ARCHIVED INFORMATION -- Annual Accountability Report Fiscal Year 1995

Education's Financial Systems


Education is Unable to Fully Reconcile its Cash Balances with Treasury. (material weakness)

A major objective of our financial audit is to assess the effectiveness of internal controls that ensure the integrity of the underlying accounting data that are included in Education's financial statements. An important control in this regard is the periodic reconciliation of Education's accounting records with records maintained by the Department of Treasury, which effectively serves as Education's bank. Proper reconciliations provide assurance that all disbursements, receipts and appropriated funds transactions that are processed on Education's behalf by Treasury are recorded in Education's accounting records. Remaining in-balance or reconcilable with ones bank account is perhaps the most fundamental and important control for assuring the accounting records remain consistent with cash transactions. Thus quarterly reconciliations, followed by prompt action to resolve differences, are necessary to ensure the reliability of accounting data and management control over cash transactions.

For many years, Education has been working to identify, explain and resolve differences between its accounting records and cash transactions reported by Treasury. It has made significant progress. During fiscal years 1993 and 1994, Education undertook an extensive reconciliation project that resulted in a need to post over 500 adjustments, aggregating billions of dollars ($889 million, net), to adjust its cash balances as recorded in its general ledger to agree with Treasury.

However, despite these efforts, unreconciled differences continue to occur and our work showed that these differences cannot be wholly attributed to old transactions that persistently cause such differences. Since the earlier reconciliation effort was completed, an additional unreconciled difference of $183 million, more than Treasury, has accumulated.

There is no documentary evidence that would explain what this $183 million difference consists of and what effect it might have on the financial statements, if some or all of it were found to contain errors. Even though the remaining unreconciled balance is relatively small when compared to Educations $39 billion Treasury balance, we have reported it as a material weakness. We have done so because of the importance this particular control has on the integrity of the internal control structure, because persistent differences appear to arise as a result of systemic problems, and because there is a lack of evidence that can conclusively show that this difference is inconsequential.

Education attributes its reconciliation problems to inadequate integration between its general ledger system and its payments and funds control systems that are the original points of entry for many cash transactions. These integration problems result in certain cash transactions not being properly and timely transferred from the originating systems to Education's general ledger system, thus causing Education's cash balances as recorded in its general ledger to differ with Treasury. Moreover, Education's general ledger system is not well integrated with external systems Education uses to process its payroll and administrative disbursements; systems that interface directly with Treasury.

To correct its financial systems problems, Education is implementing the Education Central Automated Processing System (EDCAPS). EDCAPS will improve integration between Education's general ledger and other financial systems and thus reduce the problems in posting of transactions to the general ledger that currently exists. Improved data posting to Education's general ledger should reduce differences that exist between Education's cash balances as recorded in its general ledger and Treasury balances, and to research the differences that do exist. As long as Education concurrently develops a process through which the new system is used to thoroughly and regularly reconcile with Treasury, the reconciliation problem should be solved on a going forward basis. EDCAPS is scheduled to be implemented in late 1997.

For unreconciled differences that accumulate before EDCAPS is implemented, Education is developing automated programs to facilitate identification of differences in data between its general ledger system and its payments and funds control system, which is necessary to identify the causes of differences with Treasury. These automated programs are being developed for Education's 55 largest appropriations, which account for approximately 95% of Education's cash activity. If these programs are able to dis-aggregate unreconciled differences into categories such that timing differences, posting problems or errors can be identified, then pre-EDCAPS differences can also be resolved.

Recommendations

We recommend that Education:

  1. Develop and document a quarterly process to perform reconciliations that identify specific differences between detailed records supporting its general ledger balances and those supporting Treasury's records. This process should take into account information that can be provided once EDCAPS is implemented.

  2. Investigate and document the causes of the differences, e.g., whether the differences are caused by timing of posting of information (between its general ledger and Treasury's records), missing transactions, or errors in posting transactions.

  3. Require that any future adjustments to its cash records be documented and that such documentation be maintained for review and audit purposes.


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