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Pursuant to a congressional request, GAO reviewed the appropriateness of the accounting treatment of an error correction reflected in the District of Columbia's fiscal year (FY) 1988 Comprehensive Annual Financial Report. GAO noted that: (1) to correct mortgage receivables erroneously charged as expenditures in FY 1979 through FY 1987, the District established a mortgage receivables account of $16,746,000 in FY 1988 and decreased its FY 1988 expenditures account by the same amount; (2) certain accounting standards state that if an error in the financial statements of a prior period is discovered and corrected in a subsequent year, the error correction should be reported as a prior period adjustment and that prior period adjustments are to be made by adjusting the beginning retained earnings balance, but they do not have to be applied if the items are immaterial; (3) both KPMG Peat Marwick (KPMG) and the District's chief financial officer agreed that the amount involved was immaterial, since it amounted to less than 1 percent of the District's total FY 1988 expenditures; (4) KPMG stated that the District disclosed the effect of the error correction in its notes to the financial statements; (5) it did not evaluate the reasonableness of the decision on whether the error correction should be reported as a prior period adjustment, since it did not participate in the FY 1988 audit and KPMG working papers from the FY 1988 audit were no longer available; and (6) the effects of the error correction presentation do not impact the District's current financial statements or the financial statements for any year after FY 1988.

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