Financial Management Service: Significant Weaknesses in Computer 
Controls Continue (31-JAN-02, GAO-02-317).			 
                                                                 
The Financial Management Service's (FMS) security controls fell  
short in promptly identifying, deterring, and responding to	 
computer control weaknesses. Consequently, billions of dollars of
payments and collections are vulnerable to loss or fraud,	 
sensitive data are at risk of inappropriate disclosure, and	 
critical computer-based operations are vulnerable to serious	 
disruptions. During its fiscal year 2000 audit, GAO found new	 
computer control weaknesses in the entity-wide security 	 
management program, access controls, and system software. GAO	 
also identified weaknesses in the authorization and completeness 
controls over one key FMS financial application. As of September 
2000, FMS had corrected or mitigated the risks associated with 35
of the 61 computer control weaknesses.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-317 					        
    ACCNO:   A02697						        
  TITLE:     Financial Management Service: Significant Weaknesses in  
Computer Controls Continue					 
     DATE:   01/31/2002 
  SUBJECT:   Computer security					 
	     Financial management systems			 
	     Financial statement audits 			 
	     Internal controls					 

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GAO-02-317
     
United States General Accounting Office

                 GAO Report to the Secretary of the Treasury

January 2002

FINANCIAL MANAGEMENT SERVICE

Significant Weaknesses in Computer Controls Continue

                                      a

GAO-02-317

Contents

Letter

Results in Brief
Background
Objectives, Scope, and Methodology
FMS's Entity-Wide Security Management Program Continues to Be

Ineffective
Serious General Computer Control Weaknesses Place FMS's

Systems and Data at Significant Risk
FMFIA Reporting
FMS's Application Controls Can Be Strengthened
FRB Computer Controls Can Be Improved
Conclusion
Recommendations
Agency Comments and Our Evaluation

1

2 3 4

4

8 13 13 14 15 15 16

Appendix I Scope and Methodology

Appendix II Comments from the Department of the Treasury

Table

Table 1: Areas Where  Significant General Control Weaknesses Were Identified
at FMS Data Centers

United States General Accounting Office Washington, DC 20548

January 31, 2002

The Honorable Paul H. O'Neill The Secretary of the Treasury

Dear Mr. Secretary:

In connection with fulfilling our requirement to audit the U.S. government's
fiscal year 2000 financial statements,1 we reviewed the general and
application computer controls over key financial systems maintained and
operated by the Department of the Treasury's Financial Management Service
(FMS) as of September 30, 2000. These systems, some of which are operated
and maintained by contractors and the Federal Reserve Banks (FRB), are
critical to FMS's mission of serving as the government's financial manager,
central disburser, collections agent, and reporter of financial information.
On December 14, 2001, we issued a Limited Official Use report detailing the
results of our review. This excerpted version of the report for public
release summarizes (1) the significant weaknesses we identified and
recommendations we made and (2) our follow-up on previously reported
weaknesses.

The computer control weaknesses we identified during our fiscal year 2000
audit place FMS's financial systems at significant risk of fraud,
unauthorized disclosure and modification of sensitive data and programs,
misuse or damage to computer resources, or disruption of critical
operations. In addition to the new weaknesses, we found that FMS still
needed to act on approximately 42 percent of the weaknesses discussed in our
fiscal year 1999 report.2 While performing our work, we communicated
detailed information regarding our findings to FMS management. This report
provides an overall assessment and summary of FMS computer control
weaknesses and recommendations to you as the agency head.

We also assessed the general and application computer controls over key FMS
financial systems that the FRBs maintain and operate and have

131 U.S.C. 331(e) (1994).

2Financial  Management Service: Significant Weaknesses  in Computer Controls
(GAO/AIMD-00-305, Sept. 26, 2000).

Results in Brief

issued a separate letter to the Board of Governors of the Federal Reserve
System.3

FMS's overall security control environment continues to be ineffective in
identifying, deterring, and responding to computer control weaknesses
promptly. Consequently, billions of dollars of payments and collections are
at significant risk of loss or fraud, sensitive data are at risk of
inappropriate disclosure, and critical computer-based operations are
vulnerable to serious disruptions. Based on the results of our fiscal year
2000 audit, we continue to consider FMS's computer control problems a
material weakness.4 FMS officials have also recognized the serious nature of
these problems. They have reported these matters as a material weakness to
Treasury for fiscal years 2000, 1999, and 1998 following the annual
evaluation of internal accounting and administrative controls required to be
performed by 31 U.S.C. 3512 (d), commonly referred to as the Federal
Managers' Financial Integrity Act (FMFIA). Treasury has also recognized the
nature of this problem and reported FMS's computer control problems as a
material weakness in The Secretary's Letter of Assurance included in
Treasury's annual accountability reports for each of those fiscal years.

During our fiscal year 2000 audit, we found new general computer control
weaknesses in the entity-wide security management program, access controls,
and system software. We also identified new weaknesses in the authorization
and completeness controls over one key FMS financial application. Our
follow-up on the status of FMS's corrective actions to address weaknesses
discussed in our fiscal year 1999 report found that as of September 30,
2000, FMS had corrected or mitigated the risks associated with 35 of the 61
computer control weaknesses discussed in that report. To assist FMS
management in addressing its computer control weaknesses, we made four
overall recommendations. One of these recommendations refers to 85 detailed
recommendations included in the Limited Official Use version of this report.

3Federal Reserve Banks: Areas for Improvement in Computer Controls
(GAO-02-266R, Dec. 10, 2001).

4A material weakness is a condition 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 errors or irregularities in amounts that would be
material to the financial statements may occur and not be detected promptly
by employees in the normal course of performing their duties.

In commenting on a draft of this report and our more detailed Limited
Official Use report, FMS stated that it understands that additional
improvements are needed and recognizes the importance of having an effective
entity-wide security program, as well as strong internal control, given its
critical payment, collections, and government-wide accounting
responsibilities. FMS also stated that actions were underway to address the
individual audit findings. Further, FMS stated that computer security
remains one of FMS's top priorities and that it is completely dedicated to
fully implementing and maintaining an effective and robust security program.

                                 Background

FMS is the government's financial manager, central disburser, and
collections agency as well as its accountant and reporter of financial
information. For fiscal year 2000, the U.S. government disbursed over $1.9
trillion primarily for Social Security and veterans' benefit payments,
Internal Revenue Service (IRS) tax refunds, federal employee salaries, and
vendor billings. With several exceptions (the largest being the Department
of Defense), FMS makes disbursements for most federal agencies. FMS is also
responsible for administering the federal government's collections system.
In fiscal year 2000, the government collected over $2 trillion in taxes,
duties, and fines. In addition, FMS oversees the federal government's
central accounting and reporting systems used to reconcile and keep track of
the federal government's assets and liabilities. Financial and budget
execution information from these central systems is used by FMS to publish
financial reports that are available for use by the Congress, the Office of
Management and Budget, other federal agencies, and others who make financial
decisions on behalf of the U.S. government.

FMS maintains multiple financial and information systems to help it process
and reconcile moneys disbursed and collected by the various government
agencies. These banking, collection, and disbursement systems are also used
to process agency transactions, record relevant data, transfer funds to and
from the Treasury, and facilitate the reconciliation of those transactions.
FMS has three data centers and also has three field operations centers that
are responsible for issuing paper check and electronic funds transfer
payments. In addition, FMS relies on a network of four contractor data
centers and the FRBs to help carry out its financial management
responsibilities.

Objectives, Scope, and Methodology

FMS's Entity-Wide Security Management Program Continues to Be Ineffective

Our objectives were to evaluate and test the effectiveness of the computer
controls over FMS's key financial management systems and to determine the
status of the computer control weaknesses discussed in our fiscal year 1999
audit report. We used a risk-based and rotation approach for testing general
and application controls. Under that methodology, every 3 years, each data
center and key financial application is subjected to a full-scope review
that includes testing in all of the computer control areas defined in our
Federal Information System Controls Audit Manual (FISCAM).5 During the
interim years, we focus our testing on the FISCAM areas that we have
determined to be at greater risk for computer control weaknesses. See
appendix I for the scope and methodology of our fiscal year 2000 review at
each of the selected data centers and for the key financial applications.

During the course of our work, we communicated our findings to FMS
management, which informed us of the actions FMS planned or had taken to
address the weaknesses we identified.

We performed our work from August 2000 through February 2001 in accordance
with U.S. generally accepted government auditing standards. We requested
comments on a draft of this report from the Department of the Treasury. The
comments are discussed in the "Agency Comments and Our Evaluation" section
of this report and reprinted in appendix II.

An entity-wide program for security management is the foundation of an
entity's security control structure and should establish a framework for
continual (1) risk assessments, (2) development and implementation of
effective security procedures, and (3) monitoring and evaluation of the
effectiveness of security procedures. A well-designed entity-wide security
management program helps to ensure that security controls are adequate,
properly implemented, and applied consistently across the entity and that
responsibilities for security are clearly understood.

The overriding reason that computer control problems at FMS continued to
exist during fiscal year 2000 is that FMS does not have an effective
entity-wide computer security management program (security program). In
response to our prior years' recommendation that FMS establish an effective
security program, FMS completed its Information Technology

                       5GAO/AIMD-12.19.6, Jan. 1999.

Security Handbook for Major Application Systems in late 1999. During fiscal
year 2000, the FMS Information Technology Security Policy Manual and
Entity-Wide Information Technology Security Program manuals were approved
and distributed. In addition, FMS developed an

Entity-Wide Information Technology Security Program Implementation Strategy
in March 2001. This document discusses FMS's high-level strategy for the
full implementation of its security program by a target date of September
30, 2002.

In April 2001, FMS completed an internal assessment to determine the
effectiveness of its security program and its initiatives. The assessment
was performed using the Federal Information Technology Security Assessment
Framework6 (Framework). The Framework provides a method for agency officials
(1) to determine the current status of their security programs relative to
existing policy and (2) where necessary, establish a target for improvement.
The Framework identifies five levels of security program effectiveness-Level
1, Documented Policy; Level 2, Documented Procedures; Level 3, Implemented
Procedures and Controls; Level 4, Tested and Reviewed Procedures and
Controls; and Level 5, Fully Integrated Procedures and Controls. The five
levels measure specific management, operational, and technical control
objectives. Each of the five levels contains criteria to determine whether
the level is adequately implemented, with each successive level representing
a more complete and effective security program. FMS's assessment did not
contain an overall determination of the level of effectiveness of its
security program. Our review of its assessment found that FMS identified as
not being met 29 of the 45 control objectives that should be applied to a
secure system and another 15 control objectives in which some aspects of the
related performance criteria were identified as being partially met.

As discussed above, FMS has taken steps toward improving its security
program by developing policy manuals, an implementation strategy, and an
internal self-assessment. Through its self-assessment, FMS has identified
areas within its existing security program that need improvement in order to
achieve a fully implemented Level 5 security program. However, FMS has not
yet developed a detailed plan that

6Federal Information Technology Security Assessment Framework, prepared by
the National Institute of Standards and Technology (NIST), Computer Security
Division, Systems and Network Security Group, November 28, 2000.
Incorporated as Appendix C of NIST Special Publication 800-26, Security
Self-Assessment Guide for Information Technology Systems, August 2001.

describes the remedial actions; resources (physical, human capital, and
fiscal); target dates; and responsible agency officials needed to correct
the shortcomings of its security program. A Level 5 security program is
described as a comprehensive and integral part of an agency's organizational
culture. The components of a fully integrated Level 5 security program
include

* an active entity-wide security program that achieves cost-effective
security,

* integration of information technology security through all aspects of the
information technology life-cycle,

* understanding and management of security vulnerabilities,

* continual evaluation of threats and adjustment of controls to the changing
security environment,

* identification of additional or more cost-effective security alternatives
as the need arises,

* measurement of the costs and benefits of security, and

* establishment of status metrics to assess the effectiveness of the
security program that are also met.

FMS's entity-wide security control structure has yet to address many of the
weaknesses and related significant risks associated with its current and
evolving computing environment. Our audits for fiscal years 2000, 1999,
1998, and 1997 have identified significant general computer control
weaknesses at each of the FMS data centers. As shown in table 1, these
weaknesses have involved each of the six general control areas defined in
FISCAM at multiple FMS data centers.

 Table 1: Areas Where Significant General Control Weaknesses Were Identified
                            at FMS Data Centers

Data center Entity-wide security management program Access controls System
software Application software development and change controls

Segregation
of duties Service continuity

Fiscal year 1997

X XXX XX

XX XX

X XXX

X XX

XX X

X XXX X

XXX X

Fiscal year 1998

X XXX XX

XX XX

XX X

X XX

XX

X XXX X

X XXX X

Fiscal year 1999

X XXX XX

2 XX
3X X
4X
5X
6 X XXX
7 XX

                              Fiscal year 2000

1 XXX XX
4 XXX
5X
6 X XXX
7 XX

Source: GAO's analysis of current and prior years' audits results.

If FMS had a fully developed, implemented, and effective security program,
weaknesses found in prior years, such as the following, would be less likely
to reoccur. For example, at one data center, we found access control
weaknesses during our fiscal year 2000 audit that were the same as or very
similar to issues that we reported at other data centers in previous years'
audits. Although FMS took corrective actions to address the individual prior
years' weaknesses found at those specific data centers,

FMS did not determine whether these weaknesses also existed at their other
data centers that were using the same type of computing platform. Another
example involved a data center that performed security violation and
sensitive activity monitoring procedures over its legacy environments.
However, FMS did not apply these same procedures and requirements to a new
computing environment introduced during fiscal year 2000. Until FMS takes a
more disciplined and structured approach to computer security through a
fully implemented entity-wide security program, there is a significant
increased risk that controls will not be adequate, properly implemented, or
applied consistently across each of its data centers.

Integral to all security programs is a continuous risk assessment process
for determining the sensitivity of information and systems, acceptable
levels of risk, and specific controls needed to provide adequate security
over computer resources and data. Our May 1998 best practices guide7 on
information security management practices at leading nonfederal
organizations found that organizations successfully managed their
information security risks through an ongoing cycle of risk management
activities. During our fiscal year 2000 audit, we found that FMS had not
developed a comprehensive entity-wide risk assessment to be used as a basis
for establishing appropriate security policies and selecting cost-effective
techniques for implementing policies. Documents and approaches that FMS had
already developed could be used together to form the foundation of an
entity-wide risk assessment. The absence of a comprehensive risk assessment
that identifies entity-wide risks could lend itself to practices that are
inconsistent with acceptable standards and expose FMS to increased
weaknesses and unnecessary risks.

General controls are the structure, policies, and procedures that apply to
an entity's overall computer operations. General controls establish the
environment in which application systems and controls operate. In addition
to an entity-wide security management program discussed above, they include
access controls, system software controls, application software development
and change controls, segregation of duties, and service continuity controls.
An effective general control environment would (1) protect data, files, and
programs from unauthorized access, modification, and destruction; (2) limit
and monitor access to programs

Serious General Computer Control Weaknesses Place FMS's Systems and Data at
Significant Risk

7 Information  Security  Management:  Learning from  Leading  Organizations
(GAO/AIMD-98-68, May 1998).

and files that control computer hardware and secure applications; (3)
prevent the introduction of unauthorized changes to systems and applications
software; (4) prevent any one individual from controlling key aspects of
computer-related operations; and (5) ensure the recovery of computer
processing operations in case of a disaster or other unexpected
interruption.

In addition to the weaknesses in its security program discussed above, our
fiscal year 2000 review of FMS's general computer controls also identified
serious new general control weaknesses in access controls and system
software.

As we previously reported for fiscal years 1998 and 1999, FMS is continuing
the process of moving one of its key financial applications to a distributed
environment. As of June 30, 2001, FMS reported that approximately 81 percent
of the users had converted to a new version of this application, and
completion of the new application's implementation was scheduled for
September 30, 2001.8 FMS officials have informed us that they expect that
the migration of its key financial application will facilitate the
implementation of more effective controls in the future.

Our fiscal year 2000 audit found that as of September 30, 2000, FMS had
corrected or mitigated the risks associated with 35 of the 61 computer
control weaknesses discussed in our prior year's report. However, we are
continuing to reaffirm our prior year's recommendations to correct the
remaining weaknesses discussed in our fiscal year 1999 report because of the
significance of the associated risks and the lack of other effective
compensating controls to mitigate those risks.

                               Access Controls

Access controls are designed to limit or detect access to computer programs,
data, equipment, and facilities to protect these resources from unauthorized
modification, disclosure, loss, or impairment. Such controls include logical
and physical security controls.

Logical security control measures involve the use of computer hardware and
security software programs to prevent or detect unauthorized access

8In commenting on the Limited Official Use version of this report, FMS
stated that for this system all of the subapplications except one were
implemented, and the remaining one is scheduled for implementation in
December 2001.

by requiring users to input unique user identifications (ID), passwords, or
other identifiers that are linked to predetermined access privileges.
Logical security controls restrict the access of legitimate users to the
specific systems, programs, and files they need to conduct their work and
prevent unauthorized users from gaining access to computing resources.

Physical security controls include locks, guards, badges, alarms, and
similar measures (used alone or in combination) that help to safeguard
computer facilities and resources from intentional or unintentional loss or
impairment by limiting access to the buildings and rooms where they are
housed.

Our review of FMS's access controls identified a number of weaknesses at all
of the sites we visited. These weaknesses, many of which were included in
our prior years' reports, included data centers that

* had weak network security configurations that allowed us to identify user
names and compromise the associated passwords, which resulted in our gaining
unauthorized access to the mainframe production environment of a key
financial application at one data center, the development environments at
another data center, and an unrelated procurement application at a third
data center;

* granted excessive and powerful systems privileges to certain users who did
not need such access;

* did not effectively manage the administration of certain passwords and
user IDs;

* were not always applying security system parameters so as to provide
optimum security or appropriate segregation of duties; and

* were not effectively monitoring and controlling dial-in access to certain
local area networks and the mainframe environments.

In addition, physical security controls at three of the five sites we
visited were not sufficient to control physical access to these centers. For
example, at one data center management was not able to provide us with a
list of individuals granted physical access to the building because the
security system was not functioning properly.

The risks created by these access control weaknesses were heightened because
FMS was not adequately managing and monitoring user access activities.
Program managers and security personnel did not consistently monitor and
evaluate user access rights, security violations, and software security
settings at many of the sites visited. Because of these identified access
control weaknesses, FMS is also at risk that unauthorized activities,

such as corruption of financial data, disclosure of sensitive data, or
introduction of malicious programs or unauthorized modifications of software
will go undetected.

                               System Software

System software coordinates and helps control the input, processing, output,
and data storage associated with all of the applications that run on a
system. System software includes operating system software, system
utilities, program library systems, file maintenance software, security
software, data communications systems, and database management systems.
Controls over access to and modification of system software are essential to
protect the overall integrity and reliability of information systems.

During our fiscal year 2000 audit, we found system software weaknesses at
four of the five sites we visited. Specifically, we found duplicate software
modules in certain libraries, lack of procedures to ensure system software
changes were properly documented, and the inability for a system to generate
reports needed to monitor user activities. These weaknesses increase the
risk of obsolete or inappropriate versions of a program executing and
causing unexpected results, unauthorized changes to system software, or
unauthorized access to sensitive systems.

Application Software Development and Change Controls

Controls over the design, development, and modification of application
software help to ensure that all programs and program modifications are
properly authorized, tested, and approved. Such controls also help prevent
security features from being inadvertently or deliberately turned off and
processing irregularities or malicious code from being introduced. We found
application software development and change control weakness at one of the
five FMS sites we visited. As we reported in the prior year, we found during
our fiscal year 2000 audit that a significant weakness at the site was that
policies and procedures over system design, development, and modification
were not established, were inadequate, or were simply not being followed.
Without other effective compensating controls in place, failure to implement
a disciplined approach to application software development and change
controls may result in changes that are not tested, documented, or approved.

Segregation of Duties Another key control for safeguarding programs and data
is to ensure that duties and responsibilities for authorizing, processing,
recording, and reviewing data, as well as initiating, modifying, migrating,
and testing

programs, are separated to reduce the risk that errors or fraud will occur
and go undetected. Duties that should be appropriately segregated include
applications and system programming and responsibilities for computer
operations, security, and quality assurance. Policies outlining the
supervision and assignment of responsibilities to groups and related
individuals should be documented, communicated, and enforced.

As we reported in the prior year, we also found during our fiscal year 2000
audit that the programmers at one data center were also serving as backup
computer operators, which significantly increases the risk for unauthorized
or inappropriate changes to production data and source code or disclosure of
sensitive data.

                             Service Continuity

An organization's ability to accomplish its mission can be significantly
affected if it loses the ability to process, retrieve, and protect
information that is maintained electronically. For this reason,
organizations should have (1) established procedures for protecting
information resources and minimizing the risk of unplanned interruptions and
(2) plans for recovering critical operations should interruptions occur. A
contingency or disaster recovery plan specifies emergency response, backup
operations, and postdisaster recovery procedures to ensure the availability
of critical resources and facilitate the continuity of operations in an
emergency situation. It addresses how an organization will deal with a full
range of contingencies, from electrical power failures to catastrophic
events, such as earthquakes, floods, and fires. The plan also identifies
essential business functions and ranks resources in order of criticality. To
be most effective, a contingency plan should be periodically tested in
disaster simulation exercises and employees should be trained in and
familiar with its use.

Because it is not cost-effective to provide the same level of continuity for
all operations, it is important that organizations analyze relevant data and
operations to determine which are the most critical and what resources are
needed to recover and support them. As discussed in our May 1998 best
practices guide, the criticality and sensitivity of various data and
operations should be determined and ranked based on an overall risk
assessment of the entity's operations. Factors to be considered include the
importance and sensitivity of the data and other organizational assets
handled or protected by the individual operations and the cost of not
restoring data or operations promptly.

FMFIA Reporting

FMS's Application Controls Can Be Strengthened

During our fiscal year 2000 follow-up review of FMS's service continuity, we
found that FMS management was still in the process of developing an
entity-wide service continuity plan. Consequently, the FMS data centers were
still at significant risk that in the event of an emergency or disaster,
data center personnel might not be prepared to effectively prioritize
recovery activities, integrate recovery steps, or fully recover systems.

FMFIA requires ongoing evaluations of the internal control and accounting
systems that protect federal programs against fraud, waste, abuse, and
mismanagement. It further requires that the heads of federal agencies report
annually to the president on the condition of these controls and systems and
on their actions to correct the weaknesses identified.

During the course of our work, we communicated our general computer control
findings to FMS management. As a result, FMS reported its general computer
control problems as a material weakness to the Department of the Treasury.
The Department of the Treasury reported in its fiscal year 2000
Accountability Report that FMS, along with other Treasury components, had a
material weakness in general computer controls designed to safeguard data,
protect computer application programs, protect system software from
unauthorized access, and ensure continued computer operations.

Application controls relate directly to the individual computer programs,
which are used to perform certain types of work, such as generating payments
or recording transactions in a general ledger. In an effective general
control environment, application controls help to further ensure that
transactions are valid, properly authorized, and completely and accurately
processed and reported.

                           Authorization Controls

Authorization controls for specific applications, similar to general access
controls, should be established to (1) ensure individual accountability and
proper segregation of duties, (2) ensure that only authorized transactions
are entered into the application and processed by the computer, (3) limit
the processing privileges of individuals, and (4) prevent and detect
inappropriate or unauthorized activities.

Our fiscal year 2000 review of FMS's authorization controls found that a
number of the weaknesses discussed in our fiscal years 1998 and 1999

reports remained uncorrected and certain new weaknesses over one key
financial application were identified. These weaknesses included

* inappropriate access to application functions and privileges that were not
required by the users' job responsibilities and that in some instances also
created an inadequate segregation of duties,

* users sharing IDs or being assigned multiple IDs without a functional
requirement,

* security reports not being consistently monitored or followed up on,

* application passwords not being properly managed,

* lack of certain user access request documentation and recertifications,
and

* lack of documented policies and procedures for an application.

The authorization control weaknesses described above increase the risk of
unauthorized activities such as inappropriate processing of transactions,
unauthorized access or disclosure of sensitive data, corruption of financial
data, or disruption of operations.

Completeness Controls

FRB Computer Controls Can Be Improved

Completeness controls are designed to ensure that all transactions are
processed and missing transactions are identified. Common completeness
controls include the use of record counts and control totals, computer
sequence checking, computer matching of transaction data with data in a
master or suspense file, and checking of reports for transaction data.

Our fiscal year 2000 review of completeness controls over one key FMS
financial application found that input data edit and validation procedures
were not complete, software needed to monitor modifications to the database
was not in place, and application recovery policies and procedures were not
written. As a result, there was an increased risk of processing incomplete
or erroneous data and disruption of operations.

Because the FRBs are integral to the operations of FMS, we assessed the
effectiveness of general and application controls that support key FMS
financial systems maintained and operated by the FRBs. Overall, we found
that the FRBs had implemented effective general and application controls.
Our fiscal year 2000 audit procedures identified certain new vulnerabilities
in general controls that did not pose significant risks to the FMS financial
systems but nonetheless warranted FRB management's attention and action.
These included vulnerabilities in general controls over (1) access to data,
programs, and computing resources; (2) system software; and

Conclusion

Recommendations

(3) service continuity. Our follow-up work found that the FRBs had corrected
or mitigated the risks associated with all of the vulnerabilities that were
identified in our prior year's report. We provided details of these matters
in a separate letter to the Board of Governors of the Federal Reserve System
along with our recommendations for improvement. FRB management has informed
us that the FRBs have taken or plan to take corrective actions to address
the vulnerabilities related to FMS systems that we identified.

The pervasiveness of the computer control weaknesses-both old and new-at FMS
and its contractor data centers place billions of dollars of payments and
collections at risk of loss or fraud. Sensitive data are at risk of
inappropriate disclosure, and computer-based operations are at risk of
disruption. The severity of these risks magnifies as FMS expands its
networked environment through the migration of its financial applications
from mainframes to client-server environments. Thus, as FMS provides users
greater and easier access to larger amounts of data and system resources,
well-designed and effective general and application controls are essential
if FMS's operations and computer resources are to be properly protected. It
will take a significant and sustained commitment by FMS's management to
fully address its serious computer control weaknesses, including fully
implementing an effective security program.

In our December 14, 2001, Limited Official Use version of this report, we
reaffirmed our prior year's recommendations that the secretary of the
Treasury direct the commissioner of the Financial Management Service, along
with the assistant commissioner for information resources,

* to fully implement an effective security program,

* to correct each individual weakness that we identified and address each of
the 85 specific recommendations detailed in the December 14, 2001 report,
and

* to work with the FRBs to monitor corrective actions taken to resolve the
computer control vulnerabilities related to FMS systems supported by the
FRBs that we identified and communicated to the FRBs.

In addition, we recommended that FMS develop a detailed plan that describes
the remedial actions, resources, target dates, and responsible agency
officials to facilitate the implementation of its security program.

Agency Comments
and Our Evaluation

In commenting on a draft of the Limited Official Use version of this report,
FMS stated that it understands that additional improvements are needed and
recognizes the importance of having an effective entity-wide security
program, as well as strong internal control, given its critical payment,
collections, and government-wide accounting responsibilities. FMS also
stated that actions were under way to address the individual audit findings.
Further, FMS stated that computer security remains one of FMS's top
priorities and that it is completely dedicated to fully implementing and
maintaining an effective and robust security program.

FMS also stated that it has made great strides in eliminating the
vulnerabilities caused by old legacy systems and obsolete technology,
resulting in a significant reduction in risks that is not reflected in our
report. We believe the report adequately reflects such progress for actions
taken by FMS during fiscal year 2001. In particular, our report noted that
continued progress has been made in the replacement of FMS's key financial
application (which is used by federal agencies to account for their
disbursement and receipt activities) by a new version of the application on
a distributed computing platform. However, our work over the past 4 years
has continued to identify serious issues at FMS. As we stated in our report,
FMS's entity-wide security control structure has yet to address many of the
weaknesses and related significant risks associated with its current and
evolving computing environment. For example, we found that FMS's corrective
actions were not being implemented on an entity-wide basis. Weaknesses found
and corrected in prior years at certain data centers were identified during
the current year audit at another data center. These weaknesses in FMS's
computer security controls not only affect the effectiveness of computer
security over the new applications recently moved to distributed
environments, but also FMS's other key financial applications that are used
to collect from and pay to the public billions of dollars annually.

In its comment letter, FMS pointed out that the general consensus of the
members of the Treasury CIO Council is that a computer security program that
achieves Level 3 effectiveness (which is reached when computer security
procedures and technical controls are implemented) is an appropriate
standard and should be the department's objective. However, we believe that
an effective entity-wide security program is achieved at Level 5 and is the
appropriate level for Treasury given its government-wide responsibilities as
financial manager, central disburser, and collections agency as well as
accountant and reporter of financial information. The need for Treasury to
implement an effective and fully integrated entity-wide security program is
further underscored by recent events and reports

that critical federal operations and assets continue to be highly vulnerable
to computer-based attacks. It is important to note that until an entity has
accomplished the Level 4 goal that requires the testing of security
procedures and technical controls, it does not have reasonable assurance
that the documented controls developed in Levels 1 through 3 have been
effectively implemented. A fully integrated Level 5 security program helps
to ensure that an organization has incorporated the fundamental activities
needed to manage information security risks cost-effectively and is not
reacting to individual problems on an adhoc basis only after a problem has
been detected. Since FMS's systems process and account for billions of
dollars in transactions, we are encouraged that FMS has a goal of continuing
to strive for a high level of security effectiveness. While its near term
goal of achieving Level 3 effectiveness is commendable, we cannot
overemphasize the need for FMS management to make a focused and sustained
commitment to accelerate the full implementation of an effective entity-wide
security program.

We will follow up on these matters during our audit of the federal
government's fiscal year 2001 financial statements. In addition to its
written comments, the staff of FMS provided technical comments, which have
been incorporated as appropriate.

We are sending copies of this report to the chairmen and ranking minority
members of the Senate Committee on Appropriations; Senate Committee on
Finance; Senate Committee on Governmental Affairs; Senate Committee on the
Budget; Subcommittee on Treasury and General Government, Senate Committee on
Appropriations; House Committee on Appropriations; House Committee on Ways
and Means; House Committee on Government Reform; House Committee on the
Budget; Subcommittee on Government Efficiency, Financial Management, and
Intergovernmental Relations, House Committee on Government Reform; and
Subcommittee on Treasury, Postal Service, and General Government, House
Committee on Appropriations. We are also sending copies of this report to
the commissioner of the Financial Management Service, the inspector general
of the Department of the Treasury, the director of the Office of Management
and Budget, and other agency officials. Copies will also be made available
to others upon request.

If you have any questions regarding this report, please contact me at (202)
512-3406. Key contributors to this assignment were Paula M. Rascona,
Daniel G. Mesler, and Mickie E. Gray.

Sincerely yours,

Gary T. Engel
Director
Financial Management and Assurance

                      Appendix I: Scope and Methodology

We used a risk-based and rotation approach for testing general and
application controls. Under that methodology, every 3 years each data center
and key financial application is subjected to a full-scope review that
includes testing in all of the computer control areas defined in the FISCAM.
During the interim years, we focus our testing on the FISCAM areas that we
have determined to be at greater risk for computer control weaknesses.

The scope of our work for fiscal year 2000 included follow-up on weaknesses
discussed in our fiscal year 1999 report and

* a focused review at three data centers of the two general control areas
intended to

* protect data, files, and programs from unauthorized access, modification,
and destruction and

* limit and monitor access to system software programs and files that
control computer hardware and secure applications;

* a focused review at a fourth data center of the three general control
areas intended to

* protect data, files, and programs from unauthorized access, modification,
and destruction;

* prevent the introduction of unauthorized changes to systems and
applications software; and

* ensure the recovery of computer processing operation in case of a disaster
or other unexpected interruption.

We limited our work at another data center to a follow-up review of the
status of weaknesses discussed in our fiscal year 1999 report.

We limited our testing of FMS's entity-wide security program to a comparison
of FMS's information security manuals with our executive guide on
information security management.1

We performed a full-scope application control review of one key FMS
financial application to determine whether the application is designed to
ensure that

   1Executive Guide: Information Security Management (GAO/AIMD-98-68, May
                                   1998).

Appendix I: Scope and Methodology

* access privileges (1) establish individual accountability and proper
segregation of duties, (2) limit the processing privileges of individuals,
and (3) prevent and detect inappropriate or unauthorized activities;

* data are authorized, converted to an automated format, and entered into
the application accurately, completely, and promptly;

* data are properly processed by the computer and files are updated
correctly;

* erroneous data are captured, reported, investigated, and corrected; and

* files and reports generated by the application represent transactions that
actually occur and accurately reflect the results of processing, and reports
are controlled and distributed to the authorized users.

We limited our work over another seven key financial applications to a
follow-up review of the status of weaknesses discussed in our fiscal year
1999 report.

To evaluate the general and application controls, we identified and reviewed
FMS's information system general and application control policies and
procedures; observed controls in operation; conducted tests of controls,
which included selecting items using a method in which the results are not
projectable to the population; and held discussions with officials at
selected FMS data centers to determine whether controls were in place,
adequately designed, and operating effectively. We performed network
vulnerability assessment testing at three data centers. Through our network
security vulnerability assessments, we attempted to access sensitive data
and programs. These attempts were performed with the knowledge and
cooperation of appropriate FMS officials. The scope of our network
vulnerability assessment testing was limited by a fourth data center to a
review of a redacted report prepared by other auditors.

Because the FRBs are integral to the operations of FMS, we followed up on
the status of the FRBs' corrective actions to address vulnerabilities
discussed in our fiscal year 1999 report. We assessed general controls over
FMS systems that the FRBs maintain and operate, and we evaluated application
controls over two key FMS financial applications.

To assist in our evaluation and testing of computer controls, we contracted
with the independent public accounting firm PricewaterhouseCoopers, LLP. We
determined the scope of our contractor's audit work, monitored its progress,
and reviewed the related working papers to ensure that the resulting
findings were adequately supported.

Appendix I: Scope and Methodology

During the course of our work, we communicated our findings to FMS
management. We performed our work from August 2000 through February 2001 in
accordance with U.S. generally accepted government auditing standards.

Appendix II: Comments from the Department of the Treasury

                  Page 22 GAO-02-317 FMS Computer Controls

Appendix II: Comments from the Department of the Treasury

                  Page 23 GAO-02-317 FMS Computer Controls

Appendix II: Comments from the Department of the Treasury

             (198096) Page 24 GAO-02-317 FMS Computer Controls

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