Financial Management: Department of Homeland Security Faces Significant Financial Management Challenges
Published: 2004-07-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: When the Department of Homeland Security (DHS) began operations in March 2003, it faced the daunting task of bringing together 22 diverse agencies. This transformation poses significant management and leadership challenges, including integrating a myriad of redundant financial management systems and addressing the existing weaknesses in the inherited components, as well as newly identified weaknesses. This review was performed to (1) identify the financial management systems' weaknesses DHS inherited from the 22 component agencies, (2) assess DHS's progress in addressing those weaknesses, (3) identify plans DHS has to integrate its financial management systems, and (4) review whether the planned systems DHS is developing will meet the requirements of relevant financial management improvement laws.
section_title: What GAO Found
paragraphs: DHS inherited 30 reportable internal control weaknesses identified in prior component financial audits with 18 so severe they were considered material weaknesses. These weaknesses include insufficient internal controls, system security deficiencies, and incomplete policies and procedures necessary to complete basic financial information. Of the four inherited component agencies that had previously been subject to stand-alone audits, all four agencies' systems were found not to be in substantial compliance with the requirements of the Federal Financial Management Improvement Act (FFMIA), an indicator of whether a federal entity can produce reliable data for management and reporting purposes. Component agencies took varied actions to resolve 9 of the 30 inherited internal control weaknesses. The remaining 21 weaknesses were combined and reported as material weaknesses or reportable conditions in DHS's first Performance and Accountability Report, or were reclassified by independent auditors as lower-level observations and recommendations. Combining or reclassifying weaknesses does not resolve the underlying internal control weakness, or mean that challenges to address them are less than they would have been prior to the establishment of DHS. DHS is in the early stages of acquiring a financial enterprise solution to consolidate and integrate its business functions. Initiated in August 2003, DHS expects the financial enterprise solution to be fully deployed and operational in 2006 at an estimated cost of $146 million. Other agencies have failed in attempts to develop financial management systems with fewer diverse operations. Success will depend on a number of variables, including having an effective strategic management framework, sustained management oversight, and user acceptance of the efforts. It is too early to tell whether DHS's planned financial enterprise solution will be able to meet the requirements of relevant financial management improvement laws. As of June 2004, DHS is not subject to the CFO Act and thus FFMIA, which is applicable only to agencies subject to the CFO Act. While DHS is currently not required to report on compliance with FFMIA, its auditors disclosed systems deficiencies that would have likely resulted in noncompliance issues.

section_title: Letter
paragraphs: When the Department of Homeland Security (DHS) began operations in  March 2003, it faced the daunting task of bringing together 22 diverse  agencies. Not since the creation of the Department of Defense had the  federal government undertaken a transformation of this magnitude. As we  previously reported, such a consolidation poses significant management  and leadership challenges, including integrating a myriad of redundant  financial management systems and addressing the existing and newly  identified weaknesses in the inherited components.
You asked us to review DHS’s progress in addressing financial management  weaknesses and integrating its financial systems. This report (1) identifies  the financial management systems’ weaknesses DHS inherited from the 22  component agencies, (2) assesses DHS’s progress in addressing those  weaknesses, (3) identifies plans DHS has to integrate its financial  management systems, and (4) reviews whether the planned systems DHS is  developing will meet the requirements of relevant financial management  improvement laws.
Our work is based primarily on reviews of DHS’s Performance and  Accountability Report for fiscal year 2003 and prior period component  agency annual financial reports, when available. We interviewed DHS  officials and obtained documents related to DHS’s financial management  systems integration project. In addition, we reviewed our and Office of  Inspector General (OIG) previously issued reports and relevant laws and  regulations. A more detailed discussion of our scope and methodology can  be found in appendix I. We conducted our work from October 2003 through  June 2004 in accordance with U.S. generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: In the aftermath of the terrorist attacks of September 11, 2001, responding  to potential and real threats to homeland security became one of the  federal government’s most significant challenges. To address this  challenge, the Congress passed, and the President signed, the Homeland  Security Act of 2002, which merged 22 federal agencies and organizations  into DHS, making it the department with the third largest budget in the  federal government, about $40 billion for fiscal year 2005. In January 2003,  we designated implementation and transformation of the new Department  of Homeland Security as high risk based on three factors: (1) the  implementation and transformation of DHS is an enormous undertaking  that will take time to achieve in an effective and efficient manner,   (2) components to be merged into DHS already face a wide array of  existing challenges, and (3) failure to effectively carry out its mission  would potentially expose the nation to very serious consequences. As we  previously reported, one of the department’s key challenges is integrating  the components’ respective financial management systems, many of which  were outdated and had limited functionality, as well as addressing  weaknesses from the inherited components.
The Homeland Security Act of 2002 states that DHS’s missions include,  among other things, preventing terrorist attacks within the United States,  reducing America’s vulnerability to terrorism, minimizing subsequent  damage, and assisting in the recovery from attacks that do occur. To help  accomplish this integrated homeland security mission, the various mission  areas and associated programs of 22 federal agencies were merged, in  whole or in part, into DHS. The department’s organizational structure  consists of eight major components—the U.S. Coast Guard (Coast Guard),  the U.S. Secret Service, the Bureau of Citizenship and Immigration Services  (CIS), and five directorates, each of which is headed by an Under  Secretary: Information Analysis and Infrastructure Protection, Science and  Technology, Border and Transportation Security, Emergency Preparedness  and Response, and Management. Within the Management Directorate is  DHS’s Office of the Chief Financial Officer (OCFO), which is assigned  primary responsibility for functions, such as budget, finance and  accounting, strategic planning and evaluation, and financial systems for the  department. OCFO is also charged with ongoing integration of these  functions within the department.
The CFO Act requires the agency’s CFO to develop and maintain an  integrated accounting and financial management system that provides for  complete, reliable, and timely financial information that facilitates the  systematic measurement of performance at the agency, the development  and reporting of cost information, and the integration of accounting and  budget information. The act also requires that the agency’s CFO be  qualified, presidentially appointed, approved by the Senate, and report to  the head of the agency. FFMIA requires that CFO Act agencies implement  and maintain financial management systems that substantially comply with  federal financial management systems requirements, applicable accounting  standards, and the U.S. Government Standard General Ledger at the  transaction level. It also requires auditors to report whether the agency’s  financial management systems substantially comply with the three  requirements of FFMIA. While not required to comply with provisions of  the CFO Act or FFMIA, the Accountability of Tax Dollars Act of 2002,  requires DHS to prepare and have audited financial statements annually.  The Accountability of Tax Dollars Act of 2002, however, does not require  compliance with the CFO Act or FFMIA.
In identifying improved financial performance as one of its five  governmentwide initiatives, the President’s Management Agenda  recognized that an unqualified financial audit opinion is a basic  prescription for any well-managed organization and that without sound  internal control and accurate and timely financial information, it is not  possible to accomplish the agenda and secure the best performance and  highest measure of accountability for the American people. In addition, the  Joint Financial Management Improvement Program (JFMIP) Principals  have defined certain measures, in addition to receiving an unqualified  financial statement opinion, for achieving financial management success.  These additional measures include being able to routinely provide timely,  accurate, and useful financial and performance information, having neither  material internal control weaknesses nor material noncompliance with  laws and regulations, and meeting the requirements of FFMIA.
DHS obtained a consolidated financial audit for the 7-month period from  March 1, 2003, to September 30, 2003, and received a qualified opinion from  its independent auditors on its consolidated balance sheet as of   September 30, 2003, and the related statement of custodial activity for the   7 months ending September 30, 2003. Auditors were unable to opine on the  consolidated statements of net costs and changes in net position, combined  statement of budgetary resources, and consolidated statement of financing.  The auditors reported 14 reportable conditions on internal control, 7 of  which were considered to be material weaknesses.
section_title: DHS Inherited Significant Weaknesses from Its Component Agencies
paragraphs: When DHS was created in March 2003 and merged with 22 diverse  agencies, there were many known financial management weaknesses and  vulnerabilities in the inherited agencies. For 5 of the agencies that  transferred to DHS—Customs Service (Customs), Transportation Security  Administration (TSA), Immigration and Naturalization Service (INS),  Federal Emergency Management Agency (FEMA), and Federal Law  Enforcement Training Center (FLETC)—auditors had reported 30  reportable conditions, 18 of which were considered material internal  control weaknesses. Further, of the four component agencies—Customs,  TSA, INS, and FEMA—that had previously been subject to stand-alone  audits, all four agencies’ systems were found not to be in substantial  compliance with the requirements of FFMIA.
Most of the 22 components that transferred to DHS had not been subjected  to significant financial statement audit scrutiny prior to their transfer, so  the extent to which additional significant internal control deficiencies  existed was unknown. For example, conditions at the Coast Guard have  surfaced because of its greater relative size and increased audit scrutiny at  DHS as compared to its former legacy agency, the Department of  Transportation (DOT). As part of DOT’s financial statement audit, the Coast  Guard had no specifically attributable reported weaknesses identified.  However, newly identified weaknesses related to the Coast Guard were one  of the main reasons that independent auditors issued a qualified opinion on  DHS’s consolidated balance sheet and why they were unable to provide an  opinion on other financial statements for the 7 months ending September  30, 2003.
For fiscal year 2002 and prior to its transfer to DHS, Customs’ auditors  reported nine internal control weaknesses, including weaknesses in its  ability to monitor the effectiveness of its internal controls over entry duties  and taxes, controls over drawback claims, security issues in information  technology (IT) systems, and issues concerning the strength of its core  financial systems. These weaknesses can result in inaccurate reporting of  certain material elements of Customs’ financial situation, system security  weaknesses that could leave Customs’ information vulnerable to  unauthorized access, and the necessity of extensive manual procedures  and analyses to process routine transactions. Finally, these weaknesses  contributed to Customs’ systems inability to substantially comply with the  requirements of FFMIA.
Although TSA is a relatively new agency formed after the September 11,  2001, terror attacks, its auditors reported six internal control weaknesses,  including weaknesses in the hiring of qualified personnel, financial  reporting and systems, property accounting and financial reporting,  financial management policies, administration of screener contracts, and  maintenance of adequate information in its personnel files. These  weaknesses can result in uncontrolled spending of taxpayer dollars,  misplaced or unaccounted for property, and challenges in producing  financial statements. In its first year audit ending September 30, 2002, TSA  obtained an unqualified audit opinion on its financial statements. However,  TSA’s systems did not substantially comply with the requirements of  FFMIA.
INS’s auditors reported four internal control weaknesses as of February 28,  2003, including weaknesses in the functionality of its financial systems;  recording accounts payable and related accruals; financial reporting; and  controls over its financial management system. Weaknesses such as these  have existed for several years and contribute to INS’s systems continuing  inability to substantially comply with the requirements of FFMIA. Although  the weaknesses did not interfere with the agency’s ability to obtain an  unqualified opinion on its financial statement audit, they did result in the  need for extensive manual effort to prepare reliable financial information  and record basic financial transactions to aid management in decision  making.
FEMA’s auditors reported seven internal control weaknesses for fiscal year  2002, including weaknesses in information security controls over its  financial systems environment; financial system functionality; financial  reporting process; real and personal property system processes; account  reconciliation processes; accounts receivable processes; and the lack of a  process to evaluate the accuracy of a new claims estimation methodology.  These weaknesses resulted in the need for extensive manual effort to  compile financial information because FEMA’s financial systems were  unable to perform certain basic accounting functions efficiently. Further,  FEMA’s systems were unable to accurately track basic accounting  information, such as real and personal property and accounts receivable.  Many of these weaknesses specifically contributed to FEMA’s systems’  failure to substantially comply with the requirements of FFMIA.
Finally, FLETC’s auditors reported four internal control weaknesses for  fiscal year 2002. These weaknesses resulted from FLETC not having  adequate policies and procedures in place to ensure that funds obligated  were proper and that costs for construction in progress were recorded  properly. Further, auditors found that FLETC was not taking the steps  necessary to be in compliance with certain Office of Management and  Budget requirements. Many of these weaknesses lead to FLETC’s systems’  inability to substantially comply with the requirements of FFMIA.
section_title: Some Progress Made in Addressing Inherited Weaknesses
paragraphs: DHS has made some progress in addressing the internal control  weaknesses it inherited from component agencies. Nine of the 30 internal  control weaknesses identified in prior component financial statement  audits have been closed as of September 30, 2003. The remaining 21 issues  represent continuing weaknesses that have been reported in DHS’s first  Performance and Accountability Report. Nine of these were combined and  reported as 3 material weaknesses, while 5 were reported as reportable  conditions. The department’s independent auditors classified the remaining  7 weaknesses as lower level observations and recommendations. Table 1  summarizes the status of the 30 weaknesses DHS inherited from  component agencies as of September 30, 2003.
Auditors reported 6 additional weaknesses as of September 30, 2003,  bringing the total number of reportable conditions for DHS to 14 for fiscal  year 2003, 7 of which were considered to be material weaknesses. A  description of these weaknesses can be found in appendix II. As mentioned  previously, several of the departmentwide weaknesses resulted from  combining previously identified weaknesses or reclassifying them, rather  than from resolving the underlying internal control weaknesses. For  example, in fiscal year 2003, DHS’s auditors reported a departmentwide  material weakness related to financial systems functionality and  technology. This weakness resulted from combining what accounted for 7  of the inherited weaknesses—3 from Customs, 2 from FEMA, 1 from INS,  and 1 from TSA. Appendix III provides detailed information on the status of  each of the 30 inherited weaknesses, including how they were reported in  DHS’s Performance and Accountability Report.
Component agencies took various steps to resolve nine of the previously  identified weaknesses inherited from component agencies. For example,  Customs had a previously identified weakness related to the effectiveness  of its internal controls over accurate reporting of entry duties and taxes.  This weakness was resolved by reinstituting a program that Customs had in  place prior to the terrorist attacks of September 11, 2001, which allows for  more accurate reporting of these taxes and duties. Another weakness DHS  inherited relates to FEMA’s inability to identify and record certain accounts  receivable in a timely manner. FEMA’s accounts receivable processes were  strengthened to ensure that accounts receivable are determined and  recorded on a timely basis. In order to resolve several weaknesses at  FLETC and TSA, various policies and procedures were implemented at  these components to ensure that financial information was recorded and  properly approved. Further, TSA has hired additional staff, thereby  resolving its weaknesses of not having a sufficient number of qualified  accounting personnel.
In addition to the 7 material weaknesses and 7 reportable conditions  reported in DHS’s 2003 financial statement audit, DHS reported 12  additional weaknesses that affect the department’s full compliance with  certain objectives of 31 U.S.C. 3512(c), (d) (commonly known as the  Federal Managers’ Financial Integrity Act of 1982 (FMFIA)). FMFIA  requires that management ensure that it has an organizational structure  that supports the planning, directing, and controlling of operations to meet  agency objectives; clearly defines key areas of authority and responsibility;  and provides for appropriate lines of reporting. The standards also define  internal control as a key component necessary to ensure that financial  reporting information is reliable. Examples of the FMFIA weaknesses  reported by DHS included deficient controls over laws and regulations  regarding the border entry process, nonconformance related to system  security, and lack of oversight and administration of major contracts at  TSA.
Of the seven departmentwide material weaknesses reported by DHS’s  auditors for fiscal year 2003, four were newly identified and contributed to  the auditors’ inability to render an opinion on all of DHS’s financial  statements. Newly identified weaknesses included the lack of procedures  at DHS to verify the accuracy and completeness of balances transferred on  March 1, 2003, and significant weaknesses with the number of qualified  financial management personnel employed by the department. DHS’s  auditors also found significant deficiencies at the Coast Guard and Secret  Service, preventing them from being able to express an opinion on certain  financial statements.
In addition to the internal control weaknesses cited in its 2003 financial  statement audit, there were other weaknesses that, while not material to  DHS on a departmentwide basis, are still important weaknesses that need  to be addressed. FEMA, Customs, and TSA each had weaknesses at the  time of their transfer to DHS. However, in the 2003 audit report, these  weaknesses were classified as observations and recommendations, a much  less serious classification. Lower classification within DHS does not mean  that the issues are now somehow less severe, it merely refers to the  materiality of a component within DHS. Considered against operations or  assets of the stand-alone entity, these issues by themselves were relatively  more significant than when considered in the context of the much larger  consolidated operations of DHS as a whole. Resolving all previously  reported internal control weaknesses, regardless of the current designation  at DHS, is key to DHS’s ability to produce relevant and reliable financial  information.
DHS’s CFO testified that the department is committed to resolving the  remaining weaknesses and has developed a plan to do so. According to the  CFO’s plans, corrective actions will be developed by each applicable  bureau or directorate and submitted to the OCFO. Currently, DHS’s OCFO  has compiled a summary document with the corrective action plans as  submitted by the applicable bureau or directorate. According to this  document, corrective action plans of varying levels of detail are in place to  address 12 of the 14 internal control weaknesses, some of which are  scheduled to be completed by the end of fiscal year 2004. However, 2  material internal control weaknesses—Financial Systems Functionality  and Technology and Transfer of Funds, Assets, and Liabilities to DHS—do  not currently have any planned corrective actions in place.
Along with developing corrective action plans, the CFO testified that DHS  plans to implement a departmentwide tracking system to monitor the  status of corrective actions. DHS has begun working with a contractor to  design and implement a tracking system for outstanding weaknesses  identified during the department’s independent financial audits. While this  system is still being developed by the OCFO, with assistance from  contractors, it is not yet fully functional and does not include information  on all reported weaknesses. Until such time that it does, it will provide  limited oversight and information on the status of corrective actions to  address weaknesses at DHS. While progress has been made to address the  known material weaknesses, much work still remains. Follow-through with  planned corrective actions is paramount. The support of top officials at the  department will be key in ensuring that the necessary resources are  available to address the weaknesses and to ensure that they are resolved in  a timely manner.
section_title: DHS Is in the Early Stages of Integrating Its Financial Management Systems
paragraphs: DHS intends to acquire and deploy an integrated financial enterprise  solution and reports that it has reduced the number of its legacy financial  systems. DHS has established the Resource Management Transformation  Office (RMTO) within the Management Directorate to manage its financial  enterprise solution project. However, the acquisition is in the early stages,  and continued focus and follow through, among other things, will be  necessary for it to be successful.
RMTO has termed its financial enterprise solution project “electronically  Managing enterprise resources for government effectiveness and  efficiency” (eMerge), which according to the RMTO’s Strategic  Framework, “establishes the strategic direction for migration,  modernization, and integration of DHS financial, accounting, procurement,  personnel, asset management and travel systems, processes, and policies.”  DHS expects the acquisition and implementation of the financial enterprise  solution to take place over a 3-year time period and cost approximately  $146 million.
According to the strategic framework DHS provided to us, the development  of an integrated financial enterprise solution will be accomplished in three  phases. Phase I includes defining, acquiring, and testing the planned  solution. Phase II involves implementing the solution throughout DHS, and  Phase III is ongoing maintenance of the solution. According to DHS, the  eMergevendor selection to occur in April or May of 2004. However, vendor  proposal requests were issued in June 2004 and selection is to be  completed in July 2004.
Concurrent with eMerge, DHS has issued a request for quotation (RFQ) for  an interim project—the Business Automation Initiative—to be developed  by contractors during 2004. The RFQ requested system proposals to  automate purchase requests for the department and to streamline the  employee entry/exit process. Another interim initiative was considered by  the department to integrate data mining and warehousing, improve grants  visibility (beginning with first responder grants), and streamline financial  statement consolidation. However, instead of pursuing this interim  solution, DHS plans to include it in the requirements of the eMerge initiative and obtained approval of the  requirements from various high-level DHS officials. Additionally, a request  for proposal (RFP) was issued by DHS for the eMerge initiative. However, these documents were not provided to  us until after we completed our fieldwork. Thus, we are not providing  description, analysis, or evaluation of such information in this report, and  we are unable to determine if DHS, through the RMTO, is developing a  financial enterprise solution that will be in alignment with departmentwide  information technology plans, many of which are still under development.
Nevertheless, we have found that similar projects have proven challenging  and costly for other federal agencies. For example, we have reported on the  efforts of National Aeronautics and Space Administration (NASA), and  the District of Columbia Courts (DC Courts) to acquire new information  systems. NASA is on its third attempt in 12 years to modernize its financial  management process and systems, and has spent about $180 million on its  two prior failed efforts. DC Courts began its system acquisition in 1998 and  has struggled in its implementation. One of the key impediments to the  success of integration efforts at NASA was the failure to involve key  stakeholders in the implementation or evaluation of system improvements.  As a result, new systems failed to meet the needs of key stakeholders. DC  Courts struggled in developing requirements that contained the necessary  specificity to ensure the system developed would meet its users’ needs. To  avoid similar problems, it is important, among other things, that DHS  ensure commitment and extensive involvement from top management and  users in eMergeAlthough we did not perform audit procedures to determine the impact of  these reductions, reduction of service providers prematurely, without  considering the provider’s reliability, or without an overall consolidation  plan, could be negative if it interferes with the enterprise approach or  causes significant short-term inefficiencies for agencies that must quickly  adapt to other systems.
section_title: It Is Not Known Whether DHS’s Planned Financial Management Systems Will Be Able to Meet the Requirements of Relevant Financial Management Improvement Laws
paragraphs: It is too early to tell whether DHS’s planned financial enterprise solution  will be able to meet the requirements of relevant financial management  improvement laws-–those currently applicable to DHS (such as FMFIA), as  well as some not applicable that are subject to pending legislation. DHS is  currently subject to most financial management improvement laws except  for the CFO Act and FFMIA. The goals of the CFO Act and FFMIA are to  provide the Congress and agency management with reliable financial  information for managing and making day-to-day decisions and to improve  financial management systems and controls to properly safeguard the  government’s assets. Further, the CFO Act requires certain agencies to have  a qualified, presidentially appointed, Senate-confirmed CFO who reports to  the head of the agency.
FFMIA requires major departments and agencies covered by the CFO Act  to implement and maintain financial management systems that comply  substantially with (1) federal financial management systems requirements,  (2) applicable federal accounting standards, and (3) the U.S. Government  Standard General Ledger at the transaction level. Although DHS is not  currently subject to FFMIA, its auditors disclosed systems deficiencies in  its financial management information systems, the application of  accounting standards, and recording of financial transactions, all of which  relate to the requirements of FFMIA. Based on these weaknesses it is likely  that DHS’s systems would not have been in substantial compliance with the  requirements of FFMIA. Table 3 lists relevant financial management laws  and describes their relationship to DHS.
DHS is currently required to have annual audits under the Accountability of  Tax Dollars Act and to report on its internal controls under FMFIA.  Although DHS’s CFO has testified that DHS complies with the audit  provisions of the CFO Act and will continue to do so, we believe DHS  should be a CFO Act agency and be subject to the requirements of FFMIA.  DHS should not be the only cabinet-level department not covered by what  is the cornerstone for pursuing and achieving the requisite financial  management systems and capabilities in the federal government.
Given its early implementation, it is too early to tell whether DHS’s planned  financial enterprise solution will meet the requirements of financial  management laws it is currently not subject to. While DHS systems must  meet the requirements of laws they are currently subject to, it is also  important that DHS be proactive and incorporate the requirements of the  CFO Act and FFMIA. It would certainly make good business sense to do so  given DHS’s size and mission.
DHS has implemented a commercial-off-the-shelf tool called Dynamic  Object Oriented Requirements System (DOORS) to track the requirements  of various laws, regulations, and circulars place on the development of an  integrated financial system. DOORS is intended to be DHS’s repository of  all applicable system, process, technological, data, or other requirements.  DHS estimated that several thousand compliance requirements will be  tracked using DOORS once analysis is completed. After the repository is  complete, requirements reports are to be printed directly from DOORS and  attached to future RFPs to ensure that contractors are aware of the  legislative requirements of the systems to be developed. A system to  record, track, and link all legislative requirements as a financial  management system is being developed is important. Also important is that  DHS be statutorily required to comply with the CFO Act and FFMIA and  that the systems DHS acquires are capable of meeting the requirements of  those laws, as well as ones currently applicable. Meeting these financial  management improvement requirements will help produce timely and  useful financial and business information.
section_title: Conclusions
paragraphs: Since its inception in March 2003, DHS has been faced with many  challenges, including how to integrate its financial management processes  and systems. Steps have been taken to address the 30 internal control  weaknesses it inherited from its component agencies. However, to ensure  financial accountability and establish an effective financial environment,  DHS must address all outstanding inherited weaknesses, as well as address  the newly identified department-level weaknesses. Through the eMerge  initiative, DHS has plans to integrate and consolidate its financial and  business systems. But without such things as continued active oversight  from top-level management and systematic approaches to this integration,  DHS could find itself in the same position as other federal departments— producing an ineffective and costly financial management system that does  not provide the information needed by management or meet the  requirements of financial management laws. Finally, we believe that it is of  critical importance that DHS be statutorily required to comply with the  important financial management reforms legislated in the CFO Act and  FFMIA. The financial management improvements of FFMIA build on the  CFO Act by emphasizing the need for agencies to have systems that can  generate reliable, useful, and timely information with which to make fully  informed decisions and to ensure accountability on an ongoing basis. This  issue is still of foremost importance, especially as DHS continues its  financial management system integration and development.
section_title: Matter for Congressional Consideration
paragraphs: In view of the size of DHS and the importance of the CFO Act and FFMIA in  improving financial management and its applicability to all other cabinet  departments, the Congress may wish to consider the following action:  Enact legislation to designate DHS as a CFO Act agency.
section_title: Recommendations for Executive Action
paragraphs: We are making eight recommendations for executive action at DHS that  will improve financial management at the department. Specifically, we  recommend that the Secretary of Homeland Security direct the Under  Secretary for Management to do the following:  Continue to maintain strong involvement of key stakeholders and top  management throughout the acquisition and implementation of the  eMerge Maintain a tracking system of all auditor-identified and management- identified control weaknesses.
section_title: Agency Comments and Our Evaluation
paragraphs: We obtained written comments on a draft of this report from DHS’s Chief  Financial Officer. The comments DHS provided to us are reprinted in  appendix IV.
In commenting on a draft of this report, DHS generally agreed with the  overall findings and recommendations. However, in response to our  recommendation to incorporate all internal control weaknesses in the  tracking system DHS is currently developing, DHS felt the recommendation  was too broad and suggested that we change the language to reflect  tracking of all auditor-identified and management-identified internal  control weaknesses. The original intent of our recommendation was to  encourage DHS to track and resolve all auditor reported material  weaknesses, reportable conditions, and observations and  recommendations, similar to those discussed throughout this report. We  fully support DHS including all management-identified control weaknesses  as well, and have updated our recommendation accordingly. Additionally,  DHS commented on its commitment to full adherence to the CFO Act and  FFMIA. We applaud the current leadership at DHS for voluntarily  complying with some audit provisions of the CFO Act, however, we  continue to strongly support passage of legislation that would statutorily  make DHS a CFO Act agency, and thus guarantee future requirements to  adhere to important financial management legislation.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this letter. At that time, we will send copies of this report to  interested congressional committees and subcommittees. We will also  make copies available to others on request. In addition, the report will be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report or wish to discuss  it further, please contact me at (202) 512-6906 or Casey Keplinger, Assistant  Director, at (202) 512-9323. In addition, Heather Dunahoo and Scott  Wrightson made key contributions to this report.
section_title: Scope and Methodology
paragraphs: To identify what were the existing weaknesses in the Department of  Homeland Security’s (DHS) component agencies’ financial management  systems, we reviewed relevant DHS Office of Inspector General (OIG)  reports and our January 2003 report on major management challenges at  DHS and looked at how such challenges are being addressed. We also  reviewed DHS’s Performance and Accountability Report for the 7 months  ending September 30, 2003. We reviewed prior-period component agency  annual financial statement audit reports when available; Immigration and  Naturalization Service’s (INS) financial statement audit report for the 5  months ending February 28, 2003; and Performance and Accountability  Reports for the Federal Emergency Management Agency (FEMA) and the  Departments of Transportation, Justice, and Treasury. We reviewed  testimony of DHS’s current and former Chief Financial Officer (CFO) and  DHS’s OIG reports related to financial management at the department.  Finally, we interviewed officials from the OIG and the Office of the Chief  Financial Officer (OCFO).
To determine whether DHS was addressing the problems that existed in the  financial management systems DHS acquired from its component agencies,  we met with officials from the OCFO’s Office of Financial Management and  OIG staff. In addition to items already mentioned, we reviewed planned  corrective actions developed by the department to address its fiscal years  2002 and 2003 material weaknesses and reportable conditions. We also  reviewed testimony of DHS’s CFO related to this issue. Further, we  conducted a walk-through to review the system DHS is developing to track  planned corrective actions.
To determine what plans DHS has to integrate its financial management  systems, we met with the Director of the Resource Management  Transformation Office (RMTO) and other staff in this office. We also  reviewed testimony of DHS’s current and former CFO and DHS’s OIG  related to financial management at the department. We reviewed  documentation detailing the reduction of financial service providers, but  we did not complete audit procedures to determine if these reductions  were positive or negative for the department. Finally, we reviewed the  RMTO’s strategic framework. However, substantial documentation related  to the eMerge initiative was not provided to us until after we completed  our fieldwork. Thus, we did not include analysis or evaluation of such  information in this report.
To determine whether the planned systems that DHS is developing will be  able to meet the requirements of relevant financial management  improvement laws, we reviewed relevant laws and regulations, and  relevant guidance related to financial management, financial reporting,  systems implementation, and requirements. We also interviewed the  Director of the RMTO and other officials. Further, we reviewed testimony  relevant to this issue by DHS’s current and former CFO and DHS’s OIG. We  have not reviewed system requirements or other recently developed plans  because these were completed and obtained after our fieldwork was  completed.
We requested comments on this report from the Secretary of Homeland  Security or his designee. Written comments were received from the  department’s Chief Financial Officer and are reprinted in appendix IV.
We performed our review from October 2003 through June 2004 in  Washington, D.C., in accordance with U.S. generally accepted government  auditing standards.
section_title: Material Weaknesses and Reportable Conditions at DHS for Fiscal Year 2003
paragraphs: Financial management and personnel: DHS’s OCFO needs to establish  financial reporting roles and responsibilities, assess critical needs, and  establish standard operating procedures (SOP) for the department. These  conditions were not unexpected for a newly created organization, especially  one as large and complex as DHS. The Coast Guard and the Strategic  National Stockpile had weaknesses in financial oversight that have led to  reporting problems.
Financial reporting: Key controls to ensure reporting integrity were not in  place, and inefficiencies made the process more error prone. At the Coast  Guard, the financial reporting process was complex and labor-intensive.  Several DHS bureaus lacked clearly documented procedures, making them  vulnerable if key people leave the organization.
Financial systems functionality and technology: The auditors found  weaknesses across DHS in its entitywide security program management and  in controls over system access, application software development, system  software, segregation of duties, and service continuity. Many bureau systems  lacked certain functionality to support the financial reporting requirements.
Property, plant, and equipment (PP&E): The Coast Guard was unable to  support the recorded value of $2.9 billion in PP&E due to insufficient  documentation provided prior to the completion of audit procedures,  including documentation to support its estimation methodology. The  Transportation Security Administration (TSA) lacked a comprehensive  property management system and adequate policies and procedures to  ensure the accuracy of its PP&E records.
Operating materials and supplies (OM&S): Internal controls over physical  counts of OM&S were not effective at the Coast Guard. As a result, the  auditors were unable to verify the recorded value of $497 million in OM&S.  The Coast Guard also had not recently reviewed its OM&S capitalization  policy, leading to a material adjustment to its records when an analysis was  performed.
Actuarial liabilities: The Secret Service did not record the pension liability  for certain of its employees and retirees, and when corrected, the auditors  had insufficient time to audit the amount recorded. The Coast Guard also  was unable to provide, prior to the completion of audit procedures, sufficient  documentation to support the recorded value of $201 million in post-service  benefit liabilities.
Transfers of funds, assets, and liabilities to DHS: DHS lacked controls to  verify that monthly financial reports and transferred balances from legacy  agencies were accurate and complete.
Drawback claims on duties, taxes, and fees: The Bureau of Customs and  Border Protection’s (CBP) accounting system lacked automated controls to  detect and prevent excessive drawback claims and payments.
Import entry in-bond: CBP did not have a reliable process of monitoring the  movement of “in-bond” shipments—i.e., merchandise traveling through the  U.S. that is not subject to duties, taxes, and fees until it reaches a port of  destination. CBP lacked an effective compliance measurement program to  compute an estimate of underpayment of related duties, taxes, and fees.
Acceptance and adjudication of immigration and naturalization  applications: The Bureau of Citizenship and Immigration Services’ (CIS)  process for tracking and reporting the status of applications and related  information was inconsistent and inefficient. Also, CIS did not perform cycle  counts of its work in process that would facilitate the accurate calculation of  deferred revenue and reporting of related operational information.
Fund balance with Treasury (FBWT): The Coast Guard did not perform  required reconciliations for FBWT accounts and lacked written standard  operating procedures (SOP) to guide the process, primarily as the result of a  new financial system that substantially increased the number of reconciling  differences.
Intragovernmental balances: Several large DHS bureaus had not  developed and adopted effective SOPs or established systems to track,  confirm, and reconcile intragovernmental balances and transactions with  their trading partners.
Strategic National Stockpile (SNS): The SNS accounting process was  fragmented and disconnected, largely due to operational challenges caused  by the laws governing SNS. A $485 million upwards adjustment had to be  made to value SNS in DHS’s records properly.
Accounts payable and undelivered orders: CIS and the Bureau of  Immigration and Customs Enforcement (ICE), TSA, and the Coast Guard  had weaknesses in their processes for accruing accounts payable or  reporting accurate balances for undelivered orders.
section_title: Disposition of Reported Internal Control Weaknesses by Component
paragraphs: Reportable Condition (Drawback Claims on Duties, Taxes, and Fees)
Material Weakness (Financial Systems Functionality and Technology)
Material Weakness (Financial Systems Functionality and Technology)
Observation & Recommendations to Management Reportable Condition (In-bond Movement of Imported Goods)
Observation & Recommendations to Management Material Weakness (Financial Systems Functionality and Technology)
Immigration and Naturalization Service  (as of February 28, 2003)
Reportable Condition (Acceptance and Adjudication of Immigration and  Naturalization Applications)
Reportable Condition (Accounts Payable and Undelivered Orders)
Observation & Recommendations to Management Material Weakness (Financial Systems Functionality and Technology)
Material Weakness (Financial Systems Functionality and Technology)
Material Weakness (Financial Systems Functionality and Technology)
Material Weakness (Financial Reporting)
Observation & Recommendations to Management Reportable Condition (Intragovernmental Balances)
Agency and Condition Reported in 2002 Federal Law Enforcement Training Center 22. Laws and Regulations (OMB Circular A-127) 24. Laws and Regulations (OMB Circular A-11)
Material Weaknesses (Financial Reporting; Financial Systems  Functionality and Technology)
Material Weakness (Property, Plant, and Equipment)
section_title: Comments from the Department of Homeland Security
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