Michael R. Bromwich
Inspector General, U.S. Department of Justice
House Committee on Government Reform
Subcommittee on Government Management,
Information, and Technology
U.S. Department of Justice
Annual Financial Statement
Fiscal Year 1998
March 18, 1999
* * * * *
Mr. Chairman, Congressman Turner, and Members of the Subcommittee on Government Management, Information, and Technology:
I appreciate the opportunity to appear before the Subcommittee to discuss the Department of Justice's Consolidated Annual Financial Statement Audit for FY 1998. Accompanying me today is Marilyn Kessinger, Director of our Financial Statement Audit Office, who is responsible for coordinating the audits of the consolidated financial statements.
This report represents the third year that the Office of the Inspector General (OIG) has audited the Department's consolidated financial statement. Due to the Department's decentralized nature, separate audits of nine Department reporting components are first completed and then combined into the consolidated audit report. Consequently, the consolidated audit opinion is dependent upon the results of the component audits.
We noted improvements at the component level during FY 1998, most notably a 50 percent decrease in the number of material weaknesses(1) compared to the preceding year (26 in FY 1997 versus 13 in FY 1998). Other reportable conditions(2) also decreased from 26 in FY 1997 to 18 in FY 1998. No substantial new internal control weaknesses were identified in FY 1998, and we noted progress in many of the areas that received unfavorable findings during the prior two years.
However, this positive news must be tempered by the fact that for the third year in a row the Department received a "disclaimer of opinion" - in effect, no opinion on its consolidated financial statement - because of an inability to complete the audit due to serious deficiencies noted in the underlying audits. Four of the nine components - the Assets Forfeiture Fund/Seized Asset Deposit Fund, the Immigration and Naturalization Service, the Offices, Boards, and Divisions, and the U.S. Marshals Service - received disclaimers of opinions on their individual audits in FY 1998. On the other hand, four components - the Federal Bureau of Investigation, the Drug Enforcement Administration, the Office of Justice Programs, and the Working Capital Fund - received unqualified or "clean" opinions on their balance sheets in FY 1998. The Federal Prison System received a qualified opinion in FY 1998, which means that its financial statements were presented in accordance with applicable accounting standards except for a line item or account.
The following table summarizes the opinions received by the components for FY 1998:
|Department of Justice Audit Results: Fiscal year 1998|
Statement of Net
Statement of Financing
|Assets Forfeiture Fund and Seized Asset Deposit Fund||D||D||D||D||D|
|Drug Enforcement Administration||U||D||D||D||D|
|Federal Bureau of Investigation||U||U||U||U||U|
|Federal Prison System||Q||Q||Q||Q||Q|
|Immigration and Naturalization Service||D||D||D||D||D|
|Offices, Boards and Divisions||D||D||D||D||D|
|Office of Justice Programs||U||D||D||D||D|
|U.S. Marshals Service||D||D||D||D||D|
|Working Capital Fund||U||U||U||U||U|
D - Disclaimer of Opinion
Q - Qualified Opinion
U - Unqualified Opinion
The three main areas audited in each component are: 1) financial statements; 2) internal controls (which generates the majority of findings); and 3) compliance testing. With respect to the first issue, auditors looked at five different financial statements for the Department and each component in FY 1998:
With respect to the consolidated Report on Internal Controls, the second main area reviewed, auditors reported one material weakness and three reportable conditions. The material weakness stemmed from the Department's failure to record financial transactions in accordance with federal accounting standards (i.e., transactions were not consistently and accurately recorded). This weakness represents a combination of previously identified issues, all of which were caused by a failure to effectively implement proper accounting policies and procedures. Many of these issues are long-standing problems that were not a priority before FY 1996, the first year Department-wide financial statement audits were required by the Government Management Reform Act. All but two components - the Federal Prison System and the Working Capital Fund - had these issues identified in their component reports. As a result of this deficiency, Department managers have not always had reliable financial information available to prepare budgets, report results of operations, and make critical resource decisions. These control weaknesses also leave the Department more susceptible to fraud.
The three reportable conditions for FY 1998 related to improvements needed in reconciling Fund Balance with Treasury accounts - in essence, "balancing the checkbook" - computer security and component financial management systems, and fiscal year-end closing procedures. These same issues were highlighted in last year's consolidated audit and have yet to be fully corrected. Of particular concern is computer security and the Department's ability to safeguard critical financial information from unauthorized access.
The audit discovered examples of non-compliance with financial laws and regulations throughout the Department. This deficiency emphasizes that financial controls are not functioning properly and resources are not being effectively managed. Non-compliance with the Federal Financial Management Improvement Act was cited at eight of the nine reporting components - even at components that received an unqualified or qualified opinion. Several components were unable to follow federal accounting standards that are fundamental to fair and accurate financial reporting. Other components are using financial systems that do not meet requirements issued by the Office of Management and Budget.
Two components, the Drug Enforcement Administration and the Immigration and Naturalization Service, failed to pay interest to vendors as required by the Prompt Pay Act. In addition, the Immigration and Naturalization Service was unable to properly allocate cash receipts between two deposit accounts. While these items may appear to be relatively inconsequential, they are symptomatic of controls that do not function as intended, procedures that are not being followed effectively, and a lack of accountability.
A more serious issue of non-compliance with appropriation law was discovered at the Immigration and Naturalization Service where staff was establishing obligations based on anticipated needs and unforeseen costs rather than binding agreements. This serious violation undermines the integrity of financial reporting and was referred to our Investigations Division for review.
As mentioned previously, we noted improvements at the component level during FY 1998 as the number of material weaknesses decreased from 26 to 13 compared to FY 1997 and other reportable conditions decreased from 26 to 18. No substantial new internal control weaknesses were identified in FY 1998.
Since we first started performing consolidated financial statement audits three years ago, the Department has shown particular improvement in its accounting for property, plant, and equipment. The issue was listed as a material weakness in FY 1996, improved to a reportable condition in FY 1997, and in FY 1998 has dropped off the deficiency list entirely. Only two components - the Immigration and Naturalization Service and Drug Enforcement Administration - have issues remaining in this area.
Another area where the Department significantly improved was reconciliation of Fund Balance with Treasury. For FY 1997, very large differences were noted for the Office of Justice Programs and the Immigration and Naturalization Service. While some issues remain at the Office of Justice Programs, the large unreconciled balance was eliminated using contractors. The Immigration and Naturalization Service also used contractors to begin resolving its large unreconciled balance. The Drug Enforcement Administration showed an increase in clearing account balances for FY 1998, but is currently in the process of hiring contractors to assist them in clearing these issues.
For the first time in three years, computer security was not reported as a material
weakness in the Department's consolidated report. However, we continue to have concerns
about some of the components' financial systems, at least three of which are in the
process of being replaced. Of particular concern is the U.S. Marshals Service's new
financial management system implemented during FY 1998 and the Immigration and
Naturalization Service's financial management systems. A related issue is the
vulnerability of the Department's financial systems to unauthorized access and
modification. The Department needs to strengthen its controls in order to prevent
penetration by unauthorized users.
The Department faces many challenges in FY 1999 and beyond for it to continue making progress towards improved financial management and obtain a "clean" consolidated audit opinion. First, top Department management must continue to emphasize the importance of these issues and provide necessary support to the component financial staffs. Managers must emphasize long-term correction of problems to improve the Department's financial management, not just short-term fixes that will earn a better audit opinion. Some components have used contractors extensively to supplement their financial management staff and more quickly implement short-term fixes. This heavy use of contractor support raises two concerns: 1) components may become too reliant on contractor assistance and not make the appropriate systemic changes; and 2) components' financial management staffs will not learn from this process if contractors are shouldering the bulk of the responsibility.
This leads to another observation: we see a shortage of adequately trained financial management staff at the Department. While this shortage precipitates the extensive use of contractors, it also has caused many Department components to struggle to meet the schedule jointly established by the OIG and the Department's Acting Chief Financial Officer for a March 1 issuance of the consolidated audit report. In addition, many Department components could fail in the future if anything happened to their handful of key financial managers.
Finally, successful implementation of new financial systems is critical to the
Department's future financial management success. The U.S. Marshals Service encountered
numerous difficulties implementing its new system and this had a significant adverse
impact on its audit results in FY 1998. Problems with the Marshals' new financial system
also affected the audit of the Assets Forfeiture Fund and Seized Asset Deposit Fund
because the audit relies on data from the Marshals' system.
Presented below are brief summaries of the components' audit results for FY 1998, along with challenges facing them in FY 1999:
Drug Enforcement Administration
The DEA received an unqualified opinion on its balance sheet and a disclaimer on its remaining financial statements. The DEA made significant progress in FY 1998 addressing previously identified weaknesses. For FY 1998, it had four reportable conditions, one of which was considered a material weakness. Implementation of a new core accounting system, along with a commitment by senior management, was critical in resolving many of DEA's outstanding issues. DEA used contractors to assist in correcting prior year weaknesses and plans to use contractors to address its one material weakness reported for FY 1998 on reconciling its Fund Balance with the Treasury account. A particular challenge in FY 1999 for the DEA is the replacement of key finance personnel.
Immigration and Naturalization Service
For the third straight year, INS received a disclaimer of opinion on its FY 1998 financial statements. INS had nine reportable conditions of which five were considered material weaknesses. Although improvements were made in many areas - INS reduced its material weaknesses from eight to five - weaknesses continue to exist in the overall control environment that prevents INS from producing auditable financial statements. During FY 1998, INS management began or continued several initiatives to reduce long-standing financial management issues including a restructuring of its regional accounting operations, continued implementation of a new core accounting system, and resolution of problems in its property subsidiary system. The successful implementation of the new core accounting system scheduled for October 1, 1999, along with development of adequate staffing levels, are critical to improving financial management at INS.
United States Marshals Service
Like INS, the USMS received its third straight disclaimer of opinion on its FY 1998 financial statements. It had three reportable conditions of which two were considered material weaknesses. The USMS was unable to process routine transactions in accordance with standards and provide documents on a timely basis in order to complete the audit. There were also significant internal control weaknesses over its new financial management system, Standardized Tracking Accounting and Reporting System (STARS), which was implemented in FY 1998. The weaknesses identified in STARS represent the most significant challenge to the USMS in resolving its outstanding issues.
Assets Forfeiture Fund/Seized Asset Deposit Fund
This component again received a disclaimer of opinion on its FY 1998 financial statements due primarily to an inability to accurately report information on seized and forfeited property. It had three reportable conditions, two of which were considered material weaknesses. The primary challenge facing this component is to improve the quality of data maintained in its Consolidated Asset Tracking System. This will require significant coordination with the many seizing, custodial, and other organizations involved in the asset forfeiture process.
Federal Bureau of Investigation
The FBI received an unqualified opinion on its FY 1998 financial statements. It had three reportable conditions and no material weaknesses. While FBI management has demonstrated an ability to respond to the increasing financial reporting requirements, we have concerns over their continued ability to do so on a timely basis because of the amount of responsibility concentrated in a few key individuals.
Federal Prison System
The Federal Prison System received a qualified opinion on its FY 1998 financial statements. It only had one reportable condition and no material weaknesses. The Federal Prison System continued to make progress in meeting financial reporting requirements although we note concerns about its ability to produce information promptly. The Federal Prison System has its own reporting complications in that the Federal Prison Industries, Inc., is audited using a different basis of accounting because it more closely resembles a manufacturing concern than a government entity. The Federal Prison System must then consolidate its three reporting entities into a single report, all within the Department's reporting deadlines. The biggest challenge facing the Federal Prison System is implementation of its new accounting system, which is scheduled for October 1999.
Offices, Boards and Divisions
This component again received a disclaimer of opinion on its FY 1998 financial statements. It had four reportable conditions, two of which were considered material weaknesses. Previously identified weaknesses in processing transactions continued to exist. Management has taken steps to improve financial reporting, including the establishment of a "FY 1999 Offices, Boards and Divisions Financial Statements Clean Audit Project," with an emphasis on evaluating and correcting weaknesses identified and providing appropriate training to the many entities (approximately 30) that constitute this reporting component.
Office of Justice Programs
The OJP received an unqualified opinion on its balance sheet and a disclaimer on its remaining FY 1998 financial statements. It had three reportable conditions of which one was considered a material weakness. The OJP took sufficient corrective action during the year using contractors to resolve prior year material weaknesses on grant accruals and reconciliation of Fund Balance with Treasury. In FY 1999, OJP must continue these efforts and successfully implement a new core accounting system.
Working Capital Fund
The Working Capital Fund received an unqualified opinion on its FY 1998 financial
statements. It had one reportable condition which related to reconciling accounts with
Treasury records and no material weaknesses.
Results from the Department's first consolidated financial audit in FY 1996 were not encouraging. Regrettably, the results for FY 1997 were even more disappointing as the reality of the new financial reporting requirements sank in and the Department enforced the March 1 deadline established by the Act. There was also very little time for corrective action to take place between completion of the FY 1996 audits and initiation of the FY 1997 audits.
The Department has made noteworthy progress in FY 1998. However, it faces major challenges with the implementation of new financial systems, increasing financial reporting requirements, and a shrinking of the pool of qualified financial managers. The success of the consolidated effort is dependent upon the success of individual component audits. Several components have long-standing financial problems that are now just beginning to be addressed after years of neglect. Some of these problems are not easy to correct. The Department needs to concentrate its efforts on the four components that received disclaimers of opinion in FY 1998, while at the same time maintaining the successful results obtained in other components.
The following chart summarizes the opinions received on the Balance Sheet (formerly
known as the Statement of Financial Position) and shows how the Department has fared since
consolidated reports began being prepared for Department components.
|Comparison of Balance Sheet Results|
|Reporting Entity||FY 1996||FY 1997||FY 1998|
|Assets Forfeiture Fund and Seized Asset Deposit Fund||Unqualified||Disclaimer||Disclaimer|
|Drug Enforcement Administration||Disclaimer||Disclaimer||Unqualified|
|Federal Bureau of Investigation||Qualified||Qualified||Unqualified|
|Federal Prison System||Disclaimer||Qualified||Qualified|
|Immigration and Naturalization Service||Disclaimer||Disclaimer||Disclaimer|
|Offices, Boards and Divisions||Disclaimer(3)||Disclaimer||Disclaimer|
|Office of Justice Programs||Unqualified||Disclaimer||Unqualified|
|U.S. Marshals Service||Disclaimer(3)||Disclaimer||Disclaimer|
|Working Capital Fund||Unqualified||Unqualified||Unqualified|
This concludes my prepared testimony. We would be happy to answer any questions you may have.
3 In FY 1996, the Offices, Boards and Divisions and the U.S. Marshals Service were a combined reporting entity that together received a disclaimer of opinion.