Federal Reports

Annual audit of the financial statements.

TVA contracted with Ernst & Young LLP (E&Y) to audit TVA's balance sheet as of September 30, 2008, and the related statements of income, changes in proprietary capital, and cash flows for the year then ended. In addition, the contract called for the review of TVA's fiscal year 2008 interim financial information filed on Form 10-Q with the Securities and Exchange Commission. The contract required the work be performed in accordance with generally accepted government auditing standards. We evaluated E&Y's work to determine compliance with these standards. The objective of our review was not intended to enable us to express, and we did not express, an opinion on TVA's financial statements or on management's conclusions about the effectiveness of its system of internal control. E&Y is responsible for the auditor reports dated December 12, 2008, and the conclusions expressed in those reports. However, our review disclosed no instances where E&Y did not comply, in all material respects, with generally accepted government auditing standards.

The objective of our review was to assess the procedures and key control activities used to track and account for tools on the Watts Bar Nuclear Plant Unit 2 Construction Project (WBN U2 Project). Our review of the WBN U2 Project tool program found (1) nothing to indicate significant discrepancies in the tool inventory at this time; (2) data entry errors in the Tool Hound system; (3) opportunities exist to improve controls, based on our review of the contractor's Small Tools and Small Capital Equipment Procedure; and (4) some non-compliances with the contractor's Small Tools and Small Capital Equipment Procedure. We recommend the contractor (1) ensure accuracy of data entry in the Tool Hound system; (2) consider modifying the contractor's WBN U2 Project small tool procedure to include the additional control opportunities identified and the valuation criteria for bulk items; (3) ensure compliance with the contractor's Small Tools and Small Capital Equipment Procedure; and (4) enhance controls over inventory contained in unlocked sea/land containers. Management agreed with our findings and has initiated or plans to initiate corrective action.

TVA contracted with the independent certified public accounting firm of PricewaterhouseCoopers LLP (PwC) to audit revisions to the balance sheets and the related statements of income, changes in proprietary capital, and cash flows as of September 30, 2007 and 2006, for the purpose of restating TVA's previously issued financial statements. The contract required the audit be done in accordance with generally accepted government auditing standards. Our review disclosed no instances where PwC did not comply, in all material respects, with generally accepted government auditing standards.