Report from the CFO

FY 2007 Financial Report
Bureau of Resource Management
November 2007
Report

Image of United States Department of State logo on letterhead.

United States Department of State

Washington, D.C. 20520

 

November 15, 2007

MEMORANDUM

TO: OIG - Mr. Howard J. Krongard

FROM: RM - Bradford R. HigginsInitials of Bradford R. Higgins

SUBJECT: Draft Audit Report on the Department of State's 2007 and 2006 Financial Statements

 

This is in response to your request for comments on the draft report titled "Audit of the U.S. Department of State's 2007 and 2006 Financial Statements" (Report).

The Department operates in over 260 locations in 172 countries, while conducting business in 150 currencies and an even larger number of languages. Thousands of talented financial professionals around the world plan, budget, allocate, obligate, disburse, and account for billions of dollars in annual resources. Very few agencies or corporations have the depth and variety of challenges that the men and women of the Department of State (Department) face daily. Despite these complexities, the Department pursues a commitment to financial integrity, transparency, and accountability that is the equal of any multi-national corporation.

Given the breadth, depth and complexity of our financial operations, it will always be a challenge for the Department to meet OMB's November 15 deadline. In addition, each year will bring new challenges (such as accounting for contractor held property in Iraq/Afghanistan, increased spending through allocations to other agencies such as for HIV/AIDs, etc). Adding to that complexity this year, the Department implemented the new Global Financial Management System (GFMS) as the next step in our multiyear effort to establish a single global financial system. GFMS replaces the Department's 20 year old Central Financial Management System (our core accounting system) and centrally accounts for the Department's billions of dollars of finances through millions of annual transactions by 1,000 users and over 25 "handshakes" with other internal and external systems. As part of this implementation, the Department also installed integrated acquisitions and fixed assets modules, a managerial cost allocation module, and a new data warehouse. Upgrading a financial system of this size and complexity is a large and challenging undertaking.

Working closely with the Independent Auditor and your office, the Department has a proud tradition of unqualified opinions on our financial statements for the past decade. Due to the complexity of the matters involved with installing a new core financial system, it took the Department slightly longer to close our books this year. Consequently, the Department was unable to provide financial statements and certain evidential documentation in a timely fashion, and the Independent Auditor issued a disclaimer of opinion on our FY 2007 financial statements.

In addition to accomplishing the upgrade of our core financial system, we continued our efforts to resolve significant internal control weaknesses. Our priority was on those items that were reported as material weaknesses in recent years and that were downgraded last year to significant deficiencies (formerly reportable conditions) - IT Security, Accounting for Real Property, and Accounting for Personal Property. As a result of our efforts, the Independent Auditor downgraded the IT Security and Accounting for Real Property to deficiencies (from a significant deficiency). With the introduction of new definitions by SAS 112, which in effect "raises the bar" on moving items down in terms of severity, we think this is a significant achievement.

With respect to the Independent Auditor reporting the Accounting for Personal Property as a material witness, we respectfully disagree with this determination. Our continuing progress to address the many causes of this weakness for our multitude of global assets (aircraft, vehicles, security equipment) is perhaps not as fast as we would like. However, we believe our actions have improved our controls from a year ago (when it was downgraded to a significant deficiency). As a result of the improved status by September 30, 2007, the Department's Management Control Steering Committee (MCSC) voted to downgrade this item from a significant deficiency to a deficiency. In FY 2007, management did complete its assessment of the controls over personal property, noting additional improvements in conducting inventories of vehicles, both held by the Department and by contractors; the successful implementation of tools in ILMS to manage its vehicle fleet; and improvements in guidance and policy. Further corrective actions are planned for FY 2008, including expanding the capabilities for overseas posts to report acquisitions and disposals in the Integrated Logistics Management System. In 2008, the MCSC will ensure that efforts continue to further strengthen the controls over the accounting for personal property.

The Report cites a new material weakness for the management of unliquidated obligations, and notes that there have been improvements in this area. We are already refocusing our efforts to establish adequate processes and controls. Improvements in the management of unliquidated obligations is a priority for the Department in FY 2008, and corrective actions are already underway including the distribution of aging reports, and using recently developed enhancements to our Global Financial Management System's capabilities to automate deobligations. In addition, actions to improve contract closeout procedures relative to unliquidated obligations will be established, and the Senior Assessment Team will be actively engaged with the implementation and oversight of these corrective actions.

Significant improvement in the Department's management of Federal financial assistance were made in 2007. To address the need for increased training, two new FSI courses, quarterly assistance meetings, an annual symposium, and periodic audio-conferences on financial management issues have been established. Outreach efforts include the creation of a new "Ask Grants" electronic bulletin board, as well as continued updates of three linked websites that offer comprehensive information on assistance. Key achievements in the standardization of policies have been the issuance of sixteen updated and four new Grant Policy Directives and a Payment Management System (PMS) User Handbook; newly-standardized Terms & Conditions have been finalized. A new Grants Officer's Handbook and FAM/FAH updates are being circulated for clearance. The existing Grants Database Management System (GDMS) was upgraded to accommodate the data reporting requirements for the Federal Funding Accountability & Transparency Act (FFATA). In addition, all domestic offices completed the transition to using the HHS Payment Management System (PMS) for all assistance disbursements (one-time payments are exempt from mandatory use) and an automated system to apply for and receive grants warrants was implemented. Development of an automated assistance management system that will track assistance activities from solicitation to post-award monitoring and closeout continues; configuration is approximately 80% complete.

The Department continues to make progress in implementing Managerial Cost Accounting Standards (MCAS). In 2005, the Department established a project team, which includes consultants with experience implementing Cost Accounting Systems. In 2006, the team surveyed other agencies and organizations for lessons learned and best practices; conducted an assessment of offices to determine business needs for cost information, current cost accounting practices, outputs and outcomes, and unmet needs; evaluated a managerial cost software module and confirmed usability; and developed a strategic approach and implementation strategy. In 2007, the Department implemented CGI's Momentum Cost Allocation module, and an initial cost model was developed that assigns costs to bureaus. The MCA model contains three cost components: 1) central payroll, 2) bureau managed funds, and 3) overhead/support. This model was run for each quarter of FY 2007. The next phase in FY 2008 will be to incorporate bureaus' specific cost allocations. The Department's new data warehouse will be used to generate all managerial cost reports.

With respect to the significant deficiency for defined benefit supplemental pension plans for locally employed staff, the Department will undertake efforts in FY 2008 to establish an accurate inventory of these plans. This will serve as a basis to work and establish an appropriate approach to determining any unfunded actuarial amounts.

We thank you for the opportunity to comment on the draft report. Our work with the Independent Auditor and your office over the past 10 years has been collaborative, productive and a catalyst for positive change. We would like to extend our appreciation to Leonard G. Birmbaum and Company, LLP, for their dedicated efforts on this year's audit. We believe, as detailed above, that considerable progress on a number of matters has been made over the years, and the Department remains committed to improving the management of its programs and the quality of its financial reporting.

 


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