Report of Independent Auditors: Report on Compliance with Applicable Provisions of Laws, Regulations, Contracts, and Grant Agreements

Bureau of the Comptroller and Global Financial Services
Report
November 17, 2014




Kearney and Company letterhead.

INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH APPLICABLE
PROVISIONS OF LAWS, REGULATIONS, CONTRACTS, AND GRANT
AGREEMENTS

To the Secretary and the Inspector General of the U.S. Department of State

We have audited the consolidated financial statements of the U.S. Department of State (Department) as of and for the year ended September 30, 2014, and have issued our report thereon dated November 15, 2014.We conducted our audit 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. 14-02, Audit Requirements for Federal Financial Statements.

Compliance

As part of obtaining reasonable assurance about whether the Department’s consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material impact on the determination of financial statement amounts, and certain provisions of other laws and regulations specified in OMB Bulletin No. 14-02, including the provisions referred to in Section 803(a) of the Federal Financial Management Improvement Act of 1996 (FFMIA) that we determined were applicable. We limited our tests of compliance to these provisions and did not test compliance with all laws, regulations, contracts, and grant agreements applicable to the Department. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.

The results of our tests, exclusive of those related to FFMIA, disclosed instances of noncompliance that are required to be reported under Government Auditing Standards and OMB Bulletin No. 14-02 and which are summarized as follows:

  • Antideficiency Act.  This act prohibits the Department from (1) making or authorizing an expenditure from, or creating or authorizing an obligation under, any appropriation or fund in excess of the amount available in the appropriation or fund unless authorized by law; (2) involving the Government in any obligation to pay money before funds have been appropriated for that purpose, unless otherwise allowed by law; and (3) making obligations or expenditures in excess of an apportionment or reapportionment, or in excess of the amount permitted by agency regulations. Our audit procedures identified Department of the Treasury fund symbols with negative balances that were potentially in violation of the Antideficiency Act. We also identified systemic issues in the Department’s use of allotment overrides to exceed available allotment authority. Establishing obligations that exceed available allotment authority increases the risk of noncompliance with the Antideficiency Act.
  • Prompt Payment Act.  This act requires Federal agencies to make payments in a timely manner, pay interest penalties when payments are late, and take discounts only when payments are made within the discount period. The Department did not always make payments within 30 days, as required. Additionally, we found that the Department did not consistently pay interest penalties for domestic and overseas payments in accordance with the Prompt Payment Act.

Under FFMIA, we are required to report whether the Department’s financial management systems substantially comply with Federal financial management systems requirements, applicable Federal accounting standards, and the U.S. Standard General Ledger (USSGL) at the transaction level. Although we did not identify any instances of substantial noncompliance with Federal accounting standards, we did identify instances, when combined, in which the Department’s financial management systems and related controls did not substantially comply with certain Federal financial management systems requirements and the USSGL at the transaction level.

Federal Financial Management Systems Requirements

  • The Department has long-standing weaknesses in its financial management systems regarding its capacity to account for and record financial information. For instance, the Department has significant deficiencies relating to financial reporting, property and equipment, budgetary accounting, and unliquidated obligations.
  • During its annual evaluation of the Department’s information security program, as required by the Federal Information Security Management Act, the Department’s Office of Inspector General (OIG) identified weaknesses with computer security that it reported collectively as representing a significant deficiency.3
  • The Department did not maintain effective administrative control of funds. Specifically, obligations were not created in a timely manner or were recorded in advance of an executed obligating document. In addition, there were systemic issues identified in the Department’s use of allotment overrides.
  • The Department did not always minimize waste, loss, unauthorized use, or misappropriation of Federal funds. For example, OIG reported more than $45 million in questioned costs and funds put to better use during FY 2014.
  • Interest was not always paid on overdue domestic and overseas payments.

Standard General Ledger at the Transaction Level

  • The Department’s financial management systems did not consistently post transactions to USSGL compliant accounts or track proprietary and budgetary account attributes consistent with the USSGL.
  • General ledger account balances could not always be traced to discrete transactions. Further, discrete transactions could not always be traced to source documents.

The Department had not implemented and enforced systematic financial management controls to ensure substantial compliance with FFMIA. The Department had not developed and executed remediation plans to address instances of noncompliance or validate compliance against criteria. The Department’s ability to meet Federal financial management system requirements and fully process transaction-level data in accordance with the USSGL was hindered by limitations in systems and processes.

During the audit, we noted certain additional matters involving compliance that we will report to Department management in a separate letter.

Department’s Response to Findings

Department management has provided its response to our findings in a separate memorandum attached to this report. We did not audit management’s response, and accordingly, we express no opinion on it.

Purpose of This Report

The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing and not to provide an opinion on the effectiveness of the entity’s compliance. This report is an integral part of an audit performed in accordance with auditing standards generally accepted in the United States of America, Government Auditing Standards, and OMB Bulletin No. 14-02 in considering the entity’s compliance. Accordingly, this report is not suitable for any other purpose.

Signature of Kearney and Company.

Alexandria, Virginia
November 15, 2014

 


3 Audit of the Department of State Information Security Program (AUD-IT-15-17, Nov. 2014). (back to text)