NOTE 7

NOTE 8

NOTE 9

NOTE 10

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

APPORTIONMENT CATEGORIES OF OBLIGATIONS INCURRED
DIRECT VS. REIMBURSABLE OBLIGATIONS

Direct vs. Reimbursable Obligations incurred have the following apportionment
categories for the fiscal years ended September 30:

2013 2012
Direct Obligations (Category A) $ 44,523,263 $ 47,228,548
Reimbursable Obligations (Category A) 1,545,927 1,380,424
Total $ 46,069,190 $ 48,608,972

UNDELIVERED ORDERS AT THE END OF THE PERIOD

The Unpaid Obligated Balances of $3,060,699 and $7,359,559 for the fiscal years
ended September 30, 2013 and 2012, respectively, represented obligations
relating to Undelivered Orders (goods and services contracted for but not yet
received at year end), Accounts Payable (amounts owed at year end for goods and
services received) and Accounts Receivable (amounts owed to FMCS at year end
for goods and services provided).

BUDGETARY RESOURCES

FMCS maintains unobligated balances in annual appropriations. The remaining
unobligated balances in annual appropriations are no longer available for
obligation, except for upward and downward adjustments of the balance. Annual
funds are primarily for salaries and operating expenses. FMCS monitors its
budget execution at the individual appropriation level. The amount of budgetary
resources obligated for undelivered orders at September 30, 2013 and 2012, was
$1,839,650 and $3,249,644, respectively, which is included in the unpaid
obligations balance on the statements of budgetary resources.

OPERATING LEASES

FMCS has numerous operating leases with the General Services Administration
(GSA), for office space at its headquarters operations in Washington, D.C. and for
district and field operations. The lease agreements expire at various dates, the
latest being 2023. The GSA charges rent that is intended to approximate
commercial rental rates. FMCS has estimated its future minimum liability on
GSA operating leases by adding inflationary adjustments to the FY 2013 lease
rental expense.

-18-


NOTE 2

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued
Liabilities (continued)

liabilities and there is no certainty that corresponding future appropriations will be
enacted. Liabilities arising from other than contracts can be abrogated by the
Government, acting in its sovereign capacity, since liabilities are only those items
that are present obligations of the government. FMCS’s liabilities are classified as
covered by budgetary resources or not covered by budgetary resources. Liabilities
Covered by Budgetary Resources include: (1) new budget authority, (2) spending
authority from offsetting collections, (3) recoveries of expired budget authority,
(4) unobligated balances of budgetary resources at the beginning of the year, and
(5) permanent indefinite appropriations or borrowing authority. Liabilities Not
Covered by Budgetary Resources represent liabilities where funding has not yet
been made available through Congressional appropriations or current earnings.
The major liabilities in this category include employee annual leave earned but
not taken. Liabilities Covered by Budgetary Resources and Liabilities Not
Covered by Budgetary Resources are combined on the balance sheets.

Accounts payable

Accounts payable primarily consist of amounts due for goods and services
received, progress on contract performance, interest due on accounts payable and
other miscellaneous payables.

Accrued payroll and benefits

Accrued payroll and benefits consist of salaries, wages, leave and benefits earned
but not taken or disbursed as of year-end. Annual and compensatory leave is
expended with an offsetting liability as it is earned and the liability is reduced as
leave is taken. Each year, the balance in the accrued annual leave liability
account is adjusted to reflect current pay rates. To the extent current or prior year
appropriations are not available to fund annual and compensatory leave earned
but not taken, funding will be obtained from future financing resources. Sick
leave and other types of non-vested leave are expended as taken.

Interest on late payments
Pursuant to the Prompt Payment Act, 31 U.S.C. 3901-3907, Federal agencies
must pay interest on payments for goods and services made to business concerns

after the due date. The due date is generally 30 days after receipts of a proper
invoice or acceptance of the goods or services and 15 days for small businesses.

-12-


FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

NOTE 14 RECONCILIATION OF NET COST OF OPERATIONS (PROPRIETARY)

TO BUDGET (Continued)
2013 2012
Resources Used to Finance Activities
Budgetary resources obligated
Obligations incurred $ 46,069,190 $ 48,608,972
Less: Spending authority from offsetting collections and recoveries (2,993,257) (2,710,266)
Obligations net of offsetting collections and recoveries 43,075,933 45,898,706
Less: Distributed offsetting receipts (727) (5,379)
Net obligations 43,075,206 45,893,327
Other resources
Imputed financing from costs absorbed by others 1,888,953 1,868,516
Total Resources Used to Finance Activities 44,964,159 47,761,843
Resources Used to Finance Items Not Part of the
Net Cost of Operations
Change in budgetary resources obligated for goods, services,
and benefits ordered but not yet provided 1,409,994 (161,326)
Resources that fund expenses recognized in prior periods (126,830) 112,405
Resources that finance the acquisition of assets 238,652 40,937
Total Resources Used to Finance Items not Part of the
Net Cost of Operations 1,521,816 (7,984)
Total Resources Used to Finance the Net Cost of Operations 46,485,975 47,753,859
Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period
Components requiring or generating resources in future periods:
Increase in annual leave liability 176,749 90,081
Total Components of Net Cost of Operations That Will
Require or Generate Resources in Future Periods 176,749 90,081
Components Not Requiring or Generating Resources:
Depreciation and amortization 270,831 262,272
Other adjustments (11,329) 13,970
Total Components of Net Cost of Operations That Will
Not Require or Generate Resources in the Current Period 436,251 366,323
Net Cost of Operations $ 46,922,226 $48,120,182



systems requirements, (2) applicable Federal accounting standards, and (3) the United States
Government Standard General Ledger (USSGL) at the transaction level. We used OMB’s
Implementation Guidance for the Federal Financial Management Improvement Act, dated
January 9, 2009, to determine compliance.

RESPONSIBILITIES
Management’s Responsibilities

Management of FMCS is responsible for the financial statements; establishing and maintaining
effective internal control; and complying with laws, regulations, contracts, and grant agreements
applicable to FMCS.

Auditors’ Responsibilities

Our responsibility is to express an opinion on the financial statements of Federal Mediation and
Conciliation Service as of and for the years ended September 30, 2013 and 2012 based on our
audits. We conducted our audits in accordance with auditing standards generally accepted in the
United States of America; the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States; and OMB Bulletin
No. 07-04, as amended. Those standards and OMB Bulletin No. 07-04 require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements; assessing the accounting principles used and
significant estimates made by management; and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In planning and performing our audit as of and for the year ended September 30, 2013, we
considered FMCS’ internal control over financial reporting by obtaining an understanding of
FMCS’ internal control, determining whether internal controls had been placed in operation,
assessing control risk, and performing tests of controls as a basis for designing our auditing
procedures for the purpose of expressing our opinion on the financial statements, but not for the
purpose of expressing an opinion on the effectiveness of FMCS’ internal control over financial
reporting. Accordingly, we do not express an opinion on the effectiveness of FMCS’ internal
control over financial reporting. We did not test all controls relevant to operating objectives as
broadly defined by the Federal Managers’ Financial Integrity Act of 1982.

As part of obtaining reasonable assurance about whether FMCS’ financial statements as of and
for the year ended September 30, 2013 are free of material misstatement, we performed tests of
FMCS’ compliance with certain provisions of laws, regulations, contracts, and grant agreements,
noncompliance with which could have a direct and material effect on the determination of the
financial statement amounts, and certain provisions of other laws and regulations specified in
OMB Bulletin No. 07-04, as amended. We limited our tests of compliance to the provisions
described in the preceding sentence, and we did not test compliance with all laws, regulations,
contracts, and grant agreements applicable to FMCS. However, providing an opinion on


NOTE 10

NOTE 11

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

OPERATING LEASES (Continued)

Future estimated minimum lease payments for the fiscal years ended September
30 are as follows:

2014 $ 5,666,000
2015 5,703,000
2016 5,986,000
2017 6,385,000
2018 6,695,000
Thereafter 7,030,000

Total $37,465,000

Rent expense totaled $5,211,825 and $5,436,621 for the fiscal years ended
September 30, 2013 and 2012, respectively.

PENSIONS, OTHER RETIREMENT BENEFITS, AND OTHER POST
RETIREMENT BENEFITS

FMCS reports the full cost of employee pensions, other retirement benefits, and
other post-employment benefits in accordance with SFFAS No. 5, Accounting for
Liabilities of the Federal Government. Although FMCS funds a portion of the
benefits under FERS and CSRS relating to its employees and withholds the
necessary payroll deductions, a portion of the Normal Pension Cost remains
unpaid. SFFAS No. 5 requires the recognition of this remaining cost as imputed
financing.

FMCS also funds a portion of the benefits for health and life insurance relating to
its employees and withholds the necessary premiums as established annually by
the Office of Personnel Management. FMCS’ portion of the health insurance
premium is determined by the Office of Personnel Management and is based upon
the plan under which the employee is enrolled. FMCS’ portion of the basic life
insurance coverage is 2/3 of the premium. The premium is determined by the
employee's annual salary rounded to the next $1,000, plus $2,000.

Pension and other retirement benefit expenses are calculated using cost factors
determined by actuaries at the Office of Personnel Management. These cost
factors are calculated based on economic and demographic assumptions. The cost
factor is multiplied by the basic pay in order to obtain the Normal Cost for the
accounting period. This Normal Cost is the present value of the projected benefits
of each employee allocated on a level basis over the service of the employee
between entry age and assumed exit age. The imputed financing amount
represents the difference between normal cost of benefit plan and the employer's
total benefit expense and the employees’ contribution.

-19-


accounts that are no longer required and accounts of terminated or transferred users, and
reviewing accounts.

-25 -


NOTE 12

NOTE 13

NOTE 14

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

STATEMENT OF BUDGETARY RESOURCES COMPARISONS TO THE
BUDGET OF THE UNITED STATES GOVERNMENT (Continued)

The Federal Mediation and Conciliation Services Budget Appendix can be found
on the OMB website (http:/Avww.whitehouse.gov/omb/budget) and will be
available in early February 2014.

Distributed

Budgetary Obligations Offsetting Net
Resources Incurred Receipts Outlays
Statement of
Budgetary
Resources $ 54. § 49 $ - $ 45
Expired Funds (2) : - -
Budget of the
United States $ 52_ $ 49 $ - $ 45

The difference between the Statement of Budgetary Resources and the Budget of
the U.S. Government is due to Expired Unobligated Balances being reported in
the Budget of the United States Government but not in the Statement of

Budgetary Resources.

SUBSEQUENT EVENTS

In preparing these financial statements, FMCS has evaluated events and
transactions through December 16, 2013, the date the financial statements were

issued, for potential recognition or disclosure in the financial statements for the
year ended September 30, 2013.

RECONCILIATION OF NET COST

The objective of the information shown below is to provide an explanation of the
differences between budgetary and financial (proprietary) accounting. This is
accomplished by means of a reconciliation of budgetary obligations and non-
budgetary resources available to FMCS with its net cost of operations.

See next page for reconciliation schedule.

-21-


FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012
NOTE 3 FUND BALANCE WITH TREASURY (Continued)

The balances were comprised of the following at September 30:

2013 2012
Fund balance with Treasury
Appropriated S&E Funds $ 4,958,469 $ 9,113,278
Labor Mgmt. Coop Project 4,560,599 4,366,865
Total $_9,519,068  $ 13,480,143
Status of fund balance with Treasury
Unobligated balance
Available $ 816,383 $ 667,538
Unavailable 5,641,259 5,447,667
Obligated balance not yet disbursed 3,061,426 7,364,938
Total $9,519,068  $ 13,480,143

In fiscal year 2013, FMCS cancelled its FY 2008 annual appropriation and FY
2007/2008 grant fund and returned $329,635, to the Treasury. In addition, the
current fiscal year appropriation was rescinded by $2,414,580 which included the

rescission of $92,325 and sequestration amount of $2,322,255.

In fiscal year 2012, FMCS cancelled its 2007 annual appropriation and returned
$178,192 to the Treasury. In addition, the current fiscal year appropriation was

rescinded by $87,413.

NOTE 4 ACCOUNTS RECEIVABLE

Accounts receivable consist primarily of amounts due from federal government
departments and other agencies. Since these receivables are from other

government agencies, management believes these receivables

collectable.
The receivable balance consisted of the following at September 30
2013 2012

Accounts Receivable
Intra-governmental $ 25,278 $ 88.439

-16-

are fully


FEDERAL MEDIATION AND CONCILIATION SERVICE
STATEMENTS OF BUDGETARY RESOURCES

Year ended September 30,

2013 2012
Budgetary Resources
Unobligated balance, beginning of period $ 6,115,205 § 6,029,516
Recoveries of prior year obligations 554,251 728,914
Other changes in unobligated balances (2,744,215) (265,605)
Appropriations discretionary 46,162,588 46,250,000

Spending authority from offsetting collections 2,391,503 1,981,352
Total Budgetary Resources $_52,479,332_ $54,724,177
ae CANT

Status of Budgetary Resources

Obligations incurred $ 46,069,190 $ 48,608,972
Unobligated balance, end of year
Apportioned 816,383 667,539
Unapportioned 5,593,759 5,447,666
Total unobligated balance, end of year 6,410,142 6,115,205
Total Status of Budgetary Resources $__ 52,479,332 $_ 54,724,177

Change in Obligated Balance

Unpaid obligations brought forward October 1 7,447,998 6,124,071
Uncollected customer payments (88,439) (14,204)
Unpaid obligated balance brought forward, net 7,359,559 6,109,867
Obligations incurred 46,069,190 48,608,972
Gross outlays (49,876,960) (46,556,131)
Change in uncollected customer payments from federal sources 63,160 (74,235)
Recoveries of prior year unpaid obligations, actual (554,251) (728,914)
Obligated balance, net - end of period
Unpaid obligations 3,085,977 7,447,998
Uncollected customer payments from federal sources 25,278) (88,439)
Total Obligated Balance, Net, End of Period $ 3,060,699 § 7,359,559
Budget Authority
Budget authority $ 46,139,510 $ 48,143,939
Offsetting collections (2,502,165) (1,907,117)
Change in uncollected customer payments from federal sources 63,160 (74,235)
Budget Authority, Net $___ 43,700,505 $46,162,587
Outlays
Gross outlays $49,876,960 $ 46,556,131
Offsetting collections (2,502,165) (1,907,117)
Outlays, net 47,374,795 44,649,014
Distributed offsetting receipts (727) (5,379)
Agency Outlay, Net $__ 47,374,068 $___ 44,643,635

The accompanying notes are an integral part of these financial statements.

-8-


SUPPLEMENTAL INFORMATION


FEDERAL MEDIATION AND CONCILIATION SERVICE

BALANCE SHEETS

ASSETS
Intragovernmental Assets
Fund balance with Treasury (Note 3)
Accounts receivable (Note 4)
Total intragovernmental assets

General property and equipment, net (Note 5)
Total Assets

LIABILITIES
Intragovernmental Liabilities
Accounts payable
Accrued federal employees' compensation act liabilities
Advances from others
Other
Total intragovernmental liabilities

Liabilities with the Public
Accounts payable
Accrued payroll and benefits
Accrued annual and compensatory leave liabilities
Total non-governmental liabilities

Total Liabilities
NET POSITION

Unexpended appropriations
Cumulative results of operations

Total Net Position

Total Liabilities and Net Position

$

$

$

September 30,

2013 2012
9,519,068 $ 13,480,143
25,278 88,439
9,544,346 13,568,582
492,604 524,783
10,036,950 $ 14,093,365
27,759 $ — 1,524,402
896,773 720,024
212,313 -
727 5,379
1,137,572 2,249,805
414,133 465,926
804,435 2,208,026
2,824,174 2,697,343
4,042,742 5,371,295
5,180,314 7,621,100
3,786,340 5,063,976
1,070,296 1,408,289
4,856,636 6,472,265

10,036,950

$14,093,365

The accompanying notes are an integral part of these financial statements.

5.


Our responsibility also included expressing an opinion on FMCS’ compliance with FFMIA
section 803(a) requirements as of and for the year ended September 30, 2013, based on our
examination. Our examination was conducted in accordance with attestation standards
established by the American Institute of Certified Public Accountants and the standards
applicable to attestation engagements contained in Government Auditing Standards issued by the
Comptroller General of the United States, and accordingly, included examining, on a test basis,
evidence about FMCS’ compliance with the requirements of FFMIA section 803(a) and
performing such other procedures as we considered necessary in the circumstances, We believe
that our examination provides a reasonable basis for our opinion. Our examination does not
provide a legal determination on FMCS’ compliance with specified requirements.

We issued a draft of this report to FMCS’ management and requested its comments.
Management replied by indicating its general agreement with the audit results.

This report is intended solely for the information and use of FMCS’ management, OMB, the
U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and
should not be used by anyone other than these specified parties.

athr.+bs, 22pP

December 16, 2013


FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

NOTE5 GENERAL PROPERTY AND EQUIPMENT

General property and equipment owned by FMCS are all classified as equipment
and consisted of the following at September 30:

2013 2012
Equipment, Furniture and Hardware $ 1,881,499 $ 1,701,961
ADP Software 22,377 22,377
Total 1,903,876 1,724,338
Less: Accumulated depreciation and
amortization (1,411,272) (1,199,555)
Net Book Value $ 492,604 $ 524,783

Depreciation expense for the fiscal years ended September 30, 2013 and 2012,
was $270,831 and $262,272, respectively. During fiscal years 2013 and 2012,
FMCS disposed of property and equipment totaling $59,114 and $22,789,
respectively and reduced its cost and accumulated depreciation by this amount.

NOTE 6 LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

Liabilities not covered by budgetary resources include liabilities for which
congressional action is needed before budgetary resources can be provided.

Liabilities covered by budgetary resources as of September 30, 2013 and 2012,
were respectively comprised of accounts payable of $414,133 and $465,926
advances from others of $212,313 and $0 and accrued funded payroll and leave of

$804,435 and $2,208,026.
FMCS future funding requirements were comprised of the following at September
30:
2013 2012

Unfunded annual leave liability $ 2,824,174 $ 2,697,343

Unfunded FECA liability 896,773 720,024

Total liabilities not covered by

budgetary resources $ 3,720,947 $ 3,417,367

Change in liability not covered by budgetary resources:

2013 2012 Change
Unfunded leave liability $ 2,824,174 $ 2,697,343 $ 126,831
Unfunded FECA liability 896,773 720,024 176,749

$_3,720,947_ $__ 3,417,367 $ 301,077

-17-


FEDERAL MEDIATION AND CONCILIATION SERVICE
STATEMENTS OF CHANGES IN NET POSITION

Cumulative Results of Operations
Beginning balance

Budgetary Financing Sources
Appropriations used
Other Financing Sources
Imputed financing
Other revenue

Total Financing Sources
Net cost of operations
Net Change

Cumulative Results of Operations

Unexpended Appropriations
Beginning balance

Budgetary Financing Sources
Appropriations received
Other adjustments
Appropriations used
Total Budgetary Financing Sources
Total Unexpended Appropriations

Net Position

Year ended September 30,
2013 2012

$ 1,408,289 $ 1,539,837

44,696,008 46,125,497
1,888,953 1,868,516
(727) (5,379)
46,584,234 47,988,634
(46,922,226) (48,120,182)
(337,993) (131,548)
1,070,296 1,408,289

$ 5,063,976 $ 5,205,078

46,162,588 46,250,000
(2,744,215) (265,605)
(44,696,008) (46,125,497)
(1,277,635) (141,102)

$3,786,341 $ 5,063,976
$_ 4,856,637 $ 6,472,265

The accompanying notes are an integral part of these statements.

-7-


Appendix I
Deficiencies in the Design and Operations of Information Technology General Controls

During fiscal year 2013, we noted continued deficiencies in the design and/or operations of
FMCS’s Information Technology (IT) general controls pertaining to Security Management and
Access Controls. The details of these conditions are as follows:

Security Management

Although FMCS made progress in implementing its security awareness training program during
fiscal year 2013 and now requires employees and contractor personnel to complete both initial
and annual refresher security awareness training, the program had not been implemented at three
district offices. Without the completion of initial and annual refresher security awareness
training, personnel may be unaware of new risks that may compromise the confidentiality,
integrity, and availability of data. As a result, personnel may be unable to recognize and respond
appropriately to real and potential security concerns.

Access Controls

Access controls at FMCS enhanced to provide a more secure financial processing and computing
environment. Although FMCS made improvements to its access controls during fiscal year
2012, we noted several access controls that continue to be deficient:

a. The Microsoft Windows password settings, which are used to authenticate users of the
FMCS network, did not adhere to guidelines established by the National Institute of
Standards and Technology’s (NIST) United States Government Configuration Baseline
(USGCB)'. Most notably password aging policy settings were less restrictive than the
USGCB’s recommended settings.

b. As noted in the prior year, user account management controls were not implemented to
ensure user accountability and reduction of the risk of unauthorized access. We observed
the following control exceptions:

¢ Two (2) Microsoft Active Directory (AD) user accounts had not logged onto the
network for over 90 days.

e Seven (7) Microsoft AD user accounts had not logged onto the network for over 120
days.

© Thirty-two (32) Microsoft AD user accounts had not logged onto the network for
over 200 days.

e Generic user accounts existed that had not been used.

'NIST United States Government Configuration Baseline Windows Settings, September 21, 2011.

-23-


FEDERAL MEDIATION AND CONCILIATION SERVICE
AUDIT REPORTS
IN ACCORDANCE WITH THE REPORTING REQUIREMENTS OF THE FEDERAL
ACCOUNTING STANDARDS ADVISORY BOARD

For the Years Ended September 30, 2013 and 2012

WW

Walker & Co. LLP

Assurance, Business and Advisory Services



NOTE 2

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of presentation (continued)

Net Position, shown on the Balance Sheet, is composed of unexpended
appropriations and cumulative results of operations. Unexpended appropriations
are appropriated funds obligated during the period when they were available for
obligation. Those goods and services to be provided to FMCS that have not been
completely received at the end of the fiscal year will be delivered in a subsequent
year. Funds to cover the cost of those goods and services are carried forward after
fiscal year end close. "Cumulative results of operations” is the account to which
revenues and expenses are closed.

Funds from Dedicated Collections

By Government Accountability Office’s (GAO) definition of Funds from
Dedicated Collections, FMCS does not have any funds from dedicated
collections.

Basis of accounting

FMCS prepares financial statements to report its financial position and results of
operations pursuant to the requirements of 31 U.S.C. 3515(b), the Chief Financial
Officers Act of 1990 (P. L. 101-576), as amended by the Government
Management Reform Act of 1994, and in accordance with the requirements in
OMB Circular No. A-136, as revised. These statements have been prepared from
FMCS’ financial records using the accrual basis in conformity with GAAP.
GAAP for federal entities are the standards prescribed by the FASAB and
recognized by the American Institute of Certified Public Accountant (AICPA) as
federal GAAP.

Transactions are recorded on the accrual and budgetary bases of accounting.
According to the accrual basis of accounting, revenues are recognized when
earned, and expenses are recorded when resources are consumed, without regard
to the payment of cash. Budgetary accounting principles, on the other hand, are
designed to recognize the obligation of funds according to legal requirements,
which in many cases is prior to the occurrence of accrual based transactions. The
recognition of budgetary accounting transactions is essential for compliance with
legal constraints and controls over the use of federal funds. FMCS uses the cash
basis of accounting for some programs with accrual adjustments made by
recording year-end estimates of unpaid liabilities.

-10-


NOTE1

NOTE 2

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

ORGANIZATION AND PURPOSE
Reporting entity

Federal Mediation and Conciliation Service (FMCS) is an independent federal
agency whose primary mission is to prevent or minimize labor-management
disputes affecting interstate commerce by providing mediation, conciliation, and
voluntary arbitration services. These activities are performed in both the private
and public sectors, except for the railroad and airline industries, which are
covered by the Railway Labor Act and the National Mediation Board,
respectively.

For the year ended September 30, 2013, FMCS operated a national office, ten
district offices, and 58 field offices.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies utilized in the preparation of the
financial statements is as follows:

Basis of presentation

These financial statements have been prepared from the books and records of
FMCS to report the financial position and results of operations of FMCS as
required by the Government Management Reform Act of 1994, Public Law 103-
356, 108, Stat. 3515 in accordance with accounting principles generally accepted
in the United States (GAAP), and the form and content for entity’s financial
statements specified by the Office of Management and Budget (OMB) in OMB
Circular No. A-136, Financial Reporting Requirements, as revised. GAAP for
federal entities are standards prescribed by the Federal Accounting Standards
Advisory Board (FASAB), which has been designated the official accounting
standards-setting body for the federal government by the American Institute of
Certified Public Accountants (AICPA).

OMB Circular No. A-136 requires agencies to prepare basic financial statements,
which include a balance sheet, statement of net cost, statement of changes in net
position and a statement of budgetary resources. The balance sheets present, as of
September 30, 2013 and 2012, amounts of future economic benefits owned or
managed by FMCS (assets), amounts owed by FMCS (liabilities) and amounts
which comprise the difference (net position). The statements of net cost report
the full cost of the Agency’s program, both direct and indirect costs of the output,
and the costs of identifiable supporting services provided by other segments
within FMCS. The statement of budgetary resources reports FMCS’s budgetary
activity.


FEDERAL MEDIATION AND CONCILIATION SERVICE
Required Supplemental Information

INTRA-GOVERNMENTAL BALANCES BY TRADING PARTNER:

Intra-governmental Assets by Trading Partner:

Trading Partner

Fund Balance
with Treasury

Accounts
Receivable

Other
Assets

Library of Congress (03)
Government Printing Office (04)
General Accounting Office (05)
U.S. Capitol Police (09)
USS. Postal Service (18)
Department of State (19)
Department of Treasury (20)
Office of Personnel Management (24)
General Services Administration (47)
National Science Foundation (49)
Department of Transportation (69)
Treasury General Fund (99)
Other Material Agency (Please List)
Others - Immaterial Agencies (Please List)
Court Service and Offender (15)
HUD (86)

Total

Total Intra-governmental Assets

Intra-governmental Liabilities by Trading
Partner:

Trading Partner

$ -

$

$ 9,519,068

Accounts
Payable

$

Other
Liabilities

Library of Congress (03)
Government Printing Office (04)
General Accounting Office (05)
U.S. Capitol Police (09)
U.S. Postal Service (18)
Department of State (19)
Department of Treasury (20)
Office of Personnel Management (24)
General Services Administration (47)
Department of Transportation (69)
Other Material Agency (Please List)
Others - Immaterial Agencies (Please List)

National Archives

Total
Total Intra-governmental Liabilities

AA


FEDERAL MEDIATION AND CONCILIATION SERVICE
STATEMENTS OF NET COSTS

Gross Program Costs
Non government gross costs

Less: non government earned revenue

Non government net costs

Government gross costs

Less: Earned revenues from the public

Net costs - government

Costs not assigned to programs

Less: earned revenues not attributable to programs

Net Cost of Operations

Year ended September 30,

- 2013 2012

35,897,588 $ 41,797,574

(944,209) (919,686)
34,953,379 40,877,888
13,190,430 8,303,795
(1,221,583) (1,061,501)
11,968,847 7,242,294

46,922,226 $ 48,120,182

The accompanying notes are an integral part of these statements.

-6-


NOTE 11

NOTE 12

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

PENSIONS, OTHER RETIREMENT BENEFITS, AND OTHER POST
RETIREMENT BENEFITS (Continued)

For the years ended September 30, 2013 and 2012, the Normal Cost, employers
total pension expense, employees’ contribution and imputed financing amounts

were as follows:

Employers
Imputed
Employee Financing
Benefit Type Normal Cost Withholding Contribution Expense
2013
CSRS $ 665,244 §$ 144,171 $ 144,171 $ 376,903
CSRS-Offset 155,288 6,673 44,188 104,428
FERS-RAE 8,151 1,780 3,871 2,501
FERS 3,307,000 186,310 2,771,359 349,331
Total $ 4,135,683 $ 338,933 $ 2,963,588 $ 833,163
Health insurance 1,050,975
Life insurance 4,815
Total life and health insurance cost 1,055,790
Total Imputed Financing Cost $__ 1,888,953
2012
CSRS $ 681,548 $ 160,095 $ 160,095 $ 361,358
CSRS-Offset 147,285 5,323 44,440 97,522
FERS 3,206,440 187,237 2,785,156 234,047
Total $ 4,035,273 $ 352,665 $ 2,989,691 $ 692,927
Health insurance 1,170,671
Life insurance 4,917
Total life and health insurance cost 1,175,588
Total Imputed Financing Cost $ 1,868,515

STATEMENT OF BUDGETARY RESOURCES COMPARISONS TO THE
BUDGET OF THE UNITED STATES GOVERNMENT

The Budget of the United States Government with actual amounts for the year
ended September 30, 2013, has not been published as of the issue date of these
financial statements. A reconciliation of budgetary resources, obligations incurred
and net outlays (in millions), as presented in the Statement of Budgetary
Resources, to amounts included in the Budget of the United States Government
for the year ended September 30, 2012, is shown below.

-20-


Recommendations:
We recommend that FMCS strengthen its IT general controls as follows:
1. Security Management

a. We recommend that FMCS’ management continue its efforts to implement security
awareness training at all of its district offices. FMCS must also enforce sanctions against
personnel who do not successfully complete the security awareness training as required
by NIST SP 800-53, Revision 3.

2. Access Controls

a. We recommend that FMCS’ management update its password policies and procedures for
Microsoft Windows to require the 60 day maximum password expiration interval
established by the United States Government Configuration Baseline (USGCB). FMCS
should employ a risk-based decision process for any deviations to stated policies,
guidelines, or regulations and document the decision accordingly.

b. We recommend that FMCS management establish policies and procedures to restrict the
use of generic user accounts and require unique identifiers for user accounts to ensure
individual user accountability in accordance with NIST SP 800-53, Revision 3.

c. We recommend that FMCS management establish policies and procedures to monitor and
periodically review user accounts, and remove user accounts that are no longer needed as
tequired by NIST SP 800-53, Revision 3.

Management’s Response:

The IT department will continue to update our processes and procedures in an effort to fully meet
the criteria for all items listed.

Auditor's Response:
Management has provided a corrective action plan to address our recommendation. Our fiscal

year 2014 audit procedures will determine whether the recommendation has been adequately
addressed and considered closed.

- 26 -


INTERNAL CONTROL OVER FINANCIAL REPORTING

Our consideration of the internal control over financial reporting was for the limited purpose
described in the Responsibilities section of this report and was not designed to identify all
deficiencies in internal control over financial reporting that might be deficiencies, significant
deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies,
significant deficiencies, or material weaknesses have been identified.

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. 4 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. 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. Our consideration of internal control over
financial reporting resulted in identifying a deficiency that we considered to be a significant
deficiency. The deficiency and FMCS’ response is described in Appendix 1.

Status of Prior Year’s Findings

As required by United States generally accepted government auditing standards and OMB
Bulletin No. 07-04, as amended, We have reviewed the status of the FMCS’s corrective actions
with regards to prior year’s findings and recommendations included in the September 30, 2012
Independent Auditors Report dated November 14, 2012. Appendix II summarizes the status of
the two significant deficiencies reported in the prior year’s audit report.

COMPLIANCE AND OTHER MATTERS

The results of our tests of compliance as described in the Responsibilities section of this report,
exclusive of those referred to in the FFMIA, disclosed no instances of noncompliance that are
required to be reported herein under Government Auditing Standards or OMB Bulletin No. 07-
04, as amended.

OPINION ON COMPLIANCE WITH FFMIA

FMCS represented that, in accordance with the provisions and requirements of FFMIA, the
Chairman determined that FMCS’ financial management systems were in substantial compliance
with FFMIA as of September 30, 2013.

We have examined Federal Mediation and Conciliation Service’s compliance with section 803(a)
of the Federal Financial Management Improvement Act of 1996 as of September 30, 2013.
Under section 803(a) of _FFMIA, Federal Mediation and Conciliation Service’s financial
management systems are required to substantially comply with (1) Federal financial management
systems requirements, (2) applicable Federal accounting standards, and (3) the United States
Government Standard General Ledger (USSGL) at the transaction level. We used OMB’s

-2-


NOTE 2

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal employee benefits

With few exceptions, employees hired before January 1, 1984, are covered by the
Civil Service Retirement System (CSRS), a defined benefit plan, and employees
hired after December 31, 1983, but before January 1, 2013 are covered by the
Federal Employees Retirement System (FERS). Employees hired on or after
January 1, 2013 are covered by the FERS-RAE (Revised Annuity Employee).

For employees covered under CSRS, FMCS withholds 7.0% of each employee's
salary and contributes a matching amount to the Civil Service Retirement and
Disability Fund (the Fund). CSRS covered employees are not subject to FICA
withholdings and, thus do not accrue Social Security benefits. However, 1.45%
for Medicare is withheld and matched.

Employees covered under CSRS Offset have 0.8% of their basic pay withheld
from their salaries biweekly. FMCS contributes 7% of their basic salaries to
CSRS and 7.65% (6.2% OSADI + 1.45% Medicare) of their gross pay to Social
Security biweekly. If an employee reaches the annual Social Security wages
maximum and withholding stop for OASDI tax, the CSRS withholding increases
to 7% (0.8% + 6.2%).

For employees covered under FERS, in addition to FICA withholdings, FMCS
withholds 0.8% from each employee's basic earnings for a retirement annuity.
FMCS makes contributions to the plan at an established rate by the U.S. Office of
Personnel Management (OPM) which was 11.9% for both fiscal years 2013 and
2012. Under FERS, employees also receive retirement benefit from Social
Security and benefits from a defined contribution plan known as the Thrift
Savings Plan (TSP). Under the TSP, an employee may contribute up to the
annual IRS limit to a tax deferred investment fund. FMCS contributes 1% of
salary for FERS employees, whether or not they contribute their own money to
the TSP. For FERS employees who do contribute their own money to the TSP,
FMCS matches the amount dollar-for-dollar on the first 3% and 50 cents on the
dollar for the remaining 2%. The combined automatic and matching portion of
FMCS' contribution cannot exceed 5% of salary. Those employees who elected
to remain under CSRS after December 31, 1983 and those covered by CSRS
offset, continue to receive benefits in place, and may also contribute (tax deferred)
up to the annual IRS limit to the TSP, but with no matching amount contributed
by FMCS. CSRS, CSRS Offset and FERS employees are eligible to contribute an
additional tax deferred amount to TSP for a “TSP Catch-Up” if they are over age
50 and plan to have the maximum in “regular” TSP deductions during the tax
year. There is no match on the catch-up contributions.

-13-


NOTE 2

NOTE 3

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acturial liabilities (continued)

obligated against budgetary resources until the fiscal year in which the cost is
actually billed to FMCS.

Comparative data

Comparative data for the prior year have been presented in order to provide an
understanding of changes in the financial position and operations of FMCS.

Revenues and other financing sources

FMCS receives the majority of the funding needed to support its operations
through appropriations. FMCS receives annual appropriations that may be used,
within statutory limits, for operating expenditures. Additional amounts are
obtained from fees reimbursed for alternative dispute resolution and arbitration
services provided to the federal, public and private sectors.

Appropriations are recognized as other financing sources when used and fees for
services are recognized as revenues at the time they are earned and the related
program or administrative expenses are incurred. Appropriations accrued for
property and equipment are recognized as expenses when the asset is consumed in
operations.

Contingencies and commitments

FMCS leases various facilities accounted for as operating leases. Assets held
under these leases consist primarily of offices and parking facilities. All of the
space occupied by FMCS is leased by the General Services Administration
(GSA). The space is assigned to FMCS by GSA based on FMCS' square footage
requirements, The rent charged by GSA is based on approximate commercial
rates for commercial space. FMCS may terminate the leases with GSA; however,
it is anticipated that FMCS will continue to occupy and lease space from GSA in
future years.

FUND BALANCE WITH TREASURY

The fund balance with the Treasury as reported in the September 30, 2013 and
2012 financial statements represents the unexpended cash balance on FMCS
books for all FMCS Treasury Symbols and custodial liability of $727 and $5,379,
respectively.

-15-


Walker & Co., LLP

Assurance, Business and Advisory Services

REPORT OF INDEPENDENT AUDITORS

Director
Federal Mediation and Conciliation Service

We have audited the accompanying balance sheets of the Federal Mediation and Conciliation
Service (FMCS) as of September 30, 2013 and 2012 and the related statements of net cost,
changes in net position and budgetary resources for the years then ended.

In connection with the audit of FMCS as of and for the year ended September 30, 2013, we also
considered FMCS’ internal control over financial reporting and tested FMCS’ compliance with
certain provisions of applicable laws, regulations, contracts, and grant agreements that could
have a direct and material effect on these financial statements. We have also examined FMCS’
compliance with section 803(a) of the Federal Financial Management Improvement Act of 1996
(FFMIA) as of September 30, 2013.

OPINION ON THE FINANCIAL STATEMENTS

We have audited the accompanying balance sheets of the Federal Mediation and Conciliation
Service as of September 30, 2013 and 2012; the related statements of net cost and changes in net
position and the statements of budgetary resources for the years then ended. In our opinion, the
financial statements referred to above present fairly, in all material respects, the financial
position of the Federal Mediation and Conciliation Service as of September 30, 2013 and 2012;
its net costs, changes in net position, and budgetary resources for the years then ended, in
conformity with U.S. generally accepted accounting principles.

The information in the supplementary section is not a required part of the financial statements,
but is supplementary information required by OMB Circular A-136, Financial Reporting
Requirements. We have applied certain limited procedures to such information, which consisted
principally of inquires of management regarding the methods of measurement and presentation
of the supplementary information. We also reviewed such information for consistency with the
related information presented in FMCS’ financial statements. We did not audit this information,
however and, accordingly, express no opinion on it.

5101 Wisconson Avenue, NW, Sth Floor, Washington, DC 20016 | T. 202.363.9300 F. 202.363.0531
Member AICPA Private Companies Practice Section & Government Audit Quality Center


Access controls should provide reasonable assurance that computer resources (data files,
application programs, and computer-related facilities and equipment) are protected against
unauthorized access, modification, disclosure, loss, or impairment. Without more stringent user
account management controls, unauthorized use of user accounts and thus, the risk of
unauthorized access to systems increases significantly. Unauthorized access to systems may
result in the improper access to and dissemination of confidential data, submission of false
transactions and other malicious activities.

In regard to security awareness, NIST Special Publication (SP) 800- 53, Revision 3,
Recommended Security Controls for Information Systems and Organizations,’ states:

The organization ensures all users (including managers and senior executives) are
exposed to basic information system security awareness materials before
authorizing access to the system and thereafter (that is, at least annually).

The organization employs a formal sanctions process for personnel failing to
comply with established information security policies and procedures.

Office of Management and Budget (OMB) . Circular No. A-130, Management of Federal
Information Resources, Revised, Appendix II,’ states:

Agencies shall implement and maintain a program to assure that adequate security
is provided for all agency information collected, processed, transmitted, stored, or
disseminated in general support systems and major applications. “Adequate
security” means security commensurate with the risk and magnitude of the harm
resulting from the loss, misuse, or unauthorized access to or modification of
information. This includes assuring that systems and applications used by the
agency operate effectively and provide appropriate confidentiality, integrity, and
availability, through the use of cost-effective management, personnel, operational,
and technical controls.

According to the NIST USGCB Windows Settings,’ the Microsoft Windows policy settings
should be established as follows:

e Minimum password age of 1 day;
e Maximum password age of 60 days, and

NIST SP 800-53, Revision 3,° states that the organization manages information system accounts,
including establishing, activating, modifying, disabling, and removing accounts, authorizing and
monitoring the use of guest/anonymous and temporary accounts, deactivating temporary

? NIST SP 800-53, Revision 3, Recommended Security Controls for Information Systems and Organizations, August
2009 (updated through September 14, 2009).

3 OMB Circular No. A-130 Revised, Management of Federal Information Resources, Appendix UL, “Security of
Federal Automated Information Resources,” November 28, 2000.

* Ibid.

* Ibid.

-24-


FEDERAL MEDIATION AND CONCILIATION SERVICE

TABLE OF CONTENTS

Page
REPORT OF INDEPENDENT AUDITORS 1

FINANCIAL STATEMENTS
Balance Sheets 5
Statements of Net Cost 6
Statements of Changes in Net Position 7
Statements of Budgetary Resources 8
Notes to Financial Statements 9

SUPPLEMENTAL INFORMATION

Intra-governmental Balances by Trading Partner 28


September 30, 2013

Appendix IT

FEDERAL MEDIATION AND CONCILIATION SERVICE
STATUS OF PRIOR YEAR’S SIGNIFICANT DEFICIENCIES

nary of Cont

Financial
Management
Information
Systems

FMCS has not established a
security awareness training
program. As a_ result,
employees and contractor
personnel were not required to
complete both initial and
annual refresher security
awareness training.

The Microsoft Windows
password settings, which are
used to authenticate users to
the FMCS network, did not
adhere to the guidelines
established by the National
Institute of Standards and
Technology’s (NIST) United
States Government
Configuration Baseline.

User account management
controls were not
implemented to ensure user
accountability and reduce the
risk of unauthorized access.

Certain progress noted, certain issues
need continued focus, Modified
Repeat Condition (See Appendix 1)

Certain progress noted, certain issues
need continued focus. Modified
Repeat Condition ( See Appendix I)

Certain progress noted, certain issues
need continued focus, Modified
Repeat Condition ( See Appendix I)

-27-



NOTE 2

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of estimates

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities, at the
date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

Fund balance with Treasury

FMCS maintains its available funds with the Department of the Treasury
(Treasury). The fund balance with Treasury is available to pay current liabilities
and finance authorized purchases. Cash receipts and disbursements are processed
by Treasury and reconciled with those of Treasury on a regular basis. Note 3,
Fund Balance with Treasury, provides additional information.

Accounts receivable

Accounts receivable consist of the amounts owed to FMCS as the result of the
provision of goods and services. Intra-governmental accounts receivable generally
arise from the provision of reimbursable services to other federal agencies and no
allowance for uncollectible accounts is established as those accounts are
considered to be fully collectible.

General property and equipment

General property and equipment (P&E) consists of software and equipment used
for operations. The basis for recording purchased P&E is acquisition cost, which
includes all costs incurred to bring the P&E to its intended use. All P&E with
initial acquisition cost of $5,000 or more and estimated useful lives of two years
or more are capitalized except for internal use software.

The P&E is depreciated using the straight-line method over the estimated useful
lives of assets. Maintenance and repair costs are expensed as incurred.

Liabilities

Liabilities represent the amount of monies or other resources that are likely to be
paid by FMCS as a result of a transaction or event that has occurred. Since
FMCS is a component of the U.S. Government, a sovereign entity, its liabilities
cannot be liquidated without legislation providing resources to do so. Liabilities
for which an appropriation has not been enacted are classified as unfunded

-ll-


NOTE 2

FEDERAL MEDIATION AND CONCILIATION SERVICE
NOTES TO FINANCIAL STATEMENTS
September 30, 2013 and 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal employee benefits (continued)

For employees covered under FERS-RAE, in addition to FICA withholdings,
FMCS withholds 3.1% from employees’ basic earnings for a retirement annuity.
FMCS makes contributions to the plan at an established rate by OPM of 9.6%.
Otherwise, the same information regarding FERS employees is the same as
above.

The U.S. Office of Personnel Management administers these benefit plans and,
thus, report CSRS or FERS assets, accumulated plan benefits or unfunded
liabilities applicable to federal employees. Therefore, FMCS financial statements
do not recognize any liability on its balance sheets for pension, other retirement
benefits and other post- employment benefits.

Actuarial liabilities

The Federal Employees' Compensation Act (FECA) provides wage loss benefits,
medical benefits and vocational rehabilitation to covered Federal civilian
employees injured on the job, employees who have incurred a work-related
occupational disease, and survivor benefits to eligible dependents of injured
workers whose death is attributable to a job-related injury or occupational disease.
Claims incurred for benefits of FMCS employees under FECA are administered
by the Department of Labor (DOL) and are ultimately paid by FMCS. The future
workers' compensation liability has two components, (1) unpaid billings, and (2)
an amount of estimated unbilled claims. The unbilled claims are estimated by
applying actuarial procedures. The DOL calculated the liability of the Federal
Government for future compensation benefits, which includes the expected
liability of the Federal Government for future compensation benefits, which
includes the expected liability for death, disability, medical, and miscellaneous
costs for approved compensation costs. The liability was determined using the
paid-losses extrapolation method patterns related to a specific incurred period to
predict the ultimate payments related to that period. The projected annual benefit
payments were discounted to present value. The resulting Federal Government
liability was then distributed by agency.

In accordance with OMB guidance, each reporting entity preparing financial
statements under the Chief Financial Officers Act and the Government
Management Reform Act should include its respective portion of the actuarial
liability for workers' compensation benefits as a liability in its financial
statements, if such amounts are material. The FECA actuarial data is for financial
statements presentation only and should not be used as a standard for
incorporating actuarial liabilities in fees, prices, and reimbursements. This
liability constitutes an extended future estimate of cost, which will not be

-14-