U.S. Postal Service Actions to Improve Its Financial Reporting
Gao ID: GAO-03-26R November 13, 2002Over the past 2 years, we have been raising concerns and have made recommendations regarding the lack of sufficient and timely periodic information on the U.S. Postal Service's financial condition and outlook available to the public between publications of its audited year-end financial statements. This report responds to a request that we provide periodic updates on several key areas related to the Service's financial outlook, including improvements in financial and performance reporting. Specifically, this report discusses actions taken by the Service to address our past recommendations to provide sufficient, more timely, and accessible financial reports as well as our assessment of the Service's responses.
Transparency is particularly important because the Service is the hub of a $900 billion mailing industry and is a vital part of the nation's communications network. Its recent financial difficulties have accentuated the need for stakeholders--including the Congress, Postal Rate Commission, and mailers--to be well apprised of the Service's financial situation and understand how future operating results may be affected by impending events. Although the service has traditionally provided a range of detailed financial and operating data to stakeholders throughout the fiscal year, its periodic financial reports have not clearly explained changes in its financial condition, results of operations, and outlook and have not always been readily available to the public. The Securities and Exchange Commission requires that quarterly reports submitted by publicly traded companies include a discussion of material changes in a company's financial condition and results of operations. This type of discussion is consistent with the intent of our recommendations.
GAO-03-26R, U.S. Postal Service Actions to Improve Its Financial Reporting
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United States General Accounting Office:
November 13, 2002:
The Honorable Daniel K. Akaka:
Chairman:
The Honorable Thad Cochran:
Ranking Minority Member:
Subcommittee on International Security,
Proliferation, and Federal Services:
Committee on Governmental Affairs:
United States Senate:
Subject: U.S. Postal Service Actions to Improve Its Financial
Reporting:
Given the vital role of the nation‘s postal system and the importance
of its financial viability, it is imperative that the U.S. Postal
Service (the Service), the Congress, stakeholders, and the public have
adequate information available to them to understand the Service‘s
financial situation and assess its progress towards meeting its
performance goals and planning for its future. During the first part of
fiscal year 2001, the Service made numerous revisions to its estimated
net income with little or no public explanation. The Service‘s
financial outlook changed from a $480 million deficit in its fiscal
year 2001 budget approved in November of 2000, to a $2 billion to $3
billion deficit projected 3 months later in February 2001. Likewise, at
the beginning of fiscal year 2002, the Service estimated that it would
end the year with a $1.35 billion deficit and then stated, in May 2002,
that its net loss for the year could have reached $4.5 billion. Despite
the fact that the Service publicly released periodic financial
information, these significant changes in financial outlook were not
evident from publicly available information and came as a surprise to
many stakeholders. More recently, the Service announced the results of
a new financial analysis that could significantly reduce its Civil
Service Retirement System (CSRS) pension liability if Congress takes
related legislative action, which would significantly impact the
Service‘s financial outlook.[Footnote 1] It will be important for the
Service to keep stakeholders well informed about this issue.
Over the past 2 years, we have been raising concerns and have made
recommendations regarding the lack of sufficient and timely periodic
information on the Service‘s financial condition and outlook available
to the public between publications of its audited year-end financial
statements. This report responds to your July 31, 2002, request that we
provide periodic updates on several key areas related to the Service‘s
financial outlook, including improvements in financial and performance
reporting. Specifically, this report discusses the actions taken by the
Service to address our past recommendations to provide sufficient, more
timely, and accessible financial reports as well as our assessment of
the Service‘s responses. Our specific recommendations and the Service‘s
initial responses were as follows:
In April 2001, we recommended that the Service provide summary
financial reports to Congress and the public on a quarterly basis.
These quarterly reports were to present sufficiently detailed
information for stakeholders to understand the Service‘s current and
projected financial condition, how its outlook may have changed since
the previous quarter, and its progress towards achieving its desired
results.[Footnote 2] In a letter dated June 2001 to congressional
oversight and appropriation committees and subcommittees, the Service
agreed to provide additional transparency related to its financial
condition and said that it would create, and post to its Web site,
financial statements ’similar to what publicly traded enterprises
provide“ and continue this practice quarterly.
In February 2002, we recommended that the Service provide its monthly
and quarterly financial reports on its Web site in a user-friendly
format and in a timelier manner.[Footnote 3] In its February 2002
comments on a draft of our report, the Service agreed with our
recommendation and said it was providing financial reports on its Web
site in a more timely and user-friendly manner.
In September 2002, we reported that the Service should carefully
reassess its overall accounting treatment for pension and
postretirement health obligations and reaffirmed a recommendation that
we previously made to the Service to enhance disclosure of its
postretirement health benefit obligations in its financial statements.
In its September 10 letter commenting on the report, the Service stated
that it planned to address its pension and postretirement health
obligations in the Management Discussion and Analysis (MD&A) section of
its annual report.[Footnote 4]
This report on the Service‘s financial reporting is based on our
previous work, review of the Service‘s monthly and quarterly financial
reports from the third quarter of fiscal year 2001 through the third
quarter of fiscal year 2002, the Service‘s written responses to our
recommendations, and discussions with Service officials about their
responses to our recommendations.
We compared the Service‘s quarterly financial report for the third
quarter ending in May 2002, with those of a similar period completed by
two of its major publicly traded competitors--FedEx and United Parcel
Service (UPS). Publicly traded companies are subject to Securities and
Exchange Commission (SEC) quarterly financial reporting
requirements.[Footnote 5] These quarterly reports include three major
components: (1) financial statements, which consist of an income
statement, balance sheet, cash flow statement, and related footnotes;
(2) management‘s discussion and analysis (MD&A) of financial condition
and results of operations; and (3) quantitative and qualitative
disclosures about market risk.[Footnote 6] The SEC requires that
information in quarterly reports from publicly traded entities provide
investors and others with an accurate understanding of the company‘s
current and prospective financial position and operating results.
Although the Service is not subject to SEC reporting requirements, the
purpose of these requirements is similar to the intent of our
recommendations for improved transparency to enable stakeholders to
better understand the Service‘s financial condition and outlook.
We conducted our review between July 2002 and September 2002 in
accordance with generally accepted government auditing standards. We
requested comments on a draft of this report from the Postal Service,
and its comments are discussed near the end of this letter and are
reproduced in enclosure IV.
Results In Brief:
Transparency is particularly important because the Service is the hub
of a $900 billion mailing industry and is a vital part of the nation‘s
communications network. Its recent financial difficulties have
accentuated the need for stakeholders--including the Congress, Postal
Rate Commission (PRC), and mailers--to be well apprised of the
Service‘s financial situation and understand how future operating
results may be affected by impending events. Further, we recently
reported that the Service‘s financial situation is significantly
impacted by its pension and postretirement health obligations and that
the Service should reassess its accounting treatment and reporting of
these obligations. We also reaffirmed our previous recommendation that
the Service disclose the full amount of the accrued postretirement
health benefits earned by its employees and retirees in notes to its
financial statements. The importance of these obligations was recently
highlighted when the Service announced the results of a new analysis
that could significantly reduce its CSRS pension liabilities if
Congress takes related legislative action. This change would improve
its overall financial condition and provide opportunities to address
other key financial issues, such as its postretirement health benefit
obligations and outstanding debt.
Although the Service has traditionally provided a range of detailed
financial and operating data to stakeholders throughout the fiscal
year, its periodic financial reports have not clearly explained changes
in its financial condition, results of operations, and outlook and have
not always been readily available to the public. In response to our
recommendations, the Service committed to provide quarterly financial
statements ’similar to what publicly traded enterprises provide.“ The
Service also has begun posting its quarterly reports on mail volumes
and revenues, along with its monthly operating statements, to its Web
site. However, we do not believe that the quarterly financial reports
provided to date meet the intent of our recommendations, because the
Service provided only limited analysis and explanations to help
stakeholders understand what had changed, why it had changed, and how
these changes affected the Service‘s current financial situation and
expected outlook.
The SEC requires that quarterly reports submitted by publicly traded
companies include a discussion of material changes in a company‘s
financial condition and results of operations.[Footnote 7] This type of
discussion is consistent with the intent of our recommendations. When
we compared the Service‘s most recent quarterly report with those of
two of its publicly traded competitors--FedEx and UPS--we found that
the Service‘s quarterly report generally provided the same basic
financial statements as did its competitors. However, unlike the
Service, FedEx and UPS also provided very detailed ’Management‘s
Discussion and Analysis“ sections in their reports that discussed
events during the period that may have had a significant impact on the
financial condition of the company and the outlook for the future, and
compared the results of operations with the prior year‘s results. FedEx
and UPS‘s reports also included explanatory footnotes to the financial
statements that provided details about significant changes that have
occurred and material contingencies that were not included in the
Service‘s reports. Further, the Service‘s quarterly reports were not
consistent in format and content, or as available to the public as the
FedEx and UPS quarterly reports. These changes in subsequent quarterly
reports and their limited availability made it difficult to make
comparisons and analyze trends.
In commenting on our draft report, the Service said that it would
provide additional information in its periodic financial reports to
improve stakeholder understanding of its business and that it would
retain the data placed on its Web site for 3 years. The Service also
cautioned that public discussion of retirement obligations must be
undertaken with great care, and that it would ensure greater public
understanding in this area. Due to the magnitude of these costs, the
potential effects on current and future ratepayers, and the complexity
of the issues involved in reporting retirement-related obligations, we
agree that greater public understanding of these obligations is
important and that the Service can help accomplish this through
enhanced disclosure in its financial and related statements. The
Service also said that it makes more financial and operating
information available than we reflected in our report. We discuss this
issue near the end of this letter.
Background:
Traditionally, between the annual issuance of its audited year-end
financial statements, the Service has provided several types of
periodic financial reports, including its monthly Financial and
Operating Statements; quarterly Revenue, Piece, and Weight (RPW)
Reports; and most recently, quarterly financial reports.[Footnote 8]
The information provided in its periodic monthly operating statements
and quarterly RPW reports is as follows:
Monthly Financial and Operating Statements: Cover a 4-week period and
include data that provide an overview of financial results for that
period, compare results with the budget, compare results with the same
period in the previous year, and provide year-to-date information.
These statements also include detailed information on revenues,
expenses, volumes, and work hours; a balance sheet; a cash flow
statement; and capital commitments and outlays. Traditionally, these
reports were sent to stakeholders by request or posted on the PRC‘s Web
site. The Service began posting the most recently completed financial
and operating statement to its Web site in early 2002.
Quarterly Revenue, Piece, and Weight Reports: Contain information
relating to the Service‘s mail classes and special services. RPW
reports document the total revenue, pieces, and weights for each mail
class, subclass, and service for that quarter; in addition, the reports
provide data on the amount and percentage change from the same period
in the previous year and year-to-date information. Quarterly RPW
reports dating back to fiscal year 1999 are currently available on the
Service‘s Web site.
During the fall of 2001, when the Service experienced sharp declines in
its mail volumes and revenues, and it requested additional
appropriations from Congress, readily available and detailed
information on the Service‘s changing financial situation was scarce.
Our February 2002 report noted that from October 2001 to mid-January
2002, the Service did not publicly release its monthly statements for
the last accounting period of fiscal year 2001 and for the first three
accounting periods of fiscal year 2002.[Footnote 9] Although the
Service issued its annual report for fiscal year 2001 in December 2001,
it did not publicly release financial results for the fourth quarter of
fiscal year 2001.[Footnote 10] We reported that more timely
availability of monthly and quarterly reports, even if they contain
preliminary data subject to revision, would be useful to improve
transparency for congressional oversight, the stakeholder community,
and the public.[Footnote 11]
The Service‘s Quarterly Financial Reports Lacked Explanatory
Information, Consistency, and Public Availability:
Much attention has recently been focused on efforts to improve
accountability and the usefulness of financial information, in both the
public and private sectors. One of the key components of the
President‘s Management Agenda is to improve accountability to the
American people by enhancing the timeliness, usefulness, and
reliability of financial information provided by federal agencies.
Likewise, recently enacted legislation--the Sarbanes-Oxley Act of 2002
(Public Law 107-204, enacted into law on July 30, 2002)--seeks to
protect investors by improving the accuracy and reliability of
corporate disclosures made pursuant to the securities laws. Given the
importance of the Service‘s financial condition and outlook, timely,
accurate, and complete financial information is needed for oversight
purposes and for stakeholders to better understand the Service‘s
changing financial situation and its potential effect on stakeholders‘
future plans.
The key limitations of the Service‘s quarterly financial reports were
that they have lacked sufficient analysis and explanation of what has
changed and why in its financial condition, operating results, and
outlook. This type of explanatory information is typically provided in
quarterly financial reports of publicly traded companies and is
consistent with the intent of our previous recommendations. Further,
the Service‘s quarterly reports have not been consistent in format and
content or readily available to the public. Sufficient, consistent, and
accessible financial information helps provide the necessary
transparency and accountability that are fundamental principles in
ensuring public confidence in an organization and proper oversight.
The Service‘s Quarterly Financial Reports Lacked Sufficient Analysis
and Explanations:
When we compared the most recent quarterly reports of the Service with
those of its publicly traded competitors--FedEx and UPS--we found that
the greatest differences were in the level of analysis and explanation
provided for changes in financial condition, operating results, and
outlook.[Footnote 12] This information is generally included in the
sections titled MD&A in the publicly traded quarterly reports and in
the notes to the financial statements.
Management‘s Discussion and Analysis (MD&A):
The SEC requires publicly traded enterprises to provide a management‘s
discussion and analysis of the entities‘ financial condition and
results of operations, both in quarterly and annual reports. The SEC
guidance for interim financial reports states:
’the MD&A requirements are intended to provide in one section of a
filing, material historical and prospective textual disclosure enabling
investors and other users to assess the financial condition and results
of operations of the registrant, with particular emphasis on the
registrant‘s prospects for the future . . .. Disclosure is mandatory
where there is a known trend or uncertainty that is reasonably likely
to have a material effect on the registrant‘s financial condition or
results of operations. Accordingly, the development of an MD&A should
begin with management‘s identification and evaluation of what
information, including the potential effects of known trends,
commitments, events, and uncertainties, is important to providing
investors and others an accurate understanding of the company‘s current
and prospective financial position and operating results.“[Footnote 13]
In comparing the most recent quarterly reports of the Service, FedEx,
and UPS, we found that the most notable differences were in the level
of detail provided in the MD&A sections of the reports.[Footnote 14]
For example, FedEx and UPS provided explanations in their MD&A sections
of how they planned to meet their working capital needs for the future;
causes of changes in revenues and volume, by business line, compared
with prior periods; and their outlook for the future, including the
effect of significant events, such as the terrorist-related events of
the fall of 2001. In contrast, the Service provided minimal
explanations in these areas. Given the potential impact of these and
other key factors, such as the timing and amount of proposed rate
increases, it would be helpful to know how these factors affect the
Service‘s changing year-end outlook. Specific examples of the
differences between the MD&A section of the Service‘s quarterly report
and those in FedEx‘s and UPS‘s quarterly reports are provided below.
The full text of the quarterly reports we compared can be found in
enclosure I for the Service, enclosure II for FedEx, and enclosure III
for UPS.
Postal Service discussion of outlook:
’Volume trends of the past three quarters are expected to continue
through the fiscal year end in September. Taking the June 30, 2002 rate
increase into account, volume losses in the 3 to 4 percent range are
anticipated for the quarter, compared to the same quarter last year.
With expense reductions in excess of $2.5 billion and the rate increase
on June 30, the estimated net loss for the year will be in the range
$1.0 billion to $1.5 billion.“
FedEx discussion of outlook:
’While we believe there is evidence that a modest economic recovery is
underway, a significant portion of our U.S. domestic express business
comes from the manufacturing and wholesale sectors, especially in the
high technology area. Recovery in these sectors is still lagging the
rest of the economy on a year-over-year basis. Until these key sectors
experience sustained growth, volumes at FedEx Express are expected to
remain soft.
’Our fourth quarter volume outlook for FedEx Express is for U.S.
domestic average daily package volume to be approximately 2% below last
year‘s fourth quarter and for IP shipments to be down about 1%. In
addition, our dynamic fuel surcharge at FedEx Express effectively has a
six-week lag before the surcharge is adjusted for increased fuel
prices. Therefore, our operating income may be negatively affected
should the spot price of jet fuel increase significantly in the fourth
quarter. At FedEx Ground, fourth quarter volume is expected to grow
about 16% year-over-year.
’We believe our diverse portfolio of services is the key factor to our
long-term growth. The expansion of our Home Delivery network and
continued development and cross selling of the diverse FedEx portfolio
of services, particularly to small-and medium-sized businesses, is
central to our strategy. Our website, fedex.com, is heavily utilized
and has helped us reduce costs and improve customer satisfaction. We
believe that our substantially fixed cost express network
infrastructure will allow us to realize incremental profits when the
economy recovers.
’Maintenance costs during the fourth quarter of 2002 are expected to be
higher due to scheduled maintenance activities. Also, we accrued
increased variable compensation in the third quarter of 2002 and expect
to continue to do so in the fourth quarter. Our 2002 incentive
compensation costs will be sharply reduced for most employees
(including senior management). However, fourth quarter incentive
compensation provisions will be higher year-over-year since the prior
year‘s fourth quarter included reversals of incentive compensation that
had been previously accrued.
’We expect pension and health care costs to continue to increase over
the near term. Our net pension cost for 2002 will increase by
approximately $90 million due to lower interest rates and a reduction
in the value of plan assets. We expect next year‘s pension cost to
increase by $90-100 million based on a continued decline in interest
rates and a decrease in the expected return on pension plan assets.
While employee retirement costs continue to rise, our retirement
programs are well funded, with assets more than sufficient to meet our
current obligations.“:
UPS excerpts of significant events and outlook:
’— Due to the events of September 11, 2001, increased security
requirements for air carriers may be forthcoming; however, we do not
anticipate that such measures will have a material adverse effect on
our financial condition, results of operations or liquidity. In
addition, our insurance premiums have risen and we have taken several
actions, including self-insuring certain risks, to mitigate the expense
increase.
’As of December 31, 2001, we had approximately 232,500
employees (64% of total employees) employed under a national master
agreement and various supplemental agreements with local unions
affiliated with the International Brotherhood of Teamsters
(’Teamsters“). These agreements run through July 31, 2002. The majority
of our pilots are employed under a collective bargaining agreement with
the Independent Pilots Association, which becomes amendable January 1,
2004. Our airline mechanics are covered by a collective bargaining
agreement with Teamsters Local 2727, which became amendable on
August 1, 2001. Members of Teamsters 2727 recently voted down a
proposed new contract, and negotiations resumed in April 2002 with the
assistance of the National Mediation Board. In addition, the majority
of our ground mechanics who are not employed under agreements with the
Teamsters are employed under collective bargaining agreements with the
International Association of Machinists and Aerospace Workers. These
agreements have various expiration dates between July 31, 2002 and
May 31, 2003.
’We entered into negotiations with the Teamsters in
January 2002 for a new national master agreement. It is our desire
through these discussions to reach an agreement on a new contract prior
to the end of our current five-year agreement on July 31, 2002. Any
strike, work stoppage or slowdown that results from our failure to
reach a timely agreement with the Teamsters, and any change in shipping
behavior by our customers or potential customers due to perceptions
that we will not reach a timely agreement with the Teamsters, could
have a material adverse effect on our financial condition and results
of operations. We do not, however, anticipate that this will occur.
’We believe that funds from operations and borrowing programs
will provide adequate sources of liquidity and capital resources to
meet our expected long-term needs for the operation of our business,
including anticipated capital expenditures such as commitments for
aircraft purchases, through 2009.“:
* Postal Service discussion of changes in revenue:
’U.S. domestic package revenue decreased 1.2% compared to last year.
This decline was driven by a 1.5% reduction in average daily package
volume which was primarily a result of the continued weakness in the
U.S. economy. Revenue for our Next Day Air products was also adversely
affected by a decline in revenue per piece. The decline results in part
from lower package weights combined with a mix shift favoring letters
to packages. This reflected what we believe to be continued slowness in
the manufacturing sector. Conversely, revenue for our Ground products
increased slightly due to a 3.5 % increase in average revenue per
piece. This improvement resulted in part from having a rate increase
that occurred four weeks earlier than compared to the pr“Revenue:
Revenue of $15.3 billion was 4.9 percent ($796 million) below plan and
2.0 percent
($322 million) below Quarter III of last year. Planned revenue growth
for Quarter III was 3.1 percent.
’Volume in Quarter III was 2.5 percent below last year. We processed
and delivered 47.1 billion pieces as compared to 48.3 billion pieces
last year. Revenue loss from the volume decline of 1.2 billion pieces
was offset through expense reductions.“
* UPS excerpts of changes in revenue:
UPS reports its operations in three segments: U.S. domestic package
operations, international package operations, and nonpackage
operations, as well as on a consolidated basis. Although the entire
revenue discussion is included in enclosure III, for brevity purposes,
only the U.S. domestic package revenue discussion is presented here, as
follows:
’U.S. domestic package revenue decreased 1.2% compared to last year.
This decline was driven by a 1.5% reduction in average daily package
volume which was primarily a result of the continued weakness in the
U.S. economy. Revenue for our Next Day Air products was also adversely
affected by a decline in revenue per piece. The decline results in part
from lower package weights combined with a mix shift favoring letters
to packages. This reflected what we believe to be continued slowness in
the manufacturing sector. Conversely, revenue for our Ground products
increased slightly due to a 3.5% increase in average revenue per piece.
This improvement resulted in part from having a rate increase that
occurred four weeks earlier than compared to the prior year.
’On January 7, 2002, we increased rates for standard ground shipments
an average of 3.5% for commercial deliveries. The ground residential
charge increased $0.05 to $1.10 over the commercial ground rate, and
this charge will also be applied to express deliveries in 2002. The
additional delivery area surcharge, which is added to ground deliveries
in certain less accessible areas, remained at $1.50. In addition, in
2002, this charge will also be applied to express deliveries to these
addresses. Rates for UPS Hundredweight increased 5.9%.
’We also increased rates for UPS Next Day Air, UPS Next Day Air Saver,
UPS 2nd Day Air, and 3 Day Select an average of 4.0%. The surcharge for
UPS Next Day Air Early A.M. increased from $27.50 to $28.50. Rates for
international shipments originating in the United States (Worldwide
Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS
International Standard service) increased an average of 3.9%. Rate
changes for shipments originating outside the U.S. were made throughout
the past year and varied by geographic market.
’An index-based fuel surcharge, which became effective December 10,
2001, continued and resets on a monthly basis beginning in
February 2002. The index-based surcharge is based on the National U.S.
Average On-Highway Diesel Fuel Prices as reported by the U.S.
Department of Energy.“:
* FedEx discussion of changes in revenue:
FedEx also reports its operations on a consolidated basis and for its
major business segments: FedEx Express, FedEx Ground, FedEx Freight,
and other Operations. See enclosure II for the complete tables and
discussion in each of these areas.
As these examples indicate, the level of explanations in the FedEx and
UPS quarterly MD&A sections is significantly greater than that provided
by the Service and helps provide the reader with a better understanding
not only of what has changed, but why. In comparing the quarterly
reports, we developed the following questions that we believe would
provide meaningful information for the Service to include in its
quarterly report in order to make it a more useful document to its
stakeholders:
Information regarding the current reporting period:
What were the major changes in revenue, expense, and volume and the
causes of these changes? How do these results compare with the prior
period‘s?
What major challenges or risks did the Service face during the period,
and what was done to respond to them?
What were the financial consequences of these occurrences?
Information regarding the upcoming reporting period:
What challenges are expected, by business line? How will they be
overcome?
What are the financial expectations of the Service as a whole and on a
business line basis?
What impact will competitors have in the upcoming period?
What significant trends, events, commitments, or uncertainties may
affect the Service‘s expectations?
What are the expected cash requirements and year-end cash position?
What are the expected capital commitments and outlays?
What is the expected net income, and what actions may be taken to
address specific situations or conditions? Specifically, focus on the
causes of any losses and specific plans to correct them, if known.
By major business line, what are the major challenges faced,
accomplishments, and plans to generate revenue, reduce costs, and pay
down the debt with the U.S. Treasury?
Information regarding long-term outlook:
What are the capital expansion plans, projects, time periods, amounts,
and return on investment? What are current projects, their status, and
planned projects? How will these projects be funded and implemented?
How will changing economic factors affect these plans? What risk
analysis and contingency plans have been developed? What are the
changes to the previously reported plans?
What are the plans to remain within the present debt limit and plans to
pay off long-term debt?
How is the Service prepared to meet its long-term obligations, such as
funding postretirement health care costs?
While not all of these issues would necessarily be included in every
report, they do represent items that should be considered for
disclosure each quarter, giving special consideration to changes that
have occurred since the annual report was issued. In addition, some of
these disclosures would most appropriately be made in the footnotes
accompanying the quarterly financial statements, as are discussed in
more detail below.
Financial Statement Footnotes:
The Service‘s most recent quarterly report provided financial
statements that were generally comparable to those provided by FedEx
and UPS in that they included the basic statements of income, balance
sheet, and cash flow. However, unlike the Service, FedEx and UPS
provided notes to the quarterly financial statements that included
explanations on a variety of issues, including changes in accounting
policies, business segment information, major new commitments and
contingencies, and supplemental cash flow information. The SEC guidance
for the content of interim financial statements states, in part, that:
’— disclosure shall be provided where events subsequent to the end of
the most recent fiscal year have occurred which have a material impact
on the registrant. Disclosures should encompass, for example,
significant changes since the end of the most recently completed fiscal
year in such items as: accounting principles and practices; estimates
inherent in the preparation of financial statements; status of long-
term contracts; capitalization including significant new borrowings or
modification of existing financing arrangements; and the reporting
entity resulting from business combinations or dispositions.
Notwithstanding the above, where material contingencies exist,
disclosure of such matters shall be provided even though a significant
change since year end may not have occurred...“[Footnote 15]
These footnote explanations can greatly enhance the reader‘s
understanding of the quarterly financial statements. For example, in
their quarterly reports, FedEx and UPS each discuss in detail
contingent losses due to pending lawsuits, whereas the Service does not
present similar information on contingent losses, even though such
contingencies exist.[Footnote 16]
Another area where footnote disclosures would be helpful to the
understanding of the Service‘s quarterly reports is a more detailed
breakdown of certain key line items in the financial statements. For
example, the Service includes in its income statement a single line
item for ’revenues,“ with no further breakdown provided. UPS also
reports a single line item for revenue in its income statement, but
then provides breakdowns of revenue for each of its reporting segments,
including comparative numbers for the prior quarter. Similarly, details
of financial statement line items for ’other expenses“ and ’other
assets“ are provided in UPS footnotes, which would also be helpful for
the Service. ’Other liabilities“ is also a significant line item on the
Service‘s balance sheet at $41.8 billion, out of $63 billion in total
liabilities. Within this number is approximately $30 billion related to
deferred pension liabilities that warrant explanation in the footnotes,
as well as other liabilities related to employee benefits that are
included in this line item. Further, we have recommended that the
Service disclose the amount of postretirement health benefits earned by
postal employees and retirees in notes to its financial statements to
provide more complete information about these significant
obligations.[Footnote 17] In our September 2002 report, we stated that
the Service should reassess its accounting treatment for both its
pension and postretirement health obligations and reiterated our
previous recommendation that the Service should fully disclose its
postretirement health obligations because they represent a very
material commitment that affects the future viability of the Service.
An additional useful footnote disclosure for the recent quarterly
report would have been a discussion of the $675 million in supplemental
funds appropriated to the Service during fiscal year 2002 to deal with
expenses relating to the terrorist attacks of September 11 and
subsequent anthrax attacks.[Footnote 18] These funds are significant
because the Service, as an entity that is substantially self-financing,
generally receives only a small annual appropriation. For example, in
fiscal year 2002, the Service was appropriated only about $77 million
in its general fiscal year appropriation.[Footnote 19] Further,
disclosure of the approximately $4 billion projected to be needed over
the next 5 years for improving the Service‘s mail processing systems to
protect postal employees and the general public from future attacks
through the mail would have informed the reader of the potentially
material effect these expenses may have on the Service‘s financial
results in the future.[Footnote 20]
Consideration of the level of detail included in FedEx‘s and UPS‘s
quarterly reports, as well as that of other organizations‘ reports, may
be helpful to the Service as it makes enhancements to future quarterly
reports. We recognize that judgments must be made about the level of
detail that should be provided in quarterly financial reports and that
not all quarterly reports will be the same. However, it is clear from
recently publicized problems in financial reporting that more detailed
information and transparency are called for by both Congress and the
public. Such transparency is critical for the Service because of the
importance of its financial situation and the implications for
stakeholders in making their own financial plans. These factors help
support stakeholders‘ need for timely, accurate, and complete financial
information that is provided on a consistent basis.
The Service‘s Quarterly Financial Reports Lacked Consistent Format and
Adequate Availability to the Public:
The first quarterly report that the Service posted to its Web site for
the third quarter of fiscal year 2001 was a good starting point for
providing information to Congress and the public. However, changes in
subsequent quarterly reports and their limited availability made it
difficult to make comparisons and analyze trends. Table 1 shows
quarterly financial information provided since our recommendation.
Table 1: The Service‘s Quarterly Financial Reports from Third Quarter
Fiscal Year 2001 through Third Quarter Fiscal Year 2002:
(Continued From Previous Page)
Fiscal quarter; The Service‘s actions.
Third quarter, FY 2001; Posted quarterly report to its Web site.
Fourth quarter, FY 2001; Annual report, no quarterly report available.
First quarter, FY 2002; Posted slide presentation to its Web site.
Second quarter, FY 2002; Posted slide presentation to its Web site.
Third quarter, FY 2002; Posted quarterly report to its Web site.
[End of table]
Source: U.S. Postal Service.
The Service stated that its audited fiscal year 2001 annual report
would serve as its fourth quarter report, which is a common reporting
practice for publicly traded companies under SEC‘s rules. Although
neither FedEx nor UPS are required to submit fourth quarter reports to
the SEC, they do issue press releases on their Web sites that include
detailed fourth quarter financial information, such as income statement
and balance sheet information, and a discussion of quarterly results.
The Service occasionally releases financial information via press
releases; however, no press release was provided that included
financial results for the fourth quarter of fiscal year 2001. Utilizing
press releases to discuss fourth quarter results would compensate for
the time lapses between the release of its third quarter report and its
annual report, thus providing stakeholders with more timely financial
information.
Another concern we raised was that the format for quarterly reports was
not consistent, so that it was difficult to compare results and analyze
trends over time. For the first quarter of fiscal year 2002, the
Service changed its reporting format from what was provided in its
first publicly available quarterly report for the third quarter of
fiscal year 2001. The Service used the Chief Financial Officer‘s (CFO)
first quarter slide presentation to the Board of Governors as its
quarterly financial report and stated that it was posted on its Web
site. In spring of 2001, the Service stated that for future quarterly
reports these slide presentations would be used. The Service then
posted the CFO‘s slide presentation for the second quarter of fiscal
year 2002 to its Web site. We testified in May of 2002 that the CFO‘s
slide presentations contained less information than the fiscal year
2001 third quarter report.[Footnote 21] The slide presentations
included summary information on total revenues, expenses, and work-hour
information, but did not include any discussion of the Service‘s
current position and outlook. For the third quarter of fiscal year
2002, the Service posted to its Web site a quarterly report that was
similar to its third quarter report for fiscal year 2001.
Finally, we raised a concern that the Service‘s financial reports were
not readily available to the public. Although the Service has begun to
post both its monthly and quarterly reports to its Web site, it only
posted the two most recent monthly reports and the latest quarterly
report. In comparison, FedEx and UPS make available not only their most
recent report, but also past quarterly reports. For example, FedEx‘s
quarterly reports dating back to April 1998 and UPS‘s quarterly reports
dating back to May 2000 are currently available on their Web sites.
Posting past monthly and quarterly reports to the Service‘s Web site
would improve accessibility to past financial information and would
assist stakeholders in understanding the Service‘s changing financial
condition and allow for trend analysis and comparisons.
Agency Comments and Our Evaluation:
The Service provided comments on a draft of this report in a letter
from the Chief Financial Officer dated October 17, 2002. These comments
are summarized below and reproduced in enclosure IV. In commenting on
our draft report, the CFO stated that the Service would provide
additional information in its periodic financial reports to improve
stakeholder understanding of its business and that it would retain the
data placed on its Web site for 3 years. Specifically, the Service
agreed to provide explanations about variances from budgeted amounts,
financial expectations, and the projected financial and operational
impact of material events or transactions.
The CFO pointed out that while the Service received many suggestions
for fine-tuning certain disclosures, the financial community expressed
overall satisfaction with the quantity and quality of data the Service
provides. The CFO commented that the Service publicly discloses
information to the PRC during rate case filings that exceeds the amount
of information required by SEC-regulated companies and most other
government agencies. We acknowledge that the Service provides a
significant amount of information in its rate case filings; however,
this information is provided only for rate-setting purposes, and rate
cases are not filed on a regular cycle. Thus, rate case information
does not provide stakeholders timely information about the Service‘s
current financial condition and changes to its expected outlook. As we
have reported, stakeholders have been surprised by the significant
changes that have occurred during the fiscal year to the Service‘s net
income estimates and financial outlook.
The CFO also stated that our report did not adequately or completely
reflect the Service‘s ongoing financial reporting, including its
detailed revenue, volume, and weight information; annual billing
determinants data; and 4-week Financial and Operating Statements. Our
report does provide descriptions of the Service‘s periodic financial
information, including its quarterly Revenue, Piece, and Weight reports
and its monthly Financial and Operating Statements. As we noted,
however, these periodic financial reports do not clearly explain
changes in its financial condition, outlook, and results of operations,
and have not always been readily available to the public. The Service
also provides annual information, such as its Annual Auditor‘s Report
and annual billing determinants data, but this information is not
available throughout the year for use in periodic analysis. Moreover,
the billing determinants data for fiscal year 2001, which ended in
September 30, 2001, was not released until October of 2002.
With regard to the CFO‘s point about the Service‘s retirement
obligations, he cautioned that public discussion of retirement
obligations must be undertaken with great care and that the Service
would ensure greater public understanding in this area. Due to the
magnitude of these costs, the potential effects on current and future
ratepayers, and the complexity of the issues involved in reporting
retirement-related obligations, we agree that greater public
understanding of these obligations is important. The Service‘s
announcement regarding its CSRS pension liability at its November 2002
Board of Governors meeting further emphasizes the importance of
enhanced disclosure and discussion of the implications of all of its
retirement-related obligations. Further, the reduction in future
pension obligations would increase the Service‘s options for dealing
with its postretirement health obligations and other financial
challenges. For these:
reasons, we believe that the Service needs to enhance its disclosure of
its postretirement health obligations in its financial reports.
Importantly, a number of major employers have provided disclosures
relating to these types of obligations for several years. In addition,
the consolidated financial statements of the U.S. government include
extensive disclosures of these obligations on a government-wide basis.
Without sufficient disclosure of these obligations in the Service‘s
financial statements or the related footnotes, neither Congress nor
stakeholders can have adequate information needed to make appropriate
decisions related to these issues. We continue to believe that, at a
minimum, these obligations should be discussed in the notes to the
financial statements.
- - - --:
We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Governmental Affairs,
Chairman and Ranking Minority Member of the House Committee on
Government Reform, the Service‘s Postmaster General/Chief Executive
Officer, the Service‘s Chief Financial Officer, the Chairman of the
Postal Rate Commission, and other interested parties. We will also make
copies available to others on request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report or the enclosures, please
contact Bernard Ungar at (202) 512-2834, ungarb@gao.gov, or Linda
Calbom at (202) 512-8341, calboml@gao.gov. Key contributors to this
assignment were Teresa Anderson, Tida Barakat, Joshua Bartzen, Heather
Dunahoo, and Michael Fischetti.
Bernard L. Ungar:
Director, Physical Infrastructure Issues:
Signed by Bernard L. Ungar:
Linda Calbom:
Director, Financial Management and Assurance:
Signed by Linda Calbom
[End of Section]
Enclosure 1: Postal Service Fiscal Year 2002 Third Quarter Financial
Report:
[See PDF for image]
[End of enclosure]
FedEx Fiscal Year 2002 Third Quarter Financial Report:
[See PDF for image]
[End of enclosure]
United Parcel Service Quarterly Report:
[See PDF for image]
[End of enclosure]
Comments from the U.S. Postal Service:
[See PDF for image]
[End of enclosure]
(543036):
FOOTNOTES
[1] In May 2002, we asked the Office of Personnel Management (OPM) to,
among other things, estimate how much of the underfunded CSRS pension
liability is attributable to the Service. OPM‘s projections indicate
that the Service‘s future payments required under current legislation
would overfund the CSRS liability by $71 billion over the remaining
benefit period. Legislation would be required to modify the existing
funding method so as to prevent overfunding of benefits in the future.
[2] U.S. General Accounting Office, U.S. Postal Service: Transformation
Challenges Present Significant Risks, GAO-01-598T (Washington, D.C.:
Apr. 4, 2001).
[3] U.S. General Accounting Office, U.S. Postal Service: Deteriorating
Financial Outlook Increases Need for Transformation, GAO-02-355
(Washington, D.C.: Feb. 28, 2002).
[4] U.S. General Accounting Office, U.S. Postal Service: Accounting for
Postretirement Benefits, GAO-02-916R (Washington, D.C.: Sept. 12,
2002).
[5] See 17 C.F.R. §240.13a-13.
[6] Such risks are typically associated with derivative instruments
utilized to hedge changing market conditions and may not be applicable
to activities of the Service.
[7] See 17 C.F.R. §229.303 (b)(2002).
[8] The Service uses a 52-week ’postal fiscal year“ for management
purposes that contains 364 days and thus starts and ends on a different
day each postal fiscal year. The Service divides each postal fiscal
year into 13 accounting periods of 4 weeks each. The first postal
quarter corresponds to the first three accounting periods, and the last
postal quarter includes the last four accounting periods of the postal
fiscal year.
[9] GAO-02-355.
[10] The Service has a long-standing practice of withholding detailed
financial information on the fourth quarter of a fiscal year and the
first accounting periods of the following fiscal year until its annual
financial statements have been audited and approved by the Board of
Governors. The board approved the Service‘s audited financial
statements for fiscal year 2001 in December 2001.
[11] GAO-02-355, pp. 44-45.
[12] Our comparisons were based on the most recent publicly available
quarterly reports by the Postal Service, FedEx, and UPS, which covered
different periods. The Postal Service‘s third quarter report for fiscal
year 2002 covered the period February 23-May 17, 2002, and was made
publicly available in July 2002. FedEx‘s third quarter report for
fiscal year 2002 covered the period December 1, 2000-February 28, 2002,
and was filed with the SEC in April 2002. UPS‘s first quarter report
for fiscal year 2002 covered the period January 1, 2002-March 31, 2002,
and was filed with the SEC in May 2002.
[13] See SEC Rel. Nos. 33-8056; 34-45321; FR-61 (Jan. 22, 2002).
[14] The Service did not have a section titled Management‘s Discussion
and Analysis in its quarterly report, but it did have similar sections
titled ’Operating Results“ and ’Message from the Chief Financial
Officer.“ In our analysis, we compared these sections with the MD&A
sections of FedEx and UPS quarterly reports.
[15] See 17 C.F.R. §210.10-01(a)(5)(2002).
[16] A general discussion in the footnotes to the U.S. Postal Service
Annual Report 2001 discloses contingent liabilities.
[17] In May 1992, we recommended that the Service provide additional
information on its postretirement health benefits as part of its annual
financial statement (U.S. General Accounting Office, Financial
Reporting: Accounting for the Postal Service‘s Postretirement Health
Care Costs, GAO/AFMD-92-32, Washington, D.C.: May 20, 1992). The
Service did not agree with and did not implement this recommendation.
We reiterated this recommendation and also discussed the accounting
treatment of these obligations in our recent report, U.S. General
Accounting Office, U.S. Postal Service: Accounting for Postretirement
Benefits, GAO-02-916R (Washington, D.C.: Sept. 12, 2002).
[18] On November 20, 2001, the President released $175 million to the
Postal Service from the Emergency Response Fund for expenses relating
to the terrorist attacks. In January 2002, the Service was appropriated
an additional $500 million for emergency expenses.
[19] Public Law 107-67.
[20] Public Law 107-117 appropriated $500 million to the Service for
emergency expenses and required the Service to develop an Emergency
Preparedness Plan with its planned expenditures to support this Plan.
[21] GAO-02-694T.
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