Department of Homeland Security
 

National Protection and Programs Directorate’s 


Management Letter for FY 2011 DHS Consolidated 


Financial Statements Audit 


OIG-12-52 March 2012
 
Office ojlnSl'cc/or Gel/eml 

U.S. Department of Homeland S«urlly 

Washinglon. DC 20528 

Homeland 

Security 

MAR l' 4 2011 

Preface 

The Department of Homeland Security (DHS) Office of Inspector General (D IG) was 

established by the Homeland Security Act 0/2002 (Public Law 107-296) by amendment 

to the Inspector General Act 0/1978. This is one ofa series of audit, inspection, and 

special reports prepared as part of our oversight responsibilities to promote economy, 

efficiency, and effectiveness within the Department. 

This report presents the National Protection and Programs Directorate's Management 

Letter for FY 201 1 DHS Consolidated Financial Statements Audit. It contains 

observations related to internal controls that were not required to be reported in the 

financial statements audit report. The independent public accounting finn KPMG LLP 

(KPMG) perfonned the integrated audit ofDHS' FY 201 1 financial statements and 

internal control over financial reporting and prepared this management letter. KPMG is 

responsible for the attached management letter dated February 3, 2012 and the 

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

internal control or provide conclusions on compliance with laws and regulations. 

The observations herein have been discussed in draft with management officials. We 

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

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

Anne L. Richards 

Assistant Inspector General for Audits 
 

 

KPMG LLP 

Suite 12000 

1801 K Street, NW 

Washington, DC 20006 

February 3, 2012 

Office of Inspector General 

U.S. Department of Homeland Security, and 

Chief Financial Officer 

U.S. Department of Homeland Security National Protection and Programs Directorate 

Washington, DC 

Ladies and Gentlemen: 

We have audited the balance sheet of the U.S. Department of Homeland Security (DHS or 

Department) as of September 30, 2011 and the related statement of custodial activity for the year 

then ended (referred to herein as the “fiscal year (FY) 2011 financial statements”). The objective 

of our audit was to express an opinion on the fair presentation of these financial statements. We 

were also engaged to examine the Department’s internal control over financial reporting of the 

balance sheet as of September 30, 2011, and statement of custodial activity for the year then ended, 

based on the criteria established in Office of Management and Budget, Circular No. A-123, 

Management’s Responsibility for Internal Control, Appendix A. 

Our Independent Auditors’ Report issued on November 11, 2011, describes a limitation on the 

scope of our audit that prevented us from performing all procedures necessary to express an 

unqualified opinion on DHS’ FY 2011 financial statements and internal control over financial 

reporting. In addition, the FY 2011 DHS Secretary’s Assurance Statement states that the 

Department was unable to provide assurance that internal control over financial reporting was 

operating effectively at September 30, 2011. We have not considered internal control since the 

date of our Independent Auditors’ Report. 

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 

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. In accordance with Government Auditing 

Standards, our Independent Auditors’ Report, referred to in the paragraph above, included internal 

control deficiencies identified during our audit, that individually, or in aggregate, represented a 

material weakness or a significant deficiency. 

The National Protection and Programs Directorate (NPPD) is a component of DHS. We noted 

certain matters, related to NPPD that are summarized in the Table of Financial Management 

Comments on the following pages, involving internal control and other operational matters that are 

less severe than a material weakness or a significant deficiency, and consequently are reported 

separately to the Office of Inspector General (OIG) and NPPD management in this letter. These 

comments and recommendations, all of which have been discussed with the appropriate members 

of management, are intended to improve internal control or result in other operating efficiencies. 

The disposition of each internal control deficiency identified during our FY 2011 audit – as either 

reported in our Independent Auditors’ Report, or herein – is presented in Appendix A. The 

KPMG LLP is a Delaware limited liability partnership, 

the U.S. member firm of KPMG International Cooperative 

(“KPMG International”), a Swiss entity. 
status of internal control deficiencies identified during our FY 2010 audit is presented in Appendix 

B. 

We would be pleased to discuss these comments and recommendations with you at any time. This 

report is intended for the information and use of DHS’ and NPPD’s management, the DHS Office 

of Inspector General, the U.S. Office of Management and Budget, the U.S. Congress, and the 

Government Accountability Office, and is not intended to be and should not be used by anyone 

other than these specified parties. 

Very truly yours, 
APPENDIX 

Appendix Subject Page 

A 

B 

Crosswalk – Financial Management Comments to Active Notices of Finding and 

Recommendation (NFRs) 

Status of Prior Year NFRs 

4 

5 

National Protection and Programs Directorate 

Table of Financial Management Comments 

September 30, 2011 

TABLE OF FINANCIAL MANAGEMENT COMMENTS (FMC) 

Comment
 

Reference Subject Page(s)
 

FMC 11-01 Inadequate Internal Controls over Reporting of Government Furnished Equipment 2 

Asset Disposals 

FMC 11-02 Subject to Availability of Funding Agreements Not Obligated in Federal Financial 2 

Management System at Outset of Agreement 

FMC 11-03 Inadequate Internal Controls over Reporting of Internal Use Software Projects 2-3 

FMC 11-04 Inadequate Internal Controls over Reporting of Equipment 3 

FMC 11-05 Untimely Reporting of Leasehold Improvements 3 

1
 
National Protection and Programs Directorate 

Financial Management Comments 

September 30, 2011 

FMC 11-01 – Inadequate Internal Controls over Reporting of Government Furnished Equipment 

Asset Disposals (NFR No. NPPD 11-01) 

During testwork over a sample of five items from the capitalized asset disposal population at June 

30, 2011, we noted that one asset was disposed of in fiscal year (FY) 2010, but was not recorded 

as a disposal in Federal Financial Management System (FFMS) until FY 2011. 

Recommendation: 

We recommend that National Protection and Programs Directorate (NPPD) follow existing 

policies and procedures related to the reporting of fixed assets and fixed asset disposals. We also 

recommend that NPPD continue to increase communications in this regard with its financial 

reporting provider, Immigration and Customs Enforcement. 

FMC 11-02 – Subject to Availability of Funding Agreements Not Obligated in Federal Financial 

Management System at Outset of Agreement (NFR No. NPPD 11-02) 

We noted that the Federal Protective Services (FPS) did not record a dollar value for obligations 

in FFMS for Subject to Availability Funding (SAF) agreements prior to incurring costs on the 

agreements. 

We also noted that it is FPS’s policy to obligate $0 in FFMS for an agreement while costs are 

incurred. Additional funding is added to the obligation after the receipt of an invoice if the 

funding in FFMS is not sufficient to pay the invoice. 

Recommendations: 

We recommend that NPPD: 

•	 Obtain specific, written representations from internal legal sources and external 

regulatory sources to support the practice if NPPD continues to utilize this practice. 

•	 Consider implementing procedures to record obligations as they occur while minimizing 

the potential impact (e.g., potential Anti-deficiency Act violations) to customer 

organizations. 

FMC 11-03 – Inadequate Internal Controls over Reporting of Internal Use Software Projects (NFR 

No. NPPD 11-04) 

We noted that NPPD performed a review of internal use software (IUS) and identified two 

programs that create IUS but did not report any costs as capitalized as of September 30, 2011. 

NPPD reviewed expenses on all contracts on the two programs and noted that the capitalized 

costs and non-capitalized costs could not be separated and identified based on the supporting 

documentation available at the time of the review and therefore developed a methodology for 

determining the effect on the balance sheet. We noted that NPPD asset management failed to 

report capitalized costs for IUS projects in a timely manner for inclusion in the general ledger. 

2
 
National Protection and Programs Directorate 

Financial Management Comments 

September 30, 2011 

Recommendations: 

We recommend that NPPD: 

•	 Work with sub-components and programs to ensure proper tracking and reporting for all IUS. 

•	 Work with the Office of Acquisitions and Office of Procurement Operations to ensure each 

contract includes the proper property reporting clause and to add/modify contract line item 

numbers/appropriate accounting strings specifically for property. 

FMC 11-04 – Inadequate Internal Controls over Reporting of Equipment (NFR No. NPPD 11-05) 

When performing testwork over property, plant, and equipment (PP&E) additions for the fourth 

quarter of FY 2011, we noted one instance where NPPD recorded capitalized costs related to 

government furnished equipment (GFE) in an untimely manner and one instance where NPPD 

recorded capitalized costs related to GFE at the incorrect amount. 

Recommendations: 

We recommend that NPPD – US-Visitor and Immigrant Status Indicator Technology’s Asset 

Management Team: 

•	 Review its GFE and personal property to ensure all assets are properly accounted for in the 

asset management system. 

•	 Revise management policies and procedures for both GFE and government held personal 

property to ensure internal controls are established and implemented to properly account for 

property. 

FMC 11-05 – Untimely Reporting of Leasehold Improvements (NFR No. NPPD 11-06) 

When performing testwork over PP&E additions for the fourth quarter of FY 2011, we noted that 

two items that were classified as leasehold improvements were not capitalized in a timely manner 

as the invoices included expenses incurred in prior years. 

Recommendation: 

We recommend that NPPD continue to work with ICE Office of Financial Management to 

improve policies and procedures to ensure that capital projects are identified at the time of 

obligation, including leasehold improvements. 

3
 
Disposition1 

IAR FMC 

NFR No. Description MW SD NC No. 

11-01 Inadequate Internal Controls over Reporting of Government 

Furnished Equipment Asset Disposals 11-01 

11-02 

Subject to Availability of Funding Agreements Not Obligated in 

Federal Financial Management System (FFMS) at Outset of 

Agreement 

11-02 

11-03 Potential ADA Violation N 

11-04 Inadequate Internal Controls over Reporting of Internal Use Software 

(IUS) Projects 11-03 

11-05 Inadequate Internal Controls over Reporting of Equipment 11-04 

11-06 Untimely Reporting of Leasehold Improvements 11-05 

 

Appendix A 

National Protection and Programs Directorate 

Crosswalk - Financial Management Comments to Active NFRs 

September 30, 2011 

1

Disposition Legend: 

IAR	 Independent Auditors’ Report dated November 11, 2011 

FMC	 Financial Management Comment 

MW	 Contributed to a Material Weakness at the Department level when combined with the results of all other components 

SD	 Contributed to a Significant Deficiency at the Department level when combined with the results of all other 

components 

NC	 Contributed to Non-Compliance with laws, regulations, contracts, and grant agreements at the Department level when 

combined with the results of all other components 

NFR	 Notice of Finding and Recommendation 

Cross-reference to the applicable sections of the IAR: 

A Financial Reporting 

B Information Technology Controls and System Functionality 

C Property, Plant, and Equipment 

D Environmental and Other Liabilities 

E Budgetary Accounting 

F Entity-Level Controls 

G Fund Balance with Treasury 

H Grants Management 

I Custodial Revenue and Drawback 

J Federal Managers’ Financial Integrity Act of 1982 (FMFIA) 

K Federal Financial Management Improvement Act of 1996 (FFMIA) 

L Single Audit Act Amendments of 1996 

M Chief Financial Officers Act of 1990 (CFO Act) 

N Antideficiency Act, as amended (ADA) 

O Government Performance and Results Act of 1993 (GPRA) 

4
 
Appendix B 

National Protection and Programs Directorate 

Status of Prior Year NFRs 

September 30, 2011 

Disposition1 

NFR No. Description Closed2 Repeat 

(2011 NFR No.) 

10-01 Inadequate Internal Controls over Reporting of IUS Projects NPPD-11-04 

10-02 Inconsistent Application of Property Capitalization Thresholds at NPPD X 

10-03 Untimely De-Obligation of Undelivered Orders X 

10-04 Potential ADA Violation NPPD-11-03 

10-05 Subject to Availability of Funding Agreements Not Obligated in FFMS at 

Outset of Agreement NPPD-11-02 

10-06 Obligations Are Not Recorded in FFMS in a Timely Manner X 

10-07 Payment Processed Without Contracting Officer Certification X 

1 KPMG was engaged to perform an audit over the DHS balance sheet and statement of custodial activity as of and for the year 

ended September 30, 2011, and was not engaged to perform an audit over the statement of net cost, statement of changes in net 

position, and statement of budgetary resources for the year ended September 30, 2011. In addition, we were engaged to followup on the status of all active NFRs that supported significant deficiencies reported in our FY 2010 Independent Auditors’ Report. 

2 The scope of our audit was limited to follow-up on NFRs that supported a material weakness or significant deficiency as 

reported in our Independent Auditors’ Report. All other NFRs, e.g., that described insignificant findings, and therefore presented 

to DHS management as observations for consideration, were considered closed. 

5
 
Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretary 

Director, GAO/OIG Liaison Office 

Assistant Secretary for Office of Policy 

Assistant Secretary for Office of Public Affairs 

Assistant Secretary for Office of Legislative Affairs 

Chief Financial Officer 

Chief Information Officer 

National Protection and Programs Directorate 

Under Secretary 

Director of Finance, Budget, and Acquisition 

Audit Liaison 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as 

appropriate 
 

 

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