Archived Information -- Fiscal Year 1997 Annual Accountability Report

Department of Educations's s eal UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL

REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS
ACN 17-70002


To the Honorable Richard W. Riley
Secretary of the U.S. Department of Education

We have audited the consolidated financial statements of the U.S. Department of Education (Education) as of and for the fiscal year ended September 30, 1997, and have issued our report thereon dated May 29, 1998. We conducted our audit in accordance with Government Auditing Standards issued by the Comptroller General of the United States, and Office of Management and Budget (OMB) Bulletin No. 93-06, "Audit Requirements for Federal Financial Statements," as amended.

The management of Education is responsible for complying with laws and regulations applicable to the agency. As part of obtaining reasonable assurance about whether the agency's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of applicable laws and regulations, noncompliance with which could have a direct and material effect on the determination of financial statement amounts and certain other laws and regulations specified in OMB Bulletin 9306, as amended, including the requirements referred to in the Federal Financial Management Improvement Act (FFMIA) of 1996.

The results of our tests of compliance with the laws and regulations described in the preceding paragraph disclosed instances of noncompliance with the following laws and regulations that are required to be reported under Government Auditing Standards and OMB Bulletin 93-06.

The results of our tests of compliance disclosed no instances of noncompliance with other laws and regulations discussed in the preceding paragraph.

Under FFMIA, we are required to report whether Education's financial management systems substantially comply with the Federal financial management systems requirements, applicable accounting standards, and the United States Standard General Ledger at the transaction level. To meet this requirement, we performed certain tests of compliance using the implementation guidance for FFMIA issued by OMB on September 9, 1997. This guidance provides indicators to be used in assessing whether Education is in substantial compliance with the Act.

The results of our tests disclosed instances described below where the agency's financial management systems did not substantially comply with the Federal financial management systems requirements in accordance with OMB's implementation guidance.

Material Weakness Relevant to FFMIA Reported Pursuant to Section 4 of the Integrity Act

Education reported in its FY 1997 Integrity Act Report, dated December 30, 1997, that its financial management systems do not materially conform to the requirements of Section 4 of the Integrity Act, due to numerous functional and technological problems that prevent it from complying with government wide financial system requirements.

Actions reported as necessary to resolving this non-conformance include quarterly reconciliations of cash transactions and balances with Treasury, and complete implementation of all phases of its new core financial accounting system (EDCAPS). However, as reported in this year's internal control report, there are material weaknesses in internal controls surrounding Education's reconciliations with Treasury. Also, during FY 1997 the old core financial system continued to operate.

Education has made progress in resolving this weakness since it was first reported in FY 1989, primarily through increased attention to financial management issues as a result of the Chief Financial Officers Act (CFOS) of 1990, and more recently by the development of EDCAPS. The Office of the Chief Financial & Chief Information Officer (OCF&CIO) is responsible for the core financial system. OCF&CIO plans to remedy these problems during FY 1998 by implementing all phases of EDCAPS to replace the old system, and by implementing controls to ensure more timely and effective cash reconciliations with Treasury. Final modifications to the core financial management systems to bring them into compliance with A-1 27 are planned for FY 1999.

Material Weaknesses in Internal Controls

Internal controls include Education's policies and procedures that provide reasonable assurance that transactions are properly accounted for to permit the preparation of reliable financial statements. Audit procedures performed for the purpose of obtaining evidence in support of our opinion on the financial statements disclosed the following material weaknesses in internal controls related to the financial management systems:

Education's general ledger records defaulted FFEL loans receivable activity reported by the guaranty agencies (GAs) on an aggregate basis (subsidiary records by GA are not maintained). While GAs report to Education the loans receivable balance from their records on a quarterly basis, Education is unable to fully reconcile loans receivable from its general ledger to cumulative balances reported by the GAs. A subsidiary ledger which tracks GA activity for both loans receivable and reserves held by the GAs would enhance the system capability for accounting for these assets. Time frames for this remedial action still need to be determined after consultation between the OCF&CIO and the Office of Postsecondary Education (OPE).

Education does not prepare and analyze interim financial statements and lacks sufficient documented policies and procedures for financial reporting. These weaknesses in Education's financial reporting process contributed to producing 434 year end financial statement adjustments valued at about $89 billion (1 20% of total assets). The OCF&CIO is responsible for the core financial system and controls surrounding financial reporting and plans to implement the necessary improvements in FYs 1998 and 1999.

The above weaknesses and our recommendations for improvement are described in detail in our Report on Internal Controls.

Annual Financial Statements not prepared from Education's Core Financial or Other Supporting Systems

Education did not rely upon its core financial system or the National Student Loan Data System (NSLDS) containing the detail data, for calculating the loan program estimates in accordance with Statement of Federal Financial Accounting Standard Number 2. The prior year financial audit reports noted there were still many instances where key historical data supporting the estimates was either missing or questionable data could not be explained. This lack of auditable documentation to support loan program estimates was the primary cause of the disclaimer of opinion on the FY 1995 and 1996 financial statements. To overcome this lack of support for FY 1997, Education obtained data from ten of the larger GAs. This data was subjected to agreed upon procedures performed by the GA's independent auditors. See our Report on Internal Controls for a more complete description of the process for calculating these estimates.

Education has already begun to address the concerns surrounding NSLDS through an effort to reconcile the detail data in NSLDS with the summary data periodically reported to ED, and by making use of a previously performed review that confirmed NSLDS details with GAs, lenders, schools and borrowers. However, additional analysis remains to be performed on the adequacy of these internal reviews before NSLDS can be relied upon to prepare Education's financial statements.

OPE is primarily responsible for NSLDS, although others rely heavily upon the system for supporting budget estimates of loan program liabilities and costs. To prepare the FY 1998 financial statements, Education will either perform additional analysis of NSLDS or obtain updated loan history data from the GAs that has been subjected to testing.

This report is intended for the information of the management of Education and the Congress. However, this report is a matter of public record and its distribution is not limited.



Steven A. McNamara
Acting Deputy Inspector General

May 29, 1998
Washington, DC


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[Auditor's Report on Internal Controls] [Table of Contents] [Department's Response to Auditor's Report on Internal Control and Compliance with Laws and Regulations]