NPR was shaken, President Frank Mankiewicz and other top managers toppled and some 60 staffers laid off in the network’s 1983 financial crisis. NPR, then largely dependent on federal aid through the Corporation for Public Broadcasting, had expanded activities to generate nonfederal money. But those efforts contributed to NPR’s near-collapse.
The U.S. Government Accounting Office found that revenues lagged behind budget, expenditures exceeded budget and management lacked systems to monitor the situation, resulting in a $6.4 million deficit in fiscal year 1983.
In this statement, Frederick D. Wolf, director of GAO’s Accounting and Financial Management Division, reviewed factors in NPR’s fiscal crisis and cutbacks that barely enabled it to break even at that point. He spoke before the U.S. House of Representatives Energy and Commerce Committee, Subcommittee on Oversight and Investigations, Feb. 10, 1984.
Introduction
Good Morning, Mr. Chairman and Members of the Subcommittee. We appreciate the opportunity to testify before the House Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce on our review of the financial operations of National Public Radio (NPR). I am accompanied by two personnel from GAO’s Accounting and Financial Management Division, Mr. Thomas Sholedice, Group Director, and Mr. Todd Givens, Audit Manager, who were responsible for conducting our review.
In early 1983, NPR underwent a significant financial crisis culminating in a need to seek an unanticipated loan of $7 million from the Corporation for Public Broadcasting (CPB). At that time, you asked us to review NPR’s financial operations. specifically you requested we review (1) the reasons for NPR’s financial problems, (2) NPR’s financial management system, (3) the controls being implemented by NPR and CPB to prevent a similar situation in the future, and (4) the ability of NPR to operate under the terms of its contract with CPB. Discussions with your staff also indicated that you desired us to perform an examination of the propriety of various expenditures made by NPR. Our testimony on the results of our review is provided for the record. In addition, answers to specific questions asked by your staff are included as an attachment to this testimony.
In conducting our review of NPR financial matters, we interviewed present and former officers and Directors of NPR and officials of CPB. We also examined minutes of NPR’s Board of Directors and various committees, financial records, correspondence and other documents which we believed related to the matters under review. In many cases, we were forced to rely on interviews because documentation for many events did not exist or could not be located. For example, board minutes for some meetings existed in only draft form and certain files related to the budget and other matters could not be located by either the Executive Vice President or NPR.
NPR’s financial problems, which resulted in an operating deficit of approximately $6.4 million for the year ended September 30, 1983, and the unanticipated need to borrow $7 million from CPB, occurred because the organization was not properly prepared for, and in fact, failed in its ambitious plan, known as Project Independence. NPR was not prepared for a number of reasons. First, its management operations were not properly structured to undertake the major expansion in program hours and commercial venture operations that were planned in Project Independence. NPR’ s operations, as pointed out in a management consultant’s report to the Board in January 1982, were informal, resulting in decisions made on incomplete or inaccurate information, lack of coordination in implementation of decisions, lack of monitoring of actions taken, and confusion regarding the authority and the responsibilities of key members of management. These management problems and confusion over the budget led to overspending on the expansion and commercial efforts. Second, NPR’s capability to raise funds, from private grants and contributions had not been fully developed and, as a result, its grant revenue goals were not realized. Third, NPR’s financial position was not adequate to sustain the increased operations and commercial joint ventures if these activities did not begin producing revenues as planned. Further, NPR did not have a formal contingency plan to compensate for any revenue deficiencies. Finally, NPR did not have a functioning financial management information system to provide essential reports, such as comparisons of budgeted and actual revenues and expenditures, to enable management to monitor operations during a period when vital financial management decisions needed to be made.
I will first review the details of Project Independence and then will discuss how NPR’s problems of informal management and inadequate fund raising capability became apparent during the preparation of the 1983 budget and fiscal 1983 operations.
Project Independence was a plan by which NPR hoped to eliminate entirely its need for federal funds by 1988. It was developed in response to anticipated reductions in Federal grants from the Corporation for Public Broadcasting (CPB). NPR had been pursuing a significant expansion program for several years, with the number of program hours growing from approximately 2,100 in fiscal 1977 to 3,400 in fiscal 1982. This increase in programming was reflected in NPR’s expenses, which increased from $7.3 million in fiscal 1977 to $26.7 million in fiscal 1982. Faced with anticipated reductions of Federal grants, NPR had three options in our opinion: (1) find alternative sources of revenue that would be sufficient to fund NPR’s planned operations; (2) reduce operations and expenditures to reflect the lower federal revenue; or (3) institute a program combining (1) and (2). NPR’s President decided to pursue the first option.
In November 1981, NPR’s president announced his plan, Project Independence, to obtain additional non-federal revenues. He provided details of the plan to the member stations at the Annual Membership Meeting on April 21, 1982. Project Independence included increased efforts to secure new grants and contributions from non-federal sources; the initiation of new commercial ventures which would provide profits to fund NPR operations; and increased programming, later called NPR Plus, which would be sold to member stations. The immediate purpose of this plan was to obtain sufficient revenue to meet plans for 1983, while the ultimate goal was to develop these alternative revenue sources so that NPR would not require any Federal funding by 1988. The Board of Directors was informed of the plan but did not formally approve the Project Independence concept until July 30, 1982, just two months prior to the start of fiscal 1983, at the same time it approved the fiscal 1983 budget.
Each of the individual components of Project Independence, fund raising, NPR Ventures, and NPR Plus, was significant and each had associated risks.
NPR based its planning for Project Independence on the assumption that it could obtain $7.2 million in nonfederal grants and contributions in fiscal 1983. By fiscal 1982, NPR was already receiving an increasing portion of its revenues from sources other than CPB. From 1977 to 1982, non-CPB revenues increased from 6 percent of total revenues to 34 percent of total revenues. The additional revenues were generated from grants, contributions, sales of programs to member stations, and other miscellaneous sources.
During the period from 1977 to 1982, grants and contributions from individuals, foundations and corporations increased from $294,000 to $3,095,000, while CPB funding had increased from $6.8 million to $17.4 million.
Despite the consistent growth in grants and contributions, NPR needed a strong fund raising program to meet its 1983 goal of $7.2 million for nonfederal grants and contributions. This goal was more than twice the amount of private grants and contributions which NPR had ever been able to achieve. A January 1982 study by consultants, McKinsey & Co., concluded, however, that NPR’s fund raising organization and activities were insufficient to meet its future revenue needs. In response to this report, the Board of Directors created a new position of Vice President of Development and NPR proceeded to recruit a professional fund raiser. The Vice President did not, however, assume her duties until August 16, 1982 — only six weeks prior to the start of the fiscal year 1983 operations which were to be funded by substantially increased grants and contributions.
NPR management originally expected that a significant portion of the 1983 nonfederal grants and contributions goal of $7.2 would be achieved by obtaining two large grants in support of NPR Plus. NPR had sought a 3 year, $4.5 million grant from one foundation and a 3 year, $5 million grant from another foundation. However, as of September 1982, formal negotiations with one foundation had not begun and the other foundation had indicated they would not provide NPR with any grant money. (At this point, according to the Executive Vice President, he believed any grant and contribution revenue shortage would be made up by revenues provided by NPR commercial ventures.)
In addition, the new Vice President of Development did not know that the goal for 1983 grants and contributions was $7.2 million. While developing the 1983 budget, which we will discuss later, NPR had several different estimates of the amount of revenues expected to be obtained for fiscal 1983 by fund raising. None of the estimates were based on committed grants, but rather were target revenues which were needed to meet NPR’s financial needs. When she was recruited, the Vice President of Development understood that the goal for grants and contributions was approximately three to four million dollars. In October 1982, the Vice President of Development was informed that the target was $5.3 million. This reflects the confusion that existed at NPR because this estimated goal was not in agreement with the funding proposal submitted to CPB in August 1982, which indicated that NPR required $7.2 million of grants and contributions in 1983 to balance the budget.
NPR’s entry into commercial ventures was the second major component of Project Independence. Basically, all the venture plans anticipated use of the excess capacity of NPR’s leased communications satellite radio channels. The Public Radio Act of 1981 authorized use of these satellite channels for commercial purposes as long as public service was not jeopardized. During the fall of 1981 and throughout 1982, NPR held negotiations with various organizations to establish partnerships in commercial ventures to use the satellite channels. While numerous possibilities were investigated, there were five ventures which were formally negotiated. These ventures on which negotiations were held included National Satellite Paging, CODART, DATASPEED, Cellular Radio, and Information Network Corporation. Because of the problems discussed later, only one of these ventures is still in open, but currently inactive. All the other ventures have been terminated and NPR does not presently plan to pursue them.
The January 1982 study by McKinsey & Co. had also pointed out the need for a senior executive, with commercial experience, to oversee NPR’s commercial ventures. The Board authorized the creation of a position as Vice President of Ventures, but again a person was not hired to fill the position until August of 1982. The lack of expertise in commercial operations was not the only problem facing NPR management with the proposed venture operations.
The main problem, as management was aware, facing NPR Ventures at the beginning of fiscal 1983 was obtaining Federal Communications Commission (FCC) authorization to use the satellite channels for the ventures. NPR had filed the necessary petitions between late 1981 and early 1982 and believed that the FCC would approve the petitions by late spring 1982. An unexpected challenge to NPR’s petition delayed approval and as of the beginning of fiscal year 1983 approval had not been obtained. This delay was one of the primary reasons that the venture operations were unable to commence operations and, in fact, the approvals by the FCC have still not been issued.
Second, NPR management knew, based on studies done by McKinsey and Co. and NPR personnel, that the ventures had many uncertainties and that the venture partners had little or no financial resources or actual operating experience. Each of the venture operations had a high degree of risk.
Finally, because of the uncertainties of the ventures operations, NPR did not prepare a detailed ventures budget until the second quarter of fiscal 1983. The NPR budget approved by the Board in July 1982 did not contain firm ventures revenue and expense estimates, although the Board was told that revenues and expenses would be “balanced” or break-even.
NPR spent over $865,000 in fiscal 1983 on venture operations start up expenses. These costs were primarily NPR personnel and administrative expenses. At the present time, all but one of the venture operations have been suspended and there does not appear to be a significant possibility of NPR recovering these costs.
Even in the face of the problems with ventures, the Executive Vice President, has indicated that, at the time, he expected that venture revenues would possibly exceed venture expenses and might compensate for the two large grants that had not materialized.
The third major component of Project Independence was NPR Plus. The concept of NPR Plus began in early 1982, when NPR began exploring the idea of generating additional revenue by increasing programming and charging member stations a fee for broadcast rights. Originally, the plan included a classical music program running twenty-four hours a day, seven days a week, with an estimated cost of $700,000. A number of surveys conducted by groups not affiliated with NPR indicated that a market existed for such a service. NPR expected that member station fees and grants from private foundations for the increased programming would provide sufficient revenue to cover development and operational costs. Estimated costs of NPR Plus grew rapidly due to increases in the program format and errors in original cost projections. By July 1982, when the Board approved the plan, it had been expanded to include the classical music program, and a jazz program running six hours a day, six days a week, and additional hourly newscasts. NPR Plus was the primary reason that program hours produced or acquired were anticipated to increase from 3,430 in 1982 to 10,500 in 1983, almost a threefold increase. NPR estimated costs for the expanded programs at $1.3 million during development of the fiscal 1983 budget, with estimated revenues of $1 million. The final cost estimate for NPR Plus, approved by the Program Committee in December 1982, was $1.7 million. This estimate was approved despite the fact that it was known that less than the number of stations required for the program to breakeven had signed up. Actual NPR Plus revenues through September 30, 1983 were only $295,000 while costs were in excess of $860,000.
Project Independence, the program by which NPR planned to eliminate the need for Federal funds, was an ambitious undertaking which had significant risks and uncertainties. None of its major components developed as management anticipated they would when the 1983 budget was developed. Because the budget for 1983 and the problems with it are significant to understanding the eventual 1983 financial problems, I will now briefly review the 1983 budget development process.
In summary, despite a long development process, the 1983 budget was inadequate. The final 1983 budget was never approved by Board or communicated to the operating divisions and needed revisions to reflect changes in grant revenue estimates and NPR Plus revenues and expenses which were not made. In addition, there were no detail budgets for venture operations and the Finance Department was not involved in the initial budget development process.
From October 1981, when the Board authorized the Executive Vice President to begin its development, through March 1982, budgets were submitted from operating divisions and departments, meetings were held with member stations and a preliminary CPB proposal was prepared. On March 15, 1982, the Executive Vice President presented a draft planning budget to the Board’s Finance Committee. The draft reflected the following budget estimates:
| 1981 |
1983 Budget (000’s)
|
|||
| Actual | Minimum | Target | Consolidated* | |
| CPB grants |
$18,220
|
$12,200
|
$14,300
|
$14,300
|
| Grants and contracts |
1,464
|
5,900
|
8,600
|
8,600
|
| Other |
2,231
|
3,424
|
3,024
|
3,024
|
| Ventures |
—
|
—
|
—
|
3,700
|
| Total Revenues |
21,915
|
21,524
|
25,924
|
29,624
|
| NPR expenses |
20,378
|
20,607
|
25,067
|
25,067
|
| Capital expenditures |
1,239
|
635
|
806
|
806
|
| Venture expenses |
—
|
—
|
—
|
3,582
|
| Total Expenses |
21,617
|
21,242
|
25,873
|
29,455
|
| “Net Income” |
$298
|
$282
|
$51
|
$169
|
| *Target budget plus Venture revenues and expenses. | ||||
The Board approved this planning budget for circulation to the member stations. On April 21, 1982, this budget was formally presented by the Executive Vice President to the member stations at the Public Radio Conference. Based on comments received from members, revisions to estimates from operating departments and further negotiations with CPB, the Executive Vice President prepared a revised planning budget and released it in July 1982 to NPR officers for comment. The budget reflected the following:
|
1983 Budget (000s)
|
|||
| Minimum | Target | Consolidated* | |
| CPB grants |
$12,200
|
$12,600
|
$12,600
|
| Grants and contracts |
6,400
|
11,700
|
11,700
|
| Other |
3,424
|
3,124
|
3,124
|
| Ventures |
—
|
—
|
3,700
|
| Total Revenues |
22,024
|
27,424
|
31,124
|
| NPR expenses |
21,320
|
26,432
|
26,432
|
| Capital expenditures |
635
|
806
|
806
|
| Venture expenses |
—
|
—
|
3,671
|
| Total Expenses |
21,955
|
27,238
|
30,909
|
| Net Income |
$69
|
$186
|
$215
|
| *Target budget plus Venture revenues and expenses. | |||
At a retreat for officers held in July 1982 in Annapolis, Maryland, the Executive Vice President instructed NPR officers use the target budget figures for operating purposes with the understanding that if additional revenues did not materialize, NPR would revert to spending at the minimum budget level.
The Board unanimously adopted the above budget on July 30, 1982. During the meeting, the Chairman of the Finance Committee reported that expected increases in revenues would allow NPR to operate on the target level budget and that estimated revenues and expenses of ventures in 1983 would be approximately $2.5 million rather than the $3.7 million included in the budget document, although we found no documentation supporting the revised estimates.
During August 1982, based on funding negotiations with CPB and without the approval of the Board, the Executive Vice President revised the budget approved in July by the Board by selectively choosing from the budget document the final budget spending levels for each NPR department. Some department budgets were selected from the minimum budget levels while others were selected from the target budget. Based on these changes, the Finance department prepared schedules which were included in the Comprehensive Funding Proposal sent to CPB on August 23, 1982. In summary, this proposal reflected the following budget for NPR in 1983 but excluded the estimates for Ventures.
|
000’s
|
|
| CPB grants |
$12,900
|
| Grants and contracts |
10,176
|
| Other |
3,124
|
| Total Revenues |
26,200
|
| NPR expenses |
25,369
|
| Capital expenditures |
801
|
| Total Expenses |
26,170
|
| “Net Income” |
$30
|
CPB reviewed the proposal but reduced their funding support by $325,000 to a total of $12.6 million. The Executive Vice President did not reduce NPR budgeted expenses, but rather planned to seek additional grant and contribution funding to compensate for this decrease in CPB support. In addition, on September 22, 1982, the Executive Vice President approved a budget transfer between the Engineering and Distribution Divisions of $1.24 million, to reflect a reorganization in operations. The Finance department produced “final” budget schedules based on the Comprehensive Funding proposal, but these schedules did not include the $325,000 CPB funding reduction or the $1.24 million internal budget transfer.
As a result of this long development process, NPR, as of September 30, 1982, had a final budget for fiscal 1983. The final budget reflecting $26.2 million in expenditures had not been formally approved by or communicated to the Board and the operating division directors believed they were to utilize the July 1982 target budget which had expenditures of $27.2 million.
A number of other problems existed with the 1983 budget:
- The Finance department, including the Director of Budgets, was not involved in the initial development of the budget and had little knowledge of it.
- The budget was not revised, even after it was known before the start of the year that two large anticipated grants would not be received.
- The budget was not revised subsequently to reflect increases in NPR plus expenses and decreases in revenue estimates.
- There was no detailed budget for venture operations.
- Management relied on anticipated revenues from the joint ventures as the source of any deficiencies in grant revenues even though the FCC had not approved NPR’s petitions for commercial use of the satellite channels and the Board had been told there would be no venture revenues in excess of expenses.
Other Problems at the Start of Fiscal 1983
Several other significant financial management problems existed at September 30, 1982.
First, NPR had a serious working capital deficit of $1.5 million as of the end of fiscal 1982. This deficit was not reported to management and the Board until late December 1982 and early January 1983, respectively, when they reviewed the audited 1982 financial statements.
Second, NPR did not have a functioning financial management system to monitor actual operations and compare them to the budget. The old system, a computer system operated at a service bureau which had been used in 1982, was being replaced with an [sic] new computer system which would provide NPR the capability to generate its own financial management reports. Because the NPR Finance department personnel were installing the new system, reports from the old system comparing actual operations to the budget were terminated in June 1982. The new system, however, was not in place and was not capable of producing reports comparing budget to actual at the start of fiscal year 1983. Because of problems with the new system implementation, the final 1983 budget was not entered into the new system and no reports were generated and distributed to management until the second quarter of 1983.
NPR Status at September 30, 1982
In summary, at the beginning of fiscal 1983, NPR management was embarked on an ambitious plan to expand programs broadcast, initiate various commercial joint ventures, and significantly increase private grants and contributions, but
- knew its [sic] was unlikely that they would receive any significant funds from two large grants which they had included in the budget estimates.
- had not yet established an effective fund raising program.
- Had not received approval from the FCC for use of the satellite channels for commercial purposes.
- Had not established an effective venture staff or a budget.
- Had increased the scope of NPR plus and its expected costs
- had not informed the operating division directors of the final budget
- had a large working capital deficit.
- did not have a functioning financial management system.
- Had an informal management structure which did not always function efficiently.
- Had no formal contingency plan for unexpected problems.
1983 Operations Through April 30, 1983
After NPR began fiscal 1983 operations, the following problems rapidly developed:
- Overspending, compared to the final budget, by various departments.
- Overspending due to NPR Plus start-up costs being higher and revenues less than budgeted.
- Unreimbursed spending on venture operations.
- Non-CPB grant revenues were not meeting expectations.
- Cash collections were delayed due to financial management information system problems.
- Financial reports, including budget vs. actual data, were not being supplied to management.
During the first quarter of 1983, the President and Executive Vice President were heavily engaged, often out of town, in negotiations regarding grants and joint venture arrangements. The Chief Financial Officer was on vacation during the month of November, the Controller was involved in day-to-day accounting matters and the 1982 audit, and the Director of the Financial Management System was involved in installing the new financial management information system. As a result, management was not in a position to recognize the signs of impending problems.
In both November and December 1982, written memos were issued by the Finance department discussing cash flow problems. A December 8, 1982, memo, in particular, indicated that approximately $1 million a month in cash from non-CPB sources was required to provide for the budgeted 1983 expenses and that currently expenditures were exceeding cash receipts.
Management, including the Chief Financial Officer, however, believed the cash flow problems were routine and could be dealt with through normal measures, such as increased efforts to collect receivables. Management also questioned the reliability of the memos because they had not been generated by the new system, but were estimates based on cash receipts and disbursement records, although these were the only sources of information available.
In addition to the lack of any management information from the new system, the cash flow problems were further compounded because the new system did not provide accurate revenue information, preventing the Distribution Division from monitoring revenue. As a result, inaccurate bills were sent out, which were then not paid because of ensuing disputes.
Because the Representation Division was unable to receive accurate financial reports it stopped relying on the Finance Department and began relying on its own financial records. This was a typical response by the operating divisions because they did not receive any budget variance reports during this period. As a consequence, NPR management, as a whole, had lost control of expenditures in relation to the budget. In addition, the chairman of the finance committee did not receive regular financial reports that he had requested, and was never told of the new system problems.
The lack of budgetary control led to overspending by most NPR operating units. Some overspending was also due to confusion within the departments regarding certain grant revenue. The operating division personnel believed that grants received for specific purposes could be spent in addition to their budgeted expenditures. While this had been the practice in the past, all grant revenues in 1983 were to be considered as funding for the overall budgeted expenditures.
GAO’s analysis of NPR’s expenditures indicates that overspending was occurring throughout the organization. A projection of annual expenditures, based on the audited seven-month actual expenditures through April 30, 1983, indicated the following potential overspending by NPR:
|
000s
|
|||
| Budget | Projected | Over/Under | |
| Administration |
$5,299
|
$7,697
|
$2,398
|
| Programming |
11,851
|
13,730
|
1,879
|
| Representation |
1,244
|
1,164
|
(80)
|
| Distribution |
736
|
1,998
|
1,262
|
| Engineering |
5,940
|
6,458
|
518
|
| Capital/other |
1,101
|
1,366
|
265
|
| Total |
26,171
|
32,413
|
6,242
|
| Ventures, net |
—
|
1,199
|
1,199
|
| Total |
$26,171
|
$33,612
|
$7,441
|
In addition, revenues were not meeting expectations. GAO projected annual revenues of $23.8 million, based on the audited financial statements for the period ended April 30, 1983. This revenue would have been $2.4 million under the final 1983 budget. This failure to achieve revenue estimates, combined with the $7.4 million overspending projected above, would have resulted in an operating deficit for the year ended September 30, 1983 of $9.8 million. The fact that the actual operating deficit for the year ending September 30, 1983 was only $6.4 million is due primarily to the efforts of the interim management team to reduce expenses.
The magnitude of these problems was not known by NPR management until the second quarter of fiscal 1983. In late December 1982, the Executive Vice President began preparation of the 1984 budget. As part of this process, he attempted to review fiscal 1983 operations to date. He was unable to obtain reliable financial information from the Finance Department, however, due to problems associated with the conversion to the new financial reporting system. The only reports available through January of 1983 were prepared from the cash receipts and disbursements records.
The lack of adequate financial data from the Finance Department led the Executive Vice President to seek information from the individual operating departments throughout the month of February. Based on this information, he estimated a $3.3 million potential deficit, which he reported to the President on February 26, 1983.
Planning sessions were held in early March with division and department heads to discuss possible reductions in the budget. The estimated deficit of $3.3 million, and the proposed budget reductions to overcome it, was presented to the Board on March 11, 1983. The Board approved the proposed solution including staff lay-offs which were announced on March 14, 1983.
During the next several weeks, revised estimates of revenue and expenses, including termination costs, became available to the Executive Vice President, and the potential deficit estimate was revised upward to $5.8 million. The member stations were informed of NPR’s financial problems at the April 18, 1983, Public Radio Conference. At this time, the President resigned. Ultimately, after audit, the actual operating deficit for fiscal 1983 came to approximately $6.4 million.
NPR’s financial problems in 1983 resulted from:
- Non-CPB grant revenue projections which were not realized.
- Overspending by the organization on NPR Plus and other operations.
- Unreimbursed spending on venture operations.
These problems were caused or compounded by NPR’s informal management operations, lack of developed venture management and fund raising capabilities, confusion over the budget, its weak financial condition at the beginning of the year and lack of a functioning financial management information system.
Transition Period from April 30, 1983 to October 31, 1983
As of May 1983, a new interim president and management team were selected to bring NPR operations under control and deal with its financial problems. The new management made a number of changes in operations. The actions taken included:
- Hiring an accounting firm to perform an interim audit to determine NPR’s financial condition as of April 30, 1983 and review management and control procedures.
- Further substantial reductions in expenses through personnel terminations and reductions in operating expenses.
- Negotiation of a loan from CPB.
- Reduction of venture operations.
- Completion of the financial management information system.
- Development of a 1984 budget based on supporting assumptions which were reviewed by the outside auditors.
- Approval of all expenditures by the President.
- Increased involvement of the Board in management.
- Search for a new permanent management team.
The interim management also began the process of improving NPR operating controls and procedures to prevent a similar future problem.
In general, the financial problems experienced by NPR in 1983 were caused by or compounded by the lack of management and financial controls over its operations. Since April 30, 1983, the peak of the crisis period, numerous changes and controls over operations have been instituted internally by NPR management and externally by CPB through the loan agreement. The primary sources of recommendations for making changes and instituting controls were (1) the Coopers and Lybrand management report which assessed NPR’s controls as of April 30, 1983, (2) recommendations made by the interim President and his management team and (3) the CPB loan agreement. Some of the key areas which were focused on include: (1) the budget process, (2) administrative policies and procedures, (3) revenue controls, (4) purchasing controls, (5) CPB oversight, (6) the bylaws, and (7) the financial management system.
Budget Process
The main budget recommendation made by Coopers and Lybrand was that operating departments should have formal policies and procedures regarding the preparation, execution, and monitoring of budgets. According to NPR’s Acting Executive Vice President the formal budget policies have been drafted and implemented. He also expects that further refinements to the process will be needed. In addition to this specific policy, other budgetary policies and procedures have been incorporated in the new draft NPR bylaws.
Administrative Policies
The Coopers and Lybrand management report identified numerous significant weaknesses in NPR’s administrative policies as of April 30,1983. The interim president and his management team implemented a number of administrative policies which added to, amended or superseded the existing inadequate policies. These policies focus on areas such as the procurement of goods and services, travel and related expenses, conflict of interest, hiring and compensation of outside auditors, personnel and employee conduct and responsibilities etc.
Revenue Controls
The institution of revenue controls result principally from the Coopers and Lybrand management report and requirements specified in the CPB loan agreement. The majority of the controls which were implemented internally address tightening the billing and revenue collection procedures. Specifically, some of these include preparing a monthly list of unpaid accounts and follow up on them, and distributing a computer listing of all bills to the originating department. In addition, improved control over grant revenue accounting was provided.
Purchasing Controls
Recommendations made by Coopers and Lybrand regarding improved purchasing controls have also been adopted. These controls include centralized purchasing, improved control over purchase orders, the comparison of purchase requests to available budget authority, and improved control over vendor invoices.
CPB Oversight
CPB oversight of NPR has been strengthened since April 30, 1983. For example, the loan agreement between NPR and CPB provides that for each of the fiscal years covered by the agreement NPR will develop an annual budget under which reasonably projected expenditures will not exceed the reasonably projected revenues. A public accounting firm is to examine the management assumptions used in preparing the budget and render on [sic] opinion on the assumptions reasonableness. In addition, CPB will approve NPR’s budget on the grounds of financial prudence. Subsequent to CPB’s approval of the budget, NPR will not make any revisions or reallocations between the line items that will exceed ten percent without prior written CPB approval. When requesting an advance under the loan agreement, NPR is to explain how the advance will impact upon its budget and provide CPB a financial status report for each month that the agreement is in effect. This report is to contain a balance sheet, statement of financial activity, statement of changes in financial position, and supplementary statements detailing income by major sources and the number of persons currently employed by NPR.
NPR Bylaws
NPR’s bylaws have been redrafted to incorporate control over the budget and internal control systems. Specifically the bylaws state that the Board shall have sole authority to adopt or modify the budget for each fiscal year. The Finance Committee is to review and make recommendations to the Board regarding corporate and departmental revenue estimates and budget proposals, compliance with spending levels previously budgeted, and the establishment and amendment of the budget. The Audit Committee shall oversee NPR’s internal control systems, and the internal and external audits of NPR’s financial condition. In addition, the bylaws state that the Controller shall ensure that all expenditures are made in accordance with budgets, policies and procedures.
These amended bylaws were presented to the Board in September 1983, at which time the Board moved that they be reviewed by its Governance Committee and by NPR’s member stations. The amended bylaws are also to be reviewed at the April 1984, Public Radio Conference.
Financial Management Information System
NPR’s financial management information system has now been implemented, based on our discussions with management personnel. They did report that certain minor problems are currently being resolved. The system is, however, producing monthly reports which are distributed to managers. The reports include financial statements, comparisons of actual to budgeted expenditures, and the costs assigned to each program area. These reports are being used, according to management, to monitor the operations of NPR.
NPR’s Ability to Continue Operations
NPR’s 1984 budget of $20.8 million in revenues reflects a reduction of $5.4 million from the final fiscal 1983 budget, with reduced funding from CPB. The unaudited financial statements for the first quarter of fiscal 1984 reflect a net income of $285,000, with 63 percent of revenues from CPB grants. This compares very favorably with the budgeted result which had planned a small deficit of approximately $50,000. These figures demonstrate that, while NPR’s continued existence is dependent upon CPB support, significant reductions in expenses have been made since fiscal 1983 when the organization lost $6.4 million. In particular, the reductions in personnel, from over 450 people in March 1983 to 288 as of December 31, 1983, help ensure the organization is now structured to operate on a much lower level of revenues.
Conclusions and Recommendations
In summary, NPR has made substantial progress in bringing operations under control and in implementing improved controls and procedures. Most of these changes and controls became effective during fiscal 1984, and as a result GAO is not in a position at the present time to determine if all controls are working effectively. We concur, however, with the recommendations made by Coopers and Lybrand in their management report and those made by the interim President, particularly those relating to the bylaws. We also concur with the controls currently required by the CPB loan agreement. We recommend that NPR’s Board and management and CPB complete implementation of improved controls in response to the existing recommendations and to regularly review the procedures and controls to ensure they operate effectively in the future.