Department of Homeland Security
 

National Flood Insurance Program’s Management 

Letter for FY 2011 DHS Consolidated 

Financial Statements Audit 

(Redacted) 

OIG-12-71 April 2012 (Revised)
 
 

             

 

 

Office of Inspector General 

U.S. Department of Homeland Security 

Washington, DC 20528 

APR 16 2012

Preface 

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

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

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

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

efficiency, and effectiveness within the Department. 

This report presents the National Flood Insurance Program’s Management Letter for FY 

2011 DHS Consolidated Financial Statements Audit. It contains observations related to 

internal control that were not required to be reported in the financial statements audit 

report. The independent public accounting firm KPMG LLP (KPMG) performed the 

integrated audit of DHS’ FY 2011 financial statements and internal control over financial 

reporting and prepared this management letter. KPMG is responsible for the attached 

management letter dated November 11, 2011 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 those responsible for 

implementation. 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 
NATIONAL FLOOD INSURANCE PROGRAM
 

Management Letter for the
 

Year Ended September 30, 2011 

 

KPMG LLP 

Suite 12000 

1801 K Street, NW 

Washington, DC 20006 

November 11, 2011 

Office of Inspector General 

U.S. Department of Homeland Security, and 

Associate Administrator, Federal Insurance and Mitigation Administration 

U.S. Department of Homeland Security Federal Emergency Management Agency 

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. 123, 

Management’s Responsibility for Internal Control, Appendix A. In connection with our audit, we 

also considered DHS’ compliance with certain provisions of applicable laws, regulations, 

contracts, and grant agreements that could have a direct and material effect on the FY 2011 

financial statements. 

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. 

During our FY 2011 DHS audit, we noted certain matters involving the Federal Emergency 

Management Agency’s (FEMA) National Flood Insurance Program (NFIP) internal control and 

other operational matters that are presented for your consideration. These observations and 

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

management of the named insurance companies (where applicable), FEMA’s Office of the Chief 

Financial Officer, and FEMA’s Federal Insurance and Mitigation Administration, are intended to 

improve internal control or result in other operating efficiencies and are summarized in Exhibit I 

of this letter. These comments are in addition to the material weaknesses and significant 

deficiencies presented in our Independent Auditors’ Report, dated November 11, 2011, included 

in the FY 2011 DHS Annual Financial Report. The status of our prior year observations is 

presented in Exhibit II. 

Certain control deficiencies related to FEMA information technology (IT) controls will be 

presented in a separate letter to the DHS Office of Inspector General and the FEMA Chief 

Information Officer, and certain other control deficiencies related to FEMA’s internal controls 

exclusive of our IT findings will be presented in a separate letter to the DHS Office of Inspector 

General and the FEMA Chief Financial Officer. 

KPMG LLP is a Delaware limited liability partnership, 

the U.S. member firm of KPMG International Cooperative 

(“KPMG International”), a Swiss entity. 
Other deficiencies in internal control, potentially including additional material weaknesses and 

significant deficiencies, may have been identified and reported had we been able to apply 

sufficient audit procedures to express an opinion on DHS’ internal control over financial 

reporting of the FY 2011 financial statements. We aim, however, to use our knowledge of the 

NFIP gained during our work to make observations and suggestions that we hope will be useful to 

you. 

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

This report is intended for the information and use of DHS and FEMA management, the DHS 

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

the U.S. Government Accountability Office, and is not intended to be and should not be used by 

anyone other than these specified parties. 

Very truly yours, 
Exhibit I 

I. BACKGROUND 

The Federal Insurance and Mitigation Administration of the Department of Homeland Security (DHS) 

Federal Emergency Management Agency (FEMA) manages the National Flood Insurance Program 

(NFIP). Private insurance companies and the Direct Servicing Agent administer the flood insurance 

policies issued through the NFIP. The insurance companies and Direct Servicing Agent write NFIP 

policies, adjust flood claims, process and distribute claim payments to policyholders, and establish and 

maintain loss reserves. The data associated with flood policies and claims are used to calculate estimates 

included in the year-end NFIP financial statements, which are recorded in the year-end DHS financial 

statements. Thus, the precision of the estimates used to reflect actual events is dependent upon the 

accuracy and consistency of the underlying data submitted by the insurance companies and the Direct 

Servicing Agent on a monthly basis. 

II. INTERNAL CONTROL DEFICIENCIES RELATED TO CLAIMS 

A. 	 Internal Control Deficiencies and Errors Identified over Claims Paid 

Observation: 

We selected nine insurance companies at which to perform audit procedures over claims paid for the 

periods October 1, 2010 through March 31, 2011, April 1 through June 30, 2011, and July 1 through 

August 31, 2011. For the nine companies selected, we tested a sample of claims paid totaling 450 items 

covering the three testing periods identified above. During this testing, we noted the following internal 

control deficiencies and errors: 

1)	 Based on our March 31, 2011 testwork, for two sample items, the claim payment was not 

recorded in the correct fiscal year: 

Company Policy Number Date of Loss Claim Payment 

 03/30/2010 $100,000 

 03/30/2010 $400,000 

2)	 Based on our March 31, 2011 testwork, for eight sample items, the loss reserve related to the 

claim transaction was not updated properly to reflect claim payments or additional adjustor 

reports, causing reserves to be overstated or understated: 

Company Policy No. Date of Loss Claim Payment 

 09/30/2010 $34,823.74

 10/01/2010 $169,142.53 

 10/05/2010 $237,905.80 

 12/13/2010 $69,497.31 

 12/26/2010 $55,667.97 

 09/13/2008 $197,601.74 

 09/30/2010 $36,547.24 

I.1
 
 

 

 

Exhibit I 

Company Policy No. Date of Loss Claim Payment 

 10/01/2010 $417,755.32 

3) Based on our March 31, 2011 testwork, for one sample item, the deductible was not properly 

applied to a contents claim: 

Company Policy Number Date of Loss Claim Payment 

 09/30/2010 $6,238.15 

4) Based on our March 31, 2011 testwork, for two sample items, the claim was not properly closed 

after the policy was closed and rewritten: 

Company Policy Number Date of Loss Claim Payment 

 09/13/2008 $135,000 

 09/13/2008 $145,000 

5)	 Based on our March 31, 2011 and June 30, 2011 testwork, for four sample items, we noted that 

the claim payment made to the insured did not match the total claim payment on the final report, 

causing the insured to be underpaid or overpaid. 

March 31, 2011 Testwork Results: 

Company Policy Number Date of Loss Claim Payment 

 06/05/2009 $15,201.94 

June 30, 2011 Testwork Results: 

Company Policy Number Date of Loss Claim Payment 

 05/01/2011 $71,035.69 

 04/14/2011 $26,889.74 

 02/28/2011 $500,000.00 

FEMA’s Federal Insurance and Mitigation Administration did not provide adequate oversight to ensure 

claim files were processed and reviewed in accordance with NFIP guidelines before the approval and 

issuance of claim payments, and to ensure the specific and consistent establishment and reporting of loss 

reserves and subsequent adjustments to the loss reserves. 

Recommendations: 

We recommend that FEMA’s Federal Insurance and Mitigation Administration: 

1)	 Follow-up with each of the insurance companies to determine that appropriate corrective action 

has been implemented to address the exceptions noted. 

I.2
 
 

 

 

Exhibit I 

2)	 Provide increased oversight to insurance companies participating in the NFIP to ensure claim 

files are being processed and reviewed in accordance with NFIP guidelines before the approval 

and issuance of claim payments, and to ensure the specific and consistent establishment and 

reporting of loss reserves and subsequent adjustments to the loss reserves. 

B. 	 Inaccuracies in Claims’ Loss Reserves 

Observation: 

We selected nine insurance companies at which to perform audit procedures over the accuracy and 

completeness of loss reserves established as of March 31, 2011 and August 31, 2011. For the nine 

companies selected, we tested a sample of loss reserves reported as of March 31, 2011 and August 31, 

2011, totaling 130 items. During this testing, we noted the following inaccuracies at the respective 

insurance companies: 

1)	 Based on March 31, 2011 and August 31 testwork, for seven sample items, the loss reserve 

recorded in the insurance company’s NFIP claims system was not updated appropriately to reflect 

additional adjustor reports and/or claim payments, causing the reserves to be misstated. 

March 31, 2011 Testwork Results: 

Company Policy Number Date of Loss Loss Reserve 

 03/11/2011 $31,000 

 03/06/2011 $17,000 

 03/06/2011 $22,000 

 03/11/2011 $50,000 

 03/11/2011 $3,000 

August 31, 2011 Testwork Results: 

Company Policy Number Date of Loss Loss Reserve 

 07/18/2011 $9,000 

 07/19/2011 $500,000 

2) Based on March 31, 2011 testwork, for three sample items, the claim was not closed in a timely 

manner, which caused reserves to be overstated. 

Company Policy Number Date of Loss Loss Reserve 

 11/11/2009 $40,000 

 09/13/2008 $30,000 

 09/18/2003 $30,000 

I.3
 
Exhibit I 

3)	 Based on March 31, 2011 testwork, for one sample item, the claim was closed without payment 

and then reopened in order to pay adjustor fees. However, the claim was not re-closed after the 

fees were paid, which in turn caused reserves to be overstated. 

Company Policy Number Date of Loss Loss Reserve 

 02/28/2011 $10,000 

Recommendations: 

We recommend that FEMA’s Federal Insurance and Mitigation Administration: 

1)	 Follow-up with each of the insurance companies noted above to determine that appropriate 

corrective action has been implemented to address the exceptions noted. 

2)	 Provide increased oversight to ensure specific and consistent documentation of the established 

loss reserve and subsequent adjustment to the loss reserve per claim at the insurance companies 

participating in the NFIP is maintained. 

I.4
 
Exhibit II 

STATUS OF PRIOR YEAR OBSERVATIONS 

The status of each observation reported in our letter dated November 12, 2010 to the Office of Inspector 

General, U.S. Department of Homeland Security, and Acting Administrator, Mitigation Directorate, 

Federal Emergency Management Agency, U.S. Department of Homeland Security, is summarized in the 

table below. For each repeated observation, we provided the current year Observation Number and 

Notice of Findings and Recommendations (NFR) Number. 

Disposition 

2010 

Observation 

No. 

Description Closed 

Repeat (2011 

Observation No./ 

NFR No.) 

II.A Internal Control Deficiencies Identified 

over Claims Paid II.A/ FEMA 11-15 

II.B Inaccuracies in Claims’ Loss Reserves II.B/ FEMA 11-14 

III.A Internal Control Deficiencies Identified 

over Premiums Written X 

III.B Internal Control Deficiencies over the 

Retrospective Reserve Analysis X 

III.C 

Deficiency in the Methodology Used to 

Calculate the Non-Current Portion of the 

Insurance Liability Estimate 

X 

II.1
 
Exhibit III 


MANAGEMENT’S RESPONSE
 

u.s. Depntment of Homeland Stturity 

500 C Street, SW 

Washington, DC 20472 

March 14, 2012 

Memorandum For: Anne Richards 

Assistant Inspector General for Audits 

From: E

Deputy 

dward 

Associate 

L. Connor 

Administrator 

Z~ for Federa~ l Insurance 

Federal Emergency Management Agency 

Subject: Draft Report: NFIP Management Letter for DHS FY 20 11 

Financial Statement Audit 

Thank you for the opportunity to comment on the draft management letter for the DHS FY 20 I I 

financial statement audit. 

Internal Control Deficiencies Related to Claims 

A. Internal Control Deficiencies Identified over Claims Paid 

Management concurs with the recommendation and has initiated follow-up with the WYO 

companies on the exceptions noted. The NFlI' wi ll continue to review WYO company claims 

handling as part of the ongoing claims operation reviews to ensure compliance with NFIP guidelines 

and consistent establishment and reporting of loss reserves and subsequent adjustments. 

Management does not believe that individual claims loss reserves are material to the NFlI' loss 

reserving process. 

B.lnaccuracies in Claims' Loss Reserves 

Management concurs with the recommendation and has initiated fo llow-up with the WYO 

companies on the exceptions noted and wi ll continue to review WYO company claims loss reserving 

as part of the ongoing claims operation reviews to ensure consistent establishment and reporting of 

loss reserves and subsequent adjustments. Additional emphasis is given to these matters through 

Workshops during the National Flood Conference. Management does not believe that individual 

claims loss reserves are material to the NFrp loss reserving process. 

www.fema .gov 

III.1
 
 

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 

Federal Emergency Management Agency 

FEMA Administrator 

Chief Financial Officer 

FEMA Audit Liaison 

Deputy Associate Administrator for Federal Insurance 

Chief of Risk Insurance 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as 

appropriate 
ADDITIONAL INFORMATION AND COPIES 

To obtain additional copies of this report, please call the Office of Inspector General 

(OIG) at (202)254-4100, fax your request to (202)254-4305, or e-mail your request to 

our OIG Office of Public Affairs at DHS-OIG.OfficePublicAffairs@dhs.gov. For 

additional information, visit our OIG website at www.oig.dhs.gov or follow us on Twitter 

@dhsoig. 

OIG HOTLINE 

To report alleged fraud, waste, abuse or mismanagement, or any other kind of criminal 

or noncriminal misconduct relative to Department of Homeland Security programs and 

operations: 

• Call our Hotline at 1-800-323-8603 

 

• Fax the complaint directly to us at (202)254-4292 

• E-mail us at DHSOIGHOTLINE@dhs.gov; or 

• Write to us at: 

DHS Office of Inspector General/MAIL STOP 2600, 

Attention: Office of Investigation - Hotline, 

245 Murray Drive SW, Building 410 

Washington, DC 20528 

The OIG seeks to protect the identity of each writer and caller.