September 30, 1998

TABLE OF CONTENTS

Report on Compliance with Laws and Regulations

Report on Internal Controls

• Material Weaknesses
• Reportable Conditions

Financial Statements, Notes, and Supplemental Information

Management Response to Auditor Internal Control Report

Independent Auditor’s Report

To the Inspector General of the
Department of Health and Human Services, and
The Administration for Children and Families

We have audited the accompanying consolidated balance sheet of the Administration for Children and Families (ACF), a division of the United States Department of Health and Human Services (HHS), as of September 30, 1998, and the consolidated statement of net cost, consolidated statement of changes in net position, combined statement of budgetary resources, combined statement of financing, and statement of custodial activity for the year then ended (collectively the Financial Statements). These Financial Statements are the responsibility of ACF management. Our responsibility is to express an opinion on these Financial Statements based on our audit.

Except as explained in the second following paragraph, we conducted our audit in accordance with generally accepted auditing standards, the standards applicable to the financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States and Office of Management and Budget (OMB) Bulletin 98-08, "Audit Requirements for Federal Financial Statements." These standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

These Financial Statements were prepared on the basis of accounting described in Note 1 to the Financial Statements, which is a comprehensive basis of accounting other than generally accepted accounting principles.

ACF has not been able to provide documentation to reconcile the Combined Statement of Budgetary Resources, Combined Statement of Financing and Statement of Custodial Activity for the year ended September 30, 1998 to amounts reflected in the General Ledger, which was used to prepare the other accompanying financial statements. ACF records are not available to permit the application of other auditing procedures to satisfy ourselves as to the amounts in these three statements. Therefore, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying Combined Statement of Budgetary Resources, Combined Statement of Financing and Statement of Custodial Activity for the year ended September 30, 1998.

In our opinion, the Consolidated Balance Sheet, the Consolidated Statement of Net Cost, and the Consolidated Statement of Changes in Net Position referred to above present fairly, in all

material respects, the financial position of ACF at September 30, 1998, and the net cost of operations and changes in net position for the year then ended in accordance with the accounting policies described in Note 1 to the Financial Statements.

Our audit was made for the purpose of forming an opinion on the basic Financial Statements taken as a whole. The accompanying supplemental consolidating information is presented for purposes of additional analysis and is not a required part of the basic Financial Statements. Such information has been subjected to the auditing procedures applied in the audit of the basic Financial Statements, and in our opinion, is presented fairly, in all material respects, in relation to the basic Financial Statements taken as a whole. The required supplementary stewardship information is not a required part of the basic Financial Statement but is supplementary information required by federal accounting standards. We have applied certain limited procedures, which consisted principally of inquires of management regarding the method of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. The information in the Overview of ACF is not a required part of the basic Financial Statements. We assessed whether this information is materially inconsistent with the information, and the manner of its presentation, in ACF’s Financial Statements. However, we did not audit the information and express no opinion on it.

In accordance with Government Auditing Standards, we have also issued our reports dated January 29, 1999 on our consideration of ACF’s internal control over financial reporting, and on our tests of ACF’s compliance with certain provisions of laws and regulations.

 

/s/ Clifton Gunderson L.L.C Greenbelt, Maryland January 29, 1999

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

ARIZONA COLORADO ILLINOIS INDIANA IOWA MARYLAND MISSOURI OHIO TEXAS VIRGINIA WISCONSIN

Independent Auditor’s Report on Compliance with Laws and Regulations

To the Office of Inspector General,

Department of Health and Human Services, and

The Administration for Children and Families

We have audited the accompanying Financial Statements of the Administration for Children and Families (ACF), a division of the United States Department of Health and Human Services (HHS), as of and for the year ended September 30, 1998, and have issued our report thereon dated January 29, 1999. The report includes an explanatory paragraph describing a certain matter relating to a scope limitation on our opinion on the Financial Statements of ACF at September 30, 1998. Except for the explanatory paragraph of our report on the Financial Statements, we conducted our audit in accordance with generally accepted auditing standards; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 98-08, "Audit Requirements for Federal Financial Statements."

The management of ACF is responsible for complying with laws and regulations applicable to ACF. As part of obtaining reasonable assurance about whether ACF’s Financial Statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws and regulations, noncompliance with which could have a direct and material affect on the determination of financial statement amounts and certain other laws and regulations specified in OMB Bulletin 98-08, including the requirements referred to in the Federal Financial Management Improvement Act (FFMIA) of 1996.

The results of our tests of compliance disclosed no instances of noncompliance with laws and regulations discussed in the preceding paragraph, exclusive of FFMIA, that are required to be reported under Government Auditing Standards and OMB Bulletin 98-08.

Under FFMIA, we are required to report whether ACF’s financial management systems substantially comply with the Federal financial management systems requirements, Federal accounting standards, and the United States Government Standard General Ledger at the transaction level. To meet this requirement, we performed tests of compliance using the implementation guidance for FFMIA included in Appendix D of OMB Bulletin 98-08.

The results of our tests disclosed instances, where ACF’s financial management systems did not substantially comply with certain requirements discussed in the preceding paragraph. The following instances of noncompliance have been identified below and such matters are described in more detail in our Report on Internal Control; items # 1, 12 and 13.

Preparation of Financial Statements - As indicated in our Report on Internal Controls, ACF’s accounting system is not adequate to prepare reliable and timely financial statements. DFO’s process for preparing the annual financial statements in the Core Accounting System (CORE) includes downloading necessary data from CORE, and using microcomputer software to process adjusting entries and to prepare annual financial statements. The generation of a complete set of financial statements as of and for the year ended September 30, 1998 was not done in a timely manner. In addition, DFO was unable to effectively use its general ledger and the HHS crosswalk to prepare the Combined Statement of Budgetary Resources, Combined Statement of Financing and Statement of Custodial Activity.

Use of Standard General Ledger - ACF does not use its general ledger to capture all accounting transactions at a level necessary to meet OMB or Treasury reporting requirements and for preparing financial statements. Certain accounting transactions, such as month end accruals and financial statement presentation related entries, are not reflected in the general ledger and must be repeated year after year. Fifty-three entries were needed as of September 30, 1998 to prepare the general ledger for use in preparation of financial statements required by OMB 97-01. In addition, some of the adjustments made to prepare the financial statements at did not follow the SGL posting rules set forth in the Department of Treasury and HHS accounting manual.

Payroll Processing – In connection with our review of HHS’s Central Payroll system, we identified three weaknesses that resulted in an assessment that Central Payroll was not in compliance with FFMIA. Such weaknesses are collectively considered a Reportable Condition in our Report on Internal Controls. The matters are explained in more detail in our separate Independent Service Auditor’s Report dated November 30, 1998 entitled "Report on Controls Placed in Operation and Tests of Operating Effectiveness for the Central Personnel and Payroll System".

Data Processing Control Environment – During our review of Electronic Data Processing (EDP) controls, we identified several weaknesses in internal EDP controls. Such weaknesses are collectively considered a Reportable Condition in our Report on Internal Controls. These matters, summarized on page 18 of this report, are explained in more detail in a separate Independent Service Auditor’s Report dated October 13, 1998 entitled "Report on Controls Placed in Operation and Tests of Operating Effectiveness for the Division of Financial Operations’ (DFO) Financial Management Systems".

Providing an opinion on compliance with certain provisions of laws and regulations was not an objective of our audit and, accordingly, we do not express such an opinion.

This report is intended for the information of the management of ACF, HHS, the HHS Office of the Inspector General, and OMB, and is not intended to be, and should not be, used by anyone other than these specified parties.

/s/ Clifton Gunderson L.L.C Greenbelt, Maryland January 29, 1999

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

ARIZONA COLORADO ILLINOIS INDIANA IOWA MARYLAND MISSOURI OHIO TEXAS VIRGINIA WISCONSIN

Independent Auditor’s Report on Internal Controls

To the Office of Inspector General,
Department of Health and Human Services, and

The Administration for Children and Families

We have audited the accompanying Financial Statements of the Administration for Children and Families (ACF), a division of the United States Department of Health and Human Services, as of and for the year ended September 30, 1998, and have issued our report thereon dated January 29, 1999. The report includes an explanatory paragraph describing a matter relating to a scope limitation on our opinion on the Financial Statements of ACF at September 30, 1998. Except for the matter discussed in the explanatory paragraph of our report on the Financial Statements, we conducted our audit in accordance with generally accepted auditing standards, the standards applicable to the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and OMB Bulletin 98-08, Audit Requirements for Federal Financial Statements.

In planning and performing our audit, we considered ACF’s internal control over financial reporting by obtaining an understanding of ACF’s internal controls, determined whether these internal controls had been placed in operation, assessed control risk, and performed tests of controls in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Consequently, we do not provide an opinion on internal controls.

Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be reportable conditions. Under standards issued by the American Institute of Certified Public Accountants, reportable conditions are matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the agency’s ability to record, process, summarize, and report financial data consistent with the assertions by management in the financial statements. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. However, we noted certain matters discussed in the following paragraphs involving the internal control and its operation that we consider to be reportable conditions and material weaknesses.

In addition, we considered ACF’s internal control over Required Supplementary Stewardship Information by obtaining an understanding of ACF’s internal controls, determined whether these internal controls had been placed in operation, assessed control risk, and performed tests of controls as required by OMB Bulletin 98-08 and not to provide assurance on these internal controls. Accordingly, we do not provide assurance on such controls.

Finally, with respect to internal controls related to performance measures reported in ACF’s Overview, we obtained an understanding of the design of significant internal controls relating to the existence and completeness assertions, as required by OMB Bulletin 98-08. Our procedures were not designed to provide assurance on internal control over reported performance measures, and, accordingly, we do not provide an opinion on such controls.

Our consideration of internal control would not necessarily disclose all matters in internal control which might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that we also considered to be material weaknesses as defined above. We have described the reportable conditions below; items # 1 to 3 are considered material weaknesses as defined above. Material weakness #1 is further supported by the potentially material collective effect of the reportable conditions # 4 to 8 noted later herein.

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MATERIAL WEAKNESSES

1. FINANCIAL REPORTING (Repeat Condition)

1. Reconciliation Of Recorded Division Of Payment Management Grant Advance Balance
2. Fund Balance With Treasury Reconciliation Procedures
3. Treasury Fund Suspense Account Activity
4. Accounting And Reporting For Elimination Entries
5. Reconciliation on Certain Non-Grant Advances

1. Continue to reemphasize duties and responsibilities within DFO and ACF’s CFO office to address CFO Act accounting and reporting requirements on a more timely basis. Consideration should be given to reorganizing and evaluating resources available in DFO and ACF to accomplish this objective.
2. In order to meet Federal Government reporting deadlines, perform "formal closings" of all accounts at an interim date (i.e. March 30 or June 30) to reduce the level of accounting activity and analysis required at year end to meet those deadlines. This "formal closing" entails ensuring that all transactions are recorded in the proper period through the month end. With complete and timely transaction recording, analysis of all major accounts, including net position accounts, can be performed effectively.
3. Develop procedures (both performance and supervisory related) to insure performance of reconciliations of all key accounts every month, and resolve differences within 30 days after month end. Such resolution should include accumulating reliable supporting documentation for reconciling items and, ultimately, adjustments to the general ledger.
4. Post all entries in the general ledger and develop procedures for reversing those that would be processed in the normal course of operations in the subsequent fiscal year.
5. Consider obtaining financial statement preparation software compatible with CORE, or modifying CORE so that it is capable of generating accrual based financial statements.
6. Thoroughly review the FASAB pronouncements and ensure that accounting systems are adequate to generate information needed to produce reliable financial statements during the year as well as at year end.
7. Perform financial account analysis on a regular basis, but at least quarterly, to assess the reasonableness of the current period reported amounts and to identify account categories out of line with expectations. Management should investigate unusual changes from year to year and obtain explanations from appropriate division managers for significant deviations. In addition, consideration should be given to performing similar analysis with budgeted amounts.
8. Review current accounting reports to determine if information is sorted and accumulated in a useful manner for financial reporting.
9. Provide additional training for all personnel involved in processing accounting transactions to ensure that they understand the importance of posting entries to the correct standard general ledger account, performing account analysis and reconciliations, maintaining supporting documentation, and updating their knowledge of financial reporting requirements. In addition, the level of supervisory review of those persons processing accounting transactions in CORE may need to be reevaluated.

2. ANALYSIS & ANNUAL ACTIVITY IN NET POSITION ACCOUNTS (Repeat Condition)

Existing Condition: ACF continues to not reconcile its net position accounts with revenue and expense (operating) activity ledger and budgetary activity in its general ledger during the year. The net position balance on the balance sheet is comprised of two line items: (1) unexpended appropriations (unobligated appropriations and undelivered orders) and (2) cumulative results of operations. Unobligated appropriations are comprised of "Available" and "Unavailable". Even though an alternative analysis was prepared, DFO was unable to provide complete details or analysis of these amounts.

The undelivered orders balance (a component of net position - unexpended appropriations) per the general ledger does not agree to the subsidiary report (AL04M) by approximately $28 million at September 30, 1998. According to DFO, the difference is mainly due to posting of journal vouchers using the 399 transactions code. However, support for these journal vouchers was limited and a formal reconciliation analysis was not performed for this account. In addition, per guidance from the Reports and Controls Branch, even though the 399 transaction code can be used in certain circumstances, they should not be used routinely to record financial activity in the general ledger. We noted instances where unauthorized individuals used 399 transaction codes in fiscal 1999. We also noted activity with a 399 transaction code that was not detailed at the document level. As such, a detailed analysis of the difference was not available.

The problems in reconciling net position accounts are complicated by the fact that a significant number of adjustments are recorded to these accounts during the year as well as during the financial statement preparation process (i.e. "pro forma" entries not in general ledger at year end as described in condition #1 on prior page) by the Division of Financial Operations. These adjustments record both the impact of prior year adjusting journal entries and adjustments needed to reconcile other accounts at year-end. It appears that the adjustments are often posted to the Access database without fully investigating the impact to the net position accounts. Accordingly, analysis and reconciliation of the balances can not easily be performed.

Recommendation: We recommend the following in regard to the issues summarized above:

1. ACF should reconcile its operating and budgetary activity in the general ledger to the change in net position accounts, to ensure that the financial statements properly reflect net position activity for the year. In addition, appropriate analysis and support for the composition of net position at September 30, and for the year then ended should be maintained. In order to avoid problems with this analysis at the end of the year, we recommend that the analysis be done periodically during the year.
2. The undelivered orders subsidiary (AL04M) should be reconciled to the amount in the general ledger on a monthly basis. Adjustments should be made as necessary to the general ledger or subsidiary report for reconciling items that would not be resolved in a timely manner in the normal course of accounting operations. In addition, DFO should re-emphasize that the use of 399 transactions be used sparingly and be formally approved by a responsible official.
3. We also recommend that all audit and year-end closing adjustments are recorded in the CORE Accounting System to avoid reconciliation problems in net position accounts in future years.

3. ACCOUNTS PAYABLE AND UNDELIVERED ORDERS TRANSACTION PROCESSING

Existing Conditions: Accounts payable and undelivered orders are not being liquidated after all goods or services have been received and final payments are made. The condition resulted in an overstatement of $52 million in undelivered orders and $5 million in accounts payable at September 30, 1998.

We also noted a number of instances where documentation including purchase orders, receiving reports and disbursement information in support of amounts recorded did not agree. The majority of these exceptions stem from the fact that complete documentation was not provided in support of the sample items selected.

Recommendation: We recommend the following in regard to the issues summarized above:

1. Management should periodically review the accounts payable and undelivered orders balance that extend past one year. Budget offices should perform a similar review for undelivered orders.
2. Management should ensure the maintenance of all documentation in support of accounts payable and undelivered orders transactions.
3. Procedures should be established to insure that proper transaction codes are used to process final payments. This should improve the likelihood that outstanding accounts payable and undelivered orders would be properly liquidated after final payment.

Existing Condition: We commend ACF and DFO for implementing new recording and reconciliation procedures related to grant advances beginning in March 1998. The new procedures provide for recording advance transactions at the document level and provides for a true reconciliation of current activity recorded in both the general ledger and amounts reported by the Department of Payment Management (DPM) on the Summary Reconciliation Report. However, various issues were noted that require further refinement to the reconciliation process as follows:

1. Procedures performed in the reconciliation process are not formally documented to include all key steps (both preparation and supervisory review) to be performed by both DPM and ACF. Additionally, procedures on how issues raised during the reconciliation process should be resolved and formally communicated to appropriate parties, is not formally documented and approved.
2. The DPM advance balance reconciliations from April 1998 to September 1998 did not include balances for the fiscal years prior to 1993 for the "X" and multiple year appropriations. As such, the advance balance at September 30, 1998 was initially understated by approximately $93 million.

1. Obtain and review the most recent auditor report entitled "Report on Department of Health and Human Services, Program Support Center, Division of Payment Management’s Policies and Procedures in Operation and Tests of Operating Effectiveness." Particular attention should be given to the user control section of the report and the impact on the reconciliation process. User controls are defined in the report as being "internal control structure policies and procedures that should be in operation at user organizations to complement the control structure policies and procedures at HHS." A listing of certain key user controls is provided in the report. These key user controls should be established and/or enforced to reduce the risk of error and facilitate the reconciliation process.
2. Continue the reconciliation process started in March 1998. Develop formal procedures, probably at the Department level with input from DFO, to document the process of reconciling the advance balance reported to ACF by DPM including the impact of related journal vouchers on account balances. Such procedures should include responsibilities for the preparation and supervisory review of both DPM and ACF personnel, and address all communications with DPM.
3. Cross train personnel so that the loss of one person does not impact DFO’s ability to continue the important reconciliation process.

5. FUND BALANCE WITH TREASURY RECONCILIATION PROCEDURES (Repeat Condition)

Existing Condition: At September 30, 1997, ACF was unable to completely reconcile Fund Balances With Treasury (FBWT) reflected in its general ledger to that reported by The Department of Treasury (Treasury). However, ACF adjusted its 1997 financial statements by approximately $500 million to agree to the amounts reported by the Treasury, even though there was no supporting detail to substantiate this adjustment. ACF did not perform reconciliations until February of fiscal 1998. When the final reconciliation for fiscal 1998 was performed at September 30,1998, there were several material reconciling items noted; however, the differences with no supporting detail between Treasury and the general ledger at September 30,1998 declined to only $ 9 million (from the $ 500 million referred to above).

However, during our review of the FBWT reconciliations performed beginning as of February 28, 1998, we noted the following:

• Reconciling items are often the result of information maintained by several different people involved in the reconciliation process, including those responsible with recording adjustments to the general ledger (i.e. Reports & Control Branch and DFO). Since so many individuals have partial information on reconciling items, obtaining explanations and documentation for reconciling items is an excessively time consuming and arduous process.
• Several instances were noted where reconciling items on Fund Balance With Treasury reconciliations were not adequately supported.
• There are still many material reconciling items between the balance in general ledger and that reported by Treasury, indicating that transactions are not being processed consistently between Treasury & ACF.
• As reconciliations were performed during the year, adjustments needed to the general ledger as a result of the reconciliation were not posted to the general ledger for several months. In addition, we noted several instances where "reconciliation adjustments" were reversed or corrected after initial posting. This seemed to indicate confusion over the need or rationale for the adjustment in the first place.
• Several instances were noted where data sent to the Treasury could not always be traced to the general ledger.
• Preparers had little written guidance on how to prepare the reconciliations, nor was there any evidence of supervisory review noted on the reconciliations.

6. TREASURY FUND SUSPENSE ACCOUNT ACTIVITY

7. ACCOUNTING AND REPORTING FOR ELIMINATION ENTRIES

Existing Condition: In accordance with OMB 97-01, Form and Content of Agency Financial Statements, HHS prepares consolidated principal financial statements that should eliminate transactions between HHS operating Divisions (ACF is an operating division). The Department developed a process for identifying these transactions and issued guidance to the operating divisions to ensure that inter-HHS transactions would be identified during the financial statement preparation process for elimination at the consolidated level. ACF’s analysis of inter-HHS transactions was in a constant state of change until the very end of our audit.

During our audit procedures performed on accounts receivable and revenue accounts, we noted that a portion of the increases from prior year was attributable to intra-ACF transactions in the amount of approximately $17 million that had not been properly eliminated at the time of the preparation of the financial statements.

Additionally, we noted that the intra and inter agency revenues and expenses do not equal indicating that certain transactions were not recognized on a timely basis. It appears that this is caused by the fact that expenses are being recognized when paid (i.e. on cash basis) using transactions code 181 and not when expenses are incurred. Appropriate audit adjustments were made in the final 1998 financial statements.

Recommendation: We recommend that ACF perform the following:

1. Implement procedures provided by the Department for identifying inter-HHS transactions;
2. Develop internal procedures to properly record (timely and amount), identify and eliminate intra-ACF transactions;
3. Perform periodic (or at a minimum during the financial statement preparation process) analysis of revenue accounts to ensure balances are reasonable.

8. RECONCILIATION OF CERTAIN NON-GRANT ADVANCES (ASSET AND LIABILITY) (Repeat Condition)

Existing Condition: ACF transfers funds to other governmental agencies for the purpose of funding various programs monitored at other agencies for which ACF has an interest. Correspondingly, ACF also receives funds from other governmental agencies in anticipation of assisting ACF in funding certain programs that they monitor, for which the other agency has an interest. In addition, ACF also transfers funds between its various appropriations (i.e. within ACF accounts) establishing assets and liabilities that theoretically should eliminate. These transactions are recorded in the general ledger system as non-grant advance assets or non-grant advance liabilities. During the 1997 audit it could not be determined whether certain balances at September 30, 1997 were valid or should be liquidated. Accordingly, we included a scope limitation in our audit report on the 1997 financial statements due to this matter. Although we were able to apply audit procedures at September 30, 1998 (the balances were reduced to zero), a reconciliation of the general ledger accounts to the detail provided for the related accounts had not been performed during the year.

Recommendation: The HHS Accounting Manual requires that advance accounts be analyzed monthly. Accordingly, we recommend the following:

1. Perform a detailed review and reconciliation of the non-grant advance accounts (both asset and liability) on a monthly basis.
2. Implement adequate policies and procedures, with training as needed, to ensure the proper recording, monitoring and liquidation of non-grantee advances in accordance with federal and non-federal guidelines.

9. GRANT ACCRUAL (Repeat Condition)

Existing Condition: In accordance with the Statement of Federal Financial Accounting Standard #5, "Accounting for Liabilities in the Federal Government," an entity should recognize and report on its financial statements, a liability for any unpaid amounts due as of the reporting date. In 1997, a task force was formed by the Assistant Secretary for Management and Budget (ASMB) and ACF to develop a methodology to estimate the liability related to grant expenditures that had been incurred but not reported to DPM on the grantees’ Statement of Federal Cash Transactions (SF 272) submitted by September 30, 1998. The estimation process developed resulted in an accrual methodology that was not adequately supported by historical spending trends. Since the reasonableness of the amount reported in the 1997 financial statements could not be determined, our report included a scope limitation related to the accrual.

During 1998, ASMB decided to reevaluate the accrual methodology used in 1997. The new method used by ASMB was based upon a regression analysis developed by another Federal Agency. However, such method did not consider all expenses incurred but not reported (IBNR) through September 30,1998. ASMB & ACF concluded that the Division of Payment Management (DPM) did not have grantee historical spending trend data information sufficient to provide a reasonable estimate of this IBNR. Therefore, ASMB performed limited surveys of grantees trying to replicate such spending patterns at the end of their fiscal year.

ASMB’s and ACF’s attempt to estimate the IBNR portion of the accrual was time consuming and confusing, and resulted in a very simplistic calculation that was marginally supported by historical spending trends of the grantee. In addition, the total grant accrual calculation had many errors in the estimation formula requiring several revisions to the mechanics of the calculation.

Recommendation: We commend ACF and ASMB for their attempts made during 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:

1. ACF, in coordination with ASMB and in consultation with the Office of Management and Budget (OMB), should determine whether changes in current grant recipient reporting requirements (SF-272) are possible to provide relevant information that could be used to better estimate the IBNR.
2. If revised grantee reporting is not feasible, management should obtain confirmation from OMB that the methodology used satisfies their interpretation of the requirements of FASAB #5.
3. Provide training to all individuals involved in the process for adequate understanding of the calculation, responsibilities and recording of the accrual estimate in the accounting system.

10. ACCOUNTING FOR LITIGATION CLAIMS (Repeat Condition)

11. FMFIA

12. PAYROLL PROCESSING

Existing Condition: During our review of Payroll Processing controls, we identified several weaknesses in internal controls that collectively are considered a Reportable Condition. Such matters, summarized below, are explained in more detail in a separate Independent Accountant’s Report dated November 30,1998 entitled "Report on Controls Placed in Operation and Tests of Operating Effectiveness for the Central Personnel and Payroll System":

• Implementation of entity-wide security plan;
• Unauthorized access to computer resources, production programs, data and facilities;
• Continuity of operations in the event of a disaster.

13. ELECTRONIC DATA PROCESSING (Repeat Condition)

• Completeness and Accuracy Controls
• Segregation of Duties Over Change Control Procedures

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Attached to this report are management’s responses to the findings and recommendations summarized above. Management has concurred with several of our findings and recommendations and, accordingly, has developed a plan to address such internal control weaknesses. However, in other cases, management has disagreed with our finding and/or related recommendation. We have review such responses, considered their points and reevaluated our finding or recommendation in dispute. However, we have concluded that no change is needed to our original finding or recommendation.

In addition to the reportable conditions described above, we noted certain matters involving internal control and its operations that we reported to the management of ACF in a separate letter dated January 29, 1999.

This report is intended for the information of the management of ACF, HHS, the HHS Office of the Inspector General, and OMB, and is not intended to be, and should not be, used by anyone other than these specified parties.

/s/

Clifton Gunderson L.L.C.

Greenbelt, Maryland January 29, 1999