ARCHIVED INFORMATION -- Annual Accountability Report Fiscal Year 1996

Report of Independent Accountants

To the Inspector General
U.S. Department of Education

We were engaged to audit the accompanying consolidated statement of financial position of the U.S. Department of Education (Education) as of September 30, 1995, and the related consolidated statements of operations and changes in net position and cash flows for the fiscal year then ended. These financial statements are the responsibility of Education's management. As part of our audit we have issued separate reports dated June 4, 1996, on Education's internal control structure and on compliance with laws and regulations.

Certain financial statement amounts related to Education's Federal Family Education Loan (FFEL) Program either could not be supported with complete, accurate and reliable data, or differences existed between amounts included in Education's financial statements and underlying data that could not be explained. The historical loan data on which the FFEL Program's aggregate liability for loan guaranties of $12.9 billion was based, either contains errors or critical prior year data is missing. The lack of reliable and complete data prevents assessing whether Education's liability estimate is materially over or under stated. Receivables for defaulted loans reported in Education's financial statements were reduced by $888 million to write-off amounts by which Education's accounting records differed from those of guaranty agencies who perform collection services on Education's behalf. Officials from Education have asserted that based on a study conducted prior to fiscal year 1995, the amounts written-off resulted from problems in the automated system Education used to record collections on defaulted loans. However, Education was unable to provide documentary evidence to support this assertion.

Reserve funds of $1.8 billion maintained by guaranty agencies are reported in Education's financial statements as assets in accordance with The Higher Education Act Sec 422(g)(1). However these reserves are reported by Education using cash instead of accrual basis information received from guaranty agencies. Since The Higher Education Act considers reserve funds and any assets purchased with such reserve funds to be assets of the United States Government, we believe reporting reserves using the accrual basis of accounting would be more appropriate. However, there is no information to determine what aggregate reserve funds would be if the accrual basis of accounting were applied.

To a much lesser degree than the FFEL Program, there are other financial statement amounts for which unreconciled differences existed, or where potential errors identified by the single audit act process were not quantified. Education's account with the U.S. Treasury was out of balance with its accounting records by a net difference of $183 million. In the absence of information to explain what comprises this difference, we are unable to determine the effect, if any, on Education's financial statements if the $183 million difference contains errors. With respect to grant expenses, audits conducted on Education's behalf revealed, from time to time, that amounts were improperly granted, in which case Education could be entitled to recoup the funds. However, the results of these audits have not been summarized by Education, and we are unable to determine the effect on the financial statements, if any, that might result from potential misuse of grant funds.

As described above, certain amounts reported in Education's consolidated financial statements could not be supported by sufficient and reliable accounting information and certain differences between financial statement amounts and underlying accounting records could not be adequately explained. Because obtaining missing information or locating evidence to explain differences in the accounting records would have entailed reconstruction of a substantial amount of supporting data, it was not practicable for us to extend our auditing procedures to satisfy ourselves regarding the effect these matters might have on Education's consolidated financial statements. Accordingly, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying consolidated financial statements.

The consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present financial position, results of operations and cash flows of Education's major programs and activities. For the reasons described in the preceding paragraph, we are unable to, and do not, express an opinion on whether such consolidating information is fairly stated, in all material respects, in relation to the consolidated statements taken as a whole.

The overview of Education contains a wide range of data, some of which are not directly related to the consolidated financial statements. We do not express an overall opinion on this information. However, we compared this information for consistency with the consolidated financial statements and discussed the methods of measurement and presentation with Education officials. Based on this limited work, we found no material inconsistencies with the consolidated financial statements.

Price Waterhouse LLP
Washington, D.C.
June 4, 1996
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