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REPORT OF INDEPENDENT ACCOUNTANTS ON INTERNAL CONTROL

Office of the Inspector General
U.S. Department of Justice

Director, Asset Forfeiture Management Staff
U.S. Department of Justice

We have audited the accompanying consolidated balance sheets of the Assets Forfeiture Fund and Seized Asset Deposit Fund, a financial reporting component of the U.S. Department of Justice referred to herein as the AFF/SADF, as of September 30, 2002 and 2001, and the related consolidated statements of net cost, changes in net position, and financing, and the combined statements of budgetary resources, for the years then ended, and have issued our report thereon dated December 2, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

Management of the Asset Forfeiture Management Staff (AFMS) is responsible for establishing and maintaining accounting systems and internal control. In fulfilling this responsibility, estimates and judgments are required to assess the expected benefits and related costs of internal control policies and procedures. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that: (1) transactions are properly recorded, processed, and summarized to permit the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America, and to safeguard assets against loss from unauthorized acquisition, use or disposition; (2) transactions are executed in compliance with laws governing the use of budget authority and other laws and regulations that could have a direct and material effect on the financial statements, and any other laws, regulations and government-wide policies identified in Appendix C of OMB Bulletin No. 01-02; and (3) transactions and other data that support reported performance measures are properly recorded, processed, and summarized to permit the preparation of performance information in accordance with criteria stated by AFF/SADF's management. Because of inherent limitations in any internal control, errors or fraud may nevertheless occur and not be detected. Also, projection of any evaluation of internal control to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate.

In planning and performing our audits of the AFF/SADF's financial statements, we obtained an understanding of the design of significant internal controls and whether they had been placed in operation, tested certain controls and assessed control risk in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements. We limited our control testing to those controls necessary to achieve the objectives described above and we did not test all controls relevant to operating objectives as broadly defined by the Federal Managers' Financial Integrity Act of 1982. Our purpose was not to provide an opinion on the AFF/SADF's internal controls. Accordingly, we do not express such an opinion.

With respect to internal control relevant to data that support reported performance measures, we obtained an understanding of the design of significant internal controls relating to the existence and completeness assertions, as required by OMB Bulletin No. 01-02. Our procedures were not designed to provide assurance on internal control over reported performance measures. Accordingly, we do not provide an opinion on such controls.

We noted certain matters in the AFF/SADF's internal control that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of internal control that, in our judgment, could adversely affect the entity's ability to meet the internal control objectives described in the second paragraph. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control elements does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited or material to a performance measure or aggregation of related performance measures may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of internal control would not necessarily disclose all matters in internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, the following reportable condition is not considered to be a material weakness:

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Improvements are needed in seized and forfeited transaction processing to permit the preparation of timely and reliable financial statements in accordance with generally accepted accounting principles.

Our audit identified that seizing and custodial agencies, and litigation offices (collectively referred to herein as participating agencies), who are integral parts of the seizure and forfeiture process, do not place sufficient emphasis on recording the correct status or valuation of seized/forfeited property or obligations throughout the fiscal year. We noted that adjustments to seized/forfeited property balances and obligations are mainly performed at the end of the fiscal year as part of the AFF/SADF's year-end financial closing procedures. This increases the risk that errors in year-end financial statement account balances may exist and not be detected by management during their year-end review. Specifically, we identified the following weaknesses:

Seized/forfeited property valuation and status

At September 30, 2002, the AFF/SADF's financial statements reported 9,481 seized properties with an estimated seizure value of $191 million, 4,735 forfeited properties with an estimated forfeiture value of $70 million, and $463 million in gross costs related to seizure and forfeiture activities. The majority of the transactions that affect these amounts are recorded in the Consolidated Asset Tracking System (CATS) by participating agencies. In the past three years, participating agencies have made progress in the timeliness and accuracy when recording seized/forfeited transactions in CATS; however, we continue to note that errors exist in seized/forfeited balances throughout the year but are generally identified and corrected only at the end of the fiscal year.

During our interim and year-end testing of seized and forfeited properties, we identified a number of status and valuation errors for both seized and forfeited property. Status errors are properties that are entered into CATS by the participating agencies as either seized or forfeited, but are in fact forfeited or disposed. Valuation errors consist of seized or forfeited properties that have incorrect values entered into CATS by the participating agencies based on fair market value of the property at the time of seizure or forfeiture, or at an appraisal date subsequent to seizure or forfeiture. Several conditions exist which cause incorrect status or values in CATS including: (a) not processing forfeiture orders in a timely manner, (b) the failure to obtain and/or enter appraisals based on the fair market value of the seized/forfeited properties, and (c) the failure to adjust CATS for errors identified in physical inventory counts. Our interim and year-end tests of the status and valuation of seized and forfeited property identified the following misstatements:

    Number of Errors (a) Dollar Value of Errors (a)
Population Error
Type
Interim
Results
Y/E
Results
Interim
Results
Y/E
Results
Seized Cash Sample Status 5 0 $5,366,198 $0
Value 0 0 $0 $0
Error Rate 3.45% 0% 3.86% 0%
Seized Property Sample Status 5 1 $3,281,000 $203,000
Value 8 9 $4,183,120 $325,330
Error Rate 8.9% 6.8% 4.0% .7%
Forfeited Property Sample Status 4 1 $622,096 $140,000
Value 10 10 $2,096,653 $1,506,034
Error Rate 9.6% 9.1% 9.2% 5.1%

(a) Number and dollar value errors are absolute errors.

In the past three years, the AFMS has improved coordination among the participating agencies and has developed procedures that have led to the identification and correction of errors in CATS. For example, the AFMS conducts on-site reviews of the underlying data supporting the seizure and forfeiture data in CATS and provides the participating agencies with reports that identifies the errors and recommends corrections that should be made in CATS. Our audit revealed that in some cases, corrections are not made timely because of disputes between participating agencies; therefore, year-end reviews are necessary to identify errors in the value or status of seized/forfeited property. As the error rates above indicate, participating agencies must improve their recording of seized/forfeited property in CATS and periodically review and adjust CATS throughout the fiscal year instead of performing this effort only at the end of the fiscal year.

Errors in the status of obligations

During our interim tests on AFF/SADF's processing of obligations, we noted that there is insufficient on-going emphasis placed on the determination of the proper status of obligations by participating agencies, requiring significant manual efforts at the end of the fiscal year to correct the status of obligations when resources are not available due to other year-end closing activities.

Our interim tests determined that the status of the Financial Management Information System (FMIS) obligations were misstated in 21 of 90 (23%) of the obligations we reviewed. We were not able to test obligations from the custodial agency's Financial Management System (FMS) because the system does not have the capability to record partially delivered orders. As a result of this error rate and the year-end testing required for the custodial agency's obligations, we selected a sample of all obligations outstanding as of September 30, 2002, and performed detailed tests on the status and valuation of AFF/SADF's obligations. The dollar value and occurrence error rates we identified during our year-end sample is shown below:

Financial System Obligation Originated Value of Error Rate of Value Error Occurrence Rate
FMIS - Delivered $1,275,852 1.7% 8%
FMS - Delivered $2,020,357 11.9% 1%
FMIS Undelivered $58,940 .10% 7%

The AFMS and participating agencies reviewed obligations at the end of the year and corrected misstatements in the status of obligations; however, the process of reviewing the status of obligations only at the end of the year increases the risk that errors in obligations will not be detected by management and could result in misstatements in the AFF/SADF's financial statements. This is evident by the error rates in the table above and the fact that management was not able to detect a $2 million keying error in the FMS delivered order population.

Changes in participating agencies' financial accounting procedures, as they relate to AFF/SADF seized and forfeited property transactions, must be made as soon as possible to ensure that timely and accurate financial information on seized and forfeited transactions is available to management on a current basis. In addition to timely and accurate information needed to manage the program, acceleration of financial statement reporting deadlines and requirements to prepare quarterly financial statements further highlights the importance of reviewing and correcting errors throughout the year as opposed to the current once-a-year efforts. Without significant changes to current financial accounting procedures, there is a serious risk that the AFMS will not be able to timely prepare auditable financial statements at the end of the fiscal year or at each fiscal year quarter end. Failure to produce auditable financial statements could result in modifications to the auditors' reports on the AFF/SADF's financial statements, internal control, or compliance with laws and regulations.

Recommendations

We recommend the Director of the Asset Forfeiture Management Staff:

  1. Continue monitoring and evaluating participating agencies' efforts to improve CATS data quality. This should include performing on-site monitoring, resolving disagreements between participating agencies, correcting CATS and the general ledger as needed, and reaffirming with the participating agencies the proper procedures for correcting errors found during physical inventory counts.

  2. Ensure that all participating agencies that establish obligations for AFF/SADF monitor the status of obligations on an on-going basis in accordance with the budgetary and accrual basis of accounting. Specifically, expenses should be recognized when goods and services are received, not when payments are processed.

Status of Prior Year Findings and Recommendations

As required by Government Auditing Standards and OMB Bulletin 01-02, we have reviewed the status of the AFF/SADF's corrective actions with respect to findings and recommendations from our prior audits of the AFF/SADF and are reporting that there were no recommendations that have not been addressed by AFMS.

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We also noted less significant matters involving the AFF/SADF's internal control that we will communicate to management in a separate letter.

This report is intended solely for the information and use of the U.S. Department of Justice Office of the Inspector General, the Asset Forfeiture Management Staff, management of the Department of Justice, the OMB, and Congress. This report is not intended to be and should not be used by anyone other than these specified parties.

Signature of PriceWaterhouseCoopers, LLP

December 2, 2002
Washington, DC