Inspector General
Equal Employment Opportunity Commission

Independent Auditor's Report on Internal Control

Cotton & Company LLP audited the Consolidated Balance Sheets of the Equal Employment Opportunity Commission (EEOC) as of September 30, 2004 and 2003; the related Consolidated Statements of Net Cost of Operations, Changes in Net Position, and Financing; and the Combined Statement of Budgetary Resources for the years then ended. We have issued our report thereon dated November 1, 2004. We conducted our audit in accordance with Government Auditing Standards, auditing standards generally accepted in the United States of America, and Office of Management and Budget (OMB) Bulletin 01-02, Audit Requirements for Federal Financial Statements.

In planning and performing our audit, we considered EEOC's internal control over financial reporting by obtaining an understanding of the agency's internal control, determining if internal control had been placed in operation, assessing control risk, and performing tests of controls to determine auditing procedures for the purpose of expressing our opinion on the financial statements. We limited internal control testing to those controls necessary to achieve objectives described in OMB Bulletin 01-02. We did not test all internal controls relevant to operating objectives as broadly defined by the Federal Managers' Financial Integrity Act of 1982, such as those controls relevant to ensuring efficient operations. The objective of our audit was not to provide assurance on internal control. Consequently, we do not provide an opinion on internal control.

Our consideration of 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 internal control that, in our judgment, could adversely affect an agency's ability to record, process, summarize, and report financial data consistent with management assertions 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 statement being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Because of inherent limitations in internal control, misstatements, losses, or noncompliance may nevertheless occur and may not be detected.

We noted a certain matter involving internal control and its operation that we consider to be a material weakness as defined above. The material weakness involves the financial reporting process.

Financial Reporting Process

Last year, we reported as a material weakness that EEOC had not established an effective quality assurance system to verify the work of individuals preparing financial statements and footnotes. The Chief Financial Officer (CFO) agreed that an effective and efficient quality assurance system must be implemented and dedicated a senior accountant to operate the quality assurance process.

This year we found a material error in the draft financial statements and the quality assurance system did not detect the error.

In compiling the Statement of Net Cost of Operations, costs were reported for the Enforcement, Mediation, and Litigation Programs under the Strategic Objective for the Private Sector. In assigning non-payroll direct costs to these three programs, EEOC assigned the non-payroll direct costs for each one to the incorrect program.

This resulted in the total costs for each program to be misstated.

With an effective quality assurance system, employees in the normal course of performing their assigned functions would have detected and corrected these errors within a timely period.

Recommendation

We recommend that EEOC's CFO improve the effectiveness of the quality assurance system to verify the work of individuals preparing financial statements and footnotes.

Management Comments

EEOC's CFO concurred with the findings and agreed to implement the recommendation.

Status of Prior-Year Internal Control Weaknesses

In the 2003 report on internal control, we described two material weaknesses and one reportable condition. In addition to the material weakness involving the financial reporting process as discussed above, the other material weakness was that EEOC did not obtain an actuarially-based estimate of its liability for future workers' compensation.

The reportable condition was that in preparing its statement of net cost, EEOC allocated material amounts of cost based on estimates rather than actual data.

EEOC resolved the material weakness and reportable condition before it prepared its FY 2004 financial statements.

With respect to internal control related to significant performance measures included in Management's Discussion and Analysis, we obtained an understanding of the design of internal control relating to the existence and completeness assertions, as required by OMB Bulletin 01-02. Our procedures were not designed to provide assurance on internal control over reported performance measures and, accordingly, we do not express an opinion on such controls.

We noted other nonreportable matters involving internal control and its operation that we will communicate in a separate management letter.

This report is intended solely for the information and use of EEOC management, OMB and Congress. It is not intended to be and should not be used by anyone other than these specified parties. This report is, however, a matter of public record and its distribution is not limited.

COTTON & COMPANY LLP

Colette Wilson, CPA

November 1, 2004
Alexandria, Virginia

This page was last modified on November 18, 2004

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