Message from the Chief Financial Officer

Bureau of Resource Management
November 15, 2011

Photo of James L. Millette, Acting Chief Financial Officer. James L. Millette

The Department of State is firmly committed to delivering the highest standard of financial accountability and reporting in support of our critical foreign affairs mission. This Agency Financial Report (AFR) is a key element and discipline in disclosing the Department’s financial status and providing transparency and accountability to the American people. The AFR provides a comprehensive view of the Department’s financial activities set against the backdrop of global issues and engagements we face as an institution working to advance U.S. interests abroad. Behind this high-level snapshot, however, is the immense financial work and dedication that occurs every day by our financial professionals in more than 270 locations, 180 countries, and in over 135 currencies and foreign languages, often in the most challenging environments.

The scale and complexity of the Department’s activities and corresponding financial management requirements continue to grow in the face of a wide range of global and regional issues. As highlighted in the Message from the Secretary, our foreign policy challenges and opportunities are immense, whether it’s transitioning to a civilian partnership in Iraq, supporting the President’s Global Heath and Feed the Future initiatives, or implementing new trade agreements and attracting foreign investment. Through the Quadrennial Diplomacy and Development Review (QDDR), Secretary Clinton has also challenged us to improve our efficiency and effectiveness in supporting these efforts. And, I’m extremely proud of our support and improvements in the management and control of the Department’s financial resources.

In the AFR’s following pages, we present the annual financial statements and Independent Auditor’s Report. The external audit has become a year-around process and focus for the Department as we strive to deliver meaningful financial statements by November 15 and demonstrate the Department’s strong financial management practices. We also do our utmost to meet the challenges of addressing growing audit and compliance requirements, managing and prioritizing improvements in our financial processes and systems, supporting the President’s Accountable Governance Initiative, and meeting our day-to-day financial management support obligations. In today’s fiscal climate, how we manage this balance and blend our efforts will have added significance as we work to squeeze the most value from our limited resources and execute investment decisions that support our most critical needs. The ultimate goal, of course, is to support an accountable and efficient financial platform that furthers the Department’s global operations and mission as well as provide accurate and high-value financial information for decision-makers and transparency and confidence for the American public.

Last year, the Department received an unqualified or “clean” opinion from the Independent Auditor for FY 2010. Without a doubt, we have continued to build on that result and make the improvements to our financial management processes and activities worldwide throughout FY 2011. This year, we received an unqualified opinion for the Statement of Budgetary Resources and the Consolidated Statement of Net Cost. However, late in the year, several issues were identified relating to the financial reporting of after-employment benefits for Foreign Service Nationals (FSN) we employ around the world. By statute, the Department establishes compensation plans for FSNs we employ in foreign countries based on prevailing laws and practices in the host country. Accounting for the financial aspects of these complex compensation plans throughout the world presents unique challenges, especially in regards to reporting the future liability for defined benefit, lump-sum retirement, and severance benefits. While we took a number of actions to moderate the most serious aspects of the financial reporting issues, and estimated and recorded amounts in the financial statements, there was insufficient time for the Independent Auditor to perform auditing procedures and satisfy themselves as to the accuracy of these amounts in time to meet the November 15, 2011 deadline imposed by OMB for issuing this Report. Consequently, the Independent Auditor issued a qualified opinion for the Consolidated Balance Sheet and Statement of Changes in Net Position. We will complete actions in FY 2012 to strengthen and refine our financial reporting and internal controls to resolve the weaknesses for reporting FSNs after-employment benefits.

The Department maintains a robust system of internal controls overseen and validated by senior leadership and administered by the Bureau of Resource Management. For FY 2011, a material weakness was identified by the Department regarding the effective oversight of the Summer Work Travel Program for students traveling to the United States for temporary and seasonal employment during their academic breaks. A corrective action plan is in place to remediate the weaknesses in the program. Except for this material weakness, and the aforementioned material weakness in financial reporting of FSN after-employment benefits, the Secretary was able to provide assurance for the Department’s internal controls in accordance with the Federal Managers’ Financial Integrity Act.

We fully recognize that there are a number of items identified by the external audit that will require our continued attention, diligence, and improvement. We are committed to addressing these items and meeting these challenges. Given the global and complex nature of our operations, there will always be areas of concern and opportunities for improvement. We understand that fact, and I am confident in our resolve as we continue to manage the Department’s finite resources on behalf of America’s taxpayers in support of our nation’s diplomatic affairs.

Signature of James L. Millette.

James L. Millette
Assistant Secretary for Resource Management
and Chief Financial Officer, Acting
November 15, 2011