Fp INSPECTOR GENERAL DEPARTMENT OF DEFENSE

accounting controls are to provide management with reasonableassurance that obligations and costs are in compliance withapplicable laws; funds, property, and assets are safeguardedagainst waste, loss, and unauthorized use or misappropriation;and assets, liabilities, revenues, and expenditures applicable tooperations are properly recorded and accounted for to permit thepreparation of reliable financial statements and to maintainaccountability over the Plant's assets.Because of inherentlimitations in any system of internal accounting controls, errorsor irregularities may occur and not be detected.Also,projection of any evaluation of the system to future periods issubject to the risk that procedures may become inadequate becauseof changes in conditions or that the degree of compliance withprocedures may deteriorate.Our evaluation, which was made for the limited purposedescribed in the second paragraph of page 1, would notnecessarily disclose all material weaknesses in the system.Accordingly, we do not express an opinion on the Plant's systemof internal accounting controls taken as a whole. However, ouraudit showed that there were no financial controls overinventories of mounted jewel bearings(see Enclosure 1,note 3). Without such controls, management had no assurance thatsales of usable mounted jewel bearings were being properlyrecorded and reported.As part of our audit, we also tested the Plant's compliancewith the provisions of the contract with the Bulova WatchCompany, Inc. — reimbursable contract no. GS-00-DS-(P)-03003.In our opinion, the Plant generally complied with the provisionsof the contract for transactions tested that could havematerially affected its financial position. In making our audit,nothing came to our attention that caused us to believe that thePlant was not complying with the provisions of the contract forthose transactions not tested.Results of Followup on GSA Report.Our followup of theprevious GSA IG audit report showed that nine ommendationswerepartiallyimplemented,and fourrecommendations recommendations that were either partially implemented or werenot implemented at the time of our audit follows.Recommendations Partially Implemented.The GSA IGrecommended establishing a cost pool to prorate General andAdministrative expenses between the jewel bearing and dosimeteroperations.The Plant had established a cost pool; however, itdid not provide for a reasonable allocation of expenses to thedosimeter operations (see page 8). The GSA IG also recommendedadjusting entries to establish proper accounting for Building #2,a leased asset, and its related obligation and to disclose theexpenses associated with the rental of the building.We found

that the entries were incomplete (Enclosure 1, note 17).Inaddition, the GSA IG recommended making a separate inventory ofadministrative and plant production equipment that FEMA furnishedat no cost to the contractor and establishing memorandum accountsso that the inventory could be reconciled against the accountbalances.The Plant inventoried the equipment; however, thePlant did not obtain the cost basis of the equipment from FEMA.Therefore, the financial records or reports did not reflect theequipment value, and reconciliations had not been performed(Enclosure 1, notes 13 and ded that the Plant return cash balances in excess of 365,000 to GSA.Effective cash management practices had notbeen established, which resulted in the plant maintainingexcessive cash balances.Cash management at the Plant isdiscussed on page 7 of this report.In addition, the GSA IGrecommended establishing an inventory account for mounted jewelbearings. The Plant did not establish this account (Enclosure 1,note 3). Further, the GSA IG recommended that the dadministrative equipment associated with dosimeter operations.The Plant did not depreciate those items (Enclosure 1, notes 11,13, and 14).Finally, related to dosimeter operations, the GSAIG recommended that the Plant cease charging dosimeter operatingexpenses to the Pre-Operating Cost asset account; that operatingcosts charged to the Pre-Operating Cost asset account afterOctober 1, 1983, be expensed; and that the balance in thePre-Operating Cost asset account on September 30, 1983, beamortized against the dosimeter operations.The Plant did notstop charging operating costs to the Pre-Operating Cost accountuntil October 1, 1986, and, as of the time of the audit, had notamortized any of those costs (Enclosure 1, note 12).Allowability of Costs.The costs that the Plant incurredwere generally in compliance with contract terms and theapplicable procurement regulations, with one exception.ThePlant reimbursed employees for the cost of eye examinations andsafety glasses under its written policy, which states, "The Plantpays the cost of safety equipment for those employees whoseworking conditions without same, in the opinion of the GeneralManager, are potentially hazardous to the employee."In ouropinion, this policy was not intended to cover the cost oftreating extraordinary eye conditions, such as the cataractproblems experienced by the Plant's General Manager. During the46 months (3.83 years) covered by our audit, we identified81 employees who requested reimbursement for amounts above 50for eye examinations and safety glasses. The total reimbursementmade to employees was 12,703, or an average of 39 per employeeper year. During the same period, similar costs for the GeneralManager amounted to 1,235, or an average of 322 per year. Webelieve that the 283 difference in average costs between theemployees and the General Manager ( 39 versus 322) was not

reasonable or necessary to effect an adequate measure of safetyprotection and should not have been reimbursed bytheGovernment.Accordingly,theexcessivecostsof 1,084(3.83 years x 322 per year) should be disallowed.Other Matters of InterestCash Management.Cash maintained in local bank accountsroutinely exceeded the amount needed for day-to-day Plantoperation.This occurred because the Plant based average cashneeds on gross monthly disbursements instead of managing cash tomeet actual payment due dates.Any reductions in outstandingcash would result in decreases in interest payments that theU.S. Treasury must make.As shown below, the average monthly cash balance that thePlant maintained for the 46 months ended June 4, 1989, exceededFY 1989 average monthly operational expenses by over 100,000.Cash tionsTotalCash Balance-ActualOperating Costs-Accrued(Excludes Depreciation) 365,997 77,110 443,107278,80464,107342,911Monthly Cash Excess 87,193 13,003 100,196Average MonthlyPayroll costs and related benefits make up about 81 percentof operating costs with the weekly payroll of less than 50,000being the Plant's major disbursing concern.The Plant managerstated that due to past delays in replenishing cash, a largebalance was necessary to ensure that adequate cash was on hand tomeet disbursing needs.Receipts for sales of jewel bearingsaveraged 257,000 per month.While FEMA did occasionally delayadvancing cash to the Plant, cash balances at the Plant rarelyfell below 100,000.The nature of the Plant's disbursements offers significantopportunities for reducing cash levels.We did not perform adetailed analysis of cash needs, but, in our opinion, no morethan 2 weeks' average operating costs, or about 172,000 based onFY 1989 costs, should be allowed to accumulate in local accounts.

f. Establish and maintain adequate financial controlsover spare parts inventory (Enclosure 1, note 6).g. Establish and maintain adequate financial controlover special tooling (Enclosure 1, note 7).h. Establish and maintain adequate financial controlsover Other—FEMA items (Enclosure 1, note 8).i. Record the cost of in-house construction forBuilding #1 and account for depreciation of the building addition(Enclosure 1, note 9).j. Account for depreciation of the Leased LandBuilding, Capital Lease—Building #2 (Enclosure 1, note 10).k. AccountfordepreciationofImprovements—Building #2 (Enclosure 1, note 11).Leasehold1. Write off the Pre-Operating Cost—Building #2 andrelated equity (Enclosure 1, note 12).m. Establish financial controls over all Building #2operating equipment, both purchased and transferred, and accountfor depreciation of all of this equipment (Enclosure 1, note 13).n. Establish financial control over all Building #2administrative equipment and account for depreciation of thisequipment (Enclosure 1, note 14).o. Adjust the balance of Obligations Under CapitalLease and properly account for monthly lease payments (Enclosure1, note 16).p. Adjust the Appropriated Capital—FEMA account tocorrect the accounting errors and write off the Pre-OperatingCost (Enclosure 1, note 17).q. Adjust the operating profit for prior and currentyears to recognize income and expenses derived from the rental ofBuilding #2 (Enclosure 1, notes 18 and 19).r. Prepare and submit a statement of changes infinancial position in its periodic financial report submissions.s. Provide for a reasonable allocation of General andAdministrative Expenses to jewel bearing and dosimeter operations(page 8).

102.We recommend that the Defense Logistics Agencycontracting officer disallow 1,084 as unreasonable costsrelating to optical safety (page 6).On December 26, 1989, we provided a copy of the draft reportto the Assistant Secretary of Defense (Production and Logistics)and the Director, Defense Logistics Agency. We received reply tothe draft report from the Director, Defense Logistics Agency,through the Assistant Secretary of Defense (Production andLogistics) on April 30, 1990. The complete text of management'scomments is provided in Enclosure 2. Management concurred withthe findings and recommendations, and actions taken or plannedshould correct the conditions disclosed. Management comments tothe draft report comply with the provisions of DoD Directive7650.3, and a response to this final report is not required.No monetary benefits are claimed in this report.Internalcontrols were inadequate and account balances were inaccurate, asdiscussed throughout the report. Recommendations in this reportaddress internal control weaknesses as defined by Public Law 97255, Office of Management and Budget Circular A-123, and DoDDirective 5010.38. Therefore, a copy of the final report will beprovided to the senior official responsible for internal controlswithin the Defense Logistics Agency.The cooperation and courtesies extended to the audit staffduring the audit are appreciated.If you have any questionsconcerning this report, please contact Mr. James Helfrich at(614)238-4141(AUTOVON 850-4141) or Mr. John Gregor at(202) 693-0633 (AUTOVON 223-0633).A list of the Audit TeamMembers is in Enclosure 3.Copies of this report areactivities shown in Enclosure 4.beingdistributedto34\JZs*Edward R. JonesDeputy Assistant Inspector Generalfor AuditingEnclosuresthe

"V1* &X1 !' v-1W fr * "*': -'WILLIAM LANGER JEWEL BEARNING PLANTSTATEMENT OF FINANCIAL CONDITIONAs of May 31, 1989 fPASSETSCurrent.Cash In Bank: (note 1) -'FEMADLA-NBC/DLA-N Special AccountPayroll Account 89,801321,115410,916Accounts Receivable:Trade Bldg. #1 (note 2)Stockpile Bldg. #1Inventories: (note 3)Finished Goods On Hand (note 4)Work-In-ProcessOperating Supplies:Blanks (note 5)Diamond PowderStock RoomSpare Parts (note 6)Special Tooling (note 7)Other-FEMA (note 8)500 411,416253,412525,009 778,421788,814518,812 235,98316,23872,41288,6989,005949423,285 1 ,730,91128,627Deferred Charges & Prepaid Expense s Bldg. #1 2,949,375TOTAL CURRENT ASSETSFIXED ASSETS 18,438Land Bldg. #11,524,393Building & LandImprove. Bldg.-#1 (note 9)788,566Leased Land-Bldg.Cap. Lease Bldg.-#2 (note 10)408,811Leasehold ImprovementsBldg. #2 (note 11)1,745,151Pre-Operating CostBldg. #2 (note 12)1,188,161Operating EquipmentBldg. #1224,399Operating Equipment- (note 13)Bldg. #292,065Administrative Equip.Bldg. #123,332Administrative Equip.Bldg. #2 (note 14) alue 18,438265,3701 ,259,02326,224762,342408,8111 ,745,151921,891266,270224,39940,86351,20223,332 1,254,348 4,758,968 7,708,343TOTAL FIXED ASSETSTOTAL ASSETSy Actually as of June 4, 1989, not as of May 31, 1989, as reported.-Notes begin on page 4 of this enclosure.ENCLOSURE 1Page l of 9

WILLIAM LANGER JEWEL BEARING PLANTSTATEMENT OF FINANCIAL CONDITIONAs of May 31, 1989 (continued)LIABILITIESAccounts Payable:TradeRolla Development Corporation (FEMA Rent)Federal Unemployment InsuranceState Unemployment InsurancePension (note 15)Leave Liability:HolidayVacationChristmas BonusAccrued PayrollDeductions Savings BondsFederal Withholding Taxes PayableState Taxes WithheldLife Insurance DeductionsDeferred Credits (FEMA)92,82312,246(1,136)5,194335 927§ 45,054 231,084 676,138TOTAL CURRENT LIABILITIES726,949OBLIGATION UNDER CAPITAL LEASE-BLDG. #2 (note 16)INVESTMENT OF U.S. GOVERNMENTInvested Cap./Tech. ImprovementsProv. for Tech. Improvements of EquipmentAppropriated Capital: DLA-NAppropriated Capital: FEMA (note 17)Operating Profit or (Loss) - Prior Years (note 18).Operating Profit or (Loss) - Current Year (note 19) Resources Reserved for Fuel Storage 9(5,118)TOTAL INVESTMENT OF U.S. GOVERNMENT 6,305,256TOTAL LIABILITIES AND INVESTMENT OF U.S. GOVERNMENT 7,708,343-Also see notes 2, 3, 4, and 5.ENCLOSURE 1Page 2 of 9

WILLIAM LANGER JEWEL BEARING PLANTSTATEMENT OF INCOMEFOR THE PERIOD AUGUST 1, 1985, THROUGH JUNE 4, 1989Sales 12,112,994419,791Jewel BearingsMounting Service (note 20) 12,532,785TOTAL SALESCost of Goods Sold231,0855,396,4336,641,981371,173 12,640,672621,793582,1561,203,949Less:Inventory Transfers In/Out - Net (note 22)122,492Less:Ending Inventories:Finished GoodsWork-In-ProcessMaterials (Blanks)Direct LaborOtherMounting Service Cost (note 21)Add:Beginning Inventories:Finished GoodsWork-In-Process 798,899518,812TOTAL COST OF GOODS SOLD1,317,711 12,404,418128,367179,185(155,699)Operating IncomeOther Income (note 23)Other Expenses (note 24)Net Income: 151,853Prior Period Adjustments (note 25)Net Income For Period (notes 2, 3, 4, and 5) (29,500)122,353ENCLOSURE 1Page 3 of 9

WILLIAM LANGER JEWEL BEARING PLANTNOTES TO FINANCIAL STATEMENTSNote 1. Cash In Bank. The account balance of 411,416 wascorrect, but, based on operating requirements, we considered thatthe amount of cash that was kept in the William Langer JewelBearing Plant (the Plant) bank account was excessive.Seediscussion on page 7 of the report.Note2.Accounts Receivable, Trade.The balance of 253,412 was overstated by 727, which represented the value oftwo delinquent customer accounts that should have been writtenoff in accordance with Article VIII of the contract.Theoverstatement represented a corresponding overstatement ofoperating profit and net income.Note3.Inventories.Inventories were understated byabout 14,270 because the Plant had not established an inventoryaccount for on-hand, potentially salable stocks of mounted jewelbearings. To allow for defects or spoilage of jewel bearings inthe mounting process, the Plant customarily sent the mountingcontractor a larger number of unmounted jewel bearings than thenumber of mounted bearings required to satisfy a customerorder.The value of these extra unmounted jewel bearings waswritten off of the Finished Goods Inventory and reported underMounting Service Cost when the bearings were shipped to themounting contractor.The number of mounted jewel bearings thatwas returned from the mounting contractor was generally largerthan the number needed to fill the customer order.The Plantretained the extra, mounted jewel bearings and maintainedinformal records as to the number on hand. However, the value ofthis inventory was not formally accounted for on the balancesheet.Thus, there was no financial control over the on-handstock of mounted jewel bearings. The understatement of inventoryrepresented a corresponding understatement of operating profitand net income.Note 4. Finished Goods On Hand. The balance of 788,814was overstated by 26,151 because it included the value ofinactive items.The Plant requested approval to write off theinactive items in October 1988 and was still awaiting approvalfrom the contracting officer at the time of our audit.Theoverstatement of finished goods represented a correspondingoverstatement of operating profit and net income.Note5.Blanks.The reported balance of 235,983 iscorrect, but the actual value of usable blanks (raw material) formanufacturing jewel bearings may have been lower because ofobsolescence.The Plant had no procedure for reviewing andwriting off obsolete blanks in inventory.Our review of23 items, valued at 84,324, in this inventory indicated that9 items, valued at 24,981, had not been used since before 1984.ENCLOSURE 1Page 4 of 9

SiKü«!gft»** -W :WILLIAM LANGER JEWEL BEARING PLANTNOTES TO FINANCIAL STATEMENTS (continued)Note 6. Spare Parts. The spare parts inventory includeditems for which there was no recorded or reported value and itemsthat were produced at the Plant and entered into inventory atcatalog prices rather than at the cost of production. We couldnot determine the value of unpriced or catalog-priced items.Note 7. Special Tooling. The balance of 9,005 could notbe verified.Records that identified quantitative balances andcosts of individual items were not maintained, and physicalinventories could not be conducted to verify the account balance.Note 8. Other — FEMA. The balance of 949 could not beverified.Records that identified quantitative balances andcosts of individual items were not maintained, and physicalinventories could not be conducted to verify the account balance.Note9.Building and Land Improvements — Building #1.The reported balance was understated by about 20,600 because ofunrecorded in-house construction and was overstated by about 13,700 because of unrecorded depreciation, a net understatementof about 6,900. This understatement represented a correspondingunderstatement of operating profit and net income.a. The balance did not include labor and indirect costsassociated with in-house construction of capital assets by Plantpersonnel.Records indicated that 1,373 hours of direct laborvalued at about 14,600, exclusive of associated indirect costs,were incurred on in-house construction between April 1988 and May1989. We did not identify all associated indirect costs, but weestimated that fringe benefits alone would have totaled about 6,000.b.The balance improperly excluded the cost ofdepreciation for FY 1989 for the new building additions that wereoccupied beginning April 1988.Based on the value of theproperty recorded as of September 30, 1988, we estimated that thedepreciation for the 8 months ended May 1989 was ding #2.The balance of 762,342 was overstated by 75,394.The reported accumulated depreciation of 26,224 wasonly through July 1985. The unreported depreciation expense forthe period August 1985 through May 1989 was 75,394 (46 months x 1,639 per month). Also, see notes 18 and 19.ENCLOSURE 1Page 5 of 9

WILLIAM LANGER JEWEL BEARING PLANTNOTES TO FINANCIAL STATEMENTS (continued)Note 11.Leasehold Improvemen

DEPARTMENT OF DEFENSE 400 ARMY NAVY DRIVE ARLINGTON, VIRGINIA 22202 REPORT NO. 90-071 May 22, 1990 MEMORANDUM FOR ASSISTANT SECRETARY OF DEFENSE (PRODUCTION AND LOGISTICS) DIRECTOR, DEFENSE LOGISTICS AGENCY SUBJECT: Report on the Audit of the Fin