March 29, 2002

Honorable Roderick Paige

Secretary of Education

Washington, D.C. 20202

Dear Mr. Secretary:

Attached are copies of the final management letters prepared by Ernst &
Young, LLP, as a result of their examination of the fiscal years 2001
and 2000 financial statements for the Department and Student Financial
Assistance. Copies are also being provided to the Office of the Chief
Financial Officer, the Office of the Chief Information Officer, the
Office of the Under Secretary, and Federal Student Aid.

The letters contain suggestions to assist management in improving
procedures and controls within the Department. The results were
discussed with Department officials throughout the audits. The Office of
the Chief Financial Officer and Federal Student Aid commented on the
findings and recommendations presented in the draft management letters
and changes were incorporated as appropriate.

In accordance with the Freedom of Information Act (Public Law 90-23),
products issued by the Office of Inspector General are available, if
requested, to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given us and Ernst & Young, LLP, during
the audits.

Sincerely,

/ s /

Lorraine Lewis

Enclosures

To the Inspector General

U.S. Department of Education

In planning and performing our audits of the consolidated balance sheets
of the U.S. Department of Education (the Department) in accordance with
auditing standards generally accepted in the United States as of
September 30, 2001 and 2000, and the related consolidated statements of
net cost and changes in net position, and the combined statements of
budgetary resources and financing for the fiscal years then ended, we
considered its internal control to determine our audit procedures for
the purpose of expressing an opinion on the financial statements and not
to provide assurance on internal control. We have separately reported in
our Report on Internal Control dated February 4, 2002, certain matters
involving internal control and its operation that we consider to be
reportable conditions or material weaknesses under standards established
by the American Institute of Certified Public Accountants.

The following suggestions, which resulted from our consideration of
internal control, are submitted to assist management in improving
procedures and controls.

**I. [Fund Balance with Treasury ]{.underline}**

*Statement of Transactions Preparation Process (Repeat Condition)*

The Department's procedures for reporting its Fund Balance with Treasury
(FBWT) activities to Treasury can be improved. During our testing of the
Department's procedures for preparing the Statement of Transactions (SF
224), we noted that the collection and disbursement transactions
reported to Treasury via the SF 224 differed from transactions posted to
the Department's general ledger, the Financial Management System
Software (FMSS). The Department prepared the SF 224 by using the data
provided in the Government On-Line Accounting Link System (GOALS) and
Cash Link, instead of the data in its general ledger. Consequently, the
collections activity recorded in the general ledger for the Direct Loan
financing account, and the collections and disbursements activity
recorded in subsidiary ledgers for the FFELP financing and liquidating
accounts do not agree with the amounts reported in the Undisbursed
Appropriation Ledger (FMS 6653). The activity in the general ledger and
subsidiary ledgers exceeded the amounts reported in the FMS 6653 by
\$2.7 billion and \$738 million for the direct loan financing account,
and FFELP financing and liquidating accounts, respectively. While we
were able to satisfy ourselves as to the Fund Balance with Treasury
balance at year-end, the differences reflected the Department's effort
through manual adjusting entries to correct past errors and inadequacies
in its Fund Balance with Treasury reconciliations. Also, the amounts
reported on the Statement of Differences (FMS 6652) do not reflect true
differences between balances in the Department's general ledger and
balances reported by Treasury in the FMS 6653.

A GAO report, *Reconciliation of Fund Balances* (GAO/AIMD-97-104R),
established guidance for use by auditors in determining the adequacy of
an agency's procedures to reconcile its FBWT. This guidance suggests
that auditors determine whether agencies adequately prepare the SF 224
by using the same detailed accounting records of collection and
disbursement transactions that are used to prepare the agencies'
financial statements. The guidance also suggests that auditors determine
whether agencies adequately research and resolve differences reported by
Treasury on the Statement of Differences (SF 6652) and report
adjustments to Treasury and post adjustments to accounting records in a
timely manner (i.e. monthly).

####### We recommend that the Department perform the following: {#we-recommend-that-the-department-perform-the-following .unnumbered}

-   Modify the procedures used to record transactions in its accounting
    records for all Agency Location Codes (ALC's) so that the SF 224
    preparers can effectively rely on the accounting data from the
    general ledger and accurately report transactions to Treasury.

```{=html}
<!-- -->
```
-   Perform reconciliations of its FBWT on a monthly basis for all major
    appropriations and quarterly for other appropriations.

-   Thoroughly research differences and clearly document the resolution
    of the differences, including prior year differences.

```{=html}
<!-- -->
```
-   Post all correcting general ledger entries identified through the
    reconciliation process and communicate those entries promptly to
    Treasury via the SF 224.

    ***Department Response:***

    This was addressed in the Internal Control Report

    **II. [Direct Loans]{.underline}**

# **GAPS to FMSS Loan Disbursement Reconciliations** {#gaps-to-fmss-loan-disbursement-reconciliations .unnumbered}

The Grant Administration and Payment System (GAPS) processes requests
for disbursing loan funds to schools. We tested a sample of the GAPS
subsidiary to FMSS general ledger reconciliations for loan disbursements
and noted that these reconciliations lacked documentation of supervisory
review and approval. The lack of supervisory review and approval
increases the risk that the reconciliations may contain errors or
irregularities that may not be detected timely.

OMB Circular A-123, *Management Accountability and Control*, states
that, "Transactions should be promptly recorded, properly classified and
accounted for in order to prepare timely accounts and reliable financial
and other reports. The documentation for transactions, management
controls, and other significant events must be clear and readily
available for examination."

We recommend that the Department ensure that supervisory review and
approval of all reconciliations is documented.

***Department Response:***

The Department agrees that the reconciliation approval documentation can
be improved.

**Action to Be Taken:**

-   Department management will maintain formal approval documentation.

    **III. [FFELP Loans Receivable]{.underline}**

#### Lack of Borrowers' Information

Lack of complete and accurate borrowers' information may impair the
Department's ability to improve collections and effectively service
defaulted loans assigned to the Department. Of the 32 confirmations sent
to borrowers to confirm loan balances at year-end, five confirmations
were returned as undeliverable. In addition, the Department was able to
provide telephone numbers for only 19 borrowers. Four of the telephone
numbers provided were either not in service or wrong numbers.

While we recognize that defaulted loans present unique challenges, we
recommend that the Department continue to review its collection and file
maintenance practices and determine if additional measures would aid in
updating borrowers' records in the Debt Collection Service.

***Department Response:***

The Department exhausts every possible resource in its collection
practices and file maintenance. The Department/Collections receives
address and telephone information from the entity (school, FFEL
Guarantor, Direct Loan Servicer, etc.) assigning the student loan/grant
to the Department. If this contact information is not provided or
determined to be incorrect, there are several tools utilized to
ascertain current data:

> \- Skip-trace account through a service provided by the Internal
> Revenue Service. DCS files are timely update from the skip-tracing
> results.

\- Skip-trace activities are also routinely performed once an account is
referred to Private Collection Agency (PCA) contractors. PCAs utilize
various options available to them (i.e., Credit Bureaus, private locator
contracts, etc.). The PCAs provide this data to Collections weekly, so
that the Debt Management Collection System is updated in a timely
manner.

> \- Match accounts against the National Directory of New Hires. This
> Directory provides home and employment contact information. DCS files
> are timely updated from the matching results.
>
> \- Request address update information from the U.S. Postal Service.
> DCS files are again timely updated.
>
> In short, the Department/Collections spends considerable time, effort
> and resources to locate borrowers. Our collection efforts have long
> been used as the standard in Federal collection efforts.

**IV. [Accounts Receivable]{.underline}**

The Department's procedures for reviewing and calculating the allowance
for loss on accounts receivable can be improved. During our testing, we
noted the following issues:

-   The Department did not follow their current policies and procedures
    for calculating the allowance for loss on certain accounts
    receivable transactions, resulting in the allowance account being
    understated; however, the amounts involved were not material to the
    financial statements as a whole.

-   We also noted that certain items included in the Department's
    subsidiary listing that were considered to be current had 100%
    allowance applied against them as part of the Department's allowance
    procedures. This could potentially overstate the allowance account.

-   The allowance for loss was not applied to the correct general ledger
    sub-account or sector code in some cases. This resulted in 2
    accounts receivable sub-accounts having a net credit balance at
    year-end (the amount of the allowance exceeded the amount of the
    receivable). In addition, certain immaterial amounts were
    misclassified between intragovernmental and governmental accounts
    receivable on the balance sheet. These items did not impact the
    overall net accounts receivable balance.

-   The Department did not perform a timely review of the allowance for
    loss and accounts receivable general ledger accounts.

The Office of the Chief Financial Officer's procedures entitled
*Assessing and Adjusting for Loss on Accounts Receivable* establishes
the methodology for calculating the allowance for all grant programs.
This document calls for adjusting the allowance on accounts receivable
to 97% of all unappropriated funds and 100% of all appropriated funds.
These procedures should be performed on a quarterly basis and at
year-end.

Without timely and adequate review of accounts receivable and allowance
for loss general ledger accounts, the accounts receivable balances are
more likely to become misstated. While the differences noted during FY
2001 were not material to the financial statements as a whole, timely
account analysis and review procedures could have identified these
discrepancies.

We recommend that the Department perform the following:

-   Comply timely with existing policies and procedures to perform
    quarterly assessment and adjustment of allowance for loss on
    accounts receivable.

-   Perform analysis and review of accounts receivable and allowance for
    loss accounts to determine that amounts have been posted to the
    correct sub-account and sector code.

-   Determine whether existing allowance percentages are appropriate, or
    whether alternate methods, such as establishing allowance
    percentages based on an aging schedule reflecting the status of the
    receivables, would provide a more appropriate methodology for
    calculating the allowance for loss.

***Department Response:***

The Department concurs with the overall intent of the recommendation.

**Action to Be Taken:**

-   Department management will review this issue and institute measures,
    as appropriate, to ensure that staff are in compliance with the
    existing A/R allowance calculation policies and procedures.

-   The current allowance assessment method will be evaluated. The
    evaluation project will also include a phase in which the Department
    will review alternative methods of assessment. Recommendations will
    be made upon conclusion.

**V.** **[Monitoring]{.underline}**

*Monitoring of Guaranty Agency Reserve Funds (Modified Repeat
Condition)*

After analyzing the information reported on Form 2000, "Guaranty Agency
Quarterly/Annual Report", we noted that guaranty agencies are only
required to report balances for the Federal Fund and the Restricted
Recall Fund balance as of September 30 each year. As a result, guaranty
agency reserve balances can only be verified at year-end. Guaranty
agencies are required to submit other information, such as loans
receivable, on a quarterly basis.

One of the uses of the Form 2000 is to track the financial condition of
the guaranty agencies. This function will not be as effective if the
reserve balances are only reported at year-end.

We recommend that the Department revise the Form 2000 to include the
requirement that each guaranty agency report the Operating, Federal, and
Restricted Recall Fund balance on a quarterly basis, which will allow
the tracking of reserve balances throughout the fiscal year instead of
only at year-end.

***Department Response:***

The Department agrees with the intent of the recommendation.

Student Financial Assistance (SFA) does not want to require the GA's to
submit the entire annual report (all line items) on a quarterly basis.
Rather, agencies would continue to submit the Annual Report (all line
items) on an annual basis.

The Form 2000 should be revised to include the requirement that each GA
report only the balances of the Operating, Federal and Restricted Fund
on a quarterly basis.

**Action to Be Taken:**

-   SFA plans to revise the Form 2000, "Guaranty Agency Quarterly/Annual
    Report" to include the requirement that each GA report only the
    balances of the Operating, Federal, and Restricted Recall Fund on a
    quarterly basis. This will allow SFA to track the reserve balance
    throughout the fiscal year instead of only at year-end.

*Monitoring for Vocational Education Grants*

The Department's monitoring of vocational education grants can be
improved. In FY 2001, the Office of Vocational and Adult Education
(OVAE) performed a risk analysis of all recipients, taking into
consideration the funding level, recent audit findings, and the last
on-site monitoring visit. A rank order list was developed, resulting in
a schedule for the upcoming year recipients to be visited by OVAE staff.
In addition, in an effort to visit the largest possible number of
recipients each year, a new system was developed within OVAE to send
staff on "mini" monitoring visits as well as "full" monitoring visits.
The mini-monitoring visits are less formal and enable recipient staff
and the Department staff to meet and discuss current issues as well as
clarify areas within the Perkins legislation. Those recipients that are
deemed most at risk, however, receive the full monitoring attention.

Although OVAE has developed a method of monitoring compliance with the
Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins
Act), we were not provided any evidence of monitoring for our sample.
With respect to the five recipients selected in our sample, monitoring
was last performed as follows: three states were last monitored in 1980;
one state was last monitored in 1981; and, one state was last monitored
in 1994. The lack of monitoring increases the risk that grant recipients
may not comply with the provisions of the Perkins Act.

We recommend that the Department implement procedures established to
monitor its vocational education grants for compliance with the Perkins
Act.

***Department Response:***

The Department concurs.

The information for FY2001 is accurate and in FY2002, the Department is
implementing the procedures established for monitoring compliance with
the Perkins Act.

**Action to Be Taken:**

-   Continue conducting FY2002 full and mini monitoring site visits.

-   Perform annual risk analyses to develop monitoring plans for
    subsequent years.

######## VI. [Grants -- Impact Aid]{.underline} {#vi.-grants-impact-aid .unnumbered}

#### Grant Confirmations

During our confirmation of available obligated balances at year-end, we
noted that for two of the three local educational agencies (LEAs) in our
sample, the Impact Aid Awards, payments and available obligated balances
confirmed by the LEA do not agree with the balances maintained in GAPS
and the Impact Aid System. For example the Impact Aid Award of
\$3,780,397 reported in GAPS and confirmed by the LEA did not agree with
the amount of \$3,457,053 recorded in the Impact Aid System. The
payments of \$3,457,053 reported in the Impact Aid System and confirmed
by the LEA did not agree with payments of \$3,067,492 recorded in GAPS.

During the conversion from the prior grant systems (the Payment
Management System and the Payment Administration System to the Grant
Administration and Payment System (GAPS)), certain incorrect obligation
and payment balances were posted to GAPS. This caused erroneous
available balances within GAPS, which directly affected the undelivered
orders balances that was reported on the financial statements at
year-end.

We recommend that the Department research the obligations and payments
posted as a result of the conversion and reconcile GAPS to the Impact
Aid System.

***Department Response:***

The Department concurs with the recommendation.

Impact Aid Program staff members have conducted extensive
reconciliations of erroneous conversion records and forwarded the
results to OCFO for correction in GAPS.

**Action to Be Taken:**

-   One outstanding erroneous obligation and its related expenditure
    records remains in GAPS. The Impact Aid Program will send an
    explanation of the necessary corrections to OCFO.

-   The Department will develop policies and procedures, which will
    enable the program office to reconcile the Impact Aid system to
    GAPS.

**VII. [Grant Disbursements]{.underline}**

*GAPS to FMSS Grant Expense Reconciliation*

Grantees use the Grant Administration and Payment System (GAPS) to
submit drawdown requests, via the Internet, to the Department. The
transactions are accumulated and electronically transmitted to FMSS, the
general ledger. Consequently, the grant expense from GAPS, the
subsidiary ledger, should equal the grant expense from the general
ledger. During our testing, we reviewed certain reconciliations of grant
expenses between GAPS and FMSS for the period of October 1, 2000 through
September 30, 2001. The reconciliations are used to show the difference
between the grant expense on the financial statements and the grant
expense per GAPS.

The Department has taken significant steps forward during FY 2001 to
begin to routinely reconcile the GAPS to FMSS grant expenses; however,
additional improvements are needed. During our testing, we noted the
following issues:

1.  The Department began preparing monthly reconciliations in
    April 2001. No monthly reconciliations were performed between
    October 2000 and March 2001; instead, the Department prepared a
    combined reconciliation for the entire six months.

2.  Based on a review of the available documentation for FY 2001
    reconciliations, we were unable to determine the timeliness of when
    the reconciliations were prepared or whether the reconciliations
    were reviewed and approved by a supervisor. Management has indicated
    that the reconciliations are approved via e-mail; however, no
    documentation was retained supporting the review and approval of the
    reconciliations.

3.  We also obtained available FY 2002 documentation for the October
    2001 and November 2001 GAPS-FMSS reconciliations and noted that
    these reconciliations were not complete as of January 2002.

## 

Without timely reconciliations, the Department's risk of not detecting
material errors or irregularities in the underlying financial data and
financial statements is increased. In addition, the lack of evidence of
supervisory review and approval increases the risk that reconciliations
may not be finalized, potentially resulting in errors or irregularities
that may not be detected timely.

We recommend that the Department perform the following:

-   Refine and enhance the existing procedures for the GAPS to FMSS
    grant expense reconciliation.

-   Develop, document, and implement additional procedures to maintain
    records of reconciliations when completed, as well as evidence of
    supervisory review and approval.

-   Reinforce the need to complete monthly reconciliations on a timely
    basis.

***Department Response:***

The Department agrees that the reconciliation approval documentation can
be improved, but we do not agree with the recommendations as stated.

The timeliness of reconciliations is a function of staff resource
availability. There are times where consolidation of reconciliation
periods is necessary to facilitate the process. All reconciliations are
dated, reviewed and approved by management.

**Action to Be Taken:**

-   Department management will maintain formal approval documentation.

######## VIII. [Accrued Grant Liability]{.underline} {#viii.-accrued-grant-liability .unnumbered}

During our testing of the accrued grant liability estimate, we noted
that some of the payees' reported liability exceeded their available
balance as of September 30, 2001. Management stated that for purposes of
calculating the estimated liability the reported liability is capped at
the available obligated balance amount when the confirmed liability
amount exceeds the available balance per GAPS. The Department did not
perform any follow up discussions or procedures for grantees that
reported discrepancies, such as liabilities exceeding available
balances.

Without procedures to follow up on discrepancies, the risk increases
that the confirmations may contain errors or irregularities and that
they may not be detected timely, potentially resulting in grant
liability information that is unreliable. In addition, although grantees
have access to GAPS to monitor grant information, discrepancies may
indicate that grantees are unaware of their available balances for
grants.

The U.S. General Accounting Office's *Standards for Internal Control in
the Federal Government* state that internal control activities help
ensure that management's directives are carried out. The control
activities should be effective and efficient in accomplishing the
agency's control objectives. Examples of control activities include top
level reviews of actual performance, reviews by management at the
functional or activity level, segregation of duties, proper execution of
transactions and events, accurate and timely recording of transactions
and events, and appropriate documentation of transactions and internal
control.

## 

We recommend that the Department develop and implement written policies
and procedures for following up on discrepancies noted in confirmations
submitted by grantees that are used to calculate the accrued grant
liability. We also recommend that the Department leverage its
confirmation processes in this area to explicitly confirm grant awards,
expenditures and/or advances to date, and available balances.

***Department Response:***

The Department concurs with the overall intent of the recommendation.

The Department understands the auditor's concerns regarding the inherent
limitations and imprecision in the current, sampling-based methodology
for calculating the grant accrual, and agree that we should move toward
a methodology based on internal program and financial data. Using
historical data accumulated over the past few years, the Department is
committed to developing an internal approach.

**Action to Be Taken:**

-   The Department will review possible approaches to a grant accrual
    calculation based on internal data, evaluate the pros and cons of
    possible techniques. The Department will develop and implement a
    revised methodology as appropriate.

**IX. [Accounts Payable]{.underline}**

We noted that amounts recorded on the accounts payable aging schedule
did not agree to accounts payable amounts recorded in the general
ledger, FMSS, by approximately \$28 million. The Department was unable
to provide adequate explanations as to the cause of the difference
between the aging schedule and the general ledger or appropriately
reconcile amounts between the two records.

OMB Circular A-123 states, "Transactions should be promptly recorded,
properly classified and accounted for in order to prepare timely
accounts and reliable financial and other reports. Proper reconciliation
of accounts shall consist of identification of differences between
general ledger balances, subsidiary ledger, and the detail. The
reconciliation must include the timely processing (preferably in the
following month) of the identified items constituting the difference
between controlling accounts and the detail. The documentation for
transactions, management controls, and other significant events must be
clear and readily available for examination."

We recommend that the Department perform the following:

-   Develop controls to ensure that the data entered into the aging
    schedule is correct in all aspects. In addition, provide additional
    training to staff responsible for the data entry processing and
    production of the aging report.

-   Refine the review and monitoring procedures over the aging report to
    ensure that the data produced is correct and can be used for
    management's intended purpose.

***Department Response:***

The Department concurs with the overall intent of the recommendation.

**Action to Be Taken:**

-   The Department will evaluate the Oracle aging report as a part of
    the overall review of the standard accounts payable reports.

-   Management will provide staff with the appropriate training and
    technical support.

**X. [Appropriations / Budget]{.underline}**

#### SF-133's (Report on Budget Execution and Budgetary Resources)

SF-133's were not submitted to OMB for the first three quarters of the
fiscal year for the FFELP financing appropriation (X4251) and the direct
loan financing appropriation (X4253). In addition, we noted differences
between the trial balance and the 4^th^ quarter SF-133's for
appropriations X4251 and X4253. For instance, at year-end for
appropriation X4253, we noted a difference of \$101 million for the
Obligated Balance, Net -- End of Period line item and a difference of
\$1.1 million, which was related to the Spending Authority from
Offsetting Collections and the Obligated Balances -- Not Available line
items. In addition, at year-end for appropriation X4251, we noted a
difference of \$140 million for the Spending Authority from Offsetting
Collections and the Unobligated Balances -- Not Available line items and
a difference of \$47 million for the Obligated Balance, Net -- End of
Period.

OMB Circular A-34, *Instructions on Budget Execution*, states that the
budget execution reports (SF-133) are to be submitted, "on a quarterly
basis for all accounts, including those that OMB has exempted from
apportionment." Additionally, OMB Circular A-123 requires that
"documentation for transactions, management controls, and other
significant events must be clear and readily available for examination."

We recommend that the Department perform the following:

-   Develop/enhance its policies and procedures to ensure that the
    Department and OMB reporting requirements are met.

-   Conduct supervisory reviews of data that is reported and ensure that
    adequate supporting documentation is maintained.

***Department Response:***

The Department concurs with the recommendation concerning the timely
reporting of the SF-133 report.

FY 2001 was a transition year for the Department for FACTS II. In FY
2000, the Department transmitted approximately 80-90 percent of its
appropriations through FACTS II. In FY 2001, the Department by year-end
transmitted 100 percent of its appropriations through FACTS II. For the
first quarter of FY 2002, the Department again transmitted 100% of its
appropriations through FACTS II.

**Action to Be Taken:**

-   None. The Department has achieved its goal of transmitting 100
    percent of its appropriations through FACTS II.

#### Improvement in Analysis of Budgetary Account Balances

At September 30, 2000, the Direct Loan financing fund, X4253, had an
obligated balance of \$7.05 billion. In FY 2001, the Department
de-obligated \$4.6 billion based on revised estimated loan commitments.
The significant change in estimated loan commitments, may be an
indication that account analysis is not adequate and needs further
refinements.

Furthermore, during our testing of the Statement of Budgetary Resources,
we noted differences in the FFELP reporting group for the Obligations
Incurred- Adjusted and Spending Authority from Offsetting Collections
line items. Both of these line items are also reported on the Statement
of Financing.

We noted that the 4902 general ledger account had a balance of \$11.591
billion per the financial statements; however, per our analysis,
\$11.161 billion should have been recorded in that account. Furthermore,
for the Spending Authority from Offsetting Collections line item, we
compared the balance of \$5.740 billion reported on the financial
statements to the \$5.002 billion per our analysis of the balance.
Failure to analyze key accounts and balances on a regular basis
increases the possibility that errors or irregularities will not be
detected timely.

The U.S. General Accounting Office's *Standards for Internal Control in
the Federal Government* states that internal control activities help
ensure that management's directives are carried out. The control
activities should be effective and efficient in accomplishing the
agency's control objectives. Examples of control activities include
periodic analysis of accounts and balances; periodic comparisons of
actual balances to estimated balances; and timely resolutions of
differences from expectations.

We recommend that the Department develop and enhance procedures for
account analysis to ensure that periodic analyses are completed to
detect errors and irregularities in a timely manner.

***Department Response:***

The Department concurs with the overall intent of the recommendation.

While agreeing with the general focus of the recommendation, the
specific concerns raised in the first issue seem to indicate a
fundamental misunderstanding of the situation. There was no
"overestimation" of direct loan commitments; all balances reflect
legitimate commitments that were entirely appropriate at the time they
were entered in the Department's financial systems. The adjustments
reflect a policy change regarding when these legitimate commitments
should be cancelled in the event that they are not disbursed.

**Action to Be Taken:**

-   The Department is committed to continuing its thorough ongoing
    review of procedures to ensure that budgetary accounts are regularly
    reviewed, reconciled, and validated to ensure both internal accuracy
    and consistency with corresponding proprietary accounts.

#### President's Budget and Statement of Budgetary Resources (SBR) Differences

During our testing, we traced the balances per the audited SBR to the
"actual" column reported in the FY 2003 President's Budget for each
financial statement line item.

During our analysis of the non-SFA reporting groups, we noted some
differences. For instance in the Office of Elementary and Secondary
Education (OESE) reporting group, our analysis shows a difference of
\$224 million for the "Outlays" line item and a difference of \$433
million for the Unobligated Balance-Ending line item. The Department
indicated in the footnotes that the differences are immaterial and are
due to expired appropriations that are not reported in the President
Budget. The Department was unable to provide documentation to support
representations made in the footnotes or the sources of the amounts
reported in the FY 2003 President's Budget.

Pursuant to OMB Circular A-34, agencies are to report budgetary
information in the SBR based on the budget terminology, definitions, and
guidance issued. It also states that the information on the SBR should
be consistent with budget execution information reported in the
President's Budget. Additionally, per Statement of Federal Financial
Accounting Standard (SFFAS) No. 7, agencies are to provide financial
statement note explanations of material differences between amounts
presented in the SBR and amounts described as "actual" in the
President's Budget.

We recommend that the Department perform an annual analysis, which will
identify any differences between the information reported in the
President's Budget and the information reported on the Statement of
Budgetary Resources.

***Department Response:***

The Department agrees with the recommendation.

**Action to Be Taken:**

-   The Department will prepare this analysis for future audits.

**XI. [Net Position]{.underline}**

#### Unobligated Balances

Excess funds for the FFELP liquidating account were not transferred to
Treasury. At year-end, FFELP liquidating account had a balance of
\$141,285,322 in Unobligated Balances -- Unavailable and a balance of
\$4,471,643 in Unobligated Balances -- Available.

OMB Circular A-11 states, "Amounts credited to liquidating accounts in
any year are only available for obligations that are incurred in that
year (the outlay may occur in a subsequent year) and for repayment of
debt. In addition, any remaining unobligated balances at the end of the
fiscal year are unavailable for obligation in subsequent fiscal years
and must be transferred to the general fund at the end of the fiscal
year unless OMB approves an extension."

We recommend that the Department record a Payable to Treasury to
recognize these excess funds as unavailable for future obligations.

***Department Response:***

The Department concurs with the facts and the recommendation.

**Action to Be Taken:**

-   Recommendations will be accepted as stated.

*Accrued Liabilities*

The Department's management obligated funds for estimated FFELP costs
incurred by guaranty agencies and lenders that have not been reported
via Form 2000 and Form 799 to the Department by year-end. The liability
for these costs was not accrued.

Failure to record the accrual of a payable for these funds could affect
the ability of the Department's management and other users of the
financial statements to assess the reasonableness and adequacy of the
reserve available to meet future losses on outstanding guaranteed loans.

We recommend that the Department record an accrual of a payable for the
estimated FFELP costs to recognize the portion of the estimated loan
guarantee liability that is no longer available as a reserve for future
losses on outstanding guaranteed loans. It may also be appropriate to
accrue and report collection activity at guaranty agencies.

***Department Response:***

The Department disagrees with the finding as presented.

The Department must record a budgetary obligation for Guaranty Agency
disbursements to ensure that the Used Budget Authority for the reporting
year is shown properly and the budgetary statements present a true
statement of annual activity. The Department has done so for FY2001.

With respect to the accrued liability (accounts payable), the Department
has consistently recorded its present value of future cash flows in the
net loans receivable accounts (general ledger accounts 1350/1399) and
loan guarantee liability (general ledger account 2180). The general
ledger accounts 1399 and 2180 are cash driven and change only with the
receipt or disbursement of cash.

If the Department were to record an accounts payable for Guarantee
Agency disbursements, it would decrease the loan guarantee liability,
thus shifting amounts from one liability to another. Because an actual
cash flow has not taken place (the cash disbursements have not been made
to the Guarantee Agency), the combined net loans receivable and loan
guarantee liability would no longer represent the present value of
future cash flows, as intended by Statement of Federal Financial
Accounting Standard No. 2.

**Action to Be Taken:**

None.

########  {#section-2 .unnumbered}

######## XII. [Miscellaneous Accounts]{.underline} {#xii.-miscellaneous-accounts .unnumbered}

########  {#section-3 .unnumbered}

######## *Transactions Awaiting Processing File (Modified Repeat Condition)* {#transactions-awaiting-processing-file-modified-repeat-condition .unnumbered}

The Transactions Awaiting Processing (TAP) file contains transactions
that have not been posted to the Department's general ledger, FMSS. When
the posting function is run, transactions should post to the appropriate
FMSS account. Transactions which contain errors will not be posted, and
instead will appear on an error report and remain in the TAP file until
the error is corrected and the posting function is run again. During our
review of the TAP file, we noted that the "roll forward" process changes
the transaction date and the accounting period of the document and
related batch. This enables the transaction to be posted upon
determining that the error has been corrected. The original transaction
date remains in the description field to identify the transaction as
coming from a prior period. The program is written to allow transactions
that did not get posted in the proper period, to post in a later period.
Normally the system does not post transactions that are outside of the
current accounting period to that accounting period. As a result,
certain prior year transactions could be posted in fiscal year 2001.

OMB Circular A-123 states, "Transactions should be promptly recorded,
properly classified and accounted for in order to prepare timely
accounts and reliable financial and other reports."

We recommend that the Department review TAP file transactions to ensure
that all transactions with errors are corrected timely and posted to the
correct period.

***Department Response:***

The Department agrees with the intent of the recommendation.

**Action to Be Taken:**

-   For FY 2002, the TAP file no longer applies. However, when posting
    items have errors, the Department will review and correct to ensure
    timely recording of the transactions.

######## XIII. [Performance Measures]{.underline} {#xiii.-performance-measures .unnumbered}

########  {#section-4 .unnumbered}

######## *Management's Discussion and Analysis* *(Modified Repeat Condition)* {#managements-discussion-and-analysis-modified-repeat-condition .unnumbered}

Congress enacted the Government Performance and Results Act (GPRA) of
1993 as a means to improve the management and accountability of Federal
agencies. GPRA requires executive agencies to prepare multi-year
strategic plans, annual performance plans, and annual performance
reports. OMB Bulletin 97-01, as amended, and OMB Bulletin 01-09, as
applicable, *Form and Content of Agency Financial Statements,* requires
agencies to report the performance measures in the Management's
Discussion and Analysis (MD&A) section of the financial statements, and
that these be consistent with the measures used by agencies as part of
their GPRA implementation efforts. Management's display of performance
information should include sufficient explanatory information to help
readers understand the significance of the measures, the results, and
any deviations from goals or plans.

While the Department's MD&A met the minimum requirements established by
OMB Bulletin 97-01, as amended, we noted several areas that could be
improved. For example, the MD&A contained minimal discussion of the
Department's actual results in comparison to stated benchmarks or areas
for improving its performance. The Department's success was often
difficult to quantify because supporting data are not regularly
available for some performance indicators. We did note that the
Department began including additional goals in the FY 2001 MD&A.

OMB Bulletin 97-01 states, "The entity's financial results should be
summarized in a manner that would illustrate significant indicators of
its financial operations for the reporting period and changes in
financial condition during the period." In addition, it states that,
"The presentation of the measures should: present historical and future
trends, if possible; provide comparison of actual results to goals or
benchmarks; and show variations from goals and plans." OMB 97-01 also
states that for performance measures to be useful, they must "be
objective and quantifiable," while GPRA states that performance goals
are to be expressed in an "objective, quantifiable, and measurable"
form.

We recommend that the Department perform the following:

-   Expand discussion of actual results and areas for improvement in
    comparison to stated goals.

-   Assess the performance measures to determine if the current measures
    are sufficient to meet management's needs and also enable readers of
    the MD&A to understand the significance and the results of the
    measures.

***Department Response:***

The Department disagrees with the MD&A noted as a finding in the
Management Letter. As stated by E&Y above, "The Department's MD&A met
the minimum requirements established by OMB Bulletin 97-01, as amended."
Therefore, we do not believe declaring this a finding is appropriate.

The Department does feel that it could improve its MD&A and will strive
to do so in the future with added measurements relative to the
Department's stated goals and financial performance. It should be
recognized that as strategic plans and goals change, performance
measures by their very nature change accordingly. Therefore, in certain
circumstances historical trends will not be available or considered
appropriate to measure.

**Action to Be Taken:**

-   The Department will develop standard financial measures to include
    and discuss in the MD&A such that trends can be determined and
    analyzed.

**XIV. [Information Technology (IT) Issues (Repeat
Condition)]{.underline}**

As part of the audit of the Department's fiscal year 2001 financial
statements, we conducted a general controls review of the information
technology processes related to the significant accounting and financial
reporting systems. OMB Circular A-130 requires: (1) standard
documentation and procedures for certification and accreditation of
systems; (2) records management programs that provide adequate and
proper documentation of agency activities; (3) agencies to develop
internal information policies and procedures and oversee, evaluate, and
otherwise periodically review agency information resources management
activities; and (4) agency plans to assure that there is an ability to
recover and provide service sufficient to meet the minimal needs of
users of the system noting that manual procedures are generally not a
viable back-up option. As a result of the procedures we performed, we
noted several issues included as Appendix A to this report. Appendix A
is for internal use only. It contains sensitive computer
security-related information. Public disclosure of this information
would risk circumvention of the law. Recipients of Appendix A must not,
under any circumstances, show or release its contents for purposes other
than official action. It must be safeguarded to prevent publication or
improper disclosure of the information it contains.

\*\*\*\*\*\*\*\*\*\*\*

This report is intended solely for the information and use of the
management of the Department and the Department's Office of the
Inspector General, and is not intended to be and should not be used by
anyone other than these specified parties.

### 

/ s /

February 4, 2002