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APPENDIX MANAGEMENT RESPONSE TO AUDITOR INTERNAL CONTROL REPORT JANUARY 29, 1999 MATERIAL WEAKNESSES 1. Financial Reporting Recommendation: We commend ACF and DFO for improvements it made in various areas identified in our prior year report; however, many of the improvements were made late in the year and were not fully implemented and effective by September 30, 1998 (See audit report for detailed segments of this finding). Response: We concur with the finding in general and provide specific comments for each segment of the recommendation below. a) DFO is constantly evaluating staff resources’ responsibilities in order to address the ever changing requirements in the CFO Act. b) DFO concurs with the theory of this recommendation but does not believe "formal closings" are necessary to analyze major accounts. c) DFO concurs with this recommendation. Reconciliation of all major accounts on a monthly basis may not be practical because of limited resources. d) We do not concur with this recommendation. Past practice has shown that audit entries that normally are corrected during the normal course of operations in the subsequent fiscal year tend to cause confusion and the problems caused outweigh the benefits. e) DFO will obtain financial statement software if it is (1) mandated by the ASMB, or (2) if a product is identified that exceeds the standards of our current procedures. f) DFO concurs with this recommendation to review FASAB pronouncements to determine the feasibility of making modifications to the accounting system to provide for new reporting requirements during the year as well as at year end. g) DFO concurs with this recommendation to perform analyses of accounts on a quarterly basis.
accounting reports to address our customer’s needs. i) We concur with the theory of this recommendation. DFO supports job-related government training, college enrollment for degree seeking candidates, and continuing professional education for CPA’s. 2. Analysis and Annual Activity in Net Position Accounts Recommendation: We recommend the following in regard to the issues summarized above (See audit report for detailed segments of this finding): Response: a) DFO concurs with the theory of this recommendation but does not believe formal closings are necessary to analyze major accounts. b) DFO concurs with this recommendation, however reconciliation of all major accounts on a monthly basis may not be practical because of limited resources. c) See our response to 1d. Audit adjustments that are corrected during the normal course of operations tend to be confusing. 3. Accounts Payable and Undelivered Orders Transaction Processing Recommendation: We recommend the following in regard to the issues summarized above (See audit report for detailed segments of this finding): Response: We do not concur that this finding is a major internal control issue. DFO has initiated procedures to address "invalid" accounts payable and undelivered order balances. Draft criteria establishing obligation review procedures and a deobligation process for obligations identified as no longer valid have been initiated. This annual deobligation process will reduce payable and undelivered order balances for ACF, create an annual review of inactive accounts, and eliminate "invalid" accounts. In addition, M-Year legislation provides for the cancellation of obligations remaining in annual appropriations after five years. Collectively these processes have diminished the outstanding "invalid" balances to non-material amounts. The CORE accounting system is designed to deobligate balances remaining when transactions are processed as final payments. DFO concurs that training is necessary for final payment processing, however, we believe the training should emphasize when a final payment should be initiated and generated, not the proper use of transaction codes.
REPORTABLE CONDITIONS 4. Reconciliation of Recorded Division of Payment Management (DPM) Grant Advance Balance Recommendation: Even though we noted significant improvements with grant advance amounts reflected in the DPM subsidiary report at September 30, 1998, we recommend the following (See audit report for detailed segments of this finding): Response: We appreciate the acknowledgment of the implementation of the new grant advance reconciliation process that accounted for 99.93 percent of the advance reconciliation process. This new process is still being developed. However, procedures were written and shared with the auditors during their field work. Formalized procedures cannot be accomplished until Y2K requirements are met and the process is consolidated into a single process for all OPDIVs. Since the documentation is still evolving we believe the finding on cross training is premature. We acknowledge that reconciliations were not performed prior to Fiscal Year 1993, but due to time limitations, we concentrated on the high dollar value activity for Fiscal Years 1993 to 1998. This process accounted for 99.93 percent of the activity.
5. Fund Balance with Treasury Reconciliation Procedures Recommendation: We commend ACF for the progress made in its accounting for FBWT during 1998. (See audit report for further narrative pertaining to this finding). Response: We do not concur that this issue is a reportable condition. During the course of the audit, we have provided the auditors with extensive and sufficient detailed responses to address their concerns and interim findings regarding the Fund Balance Reconciliation Process, as well as specific questions concerning ACF accounts and appropriations. Our bottom line difference of $9 million supports the validity of our Fund Balance with Treasury Procedures. We do concur with the auditors that written procedures for this process need to be drafted. This is due to the newness of the CORE accounting system and the reconciliation process. We anticipate hiring a contractor during Fiscal Year 1999 to complete this task.
6. Treasury Fund Suspense Account Activity Recommendation: We recommend that the suspense account balance be researched, the amount applicable to each entity identified, and corrections made to the respective entity’s general ledger system on a timely basis. Response: We concur with this recommendation. DFO is and has been actively pursuing the liquidation of our share of the DHHS Suspense Account. Because not all of the suspense account balance on the 6653 applies to DFO activity and the amount allocated to ACF is immaterial in relation to the overall size of the agency, we believe this is not a reportable condition.
7. Accounting and Reporting for Elimination Entries Recommendation: We recommend that ACF perform the following (See audit report for detailed segments of this finding): Response: We concur with the findings of the ACF audit as related to the accounting and reporting for elimination entries. Although we have implemented procedures provided by the Department for identifying inter-HHS transactions, these procedures were not implemented until the end of Fiscal Year 1998. In addition, management has reemphasized the need to concurrently recognize revenue and expense when incurred. During Fiscal Year 1999, we will be reviewing the elimination data on a quarterly basis as a minimum and more frequently as time permits. These reviews for reasonableness and completeness of data will allow us to accurately account for elimination entries in a timely manner.
8. Reconciliation of Certain Non-Grant Advances (Asset and Liability) Recommendation: The HHS Accounting Manual requires that advance accounts be analyzed monthly. Accordingly, we recommend the following (See audit report for detailed segments of this finding): Response: Non-grant advance account balances were reviewed on several occasions during Fiscal Year 1998, albeit less than monthly. Due to light activity in these accounts, a quarterly review would be more appropriate. We cannot concur that this matter merits a "finding" since it is agreed that the statement balances were accurately posted.
9. Grant Accrual Recommendation: We commend ACF and ASMB for their attempts made during Fiscal Year 1998 in redeveloping a methodology to estimate grantee expenses incurred but not reported; however, further improvement is needed to assure ACF’s compliance with federal accounting standards and, accordingly, we recommend the following (See audit report for detailed segments of this finding): Response: ASMB will request OMB to determine whether government-wide grantee reporting requirements should be revised or more extensive surveys should be conducted to provide more precise grant accruals.
10. Accounting for Litigation Claims Recommendation: HHS has developed specific guidance to ACF on this matter in November 1998. We recommend that ACF implement the guidance referred to above and confer with counsel periodically throughout the year. The resulting liability should be recorded in the general ledger and updated periodically as needed. Response: We concur with this recommendation. ACF officials have set various milestones for development of procedures and interaction with the OGC and PSC to fully implement in Fiscal Year 1999 the guidance developed by the Department.
11. FMFIA Recommendation: We recommend that ACF review its procedures in developing its FMFIA report to ensure all material weaknesses are reported. Response: We do not concur with this finding. ACF and PSC officials meet periodically to review financial management activities and believe that certain findings identified in the audit report should not be reported as material weaknesses.
12. Payroll Processing Recommendation: Develop and/or revise existing procedures to address the weaknesses noted in the aforementioned report. Response: We concur with this recommendation. HRS officials awarded contracts in Fiscal Year 1998 for the development of a security plan, continuity of operations plan, and an independent review of its access controls and RACF. Draft reports have been issued on each of these initiatives with plans and new procedures expected to be finalized in March 1999.
13. Electronic Data Processing Recommendation: Develop and/or revise existing procedures to address the weaknesses in the aforementioned report. Response: We concur with this recommendation.
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