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COMPTROLLER GENERAL OF THE UNITED STATES,
Washington 25, D. C., September 29, 1949.

The honorable the SECRETARY OF THE TREASURY.

MY DEAR MR. SECRETARY: I have reviewed and considered with a great deal of interest your letter of August 30, 1949, containing three proposals in connection with the further development and installation of the accounting system of the Coast Guard. I appreciate very much the spirit of cooperation in connection with our joint efforts to improve accounting in the Government which prompted your submission of these proposals. It is indicative of the wholehearted cooperation which the General Accounting Office has received from the Treasury Department since the inception of our program.

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I agree with you that there is much to be gained from the standpoint of the future development of our program by linking the testing and development of revised procedures along the lines of your proposals with the good work which is being done in the Coast Guard in connection with its accounting system. have, as you know, long felt that the improvement and simplification of the accounting and auditing processes for the Government as a whole is, in large measure, dependent on the extent to which there is an active force for the development and maintenance of adequate systems of accounting, internal control, and internal audit within each agency. I have been informed of the manner in which the Coast Guard has organized and staffed to develop its accounting and related procedures from the standpoint of management needs. I have been particularly interested in the plans which have been developed for utilizing the accrual basis of accounting for linking budgetary accounting with modern accounting methods dealing with the development of costs and expenses. The constructive work which is being done should provide a good basis, in terms of effective internal procedures, to test out in actual application simplified accounting and audit procedures.

The specific elements of your proposals are dealt with below:

SITE AUDIT

Site audit, on a comprehensive basis, involving appropriate utilization and evaluation of the effectiveness of internal procedures, will be provided for the Coast Guard. Conversion from present audit methods will be synchronized with the installation of the new accounting system and related internal control and internal audit procedures. The development and application of the revised external audit procedures will be the responsibility of the Chief of the Audit Division, who will, of course, work closely with the Chief of the Accounting Systems Division in effecting necessary coordination between the accounting and audit phases of the problem.

The extension of site audit to the Coast Guard is in line with my general policy of increasing the scope of the audit through application of this approach where it is determined to be in the best interests of the Government to do so, all factors considered. I regard the work being done in the Coast Guard as an opportunity to further develop in practical and specific terms the full potentialities of a comprehensive audit which will embrace an audit of the books, records, and procedures on a coordinated basis with appropriate examination of expenditure transactions. Our plans contemplate the rendition of periodic audit reports. Disallowance of any illegal expenditures disclosed as a result of any phase of the audit work will, of course, be continued on a current basis.

The audit work to be done on this basis in the Coast Guard will provide valuable factual data in connection with the development of future plans on the part of my Office with respect to modification of audit methods in relation to accounting systems and management improvement in the various agencies. I am looking forward with great interest to evaluating the results accomplished.

DEPOSITS OF COLLECTIONS DIRECTLY WITH DEPOSITARIES

I am in agreement with the installation of the proposed revised collection procedures in the Coast Guard so as to provide for direct deposits with designated depositaries, with corresponding elimination of present intermediate processes, including the preparation of schedules of collection. It will, of course, be necessary for the installation of these procedures to be closely coordinated with the installation of appropriate accounting and internal control procedures and with the conversion to site audit.

SIMPLIFICATION OF DISBURSEMENT-CONTROL PROCEDURES

I am in full accord with your proposal to establish for the Coast Guard disbursement-control procedures on a more simplified basis to the fullest extent possible under existing law. As one of the announced objectives of our program, this matter of simplifying present disbursement controls and related warrant procedures for the Government generally has been under consideration by our respective staffs for some time.

I know you appreciate as well as I do that our program for these purposes must proceed with due regard for the requirements of sections 76, 77, 78, and 498 of title 31 of the United States Code. Under these existing statutory requirements there would have to be preserved a warrant and requisition in the process of making funds available to a disbursing officer, by appropriations and the accountability of the disbursing officer for such funds, and the disbursing officer could not legally issue checks in an amount exceeding the amount advanced to him under each appropriation. But I do not regard these statutory requirements as a bar to simplification and even consolidation of warrant and requisition forms which will preserve the necessary elements of such requirements. Nor do I regard them as preventing the disbursing officer, in the discharge of his own responsibilities, from giving due regard to the internal control exercised to keep approved expenditures within the limits of advances made to him by appropriations. Also I see no legal objection to the making of arrangements for the requisitioning of all funds under a given appropriation at one time.

I am in agreement that, under existing provisions of law, revised procedures can be worked out in accordance with the following principles and substantially in accord with your suggestions:

1. By warrant action the Treasurer of the United States may be authorized to pay checks drawn by authorized disbursing officers against the total amount of appropriations and funds available for use by the Coast Guard. There appears to be no reason why, as you suggest, such action cannot be incorporated in one warrant for the entire amount of all appropriations involved. If this is done, such composite warrant must embody required elements of (a) the appropriation warrant, (b) requisition for disbursing funds by individual appropriations, and (c) an advance of funds to the Chief Disbursing Officer by individual appropriations.

2. Accounting by assistant disbursing officers making payments for the Coast Guard will be on the basis of checks issued and paid vouchers classified by appropriations, as distinguished from the establishment of separate subsidiary disbursing balances for each assistant disbursing officer by individual appropriations. All disbursements made will, however, be considered as being made against the aggregate amount advanced to the Chief Disbursing Officer under each appropriation.

3. The administrative accounts and procedures of the Coast Guard will be the primary point of control for keeping disbursements within the limits of appropriations. Consistent with this, responsible accounting officials of the Coast Guard will, for this purpose, be designated as certifying officers. While, as previously stated, this cannot, under existing law, change the legal status of advances to the Chief Disbursing Officer, nor affect his accountability therefor, it is consistent with the basic objectives of the plan and a progressive step in that it places responsibility for certifying as to the availability of appropriations for disbursements to be made with officials who have responsibility for maintaining the internal controls for such purpose.

4. Provision will be made for maintaining in the Division of Bookkeeping and Warrants central accounting for disbursements made under each appropriation on the basis of reports originating with assistant disbursing officers classifving disbursements by appropriation. It is also my understanding that the procedures to be applied will provide for current reconciliation by appropriations with related accounts of the Coast Guard. This will provide a basis which the Chief Disbursing Officer may use to assist him in making the required accounting for all disbursements made under advances to the Chief Disbursing Officer according to the individual appropriations involved.

I think we are fortunate in having in the Coast Guard at present such an inviting situation for its selection as a testing base for this pilot program. I hope we can move forward as quickly as possible over a sufficient period to permit an adequate evaluation of results. In the meantime I am sure you will agree that the application of all procedures covered by your proposals and agreed to herein, should not be considered as creating a precedent for the establishment of the

same procedures in other agencies. And I agree with you fully that extension of procedures of this nature must depend upon determinations whether agencies are equipped with a satisfactory accounting organization and system to exercise the primary controls necessary. May I add that good management, generally, should also be present.

There will be matters to be worked out in specific terms in the development and application of detailed procedures involved in this Coast Guard program. Representatives of the General Accounting Office will be glad to work with the Office of the Fiscal Assistant Secretary and the Coast Guard in working out the necessary details. This work will be under the direction of the Chief, Accounting Systems Division, who will arrange for appropriate participation on the part of other divisions of the General Accounting Office.

Again let me express my appreciation for the interest and cooperation you have evidenced in furthering accomplishments of the joint accounting program. The proposals in your letter of August 30 are another example of your helpfulness. Sincerely yours, LINDSAY C. WARREN, Comptroller General of the United States.

Hon. FRANK PACE, Jr.,

Director of the Bureau of the Budget,

Washington, D. C.

TREASURY DEPARTMENT,
Washington, November 4, 1949.

MY DEAR MR. PACE: Attached is a draft of a proposed addition to the appropriation language of the "Operating expenses" appropriation of the United States Coast Guard for fiscal year 1951. The wording of the proposed legislation, as well as the desirability and interpretation of it, has been the subject of informal joint discussions between representatives of the Treasury Department, the Bureau of the Budget, and the General Accounting Office. Statements regarding the desirability and interpretation of the proposed amendment are presented below. You are aware of the accounting improvements which are under way in the Coast Guard. With the cooperation of the Comptroller General, several important innovations are being incorporated in the Coast Guard's accounting system on a trial basis. These are designed to simplify accounting operations while retaining essential controls and providing for improved accounting results for management of the Coast Guard's operations. A particularly important feature of the accounting system is the application of the accrual principle for development of costs incurred under the various programs of the Coast Guard. The proposed addition to the appropriation language will provide a basis for effectively utilizing such improved accounting data in the budgetary processes and integrating them with control of obligations incurred on an annual basis. I believe that this is of vital importance in making it possible to develop the performance budget concept in terms of actual cost and that there is much to be gained from moving forward on this basis in the Coast Guard at this time.

The revised appropriation structure for the Coast Guard as presently proposed consolidates the four appropriation accounts now provided for operating expenses into a single appropriation account and thereby provides the simplest possible appropriation structure on an annual basis. However, there is an inescapable overlap of applied costs from the unliquidated obligations of prior years into the applied cost of the current year. By using a single continuing account into which the annual appropriations for successive fiscal years will be placed, the cumbersome process of having to determine which items of applied cost are applicable to each of the three fiscal years' appropriations becomes unnecessary.

The proposed revision provides a means of merging fiscal-year appropriations into one account, and at the same time preserving the identity and integrity of each appropriation on a fiscal-year basis. Moreover, the proposal will result in lapsing unobligated balances of appropriations much sooner than is the case under existing legislation.

Independent verification of the validity of unliquidated obligations is provided through the institution of comprehensive on-the-site auditing of the Coast Guard's accounts and records by the Comptroller General. This change in external audit procedure provides additional justification for requesting the amendment to the appropriation language that is proposed.

It has been agreed by the joint group which has developed the proposed amendment that it should be interpreted in the following manner:

(1) As soon as the books of the Coast Guard can be closed for this fiscal year, the unobligated balances as of June 30, 1950, of the four operating appropriations for both fiscal years 1949 and 1950 will lapse and be transferred to the appropriation for payment of certified claims.

(2) An amount representing unliquidated obligations for each of these operating appropriations will be transferred to the single appropriation account to be established. This should result in the closing out of these expired appropriations both on the books of the Coast Guard and the Treasury Department.

(3) The appropriation made for fiscal year 1951 will be credited to the new appropriation account.

(4) Through records to be maintained by the Coast Guard in such a manner that will make them readily subject to verification through external audit by the General Accounting Office, the difference between the amounts paid during fiscal year 1951 for obligations incurred prior to July 1, 1950, chargeable against the appropriations merged into the new appropriation account, and the balances of unliquidated obligations brought forward, i. e., the amount transferred to the new appropriation account, shall be determined. If the amount of payments is less than the balance of unliquidated obligations brought forward, an amount equivalent to the difference shall lapse and be transferred to the appropriation for certified claims. If the amount of payments is more than the balance of unliquidated obligations brought forward, the difference shall be absorbed by the 1951 appropriation. Before making this determination, however, all unliquidated obligations as of June 30, 1951, applicable to fiscal year 1949, shall be removed from the books. The adjustment will be made for the net difference of all appropriation accounts rather than on the basis of each appropriation. In no event, however, shall this net adjustment result in expenditures exceeding the amount appropriated for any year, or limitation.

(5) Any claims for payment of unliquidated obligations chargeable to annual appropriations of the Coast Guard made prior to fiscal year 1949 shall be transmitted to the General Accounting Office in the same manner as is presently the case for claims against lapsed appropriations.

(6) It is anticipated that the appropriation language of fiscal years subsequent to 1951 will provide for a continuation of the single account to be established. Your favorable consideration of the above proposal is respectfully requested. Very truly yours,

E. H. FOLEY, Jr., Acting Secretary of the Treasury.

PROPOSED ADDITION TO APPROPRIATION LANGUAGE, "OPERATING EXPENSES, COAST GUARD"

Provided further, That amounts equal to the unliquidated obligations on record as of July 1, 1950, against Coast Guard appropriations entitled "Salaries, Office of the Commandant", "Pay and allowances", "General expenses", and "Civilian employees" for the fiscal years 1949 and 1950, shall be transferred therefrom and merged with this appropriation, all to be accounted for as one fund (without fiscal-year designation for disbursing and accounting purposes) and to be available for the payment of any obligations properly incurred under and within the limits of such appropriations for the fiscal years 1949 and 1950 together with obligations incurred with respect to the funds appropriated for the fiscal year 1951: Provided further, That the total amount by which the unliquidated obligations thus brought forward may exceed the amount of payments in liquidation of such obligations shall be transferred to the "Payment of certified claims" appropriation as of June 30, 1951: And provided further, That the unobligated balances of the appropriations for the fiscal years 1949 and 1950 shall lapse June 30, 1950, and be transferred to the "Payment of certified claims" appropriation established under the provisions of the Surplus Fund-Certified Claims Act of 1949.

ACCOUNTING MANUAL

INTRODUCTION

This accounting manual contains procedures for a plan of accounting for the United States Coast Guard. It has been developed in close cooperation and with active participation of the fiscal service of the Treasury Department and the Accounting Systems Division of the General Accounting Office. This has facili

tated incorporation into the accounting plan of the basic policies, principles, and objective developed under the joint program to improve accounting in the Federal Government being sponsored by the Comptroller General, Secretary of the Treasury, and Director of the Bureau of the Budget. The plan of accounting has been geared to produce financial information that will be useful in the management of the Coast Guard's affairs in addition to providing those features necessary for accountability, which become increasingly important in the handling of public funds, and with due regard to the requirements of existing statutes and over-all Government regulations.

Principal features of the accounting plan are:

1. Maintenance of a decentralized system of accounts in each of the district offices and designated headquarters units coordinated with the central accounts maintained at headquarters through the use of reciprocal accounts. Accounts for the smaller headquarters units are, for purposes of convenience and economy, kept by the nearest district office or headquarters.

2. Provision for reconciliation with the central appropriation and receipt accounts of the Government through the establishment of reciprocal accounts by the Coast Guard and the Bookkeeping and Warrants Division of the Treasury Department.

3. Combination in a single integrated accounting system of the requirements for appropriation or fund accounting and the development of cost data. Allotment accounts are few in number and are established according to administrative authority for the expenditure of appropriations for broad general purposes. tailed cost accounts are maintained to produce financial data on the cost of each facility or unit operated by the Coast Guard.

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(a) Commitments against appropriations are accounted for at each stage that is required either for management needs or because of over-all Government regulations, from the time that they originate until funds are disbursed as follows:

(1) In order that management may be advised daily of the balance of funds available, commitments are posted to allotment ledgers as obligations generally for an estimated amount at the time that a definite decision is made by management to commit funds, i. e., requisitions, letters of agreement, travel orders, and estimated pay rolls. At the close of the fiscal year, unliquidated obligations will be adjusted so as to remove any items not legally payable from expiring annua! appropriations. In such cases, if the materials or services involved are still required, they will be reobligated against appropriations of the following fiscal

year.

(2) Monthly reports of obligations required by Budget Treasury Regulation No. 1, Revised, are prepared in accordance with the concept of obligations contained in that regulation by deducting from the amount of unliquidated obligations shown by the books, the total of those unliquidated obligations included therein which do not represent obligations as defined in Budget Treasury Regulation No. 1, Revised.

(3) Obligations are liquidated on the basis of materials and services received in order that the amounts of expenditures shown by the allotment ledger may be coordinated with the amount of expenditures shown by the cost ledger for which the accrual basis of accounting is required. The amount of such expenditures posted to the allotment ledger on the accrual basis is carried to payable accounts maintained by appropriation.

(4) For convenience in balancing, payables are transferred on the basis of certified voucher lists sent to the disbursing officer for payment to a transit account maintained by appropriation only.

(5) The transit account is liquidated and the cash account credited on the basis of copies of the voucher lists returned by the disbursing officer advising of the issuance of checks. This is the same basis upon which the central appropriation accounts are charged by the Division of Bookkeeping and Warrants of the Treasury Department.

(b) Cost accounts are maintained on an accrual basis. In addition to the accrual principles observed in accounting for expenditures in the allotment accounts with which the cost accounts are coordinated, this basis of accounting is further utilized in cost accounting to distinguish between those expenditures applicable to balance sheet and expense accounts. However, for the reasons explained in paragraph 8, full provision has not been made for applying this basis to capital costs and fixed assets. To the extent deemed practicable, stores inventory accounts are provided to which expenditures for items placed in stores are charged and which are credited with issues that are in turn charged to the appropriate cost accounts. Moreover, industrial operations, such as those conducted at the Coast Guard YARD, the

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