ARCHIVED INFORMATION -- Fiscal Year 1997 Annual Accountability Report

Department of Educations's seal UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL

OPINION ON CONSOLIDATED FINANCIAL STATEMENTS
ACN 17-70002

To the Honorable Richard W. Riley
Secretary of the U.S. Department of Education

We have audited the accompanying consolidated statement of financial position of the U.S. Department of Education (Education) as of September 30, 1997, and the related consolidated statements of operations and changes in net position and of cash flows for the fiscal year then ended. These financial statements are the responsibility of Education's management. Our responsibility is to express an opinion on these financial statements based on our audit. As part of this audit we have issued separate reports dated May 29, 1998, on Education's internal controls and on compliance with laws and regulations.

We conducted our audit in accordance with Government Auditing Standards issued by the Comptroller General of the United States, and Office of Management and Budget (OMB) Bulletin No. 93-06, "Audit Requirements of Federal Financial Statements," as amended. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

These financial statements were prepared on the basis of accounting described in Note 2, which is a comprehensive basis of accounting other than generally accepted accounting principles.

Education's fiscal year 1997 consolidated financial statements include significant estimates related to its student loan programs. These estimates include the $13.3 billion estimated liabilities for loan guarantees under the Federal Family Education Loan (FFEL) Program, $12.3 billion allowance for FFEL Program defaulted guaranteed loans, $1.2 billion allowance for direct loans, and the related guaranteed and direct loan subsidy expenses of $2.2 billion and $.4 billion, respectively. As discussed in Note 4 to the financial statements, because of uncertainties inherent in the assumptions underlying these estimates, it is at least reasonably possible that these estimates will change in the near term and that the effect of these changes would be material to the financial statements.

In preparing its fiscal year 1997 consolidated financial statements, Education prepared two separate sets of estimates of the estimated liabilities for loan guarantees under the FFEL Program, allowance for FFEL Program defaulted guaranteed loans, allowance for direct loans, and the related guaranteed and direct loan subsidy expenses. One set of estimates was based on data maintained in Education's National Student Loan Data System (NSLDS). The other was based on data provided by ten of the larger guaranty agencies. Education's expectation was that the two sets of estimates would be similar, and that the loan estimates based on data from the ten guaranty agencies would serve to validate the estimates based on NSLDS data. We applied our auditing procedures to the loan estimates based on the data provided by the ten large guaranty agencies. We determined that this approach was more practicable than a direct validation of the data in NSLDS.

In response to the results of our auditing procedures, Education made adjustments to the loan estimates based on data provided by the ten large guaranty agencies, causing them to differ materially from the estimates based on NSLDS data. Education recorded the adjusted loan estimates based on data provided by the ten large guaranty agencies in its fiscal year 1997 financial statements. Although we determined that the data provided by the ten large guaranty agencies was suitable to support the loan estimates included in the fiscal year 1997 financial statements, the usefulness of this data will diminish in fiscal year 1998 and beyond.

Education's ability to continue to prepare auditable loan estimates for its financial statements depends on establishing a reliable store of up-to-date historical loan data.

In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of Education at September 30, 1997 and the results of its operations and cash flows for the year then ended, on the basis of accounting described in Note 2.

As discussed in Notes 2 and 8 to the financial statements, Education changed its method of . computing its loan estimates and restated its loan estimates as of September 30, 1996 due to the availability of validated data.

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of Education's major programs and activities. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.



Steven A. McNamara
Acting Deputy Inspector General

May 29, 1998
Washington, DC


600 INDEPENDENCE AVE., S.W. WASHINGTON, D.C. 20201-4300

Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation



-###-
[Financial Statements and Accompanying Notes] [Table of Contents] [Auditor's Report on Internal Controls]