The U.S. Department of Education's financial management environment and effectiveness are described, together with the reliability of its accounting and internal control systems for the management of the money it gives or lends to schools, individual students, states, and local education agencies. The study found that key accounting and related internal control systems operated by the Department and its fund-receiving schools have serious weaknesses. Consequently, billions of dollars in financial resources are not adequately protected from fraud, waste and mismanagement. In addition, the Department's financial reports were found to be unreliable and not derived from its accounting system. Principal findings were: (1) loan records for the Higher Education Facilities and College Housing loan portfolios were inadequate; approximately $75 million would be required to bring the files up to commercial standards in order to sell them to the public; (2) the property accounting system is insufficient for proper Departmental control; (3) accounting weaknesses result in erroneous Pell Grant disbursements; and (4) the Department's general ledger system contains unreliable data because of inadequate and inefficient computer systems. Appendix I consists of a financial management profile of the Department in five tables that provide data on budget requests, estimated loan account balances, statements of financial condition for fiscal years 1982, 1984 and 1985, and the purposes of the Department's 29 accounting systems. Appendix II provides comments from the Department of Education. (KM)