DEPUTY INSPECTOR GENERAL’S REPORT
TO THE HONORABLE ELAINE L. CHAO SECRETARY OF LABOR
The Chief Financial Officers Act of 1990 (CFO Act) requires
agencies to report annually to Congress on their financial status and any other
information needed to fairly present the agencies’ financial position and
results of operations. To meet the CFO Act reporting requirements, the United
States Department of Labor (DOL), a Department of the United States Government,
prepares annual financial statements, which we audit.
The objective of our audit is to express an opinion on the fair
presentation of DOL’s Fiscal Year 2001 and 2000 principal financial
statements. Our objective also is to obtain an understanding of the
Department’s internal control and test compliance with laws and
regulations that could have a direct and material effect on the financial
statements.
We have audited the consolidated balance sheets of DOL as of September
30, 2001 and 2000, and the related consolidated statements of net cost, changes
in net position, budgetary resources, financing, and custodial activity for the
years then ended. These financial statements are the responsibility of
DOL’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America; 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 01-02, 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 misstatements. 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.
RELATIONSHIP TO THE SINGLE AUDIT ACT
The financial statements for the years ended September 30, 2001 and
2000, include:
- costs for grants, subsidies, and contributions primarily with
various state and local governments and nonprofit organizations in the amount
of $8.2 billion for FY 2001 and $8.1 billion for FY 2000;
- costs for unemployment benefits incurred by state employment
security agencies in the amount of $28.6 billion for FY 2001 and $21.1 billion
for FY 2000;
- state employer tax revenue of $19.9 billion for FY 2001 and $19.7
billion for FY 2000;
- net receivables for state unemployment taxes, reimbursable
employers, and benefit overpayments of $.9 billion for FY 2001 and $.7 billion
for FY 2000; and
- reimbursements from state, local, and nonprofit reimbursable
employers for unemployment benefits paid on their behalf in the amount of $1.0
billion for FY 2001 and $1.0 billion for FY 2000.
Our audit included testing these costs, financing sources, and balances
at the Federal level only. Pursuant to a mandate by Congress, the examination
of these transactions below the Federal level is primarily performed by various
auditors in accordance with the Single Audit Act of 1984, as amended, and OMB
Circular A-133. The results of those audits are reported to each Federal agency
which provides direct grants, and each Federal agency is responsible for
resolving findings for its awards.
OPINION ON FINANCIAL STATEMENTS
In our opinion the financial statements referred to above present
fairly, in all material respects, in conformity with accounting principles
generally accepted in the United States of America:
- the assets, liabilities, and net position of the Department of Labor
as of September 30, 2001 and 2000; and
- the net cost, changes in net position, budgetary resources,
reconciliation of net cost to budgetary resources, and custodial activity for
the years ended September 30, 2001 and 2000.
OTHER ACCOMPANYING INFORMATION
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements of DOL taken as a whole. The accompanying
financial information discussed below is not a required part of the principal
financial statements.
The required supplementary information, included in the Management
Discussion and Analysis and FY 2001 Financial Performance Report sections of
the Performance and Accountability Report and the Required Supplementary
Stewardship Information are required by the Federal Accounting Standards
Advisory Board and OMB Bulletin No. 97-01. We have applied limited procedures,
which consisted principally of inquiries of management regarding the methods of
measurement and presentation of the information. However, we did not audit the
information and express no opinion on it.
The information in the Annual Performance Report and the appendices of
DOL’s Performance and Accountability Report is presented for purposes of
additional analysis. Such information has not been subjected to the auditing
procedures applied in the audits of the consolidated financial statements and,
accordingly, we express no opinion on it.
REPORT ON INTERNAL CONTROL
In planning and performing our audit, we considered DOL’s internal
control over financial reporting by obtaining an understanding of the
Department’s internal control, determined whether 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. We limited our internal
control testing to those controls necessary to achieve the objectives described
in OMB Bulletin No. 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. 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 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. Because of inherent limitations
in internal controls, misstatements, losses, or noncompliance may nevertheless
occur and not be detected. We noted certain matters, discussed in the following
paragraphs, involving the internal control and its operations that we consider
to be reportable conditions. However, none of the reportable conditions is
believed to be a material weakness.
In addition, we considered DOL’s internal control over Required
Supplementary Stewardship Information by obtaining an understanding of the
agency’s internal controls, determining whether they had been placed in
operation, assessed control risk, and performed tests of controls as required
by OMB Bulletin No. 01-02. The objective of our audit was not to provide
assurance on these internal controls. Accordingly, we do not provide an opinion
on such controls.
Finally, with respect to internal control relating to performance
measures included in the Performance Report, we obtained an understanding of
the design of significant internal controls relating to the existence and
completeness assertions as required by OMB Bulletin No. 01-02. 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.
REPORTABLE CONDITIONS
Current Year Reportable Conditions
Unemployment Trust Fund Benefit Overpayments
The Office of Workforce Security (OWS) has two systems which measure
benefit overpayments for the UI program. These systems play an important role
in detecting and preventing overpayment of UI benefits, and as such are part of
management’s controls to ensure that UI resources are used consistent with
the agency mission and are safeguarded from waste, fraud, and mismanagement.
Each state has a Benefit Payment Control (BPC) system to identify and
investigate benefit overpayments. The states reported overpayments for FY 2001
and FY 2000 of approximately $669 and $599 million, respectively.
The states also have a Benefits Accuracy Measurement (BAM) unit. The BAM
unit uses statistical sampling techniques to determine the accuracy of UI
benefit payments and project these sample results to the entire benefit payment
universe. BAM management concludes that their projections have a very high
degree of accuracy, due to the sampling precision achieved and the care taken
to ensure that samples are randomly selected and are tested consistently
throughout the country. BAM results are reported each year in the UI
Performs annual report.
From FY 1997 to 2000, the BAM data reflect little change in the UI
overpayment rates. In fact, the overpayment rate has remained relatively flat
since 1989 at about 8.5 percent. These data indicate a lack of significant
improvement in the states methods and systems for preventing overpayments.
According to management, the BAM payment accuracy data is a management
tool that states can use to identify areas of UI program operations that could
be improved, but due to differences in state UI laws, the BAM payment accuracy
data are not considered comparable between states. Accordingly, the BAM payment
accuracy data are not used by ETA as an indicator to identify the need for
corrective action or to measure improvements (or lack thereof) to existing
benefit payment systems. Also, the BAM payment accuracy data are not used to
identify states that are doing a good job of preventing and detecting
overpayments for purposes of developing best practices or sharing successful
methodologies.
While the FY 2001 BAM data reflect significantly higher overpayments
than those established and reported by the BPC ($2.3 billion versus $669
million, respectively), UI management indicated that a significant portion of
the $2.3 billion in overpayments, such as work search issues, can only be
cost-effectively monitored/investigated on a sample basis. Although a
cost-benefit analysis has not been performed, current BPC procedures do not
address such benefit eligibility issues as work search.
Since the overpayment rates reflect little reduction in the payment of
erroneous benefits in the past 12 years, and given the recent President’s
Management Agenda, we believe there is a need for improvement in controls.
While management is taking great efforts to measure benefit overpayments, it is
evident that these efforts have not resulted in reduced overpayment rates or
improved safeguarding of trust fund assets. The effect of not improving
controls over benefit payments and overpayment detection will be the continued
loss of significant trust fund resources.
Management has provided information on initiatives being developed to
help states reduce or detect erroneous benefit payments.
We recommend that the Chief Financial Officer and the Assistant
Secretary for Employment and Training ensure that OWS management:
1) develop a written plan to utilize the data
produced by the BAM unit as the impetus for improving internal controls over
the benefit payment process; 2) accelerate efforts to pursue wage and
employment information at the state and national levels which will assist ETA
in preventing overpayments and detecting overpayments on a timely basis; 3)
compile BPC overpayment data in categories consistent with those used for the
BAM data, in order to identify which types of overpayments are not being
detected by the BPC and use the data to prioritize the areas most in need of
improvement; and 4) perform and document a cost benefit analysis for those
overpayments identified as not being detected by the BPC, in order to determine
whether or not additional resources should be dedicated in these areas.
Accountable Property
During our audit, we noted several agencies did not have written
procedures and systems to identify and track accountable property (general
property, plant, and equipment that does not meet the Department’s
capitalization threshold).
JFMIP states that property management systems are critical for
establishing financial accounting and maintaining physical accountability over
property. According to the JFMIP, one category of property which must be
tracked includes sensitive or controlled property that is expensed when
acquired.
Management concurs with the need to improve controls over accountable
property in order to safeguard those assets from loss or theft.
We recommend that the Chief Financial Officer and the Assistant
Secretaries for Administration and Management, Employment and Training, and
Employment Standards:
1) establish written procedures for identifying
and tracking all accountable property; and 2) develop systems, for identifying
and tracking accountable property, which meet JFMIP property management system
requirements.
Prior Year Reportable Conditions
IT Controls
DOL has made progress in resolving issues from prior year audits in the
areas of controls to protect information, system development life cycle
methodology and maintaining continuity of operations. However, DOL continues to
face significant risks in these areas that should be addressed.
DOL Continues its Need to Further Strengthen Controls to Protect Its
Information
Although DOL has made improvements in its Department wide security
programs and practices, we identified weaknesses in management's procedures for
assessing risks, implementing an effective security framework, periodically
monitoring its framework, timely resolving issues identified or reported upon,
and effectively implementing and maintaining its access controls.
Areas where improvements could be made include:
- entity-wide security programs and associated policies and procedures
for developing, implementing and monitoring Local Area Network (LAN),
distributed systems, and main-frame environments;
- establishment of a security management structure and clear
assignment of responsibilities;
- implementation of effective security-related personnel policies and
procedures;
- certification and Accreditation of appropriate general support and
major application systems; and
- logical controls over the con-figuration of security parameters,
data files, and software programs.
DOL Continues its Need to Further Enforce its Systems Development
Life Cycle Methodology
DOL systems were not properly controlled in the areas of change control
policies and procedures, access to software libraries and the development and
updating of critical system documentation. The Department issued DOL Systems
Development and Life Cycle Management Manual (SDLCM) last
year and agencies are in the process of updating systems to comply with the
manual. The SDLCM provides the life cycle policies and procedures to be
followed by all DOL agencies. The Department’s Computer Security Handbook
also requires agencies to update their System Security Plans as the system
progresses throughout its life cycle.
DOL Continues its Need to Complete and Fully Test Its Plan(s) for
Maintaining Continuity of Operations
DOL has several weaknesses that would impair the Department’s
ability to effectively respond to a disruption in business operations as a
result of a disaster or another event causing an extended service interruption
including identification of alternate data processing and telecommunications
facilities, and thorough successful testing of contingency plans.
The Department’s Computer Security Handbook provides policy and
procedural guidance to DOL agencies regarding contingency planning. The OCIO
office recently created a special working group for contingency planning. This
working group will include members from each DOL agency and develop detailed
templates and procedures for contingency planning applicable to all DOL
agencies.
Unreconciled Differences with Treasury
We have previously reported the lack of document-level cash
reconciliations being performed for Departmental Agency Location Codes (ALCs).
We also noted a lack of cash reconciliations being performed at the
appropriation level for departmental transactions processed through non-DOL
ALCs. This lack of timely and effective reconciliations resulted in large cash
differences at year end.
In FY 2001, the Department improved its reconciliation procedures at
both the ALC and appropriation level. We noted a 22 percent overall decrease in
differences at the ALC level from the prior year, and in the current year,
transactions processed through non-DOL ALCs were effectively reconciled at year
end. However, unreconciled differences related to prior years still exist in
ETA.
While ETA management has proposed corrective action plans to address
this issue, the prior year differences have not been cleared. We will review
ETA’s progress in our FY 2002 audit.
In FY 2002, management plans to fully implement the use of an electronic
bulk file transfer to submit all departmental SF-224s to Treasury monthly. The
effectiveness of this procedure in reducing unreconciled differences will be
assessed in the FY 2002 audit.
Accounting for Grants
ETA’s grant accounting has the following deficiencies:
- While ETA initiated reconciliations of grant transactions recorded
in the Department’s general ledger with the HHS Payment Management System,
which disburses grant funds, some adjustments identified in the process were
not recorded in the two systems.
- Transfers of WIA funds between programs were not accounted for in
ETA’s accounting records.
- We continued to note that ETA’s grant and contract costs were
not recorded timely. In addition, ETA is not following up with grantees who are
delinquent in reporting grant costs.
- We continue to note errors in transactions recorded for ETA’s
grants and contracts. Eleven of the 40 regional office grants had cost or
obligation errors, and we noted over 100 cost entries recorded at the national
office that were not supported by grantee cost reports and were considered to
be errors.
- ETA operates without written grant accounting procedures, both at
the regional and National offices.
ETA management believes that they have implemented various improvements
over the years to address these audit findings; however, we conclude that the
FY 2001 audit results indicate a need for further improvement in each of the
areas indicated above.
Wage and Hour’s Back Wage System
In FY 2001, ESA implemented a new subsidiary system to account for back
wage activities. While the new system provides improved controls over back
wages, additional improvements are necessary to ensure that back wage accounts
are accurate and up to date. Wage and Hour also needs to improve the processes
used to reconcile cash activity recorded in the subsidiary system with that
recorded in the general ledger.
ESA management agrees with these findings, and has indicated that they
are developing various system improvements and procedural changes which will be
implemented throughout FY 2002.
Wage and Hour’s Civil Monetary Penalties (CMP)
System
In prior audits, we recommended that Wage and Hour implement a new
subsidiary system for recording CMP activities, due to certain weaknesses in
the existing system. While efforts were made to implement these changes, the
revised system was not completed during FY 2001. In addition, we continued to
note that new penalty cases and cash receipts were not recorded timely.
Generally, ESA concurs with these findings and has agreed to take
additional steps to improve the internal controls over CMP activities.
REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS
The management of DOL is responsible for complying with laws and
regulations applicable to the Department. As part of obtaining reasonable
assurance about whether the Department’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 effect on the determination of financial statement amounts
and certain laws and regulations specified in OMB Bulletin No. 01-02, including
the requirements referred to in the Federal Financial Management Improvement
Act of 1996(FFMIA). We limited our tests of compliance to these provisions and
we did not test compliance with all laws and regulations applicable to DOL.
The results of our tests of compliance with the laws and regulations
described in the preceding paragraph, exclusive of FFMIA, disclosed instances
of noncompliance with the following laws and regulations that are required to
be reported under Government Auditing Standards and OMB Bulletin No.
01-02, which are described below.
Grant Closeout Process
While ETA has improved the grant closeout process, improvements are
still needed to ensure that grants are identified for closure and are closed on
a timely basis, in accordance with 29 CFR 97.50, 29 CFR 95.71, and other
applicable regulations and departmental policy. Manageme-nt concurs and is in
the process of developing improved procedures to ensure that grants and
contracts are closed timely.
The results of our tests of compliance disclosed no instances of
noncompliance with other laws and regulations discussed in the preceding
paragraph exclusive of FFMIA that are required to be reported under
Government Auditing Standards or OMB Bulletin No. 01-02.
COMPLIANCE WITH FFMIA
Under FFMIA, we are required to report whether the Department’s
financial management systems substantially comply with the Federal financial
management systems requirements, applicable Federal accounting standards, and
the United States Government Standard General Ledger (SGL) at the transaction
level. To meet this requirement, we performed tests of compliance with FFMIA
section 803(a) requirements.
The results of our tests disclosed no instances in which the
agency’s financial management systems did not substantially comply with
the three requirements discussed in the preceding paragraph.
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 solely for the information and use of the
management of the U.S. Department of Labor, the Office of Management and
Budget, and Congress and is not intended to be and should not be used by anyone
other than these specified parties. 
John J. Getek
Deputy Inspector General for Audit
January 11, 2002
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