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66–564 PDF 2011

INVESTIGATING FINANCIAL MISMANAGEMENT 

AT THE U.S. DEPARTMENT OF LABOR 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH, 

EMPLOYMENT, LABOR AND PENSIONS 

COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, JUNE 2, 2011 

Serial No. 112–26 

Printed for the use of the Committee on Education and the Workforce 

( 

Available via the World Wide Web: 

www.gpo.gov/fdsys/browse/committee.action?chamber=house&committee=education 

or 

Committee address: http://edworkforce.house.gov 
(II) 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN KLINE, Minnesota, Chairman 

Thomas E. Petri, Wisconsin 

Howard P. ‘‘Buck’’ McKeon, California 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Joe Wilson, South Carolina 

Virginia Foxx, North Carolina 

Bob Goodlatte, Virginia 

Duncan Hunter, California 

David P. Roe, Tennessee 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Scott DesJarlais, Tennessee 

Richard L. Hanna, New York 

Todd Rokita, Indiana 

Larry Bucshon, Indiana 

Trey Gowdy, South Carolina 

Lou Barletta, Pennsylvania 

Kristi L. Noem, South Dakota 

Martha Roby, Alabama 

Joseph J. Heck, Nevada 

Dennis A. Ross, Florida 

Mike Kelly, Pennsylvania 

George Miller, California, 

Senior Democratic Member 

Dale E. Kildee, Michigan 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

David Loebsack, Iowa 

Mazie K. Hirono, Hawaii 

Barrett Karr, Staff Director 

Jody Calemine, Minority Staff Director 

SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS 

DAVID P. ROE, Tennessee, Chairman 

Joe Wilson, South Carolina 

Glenn Thompson, Pennsylvania 

Tim Walberg, Michigan 

Scott DesJarlais, Tennessee 

Richard L. Hanna, New York 

Todd Rokita, Indiana 

Larry Bucshon, Indiana 

Lou Barletta, Pennsylvania 

Kristi L. Noem, South Dakota 

Martha Roby, Alabama 

Joseph J. Heck, Nevada 

Dennis A. Ross, Florida 

Robert E. Andrews, New Jersey 

Ranking Minority Member 

Dennis J. Kucinich, Ohio 

David Loebsack, Iowa 

Dale E. Kildee, Michigan 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 
(III) 

C O N T E N T S 

Page 

Hearing held on June 2, 2011 ................................................................................. 1 

Statement of Members: 

Andrews, Hon. Robert E., ranking minority member, Subcommittee on 

Health, Employment, Labor and Pensions ................................................. 41 

Roe, Hon. David P., Chairman, Subcommittee on Health, Employment, 

Labor and Pensions ...................................................................................... 1 

Prepared statement of ............................................................................... 3 

Statement of Witnesses: 

Flanagan, Heather Koppe, partner, KPMG, LLP .......................................... 9 

Prepared statement of ............................................................................... 11 

Lewis, Elliot P., Assistant Inspector General for Audit, Office of Inspector 

General, U.S. Department of Labor ............................................................ 6 

Prepared statement of ............................................................................... 7 

Taylor, James L., Chief Financial Officer, U.S. Department of Labor ........ 13 

Prepared statement of ............................................................................... 15 

Additional Submissions for the Record: 

Mr. Roe: 

Memo, dated May 23, 2011, from Elliot P. Lewis, Assistant Inspector 

General for Audit, Department of Labor, pertaining to the FY2010 

Independent Auditors’ Report ............................................................... 31 

‘‘Management Assurances,’’ dated Nov. 14, 2010, signed by Labor 

Secretary Solis, et al. ............................................................................. 33 

‘‘KPMG Independent Auditors’ Report of the Department of Labor’s 

Financial Records for Fiscal Year 2010’’ .............................................. 35 

(1) 

INVESTIGATING FINANCIAL 

MISMANAGEMENT AT THE 

U.S. DEPARTMENT OF LABOR 

Thursday, June 2, 2011 

U.S. House of Representatives 

Subcommittee on Health, Employment, Labor and Pensions 

Committee on Education and the Workforce 

Washington, DC 

The subcommittee met, pursuant to call, at 10:01 a.m., in room 

2175, Rayburn House Office Building, Hon. Phil Roe [chairman of 

the subcommittee] presiding. 

Present: Representatives Roe, DesJarlais, Noem, Roby, Heck, 

Ross, Andrews, Kildee, Hinojosa, and Wu. 

Also present: Representative Kline. 

Staff present: Andrew Banducci, Professional Staff Member; 

Katherine Bathgate, Press Assistant/New Media Cordinator; Casey 

Buboltz, Coalitions and Member Services Coordinator; Ed Gilroy, 

Director of Workforce Policy; Benjamin Hoog, Legislative Assistant; 

Marvin Kaplan, Professional Staff Member; Barrett Karr, Staff Director; Ryan Kearney, Legislative Assistant; Krisann Pearce, General Counsel; Molly McLaughlin Salmi, Deputy Director of Workforce Policy; Linda Stevens, Chief Clerk/Assistant to the General 

Counsel; Alissa Strawcutter, Deputy Clerk; Joseph Wheeler, Professional Staff Member; Kate Ahlgren, Minority Investigative 

Counsel; Aaron Albright, Minority Communications Director for 

Labor; Tylease Alli, Minority Clerk; Daniel Brown, Minority Junior 

Legislative Assistant; Jody Calemine, Minority Staff Director; 

Brian Levin, Minority New Media Press Assistant; Megan O’Reilly, 

Minority General Counsel; Julie Peller, Minority Deputy Staff Director; Meredith Regine, Minority Policy Associate, Labor; and 

Michele Varnhagen, Minority Chief Policy Advisor and Labor Policy 

Director. 

Chairman ROE. I would like to call the meeting to order. A 

quorum being present, Subcommittee on Health, Employment, 

Labor and Pensions will come to order. 

Good morning, everyone. 

And welcome to our witnesses. Thank you for taking time out of 

your schedule to be here today. 

Six months ago, under the leadership of Mr. Andrews, this subcommittee held an independent audit of the Department—examined an independent audit of the Department of Labor’s financial 

records. It was our first look at the department’s new financial 
2 

management system implemented at great cost to the taxpayers for 

the understanding that it would improve the department’s ability 

to track the money it spends. 

At the time a number of challenges surrounding implementation 

of the new system meant Congress and taxpayers were unable to 

receive a full evaluation of the department’s financial management. 

For the first time in more than a dozen years the department cannot issue an unqualified report. In other words, the department 

failed to produce enough information for independent auditors to 

make an informed judgment on the department’s finances. 

As I noted in December, any time an organization places a record 

system responsible for tracking billions of dollars, errors, unfortunately, are not uncommon. However, it is up to the organization’s 

executive management to take responsibility for the mistakes and 

work to prevent them in the future. 

It appears this was the course the Department of Labor planned 

to take last winter. James Taylor, Mr. Taylor is here, the department’s chief financial officer, was with us in December, and is here 

again today. He stated the department was undertaking many 

steps to overcome the problems that caused last year’s incomplete 

report. 

Mr. Taylor testified, ‘‘We are confident these actions will prove 

the 2010 disclaimer a temporary hiccup in what has been and what 

will be again a long record of unqualified opinions and sound financial management at the department.’’ 

We are here today to examine whether the department has lived 

up to this promise. Regrettably the answer is no. The challenges 

plaguing the Department of Labor’s financial management still persist. The most recent audit found the same material weaknesses 

and significant deficiencies identified in last year’s report. 

The Department of Labor is the only executive agency to have 

multiple new material weaknesses in its financial management 

system. According to the independent audit of KPMG, certified by 

the department’s Office of Inspector General, the department does 

not have sufficient controls over financial reporting and budgetary 

accounting. It lacks adequate controls over access to key financial 

systems, and improvements are required in how the department 

prepares and reviews journal entries. 

The problems I have just described only relate to the four material weaknesses identified in the report. The department also has 

significant deficiencies over its payroll, and does not prevent untimely and inaccurate processing of certain transactions. 

Last, but certainly not least, the department is in violation of 

two federal laws intended to promote the integrity of financial 

management in the federal government. Despite having roughly 6 

additional months to improve its record, department’s finances 

have failed to receive a clean bill of health, the first time since fiscal year 1997. 

Some may argue the report we are discussing today signifies a 

clean audit. According to this logic, simply completing the report, 

albeit 6 months behind schedule, results in a passing grade. However, the numerous instances of financial—however, numerous instances of financial mismanagement. 
3 

However, such logic is neither supported by standard accounting 

practices or a common sense. We should deal with the facts as presented by the professionals at KPMG, and avoid underestimating 

the seriousness of this report. 

The department oversees a number of federal efforts aimed at assisting the nation’s workforce, including unemployment insurance, 

worker’s compensation and various job training programs. At a 

time when the national debt exceeds $14 trillion and more than 13 

million individuals are seeking work, every dollar counts. Any 

misallocation of scarce resources is a disservice to taxpayers and 

workers. 

The department’s financial mismanagement is evidenced by the 

recent independent audit is unacceptable. I hope the administration can explain the disturbing facts of the recent audit, and provide a concrete plan to ensure this does not happen again. 

And now we yield to Mr. Andrews, the senior Democratic member of the subcommittee, for his opening remarks. 

[The statement of Mr. Roe follows:] 

Prepared Statement of Hon. David P. Roe, Chairman, Subcommittee on 

Health, Employment, Labor, and Pensions 

Good morning everyone. Welcome to our witnesses; thank you for taking time out 

of your busy schedules to be with us today. 

Six months ago, under the leadership of Mr. Andrews, this subcommittee examined an independent audit of the Department of Labor’s financial records. It was 

our first look at the department’s new financial management system, a system implemented at great cost to taxpayers with the understanding it would improve the 

department’s ability to track the money it spends. 

At the time, a number of challenges surrounding implementation of the new system meant Congress and taxpayers were unable to receive a full evaluation of the 

department’s financial management. For the first time in more than a dozen years, 

the department could not issue an ‘‘unqualified report.’’ In other words, the department failed to produce enough information for independent auditors to make an informed judgment on the department’s finances. 

As I noted in December, anytime an organization replaces a records system responsible for tracking billions of dollars, errors are unfortunately not uncommon. 

However, it is up to an organization’s executive management to take responsibility 

for the mistakes and work to prevent them in the future. 

It appears this was the course the Department of Labor planned to take last winter. James Taylor, the department’s chief financial officer who was with us in December and is with us again today, stated the department was undertaking ‘‘many 

steps to overcome the problems’’ that caused last year’s incomplete report. Mr. Taylor testified, ‘‘We are confident these actions will prove the 2010 disclaimer a temporary hiccup in what has been, and will again be, a long record of unqualified opinions and sound financial management at the Department.’’ 

We are here today to examine whether the department has lived up to this promise. Regrettably, the answer is no. The challenges plaguing the Department of Labor’s financial management still persist. The most recent audit found the same material weaknesses and significant deficiencies identified in last year’s report. The 

Department of Labor is the only executive agency to have multiple new material 

weaknesses in its financial management system. 

According to the independent audit by KPMG, certified by the department’s Office 

of Inspector General, the department does not have sufficient controls over financial 

reporting and budgetary accounting, it lacks adequate controls over access to key 

financial systems, and improvements are required in how the department prepares 

and reviews journal entries. 

The problems I have just described only relate to the four material weaknesses 

identified in the report. The department also has significant deficiencies over its 

payroll and does not prevent untimely and inaccurate processing of certain transactions. Last, but certainly not least, the department is in violation of two federal 

laws intended to promote the integrity of financial management in the federal government. 
4 

Despite having roughly six additional months to improve its record, the department’s finances have failed to receive a clean bill of health for the first time since 

fiscal year 1997. Some may argue the report we are discussing today signifies a 

‘‘clean’’ audit. According to this logic, simply completing the report—albeit six 

months behind schedule—results in a passing grade, despite the numerous instances of financial mismanagement. However, such logic is neither supported by 

standard accounting practices or commonsense. We should deal with the facts as 

presented by the professionals at KPMG, and avoid understating the seriousness of 

this report. 

The department oversees a number of federal efforts aimed at assisting the nation’s workforce, including unemployment insurance, workers’ compensation, and 

various job training programs. At a time when the national debt exceeds $14 trillion 

and more than 13 million individuals are searching for work, every dollar counts. 

Any misallocation of scare resources is a disservice to taxpayers and workers. The 

department’s financial mismanagement, as evidenced by the recent independent 

audit, is unacceptable. I hope the administration can explain the disturbing findings 

of the recent audit, and provide a concrete plan to ensure this doesn’t happen again. 

I will now yield to Mr. Andrews, the senior Democrat member of the subcommittee, for his opening remarks. 

Mr. ANDREWS. Thank you. Good morning, Mr. Chairman. Thank 

you for your courtesies. 

I would like to welcome the witnesses, and welcome back the witnesses I think in at least two of the cases, maybe three. 

On May 23rd of 2011 the Department of Labor received an unqualified audit letter, which is a clean audit. How we got there was 

slower than it should have been. 

I want to make two points this morning. The first is the reason 

for the delay in getting that clean audit letter. And the second is 

to respectfully challenge my friend’s assertion that the existence of 

exceptions in the clean audit letter are somehow evidence of financial mismanagement. They most emphatically are not. 

In 1989 the Department of Labor began using a software system 

to keep track of its books. And when 2002 rolled around they were 

still using that same software system. Now I think it would be true 

in most of corporate America or any government institution in 

America, if you are using in 2002 a piece of software generated in 

1989, it probably did not work very well. 

The Bush Labor Department reached that conclusion. It reached 

the conclusion they need to replace that software system. So in 

2002 the prior administration began a process to replace that software system. 

That process was an unmitigated disaster. The prior administration spent $35 million, and by 2007 they concluded that that system would never work, and they junked it. 

So for the better part of 6 years and $35 million, the prior administration tried to implement a piece of bookkeeping software 

that would give the department and the tax payers better access 

to financial data. In 2007 the prior administration began to correct 

this remedy and come up with a third system. 

By the time the new administration took office in January of 

2009, that new system, which cost about $25 million, was partially 

implemented. It was partially implemented because the training 

that was needed to train the department employees on how to best 

use that system had not yet been fully done. So when the new administration took office, it was in the midst of helping to complete 

that implementation in that new system. 
5 

Mr. Taylor, with whom we are pleased to welcome back to the 

committee, I believe, took office in June of 2010 at the Department 

of Labor as the chief financial officer. And he walked into a bit of 

a difficult situation because that software system was not yet fully 

implemented. The employees were not yet fully trained. 

By the time we reached the fall of 2010 it became obvious that 

KPMG was not going to be able to do due diligence on the financial 

audits because the correct documentation was not in place. 

As was our responsibility under the rules of the Congress, on December 7th of last year, the subcommittee, which I was then privileged to chair, and Mr. Roe—Dr. Roe was the senior minority member at the time, discharged our duty and had a hearing, and effectively said, when are you going to fix this problem so we can have 

an audit? Mr. Taylor made a commitment to the committee and to 

the public that he would lead an effort to make sure that that 

audit was completed by the spring. 

Mr. Taylor, you have honored that commitment. The audit documents were in place so the audit could be completed by the spring. 

And in fact on May 23rd of 2011, KPMG, through the IG’s Office, 

issued a clean audit letter. 

Now, my friend refers to the four exceptions in the clean audit 

letter as somehow evidence of financial mismanagement. Well, if 

that were the case, we had financial mismanagement in 2001, 

2002, 2003, 2004, 2005, 2006, 2007 and 2008. Because in each of 

those 8 fiscal years there were significant exceptions made to the 

audit as well. 

As a matter of fact, in those 8 fiscal years where the prior administration was running the department, there were 64 exceptions in 

total to the eight clean audit letters that were issued. 

Now, I do think we should focus in these exceptions and fix 

them. I would love to see an audit issued, timely audit issued for 

the 2011 fiscal year that has no exceptions in it. And I think that 

should be our goal. But I do think we should—we should begin 

today with a reflection of a record that says that we are looking 

at a department that received a clean audit letter. 

And I think we should thank you, Mr. Taylor, for honoring your 

commitment to the committee and putting us in position to produce 

that clean audit letter. 

So at this I would thank the witnesses, and turn back to my 

friend, the chairman. 

Chairman ROE. I thank the gentleman. 

Pursuant to Rule 7(c), all members will be permitted to submit 

written statements to be included in the permanent hearing record. 

And without objection, the hearing record will remain open for 14 

days to allow such statements and other extraneous material referenced during the hearing to be submitted for the official hearing 

record. 

Now it is my pleasure to introduce our distinguished panel of 

witnesses. 

Mr. Elliot P. Lewis is the assistant inspector general for audit to 

the Department of Labor. 

Welcome back, Mr. Lewis. 

Mr. Lewis has been with the Department of Labor since 1991 

serving in a variety of positions within the Inspector General’s Of-
6 

fice of Financial Management Audits. Before joining the Federal 

Government, he was a partner at T.R. McConnell and Company, 

CPAs in Columbia, South Carolina from 1986 to 1991. And that is 

a—it was probably about as hot in Columbia, South Carolina as it 

was here yesterday. 

Heather Flanagan is a partner for audit at KPMG, LLC. 

KPMG is an audit, tax and advisory service provider that has 

served as independent auditor for DOL since fiscal year 2006. 

KPMG also prepared audits in fiscal year 2010 for the Departments of Commerce, Energy, Homeland Security, Interior, Justice, 

Treasury, and the DSA, the Office of Personnel Management and 

the Small Business Administration. 

Mr. James L. Taylor is the chief financial officer of the Department of Labor. Prior to his work at DOL, Mr. Taylor was deputy 

federal inspector for the Department of Homeland Security where 

he assisted the Inspector General in managing over 600 audits, inspectors and investigators. Mr. Taylor has also served as deputy 

chief financial officer for the Department of Commerce and FEMA. 

Before I recognize each of you today will be—provide your testimony let me briefly explain our lighting system. You each have 5 

minutes to present your testimony. When you begin the light in 

front of you will turn green. With 1 minute left the light will turn 

yellow. And when your time is expired the light will turn red, at 

which point I will ask you that you wrap up your remarks as best 

as possible. 

And after everyone has testified, members will each have 5 minutes to ask questions. And I will try to also adhere to the 5 minutes 

rule. 

We will start now with Mr. Lewis. 

STATEMENT OF ELLIOT P. LEWIS, ASSISTANT INSPECTOR 

GENERAL FOR AUDIT, U.S. DEPARTMENT OF LABOR 

Mr. LEWIS. Mr. Chairman and members of the subcommittee, 

thank you for the opportunity to discuss the audit of the U.S. Department of Labor’s revised fiscal year 2010 consolidated financial 

statements. 

As I detailed in my December testimony, following the implementation of a new financial system known as New Core, which replaced a 20-year-old accounting system, the department encountered a significant number of problems and errors involving data 

migration, integration with other systems, reconciliations in system 

configuration. This resulted in the department’s inability to provide 

timely and accurate financial data, and the auditors being unable 

to give an opinion on the financial statements. 

Since November of last year the department was able to successfully mitigate the issues it experienced in 2010 to provide the necessary data for audit, and to revise and reissue the consolidated financial statements. 

In March of 2011 the CFO resubmitted its financial report and 

KPMG was able to complete the audit procedures necessary to 

render an unqualified, or clean, opinion. It is important to note the 

DOL’s received an unqualified opinion on its financial statements 

for 14 consecutive years. 
7 

However, while the opinion is unqualified for 2010, it is also important to emphasize that this does not guarantee an unqualified 

opinion for 2011. KPMG reported deficiencies in the department’s 

internal controls and made numerous recommendations to address 

them. These issues need to be addressed to help ensure the department’s ability to produce accurate financial statements in the future. 

The auditors identified several material weaknesses, which posed 

the greatest risk that the department’s financial statements could 

be incorrect. Specifically, they found that the department needs to 

implement and perform routine reconciliations. Moreover, they 

need to develop and document all business processes and controls 

required to accurately and timely record certain transactions. 

Second, the department needs to ensure that financial obligations are correct and properly recorded. They also need to ensure 

staff are trained and possess the technical knowledge needed to 

properly record budgetary transactions. 

Third, the department needs to enhance supervision of adjusting 

journal entries and improve related documentation. 

Finally, the department needs to develop policies and controls to 

ensure appropriate access to financial management systems. 

In addition to the material weaknesses, the auditors noted two 

significant deficiencies: the need to ensure payroll is properly processed, and the need to improve the timeliness and accuracy of the 

accounting for property plan and equipment. Our audit of the 2011 

statements will be assessing the extent to which the department 

has corrected these control weaknesses. 

Mr. Chairman, the department continues to make improvements 

to the new financial system, and to improve its financial management business processes. As this will obviously not be the last IT 

system the department replaces, it is equally important to look at 

this implementation for any lessons that can be gleaned from a 

broader project management standpoint. 

For example, for future IT system development projects, the department needs to fully understand and develop system requirements before beginning the procurement process, ensure that interfaces with other key departmental systems are built and tested 

prior to implementation, identify the proper user base, ensure that 

users are properly trained, establish strict project management 

oversight responsibility, and establish a viable funding plan prior 

to starting the project. 

By applying these lessons learned, the department will be better 

positioned to efficiently deliver future IT system development 

projects that are timely deployed and fully meet business needs. 

Thank you, Mr. Chairman, for the opportunity to present the results of the audit. I would be pleased to answer any questions that 

you or other members of the subcommittee may have. 

[The statement of Mr. Lewis follows:] 

Prepared Statement of Elliot P. Lewis, Assistant Inspector General for 

Audit, Office of Inspector General, U.S. Department of Labor 

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity 

to discuss the audit of the U.S. Department of Labor’s (DOL’s) revised Fiscal Year 

(FY) 2010 Consolidated Financial Statements. 
8 

Background 

The Chief Financial Officers Act of 1990, P.L. 101-576, requires Offices of Inspectors General (OIG) to audit and report on their agency’s Consolidated Financial 

Statements in accordance with generally accepted auditing standards and OMB 

guidance. In order to fulfill this responsibility, the DOL OIG contracts with an independent public accounting firm, KPMG LLP, to conduct the audit. OMB requires 

that the audit be completed by November 15 of each year. For an agency as large 

as DOL, the complexity of this audit requires that, in order to meet this deadline 

and complete all steps necessary to render an opinion on the statements, the Department must provide significant financial information and supporting documentation throughout the fiscal year. Therefore, an inability on the part of the Department to produce the necessary information in a timely manner can affect the successful completion of the audit and may result in a less-than-favorable opinion for 

the Department or a Disclaimer of Opinion, which is the inability to render an opinion. 

Specific reasons for the disclaimer of opinion 

Mr. Chairman, as detailed in my previous testimony in December, it was the Department’s inability to provide timely and accurate financial data that resulted in 

the Department receiving a Disclaimer of Opinion for FY 2010. Following the implementation of a new financial system known as the New Core Financial Management 

System (New Core), the Department encountered a significant number of problems 

and errors involving data migration, integration with other systems, reconciliation, 

and system configuration. Several examples of the problems they encountered were: 

Data Migration 

Internal agency codes and general ledger accounts that were incorrectly migrated 

to New Core. 

Certain transaction identification and coding that were not properly captured in 

New Core when migrated. 

Integration with Other Systems 

Integration between New Core and other financial systems that were not properly 

working subsequent to the implementation. For example, the Department was unable to record in a timely manner the majority of transactions related to the Unemployment Trust Fund and the Federal Employees’ Compensation Act. 

Reconciliation 

Incomplete account reconciliations as of September 30. For example, the Department could not reconcile its underlying supporting data for certain Unemployment 

Trust Fund balances to the general ledger in a timely manner. 

System Configuration 

Improper system configurations resulting in the inability to properly record certain transactions in accordance with the United States Standard General Ledger requirements. As a result, the Department had to implement manual processes to correct these errors. 

Audit of the Department’s revised FY 2010 consolidated financial statements 

In my December testimony, I identified several actions which the Department 

needed to take in order to reissue its FY 2010 Consolidated Financial Statements. 

In the intervening months, Mr. Chairman, the Department was able to successfully 

mitigate the issues it experienced in FY 2010 to provide the necessary data for audit 

and to revise and reissue the Consolidated Financial Statements. Some of the major 

adjustments made by the Department since November 15 include: 

Resolving integration errors between New Core and other financial systems by 

reconciling and investigating differences. 

Reviewing all significant transactions to ensure they were in accordance with 

United States Standard General Ledger requirements. 

Adjusting and providing sufficient documentation for the Consolidated Financial 

Statements balances, by correcting material errors not identified as of November 

2010, which impacted fund balance with treasury and accounts payable. 

In March 2011, the CFO submitted a draft of the Department’s revised Consolidated Financial Statements for audit and KPMG was able to complete the audit procedures necessary to render an unqualified or ‘‘clean’’ opinion. The Department has 

now received an unqualified opinion on its financial statements for 14 consecutive 

fiscal years. 
9 

Material weaknesses and significant deficiencies 

Even though the Department received an unqualified opinion, KPMG reported deficiencies in the Department’s internal controls and made numerous recommendations to address them. A deficiency in internal control exists when the design or operation of a control does not allow management or its 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 agency’s financial statements will not be prevented, or detected and corrected 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. 

In terms of material weaknesses, the auditors found that the Department needs 

to implement and perform routine reconciliations, as well as develop and document 

all business processes and controls required to accurately and timely record transactions, including those from DOL subsystems and other Federal agencies. 

Second, the Department needs to ensure that financial obligations are correct and 

properly recorded, as well as ensuring users are trained and possess the technical 

knowledge needed to properly record budgetary transactions. 

Third, the Department needs to enhance supervisory monitoring reviews of adjusting journal entries and related documentation. 

Finally, the Department needs to coordinate efforts with individual DOL agencies 

to develop policies and controls to address, as well as monitor, access to financial 

management systems. 

In addition to the material weaknesses, the auditors noted the following significant deficiencies. The auditors found that the Department needs to design time and 

attendance reports that reflect the necessary information for it to ensure that payroll is properly processed. Lastly, the Department needs to improve the timeliness 

and accuracy of its accounting for property, plant, and equipment. 

Lessons learned 

Mr. Chairman, the Department continues to make improvements to the new financial system and to improve its financial management business processes. As this 

will obviously not be the last system that the Department replaces, it is equally important to look at this implementation for any broader lessons that can be gleaned 

from a project management standpoint. For example, in the future the Department 

needs to: 

Fully understand and develop system requirements before beginning the procurement process; 

Ensure that interfaces with other key Departmental systems are built and tested 

prior to implementation; 

Identify the proper user base; 

Ensure that users are properly trained; 

Establish strict project management oversight responsibility; 

Establish a viable funding plan prior to starting the project. 

Conclusion 

Mr. Chairman, the Department has taken sufficient and appropriate corrective actions to enable KPMG to issue an opinion on the revised statements. Although the 

opinion is unqualified, it is important to emphasize that this does not guarantee an 

unqualified opinion for the FY 2011 statements. Our audit of the FY 2011 statements will be assessing the extent to which the Department has corrected the control weaknesses recently identified in the 2010 audit. 

Thank you, Mr. Chairman, for the opportunity to present the results of the audit. 

I would be pleased to answer any questions that you or other members of the Subcommittee may have. 

Chairman ROE. Okay. Thank you, Mr. Lewis. 

Ms. Flanagan? 

STATEMENT OF HEATHER K. FLANAGAN, 

PARTNER, KPMG, LLC 

Ms. FLANAGAN. Chairman Roe, Ranking Member Andrews, and 

members of the subcommittee, my name is Heather Flanagan, and 
10 

I am an audit partner with KPMG. Thank you for the invitation 

to come before you today to discuss the two audit engagements of 

the U.S. Department of Labor’s fiscal year 2010 consolidated financial statements. 

KPMG, under contract to the DOL Office of Inspector General, 

was engaged to audit DOL’s fiscal year 2010 consolidated financial 

statements. During fiscal year 2010 DOL encountered significant 

functionality and operational issues related to its new financial accounting and reporting system, which was implemented in January 

2010. 

These issues hindered DOL’s ability to ensure the accuracy and 

completeness of financial statement balances, and to generate the 

critical financial statement data necessary to complete our testing 

over the consolidated financial statements during our initial audit 

engagement. I will discuss the more significant areas that were impacted by these issues. 

The first was the Unemployment Trust Fund. We were unable to 

complete testing over the fund’s significant accounts because DOL 

was unable to provide to us in a timely fashion complete and accurate data that reflected the balances recorded in the general ledger. 

The second significant area was gross cost. We were unable to 

complete testing over certain expenses because a complete and accurate population of these expenses that agreed to the balances in 

the general ledger could not be provided in a timely fashion. 

The third important area was budget accounts. The final report 

on budget execution and budgetary resources, known as the FF133, for the fourth quarter was not provided to us prior to the November 15th reporting deadline. Therefore we were unable to complete our testing of the statement of budgetary resources. 

The fourth significant area was fund balance with Treasury. 

DOL was unable to reconcile the net differences that were identified between its fund balance with Treasury accounts as of September 30, 2010, and Treasury’s records. 

The fifth significant area was financial reporting. DOL management was unable to provide certain representations regarding consistency with U.S. Generally Accepted Accounting Principals with 

respect to the presentation of the fiscal year 2010 financial statements that it issued in November. 

It was impractical to extend our procedures sufficiently to determine whether the financial statements may have been affected by 

these issues. As such, we issued a disclaimer of our opinion on the 

fiscal year 2010 consolidated financial statements issued by DOL 

on November 15th. 

Under government auditing standards we are required to report 

material weaknesses and significant deficiencies identified during 

the engagement. During our initial fiscal year 2010 engagement we 

identified the following deficiencies in internal control over financial reporting that we considered to be material weaknesses or significant deficiencies: 

The lack of sufficient controls over financial reporting, a lack of 

significant controls over budgetary accounting, improvements needed in the preparation and review of journal entries, lack of adequate controls over access to key financial and support systems, 
11 

weakness noted over payroll accounting, and untimely and inaccurate processing of property, plant and equipment transactions. 

DOL recognized the need for, at a minimum, an audited consolidated balance sheet as of September 30, 2010 in order to receive 

an opinion on all of its consolidated financial statements in fiscal 

year 2011. Therefore, DOL decided to revise and reissue its fiscal 

year 2010 consolidated financial statements where certain malaises 

were performed, errors were identified and adjusting journal entries were recorded to correct the previously reported amounts as 

necessary. 

As a result, DOL requested that the OIG perform audit procedures necessary to report on its revised fiscal year 2010 consolidated financial statements in anticipation of receiving an updated 

audit report. In December 2010 the OIG engaged KPMG to audit 

these revised financial statements. 

We have looked at their efforts on testing the details on each significant account during the second fiscal year 2010 engagement. As 

required by government auditing standards, we will determine during our fiscal year 2011 audit of DOL consolidated financial statements whether DOL management has taken appropriate corrective 

actions to address the findings and recommendations identified 

during our fiscal year 2010 audit engagements. 

DOL was ultimately able to reconcile accounts and record necessary adjusting entries to corrective financial statement balances. 

In addition, DOL was able to provide the necessary data for testing 

and the relevant evidence to support the balances supported in the 

financial statement. 

As a result, we were able to complete our audit procedures, and 

on May 20, 2011 we issued an updated audit report with an unqualified opinion on DOL’s revised fiscal year 2010 consolidated financial statements. 

Thank you for the opportunity to discuss the results of these two 

fiscal year audit engagements. And I would be happy to answer 

any questions you may have. 

[The statement of Ms. Flanagan follows:] 

Prepared Statement of Heather Koppe Flanagan, Partner, KPMG, LLP 

Chairman Roe, Ranking Member Andrews, and Members of the Subcommittee; 

thank you for the invitation to come before you today to discuss the two audit engagements of the U.S. Department of Labor’s (DOL) fiscal year (FY) 2010 consolidated financial statements. 

KPMG LLP (KPMG), under contract to the DOL Office of Inspector General 

(OIG), was engaged to audit DOL’s FY 2010 consolidated financial statements. During FY 2010, DOL encountered significant functionality and operational issues related to its new financial accounting and reporting system, the New Core Financial 

Management System (NCFMS), which was implemented in January 2010. These 

issues hindered DOL’s ability to assure the accuracy and completeness of consolidated financial statement balances and to provide us the critical financial data necessary to complete our testing over DOL’s FY 2010 consolidated financial statements during our initial audit engagement. The significant areas that were impacted by these issues are discussed in more detail below. 

Unemployment Trust Fund (UTF)—We were unable to complete testing over the 

UTF significant accounts (i.e., unemployment benefit expenses, accrued benefits, 

revenue, accounts receivables, advances and transfers) because DOL was unable to 

timely provide us complete and accurate populations of the related data that reflected the balances recorded in the general ledger. This situation was caused by errors in recording UTF transactions and failure to perform certain reconciliations to 

the general ledger. 
12 

Gross Costs (Non-Payroll, Non-Benefits)—In addition to unemployment benefit expenses, we were unable to complete testing over certain other expenses because a 

complete and accurate population of these expenses that agreed to the related balances recorded in the general ledger could not be provided timely. In addition, because we could not test these expenses, our testing over the grant accrual could not 

be completed. 

Budget Accounts—The final Report on Budget Execution and Budgetary Resources (SF-133) for the fourth quarter was not provided to us prior to the November 15, 2010 Office of Management and Budget (OMB) reporting deadline. Therefore, we were unable to complete our testing over the fourth quarter reconciliations 

of the Statement of Budgetary Resources (SBR) to the SF-133s and reconciliations 

of the SF-133s to the Apportionment and Reapportionment Schedule (SF-132s). As 

a result, we were unable to conclude on budgetary resources, the status of budgetary 

resources, the change in obligated balance, and net outlays reported in the SBR. 

Further, a complete and accurate population of undelivered orders recorded in the 

general ledger as of September 30, 2010 could not be provided for testing, and we 

were unable to complete the procedures necessary to conclude on borrowing authority related to repayable advances to the UTF. 

Fund Balance with Treasury—DOL was unable to reconcile the net differences 

that were identified between its fund balance with Treasury account as of September 30, 2010 and the U.S. Department of the Treasury’s records, which prevented us from completing our testing of this balance. 

Financial Reporting—DOL management was unable to provide certain representations regarding consistency with U.S. generally accepted accounting principles with 

respect to the presentation of the FY 2010 consolidated financial statements that 

it issued on November 15, 2010. 

It was impractical to extend our procedures sufficiently to determine the extent, 

if any, to which DOL’s FY 2010 consolidated financial statements may have been 

affected by the aforementioned issues. As such, our initial audit engagement resulted in a disclaimer of an opinion on the FY 2010 consolidated financial statements issued by DOL on November 15, 2010. A disclaimer of opinion states that 

the auditors do not express an opinion on the financial statements as they were unable to form or have not formed an opinion as to the fairness of presentation of the 

financial statements in conformity with generally accepted accounting principles. 

In planning and performing our initial FY 2010 audit engagement, we considered 

DOL’s internal control over financial reporting by obtaining an understanding of 

DOL’s internal control, determining whether internal controls had been placed in 

operation, assessing control risk, and performing tests of controls as required by auditing standards generally accepted in the United States and Government Auditing 

Standards. These procedures were designed to assist us in planning our auditing 

procedures and contribute to the evidence supporting the auditors’ report on the financial statements. However, the objective of our engagement was not to express 

an opinion on the effectiveness of DOL’s internal control over financial reporting 

and therefore our procedures were not designed to identify all deficiencies in internal control. 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. 

Under Government Auditing Standards, we are required to report material weaknesses and significant deficiencies identified during the audit engagement. 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. 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. 

During our initial FY 2010 audit engagement, we identified the following deficiencies in internal control over financial reporting that we considered to be material weaknesses or significant deficiencies. 

Material Weaknesses 

1. Lack of Sufficient Controls over Financial Reporting 

2. Lack of Sufficient Controls over Budgetary Accounting 

3. Improvements Needed in the Preparation and Review of Journal Entries 

4. Lack of Adequate Controls over Access to Key Financial and Support Systems 

Significant Deficiencies 

5. Weakness Noted over Payroll Accounting 
13 

6. Untimely and Inaccurate Processing of Property, Plant, and Equipment Transactions 

DOL recognized the need for, at minimum, an audited consolidated balance sheet 

as of September 30, 2010, in order to receive an opinion on all its consolidated financial statements in FY 2011. Therefore, DOL decided to revise and reissue its FY 

2010 consolidated financial statements once certain analyses were performed, errors 

were identified, and adjusting journal entries were recorded to correct the previously 

reported amounts, as necessary. 

As a result, DOL requested that the OIG perform audit procedures necessary to 

report on its revised FY 2010 consolidated financial statements, in anticipation of 

receiving an updated audit report. In December 2010, the OIG engaged KPMG to 

audit these revised financial statements. 

Because of the aforementioned control deficiencies, our planned audit approach for 

the second FY 2010 audit engagement did not include additional tests of controls, 

and we did not rely on internal controls in the areas requiring audit work. Therefore, we focused our efforts on testing the details of each significant account during 

the second FY 2010 audit engagement. As required by Government Auditing Standards for financial statement audits, we will determine during our FY 2011 audit of 

DOL’s consolidated financial statements whether DOL management has taken appropriate corrective action to address the findings and recommendations identified 

during our FY 2010 audit engagement. 

DOL was ultimately able reconcile accounts and record necessary adjusting entries to correct its consolidated financial statement balances. In addition, DOL was 

able to provide the necessary data for testing and the relevant evidence to support 

the balances reported in the consolidated financial statements. As a result, we were 

able to complete our audit procedures, and we issued an updated audit report with 

an unqualified opinion on DOL’s FY 2010 consolidated financial statements on May 

20, 2011. 

Thank you for the opportunity to discuss the results of these two FY 2010 audit 

engagements. I would be happy to answer any questions the Subcommittee may 

have. 

Chairman ROE. Thank you. 

Mr. Taylor? 

STATEMENT OF JAMES L. TAYLOR, CHIEF FINANCIAL 

OFFICER, U.S. DEPARTMENT OF LABOR 

Mr. TAYLOR. Good morning, Mr. Chairman, and thank you. And 

Ranking Member Andrews and members of the subcommittee, I 

really do appreciate this opportunity to come before you today to 

provide an update on the financial management activities of the 

Department of Labor. 

Specifically I will address the department’s fiscal year 2010 financial statement audit, a topic about which I testified before this 

subcommittee last December. That hearing occurred because the 

department was able to achieve an unqualified opinion on 2010 financial statements. 

During the hearing, I, as a deputy chief financial officer, committed to this subcommittee to recommitting our financial statements to the department’s Office of Inspector General, an independent auditor in the hopes that the auditor would be able to 

issue a new opinion. 

As you are aware, the department’s independent auditor issued 

a disclaimer of opinion in November on the 2010 financial statements. The auditors did not have sufficient time to complete the 

audit activities in November, primarily due to the department’s 

transition to a new financial management system and the implementation and data conversion issues that arose from that effort. 

At that time our need to focus on supporting the department’s 

mission and ensure funds were appropriately obligated at year-end 
14 

did not allow us time to provide the auditors the data they required 

in a timely fashion. 

Since then we have continued to work in improving our financial 

reporting with the goal of resubmitting our statements and opinion, 

a clean opinion. We identified outstanding issues with our financial 

data, and established and met all major milestones in the audit 

process. 

As a result of that effort I am pleased to report that KPMG, as 

you just heard, did provide a clean or unqualified opinion on the 

department’s fiscal year 2010 consolidated financial statements. An 

unqualified opinion is the most favorable of all financial audit outcomes, and means that the financial statements present fairly in 

all material aspects the financial position and operating results of 

the Department of Labor. 

As a result of the revised opinion we obtained late last month, 

the department now has received an unqualified opinion on its financial statements for 14 consecutive fiscal years. 

Both the original and revised 2010 audit reports note four material weaknesses that remain in need of the department’s attention. 

Two points should be considered when reviewing these material 

weaknesses. 

First, every single one of them has been reported previously. 

They were reported significant deficiencies, in some case for as 

many as 4 years. 

In addition, as my colleagues note in their respective testimonies, 

these material weaknesses existed as of September 30, 2010. 

KPMG did not conduct any further review of the status of these 

weaknesses as part of the recent financial statement resubmission 

effort. 

However, KPMG does not in its latest report for each of the financial management weaknesses, that we did in fact correct material areas identified, or provide evidence of the proper reconciliations previously missing. 

Over the past 6 months we have continued to work to normalize 

the department’s financial operations and resolve outstanding data 

integrity issues arising from the integration of a number of existing 

legacy systems into a modern financial management cloud environment. We are making operations more efficient and effective for 

users, and continuing user outreach and training efforts. 

While there is still work to be done in all these areas, we are 

buoyed by the unqualified opinion we received, and we will build 

from this experience as we continue to strengthen the department’s 

financial management environment. And based on the work already completed, I can not only assure the subcommittee that we 

have made substantial efforts in resolving the three material weaknesses specific to financial management, but I can also tell you unequivocally that the current financial system provides the department with unprecedented control over its financial activities. 

In closing, Mr. Chairman, I am pleased that the department was 

able to secure an unqualified opinion on the department’s 2010 financial statements, and the accompanying assurance the statements are presented fairly. Our stakeholders can have confidence 

in the data we have presented, and that the department has been 

financially transparent and accountable. 
15 

We have overcome last year’s temporary setback. We recognize 

there are still improvements we need to make in our financial operations and our financial reporting. We are extremely proud and appreciative of the work of our staff, but also our colleagues in the 

Office of Inspector General and KPMG in completing this process. 

Their expertise has been invaluable in assessing and addressing 

the issues we have encountered. 

Thank you for your time, sir. And I would be happy to answer 

any questions the subcommittee may have. 

[The statement of Mr. Taylor follows:] 
16 
17 
18 
19 

Chairman ROE. I thank the members. And I will start the questioning off today. 

I was the mayor of Johnson City, Tennessee. And when I first 

went on the commission we had 53 audit findings. So I am very 

familiar with audit findings. And some were material. 

And I appreciate the fact and the history that the ranking member gave us. But the problem with this is, and I am going to go 

through some definitions because I am not a CPA or an auditor, 

so that the average people can understand what we are talking 

about. 
20 

An unqualified audit simply means, as I understand it, that the 

auditor has all the information they need to provide an opinion. I 

think. 

Is that correct? And I have stated that properly, Ms. Flanagan? 

Ms. FLANAGAN. Yes, that is correct. 

Chairman ROE. Okay. So—and clean would refer to me that 

there is absolutely nothing wrong. That would be how I would view 

it if I heard that. So this verbiage means that unqualified means 

that the people looking at it, in your case KPMG, has the information they need to be able to render an opinion. It does not mean 

that everything is okay with what is going on. 

I sort of appreciate the position, Mr. Taylor, you were in. You 

came 18 months into this. You lost two of your senior people, and 

you had a brand new system. I get that. 

And also, Mr. Lewis, you made some great points. I hope that is 

not lost on other people that are doing this the five or six points 

you brought out that this is how we want to move forward if you 

put in somewhere else. It made absolute sense that this—you could 

extrapolate this over any department that may be implementing a 

new system. 

However, if I were in—and so a clean audit and an unqualified 

audit means that we have got all the information. It does not mean 

that there is not a problem there. And some of the problems that 

we looked at in these, especially some that I viewed in here where 

there was an ability not to know where Labor’s money and Treasury and the fund balances. 

The things that I read about in here about unexpected appropriations where $10 billion, which is $10,000 million, is incorrectly presented as something else as an unexpected appropriation, if this 

kind of audit were seen in a private, I were going out and buying 

a stock in a company and I saw this kind of audit, that company 

would be off the board, I think, because of the lack of confidence 

people would have. And that is what we are dealing with here, is 

the confidence of the American people. In my case the confidence 

of the citizens of Johnson City, Tennessee that we could actually 

look at this audit and know that their money was being spent and 

looked at just exactly like they would look at their own businesses. 

And I think, Mr. Taylor, that is what you are trying to say today, 

is that you want to get to that point. But I think these material 

weaknesses are very significant. And the fact that they occurred 

before does not give me any warm and fuzzy feeling. 

And then in the November 15th, I suppose, Ms. Flanagan, you 

will have a chance to look at, which is only 5 months, you will have 

a chance to look at this again. And at that point in time I assume 

that you will have all the information you need at that point to 

make a decision. 

Am I right, Mr. Taylor, that you will have all of the data that 

she needs, or their company needs I should say—— 

Mr. TAYLOR. Yes, sir. 

Chairman ROE. So it will not be a situation like we faced last 

year in December when Mr. Andrews held a committee hearing. 

Am I right on that? 

Mr. TAYLOR. You are correct. 
21 

Chairman ROE. And can we expect in 5 months, now that you— 

a year is not long. You have been there a short time. But can we 

expect these material weaknesses to be rendered. I mean to be held 

harmless, to be taken care of? 

Mr. TAYLOR. I am very comfortable that as we stand right now 

that at least two of the material weaknesses are resolved. And in 

fact we could not have been able to do the resubmission that we 

did to get the unqualified opinion if we had not resolved them. 

Chairman ROE. Which are? 

Mr. TAYLOR. One material—I am sorry? 

Chairman ROE. Which ones are they? 

Mr. TAYLOR. The one I know on the journal vouchers, the adjustments that were made, and on budgetary accounting. 

On financial reporting I think we made significant progress. We 

have a lot of work to do, still have a lot of work to do there because 

of the integration issues. But I think we have made a lot of 

progress. That will obviously depend on the independence of the infinite review of the auditors. 

The fourth material weakness is, I just want to point out, is for 

an overall access issue to systems throughout the department, not 

just the financial system. And it is one with which the department’s Office of the CIO does not concur. 

So three of those are really financial management. One is an 

overall systems access issue that the department has. 

Chairman ROE. I guess a question I was confused with on reading all this information was how can a fund balance in the Department of Labor and Treasury be not reconciled when you are talking 

about billions of dollars? 

Ms. Flanagan, I am going to ask you that question. You are the 

auditor. 

Ms. FLANAGAN. It is not uncommon to have differences between 

an agency’s fund balance of treasury accounts and Treasury. However, normally there is a reconciliation process that occurs monthly 

in order to identify and resolve those differences. 

Chairman ROE. Okay. Well, I guess the reason, if I go to explain 

it to somebody at a local diner, how can I explain to them that 

there are billions of dollars that do not account from one account 

to the other? How do I do that? 

Ms. FLANAGAN. That is more of an accounting question versus an 

auditing question. I mean the basic analogy is always a bank statement and does your checking account agree to your bank statement. 

And in the case of the department last year, it did not, by millions of dollars during the year. And it was eventually reconciled. 

Chairman ROE. Okay. I thank you. 

Mr. Andrews? 

Mr. ANDREWS. Thank you, Mr. Chairman. 

I thank the witnesses for their testimonies. 

I think there is a shared goal here that every dime the taxpayers 

send to the department is properly spent and properly accounted 

for, and there is no dispute about that. 

Ms. Flanagan, what is an unqualified letter? What is the meaning of that? Explain that to a layperson. 
22 

Ms. FLANAGAN. An unqualified opinion relates solely to the financial statements themselves and the balances that are reported in 

them. An unqualified opinion says that those balances are materially correct, and that the—— 

Mr. ANDREWS. And material—— 

Ms. FLANAGAN [continuing]. Users of those statements can rely 

on them. 

Mr. ANDREWS. Materially correct means that the representations 

on a document match the actual money that was received and 

spent. Is that basically right? 

Ms. FLANAGAN. Yes. 

Mr. ANDREWS. Okay. 

Now let us, so the clean audit letter that was issued, in 

layperson’s terms, mean that we have an accurate accounting of 

how much the department took in and how much money it spent? 

Ms. FLANAGAN. Correct. 

Mr. ANDREWS. Okay. 

Now, Mr. Taylor, let us talk about the four exceptions. Because 

the chairman’s right, our goal should be zero exceptions. 

And the fact that these are exceptions that existed long before 

you got there and long before the administration got there and Secretary Solis got there, so what? 

I mean we want them done. We want them done away with, and 

it is our common job to do something about that. 

If you were explaining to one of the chairman is constituents in 

a diner, we have more diners in New Jersey than in Tennessee, so 

we will make it in New Jersey. What these two exceptions that you 

think are unresolved mean. What do they mean? What are we 

doing wrong that we need to fix? 

Mr. TAYLOR. In the case of the financial reporting we have for 

the first time an integrated approach to all of our financial reporting, which never existed before. When you had to do an external 

report it was almost a data call. You almost had to go out and get 

data new every time. Now it all comes into one place. 

We have to make sure that the data in all those systems is moving across the interfaces in an accurate and smooth way. 

Mr. ANDREWS. Can you help me with interfaces? 

Mr. TAYLOR. Sorry. 

Mr. ANDREWS. We just lost the guy in the—— 

Mr. TAYLOR [continuing]. It is really about—— 

Mr. ANDREWS. Here is what he wants to know. If my tax money 

is being used for a job training program in Tennessee, how can I 

be sure that they got the amount of money they were supposed to 

and they spent the money on what they were supposed to by the 

time they were supposed to spend it on? 

Do either of these weaknesses relate to that problem? 

Mr. TAYLOR. They do not relate to control over financial management. They relate to reporting. And we have processes in place that 

will provide the reporting required to accurately manage the financial activities. 

In fact, last year even though we could not provide the auditors 

with the information they needed to complete their work, we did 

not have, after reviewing this twice now, we did not have a single 

violation in the Efficiency Act, and we did not leave any more 
23 

money unspent that we had in prior years. So we really focused on 

that management part. 

Mr. ANDREWS. What is your plan to resolve these two remaining 

exceptions that you think are still lingering? 

Mr. TAYLOR. Well, the one exception is the department-wide 

issue relating to access to financial systems. As I mentioned, the 

Chief Information Officer’s Office does not concur with the finding. 

It has been there for a number of years. 

We believe in the department that we have redundant controls 

to resolve it. 

Mr. ANDREWS. Now, is the access problem that people who 

maybe should not have access do? Or people who need access do 

not? What is the nature of the problem? 

Mr. TAYLOR. It is a security issue. People who do not—— 

Mr. ANDREWS. Want to be sure that only people that are properly 

secured and checked have access to financial systems. 

Mr. TAYLOR. That is my understanding—— 

Mr. ANDREWS. And there is some disagreement over whether 

there is a problem there. But I think we all agree that we only 

want the people who are supposed to have access to have access. 

Mr. TAYLOR. Absolutely. 

Mr. ANDREWS. And what is the second problem that you are 

working on? 

Mr. TAYLOR. And the second one is financial reporting. And that 

is the preparation, the accurate preparation of the timeliness of the 

financial reporting. And that is where we are still working. 

Mr. ANDREWS. Is the problem more accuracy or timeliness? 

Mr. TAYLOR. More timeliness, but some accuracy. 

Mr. ANDREWS. Okay. So, and if I understand the timeliness problem is you got to perform two intermediate tasks at the final answer that you want? 

Mr. TAYLOR. At the time, yes. That would be correct, yes—— 

Mr. ANDREWS. You want to try to get it sooner—— 

Mr. TAYLOR. More than we—definitely as of the end of 2010. 

Mr. ANDREWS. Is there any disagreement over whether that 

problem exists? 

Mr. TAYLOR. No. 

Mr. ANDREWS. Do you concur with the finding of the exception? 

Mr. TAYLOR. In fact as of 2010 we concur with all of them. 

Mr. ANDREWS. I appreciate it. 

I, again, I do want to commend you again that you came here 

6months roughly after you started this job, walked into a real problem, promised the tax payers and the committee that there will be 

the documents to have an audit done by the spring. You delivered 

on that promise. And the audit came back with an unqualified 

opinion. We thank you for your professionalism and your efforts. 

Mr. TAYLOR. Thank you. 

Mr. ANDREWS. I yield back. 

Chairman ROE. I will thank the gentleman for yielding. 

Ms. Roby? 

Ms. ROBY. Thank you, Mr. Chairman. 

Thank you to each of our witnesses that are here today. We really appreciate you taking time to be here. 
24 

I have one very, very simple question for Mr. Lewis. And I would 

like for you to explain to us, the members of this committee, the 

difference between a material weakness and a significant deficiency. And I want you to tell us which is more serious. 

Mr. LEWIS. Okay. Well, first off the material weakness is the 

more serious. 

Both material weakness and significant deficiencies involve problems with the design or the operation of your accounting systems 

that not only feed the financial statements and produce the financial statements, but are supporting all of your other day-to-day operations of running the department and issuing grants, et cetera, 

so all the controls and aspects of running those systems. 

If we detect weaknesses in those systems either in how they are 

designed, they were not designed properly, they do not have good 

controls; or they have good controls but they are not being utilized 

as they were meant to be utilized, then we make note of those exceptions. 

The auditors will then evaluate how extensive they think that 

problem is, how much is at risk, say in a particular system, how 

much money does it process, you know, how much could go wrong 

if that control is not working or is not there. That is how they 

make their decision of whether it is a significant deficiency or it is 

a material weakness. 

The material weaknesses are the ones that could most likely result in you having a significant error in the financial statements. 

And these are all being judged against the department’s financial 

statements at that level. 

Ms. ROBY. So here we have four material weaknesses. Can you 

site other instances where there were four material weaknesses? 

How many times were there other material weaknesses like this in 

the department over the past 10 years? 

Mr. LEWIS. In the past 10 years we have not had any material 

weaknesses. I think, as someone stated earlier, these were issues 

that have been around to some degree, and in some nature yearafter-year. But it was last year, with the, you know, combination 

of putting in a new system that triggered them to what was a significant deficiency from becoming, you know, to becoming a bigger 

problem—— 

Ms. ROBY. A larger problem. 

Mr. LEWIS [continuing]. And becoming a material weakness. 

Ms. ROBY. Thank you so much. 

I yield back, Mr. Chairman. 

Chairman ROE. Mr. Kildee? 

Mr. KILDEE. Thank you, Mr. Chairman. 

Mr. Lewis, are there findings in this audit report which are the 

same that we discussed in December? Are those findings uncommon among federal agencies? 

Mr. LEWIS. I have not done my own comparison to all the other 

agencies, but I, you know in my experience in doing other audits 

and what I have seen of other agencies I do not suspect that what 

we have is highly unusual, what we have seen in other entities. 

Mr. KILDEE. As we discussed last December, was there any indication whatsoever of waste, fraud or abuse or incompetence? 
25 

Mr. LEWIS. There was nothing that the auditors brought to our 

attention that they felt would fit that category. 

Mr. KILDEE. None of those categories. 

In the private sector, I am co-chair of the Automotive Caucus 

here in the Congress, and helped lead General Motors and Chrysler 

to their problems. How does the auditing within government, particularly this agency here, compare to the level of quality in the auditing in the private sector? 

Mr. LEWIS. I think it is quite comparable. We are operating 

under not only the same standards that the commercial auditors 

would follow in a commercial entity, but additional standards that 

the GAO imposes when you are doing a government audit. So it is 

a high standard. 

Mr. KILDEE. What can we do, and within our system, that you 

feel basically is comparable to—in the private sector and there is 

no indication of waste, fraud and abuse or competence? What can 

we do to get better, a higher level of audits? 

Mr. LEWIS. Upon interpreting that correctly in terms of what can 

we do to better address the problems we are identifying in the 

audit? Is that it? 

Mr. KILDEE. Yes. 

Mr. LEWIS. Is that fair? 

Mr. KILDEE. Yes. 

Mr. LEWIS. I think it is really a matter of having the attention 

and the commitment at the highest level in an agency to address 

the problems that are identified in the audit, and to address them 

when they are hopefully smaller issues. You know when we bring 

them as significant deficiencies to really try to resolve them at that 

point before you get to a year when you compound it with other 

things, and what was a small problem has now become a larger 

problem. 

Mr. KILDEE. So at least in their attitude toward working in an 

agency, having responsibility or leadership in the agency that they 

have at least mentally a high level of priority to make sure that 

it would be able to get an audit that would be helpful and correctly 

revealing of what the situation is. 

Mr. LEWIS. I did not quite catch the question. 

Mr. KILDEE. Well, there is attitude toward the fact that you are 

going to be audited, and that the audit is very, very important to 

us. 

Mr. LEWIS. Yes. 

Mr. KILDEE. And to the chief executive. That this auditing is very 

important is that our level of priority are sufficiently high that 

would help these audits reveal better than they are now. 

Mr. LEWIS. Yes. I mean that is very important to the, not just 

the successful audit, but the successful financial management in 

the department and in any department that there be that commitment and attention to it from the top. 

Mr. KILDEE. If you have got a regular pattern of problem auditing, might you trace that then to a lack of prioritizing within that 

agency? 

Mr. LEWIS. You could certainly, I think, draw that conclusion 

that if you see things repetitively that it is could be a commitment 

to addressing those problems. 
26 

Mr. KILDEE. Thank you very much. 

Chairman ROE. I thank the gentleman for yielding. 

Ms. Noem? 

Ms. NOEM. Yes. I would yield my time to the chairman. 

Chairman ROE. Okay. Thank you for yielding. 

Just a couple of questions, and I think Mr. Kildee hit on it, and 

all of us have here. I think that the reason that a financial audit 

is so critical for a couple reasons. 

One, it protects the people, Mr. Taylor, in the organization when 

you take over that you are not doing anything wrong. 

And secondly, we have a public trust. I know as mayor we had 

a public trust so that the people. I mean there is enough conspiracy 

out there that people, and we do a good enough job of wasting people’s money anyway, that they do not want to think there is any 

fraudulent use of it. 

And they see $700 toilets and all of that, and I understand their 

frustration when they see this go on in government. We expect it 

in the private sector. We expect it in the public sector. And the bar 

probably should be even higher in the public sector. So that is one 

of the reasons I think this is absolutely critical so people can trust 

us, can trust these departments that their money is being spent 

properly. 

And I guess the question, one of the questions I wanted to get 

to, and either Ms. Flanagan or Mr. Lewis, just a question is that 

when the KPMG audited this as per request of the OIG, they found 

that the DOL failed to comply with two federal laws. The Federal 

Financial Management Improvement Act of 1996 and the Federal 

Manager’s Financial Integrity Act of 1982 was deficient in its management of $173 billion budget. Could you all comment on that and 

what that was? 

Ms. FLANAGAN. Related to the act of 1996, that act requires financial systems to comply with three requirements. One of those 

requirements relates just to financial systems. And an indicator 

that there is non-compliance is that the system cannot produce 

auditable financial statements in a timely manner, which was certainly the case in November of 2010. 

Also those requirements relate to transactions recorded in accordance with the U.S. Standard General Ledger, which we cited 

non-compliance with in our report. And also accounting, just federal accounting standards, which in November the department was 

unable to represent that their statements were fairly presented in 

accordance with those accounting principles. 

Those situations occurred as of September 30th, and we did not 

reassess them during our second audit engagement this year. 

The other act related—the act of 1982, the deficiencies we found 

or non-compliance we found related to that act was the process 

that the department has to do its reporting under that act. And we 

felt that that reporting was done untimely and was reliant on obtaining a draft of our internal control report prior to them issuing 

their management refreshment statement. 

Chairman ROE. Yes. I do not think this was intentional. I think, 

I mean I do not think anybody set out to intentionally do this. I 

think you discovered it. 
27 

And I guess, Mr. Lewis, and you may or may not know this, are 

there any penalties associated with it when you break these laws? 

I know it is obviously a civil law, but are there any penalties associated? 

Mr. LEWIS. I do not know of any penalty associated with it other 

than you are in non-compliance. And I would, with the first one 

Ms. Flanagan was discussing, you could look at it that the things 

that are required in order to get a clean opinion on your audit are 

legal requirements in effect. And by not being able to get the clean 

opinion, you know, most entities should be automatically out of 

compliance with that act. 

Chairman ROE. I think, again, back to my point, and I think all 

of us on this panel on both sides want us to have the public trust. 

And I think the public feels like if I have to obey the law then federal agencies should obey the law. And I think that is the reason 

that this is extremely important. Not only to protect the DOL, but 

to protect the public. 

So at this point I will yield the balance of my time to Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Chairman Kline and Ranking Member Miller, today’s hearing 

must focus on the steps that the Department of Labor’s taking to 

strengthen its financial management system. It is important to 

note that between the years 2003 and 2008 the Bush administration spent approximately $35 million on an effort to replace a 25- 

year-old financial system at the Department of Labor, a system 

which failed to comply with applicable statutory and regulatory requirements, and ultimately was abandoned. 

In 2008 the Bush administration made another attempt to implement Department of Labor’s financial management system, but I 

understand that there were complications once again. 

As a member of this committee it is reassuring to know that 

under President Obama’s leadership that Secretary Hilda Solis and 

her staff have been working diligently to resolve the issues in a 

timely manner. 

My first question goes to James Taylor. And I apologize that I 

came in a bit late because I was at another meeting. So if this was 

discussed with somebody before me, I apologize for that. But I 

would like to know. 

In your testimony, Mr. Taylor, you indicate that the department’s 

independent auditor has issued a clean opinion on the department’s 

2010 consolidated financial statements. Can you share with us in 

this committee what some of those issues and concerns were when 

you joined DOL? 

Mr. TAYLOR. Well, the implementation had been initiated. It was 

behind schedule. Essentially the financial statements had to be 

prepared for more than one system because the conversions in the 

new system occurred in January of 2010. So the fiscal year began 

in the first quarter actually was in the old system. 

Media conversions are always a problem. Same thing happened 

at the Department of Energy in 2005, and they lost their clean 

opinion in GAAP material weakness. It took them 2 years to get 

their clean opinion back. 
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In our case when I came in at the end of January, it was clear 

that we could not perform our primary function, which is supporting the mission of the department and making sure that our 

funds were properly expended, in addition to providing the auditors 

information they need in a timely basis. And we were pretty much 

clear in saying that early on in that last quarter. 

So we knew we were not going to get a clean opinion. We knew 

we were probably going to get unqualified for a couple months before it occurred. And so we focused first on the mission. 

The interfaces with the legacy systems—the new financial system is a cloud environment, or a shared service environment. We 

do not have any infrastructure at all for the financial system within the department. It is the first department to do this. It is very 

complicated. 

In addition, the existing entities in the department, the existing 

systems for procurement, for HR, for travel, all of those systems 

were purchased as standalone. It did not really interface with one 

another, or were not integrated. This process integrated all those 

activities. 

On top of that you had a 20 plus year old financial database, and 

trying to convert that to the latest, more robust reporting system 

was very complicated. We ran into those kinds of issues during the 

year. And those were the challenges that we faced coming in. 

Mr. HINOJOSA. I have an MBA and I run a business for 25 years, 

a large one. And I know how difficult it is to make those changes 

when the software systems do not interface, and that you have to 

run them parallel for a certain number of months, 3, sometimes 6. 

Did you all do that? Were they run parallel so that you could see 

how the old system and the new one were going to interface? 

Mr. TAYLOR. Yes, sir. What we did, it was not really intentional. 

The original plan was that the department was going to convert as 

of October 1st. 

I have done this at the Department of Commerce and at FEMA 

previously. When you try to—and usually in IT development running parallel makes a lot of sense, particularly for processing systems. When you have a system of record like a financial system, 

it is extremely complicated to keep the two in balance when you 

are trying to run more than one simultaneously. 

Mr. HINOJOSA. If you did that will the Department of Labor be 

in compliance with all the federal laws as of the end of this September 30, 2011? 

Mr. TAYLOR. Well, now this will be the first year on the new system, totally on the new system. And we are very confident we will 

be in total compliance. 

Mr. HINOJOSA. With that I yield back, Mr. Chairman. 

Chairman ROE. Thank the gentleman for yielding. 

Dr. DesJarlais? 

Mr. DESJARLAIS. Good morning. 

Mr. Taylor, in December you suggested DOL was focused on resubmitting the fiscal year 2010 statements to OIG for the audit 

and normalizing financial operations. How much did this review 

process cost? 

Mr. TAYLOR. The review process itself, we did not spend money, 

any specific money for the resubmission effort. We have added 
29 

about $7 million to the contract itself, and those required to help 

resolve issues and do the data conversion. 

Mr. DESJARLAIS. Has that impacted the fiscal year 2011 audit? 

Mr. TAYLOR. No, sir. In fact I think we had to do what we did. 

The resubmission was really a milestone, and it was a nice target 

to keep us focused. But everything that we did would have had to 

be done anyway in order for us to get a clean opinion in 2011. 

Mr. DESJARLAIS. Okay. Thank you. 

Mr. Lewis, beginning in 2006 the Office of the Deputy Secretary 

started holding regular quarterly meetings about operations at the 

OCFO. From what I understand OIG took part in these meetings 

along with the deputy secretary, the assistant secretary for administration management and the CFO. 

Do these meetings continue to occur? 

Mr. LEWIS. Yes. 

Mr. DESJARLAIS. Okay. And did you find these meetings beneficial? 

Mr. LEWIS. Yes. That is, I believe you are referring to the department’s internal control board, and that continues and we participate in that. And I think that is beneficial and it is a requirement 

that they do that to do their own self-assessment of their operations. 

Mr. DESJARLAIS. Okay. 

In 2010 several warnings had been sent out. And I am interested 

in hearing about fiscal year 2011 audit, which is currently under 

way. Specifically I would like to know where we are in the process 

and whether or not your office has issued any alert memoranda 

thus far related to the 2011 audit. 

Mr. LEWIS. We have not issued anything at this point related to 

the 2011 audit. It is at a very early stage because the auditors 

have been focused on the reissued statements in 2010 and ensuring 

that we had good beginning balances for 2011. So now that that 

has been settled, they are now starting to just really focus on the 

2011 period. 

Mr. DESJARLAIS. Okay. Thank you. 

And Mr. Chairman, that is all I have. Would you like me to yield 

my time? 

Okay. Thank you. 

Chairman ROE. Dr. Heck? 

Mr. HECK. I have no questions at this time, Mr. Chairman. 

Thank you. 

Chairman ROE. Mr. Andrews? 

Mr. ANDREWS. We have no further questions, Mr. Chairman. I 

would be happy to defer until Noem or whomever else’s questions. 

Well, in that case, I want to thank the chairman and my colleagues and the witnesses for doing boring, non-media centered, 

really necessary work. We live in an environment where the top 

news story in Capitol Hill seems to get more bizarre as the weeks 

go on. I will not comment on this week’s story. 

But our real work here is to be good stewards of the public trust 

and the taxpayer’s money. And it is a very legitimate question 

when an audit is delayed as to whether we are, each of us is discharging that duty responsibly. 
30 

And I am encouraged by the news since the December hearing. 

And I thank, Mr. Taylor, you and your team who have made that 

possible. 

And I thank Ms. Flanagan and Mr. Lewis for their continued vigilance to ensure that we get the right result. 

I am hopeful that we will be able to have a totally boring and 

non-eventful fiscal year 2011, meaning that we have no delay in 

the audit being completed, and a clean letter being issued, and zero 

out those exceptions if we can. 

But I think that the hard work of government is the boring work 

of government. So thank you for doing it in a way that is not 

flashy, but important. 

And Mr. Chairman, I am glad we had a chance to share these 

titillating 56 minutes, but who is counting? I do appreciate the 

chance to be with you this morning. And yield back. 

Chairman ROE. I thank the gentleman for yielding. And having 

spent 6 years in local government, you are right. 

It does not make the headlines going from 53 audit findings to 

zero. But zero is where we ought to be. That is what we require 

in public companies. If public companies come out with sloppy audits, they go out of business and people lose jobs. And I think we 

have a fiduciary responsibility to gain the public trust. 

There is a huge distrust of government now, both sides of the 

aisle. It is absolutely imperative that we have that. And you cannot 

have that when people pick up a newspaper in the local diner and 

say we do not know where billions of dollars went. 

And it does not necessarily mean there has been anything done 

wrong with it, but we should be able to count that competent people can do that. And I think that there are three competent people 

sitting in front of us right now. 

And I heard Mr. Taylor say that in November the 15th he expects two of these material findings to be resolved, and hopefully 

the other two will be. That is the goal is to have no findings whatsoever. 

And I also appreciate each of you coming here and presenting 

this, as the ranking member said, maybe not the most exciting 

thing, but I think extremely important, I found in my previous life. 

So thank you for being here. 

And with no further comments, the meeting is adjourned 

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[Whereupon, at 10:57 a.m., the subcommittee was adjourned.] 

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