Independent Auditor's Report on Compliance with Laws and Regulations

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Office of the Inspector General
United States Department of Justice

Board of Directors
Federal Prison Industries, Inc.

We have audited the financial statements of the Federal Prison Industries, Inc. (FPI), a component of the United States Department of Justice, as of and for the year ended September 30, 2001, and have issued our report thereon dated January 2, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

The Management of the FPI is responsible for complying with laws and regulations applicable to the agency. As part of obtaining reasonable assurance about whether FPI’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws and regulations, noncompliance with which could have a direct and material effect on the determination of financial statement amounts, and certain other laws and regulations specified in OMB Bulletin No. 01-02, including the requirements referred to in the Federal Financial Management Improvement Act (FFMIA) of 1996. We limited our tests of compliance to these provisions and we did not test compliance with all laws and regulations applicable to the FPI.

The results of our tests of compliance with the laws and regulations described in the preceding paragraph, exclusive of FFMIA, disclosed instances of noncompliance with the following laws and regulations that are required to be reported under Government Auditing Standards and OMB Bulletin No. 01-02, which are described below.

During fiscal year 2001, the FPI did not report past-due debt with the public to the United States Treasury in accordance with FPI’s policy and the Debt Collection Improvement Act of 1996.

Under FFMIA, we are required to report whether FPI’s financial management systems substantially comply with the federal financial management systems requirements, applicable federal accounting standards, and the United States Government Standard General Ledger at the transaction level. To meet this requirement, we performed tests of compliance with FFMIA section 803 (a) requirements.

The results of our tests disclosed instances, described below, where FPI’s financial management systems did not substantially comply with federal financial management systems requirements and applicable federal accounting standards.

The results of our tests disclosed no instances in which FPI’s financial management systems did not substantially comply with the United States Government Standard General Ledger at the transaction level.

Federal Financial Management Systems Requirements

During fiscal year 2001, the FPI did not have adequate internal control surrounding its inventory and accounts receivable operations, as reported in our Independent Auditor’s Report on Internal Control, dated January 2, 2002, which contains our findings and recommended remedial actions. Although the FPI attempted to mitigate the effect of these internal control weaknesses with the implementation of manual processes and procedures (workarounds) these workarounds did not satisfy the provisions of OMB Circular A-127, Financial Management Systems, Section 7(b) which requires that consistent internal controls exist in integrated financial management systems. Accordingly, FPI was not in compliance with this authoritative OMB guidance as of and for the year ended September 30, 2001.

Federal Accounting Standards

During fiscal year 2001, the FPI did not have adequate internal control surrounding its financial reporting processes, as reported in our Independent Auditor’s Report on Internal Control, dated January 2, 2002, which contains our findings and recommended remedial actions. Specifically, the FPI does not have adequate external financial statement reporting functionality within its accounting system of record, SAP, to meet the financial reporting requirements of OMB Bulletin No. 97-01, Form and Content of Agency Financial Statements, as amended. Although the FPI attempted to mitigate the effect of these internal control weaknesses with the implementation of manual processes and procedures (workarounds), these workarounds did not satisfy the provisions of OMB Circular A-127, Financial Management Systems, Section 7(d), which requires that agency financial management systems maintain accounting data to permit reporting in accordance with accounting standards recommended by the Federal Accounting Standards Advisory Board (FASAB) and issued by the Director of the OMB, and reporting requirements issued by the Director of the OMB and/or the Secretary of the Treasury, and Section 7(e), which requires that the agency financial management system provide financial information in a timely and useful fashion to "comply with internal and external reporting requirements, including, as necessary, the requirements for financial statements prepared in accordance with the form and content prescribed by OMB and reporting requirements prescribed by Treasury." Accordingly, the FPI was not in compliance with this authoritative OMB guidance as of and for the year ended September 30, 2001.

FPI’s Financial Management Branch and Management Information Systems Branch are responsible for FPI’s financial management systems.

Providing an opinion on compliance with certain provisions of laws and regulations was not an objective of our audit and, accordingly, we do not express such an opinion.

This report is intended solely for the information and use of the Office of the Inspector General, the management of the FPI and the DOJ, the FPI Board of Directors, the OMB, and Congress, and is not intended to be and should not be used by anyone other than these specified parties.

Washington, DC
January 2, 2002