Independent Auditor's Report on
 

DHS' FY 2009 Special-Purpose Financial Statements
 
ichard

Office of Inspector Gel/eral 

U.S. Department of Homeland Security 

Washington, DC 20528 

Homeland 

Security 

NOV 1 6 2009 

Preface 

The Department of Homeland Security (DHS) Office of Inspector General (OIG) was established by 

the Homeland Security Act of 2002 (Public Law 107-296) by amendment to the Inspector General 

Act of 1978. This is one of a series of audit, inspection, and special reports prepared as part of our 

oversight responsibilities to promote economy, efficiency, and effectiveness within the department. 

This report presents the independent auditor's report on DHS' FY 2009 special-purpose financial 

statements. We contracted with the independent public accounting firm KPMG LLP (KPMG) to 

perform the audit. KPMG is responsible for the attached report dated November 16, 2009, and the 

conclusions expressed in it. We do not express opinions on DHS' financial statements or intemal 

control or provide conclusion on compliance with laws and regulations. 

We trust this report will result in more effective, efficient, and economical operations. We express 

our appreciation to all of those who contributed to the preparation of this report 

L. Skinner 

Inspector General 
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KPMG LLP 

2001 M Street, NW 

Washington, DC 20036 

INDEPENDENT AUDITORS' REPORT 

Secretary and Inspector General 

U.S. Department of Homeland Security: 

We were engaged to audit the accompanying Closing Package Financial Statement ReportBalance Sheet of the Department of Homeland Security (DHS or Department) as of September 

30,2009 and 2008, and the accompanying Financial Report (FR) Notes Reports (except for the 

information in the FR Notes Reports entitled "threshold") for the years then ended; the 

accompanying Additional Note Nos. 29 and 30; and the accompanying Trading Partner Summary 

Note Report Balance Sheet as of September 30, 2009 and 2008 collectively referred 

to as the special-purpose financial statements). These special-purpose financial statements are the 

responsibility of DHS management. 

We were not engaged to audit the related accompanying Closing Package Financial Statement 

Reports - Statement of Net Cost and Statement of Changes in Position for the years ended 

September 30, 2009 and 2008, and the related Trading Partner Summary Note ReportsStatement of Net Cost and Statement ofNet Position for the years ended September 30,2009 and 

2008 (hereinafter referred to as "other fiscal year 2009 and 2008 Closing Package Financial 

Statement Reports"). 

The accompanying special-purpose financial statements have been prepared for the purpose of 

complying with the requirements of Chapter 4700 of the U.S. Department of the Treasury's 

Treasury Financial Manual (TFM), as described in Additional Note Nos. 29 and 30, solely for 

the purpose of providing financial infonnation to the U.S. Department ofthe Treasury and the 

U.S. Government Accountability Office (GAO) to use in preparing and auditing the Financial 

Report ofthe u.s. Government, and are not intended to be a complete presentation of DHS' 

balance sheets as of September 30, 2009 and 2008. 

In accordance with TFM Chapter 4700, DHS prepared FR Notes Report Nos. 2 through 28B, 

except for FR Notes Report Nos.IOA, 21, 23, and 24, which were not applicable to DHS. DHS 

included Additional Note Nos. 29 and 30 to disclose data not contained in the special-purpose 

financial statements, but which is necessary to make the special-purpose financial statements 

more informative. 

The United States Coast Guard (Coast Guard) was unable to provide sufficient evidential matter 

that support transactions and certain balance sheet accounts including fund balance with 

Treasury, accounts receivable, inventory and related property, general property, plant and 

equipment including heritage assets and stewardship land, actuarially-derived liabilities, 

environmental and other liabilities, and net position, as reported in the accompanying DHS 

special-purpose financial statements as of September 30, 2009 and 2008. The total assets of the 

Coast Guard, as reported in the accompanying DHS special-purpose financial statements were 

$18.8 billion and $17.4 billion, or 22 and 20 percent of total DHS consolidated assets as of 

September 30, 2009 and 2008, respectively. 
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The Transportation Security Administration (TSA) was unable to provide sufficient evidential 

matter that supports certain general property, plant, and equipment balances and related effects on 

net position, as reported in the accompanying DHS special-purpose financial statements as of 

September 30, 2009 and 2008. The TSA general property, plant, and equipment balances reported 

in the accompanying DHS special-purpose financial statements were $997 million and $932 

million as of September 30, 2009 and 2008, respectively, or 6 percent of DHS' consolidated 

general property, plant, and equipment in both years. 

In addition, we were unable to obtain certain representations from DHS management regarding 

the matters described above, including representations as to compliance with U.S. generally 

accepted accounting principles, with respect to the accompanying DHS special-purpose financial 

statements as of September 30, 2009 and 2008, and were unable to determine the effect of the 

lack of such representations on the FY 2009 and 2008 DHS special-purpose financial statements. 

Because of the matters discussed in the three preceding paragraphs, the scope of our work was 

not sufficient to enable us to express, and we do not express, an opinion on the accompanying 

special-purpose financial statements ofDHS as of September 30, 2009 and 2008. However, we 

noted the following discrepancies in FR Notes Report Note 22 Earmarked Funds Section FRevenue, Financing, Expenses, and Other - Prior Year: 

Line As Correct 

Number Line Description Column Reported Amount 

21 Customs User Fees Other taxes and receipts 

Intragovemmental 

transfers, net 

$435m 

$-0­

$1,925m 

$(1,490)m 

26 All other earmarked funds Other taxes and receipts 

Intragovemmental 

transfers, net 

$2,347m 

$(1,405)m 

$857m 

$85m 

We were not engaged to audit the accompanying other fiscal year 2009 and 2008 Closing 

Package Financial Statement Reports and, accordingly, we do not express an opinion on them. 

As discussed in FR Notes Report No. 17, DHS restated its fiscal year 2008 financial statements 

to correct multiple errors identified by TSA, Coast Guard, United States Customs and Border 

Protection, United States Immigration and Customs Enforcement, National Protection and 

Programs Directorate (NPPD), United States Citizenship and Immigration Services, Federal 

Law Enforcement Training Center, and the Science and Technology Directorate that required 

adjustment of balances previously reported in DHS' fiscal year 2008 financial statements. 

DHS also prepared Other Data Report Nos. 1 through 16, except for Other Data Report Nos. 3 

through 8, and 11 through 14, which were not applicable to DHS. The information included in 

Other Data Report Nos. 1,2,9 (except for the information in the section entitled "Threshold"), 

10, and 15 is presented for the purpose of additional analysis and is not a required part of the 

special-purpose financial statements, but is supplementary information required by U.S. 

generally accepted accounting principles and the TFM Chapter 4700. We were unable to 

complete limited procedures over this required supplementary information, as prescribed by 

professional standards, because of the limitations on the scope of our audits described above. 

Certain information in the Other Data Report Nos. 1 and 16 is based on other fiscal year 2009 

and 2008 Closing Package Financial Statement Reports which we were not engaged to audit. 

This information has not been subjected to the auditing procedures, and accordingly, we express 

no opinion on it. 
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c

The information in Other Data Report No. 16; the information entitled "Threshold" in Other Data 

Report No.9; the information entitled "Threshold" in FR Notes Report Nos. 2, 5, 6, 11, 12, 14, 

15, and 19; the information in the Closing Package Line Reclassification Summary ReportBalance Sheet; the information in the Closing Package Line Reclassification Summary Reports ­

Statements of Net Cost and Changes in Net Position; and the information in Closing Package 

Line Reclassification Summary Report Custodial Activity is presented for purposes of 

additional analysis and is not a required part of the special-purpose financial statements. This 

information has not been subjected to the auditing procedures applied in the audits of the specialpurpose financial statements and, accordingly, we express no opinion on it. 

The TFM Chapter 4700 requires agencies to use the Government-wide Financial Reporting 

System to input certain data as described in Additional Note No. 29. We express no opinion on 

information maintained in that system. 

In accordance with Government Auditing Standards and OMB Bulletin No. 07-04, Audit 

Requirements for Federal Financial Statements, we have also issued a combined report, dated 

November 13,2009, which discusses the reasons why we were unable to express an opinion on 

DRS' balance sheets as of September 30,2009 and 2008, and on the related statements of 

custodial activity for the years then ended; why we were unable to express an opinion on internal 

control over financial reporting of the DRS balance sheet as of September 30,2009, and 

statement of custodial activity for the year then ended; and the results of our tests of its 

compliance with certain provisions oflaws, regulations, contracts, and grant agreements, and 

other matters that are required to be reported under Government Auditing Standards. That report 

is an integral part of our engagement to audit DRS' balance sheets as of September 30, 2009 and 

2008, and the related statements of custodial activity for the years then ended, and should be read 

in conjunction with this report in considering the results of our engagement to audit the specialpurpose financial statements. Our engagement to examine the Department's internal control over 

financial reporting of the DRS balance sheet as of September 30, 2009, and statement of custodial 

activity for the year then ended disclosed material weaknesses, significant deficiencies, and 

compliance and other matters, .as follows: 

Material weaknesses in internal control over financial reporting have been identified in the 

following areas: 

•	 

•	 

•	 

•	 

•	 

• 

Financial Management and Reporting 

Information Technology Controls and Financial System Ftillctionality 

Fund Balance with Treasury 

Property, Plant, and Equipment and Operating Materials and Supplies 

Actuarial and Other Liabilities 

Budgetary Accounting 

Significant deficiencies have been identified in the following areas: 

•	 Other Entity Level Controls 

•	 Custodial Revenue and Drawback 

Non-compliance with laws, regulations, contracts, and grant agreements have been identified in 

the following areas: 

•	 

•	 

•	 

Federal Managers' Financial Integrity Act of1982, and laws and regulations supporting 

OMB Circular No. A-50, Audit Follow-up, as revised 

Federal Financial Management Improvement Act of1996 

Single Audit Act Amendments of1996 
ChieJFinancial Officers Act oj1990 

• Anti-deficiency Act 

The following other matters have been identified: 

We also reported other matters related to compliance with the Anti-deficiency Act at NPPD, 

Federal Emergency Management Agency, United States Secret Service, and Coast Guard. 

As discussed in our Independent Auditors' Report dated November 13,2009, the scope of our 

work was not sufficient to express an opinion on DRS' balance sheets as of September 30, 2009 

and 2008 or statements of custodial activity for the years then ended. In addition, the Coast 

Guard was unable to provide documentation of key processes, risk assessments, or evidence 

supporting the existence of internal controls, and management acknowledges that pervasive 

material weaknesses exist in key financial processes, and was therefore unable to make an 

assertion on the effectiveness of internal control over financial reporting. Accordingly, we were 

unable to perform the examination procedures necessary to form an opinion on DRS' internal 

control over financial reporting of the balance sheet as of September 30, 2009, and statement of 

custodial activity for the year then ended. 

Other deficiencies in internal control, potentially including additional material weaknesses and 

significant deficiencies, and other instances of non-compliance may have been identified and 

reported had we been able to perform all procedures necessary to express an opinion on DRS' 

balance sheets as of September 30, 2009 and 2008, and the related statetp.ents of custodial activity 

for the years then ended, and had we been engaged to audit the related statements of net cost, 

changes in net position, and budgetary resources, for the years then ended; and had we been able 

to perform all procedures necessary to express an opinion on DRS' internal control over financial 

reporting of DRS' balance sheet as of September 30,2009, and statement of custodial activity for 

the year then ended, and had we been engaged to examine internal controls over financial 

reporting of the other related FY 2009 financial statements. 

Management is responsible for establishing and maintaining internal control. In planning and 

performing our engagement to audit the fiscal year 2009 special-purpose financial statements we 

also considered DRS' internal control over fmancial reporting by obtaining an understanding of 

DRS' internal control over financial reporting of the special-purpose financial statements as a 

basis for designing our audit procedures, but not for the purpose of expressing an opinion on the 

effectiveness of DRS' internal control over financial reporting ofthe special-purpose financial 

statements. Accordingly, we do not express an opinion on the effectiveness of DRS' internal 

control over financial reporting of the special-purpose financial statements. 

Our consideration of internal control over financial reporting for special-purpose financial 

statements was for the limited purpose described in the preceding paragraph of this section and 

would not necessarily identify all deficiencies in the internal control over financial reporting for 

special-purpose financial statements that might be significant deficiencies or material weaknesses. 

A deficiency in internal control exists when the design or of a control does not allow 

management or employees, in the normal course of performing their assigned functions, to 

prevent, or detect and correct misstatements on a timely basis. A significant deficiency is a 

deficiency, or combination of deficiencies, in internal control that is less severe than a material 

weakness, yet important enough to merit attention by those charged with governance. A material 

weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a 

reasonable possibility that a material misstatement of the entity's financial statements will not be 

prevented, or detected and corrected on a timely basis. 
In our fiscal year 2009 engagement to audit the special-purpose financial statements, we did not 

identify any additional deficiencies in internal control over financial reporting of the specialpurpose financial statements that we consider to be material weaknesses as defined above. 

However, had we been able to perform all of the procedures necessary to express an opinion on 

the special-purpose financial statements, other matters involving internal control over financial 

reporting and compliance with TFM Chapter 4700 requirements relating to the special purpose 

financial statement may have been identified and reported. 

Management is responsible for complying with laws, regulations (including TFM Chapter 4700), 

contracts, and grant agreements applicable to DHS. As part of our engagement to audit DHS' 

fiscal year 2009 special-purpose financial statements, 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 effect on the detennination of special-purpose financial 

statement amounts. However, providing an opinion on compliance with those provisions or on 

compliance with TFM Chapter 4700 requirements was not an objective of our fiscal year 2009 

engagement to audit the special-purpose financial statements and, accordingly, we do not express 

such an opinion. 

The results of our tests of compliance with TFM Chapter 4700 disclosed no instances of 

noncompliance or other matters that are required to be reported under Government Auditing 

Standards or OMB Bulletin No. 07-04. However, had we been able to perform all of the 

procedures necessary to express an opinion on the special-purpose financial statements, other 

matters involving compliance with certain provisions of laws, regulations, contracts, and grant 

agreements and compliance with TFM Chapter 4700 requirements relating to the special-purpose 

financial statements may have been identified and reported. 

This report is intended solely for the information and use ofDHS management, the DHS Office 

ofInspector General, u.s. Department of Treasury, OMB, and GAO, in connection with the 

preparation and audit of the Financial Report ofthe Us. Government, and is not intended to be 

and should not be used by anyone other than these specified parties. 

November 16,2009 
Report Distribution 

Department of Homeland Security

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretariat 

Director, GAO/OIG Liaison Office 

Assistant Secretary for Office of Policy

Assistant Secretary for Office of Public Affairs

Assistant Secretary for Office of Legislative Affairs

Under Secretary for Management

Chief Financial Officer 

Chief Information Officer 

Office of Management and Budget

 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress

Congressional Oversight and Appropriations Committees, as 

appropriate 
ADDITIONAL INFORMATION AND COPIES 

To obtain additional copies of this report, please call the Office of Inspector General (OIG) at (202) 254-4100, 

fax your request to (202) 254-4305, or visit the OIG web site at www.dhs.gov/oig. 

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misconduct relative to department programs or operations: 

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DHS Office of Inspector General/MAIL STOP 2600, 

Attention: Office of Investigations - Hotline, 

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