You are on page 1of 9

ASSISTANT INSPECTOR GENERAL’S REPORT

U.S. Department of Labor Office of Inspector General


Washington, D.C. 20210

ASSISTANT INSPECTOR GENERAL’S REPORT

TO THE HONORABLE resources for the years then ended. These


ELAINE L. CHAO financial statements are the responsibility
SECRETARY OF LABOR of DOL’s management. Our responsibility
is to express an opinion on these financial
The Chief Financial Officers Act of 1990 statements based on our audit.
(CFO Act) requires agencies to report
annually to Congress on their financial We conducted our audit in accordance with
status and any other information needed to auditing standards generally accepted in the
fairly present the agencies’ financial United States of America; the standards
position and results of operations. To meet applicable to financial audits contained in
the CFO Act reporting requirements, the Government Auditing Standards, issued by
United States Department of Labor (DOL), the Comptroller General of the United
a Department of the United States States; and Office of Management and
Government, prepares annual financial Budget (OMB) Bulletin No. 01-02, Audit
statements, which we audit. Requirements for Federal Financial
Statements. These standards require that
The objectives of our audit are to express we plan and perform the audit to obtain
an opinion on the fair presentation of reasonable assurance about whether the
DOL’s Fiscal Years 2002 and 2001 financial statements are free of material
principal financial statements, obtain an misstatements. An audit includes
understanding of the Department’s internal examining, on a test basis, evidence
control, and test compliance with laws and supporting the amounts, and disclosures in
regulations that could have a direct and the financial statements. An audit also
material effect on the financial statements. includes assessing the accounting principles
used and significant estimates made by
Additionally, our objectives included management, as well as evaluating the
expressing an opinion on DOL’s overall financial statement presentation.
compliance with requirements of the We believe that our audit provides a
Federal Financial Management reasonable basis for our opinion.
Improvement Act of 1996, based on our
examination. RELATIONSHIP TO THE
SINGLE AUDIT ACT
We have audited the consolidated balance
sheets of DOL as of September 30, 2002 The financial statements for the years
and 2001 and the related consolidated ended September 30, 2002 and 2001,
statements of net cost, changes in net include:
position, financing, and custodial activity
and the combined statements of budgetary

OIG Report No. 22-03-004-13-001 Page 1.1


ASSISTANT INSPECTOR GENERAL’S REPORT

• costs for grants, subsidies, and OPINION ON FINANCIAL


contributions primarily with various STATEMENTS
state and local governments and
nonprofit organizations in the amount In our opinion the financial statements
of $10.0 billion for FY 2002 and $8.2 referred to above present fairly, in all
billion for FY 2001; material respects, in conformity with
accounting principles generally accepted in
• costs for unemployment benefits the United States of America:
incurred by state employment security
agencies in the amount of $50.0 • the assets, liabilities, and net position
billion for FY 2002 and $28.6 billion of the Department of Labor as of
for FY 2001; September 30, 2002 and 2001; and

• state employer tax revenue of $19.3 • the net cost, changes in net position,
billion for FY 2002 and $19.9 billion budgetary resources, reconciliation of
for FY 2001; net cost to budgetary resources, and
custodial activity for the years ended
• net receivables for state September 30, 2002 and 2001.
unemployment taxes, reimbursable
employers, and benefit overpayments As described in Note 1 (C and D) to the
of $1.0 billion for FY 2002 and $.9 financial statements, the FY 2001 financial
billion for FY 2001; and statements have been restated to adopt a
provision in OMB Bulletin No. 01-09 that
• reimbursements from state, local, and requires certain budget authority and other
nonprofit reimbursable employers for resources allocated to another agency be
unemployment benefits paid on their reported by the transferor; and for an error
behalf, in the amount of $1.3 billion in the classification within equity of certain
for FY 2002 and $1.0 billion for funds transferred from the Unemployment
FY 2001. Trust Fund to State Unemployment
Insurance and Employment Service
Our audit included testing these costs, Operations. The correction of this error for
financing sources, and balances at the periods prior to FY 2001 has been shown as
Federal level only. Pursuant to a mandate a prior period adjustment in the statement
by Congress, the examination of these of changes in net position for FY 2001.
transactions below the Federal level is
primarily performed by various auditors in OTHER ACCOMPANYING
accordance with the Single Audit Act of INFORMATION
1984, as amended, and OMB Circular A-
133. The results of those audits are Our audit was conducted for the purpose of
reported to each Federal agency that forming an opinion on the consolidated and
provides direct grants, and each Federal combined financial statements of DOL
agency is responsible for resolving findings taken as a whole. The accompanying
for its awards. financial information discussed below is

OIG Report No. 22-03-004-13-001 Page 1.2


ASSISTANT INSPECTOR GENERAL’S REPORT

not a required part of the principal financial Bulletin No. 01-02. We did not test all
statements. internal controls relevant to operating
objectives as broadly defined by the
The Required Supplementary Information, Federal Managers’ Financial Integrity Act
included in the Management Discussion of 1982, such as those controls relevant to
and Analysis and FY 2002 Financial ensuring efficient operations. The
Performance Report sections of the objective of our audit was not to provide
Performance and Accountability Report, assurance on internal control.
and the Required Supplementary Consequently, we do not provide an
Stewardship Information are required by opinion on internal control.
the Federal Accounting Standards Advisory
Board and OMB Bulletin No. 01-09. We Our consideration of the internal control
have applied limited procedures, which over financial reporting would not
consisted principally of inquiries of necessarily disclose all matters in the
management regarding the methods of internal control over financial reporting that
measurement and presentation of the might be reportable conditions. Under
information. However, we did not audit the standards issued by the American Institute
information and express no opinion on it. of Certified Public Accountants, reportable
conditions are matters coming to our
The information in the Annual Performance attention relating to significant deficiencies
Report and the appendices of the DOL’s in the design or operation of the internal
Performance and Accountability Report is control that, in our judgment, could
presented for purposes of additional adversely affect the agency’s ability to
analysis. Such information has not been record, process, summarize, and report
subjected to the auditing procedures financial data consistent with the assertions
applied in the audits of the consolidated by management in the financial statements.
and combined financial statements and, Material weaknesses are reportable
accordingly, we express no opinion on it. conditions in which the design or operation
of one or more of the internal control
REPORT ON INTERNAL CONTROL components does not reduce to a relatively
low level the risk that misstatements in
In planning and performing our audit, we amounts that would be material in relation
considered DOL’s internal control over to the financial statements being audited
financial reporting by obtaining an may occur and not be detected within a
understanding of the Department’s internal timely period by emp loyees in the normal
control, determined whether internal course of performing their assigned
controls had been placed in operation, functions. Because of inherent limitations
assessed control risk, and performed tests in internal controls, misstatements, losses,
of controls in order to determine our or noncompliance may nevertheless occur
auditing procedures for the purpose of and not be detected. We noted certain
expressing our opinion on the financial matters, discussed in the following
statements. We limited our internal control paragraphs, involving the internal control
testing to those controls necessary to and its operations that we consider to be
achieve the objectives described in OMB reportable conditions. However, none of

Page 1.3 OIG Report No. 22-01-013-13-001


ASSISTANT INSPECTOR GENERAL’S REPORT

the reportable conditions is believed to be a • 526 assets that should have been fully
material weakness. depreciated at April 30, 2002. These
items have no current year depreciation
In addition, we considered DOL’s internal expense but continued to have a net
control over Required Supplementary book value of $57 million.
Stewardship Information by obtaining an
understanding of the agency’s internal The assets were fully depreciated as of
controls, determining whether they had September 30, 2002, by adjustment.
been placed in operation, assessing control However, Statement of Federal Financial
risk, and performing tests of controls as Accounting Standards No. 6, Accounting
required by OMB Bulletin No. 01-02. The for Property, Plant, and Equipment,
objective of our audit was not to provide requires the calculation of depreciation to
assurance on these internal controls. be a systematic and rational allocation of
Accordingly, we do not provide an opinion the cost of general property, plant and
on such controls. equipment over the estimated useful life of
the asset. In addition, GAO’s Standards
Finally, with respect to internal control for Internal Control in the Federal
relating to performance measures included Government require that internal controls
in the Performance Report, we obtained an should be designed to assure that ongoing
understanding of the design of significant monitoring occurs in the course of normal
internal controls relating to the existence operations. The depreciation calculation
and completeness assertions as required by for the items noted above was not
OMB Bulletin No. 01-02. Our procedures adequately monitored to ensure a
were not designed to provide assurance on systematic and rational allocation. This
internal control ove r reported performance weakness in internal control over assets
measures, and, accordingly, we do not valuation resulted in an overvaluation of
provide an opinion on such controls. property reported in DOL’s FY 2001
financial statements.
REPORTABLE CONDITIONS
ETA agreed that there was an oversight on
Current Year Reportable Conditions its part, but believes that this is an isolated
incident not requiring additional efforts or
Job Corps Real Property Depreciation controls. However, we have concluded that
stronger internal controls should be
We noted discrepancies in the calculation designed to help prevent future oversights.
of depreciation for capitalized ETA Job
Corps real property relating to 1998 and We recommend that the Chief Financial
prior years. These discrepancies included: Officer ensures that property valuations
reported by the capitalized assets tracking
• 13 assets that should have been fully and reporting system (CATARS) are
depreciated but continued to have a net accurate by developing and documenting
book value of $6 million at April 30, internal controls that will include quarterly
2002. Depreciation expense continued
to be recorded each month.

OIG Report No. 22-03-004-13-001 Page 1.4


ASSISTANT INSPECTOR GENERAL’S REPORT

reviews of the asset cost, net book value Prior Year Reportable Conditions
and depreciation expense.
Information Technology (IT) Controls
ILAB Excessive Cost Accruals
While the Department has made progress in
The Bureau of International Labor Affairs strengthening its IT environment in the last
(ILAB) has experienced rapid growth in its 4 years, we noted several areas where the
appropriations during the la st several years, Department can continue to make
with its funding more than doubling from improvements:
FY 2000 to FY 2001. This rapid growth
has resulted in challenges in accounting The Department lacks strong logical
methodologies for ILAB. Specifically, we security controls to secure the
have noted that ILAB does not have a Department’s data and information.
documented accrual methodology for the
costs of its grants, and that ILAB does not The Department still lacks strong logical
include subsequent verification of the security controls to secure the
estimated accruals when actual costs Department’s data and information. In the
become known. As a result, accrued costs performance of our internal vulnerability
were overstated by approximately $47 assessment testing of the Department of
million at September 30, 2002. The cost Labor Accounting and Related Systems
accrual provisions of Grant Financial (DOLAR$) for FY 2002, we identified
System Requirements, issued by the Joint significant vulnerabilities involving general
Financial Management Improvement controls and security that resulted in an
Program (JFMIP), require subsequent alert report being issued to DOL’s Chief
verification of estimated accruals. Information Officer and Chief Financial
Officer. To address these vulnerabilities,
We recommend that the Chief Financial the Department needs to strengthen
Officer and the Assistant Secretary for technical security standards, administrative
Administration and Management ensure procedures, enforcement processes,
that a formal written accrual methodology monitoring processes and
is developed that satisfies all JFMIP system response/recovery processes.
requirements. The methodology should
include procedures for the subsequent In response, management stated that while
verification of the accrual accuracy, and they believe the controls in place during
procedures for adapting the methodology as FY 2002 would have prevented a
necessary based on the verification results. significant compromise of the data in the
DOLAR$ system, they consider any
Management concurs with the security weakness to be serious.
recommendation made by the OIG. They Management has taken additional steps to
will review their current methodology and strengthen these controls.
select an accrual method more in line with
the specific types of ILAB grants.

Page 1.5 OIG Report No. 22-01-013-13-001


ASSISTANT INSPECTOR GENERAL’S REPORT

Accountable Property on an annual basis to determine that all of


the items in CATARS exist and are in use.
We previously reported that several A reconciliation should be performed to
agencies did not have adequate procedures identify differences between the physical
and systems to track accountable property inventory and CATARS. The differences
(general property, plant, and equipment that should be researched to determine why they
does not meet the Department’s were not located. During our FY 2002
capitalization threshold). During FY 2002, audit, we determined that the Department
DOL entered into a contract to conduct a was not performing reconciliations of
preliminary review of current DOL CATARS to the physical inventory.
property management operations and Instead, the Department was comparing
property management systems, develop a what was in CATARS to what was found,
new property management database and and removed items from CATARS that
document responsibilities. This remains in could not be found, rather than researching
the preliminary stages. to find out the actual disposition of the
missing assets.
Further, in FY 2002, the Department raised
its capitalization threshold from $25,000 to Management concurs with the need to
$50,000, which will substantially decrease develop stronger controls and is working to
the number of items requiring capitalization correct these deficiencies.
and tracking in the capitalized property
system (CATARS). Because several Unemployment Insurance Benefit
agencies do not have adequate accountable Overpayments
property systems, items below this new
threshold will not be tracked in any system; We previously reported certain deficiencies
therefore, the potential risk of loss to the in the internal controls over Unemployment
Department increases. Insurance (UI) benefit payments. We
identified that UI overpayment data
Management has stated that they agree with collected by the Benefit Accuracy
the need to improve controls over Measurement (BAM) data reflect
accountable property and are working to significantly higher overpayments than
develop a Department-wide property those established and reported by the states’
system. Benefit Payment Control (BPC) system. In
FY 2002, management provided the OIG
Capitalized Assets with a detailed corrective action plan and
timeline, as well as descriptions of certain
We previously reported that management’s actions already put into place. While we
capitalized asset tracking and reporting generally concur with the corrective actions
procedures are inadequate to ensure that described by management, certain actions
disposals of capitalized assets are reported listed on the final timeline were not fully
in a timely and accurate manner, and that described in the written plan, and certain
assets are adequately safeguarded against decisions regarding the measurement of
loss or theft. To adequately safeguard least-detectable and nonrecoverable
assets, a physical inventory should be taken overpayments have yet to be finalized.

OIG Report No. 22-03-004-13-001 Page 1.6


ASSISTANT INSPECTOR GENERAL’S REPORT

ETA agreed with the need to provide a new • ETA continues to operate without
plan, and recently provided a revised plan written grant accounting procedures,
that will be reviewed during our FY 2003 both at the regional and National
audit work. offices.

Accounting for Grants ETA management has taken certain actions


and is continuing to implement
ETA’s grant accounting has the improvements to address our audit findings.
following deficiencies:
REPORT ON COMPLIANCE WITH
• While the number of grants in closeout LAWS AND REGULATIONS
reflects a steady decrease since EXCLUSIVE OF THE FEDERAL
FY 2000, our audit disclosed that the FINANCIAL MANAGEMENT
ending inventory of grants in closeout IMPROVEMENT ACT OF 1996
at September 30, 2002, does not include (FFMIA)
certain regional office grants that
expired but were not identified for The management of the DOL is responsible
closeout or included in the tracking for complying with laws and regulations
system. We also noted that the final applicable to the Department. As part of
certification process is not being obtaining reasonable assurance about
performed timely. whether the Department’s financial
statements are free of material
• Transfers of WIA funds between misstatement, we performed tests of its
programs continue to be unaccounted compliance with certain provisions of laws
for in ETA’s accounting records. and regulations, noncompliance with which
could have a direct and material effect on
• While ETA has stepped up its efforts to the determination of financial statement
obtain and record delinquent cost amounts and certain laws and regulations
reports from its grantees, our FY 2002 specified in OMB Bulletin No. 01-02,
audit continued to note delinquent including the requirements referred to in
reporting. the Federal Financial Management
Improvement Act of 1996. We limited our
• We continued to note data entry errors tests of compliance to these provisions and
in our grants testing. Errors were noted we did not test compliance with all laws
at both the regional offices, which are and regulations applicable to the DOL.
not recorded through the EIMS system,
The results of our tests of compliance with
and the national office. For example, at
the laws and regulations described in the
the national level we identified over
preceding paragraph, exclusive of FFMIA,
$250 million in negative cost entries disclosed no instances of noncompliance
posted. At the regional offices, we with laws and regulations that are required
noted errors in various Job Corps to be reported under Government Auditing
contracts selected for testing. Standards and OMB Bulletin 01-02.

Page 1.7 OIG Report No. 22-01-013-13-001


ASSISTANT INSPECTOR GENERAL’S REPORT

Providing an opinion on compliance with In our opinion, as of September 30, 2002,


certain provisions of laws and regulations DOL substantially complied with the
was not an objective of our audit and, requirements of FFMIA, except for
accordingly, we do not express such an applicable Federal accounting standards as
opinion. described below:

REPORT ON COMPLIANCE WITH Implementation of Managerial Cost


FFMIA Accounting

We have examined DOL's compliance with The Department of Labor is not in


the requirements of FFMIA as of compliance with the requirements for
September 30, 2002. These include managerial cost accounting contained in
implementing and maintaining financial Statement of Federal Financial Accounting
management systems that substantially Standards Number 4 (SFFAS No. 4), The
comp ly with: (1) financial management Managerial Cost Accounting Concepts and
systems requirements, (2) applicable Standards for the Federal Government.
Federal accounting standards, and (3) the Specifically, DOL has not defined outputs
United States Government Standard for its operating programs nor developed
General Ledger (SGL) at the transaction the capability to routinely report the cost of
level. Management is responsible for outputs at the operating program and
DOL's compliance with these requirements. activity levels for use in managing program
Our responsibility is to express an opinion operations. Additionally, DOL does not
on DOL's compliance based on our use managerial cost information for
examination. purposes of performance measurement,
planning, budgeting or forecasting.
Our examination was conducted in
accordance with the attestation standards Noncompliance with requirements for
established by the American Institute of managerial cost accounting persists
Certified Public Accountants; Government primarily because DOL has not succeeded
Auditing Standards, issued by the in its efforts to implement a functional
Comptroller General of the United States; managerial cost accounting system.
and OMB Bulletin No. 01-02, Audit System implementation has not been
Requirements for Federal Financial successful because agency and program
Statements. These standards include management responsible for the vast
examining on a test basis, evidence about majority of DOL’s operating programs
DOL's compliance with those requirements have not actively participated in the
and performing such other procedures as implementation effort led by the Office of
we considered necessary in the the Chief Financial Officer.
circumstances. We believe that our
examination provides a reasonable basis for We recommend that the Chief Financial
our opinion. Our examination does not Officer ensures the development of a
provide a legal determination on DOL's comprehensive Department-wide
compliance with specified requirements. managerial cost accounting system
implementation plan by June 30, 2003, that

OIG Report No. 22-03-004-13-001 Page 1.8


ASSISTANT INSPECTOR GENERAL’S REPORT

will be fully operational by January 28, This report is intended solely for the
2006. information and use of the management of
the U.S. Department of Labor, the Office of
In accordance with the provisions and Management and Budget, and Congress,
requirements of the Act, the Secretary of and is not intended to be and should not be
Labor has determined that the Department used by anyone other than these specified
of Labor financial management systems are parties.
in substantial compliance with the FFMIA.
However, the OIG maintains the position
that since costs are not captured and
reported at the level required and there is ELLIOT P. LEWIS
not in place an integrated system that can Assistant Inspector General for Audit
be used by managers to manage DOL
programs on a day-to-day basis, the January 6, 2003
Department has not implemented
managerial cost accounting as required by
the standard. Therefore, the OIG’s opinion
is that the Department is not in substantial
compliance in this regard.

—————

Page 1.9 OIG Report No. 22-01-013-13-001