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GAO discussed its audit of the Rural Telephone Bank's (RTB) 1986 financial statements. Congress established RTB in 1971 to provide supplemental financing to rural telephone company borrowers and required GAO to audit its financial statements at least once every 3 years. GAO noted that: (1) in fiscal year 1986, RTB earned net income of about $25.3 million on a shareholders' investment of $690 million; (2) while RTB has considerable latitude to set interest rates and use retained earnings to establish reserves, its net income and retained earnings over the last 3 years appear high; (3) RTB interest rates did not accurately reflect its borrowing costs; and (4) RTB should change its rate-setting procedures to more accurately reflect its borrowing costs, provide relief for loan contracts with high fixed-interest rates, refund excessive retained earnings, and lower its contingency reserve, if necessary.

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