MEMORANDUM

TO: The Honorable Bill Thomas, Chairman

Committee on House Administration

The Honorable Steny Hoyer, Ranking Minority Member

Committee on House Administration

FROM: Robert B. Frey III

Deputy Inspector General

DATE: September 24, 1999

SUBJECT: Final Report - Audit Of The Financial Statements For The Year Ended

December 31, 1998 (Report No. 99-HOC-07)

Attached is our final report on the audit of the House of Representatives' (House) consolidating financial statements for the year ended December 31, 1998. The report includes the House's Financial Statements, Notes to the Financial Statements, Supplemental Schedules, Management Report on Internal Controls, and CAO Response to the 1998 Financial Statement Audit Report. Also included is the Report of Independent Accountants encompassing PricewaterhouseCoopers' opinion on the financial statements, Report of Independent Accountants on Compliance with Laws and Regulations, and Report of Independent Accountants on Management’s Assertions About Internal Controls.

In accordance with applicable auditing standards, PricewaterhouseCoopers took into consideration in this report any events which would have required an adjustment to the House’s Financial Statements, Notes to the Financial Statement, or Supplemental Schedules up to the issuance date of this report. In addition, the report discloses problems associated with the House's financial management activities and includes recommendations to improve those activities.

Objectives And Scope Of Audit

The objectives of this audit were to assess whether the House's consolidating financial statements present fairly, as of December 31, 1998, the overall financial position, results of operations, and cash flows in accordance with generally accepted accounting principles. This report also presents findings on the House's compliance with applicable laws and regulations, and the fairness of management's assertion on whether the House's internal control structure provides

reasonable assurance of achieving generally accepted control objectives. As part of this audit, we followed up on the status of the House’s efforts to implement audit recommendations previously reported for the year ended December 31, 1997.

This audit was part of our 1999 Annual Audit Plan that was approved by the Committee on House Administration on March 10, 1999. We approved the scope of the audit work, monitored its progress at key points, and performed other procedures we deemed necessary. These procedures included the payroll audit work, which was conducted by Office of Inspector General staff, in conjunction with the financial statement audit effort. The audit was conducted in accordance with Government Auditing Standards, issued by the Comptroller General of the United States.

Results Of Audit

The House has made significant progress in improving its financial management and operations since last year’s financial statements audit. For the year ended December 31, 1998, the House compiled its own consolidating financial statements for the second consecutive year. During Calendar Year 1998, the House implemented or initiated corrective actions to address a total of 45 prior audit recommendations contained in last year’s report. These positive efforts greatly contributed to reducing the House’s eight weaknesses cited in last year’s report to five in this year’s report. Thus, for the first time at the House, PricewaterhouseCoopers expressed an “unqualified opinion” on the House’s financial statements. In addition, this year’s Report of Independent Accountants on Compliance with Laws and Regulations identifies no instances of noncompliance.

The Report of Independent Accountants on Management’s Assertions about Internal Controls identifies five internal control weaknesses--all which are reportable conditions. These five weaknesses were previously reported for the year ended December 31, 1997. Three of these weaknesses were identified as material weaknesses in last year’s report (i.e., Weaknesses 1, 2, and 3). However, these three weaknesses are now considered reportable conditions, because actions were taken or are well underway to address associated recommendations. Due to the House’s progress towards improving financial-related activities, we were able to close (i.e., fully implemented or otherwise resolved) 33 of the 45 prior recommendations. Ten of these 33 recommendations were associated with 3 weaknesses identified in the 1997 report, but have been otherwise resolved during 1998.

Prior Audit Coverage

The follow-up work performed on the 45 prior recommendations spanned a total of 11 audit reports. A brief description of each of these reports is provided below. The status of all open recommendations is addressed in the Report of Independent Accountants on Management’s Assertion about Internal Controls.

Audit Of Financial Statements For The Year Ended December 31, 1997 (Report No. 98‑HOC‑11, dated November 4, 1998) identified three material weaknesses and five reportable conditions that could adversely affect the House's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements.

Audit Of Financial Statements For The Year Ended December 31, 1996 (Report No. 97‑HOC-14, dated December 1, 1997) identified 5 material weaknesses and 8 reportable conditions that could adversely affect the House's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements.

House Needs To Refocus It’s Efforts To Meet The Year 2000 (Report No. 97-CAO-13, dated September 29, 1997) identified opportunities for improving the House’s Year 2000 management controls involving planning, budgeting, internal and external coordination issues, procurement, and conversion practices.

Internal Controls Over Equipment Inventory Systems Can Be Improved (Report No. 97‑CAO-11, dated July 28, 1997) identified internal control weaknesses over the House’s equipment inventory systems.

HIR Management Practices Undermine The House’s Ability To Keep Pace With Technological Changes (Report No. 97-CAO-09, dated May 8, 1997) identified serious problems with regard to the management process HIR-wide; planning and budgeting; policies, standards, procedures, and guidelines; and staffing.

Improvements Are Needed In The Management And Operations Of The Office Of The Chief Administrative Officer (Report No. 96-CAO-15, dated December 31, 1996) identified management weaknesses adversely affecting system development and Year 2000 projects related to financial operations.

Audit Of Financial Statements For The 15-Month Period Ended December 31, 1994 (Report No. 95-HOC-22, dated July 18, 1995) identified 14 material weaknesses that could adversely affect the House's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements.

The Management And Control Of The House's Information Systems Operations Should Be Improved To Better Meet Members' Needs (Report No. 95-CAO-19, dated July 18, 1995) identified internal control weaknesses concerning top management oversight, organization structure, training, and technology management related to the House's information systems operations.

· House Computer Systems Were Vulnerable To Unauthorized Access, Modification, And Destruction (Report No. 95-CAO-18, dated July 18, 1995) identified internal control weaknesses related to the integrity, confidentiality, and availability of information and systems.

· Split Responsibility For Equipment Leasing And Maintenance Cost The House Almost $2.0 Million Annually In Payments For Outdated Equipment (Report No. 95-CAO-17, dated July 18, 1995) identified internal control weaknesses related to the management, maintenance, and inventory of leases of office and computer equipment.

Problems Plagued The House's Financial Operations (Report No. 95-CAO-16, dated July 18, 1995) identified internal control weaknesses related to accounting policies, methods, and financial management systems.

Recommendations

The Report of Independent Accountants on Management’s Assertions about Internal Controls contains four new audit recommendations. It also includes twelve open prior recommendations in varying stages of implementation.

Management Response

The CAO formally responded to our draft report on July 13, 1999. In his response, which is included in its entirety as an appendix to this report, the CAO fully concurred with the findings, conclusions, and recommendations contained herein.

Office of Inspector General Comments

The actions taken and planned by the CAO are responsive to the issues identified and, when fully implemented, should satisfy the intent of the recommendations. Further, the milestone dates provided for completing actions on the open recommendations appear reasonable.

Attachments

cc: Speaker of the House

Majority Leader of the House

Minority Leader of the House

Members, Committee on House Administration

Transmittal Memorandum

Report of Independent Accountants 1

Financial Statements 5

Consolidating Statement of Financial Position.................................................................... 6

Consolidating Statement of Operations............................................................................... 8

Consolidating Statement of Cash Flows............................................................................. 10

Notes to the Financial Statements 13

Supplemental Schedules 33

Organization and Composition of Consolidating Financial Statements........................... 35

Officers and Legislative Offices...................................................................................................................... 41

Chief Administrative Officer........................................................................................................................... 49

Capitol Police and Other Joint Functions.......................................................................... 57

Report of Independent Accountants on Compliance with Laws and Regulations................... 61

Report of Independent Accountants on Management’s Assertion

About Internal Control............................................................................................... 65