Although many of the larger agencies that transferred to DHS have been able to obtain unqualified or “clean” audit opinions on their annual financial statements, most employed significant effort and manual work- arounds to do so in order to overcome a history of poor financial management systems and significant internal control weaknesses. Furthermore, some of the entities that transferred may also have weaknesses not yet identified or reported on merely because the problems were considered small or immaterial in relation to their large parent departments, such as the Department of Defense or the U.S. Department of Agriculture. Such weaknesses may become evident now that these smaller agencies are proportionately larger as a part of DHS, add to the known extensive existing challenges, and may therefore be subjected to increased levels of audit scrutiny. Cumulatively, these weaknesses and the efforts needed to resolve them to achieve sound financial management and business processes are an important reason for amending the CFO Act to include DHS and measuring DHS’s financial management systems and internal control against the same important financial reform legislation and performance expectations as other federal departments and agencies. DHS, like other federal agencies, has a stewardship obligation to prevent fraud, waste, and abuse, to use tax dollars appropriately, and to ensure financial accountability to the President, the Congress, and the American people. For the most part, DHS’s component entities are using legacy financial management systems that have a myriad of problems, such as disparate, nonintegrated, outdated, and inefficient systems and processes. DHS will need to focus on building future systems as part of its enterprise architecture approach to ensure an overarching framework for the agency’s integrated financial management processes. Plans and standard accounting policies and procedures must be developed and implemented to bridge the many financial environments in which inherited agencies currently operate to an integrated DHS system. Another significant challenge for DHS is fixing the previously identified weaknesses that the agencies bring with them to DHS, a number of which I will now discuss. While receiving unqualified audit opinions on its fiscal year 2001 and 2002 financial statements, the former INS under the Department of Justice (DOJ) faces numerous challenges in achieving a sound financial management environment. Although INS was abolished and split into multiple bureaus within DHS, its prior financial management weaknesses will still need to be addressed and could be further complicated by this realignment. For fiscal year 2002, INS’s financial statement auditors reported three material internal control weaknesses and that its systems were not in substantial compliance with FFMIA. Specifically, auditors noted limitations in the design and operation of INS’s financial accounting system, thereby requiring it to use stand-alone systems or obtain the required financial information via manual processes and nonroutine adjustments as part of the financial statement preparation process. Having systems that can routinely produce information for financial reporting on demand for day-to- day decision making is one of the expected results of the President’s Management Agenda, as well as one of the goals of FFMIA. In addition, for both fiscal years 2001 and 2002, auditors reported that INS did not have a reliable system for providing regular, timely data on the numbers of completed and pending immigration applications, and the associated collections of fees valued at nearly $1 billion for fiscal year 2002. Accordingly, INS was not able to accurately and regularly determine fees it earns without relying on an extensive servicewide, year-end physical count of over 5.4 million pending applications, as was the case in fiscal year 2002. INS has been developing a new tracking system to facilitate its inventory process. However, until the new system is implemented, INS must rely on inefficient manual processes that significantly disrupt its operations. These and other inherent weaknesses in INS’s financial management process limit its ability to produce useful, accurate, and timely financial information. Despite the importance and prevalence of information technology (IT) systems in accomplishing its core missions, INS has not yet established and implemented effective controls for managing its IT resources. The root cause of INS’s systems problems has been an absence of effective enterprise architecture management and an IT investment management process. To address such weaknesses, INS has been developing an enterprise architecture, including a current and target architecture, as well as a transition plan. Similarly, INS has taken steps to implement rigorous and disciplined investment management controls. However, with the transfer to DHS and the splitting of INS, these plans will have to be reanalyzed, further delaying implementation of effective systems and complicating DHS’s ability to produce reliable, timely, and accurate financial statements and information. FEMA, the only CFO Act agency to transfer in its entirety to DHS, faces several major financial management challenges, in spite of receiving an unqualified opinion on its fiscal year 2002 financial statements. In fiscal year 2002 FEMA’s auditors reported six material internal control weaknesses and that FEMA’s financial management systems were not in substantial compliance with the requirements of FFMIA. One major weakness was FEMA’s inability to efficiently prepare accurate financial statements as called for in the President’s Management Agenda. For example, auditors reported that for fiscal year 2002, FEMA did not have an integrated financial reporting process that could generate financial statements as a byproduct of already existing processes, and that its financial statements were prepared late and required significant revisions. In addition, auditors reported in fiscal year 2001 and again in fiscal year 2002 that FEMA did not have adequate accounting systems and processes to ensure that all property, plant, and equipment were properly recorded, accurately depreciated, and tracked in accordance with its polices and applicable federal accounting standards. As a result, FEMA’s property management system cannot track items to supporting documentation or to a current location. Furthermore, FEMA lacks procedures to ensure that (1) equipment is consistently recorded on either a system or a component basis, (2) procedures are in place to ensure that property inventories are performed properly, and (3) all equipment is entered into its personal property management system. As a result, there is an increased risk that equipment and other property could be lost, stolen, or improperly recorded in its accounting records. Since FEMA was the only agency to transfer to DHS in its entirety, it, unlike all of the other agencies, is left without a legacy department to prepare financial statements for the first 5 months of activity for fiscal year 2003 or an Office of Inspector General (OIG) to audit them, leaving FEMA’s financial management information for the first 5 months of this fiscal year vulnerable to omissions, errors, and ultimately material misstatements. Given the weaknesses in, among other things, FEMA’s property controls, we are initiating a review of FEMA’s disbursement activity and property management controls covering this 5-month period. We will keep this Subcommittee informed of our progress in this review. Until corrective actions are implemented to address weaknesses, FEMA will not be able to achieve effective financial accountability or ensure that property is properly accounted for. In fiscal year 2002, Customs under Treasury received a qualified opinion on a limited scope review of its internal controls. This qualified opinion was due to the identification of four material weaknesses in Customs’ internal controls by its independent auditors. For example, auditors reported that Customs’ financial systems did not capture all transactions as they occurred during the year; did not record all transactions properly; were not fully integrated; and did not always provide for essential controls with respect to override capabilities. As a result, extensive manual procedures and analysis were required to process certain routine transactions and prepare year-end financial statements. Customs, which typically collects and processes over $23 billion in fees annually, was found to have poor collection procedures throughout the agency. Ongoing weaknesses in the design and operation of Customs’ controls over trade activities and financial management and information systems continue to inhibit the effective management of these activities and protection of trade revenue. For example, auditors reported that Customs’ Automated Commercial System could not provide summary information on the total unpaid assessments for duties, taxes, and fees by individual importer. The system also could not generate periodic management information on outstanding receivables, the age of receivables, or other data necessary for managers to effectively monitor collection procedures. Such a capability would allow Customs to give managers timely access to program revenue information and more effectively present performance measures, which is critical for implementation of the President’s Management Agenda. Despite Customs’ progress in implementing recommendations GAO and others have made over the years, numerous weaknesses continue to hinder progress toward developing Customs’ planned import system, the Automated Commercial Environment (ACE). ACE is intended to replace the current system used for collecting import-related data and ensuring, among other things, that trade-related revenue is properly collected and allocated. To ensure proper implementation of these initiatives, DHS’s management must continue to provide a sustained level of commitment to its successful implementation. Until this system is fully implemented, billions in trade-related revenue will continue to be tracked by systems with inadequate controls. In addition, like INS, Customs faces additional financial management challenges because it was split into various components. TSA was created by the Aviation and Transportation Security Act under the Department of Transportation (DOT) in November 2001, to develop transportation security policies and programs that contribute to providing secure transportation for the American public. Despite its short history, the former TSA brings to DHS numerous financial management issues. In fiscal year 2002, auditors reported five material weaknesses and that TSA’s systems were not in substantial compliance with FFMIA. Specifically, auditors found that TSA management had not established written accounting policies and procedures to properly perform TSA’s financial management and budgeting functions during fiscal year 2002. This is an example of what can happen when a newly created entity does not thoroughly develop and implement standard accounting policies and procedures. DHS should carefully review TSA’s weaknesses to avoid experiencing them on a departmentwide basis. Auditors also reported that TSA did not maintain complete and accurate records of its passenger and baggage screening equipment, most notably its Explosive Detection System (EDS) equipment.