Credit Reform

Federal agencies use the Office of Management and Budget's (OMB) credit subsidy model to calculate the subsidy cost of direct loan and loan guarantee programs for budget and financial reporting purposes. Beginning in fiscal year 1996, all major agencies are required to prepare annual financial statements and have them audited. In addition, an audited governmentwide financial statement will have to be produced every year starting in fiscal year 1997. With outstanding direct loan and guaranteed loan balances for federal credit programs approaching a reported $1 trillion, accountants and auditors preparing and auditing these financial statements need to be confident that the credit subsidy model calculates a reliable subsidy cost in compliance with applicable legislation and accounting standards. This report discusses whether the credit subsidy model (1) conforms with relevant provisions of applicable legislation and accounting standards, (2) provides reliable results, and (3) is maintained and operated under a system of adequate controls. GAO also identifies supplemental audit steps that auditors should perform to ensure that federal credit agencies are using the credit subsidy model properly.

GAO noted that: (1) OMB's assertions on the CSM thoroughly explain the CSM's capabilities, limitations, and user agency responsibilities; (2) Ernst & Young concluded that OMB's assertions on the CSM are fairly stated in all material aspects and recommended several steps OMB should take to improve the reliability of CSM results and controls surrounding it; (3) based on GAO's review of Ernst & Young's work, GAO generally concurs with its conclusion and recommendations; (4) the Federal Credit Reform Act of 1990 and related federal accounting standards define the cost (subsidy) of a direct loan or loan guarantee as the estimated long-term cost to the government on a net present value basis at the time when a loan is disbursed; (5) the operation of the CSM conforms with this definition in that the model computes a subsidy cost by calculating the estimated net present value, at the time of loan disbursement, of agency-generated cash flows over the life of the loan; (6) OMB's assertions state that because of several limitations in the CSM's design, the subsidy cost calculated by the CSM may differ from a theoretically precise result; (7) for all but one of the limitations, credit agencies and their auditors can take steps to minimize or eliminate the impact of the limitations on the subsidy cost calculation; (8) the impact on the subsidy cost calculation of the limitation involving the use of nonstandard equations for discounting certain projected cash flows, however, is more difficult to evaluate and cannot be minimized by credit agencies and their auditors; (9) several weaknesses were identified relating to controls surrounding the development, maintenance, and use of the CSM; (10) GAO believes that if OMB implements a validation, verification, and testing approach (VV&T) or similar process, improves documentation, and provides guidance to credit agencies on controlling access to the CSM, the basic control weaknesses identified by Ernst & Young will be addressed; (11) OMB's assertions also state that user agencies are responsible for properly using the CSM; (12) consequently, when obtaining assurance that CSM subsidy cost calculations are correct, auditors will need to ensure that agencies are properly using the CSM; and (13) to help auditors obtain this assurance, GAO identified, with assistance from OMB staff, a series of supplemental audit procedures for auditors to follow when auditing federal credit agencies' financial statements and subsidy cost calculations.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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