Financial Management: Financial Management Challenges Remain at the Department of Education
Released: 2000-09-19T00:00:00

Letter

Background

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Over the past 10 years, dramatic changes have occurred in federal financial management in response to the most comprehensive management reform legislation of the past 40 years. The combination of reforms ushered in by (1) the Chief Financial Officers (CFO) Act of 1990, (2) the Government Management Reform Act of 1994, (3) the Federal Financial Management Improvement Act (FFMIA) of 1996, (4) the Government Performance and Results Act (GPRA) of 1993, and (5) the Clinger-Cohen Act of 1996 will, if successfully implemented, provide the necessary foundation to run an effective, results-oriented government. Efforts to continue to build the foundation for generating accurate financial information through lasting financial management reform are essential. Only by generating reliable and useful information can the government ensure adequate accountability to taxpayers, manage for results, and help decisionmakers make timely, well-informed judgments.

Education’s fiscal year 1999 audit was conducted by Ernst & Young LLP, independent auditors contracted for by the Education Inspector General. We reviewed the independent auditors’ reports and workpapers. We also interviewed Education officials to obtain the status of corrective actions and reviewed available corrective action plans. We shared a draft of this statement with Education officials, who provided technical comments. We have incorporated their comments where appropriate. Our work was conducted in accordance with generally accepted government auditing standards.

Fiscal Year 1999 Audit Results

The Office of Management and Budget’s (OMB) implementation guidance for audited financial statements requires the 24 CFO Act agencies to receive three reports from their auditors annually: (1) an opinion or report on the agencies’ financial statements, (2) a report on the agencies’ internal controls, and (3) a report on the agencies’ compliance with laws and regulations. As of August 2000, 15 of the 24 CFO Act agencies had received “clean” or unqualified opinions on their fiscal year 1999 financial statements. The Department of Education did not receive such an opinion because of its financial management weaknesses.

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Report on the Financial Statements

While Education’s financial staff and its contractors worked very hard to prepare Education’s fiscal year 1999 financial statements before the March 1, 2000, deadline, and the auditors’ opinion on the financial statements improved over that of fiscal year 1998, serious internal control and financial management systems weaknesses continued to plague the agency. For fiscal year 1999, Education made significant efforts to work around these weaknesses and produce financial statements. These efforts enabled its auditors to issue qualified opinionson four of its five required financial statements and a disclaimer on the fifth statement. Its auditors’ qualified opinion states that except for the effect of the matters to which the qualification relates, the financial statements present fairly, in all material respects, financial position, net costs, changes in net position, and budgetary resources in conformity with generally accepted accounting principles. The auditors stated the following reasons or matters for their qualification:

The Department had significant systems weaknesses during fiscal year 1999 affecting its financial management systems. The new accounting system, implemented in fiscal year 1998, had several limitations, including an inability to perform a year-end closing process or produce automated consolidated financial statements. Through its efforts and those of its contractors, Education was able to partially compensate for, but did not correct, certain aspects of the material weaknesses in its financial reporting process. In addition, during fiscal year 1999, Education experienced significant turnover of financial management staff, which also contributed to the overall weakness in financial reporting.

Education was unable to provide adequate support for about $800 million reported in the September 30, 1999, net position balance in its financial statements, and the auditors were unable to perform other audit procedures to satisfy themselves that this amount was correct.

Education processed many transactions from prior fiscal years as fiscal year 1999 transactions and manually adjusted its records in an effort to reflect the transactions in the proper period; however, the auditors could not determine if these adjustments for certain costs and obligations were correct.

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The auditors were unable to determine whether beginning balances for accounts payable and related accruals were accurate.

In addition, the auditors did not issue an opinion (referred to as a disclaimer of an opinion) on the Department’s Statement of Financing. The Statement of Financing provides a reconciliation or “translation” from the budget to the financial statements. The statement is intended to help those who work with the budget to understand the financial statements and the cost information they provide. The auditors stated that the reason for this disclaimer was that the Department did not perform adequate reconciliations and present support for amounts on the Statement of Financing in a timely manner.

To the extent that Education was able to improve the opinion it received on its financial statements for fiscal year 1999, it was generally the result of (1) time-consuming manual procedures, (2) various automated tools to “work around” the system’s inability to close the books and generate financial statements, and (3) reliance on external consultants to assist in the preparation of additional reconciliations and the financial statements. This approach does not produce the timely and reliable financial and performance information Education needs for decision-making on an ongoing basis, which is the desired result of the CFO Act.

Report on Internal Controls

The Department also receives annually from its auditors a report on internal controls. This report is significant for highlighting the agency’s internal control weaknesses that increase its risk of mismanagement that can sometimes result in waste, fraud, and abuse. In this report for fiscal year 1999, the Department’s auditors reported four materialinternal control weaknesses—three continuing from fiscal year 1998 and one additional one for fiscal year 1999—and that long-standing internal control weaknesses persist.

Error! No text of specified style in document. financial reporting process, (2) inadequate reconciliations of financial accounting records, and (3) inadequate controls over information systems. The independent auditors also identified a new material internal control weakness related to accounting for certain loan transactions. Summaries of the material internal control weaknesses follow:

Education did not have adequate internal controls over its financial reporting process. Its general ledger system was not able to perform an automated year-end closing process and directly produce consolidated financial statements as would normally be expected from such systems. Because of these weaknesses, Education had to resort to a costly, labor- intensive, and time-consuming process involving manual and automated procedures to prepare financial statements for fiscal year 1999. In addition, Education had to rely heavily on contractor services to help perform reconciliations among the various data sources used. In one instance, Education reported a balance of approximately $7.5 billion for its cumulative results of operations. However, the majority of this amount, which pertains to the Federal Family Education Loan Program (FFELP), should have been reported as a payable to Treasury rather than as cumulative results of operations. As a result of the independent auditors’ work, an adjustment was made to reclassify the $7.5 billion to the proper account. When such errors occur and are not detected by the Department’s controls, there are increased risks that the Department could retain funds inappropriately that should be returned to Treasury.

Error! No text of specified style in document. accounting records. In some instances, Education adjusted its general ledger to reflect the balance per the subsidiary records, without sufficiently researching the cause for differences. Also, as indicated in prior audits, Education has not been able to identify and resolve differences between its accounting records and cash transactions reported by the Treasury. For example, for fiscal year 1999, Education adjusted its Fund Balance with Treasury, due to a difference between its general ledger and the Treasury, by a net amount of about $244 million. Reconciling agencies’ accounting records with relevant Treasury records is required by Treasury policy and is analogous to individuals reconciling their checkbooks to monthly bank statements. In another instance, as we recently reported,Education used its grantback account as a suspense account beginning in 1993 for hundreds of millions of dollars of activity related to grant reconciliation efforts. We also reported that Education did not maintain adequate detailed records for certain grantback account activity by the applicable fiscal year and appropriation. In addition, Education used the grantback account to clear unreconciled differences in various grant appropriation fund balance accounts and adjust certain appropriation fund balances to ensure that they did not become negative.

In response to the auditors’ findings, Education has purchased a software tool to help enhance its ability to reconcile its account balances with the corresponding Treasury account balances on a monthly basis. Education has also developed web-based policies and procedures for reconciling the Department’s material accounts and programs.

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Federal Credit Reform Act of 1990, Education could not be assured that its financial or budgetary reports were accurate.

Education returned the $2.7 billion to the Treasury in February 2000. The Department also established policies and procedures to ensure compliance with the Credit Reform Act.

Education had information systems control deficiencies in (1) implementing user management controls, such as procedures for requesting, authorizing, and revalidating access to computing resources, (2) monitoring and reviewing access to sensitive computer resources, (3) documenting the approach and methodology for the design and maintenance of its information technology architecture, and (4) developing and testing a comprehensive disaster recovery plan to ensure the continuity of critical system operations in the event of disaster. The Department places significant reliance on its financial management systems to perform basic functions, such as making payments to grantees and maintaining budget controls. Consequently, continued weaknesses in information systems controls increase the risk of unauthorized access or disruption in services and make Education’s sensitive grant and loan data vulnerable to inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction, which could occur without being detected.

According to Education officials, the Department has developed and implemented a formal approach and methodology for designing and maintaining an entity-wide security program technology architecture and has updated its security policies and procedures for its financial management system to ensure that changing system security needs are reflected, access authorizations are documented, and access rights are revalidated periodically. The Department has developed a disaster recovery plan for Education’s Central Automated Processing System (EDCAPS), the accounting system implemented by the Department in fiscal year 1998.

Error! No text of specified style in document. controls. Consequently, these agencies rely on costly, time-consuming ad hoc procedures to determine year-end balances. This approach does not produce the timely and reliable financial and performance information needed for decision-making on an ongoing basis. This approach is also inherently incapable of addressing the underlying financial management and operational issues that adversely affect these agencies’ ability to fulfill their missions.

Report on Compliance With Laws and Regulations

Error! No text of specified style in document. maximizing the value and assessing and managing the risks of its IT investments.

Education officials told us that the Department has since established an Investment Review Board that assesses information technology investments.

The Department did not transfer its excess funds related to FFELP, specifically the $2.7 billion of net collections previously mentioned, to Treasury as required by the Federal Credit Reform Act of 1990.

Education officials stated that they believe the noncompliance with the Credit Reform Act issue will be resolved for the fiscal year 2000 audit because they have developed and implemented policies and procedures to respond to this issue.

Potential for Fraud, Waste, and Abuse

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In response to this issue, Education has developed policies and procedures to reconcile grant expenditures to the general ledger.

The information systems weaknesses highlight some of the computer security vulnerabilities, such as the lack of an effective process to monitor security violations on all critical systems of the Department. Information systems control weaknesses increase the risk of unauthorized access or disruption in services and make Education’s sensitive grant and loan data vulnerable to inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction, which could occur without being detected. A report issued by the Department’s Inspector General in Februaryemphasizes the need for the Department to focus on addressing its computer security vulnerabilities. In addition, earlier this year, the White House recognized the importance of strengthening the nation’s defenses against threats to public and private sector information systems that are critical to the country’s economic and social welfare when it issued its NationalPlanforInformationSystemsProtection.In the aftermath of the recent attack by the “ILOVEYOU” virus, which disrupted operations at large corporations, governments, and media organizations worldwide, we recently testifiedabout the need for federal agencies to promptly implement a comprehensive set of security controls. We also recently reportedon the results of information security audits at federal agencies that show that federal computer systems are riddled with weaknesses that continue to put critical operations and assets at risk. These types of concerns led us, in 1997 and 1999 reports to the Congress, to identify information security as a high-risk issue.

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In response to the IG’s February report, Education’s Chief Information Officer has developed a corrective action plan to address these weaknesses. This plan proposes developing security plans for the 6 mission-critical systems that did not have them. Education envisions that the plans will meet the requirements of OMB Circular A-130 and the Computer Security Act of 1987. The plan also calls for establishing requirements for security training and a monitoring process to ensure that security personnel receive adequate training. We did not evaluate the effectiveness of these corrective actions.

The auditors reported that Education had not taken a complete, comprehensive physical inventory of property and equipment for at least the past 2 years. Comprehensive inventories improve accountability for safeguarding the government’s assets, such as computer software and hardware, and establish accurate property records. Without such an inventory, property or equipment could be stolen or lost without detection or resources could be wasted by purchasing duplicate equipment already on hand. An alleged equipment theft is currently under investigation by the OIG and the Department of Justice.

In addition, vulnerabilities in the Department’s student financial assistance programs have led us since 1990 to designate this a high-risk areafor waste, fraud, abuse, and mismanagement. As we reported in our high-risk series update in January 1999, our audits as well as those by the Department’s IG have found instances in which students fraudulently obtained grants and loans.

In response to your request, we are auditing selected Education accounts that are deemed particularly susceptible to improper payments based on a risk assessment that takes into account previous findings by GAO, the IG, and Education’s independent public accountants. This work is in the initial planning phase and is expected to focus primarily on the Department’s disbursement processes and EDP controls. We plan on using various electronic auditing techniques to determine whether the Department has inappropriately disbursed funds. We also plan to evaluate the vulnerability of the Department’s EDP systems to fraud, misuse, and disruption.

Error! No text of specified style in document. well-informed judgments. While Education has planned and begun implementing many actions to resolve its financial management problems, it is too early to tell whether they will be successful. It is critical that Education rise to the challenges posed by its financial management weaknesses because its success in achieving all aspects of its strategic objectives depends in part upon reliable financial management information and effective internal controls. It is also important to recognize that several of the financial management issues that have been raised in reports emanating from reviews of Education’s financial statements directly or indirectly affect Education’s ability to meet its obligations to its loan and grant recipients and responsibilities under law.

Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other Members of the Subcommittee may have.

Contact and Acknowledgments

For information about this statement, please contact Gloria Jarmon at (202) 512-4476 or at jarmong.aimd@gao.gov. Individuals making key contributions to this statement included Dan Blair, Anh Dang, Cheryl Driscoll, and Meg Mills. (916379)