Memo from the Inspector General on the Report on the Financial Statement Audit of the Department of Health and Human Services for Fiscal Year 2007 (A-17-07-00001)

TO: The Secretary

Through: DS _______

COS _______

ES _______

FROM: Inspector General

SUBJECT: Report on the Financial Statement Audit of the Department of Health and Human Services for Fiscal Year 2007 (A-17-07-00001)

This memorandum transmits the independent auditors’ reports on the Department of Health and Human Services (HHS) fiscal year (FY) 2007 financial statements, conclusions about the effectiveness of internal controls, and compliance with laws and regulations. The Chief Financial Officers Act of 1990 (Public Law 101-576), as amended, requires the Office of Inspector General (OIG) or an independent external auditor, as determined by OIG, to audit the HHS financial statements in accordance with applicable standards.

We contracted with the independent certified public accounting firm of PricewaterhouseCoopers, LLP (PwC), to audit the HHS consolidated balance sheet as of September 30, 2007, and the related consolidated statements of net cost and changes in net position, the combined statement of budgetary resources for the year then ended, and the statement of social insurance as of January 1, 2007. The contract required that the audit be performed in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in the “Government Auditing Standards,” issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin 07-04, Audit Requirements for Federal Financial Statements.

Results of Independent Audit

Based on its audit, PwC found that the FY 2007 HHS financial statements were fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America. However, PwC noted four matters involving internal controls over financial reporting that were considered to be material weaknesses under standards established by the American Institute of Certified Public Accountants:

Financial Reporting Systems and Processes. HHS continued to have serious internal control weaknesses in its financial management systems and reporting processes. Substantial manual procedures, numerous adjusting entries, and untimely and incomplete reconciliations and accrual processes hindered its ability to produce timely and reliable financial statements. HHS’s financial management systems did not substantially comply with Federal financial management systems requirements or the U.S. Government Standard General Ledger at the transaction level.
Budgetary Accounting. HHS lacked sufficient controls over its accounting and business processes to ensure that budgetary transactions were properly recorded, monitored, and reported. Management routinely used high-level analysis to develop adjustments and to derive budgetary balances for financial reporting purposes. Improved procedures are needed to ensure accurate reporting of the status of budgetary resources.
Financial Management Information Systems. General control issues in both the design and the operation of key controls were noted. Of particular concern was the lack of pervasive information technology security standards for areas such as security settings on platforms, policies regarding the control and use of passwords, and policies regarding control over changes to applications.
Medicare Claim-Processing Controls. Although improvements were made, HHS continued to have weaknesses in the Centers for Medicare & Medicaid Services (CMS) Medicare claim-processing controls. Concerns related primarily to direct update access to Medicare claim data, controls over edit settings in application systems, controls governing the use of supplemental software used to process claims, and lack of CMS oversight of contractor compliance with internal control requirements.

Evaluation and Monitoring of Audit Performance

In accordance with the requirements of OMB Bulletin 07-04, we reviewed PwC’s audit of the HHS financial statements by:

evaluating the independence, objectivity, and qualifications of the auditors and specialists;
reviewing the approach and planning of the audit;
attending key meetings with auditors and HHS officials;
monitoring the progress of the audit;
examining audit documentation related to the review of internal controls over financial reporting;
reviewing the auditors’ reports; and
reviewing the HHS Management Discussion and Analysis, Financial Statements and Footnotes, and Supplementary Information.

PwC is responsible for the attached reports dated November 14, 2007, and the conclusions expressed in the reports. Our review, as differentiated from an audit in accordance with U.S. generally accepted government auditing standards, was not intended to enable us to express, and accordingly we do not express, an opinion on HHS’s financial statements, the effectiveness of internal controls, whether HHS’s financial management systems substantially complied with the Federal Financial Management Improvement Act, or compliance with laws and regulations. However, our monitoring review, as limited to the procedures listed above, disclosed no instances in which PwC did not comply, in all material respects, with U.S. generally accepted government auditing standards.

If you have any questions or comments about this report, please do not hesitate to call me, or your staff may contact Joseph E. Vengrin, Deputy Inspector General for Audit Services, at (202) 619-3155 or through e-mail at Joseph.Vengrin@oig.hhs.gov. Please refer to report number A-17-07-00001.

/Daniel R. Levinson/

Attachment

cc:
Charles E. Johnson
Assistant Secretary for Resources and Technology

Sheila Conley
Deputy Assistant Secretary, Finance

Memo from the Inspector General on the Report on the Financial Statement Audit of the Department of Health and Human Services for Fiscal Year 2007 (A-17-07-00001)

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