[Federal Register: July 18, 2001 (Volume 66, Number 138)]
[Rules and Regulations]
[Page 37405-37406]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jy01-3]
-----------------------------------------------------------------------
DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Part 1773
RIN 0572-AB66
Policy on Audits of RUS Borrowers; Management Letter
AGENCY: Rural Utilities Service, USDA.
ACTION: Notice of confirmation of direct final rule.
-----------------------------------------------------------------------
SUMMARY: The Rural Utilities Service (RUS) hereby gives notice that
comments were received regarding direct final rule, 7 CFR Part 1773,
Policy on Audits of RUS Borrowers; Management Letter, and confirms the
effective date of the direct final rule. This notice also serves to
address the comments received.
DATES: The direct final rule published in the Federal Register on May
21, 2001 (66 FR 27829) is effective July 5, 2001.
FOR FURTHER INFORMATION CONTACT: Richard Annan, Chief, Technical
Accounting and Auditing Staff, Program Accounting Services Division,
Rural Utilities Service, U.S. Department of Agriculture, 1400
Independence Ave., SW., STOP 1523, Washington, DC 20250-1523.
Telephone: 202-720-5227.
Background
Title 7 part 1773 implements the standard RUS security instrument
provision requiring RUS electric and telecommunications borrowers to
prepare and furnish to RUS, at least once during each 12-month period,
a full and complete report of its financial condition, operations, and
cash flows, in form and substance satisfactory to RUS; audited and
certified by an independent Certified Public Accountant (CPA),
satisfactory to RUS, and accompanied by a report of such audit, in form
and substance satisfactory to RUS.
The Rural Utilities Service (RUS) published a direct final rule on
May 21, 2001, at 66 FR 27829, in the Federal Register revising the
requirements for the management letter. Section 1773.33(c) is revised
to address continuing property records (CPRs) rather than the term
plant records. In addition, the requirement that the CPA state whether
the CPRs have been established, is expanded wherein the CPA must state
that the CPRs are established, maintained on a current basis, and are
reconciled to the general ledger plant accounts. The requirements for
the CPA to determine that the borrower secured RUS approval for the
sale of plant in Sec. 1773(c)(5) is expanded to include the sale,
lease, or transfer of assets secured under the mortgage and to state
whether the proceeds were handled in conformance with RUS requirements.
The following requirements under Sec. 1773.33 are eliminated: (1)
The requirement for the CPA to determine that loan funds were deposited
in banks designated in the loan documents; (2) a corresponding
requirement in the telecommunications management letter; (3) the
requirement for the CPA to determine that the borrower has complied
with the RUS requirement for approval of any lease of a building or
land, standard traffic settlement agreement, billing and collecting
agreements, toll pooling arrangements, directory service agreements,
and joint-use agreement; and (4) the requirement for the CPA to
determine borrower compliance with the requirement to maintain a net
plant to secured debt ratio or a funded reserve for certain loans
wherein the maturity period exceeds the economic life of the plant
facilities being financed.
Section 1773.33, Management Letter, specifies the minimum
requirements for the CPA's management letter. RUS borrowers have
increasingly diversified into other utility and nonutility related
activities through the formation of subsidiary and affiliated
companies. RUS has need of information on investments in these
subsidiary and affiliated companies to assist in its efforts to monitor
loan security issues and respond to claims of cross subsidization. A
new requirement for the CPA to provide a detailed analysis of
borrowers' investments is therefore being added to the management
letter requirements. The CPA is required to disclose certain general
and financial information regarding each of a borrower's investments in
subsidiary and affiliated companies accounted for on the cost or equity
basis. This information should readily available in the borrower's
investment subsidiary records.
In previous versions of part 1773 the sample reports, financial
statements, and management letters were contained in four appendices,
two for electric borrowers and two for telecommunications borrowers.
Beginning with this revision of part 1773, the appendices will no
longer be codified in the Code of Federal Regulations. The appendices
will be available in new RUS Bulletin 1773-1, which will contain all of
7 CFR part 1773 and the appendices. Appendix A will contain the sample
reports, financial statements and management letter for electric
borrowers while Appendix B will contain similar sample for
telecommunications borrowers. The exhibits of the management letters,
which are included in the appendices, are attached to this notice for
information only. Publishing part 1773 in bulletin form will provide
the RUS audit policy in a user-friendly format. A single copy of this
publication will be provided to all RUS borrowers and certified public
accounts approved to perform audits of RUS borrowers and will be
available at http://www.usda.gov/rus/ruswide.htm.
RUS received three comments on this direct final rule from one
party, Kiesling Associates LLP, Madison Wisconsin, which RUS deemed to
be not adverse. All of the comments were regarding the requirement to
include a supplemental schedule of each investment in subsidiary and
affiliated companies in the management letter as required in
Sec. 1773.33(i). A summary of their comments and the responses follows:
Comments
Comment: Keisling stated that the audited financial statements of
an RUS borrower already include disclosures of equity method
investments and similar information is reported in Part G of the RUS
Form 479. In addition, RUS requires the submission of supplemental
schedules of financial condition and statement of operations for each
subsidiary for consolidated financial statements. Kiesling also noted
that Generally Accepted Auditing Standards (GAAP) also requires such
disclosures.
Reply: The supplemental schedules containing the statement of
financial condition and the statement of operations submitted with the
audited consolidated financial statements contain only the information
for the current and prior year for each subsidiary or affiliated
company. However, if the investment is not considered material the
supplemental statements are not required to be submitted with the
consolidated financial statements. Only footnote disclosure would be
required in such instances. The RUS requirement for the supplemental
information regarding investments included in the management letter
will provide a summary of the financial condition since inception for
each individual
[[Page 37406]]
subsidiary or affiliated company. For this reason RUS does not consider
this information to be duplicative of similar RUS or GAAP reporting
requirements. The information submitted with the RUS Form 479 is in the
aggregate for all subsidiary companies.
Comment: Keisling also commented that similar disclosure
requirements for investments accounted for on the cost method should
not be required as such investments are typically not of a material
nature. And if such investments were material they would be properly
disclosed in the footnotes to the audited financial statements.
Reply: While investments accounted for on the cost method may or
may not be material, RUS' purpose for including similar disclosures for
investments accounted for cost method is to provide a means for RUS to
track the RUS borrowers' investments in rural infrastructure. When
called upon to provide this information from Congressional and
government oversight agencies, RUS has not been able to readily gather
and summarize such data. The disclosure of all investments in
subsidiary and affiliated companies, whether accounted for on the cost
or equity method, will provide the appropriate information for such
inquiries.
Confirmation of Effective Date
This is to confirm the effective date of July 5, 2001, of the
direct final rule 7 CFR Part 1773, Policy on Audits of RUS Borrowers;
Management Letter, published in the Federal Register on May 21, 2001,
at 66 FR 27829.
Dated: July 12, 2001.
Blaine D. Stockton,
Acting Administrator, Rural Utilities Service.
[FR Doc. 01-17933 Filed 7-17-01; 8:45 am]
BILLING CODE 3410-15-P
This archive was generated by hypermail 2b29 : 2001/07/18 EST