76 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

REPORT OF THE INDEPENDENT AUDITORS

UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL

THE INSPECTOR GENERAL

400 MARYLAND AVENUE, S.W., WASHINGTON, DC 20202-1510

Promoting the efficiency, effectiveness, and integrity of the Department’s programs and operations.

November 15, 2018 

The Honorable Betsy DeVos

Secretary of Education

Washington, D.C. 20202

Dear Secretary DeVos: 

The enclosed report presents the results of the audit of the U.S. Department of Education’s 

(Department) financial statements for fiscal year 2018 to comply with the Chief Financial 

Officers Act of 1990, as amended. The report should be read in conjunction with the 

Department’s financial statements and notes to fully understand the context of the information 

contained therein.

We contracted with the independent certified public accounting firm KPMG LLP to audit the 

financial statements of the Department as of September 30, 2018, and for the year then ended. 

The contract requires that the audit be performed in accordance with U.S. generally accepted 

government auditing standards and Office of Management and Budget bulletin, Audit 

Requirements for Federal Financial Statements.

Results of the Independent Audit

KPMG found: 

• The fiscal year 2018 financial statements are presented fairly, in all material respects, in

accordance with accounting principles generally accepted in the United States of

America;

• One material weakness in internal control over financial reporting: 

o Controls over the Reliability of Information Used in the Modeling Activities Need

Improvement; 

• One significant deficiency in internal control over financial reporting:

o Information Technology Controls Need Improvement; and

• One instance of reportable noncompliance with Federal law related to referring

delinquent student loan debts to Treasury.
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Page 2 – The Honorable Betsy DeVos

KPMG is responsible for the attached auditors’ report dated November 15, 2018, and the 

conclusions expressed therein. We do not express opinions on FSA’s financial statements or 

internal control over financial reporting, or conclusions on compliance and other matters. 

We appreciate the cooperation given KPMG and my office during the audit. If you have any 

questions or would like to discuss the report, please contact me at (202) 245-6900. 

Sincerely, 

Kathleen S. Tighe

Inspector General

Enclosure
78 FY 2018 AGENCY FINANCIAL REPORT | U.S. DEPARTMENT OF EDUCATION

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KPMG LLP is a Delaware limited liability partnership and the U.S. member 

firm of the KPMG network of independent member firms affiliated with 

KPMG International Cooperative (“KPMG International”), a Swiss entity. 

KPMG LLP

Suite 12000

1801 K Street, NW

Washington, DC 20006

Independent Auditors’ Report 

Inspector General 

United States Department of Education

Secretary 

United States Department of Education: 

Report on the Financial Statements 

We have audited the accompanying consolidated financial statements of the United States Department of 

Education (Department), which comprise the consolidated balance sheet as of September 30, 2018, and the 

related consolidated statements of net cost, and changes in net position, and combined statement of budgetary 

resources for the year then ended, and the related notes to the consolidated financial statements. 

Management’s Responsibility for the Financial Statements 

Management is responsible for the preparation and fair presentation of these consolidated financial statements 

in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and 

maintenance of internal control relevant to the preparation and fair presentation of consolidated financial 

statements that are free from material misstatement, whether due to fraud or error. 

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We 

conducted our audit in accordance with auditing standards generally accepted in the United States of America, 

in accordance with the standards applicable to financial audits contained in Government Auditing Standards

issued by the Comptroller General of the United States, and in accordance with Office of Management and 

Budget (OMB) Bulletin No. 19-01, Audit Requirements for Federal Financial Statements. Those standards and 

OMB Bulletin No. 19-01 require that we plan and perform the audit to obtain reasonable assurance about 

whether the consolidated financial statements are free from material misstatement. 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the 

consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the 

assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud 

or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation and fair presentation of the consolidated financial statements in order to design audit procedures 

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness 

of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the 

appropriateness of accounting policies used and the reasonableness of significant accounting estimates made 

by management, as well as evaluating the overall presentation of the consolidated financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our 

audit opinion. 
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Opinion 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, 

the financial position of the United States Department of Education as of September 30, 2018, and its net cost, 

changes in net position, and budgetary resources for the year then ended in accordance with U.S. generally 

accepted accounting principles. 

Other Matters 

Accompanying Prior Period Financial Statements 

The accompanying consolidated financial statements of the Department as of September 30, 2017 and for the 

year then ended were audited by other auditors whose report thereon dated November 13, 2017 expressed an 

unmodified opinion on those financial statements before the reclassifications described in Note 1 to the 

consolidated financial statements. As described in Note 1, to conform to fiscal year 2018 financial reporting 

requirements contained in OMB Circular A-136, Financial Reporting Requirements, the Department made the 

following reclassifications to the fiscal year 2017 consolidated financial statements and notes: 

 The Combined Statement of Budgetary Resources was condensed to present budgetary resources, status

of budgetary resources, and net outlays, while removing the presentation of the change in obligated

balance.

 Note 6, Liabilities Not Covered by Budgetary Resources, was expanded to include the presentation of

liabilities not requiring budgetary resources.

As part of our audit of the 2018 consolidated financial statements, we also audited the reclassifications 

described in Note 1 that were applied to reclassify the 2017 consolidated financial statements. In our opinion, 

such reclassifications are appropriate and have been properly applied. We were not engaged to audit, review, 

or apply any procedures to the 2017 consolidated financial statements of the Department other than with 

respect to the reclassifications and, accordingly, we do not express an opinion or any other form of assurance 

on the 2017 consolidated financial statements as a whole. 

Interactive Data 

Management has elected to reference to information on websites or other forms of interactive data outside the 

Agency Financial Report to provide additional information for the users of its financial statements. Such 

information is not a required part of the basic consolidated financial statements or supplementary information 

required by the Federal Accounting Standards Advisory Board. The information on these websites or the other 

interactive data has not been subjected to any of our auditing procedures, and accordingly we do not express 

an opinion or provide any assurance on it. 

Required Supplementary Information 

U.S. generally accepted accounting principles require that the information in the Management’s Discussion and 

Analysis, Required Supplementary Information, and Required Supplementary Stewardship Information sections 

be presented to supplement the basic consolidated financial statements. Such information, although not a part 

of the basic consolidated financial statements, is required by the Federal Accounting Standards Advisory Board 

who considers it to be an essential part of financial reporting for placing the basic consolidated financial 

statements in an appropriate operational, economic, or historical context. We have applied certain limited 

procedures to the required supplementary information in accordance with auditing standards generally 

accepted in the United States of America, which consisted of inquiries of management about the methods of 

preparing the information and comparing the information for consistency with management’s responses to our 

inquiries, the basic consolidated financial statements, and other knowledge we obtained during our audit of the 

basic consolidated financial statements. We do not express an opinion or provide any assurance on the 

information because the limited procedures do not provide us with sufficient evidence to express an opinion or 

provide any assurance. 
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Other Information 

Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements 

as a whole. The information on pages i through iii, Message from the Secretary, information on pages 28 and 

29, Other Information Section, and Appendices are presented for purposes of additional analysis and are not a 

required part of the basic consolidated financial statements. Such information has not been subjected to the 

auditing procedures applied in the audit of the basic consolidated financial statements, and accordingly, we do 

not express an opinion or provide any assurance on it. 

Other Reporting Required by Government Auditing Standards

Internal Control over Financial Reporting 

In planning and performing our audit of the consolidated financial statements as of and for the year ended 

September 30, 2018, we considered the Department’s internal control over financial reporting (internal control) 

to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our 

opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the 

effectiveness of the Department’s internal control. Accordingly, we do not express an opinion on the 

effectiveness of the Department’s internal control. We did not test all internal controls relevant to operating 

objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982. 

Our consideration of internal control was for the limited purpose described in the preceding paragraph and was 

not designed to identify all deficiencies in internal control that might be material weaknesses or significant 

deficiencies and therefore, material weaknesses or significant deficiencies may exist that have not been 

identified. However, as described in the accompanying exhibits, we did identify certain deficiencies in internal 

control that we consider to be a material weakness and a significant deficiency. 

A deficiency in internal control exists when the design or operation 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 material weakness is a deficiency, or a 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. We consider the deficiencies 

described in Exhibit A, Controls over the Reliability of Information Used in the Modeling Activities Need 

Improvement, to be a material weakness. 

Department management did not report the material weakness, Controls over the Reliability of Information 

Used in the Modeling Activities Need Improvement, in its Statement of Assurance, included in the 

Management’s Discussion and Analysis section of the accompanying Agency Financial Report. 

A significant deficiency is a deficiency, or a 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. We 

consider the deficiencies described in Exhibit B, Information Technology Controls Need Improvement, to be a

significant deficiency.

Compliance and Other Matters 

As part of obtaining reasonable assurance about whether the Department’s consolidated financial statements 

are free from material misstatement, we performed tests of its compliance with certain provisions of laws, 

regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect 

on the determination of financial statement amounts. However, providing an opinion on compliance with those 

provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of 

our tests disclosed an instance of noncompliance or other matters that are required to be reported under 

Government Auditing Standards or OMB Bulletin No. 19-01, and which is described in Exhibit C, Requirement 

for Referring Delinquent Student Loan Debts to Treasury.
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We also performed tests of its compliance with certain provisions referred to in Section 803(a) of the Federal 

Financial Management Improvement Act of 1996 (FFMIA). Providing an opinion on compliance with FFMIA was

not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests 

disclosed no instances in which the Department’s financial management systems did not substantially comply 

with the (1) Federal financial management systems requirements, (2) applicable Federal accounting standards, 

and (3) the United States Government Standard General Ledger at the transaction level. 

The Department’s Responses to Findings 

The Department’s responses to the findings identified in our audit are described in Exhibit D. The Department’s

responses were not subjected to the auditing procedures applied in the audit of the consolidated financial 

statements and, accordingly, we express no opinion on the responses. 

Purpose of the Other Reporting Required by Government Auditing Standards 

The purpose of the communication described in the Other Reporting Required by Government Auditing 

Standards section is solely to describe the scope of our testing of internal control and compliance and the 

results of that testing, and not to provide an opinion on the effectiveness of the Department’s internal control or 

compliance. Accordingly, this communication is not suitable for any other purpose. 

Washington, D.C.

November 15, 2018
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Exhibit A 

Material Weakness

Controls over the Reliability of Information Used in the Modeling Activities Need Improvement

Under the Federal Credit Reform Act of 1990 (FCRA), the Department of Education (the Department) is 

required to perform periodic interest rate and technical re-estimates of the subsidy costs of its direct loan and 

guaranty programs. These re-estimates are calculated using an internally-developed cash flow model

performed by the Department’s Cost Estimation and Analysis Division (CEAD). The cash flow model utilizes 

assumptions based on sourced data elements from the National Student Loan Data System (NSLDS) that are 

updated at different intervals by third parties (servicers, guaranty agencies, etc.) and certain assumptions 

provided by the Office of Management and Budget (OMB). These future cash flow outputs generated from the 

Department’s Student Loan Model (SLM) are then input into OMB’s Credit Subsidy Calculator (CSC), as 

required by U.S. generally accepted accounting principles to generate subsidy re-estimates.

Conditions:

Credit Reform Student Loan Model Documentation and Analysis

We noted that management’s documentation detailing the models currently in use including methodologies 

and/or considerations used to calculate the assumptions could be improved. Such improvements could provide 

sufficient details to enable an independent reviewer to effectively assess the reasonableness of key decisions 

made regarding critical elements of the re-estimate computations and the potential impact on the financial 

statements. We also noted that management’s analysis of the reestimate results identified material differences 

which are expected to reverse over time, however such analysis was not clearly documented to support 

management’s consideration of the effect of such differences, if any, on the fair presentation of direct loans in 

accordance with accounting standards. We found the following areas where specific documentation could be 

improved:

• CEAD produces a model inventory which includes all model assumptions, however it does not specify

which assumptions are key. The model inventory includes summarized information on inputs supporting the

assumptions, however it does not identify the specific data elements related to each input;

• CEAD’s sensitivity analysis should be expanded to include a documented evaluation of which assumptions

are key to the estimation model; and

• CEAD’s management review controls should be documented at a sufficient level of detail to demonstrate

the level of precision used in management’s analysis and the evaluation of estimation uncertainty on the

fair presentation of the financial statements and related footnotes in accordance with accounting standards.

Controls over the Completeness and Accuracy of Data Elements used in the Student Loan Model

The assumptions used in SLM are developed by utilizing certain data elements of direct and guaranty loans

extracted from the NSLDS such as loan identifier, loan type, origination date, net amount disbursed, and 

repayment plan type, among many others.

We noted that management’s processes, procedures, and controls should be improved to provide sufficient

detail over procedures and controls that specifically address the evaluation of the completeness and accuracy

of data elements from NSLDS used to develop model assumptions. 
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NSLDS Oversight of Loan Guaranty Balances

Under the Federal Family Education Loan (FFEL) guaranty loan program, private lenders provide federally 

guaranteed student loans to parents and students. The FFEL program began in 1965 and ran until 2010. 

Student loan data from schools, guaranty agencies, the direct loan program, and other Department programs 

are stored in the NSLDS. 

Financial institutions, servicers, and guaranty agencies have up to 90 days after year-end to report guaranteed 

loan data to NSLDS. Therefore, such information may not be updated until December 31 each year. To 

determine the balance of loan guarantees at the end of each fiscal year, the Department executes a query in 

NSLDS in October. The Department utilizes this information sourced from NSLDS to develop financial 

statement note disclosures related to the performing FFEL program guaranty loans, including the principal 

balance outstanding and maximum government exposure. In addition, the exposure information is used in the 

estimation methodology related to the liability for loan guarantees. 

We noted that management did not design and implement effective controls to ensure that the NSLDS query 

extracts related to the total exposure amount for loan guarantees with private lenders were complete and 

accurate. For example, specific controls over the completeness and accuracy of these queries, including how

timing differences are resolved, were not evidenced in management’s internal control processes. 

Cause/Effect:

The Department’s documentation was not at a sufficient level of detail to enable an independent reviewer to 

properly assess the reasonableness of management’s reestimate modeling practices to include processes; 

specific controls; information used; and key judgments determined by management as part of the reestimate 

methodologies utilized for financial reporting purposes. We noted that while there are controls related to the 

accounting and reporting of loan programs, such controls are not designed at a sufficient level of precision to 

demonstrate the assessment and evaluation of the completeness and accuracy of data used in the SLM 

assumptions and relevant financial statement disclosures. 

The reestimate processes and controls at the Department form an integral part of the financial reporting 

process, which impact the most significant estimates and related balances in the financial statements and 

related footnotes. As a result, weaknesses in processes, procedures, and controls in the areas described 

above impact management’s ability to prevent, detect, and correct errors in the re-estimate process, which 

could lead to a material misstatement of the financial statements. 

Criteria:

The following criteria were considered in the evaluation of the material weakness presented in this exhibit: 

• Green Book (GAO-14-704G – Federal Internal Control Standards), Section OV3.05, Section OV4.08,

Principle 10.03, Section 12.03, Section 13.04

• FASAB Technical Release 6, Preparing Estimates for Direct Loan and Loan Guarantee Subsidies under the

Federal Credit Reform Act – Amendments to Technical Release No. 3 Preparing and Auditing Direct Loan

and Loan Guarantee Subsidies under the Federal Credit Reforms Act, Paragraphs 17, 20, 23, 27, 38 and

40

• SFFAS 2, Accounting for Direct Loans and Loan Guarantees, Paragraphs 22 and 23
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Recommendations:

1. With respect to the SLM documentation and analysis, we recommend that the Department

management:

a. Coordinate among the various groups at the FSA and CEAD to determine, each year, what key

assumptions and data elements will be used in the Credit Reform re-estimate calculations.

These determinations should be fully documented to enable a reviewer to understand and reperform procedures, as needed.

2. With respect to model estimation uncertainty, we recommend that the Department and FSA

management:

a. Ensure that sufficient documentation is maintained evidencing management’s analysis and

consideration of the effects of model estimation uncertainty on the fair presentation of the

financial statements and related note disclosure reestimates in accordance with accounting

standards.

3. With respect to the completeness and accuracy of the data elements used in the SLM, we recommend

that the Department management:

a. Work with FSA to validate that appropriate data elements are extracted from NSLDS.

4. We recommend that the FSA management:

a. Enhance existing documentation and controls to demonstrate the relationship between the key

data elements used in the estimation model assumptions and the controls over student loan

transactions at FSA.

5. With respect to the NSLDS oversight of loan guaranty balances, we recommend that the Department

and FSA management:

a. Develop, implement, and document controls to assess the reasonableness of the principal

balance outstanding and maximum government exposure amounts presented in the financial

statement footnotes and used in calculating the liability for loan guarantees.

b. Enhance the query process documentation to demonstrate the completeness and accuracy of

the NSLDS query for the performing FFEL loan principal balance outstanding and maximum

government exposure.

c. Develop, implement, and document a sensitivity analysis related to NSLDS queries of

September 30 balances considering the potential timing differences in the data being used for

financial reporting.
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Exhibit B 

Significant Deficiency

Information Technology Controls Need Improvement

Condition:

During fiscal year 2018, we noted information technology (IT) control deficiencies related to logical access in

the Department’s network and in one application system managed by the Department and access and change 

control in two application systems managed by the FSA, as follows: 

• Weaknesses in the Department’s IT controls related to the removal of separated users’ access from the

network and one of its applications;

• Weaknesses in FSA’s IT controls related to the review and recertification of system access.

Specifically, the access reviews did not cover all users for one of the FSA systems. Additionally, for two

FSA systems, the access lists provided by the contractors to perform the periodic access reviews were

not verified for completeness and accuracy; and

• Weaknesses in FSA’s IT controls related to the segregation of duties. For example, in one FSA system,

the developers retained greater than read-only access to the application in the production environment.

Additionally, we noted weaknesses related to program development, where evidence of data validation upon 

system migration to a new data center was not available. 

Additionally, in FY 2017, the predecessor auditor reported a significant deficiency related to the Department 

and FSA internal control environments due to persistent unmitigated IT control deficiencies. During FY 2018, 

the Department and FSA management demonstrated progress addressing some of these long-standing 

deficiencies. However, management has not fully remediated prior year weaknesses related to logical access 

administration, user access removal, user access reviews, and recertification and system configuration 

management. Due to the nature of these control deficiencies, the Department and FSA management continue 

to implement corrective actions to remediate these control deficiencies. The continued existence of these 

deficiencies reduces managements’ ability to effectively manage information system risks. 

Cause/Effect:

These IT control deficiencies existed because (1) the Department and FSA did not consistently adhere to its 

documented agency-wide policies and procedures and NIST requirements consistently for systems hosted and 

managed by the Department and FSA or by service organizations; (2) certain Department and FSA policies and 

procedures did not require the documentation and maintenance of supporting control documentation and 

review of evidence; and (3) the Department and FSA did not fully implement their corrective actions to 

remediate prior-year conditions and associated causes. Furthermore, separated user access deficiencies 

resulted due to the lack of timely notification of user separations by internal departments. 

Ineffective IT controls increases the risk of unauthorized use, disclosure, disruption, modification, or destruction 

of information and information systems that could impact the integrity and reliability of information processed in 

the associated applications which may lead to misstatements of the financial statements.

Criteria:

The following criteria were considered in the evaluation of the significant deficiency presented in this exhibit: 

• The Departmental Directive OM 3-104, Clearance of Personnel for Separation or Transfer

• National Institute of Standards and Technology Special Publication 800-53 Revision 4, dated April 2013,

AC-2 Account Management, AC-5 Separation of Duties, AC-6 Least Privilege, CM-3 Configuration Change

Control
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• Federal Information Processing Standards 200, Minimum Security Requirements for Federal Information

and Information systems

• The Standards for Internal Control in the Federal Government, issued by the Comptroller General of the

United States, Principle No. 7, Identify, Analyze, and Respond to Risks, Principle No. 11, Design Activities

for the Information System, and Principle No. 13, Use Quality Information

• Appendix III to OMB Circular No. A-130, Section 4, Specific Requirements, I. Specific Safeguarding

Measures to Reinforce the Protection of Federal Information and Information Systems

Recommendations:

We recommend that the Department and FSA management: 

1. Perform comprehensive user access reviews and re-certifications, and confirm the access lists received for

review by designated management are complete and accurate prior to commencing the review.

2. Implement mechanisms and procedures to require timely notification of user separations and subsequent

disabling of access.

3. Establish requirements for formal documentation of data validation following data migration for systems.

4. Prevent or limit developer access in the production environment to read-only.
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Exhibit C 

Compliance Matter

Requirement for Referring Delinquent Student Loan Debts to Treasury

In 2014, Federal Law (31 U.S. Code Section 3716(c) (6)) was amended (Public Law 113-101 (DATA Act) 

Section 5) to require agencies to notify the Secretary of the Treasury of valid, delinquent nontax debts that are 

over 120 days delinquent – 60 days earlier than the previous 180 days requirement – for the purpose of 

administrative offset (i.e., collection through the reduction of future Federal payments). Due to the number of 

entities and systems involved in handling student loan debts and the decentralized nature of such processes, 

FSA is not yet capable of meeting this accelerated timeline. Accordingly, as of September 30, 2018, the 

Department and FSA are not in compliance with the requirement to refer student debt delinquent for 120 days 

to the Department of the Treasury.

To meet this requirement, the Department obtained legal clarification of how certain specific requirements of 

the amended law apply to the Direct Loan Program and other Department programs, and are improving

delinquent debt reporting procedures, increasing the frequency of some debt referrals, and modifying its 

defaulted loan management system to accommodate this change. The Department is also evaluating the 

impact of defining defaulted loans earlier in schools’ performance reporting and has developed a long-term 

project plan to incorporate the new referral requirements into various servicer contracts and guaranty agency 

agreements, so it can initiate the required system programming changes. FSA is also working with the 

Department in evaluating certain options for other requirements needed to achieve compliance.

Recommendation:

We recommend that the Department continue to execute the corrective actions as outlined in FSA’s project 

plan to comply with the timing requirement for the referral of delinquent non-tax debts.
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Management's Response Exhibit D