORTING CERTIFICATIONS OF OBLIGATIONS UNDER SECTION 1311 (31 U.S.C. 200), THE FOREGOING VERIFICATIONS FOR OBLIGATED FUND BALANCES WILL BE MADE IN A MANNER THAT WILL ASSURE THAT ALL OF THE FILES AND BALANCES HAVE BEEN RECONCILED AND VALIDATED AT LEAST ONCE EACH FISCAL YEAR (NOT NECESSARILY AS OF JUNE 30) AND THE WORK PAPERS AND RECORDS ON WHICH THE DETERMINATIONS ARE BASED WILL BE RETAINED IN A FORM TO FACILITATE AUDIT AND RECONCILIATION FOR SUCH PERIODS AS MAY BE NECESSARY. *** ACCEPTED STATISTICAL SAMPLING TECHNIQUES MAY BE USED FOR THESE VERIFICATIONS. BALANCES IN APPROPRIATE SUBSIDIARY RECORDS AND DOCUMENT FILES (E.G., RECORDS OF RECEIVABLES AND UNPAID OBLIGATIONS) WILL BE AGED PERIODICALLY AND ITEMS THAT ARE UNDULY OUTSTANDING OR INACTIVE WILL BE INVESTIGATED AND APPROPRIATE CORRECTIVE ACTION TAKEN WHERE NECESSARY." (SEE ALSO REGULATIONS GOVERNING STOCK FUND OPERATIONS, DOD DIRECTIVE 7420.1, JANUARY 26, 1967 XII B 2, 6, AND 8, AND XIV.)

THE OFFICIAL WHO MAKES CERTIFICATIONS REQUIRED BY 31 U.S.C. SEC. 200 IS NOT A "CERTIFYING OFFICER" IN THE SENSE OF BEING ACCOUNTABLE PERSONALLY FOR THE FUNDS IN QUESTION. HE IS NOT, THAT IS, AN "AUTHORIZED CERTIFYING OFFICER" OR AN "ACCOUNTABLE OFFICER" AS WE USE THOSE TERMS, WHEN HE MAKES THE CERTIFICATION REQUIRED BY 31 U.S.C. SEC. 200(C). EVEN THOUGH THE SAME INDIVIDUAL WHO MAKES THE SECTION 200(C) CERTIFICATION MAY ALSO BE AN AUTHORIZED CERTIFYING OFFICER, THESE FUNCTIONS ARE LEGALLY SEPARATE AND DISTINCT AND THE LATTER FUNCTION, CERTIFYING VOUCHERS FOR PAYMENTS, IS, ON THIS RECORD, NOT INVOLVED HERE AT ALL. (TO AVOID CONFUSION IN THIS REGARD, IT WOULD BE PREFERABLE NOT TO REFER TO THE CENTER'S CONTROLLER AS A "CERTIFYING OFFICER" IN THE CONTEXT OF SECTION 200(C) CERTIFICATIONS.) THE PURPOSE OF 31 U.S.C. SEC. 200 WAS TO PROVIDE A CLEAR DEFINITION OF THE TERM "OBLIGATION" IN ORDER TO ELIMINATE VARIATIONS BETWEEN AGENCIES AND TO PREVENT AGENCIES FROM CIRCUMVENTING LIMITATIONS ON FISCAL YEAR AVAILABILITY OF FUNDS BY RECORDING PURPORTED OBLIGATIONS WHEN IN FACT NO BINDING COMMITMENT EXISTS. ASIDE FROM ALLOWING THE CONGRESS TO DETERMINE WITH SOME DEGREE OF ACCURACY THE AMOUNT WHICH HAS BEEN OBLIGATED AGAINST OUTSTANDING APPROPRIATIONS AS A BASIS FOR DETERMINING FUTURE REQUIREMENTS (SEE H.R. REP. NO. 2266, 83RD CONG., 2D SESS., 49-50 (1954), ACCOMPANYING THE SUPPLEMENTAL APPROPRIATION ACT OF 1955), THE PROPER RECORDING OF OBLIGATIONS IS FUNDAMENTAL TO COMPLIANCE WITH THE ANTI-DEFICIENCY ACT, 31 U.S.C. SEC. 665, WHICH IS INTENDED TO ASSURE THAT APPROPRIATIONS ARE NOT OVEROBLIGATED, NECESSITATING DEFICIENCY APPROPRIATIONS. HOWEVER, FROM THE INFORMATION PROVIDED, WE SEE NO EVIDENCE THAT THE LACK OF DOCUMENTATION HERE HAS IN ANY WAY CONTRIBUTED TO THE OVEROBLIGATION OF ANY APPROPRIATION.

WITH REGARD TO THE ABSENCE OF PROPER SUPPORTING DOCUMENTATION, NO EXPLANATION IS OFFERED AS TO WHY IT CANNOT BE LOCATED. CHAPTER 33 OF TITLE 44, U.S.C. (44 U.S.C. SECS. 3301-3324), AND THE REGULATIONS THEREUNDER, 41 C.F.R. SUBPART 101-11.4, PROVIDE THE EXCLUSIVE PROCEDURES FOR ALIENATION AND DISPOSAL OF AGENCY RECORDS. SEE 44 U.S.C. SEC. 3314. THUS, UNLESS THE SUPPORTING RECORDS WERE DISPOSED OF IN ACCORDANCE WITH THESE PROCEDURES, THE DESTRUCTION OR OTHER DISPOSITION OF THE RECORDS COULD HAVE BEEN IMPROPER.

THERE IS NO PENALTY PRESCRIBED FOR VIOLATING THE REQUIREMENTS OF 31 U.S.C. SEC. 200 AS SUCH. HOWEVER, SECTION 1018 OF TITLE 18, U.S.C. MAKES IT A CRIME (PUNISHABLE BY A FINE OF NOT MORE THAT $500 OR IMPRISONMENT FOR NOT MORE THAN ONE YEAR OR BOTH) FOR A PERSON OR PUBLIC OFFICER AUTHORIZED BY LAW TO MAKE OR GIVE A CERTIFICATE, TO KNOWINGLY MAKE AND DELIVER AS TRUE A CERTIFICATE CONTAINING ANY STATEMENT HE KNOWS TO BE FALSE.

APPENDIX II OF YOUR MEMORANDUM INDICATES THAT THE COMPTROLLER'S TASK GROUP TOOK VALID STATISTICAL SAMPLES OF UNLIQUIDATED OBLIGATIONS OF $500,000 OR LESS IN THE CLOTHING AND TEXTILE, MEDICAL, AND PERISHABLE SUBSISTENCE ITEMS SUBSIDIARY ACCOUNTS AND FOUND THAT OBLIGATIONS HAD BEEN OVERSTATED. IT WOULD BE REASONABLE TO CONCLUDE THAT INACCURACIES ALSO EXISTED IN THE UNLIQUIDATED OBLIGATIONS IN UNSAMPLED SUBSIDIARY ACCOUNTS. HOWEVER, INSTEAD OF AUDITING THE REMAINING SUBSIDIARY ACCOUNTS, THE CENTER MERELY ADJUSTED THE ERRORS DISCLOSED BY THE STATISTICAL SAMPLE AND MADE NO FURTHER ATTEMPTS TO CHECK THE ACCURACIES OF THE UNSAMPLED ACCOUNTS.

THEREAFTER, WHEN DISCREPANCIES WERE DISCOVERED BETWEEN THE CENTER'S FUND CONTROL UNLIQUIDATED OBLIGATIONS ACCOUNTS AND THE SUBSIDIARY ACCOUNTS, THE CENTER PRESUMED THE SUBSIDIARY ACCOUNTS TO BE ACCURATE. ALTHOUGH THIS PRESUMPTION SEEMS TOTALLY UNWARRANTED IT APPARENTLY PROVIDED THE BASIS FOR THE 31 U.S.C. SEC. 200 CERTIFICATION.

IF THE COMPTROLLER WAS OR SHOULD HAVE BEEN AWARE OF THE LACK OF SUPPORT FOR HIS CERTIFICATION, AND IF, AS SEEMS PROBABLE, INACCURACIES EXISTED IN THE ACCOUNTS ON WHICH THE 31 U.S.C. SEC. 200 CERTIFICATION WAS BASED THEN THERE MAY HAVE BEEN A VIOLATION OF 18 U.S.C. SEC. 1018. BASED ON THIS, YOU MAY PROVIDE ANY INFORMATION YOU HAVE CONCERNING THIS MATTER TO THE DEPARTMENT OF JUSTICE IN ACCORDANCE WITH GAO ORDER 1130.1, JUNE 1, 1979.

WHETHER OR NOT THERE IS A CRIMINAL VIOLATION OF 18 U.S.C. SEC. 1018, THE AGENCY MAY TAKE DISCIPLINARY ACTION IF IT IS DETERMINED THAT THE CERTIFICATIONS WERE A RESULT OF FAILURE BY THE COMPTROLLER TO FAITHFULLY EXECUTE HIS DUTIES, OR MAY RECOGNIZE THIS PROBLEM IN THE COMPTROLLER'S PERFORMANCE APPRAISAL IF WARRANTED. IN THIS REGARD, THE THRUST OF YOUR EVIDENCE IS THAT THE CENTER'S ACCOUNTING SYSTEM WAS SO INEFFECTIVE OR POORLY OPERATED THAT THE COMPTROLLER DID NOT KNOW AND (AT LEAST WITHOUT A MAJOR AUDIT EFFORT) COULD NOT HAVE KNOWN THE CORRECT FIGURE, ALTHOUGH HE MAY HAVE KNOWN THAT IN ALL LIKELIHOOD THE FIGURE HE WAS REPORTING WAS NOT CORRECT.

CERTAINLY, YOU MAY COMMENT ON THE BREAKDOWN OF THE SYSTEM, THE MISMANAGEMENT, AND THE DEPARTURES FROM ACCEPTED ACCOUNTING PRACTICES. THE COMPTROLLER AND THE CENTER COULD ALSO BE CRITICIZED FOR NOT MOUNTING AN AUDIT EFFORT OF WHATEVER SCOPE WAS NECESSARY TO RESOLVE THE DISCREPANCIES WHICH THEY KNEW EXISTED. NO DOUBT ALSO, AS YOU SUGGEST, THE COMPTROLLER SHOULD HAVE REPORTED THAT HIS CERTIFICATION WAS BASED ON INCOMPLETE INFORMATION AND MAY HAVE BEEN IN ERROR. IN SHORT, THE CENTER'S SYSTEM FOR KEEPING TRACK OF OBLIGATIONS IS NOT WORKING, SERIOUS ERRORS HAVE RESULTED, AND RESPONSIBLE OFFICIALS HAVE NOT DONE ENOUGH TO CORRECT THE PROBLEMS.

2. THE COMPTROLLER IS THE CHIEF FINANCIAL OFFICER OF THE CENTER. WE HAVE BEEN INFORMALLY ADVISED BY MR. CARNAHAN OF YOUR STAFF THAT THE COMPTROLLER IS RESPONSIBLE FOR THE CENTER'S ACCOUNTING SYSTEM AND ITS IMPLEMENTATION. THERE IS NO EXPLICIT LEGAL AUTHORITY TO MAKE THE ADJUSTMENTS AND NONE IS NECESSARY. IN HIS POSITION, THE COMPTROLLER POSSESSES IMPLIED AUTHORITY NECESSARY TO CARRY OUT HIS DUTIES. THE ADJUSTMENTS MAY HAVE VIOLATED GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, BUT THERE IS NO BASIS TO QUESTION THE COMPTROLLER'S LEGAL AUTHORITY TO MAKE THEM.

3. NO. THERE ARE NO STATUTORY PROVISIONS REQUIRING DOCUMENTATION OF ADJUSTMENTS.

4. THERE DOES NOT APPEAR TO BE ANY LEGAL CONSEQUENCE FOR REFUSING OR FAILING TO CERTIFY OBLIGATIONS AS REQUIRED BY 31 U.S.C. SECS. 200(B) AND (C). WHILE NOT SPECIFICALLY REQUIRED BY THE LAW, WE BELIEVE THAT IN A SITUATION SUCH AS EXISTS HERE, THE AGENCY SHOULD NOT CERTIFY OBLIGATIONS FOR PURPOSES OF 31 U.S.C. SEC. 200 WHERE VALID STATISTICAL SAMPLING PROCEDURES HAVE DISCLOSED THAT THE ACCOUNTS ON WHICH THE CERTIFICATION WOULD BE BASED ARE INACCURATE. UNTIL THESE ACCOUNTS CAN BE SHOWN TO BE ACCURATE, THE CONGRESS SHOULD BE NOTIFIED AND THE AGENCY SHOULD DISCLOSE THE REASONS FOR ITS INABILITY TO CERTIFY ITS OBLIGATIONS.