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FINANCIAL REPORT

INDEPENDENT AUDITOR'S REPORT

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KPMG LLP
2001 M Street, NW
Washington, DC 20036

Independent Auditors’ Report

Secretary and Inspector General
U.S. Department of Transportation:

We have audited the accompanying consolidated balance sheet of the U.S. Department of Transportation (DOT) as of September 30, 2008, and the related consolidated statements of net cost and changes in net position, and combined statement of budgetary resources (hereinafter referred to as “consolidated financial statements”) for the year then ended. The objective of our audit was to express an opinion on the fair presentation of these consolidated financial statements. In connection with our audit, we also considered the DOT’s internal controls over financial reporting and tested the DOT’s compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements that could have a direct and material effect on these consolidated financial statements. The accompanying consolidated financial statements of the DOT as of, and for the year ended, September 30, 2007 were audited by other auditors whose report thereon dated November 9, 2007, expressed an unqualified opinion on those statements.

Summary

As stated in our opinion on the consolidated financial statements, we concluded that the U.S. Department of Transportation’s consolidated financial statements as of and for the year ended September 30, 2008 are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles. As discussed in our opinion, the DOT changed its method of accounting for and reporting of heritage assets to adopt changes in accounting standards in fiscal year 2008, and reports certain significant estimates in its excise tax revenues.

Our consideration of internal control over financial reporting resulted in the following conditions being identified as significant deficiencies:

  1. Journal Entries and Account Relationships
  2. Property, Plant, and Equipment, including the Construction in Progress Account
  3. Grant Accruals
  4. Exchange Revenue
  5. Financial Reporting
  6. Undelivered Orders
  7. Information Technology Controls over Financial Systems and Applications

However, none of the significant deficiencies are believed to be material weaknesses.

The results of our tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements disclosed the following instances of actual or potential noncompliance or other matters that are required to be reported under Government Auditing Standards, issued by the Comptroller General of the United States, and Office of Management and Budget (OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial Statements.
  1. Anti-Deficiency Act
  2. Federal Financial Management Improvement Act of 1996
  3. Federal Managers’ Financial Integrity Act of 1982
  4. Improper Payments Information Act of 2002

The following sections discuss our opinion on the DOT’s fiscal year 2008 consolidated financial statements; our consideration of the DOT’s internal controls over financial reporting; our tests of the DOT’s compliance with certain provisions of applicable laws, regulations, contracts, and grant agreements; and management’s and our responsibilities.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of the U.S. Department of Transportation as of September 30, 2008, and the related consolidated statements of net cost and changes in net position, and the combined statement of budgetary resources for the year then ended.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the U.S. Department of Transportation as of September 30, 2008, and its net costs, changes in net position, and budgetary resources, for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 9, the DOT changed its method of accounting for and reporting heritage assets in fiscal year 2008 to adopt the provisions of the Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards No. 29, Heritage Assets and Stewardship Land.As discussed in Notes 1 and 20, the consolidated financial statements reflect actual excise tax revenues deposited in the Highway Trust Fund and the Airport and Airway Trust Fund through June 30, 2008 and excise tax receipts estimated by the Department of Treasury’s Office of Tax Analysis for the quarter ended September 30, 2008.

The information in the Management’s Discussion and Analysis, Required Supplementary Information, and Required Supplementary Stewardship Information sections is not a required part of the consolidated financial statements, but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this information. However, we did not audit this information and, accordingly, we express no opinion on it.

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The information in the Other Accompanying Information section is presented for purposes of additional analysis and are not required as part of the consolidated financial statements. This information has not been subjected to auditing procedures and, accordingly, we express no opinion on it.

Internal Control Over Financial Reporting

Our consideration of the internal control over financial reporting was for the limited purpose described in the Responsibilities section of this report and would not necessarily identify all deficiencies in the internal control over financial reporting that might be significant deficiencies or material weaknesses.

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the DOT’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with U.S. generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the DOT’s consolidated financial statements that is more than inconsequential will not be prevented or detected by the DOT’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the DOT’s internal control.

In our fiscal year 2008 audit, we consider the deficiencies described in Exhibit I to be significant deficiencies in internal control over financial reporting. However, we believe that none of the significant deficiencies described in Exhibit I are material weaknesses. Exhibit III presents the status of prior year significant deficiencies.

We noted certain additional matters that we will report to management of the DOT in a separate letter.

Compliance and Other Matters

The results of certain of our tests of compliance as described in the Responsibilities section of this report, exclusive of those referred to in the Federal Financial Management Improvement Act of 1996 (FFMIA),disclosed two potential and one other instances of noncompliance that are required to be reported herein underGovernment Auditing Standards or OMB Bulletin No. 07-04, and are described in Exhibit II.

The results of our other tests of compliance as described in the Responsibilities section of this report, exclusive of those referred to in FFMIA,disclosed no instances of noncompliance or other matters that are required to be reported herein under Government Auditing Standards or OMB Bulletin No. 07-04.

The results of our tests of FFMIA disclosed instances, described in Exhibit II, where the DOT did not substantially comply with applicable Federal accounting standards.

The results of our tests of FFMIA disclosed no instances in which the DOT did not substantially comply with the Federal financial management systems requirements, and the United States Government Standard General Ledger at the transaction level.

Exhibit III presents the status of prior year instances of non-compliance.

* * * * * * *

Responsibilities

Management’s Responsibilities. Management is responsible for the consolidated financial statements; establishing and maintaining effective internal control; and complying with laws, regulations, contracts, and grant agreements applicable to the DOT.

Auditors’ Responsibilities. Our responsibility is to express an opinion on the fiscal year 2008 consolidated financial statements of the DOT 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 OMB Bulletin No. 07-04. Those standards and OMB Bulletin No. 07-04 require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but 4not for the purpose of expressing an opinion on the effectiveness of the DOT’s internal control over financial reporting. Accordingly, we express no such opinion.

An audit also includes:

We believe that our audit provides a reasonable basis for our opinion.

In planning and performing our audit, we considered the DOT’s internal control over financial reporting by obtaining an understanding of the DOT’s internal control, determining whether internal controls had been placed in operation, assessing control risk, and performing tests of controls as a basis for designing our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements. 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 express an opinion on the effectiveness of the DOT’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the DOT’s internal control over financial reporting.

As part of obtaining reasonable assurance about whether the DOT’s fiscal year 2008 consolidated financial statements are free of material misstatement, we performed tests of the DOT’s compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of the consolidated financial statement amounts, and certain provisions of other laws and regulations specified in OMB Bulletin No. 07-04, including the provisions referred to in Section 803(a) of FFMIA. We limited our tests of compliance to the provisions described in the preceding sentence, and we did not test compliance with all laws, regulations, contracts, and grant agreements applicable to the DOT. However, providing an opinion on compliance with laws, regulations, contracts, and grant agreements was not an objective of our audit and, accordingly, we do not express such an opinion.

The DOT’s response to the findings identified in our audit is presented in Exhibit IV. We did not audit the DOT’s response and, accordingly, we express no opinion on it.

This report is intended solely for the information and use of the DOT’s management, the DOT Office of Inspector General (OIG), OMB, the U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should not be used by anyone other than these specified parties.

KPMG LLP signature November 12, 2008

 

EXHIBIT IU.S. DEPARTMENT OF TRANSPORTATION
Independent Auditors’ Report
Significant Deficiencies in Internal Control

SIGNIFICANT DEFICIENCIES

A. Journal Entries and Account Relationships

Background/Criteria: From fiscal year (FY) 2003 until FY 2006, the DOT OIG reported that material weaknesses existed in internal controls over financial management and reporting activities in the DOT, specifically in the Highway Trust Fund (HTF) agencies. In FY 2007, the HTF agencies implemented significant improvements in internal controls over financial management and reporting activities. In the FY 2007 audit report, the DOT OIG identified deficiencies in controls, as required by the DOT Financial Management Policies Manual and other DOT guidance, over journal entries and analysis of proprietary and budgetary account relationships as a significant deficiency.

Conditions: We noted the following internal control weaknesses in the DOT’s use of journal entries and analysis of proprietary and budgetary account relationships.

Use of Journal Entries

We reviewed 389 journal entries processed by the HTF agencies and 6 other operating administrations (OAs) for the year ended September 30, 2008, and we noted 67 instances in which these entries could have been avoided by following existing DOT policies and procedures. Specifically, these entries could have been entered using one of the modules within Delphi, the DOT’s core accounting system, or by using standardized posting models. Further, we noted that the DOT lacks a consistent journal entry numbering scheme and journal entry nomenclature that ensures the journal entries were sequentially numbered.

Analysis of Proprietary and Budgetary Account Relationships

During our review of account relationship tests as of and for the year ended September 30, 2008 for the same agencies listed above, we noted the following exceptions related to analyzing, resolving, or explaining the variances identified by the account relationship tests:

In July 2008, the DOT formed a dedicated team of experienced accountants to focus on improving the timeliness, accuracy, and comprehensiveness of the account reconciliations. As a result, the team’s improvement efforts were only partially completed as of year-end.

Cause: The DOT Office of Financial Management developed a consistent and comprehensive set of proprietary and budgetary account relationship tests for all DOT agencies to use beginning with the quarter ended June 30, 2007. However, certain of DOT’s OAs have not adequately implemented the related policies and procedures over the analysis and resolution of variances identified between proprietary and budgetary accounts. In addition, the policies and procedures did not establish a firm due date for the resolution of any variances identified.

Finally, the resources dedicated to the effort of researching and resolving differences in the proprietary and budgetary account relationships vary during the year, and increased substantially in the months prior to year-end.

Effect: Failure to research and resolve proprietary and budgetary account variances increases the risk that quarterly or the year-end financial statements may be misstated or not properly supported.

Recommendations: We recommend that the DOT:

  1. Enforce existing policies and procedures to reduce the use of manual journal entries, especially in instances when the entry should have been processed through the Delphi modules or by using standardized posting models.
  2. Develop effective policies and procedures to ensure that journal entries are sequentially numbered.
  3. Revise the existing policies to include a firm due date for the timely resolution of variances and to require a thorough review and resolution of variances prior to posting “balancing” journal entries to the general ledger.
  4. Follow the existing and revised policies and procedures to review and document the resolution of account relationship variances at the accounting fund level on a monthly basis.
  5. Review each OA’s analysis in order to ensure compliance with the existing policies and procedures and to ensure that transactions posted to the general ledger are accurate.
B. Property, Plant, and Equipment, including the Construction in Progress Account

Background/Criteria: The Federal Aviation Administration (FAA) constructs significant capital assets, such as radar, navigational, communications, and other technology equipment that is used to operate the United States National Airspace System. The FAA’s property, plant and equipment (PP&E) portfolio totals approximately $13.8 billion, including construction in progress (CIP) of approximately $2.3 billion as of September 30, 2008. From FY 2005 through FY 2007, the DOT OIG reported that FAA had a material weakness in internal controls over the timely processing of PP&E transactions and related accounts.

Conditions: During FY 2008, we noted:

The issues noted above resulted in actual and projected errors totaling $130 million.

Cause/Effect: Weaknesses noted during FY 2008 are the result of newly developed policies and procedures not operating effectively or not being implemented throughout the FAA. If FAA is unable to correct these conditions, the CIP, PP&E and related financial statement balances may be misstated.

Recommendations: We recommend that the DOT:

  1. Continue to work with personnel in the FAA to resolve the weaknesses identified above. During our audit, we communicated seven recommendations to FAA management, including improving existing policies and procedures, ensuring supporting documentation is maintained and available, implementing a three-year rolling inventory, strengthening communication and reporting within the FAA, continuing to review the useful life and date placed in service of capitalized assets, continuing to automate transactions, and continuing training of and communication with FAA’s accounting offices.
C. Grant Accruals

Background/Conditions: For year-end reporting, the DOT, specifically the Federal Highway Administration (FHWA), the Federal Transit Administration (FTA), and the FAA, calculates and records an estimated liability for the amount of work performed by its grantees (including their contractors) but not yet billed to or reimbursed by DOT. The DOT Financial Management Policies Manual requires that estimated accruals should be carefully analyzed and compared with subsequent actual numbers to ensure the accrual process is continuously refined to improve accuracy. Further, the DOT Financial Management Policies Manual requires that accruals be made as accurate as possible based on actual events.

During FY 2008, these OAs did not receive sufficient information from their grantees in order to either evaluate the accuracy and reliability of the accrual estimated as of September 30, 2007 or update their estimates for FY 2008. As a result, the grant accrual is not based on current sufficient information provided by grantees.

Cause: Personnel in these OAs do not have effective processes in place to receive the appropriate information from their grantees in order to perform appropriate analyses of the accuracy of the prior year’s accruals or to update their estimates for the current year. The OAs are hampered in their efforts by the Paperwork Reduction Act, which limits the amount of information that agencies of the Federal government may request from state and local government entities, who are the vast majority of the DOT’s grantees.

Effect: Application of a grant accrual methodology without a proper comparison of estimates to subsequent actual results and consideration of current year information may result in improperly accruing expenses and accounts payable, and the associated liability and expense reported on the Balance Sheet and Statement of Net Cost may be misstated.

Recommendations: We recommend that the DOT:

  1. Enhance its internal controls over the development of its grant accrual methodology to ensure that information submitted from selected grantees used in the development of the methodology constitutes sufficient and appropriate evidence on which to base the grant accrual estimate.
  2. Update its policies and procedures to obtain and review appropriate information from each of its grantees and utilize the information therein to compare to the DOT’s prior year grant accrual estimate in order to refine the DOT’s current year grant accrual estimate.
D. Exchange Revenue

Background/Criteria: The DOT reported approximately $1.7 billion in earned revenue in FY 2008 resulting from the sale of goods and services to other Federal agencies and to the public. The DOT Financial Management Policies Manual requires that revenues are recorded when earned and expenses are recorded when incurred (goods are received and services performed even though the receipt of the revenue or the payment of the expense may take place, in whole or part, in another accounting period).

Conditions: During FY 2008, the DOT was in the process of reviewing a number of prior year transactions based on errors in one of the accounting modules in Delphi and in the processing of certain prior year reimbursable revenue agreements. During our audit, we noted approximately 17% of the transactions sampled were recorded in the wrong fiscal year.

Cause: Partly due to the current corrective action efforts and partly due to breakdowns in internal controls, the OAs are not following existing policies and procedures requiring them to recognize revenue in the appropriate period.

Effect: The errors noted in our audit resulted in a net overstatement in FY 2008 of $17.4 million, and projected to a net revenue overstatement in FY 2008 of $268.5 million. Management did not adjust for these errors as they deemed the actual and projected overstatement to be immaterial to the financial statements taken as a whole.

Recommendations: We recommend that the DOT:

  1. Continue its current cleanup efforts for prior revenue transactions, and complete such efforts as quickly as possible.
  2. Ensure that existing policies are consistently followed to ensure revenue is recognized in the appropriate period.
E. Financial Reporting

Background/Criteria: Financial reporting in the Federal environment is a complicated and evolving process. In addition, the complex and varied operations of the DOT and its 13 OAs makes consolidated reporting, under standards issued by the Federal Accounting Standards Advisory Board (FASAB) and OMB, a challenge for the Department.

Conditions: During our FY 2008 audit, we noted several areas for improvement in the DOT’s financial reporting process, including:

We also noted deficiencies in the disclosure of the credit reform and loan guarantee information and in the calculation of the subsidy cost and loan guarantee allowances. Specifically, we noted the subsidy cost model for the FHWA Transportation Infrastructure Finance and Innovative Act program had not been formally evaluated or updated, and relied upon outdated data from 2002 and 2005.

Further, we noted that nine OAs are not in compliance with the requirements of SFFAS No. 4, Managerial Cost Accounting Concepts & Standards for the Federal Government. Specifically, we noted that a formal managerial cost accounting system that captures and reports the full costs of programmatic activity has not been implemented at those OAs. These nine OAs are the FHWA, the Maritime Administration (MARAD), the Office of the Secretary of Transportation, the National Highway Traffic Safety Administration, the Federal Railroad Administration, the Research and Innovative Technology Administration, the Federal Motor Carrier Safety Administration, the Pipeline and Hazardous Materials Safety Administration, and the Surface Transportation Board. Without a proper cost accounting system, these OAs are unable to properly track and present their costs in accordance with the requirements of SFFAS No. 4, and the DOT is unable to produce a Statement of Net Cost by its strategic goals.

Cause: The DOT has limited resources in the office of the DOT CFO, which makes compliance with FASAB standards and OMB guidance difficult.

Effect: Without sufficient resources and processes in place, the DOT’s financial statements may be incomplete or misstated.

Recommendations: We recommend that the DOT:

  1. Ensure sufficient resources and processes are in place to enable timely and accurate financial reporting.
  2. Provide more frequent training on technical accounting topics for DOT’s accountants.
  3. Enhance and improve the DOT’s policies and procedures over financial reporting to ensure consistent treatment of accounting transactions among the DOT’s OAs, and provide more opportunities for sharing best practices among the OAs on how to account for similar transactions.
  4. More fully integrate the OA’s accounting service provider, the Enterprise Service Center, and the OA’s accountants into the DOT CFO’s quarterly and year-end compilation and financial reporting process.
  5. Improve the ability of DOT’s core financial system to report DOT’s financial statements and notes on a consolidated and combined basis with limited manual intervention.
  6. Continue its efforts to implement managerial cost accounting processes.
F. Undelivered Orders

Background/Criteria: In carrying out its mission, the DOT signs contracts or agreements for the purchase of goods and services from other Federal agencies and the public, and for the execution of grant agreements with state and local governments and other grantees. As of September 30, 2008, the DOT reported $80.3 billion in obligations. The DOT Financial Management Policies Manual requires that OAs should monitor their open obligations to ensure that existing obligations are valid.

Condition: During our audit, we noted that the DOT did not consistently de-obligate funds in a timely manner and could not support all balances recorded at June 30, 2008, resulting in an overstatement of the DOT’s undelivered orders (UDOs). Further, we noted that the subsidiary ledger used by FHWA personnel to monitor and manage active grants did not agree to the amounts reported in grant obligations in Delphi. Finally, partly as a result of conversion to Delphi in 2003 and partly due to DOT’s current business process, approximately $187 million of generic obligations not associated with a specific purchase order (“null undelivered orders”) remain recorded. When payments or activity takes place against these items, an extensive manual effort is required by DOT personnel to research and identify the original purchase order, and then to ensure that the activity is properly recorded.

Cause: We noted that the OAs are not following existing policies and procedures requiring them to periodically review UDO balances and take action to promptly de-obligate excess funds or close-out inactive balances and completed projects. Further, the OAs do not maintain proper documentation to support all UDO balances. Finally, we noted that the OAs do not have enough personnel or adequately trained personnel to effectively assess the UDO balances in a timely manner in accordance with DOT policy.

Effect: As of June 30, 2008, we noted that the UDO balances in the sample we selected were overstated by a known error of $3.9 million, which resulted in a projected error of $340.5 million. Without properly recording obligations in Delphi, there is an increased risk of inaccuracies or errors in financial reporting. Further, we noted that FHWA personnel were using a subsidiary ledger system to monitor active grant obligations that did not agree to Delphi by approximately $143 million. Finally, the $187 million of generic obligations could be overstated if DOT personnel incorrectly linked activity from the original purchase order to the wrong purchase order.

Recommendations: We recommend that the DOT:

  1. Ensure that existing policies and procedures are consistently followed to include the periodic review of the validity of UDO balances and enhance the policies and procedures to include formal documentation of the OA’s review and to ensure inactive and completed projects are de-obligated and closed-out in a timely fashion.
  2. Identify and determine the specific cause of recurring differences between the subsidiary ledger used by FHWA personnel and Delphi, and develop a corrective action plan to prevent the recurrence of such differences.
  3. Continue to research and reconcile the outstanding issues related to the generic obligations that remain in Delphi.
G. Information Technology Controls over Financial Systems and Applications

Background/Criteria: Last year, the DOT OIG reported a significant deficiency in the DOT’s financial system controls, including system control weaknesses in Delphi and computer security deficiencies in DOT systems that provide financial data to Delphi. OMB Circular No. A-130, Security of Federal Automated Information Resources, emphasizes the importance of technical and operations controls as part of management controls to protect Federal systems and data commensurate with the risk and magnitude of harm resulting from the loss, misuse, or unauthorized access to or modification of information.

In FY 2008, DOT made significant progress in strengthening the design and implementation of controls over Delphi. However, we identified several areas in which system control weaknesses continue.

Conditions: Despite progress in some areas, continued improvements are needed in the DOT’s general controls and in controls in the following systems:

Cause: Effective policies and procedures have not been implemented to ensure that controls are in place and operating effectively in the information technology environment.

Effect: The deficiencies noted could adversely affect the DOT’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the DOT’s consolidated financial statements. In addition, we also noted that these weaknesses impacted the DOT’s ability to comply with financial management system requirements listed in OMB Circular No. A-127, Policies and Standards for Financial Management Systems, Section 7 – Financial Management System Requirements, regarding computer security act requirements, internal controls, and systems maintenance activities.

Recommendation: We recommend that the DOT:

  1. Continue to improve the information technology environment applicable to the DOT applications by implementing the specific recommendations provided to management.

 

EXHIBIT IIU.S. DEPARTMENT OF TRANSPORTATION
Independent Auditors’ Report
Compliance and Other Matters

COMPLIANCE AND OTHER MATTERS

H. Anti-Deficiency Act

Background/Criteria: Title 31 U.S. Code (U.S.C.) Section 1517 states that an officer or an employee of the United States Government may not make or authorize an expenditure or obligation exceeding an apportionment or an amount permitted by regulations as specified by Title 31 U.S.C. Section 1514.

Condition: During FY 2007, MARAD’s management identified a potential violation at the U.S. Merchant Marine Academy. During FY 2008, the DOT and representatives from the Government Accountability Office (GAO) began in-depth reviews of transactions associated with the U.S. Merchant Marine Academy. Executives within the U.S. Maritime Administration, the agency responsible for oversight of the U.S. Merchant Marine Academy, concluded that there were likely both isolated and systemic violations of the Anti-Deficiency Act. Although these potential violations occurred in fiscal years 2008 and prior, management’s review of the potential violations has been ongoing and complicated by a lack of a unified accounting system at the U.S. Merchant Marine Academy and its affiliates. As of the date of our report, the DOT and the GAO had not completed their reviews of this matter.

Effect: The DOT is potentially not in compliance with the Anti-Deficiency Act.

Recommendations: We recommend that the DOT:

  1. Make it a priority to work with OMB and the Congress to formally report these potential violations, in accordance with the Anti-Deficiency Act and the applicable implementation guidance.
  2. Implement appropriate policies and procedures to correct the weaknesses identified at the U.S. Merchant Marine Academy.
I. Federal Financial Management Improvement Act of 1996 (FFMIA)

Background/Criteria: FFMIA requires that an agency’s financial management systems substantially comply with Federal financial management systems requirements, accounting standards issued by the Federal Accounting Standards Advisory Board, and the U.S. Government Standard General Ledger at the transaction level. When evaluating an entity’s compliance with FFMIA, OMB Bulletin No. 07-04 recommends that auditors evaluate whether an agency can: (1) prepare financial statements and other required financial budget reports using information generated by the financial management system(s); (2) provide reliable and timely financial information for managing current operations; (3) account for their assets reliably, so that they can be properly protected from loss, misappropriation, or destruction; and do all three in a way that is consistent with generally accepted accounting standards and the U.S. Government Standard General Ledger at the transaction level.

Condition: The DOT was not in substantial compliance with FFMIA because the DOT did not substantially comply with applicable Federal accounting standards during the year, and was not able to provide reliable and timely financial information for managing current operations at intervals throughout the year. However, our audit procedures enabled us to conclude that the DOT had substantially complied with Federal accounting standards in its year-end financial statements.

This finding is based on the various significant deficiencies in internal control over financial reporting discussed in Exhibit I of this report. Specifically, we found that:

The DOT has been making substantial progress in its efforts to create a world-class financial reporting organization that enables the OA and DOT managers to obtain meaningful information from the core accounting system and its subsidiary ledgers throughout the year. The operations of the DOT are complex and diverse, and standardization of accounting operations is critical. The DOT’s Enterprise Service Center (ESC) is recognized by the OMB as a center of excellence, and is continuing to grow as additional Federal agencies choose the DOT’s ESC as their accounting service provider. The continued progress by DOT, along with the additional agencies that are choosing the DOT as a service provider, demonstrate the commitment by DOT management to correct the existing deficiencies in internal control over financial reporting.

Effect: The weaknesses in internal control, discussed above, prevent the DOT from being able to produce timely and reliable financial information for managing current operations throughout the year.

Recommendation: We recommend that the DOT:

  1. Address and resolve the deficiencies in internal control, as described in Exhibit I of this report.
J. Federal Managers’ Financial Integrity Act of 1982 (FMFIA)

Background/Criteria: FMFIA and OMB Circular No. A-123, Management’s Responsibility for Internal Control, requires agency managers and staff to report annually on the three objectives of internal control: the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. The DOT has put in place a significant structure and process to evaluate its reliability of financial reporting and compliance with applicable laws and regulations. The DOT has demonstrated a consistent and reliable process in evaluating those areas of internal control, and is working diligently on establishing a similar structure and process to evaluate the effectiveness and efficiency of its operations.

Condition: During FY 2008, we noted that there were inconsistencies in the consideration and reporting of internal controls over the effectiveness and efficiency of operations within the DOT. Specifically, the OAs do not have a consistent process to evaluate and report program weaknesses required under FMFIA.

Effect: Without a unified DOT-wide process to evaluate the effectiveness and efficiency of internal controls over operations, the DOT and its OAs may not identify and report programmatic weaknesses on a consistent basis.

Recommendation: We recommend that the DOT:

  1. Address and resolve the weakness noted above, and fully comply with FMFIA in FY 2009.
K. Improper Payments Information Act of 2002 (IPIA)

Background/Criteria: OMB Circular A-123, Appendix C, issued on August 10, 2006, entitled “Requirements for Effective Measurement and Remediation of Improper Payments,” implements the requirements of IPIA. The circular defines an improper payment as any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements. Incorrect amounts include overpayments and underpayments, payments made to an ineligible recipient or for an ineligible service, duplicate payments, and payments for services not received.

The circular prescribes a four-step approach for use by agencies in evaluating improper payments: (1) review all programs and identify those susceptible to significant erroneous payments; (2) statistically estimate the annual amount of improper payments; (3) implement a plan to reduce erroneous payments; and (4) report estimates of the annual amount of improper payments and progress in reducing them.

During FY 2008, the DOT reported that it successfully completed its review of improper payments of the FHWA’s Federal-aid Highway Program, the FAA’s Airport Improvement Program, the FTA’s Formula Grants Program, and the FTA’s Capital Investment Grants Program. The DOT found improper payments in all four grant programs, and projected the improper payments to a range of $175.3 million to $206.1 million. The improper payments found in two of the programs (the FTA’s Formula Grants Program and the FTA’s Capital Investment Grants Program) exceeded the OMB’s definition of significant improper payments.

Condition: To evaluate the DOT’s compliance with IPIA, we worked with the DOT OIG’s IPIA evaluation team, including their sampling specialists. However, neither we nor the DOT OIG were provided information by DOT with sufficient time before the issuance of our report in order to determine if the sampling plan used by DOT was statistically valid. Specifically, we could not determine if the projection of sampling results to the program totals were based on generally accepted conventional formulas.

Effect: The DOT is potentially not in compliance with the Improper Payments Information Act.

Recommendation: We recommend that DOT:

  1. Work to ensure that information is provided to the OIG and other appropriate parties with sufficient time to evaluate whether the improper payment testing performed in FY 2009 is based on valid statistical sampling techniques.

 

EXHIBIT IIIU.S. DEPARTMENT OF TRANSPORTATION
Independent Auditors’ Report
Status of Prior Year Findings

STATUS OF PRIOR YEAR REPORTABLE CONDITIONS, AND NON-COMPLIANCE WITH
SIGNIFICANT LAWS AND REGULATIONS

Prior Year Condition As Reported At September 30, 2007 Status As Of September 30, 2008
Timely Processing of Transactions and Accounting for FAA Property, Plant, and Equipment, including the CIP Account Material weakness: The FAA lacked adequate policies, procedures, and controls to monitor its CIP activity. Downgraded to a significant deficiency
Journal Entries and Account Relationships for the HTF Agencies Significant Deficiency: The DOT has weaknesses in following policies and procedures over journal entries, and in the timely reconciliation and resolution of differences identified in the DOT’s budgetary to proprietary account relationships. Repeated as a significant deficiency
Financial System Controls Significant Deficiency: Certain general controls related to the DOT’s primary financial applications need to be strengthened. Repeated as a significant deficiency
DOT Information Security Program Significant Deficiency: The DOT did not meet Government security standards to protect information systems and did not take sufficient action to correct identified security deficiencies. Closed with respect to Federal financial management systems
FTA Grant Accrual Significant Deficiency: Certain controls were not in place in FTA to ensure that the FTA’s grant accrual was based on sufficient information provided by its grantees. Repeated as a significant deficiency
Non-compliance with the Federal Financial Management Improvement Act Instance of non-compliance: The DOT did not substantially comply with the FFMIA because the FAA was unable to account for property, plant, and equipment transactions, including the CIP account, and present balances in its periodic financial statements in accordance with generally accepted accounting principles as of and for the fiscal year ended September 30, 2007. Repeated as an instance of noncompliance
Non-compliance with the Anti-Deficiency Act Instance of non-compliance: During FY 2007, the Maritime Administration CFO reported a potential violation at the U.S. Merchant Marine Academy. Repeated as a potential instance of non-compliance
Non-compliance with the Improper Payments Information Act of 2002 Instance of non-compliance: During FY 2007, the DOT OIG was not provided with sufficient information by DOT before the issuance of the DOT FY 2007 PAR to determine if the sampling plan used by DOT was statistically valid. Repeated as a potential instance of non-compliance
Non-compliance with the SFFAS No. 4, Managerial Cost Accounting Concepts and Standards Instance of non-compliance: As of September 30, 2007, nine OAs of the DOT had not fully implemented cost accounting processes in accordance with SFFAS Number 4. Reclassified as part of the noncompliance with FFMIA

 

EXHIBIT IVU.S. DEPARTMENT OF TRANSPORTATION
Independent Auditors’ Report
Management’s Response
U.S. DOT seal
U.S. Department of
Transportation
Office of the Secretary
of Transportation		   1200 New Jersey Avenue, SE
Washington, DC 20590
November 12, 2008
MEMORANDUM TO:

Calvin L. Scovell, III
Inspector General, US DOT

Patrick Boyce
Partner, KPMG LLP

FROM: Phyllis F. Scheinberg Signature of Phyllis F. Scheinberg.
Assistant Secretary for Budget and Programs/CFO
SUBJECT: Management's Response to the Audit Report on the Consolidated Financial Statements for Fiscal Years(FY) 2008 and 2007

Thank you for your audit report on the Consolidated Financial Statements for the FY 2008 and 2007. I am very pleased that the Department of Transportation (DOT) earned an unqualified audit opinion. Noteworthy is the fact that, for the first time, no material weaknesses in any agency or at the consolidated department level were identified in the auditor's report on internal controls. This is validation of DOT's continued commitment to carefully protecting and managing the resources, assets, and programs entrusted to us. We take great pride in our ability to sustain strong and vigilant financial management, as demonsrated in our achivement of an unqualified audit opinion.

We concur with the seven significant deficiencies contained in your report on internal controls over financial reporting, and with the two potential and two actual instances of non-compliance found in certain provisions of applicable laws, regulations, contracts and grant agreements. The Department plans to submit a detailed action plan no later than December 29, 2008, to address the findings contained in your report.

Please convey my sincere appreciation and gratitude to everyone on your staffs for the professionalism and cooperation displayed during this audit. Our combined efforts and teamwork made the difference in successfully meeting the objectives of the financial audit process. Please refer any questions to Laurie Howard, Director of Financial Management.

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