**TESTIMONY OF WILLIAM S. MAHARAY**

**DEPUTY INSPECTOR GENERAL**

**FOR AUDIT SERVICES**

**U.S. DEPARTMENT OF ENERGY**

**WASHINGTON D.C.**

**BEFORE THE**

**SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,**

**ORGANIZATION AND PROCUREMENT**

**COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM**

**U.S. HOUSE OF REPRESENTATIVES**

**MARCH 20, 2007**

Mr. Chairman and members of the Subcommittee, I am pleased to be here at
your request to testify on issues associated with the FY 2005 and 2006
Audits of the Department of Energy's Financial Statements. Over the
years, the Office of Inspector General has conducted and overseen a
number of reviews of the accounting and financial operations of the
Department. Our reviews related to the audits of the year-end financial
statements have covered accounting information system issues, financial
statement reporting, and actions to remediate financial accounting and
reporting weaknesses. Prior to discussing these subjects, I would like
to provide some background information on the Department's financial
information management system.

The Department's system, which is relatively unique in the Federal
sector, is a hybrid in that it combines summary data from its major
contractors with transaction data generated by the business activities
of numerous Departmental organizations and sites. Rather than being
included in Departmental records, detailed contractor transaction data
is maintained by -- and audited at -- each of the contractor locations.
As a control measure, both contractors and Federal officials are
required to ensure that the summary data transmitted from and accepted
by the Department's accounting information system is periodically
reconciled to the contractors' systems. Over 70 percent of the
Department's budget is ultimately expended by its integrated
contractors.

**Changes to Accounting Operations**

The Department was able to sustain unqualified audit opinions on its
financial statements until Fiscal Year (FY) 2005. This changed when the
Department embarked on the mid-year implementation of a new financial
accounting information system known as the Standard Accounting and
Reporting System (STARS). The change in accounting system was necessary
to (1) ensure that the Department could implement the U.S. Government
Standard General Ledger (SGL) at the transaction level and, (2) prevent
operational disruption when the legacy hardware vendor stopped
supporting its product, and (3) comply with requirements to establish
and maintain a modern financial management system that would permit the
systematic measurement of performance; the development of cost
information; and the integration of program, budget, and financial
information for management reporting.

The Department undertook the system development/replacement effort
during a period of significant organizational change associated with a
Competitive Sourcing Initiative required by OMB Circular A-76. To
conform to the structure established through that initiative, the
Department's financial services organization was extensively reorganized
during Fiscal Years 2004 and 2005. The reorganization resulted in
consolidating the financial recording and reporting processes that were
previously performed at many separate locations into three sites. The
centralization had a negative effect on financial accounting staffing
levels and skills mix in that many key accounting personnel were
reassigned and many others were lost through attrition. Centralization
also changed the manner in which the Department's financial accounting
system interfaced with its major contractors, budgetary and other
ancillary systems.

**Pre-Implementation Reviews**

Because of concerns with completing these major initiatives
simultaneously and potential problems related to planning and system
development activities, the Office of Inspector General performed two
pre-implementation reviews of STARS. The first of these reviews,
completed in August 2004, identified a number of challenges that
increased the risk that the Department would not be prepared to launch a
fully capable system on schedule. Specifically:

-   Demands on existing staff would increase substantially and it was
    uncertain whether resources would be available to complete
    implementation and testing;

-   Critically important training was behind schedule;

-   Integrated contractor interface testing had not been completed; and,

-   Proper cleanup and conversion of field site data to STARS were not
    expected to be completed prior to implementation.

We made a number of suggestions to prioritize and resolve critical
issues before implementation of the new system. Based on our review and
other factors, the Department made the decision to delay its original
October 2004 implementation until April 2005.

During the intervening period, our Office conducted a follow-up review,
completed on January 11, 2005, that identified additional challenges.
While progress was made on certain fronts, we observed that the "planned
mid-year implementation of STARS poses special challenges that could
impact successful deployment of the system." In particular, we noted
that: two separate accounting systems would have to be used to produce
the consolidated financial statements; the accelerated reporting
schedule for year-end financial statements would provide only limited
time to correct any problems that occurred during implementation; and,
the burden of auditing two separate systems of controls (both the legacy
system and STARS) would severely stress both accounting and audit
resources.

**FY 2005 Financial Statement Audit**

In April 2005, the Department decided to move forward with the mid-year
implementation of its new financial accounting system and the adoption
of a new chart of accounts. Following deployment, our FY 2005 financial
statement audit revealed implementation issues related to converting
data from its legacy accounting system, developing new accounting
processes to effectively use the new system, and identifying related
reporting requirements. Notably:

-   Reports needed for management, control, and audit purposes were not
    available following system deployment;

-   Accounting processes had not been fully documented; and,

-   Operational control procedures were not yet being performed
    routinely.

Despite substantial effort, the Department was unable to correct many of
the problems associated with the reorganization of its accounting
function and conversion to STARS by 2005 Fiscal Year end. As of
September 30, 2005, a number of significant issues and challenges had
not been resolved. Reports needed for management, control, and audit
purposes were not available and a number of system reconciliations
remained incomplete. These problems (1) delayed preparation of the FY
2005 financial statements and supporting data, and, (2) impacted the
ability of Department officials to monitor and control their budgets.

On November 9, 2005, the Independent Public Accounting firm (IPA)
employed by the Office of Inspector General issued a disclaimer of
opinion on the Department's FY 2005 consolidated financial statements
and reported a material weakness in financial management and reporting
controls. Additionally, because of the control deficiencies, the IPA
determined that the Department's financial management systems did not
substantially comply with all of the requirements of the Federal
Financial Management Improvement Act. Weaknesses in the Department's
unclassified information systems security, a reportable condition, also
continued from prior years.

[]{.mark}

**Review of Remedial Efforts**

Given the significance of the problems with financial management and
reporting controls, the Department established a special management team
to develop a corrective action plan and oversee remedial actions. To
assist the Department in evaluating the status of corrective actions, we
initiated a series of reviews in January 2006 to determine whether the
Department's planned and completed corrective actions adequately
addressed its critical financial management weaknesses.

Our reviews focused on the Department's corrective action plan and
included assessments and tests of many revised controls. Our initial
review found that certain corrective actions were not scheduled for
completion until late in FY 2006, which would not have provided
sufficient time to test the newly established controls. We also noted
that in some instances, planned actions did not appear to be sufficient
to ensure that weaknesses identified during the FY 2005 audit were fully
addressed. Subsequent reviews by my office found that a number of key
financial accounting system reconciliations had not been completed and
reports were not available to permit testing of certain newly created
internal controls. Significant system edit errors remained unresolved
and problems with recording obligations had not been corrected. The
Office of the Chief Financial Officer concurred with our suggestions and
agreed to realign resources and refocus its efforts to address
unresolved financial management issues.

**FY 2006 Financial Statement Audit**

Because of the disclaimer of opinion, it was possible to render an
opinion only on the Department's Balance Sheet in FY 2006. During the FY
2006 audit, the Department made significant progress in addressing STARS
implementation deficiencies and other problems that surfaced in FY 2005.
It was, in our judgment, a significant improvement over the previous
year. However, actions necessary to reconcile obligations data converted
from the Department's legacy accounting system remained unfinished at
year end. Data conversion differences impacted the accuracy of
undelivered orders balances at a number of field offices. In addition,
many organizations had not performed periodic reviews of obligations and
undelivered order balances. As a result, a number of undelivered order
balances did not agree with supporting documentation, old obligations
had not been deobligated, and many undelivered orders had negative
balances.

The issues with obligations and undelivered orders balances resulted in
a material weakness in internal controls and a qualified opinion on the
Audit of the Department's FY 2006 Balance Sheet. Additionally, problems
with unclassified systems security continued as a reportable condition
from prior years, and a new reportable condition related to performance
measurement was reported. Consistent with its remedial efforts, except
for the issues associated with obligations and undelivered orders,
nothing come to our attention to suggest that the Department's systems
did not substantially comply with other requirements of the Federal
Financial Management Improvement Act.

Since the issuance of our FY 2006 financial statement audit report, we
have coordinated with the Department and have begun another focused
review of its actions to remediate the problems associated with
obligations and undelivered orders. Should this effort be successful at
all sites, and barring any new material weaknesses in FY 2007, the
Department would be in a position to obtain an unqualified opinion in
the FY 2007 Audit. We recently began the FY 2007 consolidated financial
statement audit and are presently performing information systems
assessment and testing as part of that effort.

In summary, we believe that a strong financial management program is
important to the Department of Energy. Based on our experience, the
Department's current senior leadership, including both the Secretary and
the Deputy Secretary, is committed to maintaining strong controls and
has been fully invested in resolving weaknesses related to the change in
accounting systems. We will continue to assist the Department in this
effort -- as we have in the past -- by devoting a significant portion of
our available resources to providing independent assessments of the
accounting and financial management operations of the Department.

Thank you, Mr. Chairman and members of the Subcommittee. That concludes
my statement and I am prepared to answer questions.