Policy on Audits of REA Borrowers

DEPARTMENT OF AGRICULTURE

Rural Electrification Administration

7 CFR Part 1773

RIN 0572-AA93

Policy on Audits of REA Borrowers

AGENCY: Rural Electrification Administration, USDA.

ACTION: Final rule.

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SUMMARY: This final rule revises and clarifies a provision of the

current regulation which requires a certified public accountant (CPA)

to state whether an electric borrower has complied with certain

provisions of its loan and security instruments. This final rule also

incorporates the illustrative management letter issued by the American

Institute of Certified Public Accountants in a Technical Practice Aid

dated November 11, 1992.

DATES: This rule is effective February 7, 1994. This rule applies to

audits prepared as of December 31, 1993, and thereafter.

FOR FURTHER INFORMATION CONTACT:

Ms. Roberta E. Detwiler, Chief, Technical Accounting and Auditing

Staff, Borrower Accounting Division, Rural Electrification

Administration, room 2222, South Building, U.S. Department of

Agriculture, Washington, DC 20250, telephone number (202) 720-5227.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule is issued in conformance with Executive Order

12866.

Regulatory Flexibility Act Certification

The Administrator, REA, has determined that the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this final

rule.

Information Collection and Recordkeeping Requirements

In compliance with the Office of Management and Budget (OMB)

regulations (5 CFR part 1320) which implements the Paperwork Reduction

Act of 1980 (Pub. L. 96-511) and section 3504 of that Act, the

information collection and recordkeeping requirements have been

approved by the Office of Management and Budget (OMB) under control

number 0572-0095. Comments regarding these requirements may be sent to

the United States Department of Agriculture, Clearance Office, OIRM,

room 404-W, Washington, DC 20250 or to the Office of Management and

Budget, Office of Information and Regulatory Affairs, room 3201,

Washington, DC 20503.

National Environmental Policy Act Certification

The Administrator, REA, has determined that this final rule will

not significantly affect the quality of the human environment as

defined by the National Environmental Policy Act of 1969 (42 U.S.C.

4321 et seq.). Therefore, this action does not require an environmental

impact statement or assessment.

Catalog of Federal Domestic Assistance

The program described by this final rule is listed in the Catalog

of Federal Domestic Assistance Programs under number 10.850--Rural

Electrification Loans and Loan Guarantees. This catalog is available on

a subscription basis from the Superintendent of Documents, the United

States Government Printing Office, Washington, DC 20402.

Executive Order 12372

This final rule is excluded from the scope of Executive Order

12372, Intergovernmental Consultation. A Notice of Final Rule entitled

Department Programs and Activities Excluded from Executive Order 12372

(50 FR 47034) exempts REA and Rural Telephone Bank (RTB) loans and loan

guarantees, and RTB bank loans, to governmental and nongovernmental

entities from coverage under this Order.

Executive Order 12778

This final rule has been reviewed under Executive Order 12778,

Civil Justice Reform. This final rule:

(1) Will not preempt any state or local laws, regulations, or

policies, unless they present an irreconcilable conflict with this

rule;

(2) Will not have any retroactive effect; and

(3) Will not require administrative proceeding before parties may

file suit challenging the provisions of this rule.

Background

On December 3, 1991, REA published a final rule on part 1773, at 56

FR 63354, concerning audits of REA borrowers. Part 1773 implements the

standard REA security instrument provision requiring REA borrowers to

prepare and furnish to REA, 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 REA, audited and

certified by an independent CPA, satisfactory to REA, and accompanied

by a report of such audit, in form and substance satisfactory to REA. A

report of the audit was defined in Sec. 1773.1 to include the auditor's

report, report on compliance, report on internal controls and

management letter.

The management letter is prepared by the CPA and addresses specific

internal control, compliance, and other program issues not typically

addressed in the standard auditor's report, report on internal

controls, or report on compliance. The requirements for preparing a

management letter are set forth in Sec. 1773.34, Management Letter.

This final rule revises and clarifies Sec. 1773.34(e). Section 1773.34

(e)(1)(i) for electric borrowers and Sec. 1773.34 (e)(2)(i) for

telephone borrowers requires CPAs to test compliance with the loan and

security instrument provision requiring borrowers to maintain

insurance. REA is currently reviewing its insurance requirements to

determine if these requirements are representative of current industry

standards. Therefore, until such time as REA's review is completed and

revisions, if any, to current policies are finalized, CPAs will not be

required to test for compliance with the mortgage provision relating to

insurance.

Section 1773.34(e)(1)(ii) for electric borrowers and

Sec. 1773.34(e)(2)(iii) for telephone borrowers requires CPAs to test

for compliance with the loan and security instrument provision

requiring funds to be deposited in banks or other depositories

designated in the loan documents or approved by REA. Because of the

many and varied investing activities available in today's economy, CPAs

have questioned the definition of funds and what, if any, investments

are affected. This final rule provides a definition of funds for

purposes of applying this part 1773.

Section 1773.34(e)(1)(iv) for electric borrowers and

Sec. 1773.34(e)(2)(iv) for telephone borrowers requires CPAs to review

the financial and statistical report and state whether the information

presented is in agreement with the borrower's records. CPAs have

questioned whether they are required to review a certified copy of the

report obtained directly from REA or whether they may review a copy

represented by the borrower as having been submitted to REA. This final

rule clarifies REA's requirement for CPAs to review a copy of the

financial and statistical report represented by the borrower as having

been submitted to REA.

Section 1773.34(e)(1)(iii) for electric borrowers and

Sec. 1773.34(e)(2)(ii) for telephone borrowers requires the CPA to

state whether an REA borrower has complied with the provision of its

loan and security instrument that requires a borrower to obtain written

approval of mortgagees to enter into any contract for the operation or

maintenance of all or any part of its property, or for the use of its

property by others. This requirement clearly goes beyond the scope of

government auditing standards because it requires all contracts, even

those that have little or no impact on financial statement amounts, to

be reviewed by the CPA for REA approval. This testing has, during the

effective period of part 1773, translated into increased audit fees. To

minimize the cost impact to REA borrowers yet provide REA the assurance

it requires, this final rule details the contracts that must be

reviewed by CPAs.

This final rule also incorporates the illustrative management

letter, as amended by these part 1773 revisions, issued by the American

Institute of Certified Public Accountants in a Technical Practice Aid

dated November 11, 1992. The illustrative letter properly addresses the

management letter requirements set forth in 7 CFR 1773.34 and includes

specific language to ensure compliance with the promulgated auditing

literature. As such, REA believes it is more informative than the

sample management letter previously provided in appendix C to part

1773.

Due to a procedural change within REA that will more efficiently

process and review audit reports submitted by REA borrowers, this final

rule also amends Sec. 1773.3, Sec. 1773.20, and Sec. 1773.21 to require

borrowers to submit to REA an additional copy of the audit, report on

compliance, report on internal controls, and management letter and

revises Sec. 1773.21 to require the submission of an additional copy of

borrowers' plans for corrective action.

Comments

A proposed rule entitled Policy on Audits of REA Borrowers,

published September 23, 1993, at 58 FR 49442, invited interested

parties to submit comments on or before November 22, 1993. Comments

were received from the National Rural Electric Cooperative Association

(NRECA) and two certified public accounting firms. The comments

submitted by NRECA were based upon an analysis performed by the

Accounting & Depreciation Committee, a subcommittee of the Generation

and Transmission Managers Association Technical Advisory Committee, and

were considered and concurred in by the NRECA Accounting and Tax

Committee.

One accounting firm agreed with the proposed revisions in all

respects. The other commenters agreed with the proposed revisions;

however, proffered additional revisions. The following paragraphs

address the additional revisions proposed by the commenters.

Comment. Sections 1773.40 and 1773.45 state that the certified

public accountant's (CPA) workpapers must document whether all

regulatory assets and liabilities comply with the requirements of

Statement of Financial Accounting Standards No. 71, Accounting for the

Effects of Certain Types of Regulation, and have received REA approval.

REA telephone borrowers that comply with generally accepted accounting

principles as required by part 32 of the Federal Communications

Commission's Rules and Regulations, Uniform System of Accounts for

Telecommunications Companies, are not required to obtain specific REA

approval of regulatory assets and liabilities. Only REA electric

borrowers must seek such approval. Sections 1773.40 and 1773.45 should

be amended to specify that REA approval of regulatory assets and

liabilities must only be documented for REA electric borrowers.

Response. REA agrees with the comment and has revised Sec. 1773.40

and Sec. 1773.45 accordingly.

Comment. Section 1773.9(c) states that pursuant to the terms of its

audit agreement with the borrower, the CPA must immediately report, in

writing, all irregularities and all indications or instances of illegal

acts, whether material or not to: (1) The president of the borrower's

board of directors; (2) the Director, Borrowers Accounting Division;

and (3) the Office of Inspector General. This requirement goes beyond

that of generally accepted government auditing standards (GAGAS) which

limits reporting requirements for irregularities to material instances

and instances that cumulatively could have a material effect on the

financial statements. GAGAS further limits the reporting of illegal

acts to only the top official of the entity arranging for the audit.

REA should modify the requirements set forth in Sec. 1773.9(c) to

correspond with the GAGAS requirements.

Response. REA recognizes that certain procedures set forth in part

1773 exceed the requirements of a GAGAS audit and REA has acknowledged

that fact in the rule. The Office of Inspector General, in Departmental

Regulation No. 1700-1, Basic OIG Investigation/Audit Organization and

Procedures, sets forth certain requirements that all Federal agencies

within USDA must impose upon nonFederal auditors. One of these

requirements is that all irregularities or illegal acts, regardless of

materiality, discovered by nonFederal auditors be reported to the

Federal agency requiring the audit and to OIG for appropriate action.

For this reason, no revisions were made in the final rule.

Comment. Section 1773.6(a)(2) states that ``The borrower and CPA

acknowledge that REA regulations provide that if the borrower fails to

have an audit performed and documented in compliance with GAGAS and

this part, the borrower is in violation of its security instrument with

REA''. This language exceeds the applicable mortgage covenant and the

following language should be substituted: ``The borrower and CPA

acknowledge that REA will consider the borrower to be in violation of

its security instrument with REA if the borrower fails to have an audit

performed and documented in compliance with GAGAS and 7 CFR part 1773.

This acknowledgement shall not be considered a contractual admission

against interest by either the borrower or the CPA.''

Response. REA's proposed rule published on September 23, 1993, did

not include revisions to Sec. 1773.6(a)(2). Therefore, comments on this

section went beyond the scope of the proposal. REA is planning a

separate rulemaking procedures that will include changes in

Sec. 1773.6(a)(2) and REA will be soliciting comments at that time.

Comment. Certain disclosure and reporting requirements contained in

Sec. 1773.34 should include some consideration of materiality. The

concept of materiality is inherent in all audits. Strict compliance

with the existing policy has, however, resulted in reporting of

immaterial items of non-compliance.

Response. As previously discussed, REA recognizes that certain

procedures set forth in part 1773 exceed the requirements of a GAGAS

audit and REA has acknowledged that fact in the rule. Section 1773.34

sets forth REA's requirement that the CPA must prepare a management

letter and establishes the testing and reporting requirements for the

management letter.

Section 1773.34(e) sets forth certain provisions of REA's security

instrument that REA has determined are essential to the security of its

loans. CPAs auditing REA borrowers are, therefore, required to test for

compliance with the security instrument provisions set forth in

Sec. 1773.34. Because of the degree of reliance that REA places on the

CPAs' testing in these areas, REA has determined that materiality

should not be a factor upon which testing is based. REA has, however,

through the publication of this final rule, revised and eliminated many

of the unclear or burdensome requirements set forth in part 1773. For

this reason, no additional revisions were made to Sec. 1773.34.

List of Subjects in 7 CFR Part 1773

Accounting, Electric power, Loan programs--communications, Loan

programs--energy, Reporting and recordkeeping requirements, Rural

areas, Telephone.

For the reasons set forth in the preamble, REA hereby amends 7 CFR

chapter XVII as follows:

PART 1773--POLICY ON AUDITS OF REA BORROWERS

1. The authority citation for part 1773 is revised to read as

follows:

Authority: 7 U.S.C. 901 et seq., 1921 et seq.)

2. In Sec. 1773.3, paragraph (c) is revised to read as follows:

Sec. 1773.3 Annual audit.

* * * * *

(c) Until all loans made or guaranteed by REA have been repaid, the

borrower must furnish three copies of the auditor's report, report on

compliance, report on internal controls, and management letter to REA

within 120 days of the as of audit date.

* * * * *

3. In Sec. 1773.20, paragraph (a) is revised to read as follows:

Sec. 1773.20 CPA's submission of the auditor's report, report on

compliance, report on internal controls, and management letter.

(a) Time limit. As soon as possible after completion of the audit,

but within 90 days of the as of audit date, the CPA should deliver the

auditor's report, report on compliance, report on internal controls,

and management letter to the president of the borrower's board of

directors. As a minimum, copies should be provided for each member of

the board of directors and the manager. Further, three copies must be

provided to the borrower for transmittal to REA.

* * * * *

4. In Sec. 1773.21, paragraphs (b) and (c) are revised to read as

follows:

Sec. 1773.21 Borrower's review and submission of the auditor's report,

report on compliance, report on internal controls, and management

letter.

* * * * *

(b) The borrower must furnish REA with three copies of the

auditor's report, report on compliance, report on internal controls,

and management letter within 120 days of the as of audit date. Any

provision in REA's security instrument that requires such documents to

be furnished to REA in a shorter period of time may be disregarded.

(c) The borrower must furnish REA with three copies of its plan for

corrective action, if any, within 180 days of the as of audit date.

* * * * *

5. Section 1773.34 is amended by removing paragraph (e)(1)(i),

redesignating paragraphs (e)(1)(ii) through (e)(1)(iv) as paragraphs

(e)(1)(i) through (e)(1)(iii) respectively and revising the newly

designated paragraphs, removing paragraph (e)(2)(i), redesignating

paragraphs (e)(2)(ii) through (e)(2)(iv) as paragraphs (e)(2)(i)

through (e)(2)(iii) respectively and revising the newly redesignated

paragraphs to read as follows:

Sec. 1773.34 Management letter.

* * * * *

(e) * * *

(1) * * *

(i) The requirement for funds to be deposited in banks or other

depositories designated in the loan documents or approved by REA. For

purposes of this part 1773, funds shall be defined as cash on deposit

in demand and time accounts, and certificates of deposit;

(ii) The requirement for a borrower to obtain written approval of

mortgagees to enter into any contract for the operation or maintenance

of all or any substantial part of its property, or for the use by

others of its property. For purposes of this part 1773, the following

contracts shall be deemed as requiring REA approval:

(A) Management contracts in which the borrower has contracted to

have another borrower or other entity manage its affairs;

(B) Management contracts in which the borrower has contracted to

manage another borrower or other utility system;

(C) Operations and maintenance contracts in which the borrower has

contracted to have another borrower or other entity operate and/or

maintain all or a substantial part (45% or more) of the physical plant

facilities of the borrower;

(D) Operations and maintenance contracts in which the borrower has

contracted to operate and maintain the physical plant facilities of

another borrower or other utility system; and

(E) Contracts between the borrower and its manager; and

(iii) The requirement for a borrower to prepare and furnish

mortgagees annual financial and statistical reports on the borrower's

financial condition and operations. The CPA must state whether the

information represented by the borrower as having been submitted to REA

in its most recent December 31 REA Form 7 or Form 12 is in agreement

with the borrower's records, and must comment on any exceptions noted.

If the borrower represents that an amended report has been filed as of

December 31, the comments must relate to the amended report.

(2) * * *

(i) The requirement for a borrower to obtain written approval of

the mortgagees to enter into any contract for the operation or

maintenance of property and for the use of mortgaged property by

others, or for services pertaining to toll traffic, operator

assistance, or switching. For purposes of this part 1773, the following

contracts shall be deemed as requiring REA approval:

(A) Any contract, agreement or lease between the borrower and an

affiliate other than as allowed under 7 CFR part 1744, subpart E;

(B) Any lease of a building or land; and

(C) Any other contract as defined in Sec. 1773.34 (e)(2)(i) except:

(1) Industry standard traffic settlement agreements involving

interexchange and long distance carriers which, in form and substance,

conform with contracts in general use in the telecommunications

industry;

(2) Billing and collecting agreements;

(3) Toll pooling arrangements involving National Exchange Carrier

Association and state associations;

(4) Directory services agreements; and

(5) Joint use agreements;

(ii) The requirement for funds to be deposited in banks or other

depositories designated in the loan documents or approved by REA. For

purposes of this part 1773, funds shall be defined as cash on deposit

in demand and time accounts, and certificates of deposit; and

(iii) The requirement for a borrower to prepare and furnish

mortgagees annual financial and statistical reports on the borrower's

financial condition and operations. The CPA must state whether the

information represented by the borrower as having been submitted to REA

in its most recent December 31 REA Form 479 is in agreement with the

borrower's records, and must comment on any exceptions noted. If the

borrower represents that an amended report has been filed as of

December 31, the comments must relate to the amended report.

* * * * *

6. Section 1773.40 is revised to read as follows:

Sec. 1773.40 Regulatory assets.

The CPA's workpapers must document whether all regulatory assets

comply with the requirements of SFAS No. 71. For electric borrowers

only, the CPA's workpapers must document whether all regulatory assets

have received REA approval.

7. Section 1773.45 is revised to read as follows:

Sec. 1773.45 Regulatory liabilities.

The CPA's workpapers must document whether all regulatory

liabilities comply with the requirements of SFAS No. 71. For electric

borrowers only, the CPA's workpapers must document whether all

regulatory liabilities have received REA approval.

8. Appendix C to Part 1773 is revised to read as follows:

Appendix C to Part 1773--Illustrative Independent Auditors' Management

Letter

REA requires that CPAs auditing REA borrowers provide a

management letter in accordance with Sec. 1773.34. REA requires that

this letter bear the same date as the auditor's report and be

addressed to the borrower's board of directors. The CPA is required

to sign the auditor's report, report on compliance, report on

internal controls, and management letter.

Illustrative Independent Auditors' Management Letter

March 15, 19x6

Board of Directors

[Name of Borrower]

[City, State]

We have audited the financial statements of [Name of Borrower]

for the year ended December 31, 19x5, and have issued our report

thereon dated March 15, 19x6. We conducted our audit in accordance

with generally accepted auditing standards, Government Auditing

Standards issued by the Comptroller General of the United States,

and 7 CFR part 1773, Policy on Audits of Rural Electrification

Administration (REA) Borrowers. Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement.

In planning and performing our audit of the financial statements

of [Name of Borrower] for the year ended December 31, 19x5, we

considered its internal control structure in order to determine our

auditing procedures for the purpose of expressing an opinion on the

financial statements and not to provide assurance on the internal

control structure.

A description of the responsibility of management for

establishing and maintaining the internal control structure and the

objectives of and inherent limitations in such a structure is set

forth in our independent auditors' report on the internal control

structure dated March 15, 19x6, and should be read in conjunction

with this report.

Our consideration of the internal control structure would not

necessarily disclose all matters in the internal control structure

that might be material weaknesses under standards established by the

American Institute of Certified Public Accountants.

A material weakness is a condition in which the design or

operation of the specific internal control structure elements does

not reduce to a relatively low level the risk that errors or

irregularities in amounts that would be material in relation to the

financial statements being audited may occur and not be detected

within a timely period by employees in the normal course of

performing their assigned functions. However, we noted no matters

involving the internal control structure and its operation that we

consider to be a material weakness as defined above. [If a material

weakness was noted, refer the reader to the independent auditors'

report on internal control structure.]

7 CFR 1773.34 requires comments on specific aspects of the

internal control structure, compliance with specific REA loan and

security instrument provisions, and other additional matters. We

have grouped our comments accordingly. In addition to obtaining

reasonable assurance about whether the financial statements are free

from material misstatements, at your request, we performed tests of

specific aspects of the internal control structure, of compliance

with specific REA loan and security instrument provisions, and of

additional matters. The specific aspects of the internal control

structure, compliance with specific REA loan and security instrument

provisions, and additional matters tested include, among other

things, the accounting procedures and records, materials control,

compliance with specific REA loan and security instrument provisions

set forth in 7 CFR 1773.34 (e)(1), [for telephone borrowers, 7 CFR

1773.34 (e)(2)], related party transactions, and depreciation rates.

[For electric borrowers:] The additional matters tested also include

a schedule of deferred debits and credits, upon which we express an

opinion. In addition, our audit of the financial statements also

included the procedures specified in 7 CFR 1773.38-.45. Our

objective was not to provide an opinion on these specific aspects of

the internal control structure, compliance with specific REA loan

and security instrument provisions, or additional matters, and

accordingly, we express no opinion thereon.

No reports (other than our independent auditors' report, our

independent auditors' compliance report, and our independent

auditors' report on the internal control structure, all dated March

15, 19x6) or summary of recommendations related to our audit have

been furnished to management.

Our comments on specific aspects of the internal control

structure, compliance with specific REA loan and security instrument

provisions, and other additional matters as required by 7 CFR

1773.34 are presented below.

Comments on Certain Specific Aspects of the Internal Control Structure

We noted no matters regarding [Name of Borrower]'s internal

control structure and its operation that we consider to be a

material weakness as previously defined with respect to:

--The accounting procedures and records [list other comments];

--The process for accumulating and recording labor, material, and

overhead costs, and the distribution of these costs to construction,

retirement, and maintenance or other expense accounts [list other

comments]; and,

--The materials control [list other comments].

Comments on Compliance With Specific REA Loan and Security Instrument

Provisions

Management's responsibility for compliance with laws,

regulations, contracts, and grants is set forth in our independent

auditors' report on compliance dated March 15, 19x6, and should be

read in conjunction with this report. At your request, we have

performed the procedures enumerated below with respect to compliance

with certain provisions of laws, regulations, and contracts. The

procedures we performed are summarized as follows:

--Procedure performed with respect to the requirement to maintain

all funds in institutions whose accounts are insured by an Agency of

the Federal Government:

1. Obtained information from financial institutions with which

[Name of Borrower] maintains funds that indicated that the

institutions are insured by an Agency of the Federal Government.

--Procedures performed with respect to the requirement for a

borrower to obtain written approval of the mortgagee to enter into

any contract for the operation or maintenance of property, or for

the use of mortgaged property by others [see Sec. 1773.34(e)(2)(i)

for additional telephone borrower requirements in accordance with 7

CFR 1773.34(e)] for the year ended December 31, 19x5 of [Name of

Borrower]:

1. Obtained and read a borrower prepared schedule of new written

contracts entered into during the year for the operation or

maintenance of its property, or for the use of its property by

others as defined in Sec. 1773.34(e)(1)(ii) [Sec. 1773.34(e)(2)(i)

for telephone borrowers].

2. Reviewed Board of Director minutes to ascertain whether

board-approved written contracts are included in the borrower-

prepared schedule.

3. Noted the existence of written REA [and other mortgagee]

approval of each contract listed by the borrower.

--Procedure performed with respect to the requirement to submit REA

Form 7 or Form 12 [Form 479 for telephone borrowers] to the REA:

1. Agreed amounts reported in Form 7 or Form 12 [Form 479 for

telephone borrowers] to [Name of Borrower]'s records.

The results of our tests indicate that, with respect to the

items tested, [Name of Borrower] complied, except as noted below, in

all material respects, with the specific REA loan and security

instrument provisions referred to below. With respect to items not

tested, nothing came to our attention that caused us to believe that

[Name of Borrower] had not complied, in all material respects, with

those provisions. The specific provisions tested, as well as any

exceptions noted, include the requirements that:

--The borrower maintains all funds in institutions whose accounts

are insured by an Agency of the Federal Government [list all

exceptions];

--The borrower has obtained written approval of the REA [and other

mortgagees] to enter into any contract for the operation or

maintenance of property, or for the use of mortgaged property by

others as defined in Sec. 1773.34(e)(1)(ii) [Sec. 1773.34(e)(2)(i)

for telephone borrowers] [list all exceptions]; and

--The borrower has submitted its Form 7 or Form 12 [Form 479 for

telephone borrowers] to the REA and the Form 7 or Form 12 [Form 479

for telephone borrowers], Financial and Statistical Report, as of

December 31 19x5, represented by the borrower as having been

submitted to REA is in agreement with the [Name of Borrower]'s

records in all material respects [list all exceptions].

Comments on Other Additional Matters

In connection with our audit of the financial statements of

[Name of Borrower], nothing came to our attention that caused us to

believe that [Name of Borrower] failed to comply with respect to:

--The reconciliation of subsidiary plant records to the controlling

general ledger plant accounts addressed at 7 CFR 1773.34(c)(1) [list

all exceptions];

--The clearing of the construction accounts and the accrual of

depreciation on completed construction addressed at 7 CFR

1773.34(c)(2) [list all exceptions];

--The retirement of plant addressed at 7 CFR 1773.34(c) (3) and (4)

[list all exceptions];

--Sales of plant material, or scrap addressed at 7 CFR 1773.34(c)(5)

[list all exceptions];

--The disclosure of material related party transactions, in

accordance with Statement of Financial Accounting Standards No. 57,

Related Party Transactions, for the year ended December 31, 19x5, in

the financial statements referenced in the first paragraph of this

report addressed at 7 CFR 1773.34(f) [list all exceptions]; and

--For electric borrowers only: depreciation rates addressed at 7 CFR

1773.34(g) [list all exceptions].

Detailed Schedule of Inventory Differences

A detailed schedule of differences between physical inventory,

perpetual inventory records, and the general ledger (identifying

gross overages and gross shortages) is provided below. This schedule

is not a required part of the basic financial statements but is

supplementary information required by 7 CFR 1773.34(d). We have

applied certain limited procedures, which consisted principally of

inquiries of management regarding the method of measurement and

presentation of the supplementary information. However, we did not

audit the information and express no opinion on it. [Disclose the

disposition of inventory differences.]

[The detailed schedule of inventory differences would be included

here. The word ``unaudited'' should appear in the title of the

schedule.]

For Electric Borrowers Only: Detailed Schedule of Deferred Debits and

Deferred Credits

Our audit was made for the purpose of forming an opinion on the

basic financial statements taken as a whole. The detailed schedule

of deferred debits and deferred credits required by 7 CFR 1773.34(h)

and provided below is presented for purposes of additional analysis

and is not a required part of the basic financial statements. This

information has been subjected to the auditing procedures applied in

our audit of the basic financial statements and, in our opinion, is

fairly stated in all material respects in relation to the basic

financial statements taken as a whole.

[The detailed schedule of deferred debits and deferred credits would

be included here. The total amount of deferred debits and deferred

credits as reported in the schedule must agree with the totals

reported on the Balance Sheet under the specific captions of

``Deferred Debits'' and ``Deferred Credits''. Those items that have

been approved, in writing, by REA should be clearly indicated.]

This report is intended solely for the information and use of

the board of directors, management, and the REA and supplemental

lenders. However, this report is a matter of public record and its

distribution is not limited.

Name of Firm-----------------------------------------------------------

Michael V. Dunn,

Acting Under Secretary, Small Community and Rural Development.

[FR Doc. 94-196 Filed 1-5-94; 8:45 am]

BILLING CODE 3410-15-M