As part of our audit of the fiscal years 2013 and 2012 CFS, we considered the federal government’s financial reporting procedures and related internal control. Also, we determined the status of corrective actions taken by Treasury and OMB to address open recommendations relating to the processes used by them to prepare the CFS that were detailed in our previous reports. A full discussion of our scope and methodology is included in our February 2014 report on our audit of the fiscal years 2013 and 2012 CFS. We have communicated each of the control deficiencies discussed in this report to your staff. We performed our audit of the fiscal years 2013 and 2012 CFS in accordance with U.S. generally accepted government auditing standards. We believe that our audit provided a reasonable basis for our conclusions in this report. We requested comments on a draft of this report from the Director of OMB and the Secretary of the Treasury or their designees. OMB provided oral comments, which are summarized in the Agency Comments section of this report. Treasury’s Fiscal Assistant Secretary provided written comments on June 10, 2014, which are reprinted in their entirety in appendix II and are also summarized in the Agency Comments section. During our audit of the fiscal year 2013 CFS, we identified several new internal control deficiencies in Treasury’s and OMB’s processes used to prepare the CFS. Specifically, we found that (1) Treasury’s and OMB’s corrective action plans are not adequate to reasonably assure that internal control deficiencies involving the processes used to prepare the CFS are efficiently and effectively addressed, (2) Treasury does not have procedures to sufficiently document management’s conclusions and the basis for such conclusions regarding accounting policies for the CFS, and (3) Treasury does not have adequate procedures for verifying staff’s preparation of the narrative within the notes to the CFS to reasonably assure that the narrative is accurate and supported by the underlying financial information of the significant component entities. We also updated the description of the control deficiencies related to the long- standing material weakness regarding the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities. Treasury’s and OMB’s corrective action plans are not adequate to reasonably assure that internal control deficiencies involving the processes used to prepare the CFS are efficiently and effectively addressed. Corrective action plans are the mechanism whereby management presents the procedures the agency will follow to resolve internal control deficiencies. Well-defined corrective action plans provide benefits such as consistency in addressing internal control deficiencies, concurrence on remediation activities, transparency in defining accountability and responsibility to ensure that results are achieved, and improved decision making on the status of remediation activities. An effective corrective action planning framework facilitates corrective action plan preparation, accountability, monitoring, and communication and helps ensure that the agency personnel responsible for completing the planned corrective actions and monitoring progress toward resolution have the information and resources they need to do so. The Chief Financial Officers Council’s Implementation Guide for OMB Circular A-123, Management’s Responsibility for Internal Control – Appendix A, Internal Control over Financial Reporting (Implementation Guide) includes guidance for preparing well-defined corrective action plans. Based on the guidance included in the Implementation Guide, well-defined corrective action plans include the following elements for each deficiency: (1) descriptions of the deficiency and the planned corrective actions in sufficient detail to facilitate a common understanding of the deficiency and the steps that must be performed to resolve it; (2) a clear delineation of agency personnel responsible for completing the planned corrective actions and monitoring progress toward resolution; (3) the year the deficiency was first identified; (4) the targeted resolution date; (5) interim targeted milestones and completion dates, including subordinate indicators, statistics, or metrics used to gauge resolution progress; and (6) planned validation activities and outcome measures used for assessing the effectiveness of the corrective actions taken. During our audit of the fiscal year 2013 CFS, we found that Treasury’s and OMB’s corrective action plans lacked certain key elements as recommended by the Implementation Guide. For example, these plans do not contain sufficiently detailed actions that must be performed to resolve each of the deficiencies, interim milestones so that interim actions and progress can be monitored and progress assessed, and outcome measures to assist in assessing the effectiveness of the corrective actions. In addition, we found that Treasury’s and OMB’s corrective action plans do not fully consider the interrelationships between deficiencies, such as designing a corrective action that will help resolve multiple deficiencies. Standards for Internal Control in the Federal Government provides that federal agencies should establish policies and procedures for promptly resolving findings of audits and other reviews. In addition, OMB Circular No. A-123, Management’s Responsibility for Internal Control, requires management to develop corrective action plans for material weaknesses and periodically assess and report on the progress of those plans. The Implementation Guide is widely viewed as a “best practices” methodology for executing the requirements of Appendix A of OMB Circular No. A-123. Without well-defined corrective action plans, Treasury’s and OMB’s efforts to address the numerous issues involving the processes used to prepare the CFS will be hampered. To efficiently and effectively address internal control deficiencies involving the processes used to prepare the CFS, we recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to include all key elements recommended by the Implementation Guide and fully consider the interrelationships between deficiencies in the corrective action plans. Treasury does not have procedures to sufficiently document management’s conclusions and the basis for such conclusions regarding the accounting policies for the CFS. Accounting policies are the mechanism whereby management summarizes the accounting principles and methods of applying those principles that management has concluded are appropriate for presenting fairly the entity’s assets, liabilities, net cost of operations, and changes in net position. Such policies should sufficiently document management’s conclusions regarding fair presentation and the basis of such conclusions. When sufficiently documented, accounting policies help ensure the consistent application of accounting principles by management from period to period and over similar classes of transactions, account balances, and disclosures. A summary of the significant accounting policies for the CFS is disclosed in Note 1 to the CFS, as required by U.S. generally accepted accounting principles. During our audit of the fiscal year 2013 CFS, we found that Treasury had not sufficiently documented management’s conclusions and the basis of such conclusions regarding the accounting policies for the CFS. Standards for Internal Control in the Federal Government provides that federal agencies should clearly document internal control activities—the policies, procedures, techniques, and mechanisms that enforce management’s directives—and properly manage and maintain such documentation so that it will be readily available for examination. In addition, OMB Circular No. A-123 requires management to document the decisions made during its process for developing and maintaining effective internal control over financial reporting. Without sufficiently documented accounting policies that include management’s conclusions regarding fair presentation and the basis of such conclusions, Treasury cannot be assured that accounting principles will be applied consistently from period to period and over similar classes of transactions, account balances, and disclosures. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement procedures to sufficiently document management’s conclusions and the basis of such conclusions regarding the accounting policies for the CFS. Treasury does not have adequate procedures for verifying staff’s preparation of the narrative within the notes to the CFS to reasonably assure that the narrative is accurate and supported by the underlying financial information of the significant component entities. Accompanying notes are an integral part of financial statements and provide additional disclosures that are necessary to make the financial statements more informative. Such additional disclosures often take the form of narrative and amounts, presented both within the narrative and in tables. During our audit of the fiscal year 2013 CFS, we found that Treasury’s standard operating procedures for preparing the CFS, including its procedures for analyzing the financial information submitted by the significant component entities, provide that Treasury staff are to verify the narrative within the notes and make changes so that the narrative reflects the financial information submitted by the significant component entities. However, the procedures do not include specific steps to be performed to verify the accuracy of the staff’s work, such as verifying the appropriateness of changes made by the staff and that all necessary changes were identified and made. We identified inconsistencies and errors in the narrative within the notes to the draft CFS that were not identified through the review of the staff’s work but were subsequently corrected by Treasury. Standards for Internal Control in the Federal Government provides that control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives. The standards also provide that agencies should accurately and timely record transactions and events. Without adequate procedures for verifying staff’s preparation of the narrative within the notes to the CFS, Treasury cannot be assured that such narrative is reliable. We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to improve and implement Treasury’s procedures for verifying that staff’s preparation of the narrative within the notes to the CFS is accurate and supported by the underlying financial information of the significant component entities. During our fiscal year 2013 CFS audit, we found that the federal government continued to be unable to adequately account for and reconcile intragovernmental activity and balances between federal entities. Treasury has taken certain actions over the past few years to address control deficiencies in this area. Consequently, we have updated the description of the remaining control deficiencies related to this material weakness, as discussed below. Consolidated financial statements are intended to present the results of operations and financial position of the components that make up the reporting entity as if the entity were a single enterprise. When preparing the consolidated financial statements, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated, from the financial statements.