Report from the CFO

FY 2003 Performance and Accountability Report
Bureau of Resource Management
December 2003
Report

Image of United States Department of State logo on letterhead from the Assistant Secretary and Chief Financial Officer dated December 24, 2003.

United States Department of State

Assistant Secretary and Chief Financial Officer

Washington, D.C. 20520

December 24, 2003

MEMORANDUM

TO:

OIG - Ms. Anne W. Patterson

FROM:

RM - Christopher B. BurnhamImage of Christopher B. Burnham's initials, the Assistant Secretary and Chief Financial Officer, approving this letter for release.

SUBJECT:

Draft Audit Report on the Department of State's 2003 and 2002 Principal Financial Statements

This is in response to your request for comments on the draft report titled "Audit of the U.S. Department of State 2003 and 2002 Principal Financial Statements" (Report).

For the seventh consecutive year, the independent CPA firm selected by the Office of Inspector General (OIG) will issue an unqualified ("clean") opinion on the Department's consolidated financial statements. Achieving an unqualified opinion is an important accomplishment for both of our offices. Also noteworthy is that this year's opinion is five weeks earlier than the opinion on the FY 2002 consolidated financial statements. We would like to extend our appreciation to your staff and to your contractor, Leonard G. Birnbaum and Company, LLP, for the professional and cooperative manner in which they conducted the audit.

In relation to internal control, the Report cites four reportable conditions: (1) information systems security, (2) the inadequacy of the Department's financial management systems, (3) the management of unliquidated obligations, and (4) the implementation of Managerial Cost Accounting Standards. The Department's financial management systems are also reported as noncompliant with laws and regulations, including the Federal Financial Management Improvement Act of 1996 (FFMIA).

The Report cites the Department's security for information systems networks as a reportable condition, an improvement from last year's identification of this area as a material weakness. While improvement efforts in this area will continue, we are pleased that our progress is recognized in the Report. In 2003, the Department continued to strengthen our cyber security posture. These measures include establishing a baseline inventory of applications, developing and implementing a systems/site authorization project, meeting our goal of certifying and accrediting one-third of systems by August 2003, establishing a Departmentwide process to track corrective action in mitigating security weaknesses, revising Department cyber security roles and responsibilities, and maintaining a strong perimeter defense and incident response.

Our efforts to address this weakness also include periodic meetings with staff from your Office of Audits, Leonard G. Birnbaum and Company, LLP, senior managers in IRM and our office. The purpose is to identify and coordinate actions needed to improve controls and monitor progress. We have and will continue to provide a status of these efforts to the Office of Management and Budget (OMB) as part of our reporting on the President's Management Agenda.

Substantial compliance with Federal financial systems requirements is to top priority of the Department, and many improvements have taken place to address the longstanding weaknesses in the Department's financial systems. Based on these improvements, including the implementation of the new Regional Financial Management Systems at all overseas posts, the MCSC voted to close the Department's one remaining material non-conformance for Financial and Accounting Systems. We believe our efforts in FY 2004 will provide for achieving substantial compliance with FFMIA.

Strengthening the management of unliquidated obligations is an important financial management initiative. As mentioned in the Report, the Department has made significant progress in this area. The Unliquidated Obligation System was implemented in FY 2000, and we use this system to facilitate the reconciliation, monitoring, reporting and oversight of unliquidated obligations worldwide. Data in the system is analyzed in various strata and reports to facilitate the review and management of open items. This information, together with new processes recently implemented in our financial systems, will provide for improved management and oversight of unliquidated obligations in FY 2004.

The Department is making progress in implementing Managerial Cost Accounting Standards (MCAS), but acknowledges that additional work is needed to fully comply with these standards. To address MCAS requirements, the Department developed a revised Statement of Net Cost methodology that allows for the reporting of cost information by strategic objectives and goals. This new method was used to produce the FY 2003 Statement of Net Cost.

We thank you for the opportunity to comment on the draft report and for working with us in a collaborative manner on the FY 2003 financial statements. We believe that our offices have made considerable progress over the past several years. The Department is committed to continuing its efforts to improve management of its programs and the quality of its financial reporting.