The Office of Inspector General recently completed an audit of accounts payable. The purpose of the audit was to determine if the accounts payable account balance in the amount of $466,818 was presented fairly on the official accounting records and reports and if there were any unrecorded liabilities as of September 30, 1995.
Our audit objectives were to ensure that:
1) Internal controls are in place and operating effectively;
2) Accounts payable represent authorized obligations;
3) Accounts payable and related budgetary accounts are properly valued and recorded; and
4) Accounts payable includes all significant current obligations.
Our audit of accounts payable was conducted in accordance with the General Accounting Office Government Auditing Standards and included such auditing procedures as considered necessary. Our review addressed compliance with the applicable regulations and policy guidance which included GAO Policy and Procedures Manual for Guidance of Federal Agencies-Title 2, Accounting Appendices I, II and III and the Treasury Financial Manual, Financial Management Service Series, Standard General Ledger (SGL).
The scope of our audit addressed amounts owed for goods and services provided by vendors and government agencies. The FEC is required to record a liability, usually in the form of an accounts payable, at fiscal year end (September 30) if a supplier has delivered goods or services on, or before September 30, but has not been paid for the goods or services by close of business on September 30.
Details of the sample methodology used during our audit are discussed in the report. We performed an internal control review to identify the existing controls, including year-end closing procedures, over accounts payable. Our substantive tests were designed to evaluate the effectiveness of these controls. These tests included the review of invoices, purchase orders, receiving reports, various registers, journals and reconciliations.
With regard to the results of internal control testing, we found that management generally has effective internal control procedures.
The results of our substantive testing are discussed at length in the report. The tests included sixty account payable confirmations with FEC vendors, detailed substantive testing of thirty accounts payable balances and supporting documentation, a review (search) for unrecorded liabilities and analytical reviews of account balances and reconciliations. The following is a summary of the test results.
Of the fifty-nine (59) vendor responses out of sixty (60), fifty- one (51) agreed with the FEC accounts payable balance as of September 30, 1995. Four (4) of the eight (8) vendors responded that they could not confirm the balance because the information was not current in their accounting systems. There were differences found with four (4) vendors, and based on our research, we concluded that the differences were not significant.
Substantive (attribute) testing
Of the thirty (30) accounts payable amounts tested, we generally found the accounting transactions well documented and processed correctly based on our review of the supporting documentation. The supporting documentation was contained in packets which included the invoice, purchase order and receiving report.
Of the thirty (30) invoices tested, we found six (6) that were for goods or services provided during August. Based on the review of documents, services were also provided during the month of September under the terms of the contracts and/or purchase orders. Since goods/services were received from these vendors in September, a liability should have been estimated for material amounts.
Review for Unrecorded Liabilities
Of the thirty (30) October cash disbursements tested, seventeen (17) disbursements were reported as an accounts payable on the accounts payable listing as of September 30, 1995. Thirteen (13) disbursements were not reported as accounts payable on the listing for various reasons. Five (5) of the thirteen (13) disbursements were unable to be tested, therefore a conclusion cannot be made whether the obligations were unrecorded liabilities as of 9/30/95. The remaining eight (8) disbursements were for goods, services or travel performed which were received or completed prior to the end of the fiscal year, and therefore an estimate of the liability should have been recorded as of September 30.
We reviewed the accounts payable balance reported on the Budget Execution Report (SF-133) submitted to the Office of Management and Budget (OMB) and the Treasury Year-end Closing Statement (FMS 2108). Due to a mathematical error, the total liability reported to OMB did not include accounts payable in the amount of $466,818 for goods and services as of September 30, 1995.
Determinations and Suggestions
The accounts payable balance is understated as reported in the FEC financial reports as of September 30, 1995 because liabilities are not estimated for goods and services received, but not invoiced, in September.
GAO Title 2, Appendix I, A-10 states that: "Accounts Payable are liabilities, amounts owed for goods and services received, and amounts received but not yet earned."
It goes on to state that "accounts payable for goods and services shall be recorded as a liability when the goods are received. The liability reported in the financial statements shall reflect both invoices received and estimated amounts for invoices not yet received." The U.S. Treasury Financial Management Service Standard General Ledger (SGL) requires accruals for accounts payable.
Our review found that the existing year-end closing procedures did not include a procedure to estimate a liability for goods and services received during September, but not invoiced. The existing procedure records a payable based on invoices on hand at the end of the fiscal year. The receipt of the invoice by accounting triggers the processing of the receiving report. The payable is not recorded upon receipt of goods or services, but when the receiving report is received from the division and matched with the invoice and purchase order.
The lack of accruals at the end of the fiscal year impacts both external reports Treasury's Year-end Closing Statement (FMS 2108) and OMB's Budget Execution Report (SF-133) and the FEC's Statement of Financial Position.
While we recognize that the overall amount for the account payable balance of $466,818 is small, the understating of this balance impacts the reliability and accuracy the Combined Statement of Financial Position, the U.S. Treasury Year-end Closing Statement (FMS 2108) and the Budget Execution Report submitted to OMB.
The Undelivered Orders together with Accounts Payable and Other Liabilities balances forwarded to Treasury on the FMS 2108 represents all unpaid obligations. These obligations are separately identified and reported. The Undelivered Order balance reflects goods and services obligated for, but not received. The account payable balance reflects goods and services received but not paid. Certain services which are received in September are not estimated (accrued) as required and are reported as an undelivered order. Therefore the Undelivered Orders account is overstated and Accounts Payable is understated.
The Combined Statement of Financial Position is inaccurate. Since the accounts payable balance is understated, the total liability is understated. As a result, the total equity is overstated. Assets are also understated.
The accrual of the liability for goods and services received at September 30 is a year-end reporting issue. While the current system is not designed to report this liability, we suggest including procedures to address this condition in any future plans to update and modernize your accounting system.
For fiscal year 1997, and thereafter, we believe that the FEC's internal and external reports would be more accurate and reliable if this adjustment is made at year-end to estimate the accounts payable for goods and services of a material cost.
Based on the results of our internal control testing and substantive testing, we believe the following will strengthen controls over accounts payable:
1. There should be an organizational chart for the accounting office designating key personnel responsibilities among staff.
2. Procedures should be strengthened to ensure that paid invoices are stamped "PAID".
3. Receiving reports should be completed as to number, quantity, condition etc. in accordance with the instructions on the receiving report. Receiving reports for training should be signed by the employee completing the training.