**Addendum to the Department of Energy OMB Circular A-123 Appendix A
Implementation Plan,**

**Dated August 31, 2005**

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height="2.1486111111111112in"}

**December 30, 2005**

This addendum complements the Department's A-123 Implementation Plan
submitted to the Office of Management and Budget (OMB) on August 31,
2005. Specifically, Section A of this document includes requested
clarifications on: (1) Scope and materiality; (2) Strategy for major
site and facilities management contractors; (3) Impact of the
Department's Federal Managers' Financial Integrity Act (FMFIA)
Significant Issue on the FY 2006 A-123 Program; and (4) Critical
milestones for FY 2006 implementation. Section B provides supplemental
information to address the A-123 scoring criteria for the President's
Management Agenda.

***SECTION A- SUPPLEMENT TO AUGUST 31, 2005 IMPLEMENTATION PLAN***

1.  ***SCOPE OF FINANCIAL REPORTS AND MATERIALITY DETERMINATIONS***

> ***Scope of Financial Reports***
>
> DOE plans to include the six principal consolidated financial
> statements in the scope of its initial A-123 assessment.
>
> In accordance with OMB Circular A-123, the Senior Assessment Team
> (SAT) identified the following financial reports to be significant
> and, therefore, subject to the internal control assessment.

1.  **Consolidated Balance Sheet:** Captures assets, liabilities, and
    net position components of the Department.

2.  **Consolidated Statements of Net Cost:** Summarizes the Department's
    operating costs by the seven long-term goals identified in the
    Department's Strategic Plan. Also includes "Net Cost of Transferred
    Operations."

3.  **Consolidated Statements of Changes in Net Position:** Presents
    accounting events that caused changes in the net position section of
    the Consolidated Balance Sheets from the beginning to the end of the
    reporting period.

4.  **Combined Statement of Budgetary Resources:** Provides information
    on budgetary resources available to the Department during the year
    and the status of those resources at the end of the year.

5.  **Consolidated Statements of Financing:** Reconciles the obligations
    incurred to finance operations with the net cost of operations**.**

6.  **Consolidated Statements of Custodial Activities**: Identifies
    revenues collected by the Department on behalf of others.

> ***Materiality***
>
> As defined in OMB Circular A-123, "Materiality for financial reporting
> is the risk of error or misstatement that could occur in a financial
> report that would impact management's or a user's decisions or
> conclusions based on such a report." Management must consider how an
> error would affect management or operations that rely on the key
> financial reports within the assessment scope. An error that would
> materially affect the day-to-day decisions based on these key reports
> would be considered a material error. Materiality determination is a
> complex analysis that requires professional judgment and consideration
> of various quantitative and qualitative measures.
>
> The following examples of qualitative factors will also be considered
> by the SAT when assessing the significance of an account:
> susceptibility to loss due to fraud; volume of activity; complexity;
> nature of the account; accounting and reporting complexities
> associated with the account; exposure to losses; existence of
> intragovernmental and intradepartmental transactions; changes in the
> account since previous reporting period; and viability and sensitivity
> of the program. In addition, the Department will consider the accounts
> and cycles identified by the independent financial statement auditor
> for FY 2006.
>
> The Department will establish different material amounts, discussed
> below, to ensure appropriate determinations throughout the assessment
> process.
>
> **Reporting Materiality** is the overall materiality that serves as
> the threshold for reporting weaknesses in internal controls that could
> result in a material misstatement of a financial report.
>
> **Planning Materiality** is used to determine significant accounts,
> elements or disclosures in a financial report. Planning materiality is
> generally a percentage of reporting or overall materiality.
>
> ***Department of Energy Methodology***
>
> The Department has defined reporting materiality as 1% of total
> assets[^1]. Generally, management's planning materiality level would
> need to be lower than the reporting materiality. As such, the
> Department has adopted a threshold of 75% of the reporting materiality
> for determining its planning materiality and considers an account
> included in the Department's six consolidated financial statements to
> be material if the account balance is [\>]{.underline} .75% of Total
> Assets.
>
> Material accounts have been identified and are available on the
> Department's A-123 website at:
> <http://www.cfo.doe.gov/progliaison/doeA123/index.htm> . Additionally,
> the Department will identify the financial report assertions
> associated with each material account for documentation purposes and
> to assist in testing. Financial reporting assertions are defined as
> representations by management that are embodied in the financial
> statements and are classified in the following broad categories:
>
> Presentation and Disclosure -- Financial statement account is properly
> classified, described and disclosed.
>
> Existence or Occurrence -- Assets or liabilities exist at a given date
> and whether recorded transactions occurred during a given period.
>
> Rights and Obligations -- Assets are the rights of the entity and
> liabilities are obligations of the entity at a given date.
>
> Completeness and Accuracy -- All transactions and accounts that should
> be presented are included.
>
> Valuation and Allocation -- Assets, liabilities, equities, revenues
> and expenses have been included at appropriate amounts.
>
> Compliance -- Transactions are in compliance with applicable laws and
> regulations.
>
> Safeguarding -- All assets have been safeguarded against fraud and
> abuse.
>
> Documentation -- Documentation of internal control and all
> transactions and other significant events is ready for examination.
>
> ***Key Process Cycles & Processes***
>
> To support the assessment of internal control over financial
> reporting, the Department has identified five process cycles based on
> ORACLE best practices. To support the five process cycles, nineteen
> related key processes have been identified. These key processes are
> based on Joint Financial Management Improvement Program manuals and
> the COSO Internal Control Framework and have been tailored to
> Departmental operations. These serve as standard cycles and processes
> to ensure consistent evaluation and reporting across the DOE complex.
> Sites will identify sub-processes, risks and controls to support each
> process as applicable. The process cycles and related key processes
> are listed below:
>
> **Procure to Pay (P2P):** Acquisition; Inventory Management; Payable
> Management; and Travel.
>
> **Budget to Close (B2C):** General Ledger Management; Funds
> Management; Funds Balance with Treasury; Cost Management; Insurance;
> Grants; and Loans.
>
> **Projects to Assets (P2A):** Project Cost Management; Property
> Management; and Seized Property Management.
>
> **Quote to Cash (Q2C):** Revenue Management; and Receivable
> Management.
>
> **Enterprise Resource Management (ERM):** Human Resources; Payroll;
> and Benefits.

2.  ***STRATEGY FOR MAJOR SITE AND FACILITIES MANAGEMENT CONTRACTORS***

> Requirements to comply with A-123 extend to major site and facilities
> management contractors (integrated and FAR-based, non-integrated
> contractors) to the extent that they maintain a material balance in
> key accounts of the Department. Contractors identified to be material,
> under the direction of their cognizant field site assessment team,
> will perform A-123 assessments that meet the standards established by
> the Department. However, maximum flexibility will be provided to
> cognizant site assessment teams and their contractors in determining
> how assessments will be conducted to ensure they are performed in the
> most effective, efficient and cost beneficial manner. Field CFOs will
> manage their contractors' assessment activities and will report on
> their implementation strategy and status, including the cost to
> implement the program, on a quarterly basis.
>
> In addition, contractors identified as having accounts material to the
> Department who are directly covered by SAS 70 examinations performed
> at their parent company may leverage the results to support A-123
> assessments; however, consideration must be given to whether a Type II
> (organization has had its control objectives and control activities
> examined by an independent accounting and auditing firm) SAS 70 report
> exists and if it is sufficient in scope. If a Type II SAS 70 report is
> unqualified and contains no testing exceptions then it should be
> deemed to be reliable with no further testing required in those areas
> covered by the Type II SAS 70 report. Please note that the Department
> will not encourage the conduct of SAS 70 examinations for the sole
> purpose of meeting the requirements of A-123.

3.  ***IMPACT OF FMFIA SIGNIFICANT ISSUE REMEDIATION ON THE FY 2006
    A-123 PROGRAM***

> The Department reported a significant issue in the area of financial
> control and reporting as a result of its FY 2005 FMFIA review.
> Similarly, the Department's auditors reported an "audit material
> weakness" related to the issue. These issues ultimately resulted in a
> disclaimer of opinion on the Department's FY 2005 Financial
> Statements. As a result of these conditions, the Department
> established a corporate Tiger Team to identify, prioritize and develop
> a plan for the corrective actions required to mitigate these issues.
> Many of the corrective actions are already under way and others will
> begin in the near future.
>
> Due to the impact of the financial control and reporting challenges on
> the Department, the decision was made to focus resources on the
> highest risk activities. As such, FY 2006 A-123 activities at the
> Department's three accounting service centers (Energy Finance and
> Accounting, Oak Ridge and National Nuclear Security Administration),
> will focus on the remediation, documentation, evaluation and testing
> of key processes identified as having the greatest impact on the FY
> 2006 financial statement audit opinion. As time allows, additional
> areas will be included in the assessment at the service centers.
>
> All other Departmental sites (including contractor locations) will
> implement complete A-123 assessment programs covering all material
> accounts in FY 2006.

4.  ***CRITICAL MILESTONES -- FY 2006\****

+--------------------------------------------------------+-------------+
| **Milestone**                                          | **Target**  |
|                                                        |             |
|                                                        | **Date**    |
+--------------------------------------------------------+-------------+
| **FY 2006 Process**                                    |             |
+--------------------------------------------------------+-------------+
| Issue Initial DOE Implementation Plan to OMB           | 8/31/05     |
|                                                        | (Compl.)    |
+--------------------------------------------------------+-------------+
| Issue A-123 Interim Guidance                           | 10/24/05    |
|                                                        | (Compl.)    |
+--------------------------------------------------------+-------------+
| Revised Material Accounts Listing Posted               | 11/18/05    |
|                                                        | (Compl.)    |
+--------------------------------------------------------+-------------+
| 1^st^ Quarterly A-123 Report                           | 1/15/06     |
+--------------------------------------------------------+-------------+
| Complete Planning Phase\*\*                            | 1/15/06     |
|                                                        |             |
| -   Identify Material Accounts                         |             |
|                                                        |             |
| -   Develop Site Implementation Plans                  |             |
+--------------------------------------------------------+-------------+
| Complete Documentation Phase                           | 2/15/06     |
|                                                        |             |
| -   Identify Processes and Sub-processes               |             |
|                                                        |             |
| -   Identify Processes and Sub-processes for Initial   |             |
|     Remediation                                        |             |
|                                                        |             |
| -   Document Processes, Sub-processes and Related      |             |
|     Controls                                           |             |
|                                                        |             |
| -   Identify Risks and Related Controls                |             |
+--------------------------------------------------------+-------------+
| Summary of Key Financial Decisions from the Planning   | 2/15/06     |
| Phase to OMB                                           |             |
+--------------------------------------------------------+-------------+
| Complete Evaluation Phase                              | 3/15/06     |
|                                                        |             |
| -   Perform Risk Assessment                            |             |
|                                                        |             |
| -   Assess Control Design Effectiveness                |             |
+--------------------------------------------------------+-------------+
| Complete Test Plans                                    | 3/30/06     |
+--------------------------------------------------------+-------------+
| Summary of A-123 Test Plan or Status to OMB            | 4/3/06      |
+--------------------------------------------------------+-------------+
| 2^nd^ Quarterly A-123 Report                           | 4/15/06     |
+--------------------------------------------------------+-------------+
| 3^rd^ Quarterly A-123 Report                           | 7/15/06     |
+--------------------------------------------------------+-------------+
| Complete Testing Phase                                 | 9/1/06      |
+--------------------------------------------------------+-------------+
| Field Reporting/Assertions to LPSO / cc: CFO           | 9/15/06     |
+--------------------------------------------------------+-------------+
| HQ Program Reporting/Assertions to CFO                 | 9/30/06     |
+--------------------------------------------------------+-------------+
| SAT Recommends to CFO the Level of Assurance and       | 10/6/06     |
| Issues to be Reported                                  |             |
+--------------------------------------------------------+-------------+
| CFO Makes Final Recommendation to DICARC               | 10/8/06     |
+--------------------------------------------------------+-------------+
| Secretarial Assurance Provided in Performance &        | 11/15/06    |
| Accountability Report                                  |             |
+--------------------------------------------------------+-------------+
|                                                        |             |
+--------------------------------------------------------+-------------+

\* The FY 2006 Critical Milestones reflect the Department's current
internal implementation goals.

\*\* See the attachment to this document for a depiction of the DOE
process flow and a summary of program phases.

***SECTION B -- A-123 SCORING CRITERIA FOR THE PRESIDENT'S MANAGEMENT
AGENDA***

1.  ***MANAGEMENT OVERSIGHT & ORGANIZATION***

> Implementation of A-123 Appendix A requirements at the Department is
> being overseen by the SAT composed of senior level management (See
> section B.2. for complete SAT structure). The SAT drives policy and
> guidance for A-123 implementation and corporate oversight of the
> Department's program. The A-123 effort is championed by the CFO who
> provides focus on crosscutting financial activities and ensures
> Secretarial involvement and support. The Deputy Chief Financial
> Officer and the Chief Financial Officer are briefed routinely on the
> Department's implementation strategy to ensure the senior management
> is engaged in all phases of the A-123 process. The SAT and the site
> A-123 assessment team leads meet regularly to ensure consistency in
> complex-wide implementation.
>
> The SAT is fully engaged and, through its Project Management Team, has
> overseen the development of key products including: Interim
> implementation guidance; "Quick Start" implementation guides;
> automated A-123 assessment and reporting tools; and an A-123 website
> for corporate sharing of information.

2.  ***SENIOR ASSESMENT TEAM (SAT) OR EQUIVALENT STRUCTURE***

> The Department's SAT oversees corporate implementation of A-123. The
> SAT is comprised of the following members: Director, Office Internal
> Review, Office of the Chief Financial Officer (Chairperson); Associate
> Chief Information Officer for Operations, Office of Chief Information
> Officer; Director, Office of Financial Management, Office of the Chief
> Financial Officer; Director, Energy Finance and Accounting Service
> Center; National Nuclear Security Administration Field Chief Financial
> Officer/Director, Office of Field Financial Management; Chief
> Financial Officer, Oak Ridge Operations Office; Chief Financial
> Officer, Savannah River Operations Office; and Office of Inspector
> General staff. Participation by other senior managers includes
> representatives from the Department's programs and Power Marketing
> Administrations. The SAT Chairperson reports to the Chief Financial
> Officer.
>
> The SAT's primary responsibilities are: fostering an operational
> environment to support an on-going awareness of internal controls;
> determining those financial reports and major accounts covered by the
> Department's assessment; ensuring assessment objectives are clearly
> communicated throughout the Department; monitoring progress of all
> assessments being performed; assessing the adequacy of
> assertions/reports provided by Heads of Departmental Elements;
> recommending to the CFO the Secretarial assertion on the adequacy of
> internal control over financial reporting; and monitoring the progress
> of implementing corrective actions.
>
> To oversee the day-to-day A-123 process and ensure targeted
> implementation strategies are deployed, the Department has also
> established a formal Project Management Team (PMT) under the
> cognizance of the CFO's Office of Internal Review. A senior A-123
> Project Manager has been assigned who is responsible for overseeing
> implementation of A-123 activities throughout the DOE complex and
> leading the PMT. The team is also responsible for ensuring the
> appropriate skills mix is available to implement A-123, developing
> guides and tools to support consistent implementation, providing
> Department-wide training and overseeing corporate reporting and
> validation efforts.

3.  ***COMMUNICATIONS STRATEGY & BRIEFINGS***

> Communications with all levels of the organization (including senior
> management and accountable Federal and contractor staff tasked with
> implementation) occurs on a routine basis. Frequent meetings are held
> with the SAT, senior management, Field CFOs, site/program team leads
> and other personnel involved in A-123 implementation. These meetings
> focus on policy and implementation issues and ensure corporate buy-in
> and consistent implementation. In addition, the PMT has establish an
> A-123 website to share Government-wide and DOE policy/guidance,
> implementation guides, assessment/reporting tools, reference materials
> and other pertinent information. To complement the website, the PMT
> also established an
>
> A-123 Hotline and an E-mail Helpdesk to address technical and policy
> questions. The Department further ensures open communication via A-123
> communiqués and recurring A-123 training sessions.

4.  ***TOP-DOWN APPROACH COMPONENT INTEGRATION***

> The Department's A-123 implementation strategy employs a corporate
> top-down approach. This approach consists of planning and developing
> processes from an agency-wide perspective. It focuses on reviewing key
> agency-wide financial statements and identifying the material accounts
> and the related process cycles and processes for those accounts. The
> SAT and PMT deploy the A-123 program via Department-wide
> policy/guidance and corporate "Quick Start Guides" that provide
> structure and drive consistency from the top down. Site assessment
> team activities are monitored on an on-going basis to ensure
> compliance with corporate policy and guidance. The Department's
> communications strategy (B.2.) ensures that all components of the
> agency are well informed and engaged in program implementation.

5.  ***RESOURCES IDENTIFIED CONTRACTOR VS IN-HOUSE***

> The Department has chosen an implementation approach that leverages
> in-house expertise to the maximum extent practicable to ensure the
> most cost-effective A-123 program. A support service contractor has
> been acquired (on-board June 2005) to assist in developing and
> implementing the Department's program. The contractor brings with it
> corporate Sarbanes-Oxley experience, as well as Government financial
> management expertise, which has allowed DOE to structure a program
> that bridges the gap between public and private sector implementation.
> The firm will also be engaged to support corporate mapping of key
> processes. The Department will retain the services of a certified
> public accounting firm to facilitate independent assessment of the
> Department's program as necessary.
>
> Due to the well scripted and structured implementation program
> developed by the SAT and the PMT, the day-to-day activities may be
> largely resourced through the use of in-house expertise found within
> the CFO communities. For example, each of the Department's integrated
> contractors has an internal audit group staffed with audit
> professionals that are well versed in internal control evaluation
> techniques. Similarly, Departmental Federal sites maintain internal
> review capabilities, including the same skills-mix for evaluating
> financial controls. In addition, the Department plans to leverage
> existing reviews/audits that meet the standards for A-123. Given the
> volume and scope of internal audits performed at the Department's
> contractor and Federal sites, we anticipate resource savings through
> these vehicles.
>
> .

6.  ***INTEGRATION WITH OTHER INTERNAL CONTROL EFFORTS***

> The Department's A-123 program implementation is being closely aligned
> with other internal control efforts to avoid duplication of effort and
> leverage existing work to the extent practicable. For example, the
> A-123 PMT is working closely with the Tiger Team established to define
> a clear path forward in addressing the Department's financial control
> and reporting issues that led to a disclaimer of opinion on our FY
> 2005 financial statements. This coordination will allow for the
> identification of corporate issues that may be assessed/remediated one
> time for the complex versus independently at each DOE site. In
> addition, the Department's FMFIA Program is being adjusted to rely on
> the A-123 assessments in areas of commonality. Also, as mentioned in
> section B.5., the leveraging of existing review/audit work is a key
> component of the Department's program to ensure that on-going efforts
> are integrated into the A-123 program. The SAT and PMT will continue
> to look for additional opportunities to integrate other control
> efforts and drive program efficiencies.

7.  ***SCOPE, MATERIALITY AND PROCESS IDENTIFICATION***

> The Department has clearly defined the scope of reporting to be
> considered, materiality levels and key processes as detailed in
> section A.1. of this addendum. Material accounts have been developed
> at the corporate level and are driven down to programs and sites as
> applicable. To ensure consistent evaluation, testing and reporting,
> the PMT has also defined standard process cycles and related processes
> that have been deployed across the complex. This approach will provide
> the needed consistency and structure to ensure an effective
> implementation.

8.  ***TEST PLAN***

> The Department has developed a standard testing protocol that includes
> consideration of the results of control design effectiveness, relative
> risk and the overall impact of individual controls on financial
> reporting. To support the development and execution of test plans, the
> PMT has issued a detailed "Testing Quick Start Guide" that outlines
> the corporate process and has developed a corporate assessment tool
> that guides site teams through a systematic testing approach. The
> Department's current internal goal is to develop test plans by
> 3/30/06.

9.  ***PROCESS REMEDIATION AND TRACKING***

> As part of the Department's process for implementing A-123, reporting
> tools have been developed that track processes and controls requiring
> remediation whether identified up front, during the evaluation phase
> or during final testing. Specific requirements for action plans and
> tracking are being incorporated into the Department's "Remediation
> Quick Start Guide." This will ensure that any systemic issues that
> result in qualification of the Department's A-123 assurance are
> adequately tracked until corrective actions have been taken and the
> related controls have been re-documented and tested.
>
> In addition, the Department established a corporate Tiger Team to
> identify and track corporate remediation activities required to
> address the financial control and reporting issues as identified in
> the FY 2005 Performance and Accountability Report. These issues are
> also being considered in the A-123 program to avoid duplication of
> effort.

10. ***TIMELINE***

Per the critical milestones identified in section A.4., the Department's
current internal goal is to complete the required phases in-line with
OMB's expectations.

> Attachment
>
> Department of Energy FY 2006 A-123 Process Flow
>
> ![](media/image2.wmf){width="6.0in" height="4.339583333333334in"}

[^1]:
    > Based on the President's Council on Integrity and Efficiency
    > Financial Audit Manual (FAM) which defines audit materiality as:
    > *Larger of Assets or Expenditures X 1% = FAM Materiality*.