[Independent Auditors Report on U.S. Fish and Wildlife Service
Financial Statements for Fiscal Year 1999]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 00-I-620

Title: Independent Auditors Report on U.S. Fish and Wildlife Service
       Financial Statements for Fiscal Year 1999 

  Date: August 8, 2000
  
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  **********************************                                             
  
  C-IN-FWS-001-99-R
  
  August 8, 2000
  
  INDEPENDENT AUDITORS REPORT
  
  
  Memorandum
  
  To:  Director, U.S. Fish and Wildlife Service 
  
  Subject:  Independent Auditors Report on U.S. Fish and Wildlife Service Financial
  Statements for Fiscal Year 1999  (No. 00-I-620)
  
  SUMMARY
  
  In our audit of the U.S. Fish and Wildlife Service's (FWS)  financial statements  for fiscal
  year 1999, we found the following:
  
  -  The principal financial statements were fairly presented in all material respects.  FWS's
  principal financial statements consist of the Balance Sheet as of September 30, 1999 and the
  Consolidated Statements of Net Cost, Changes in Net Position, Budgetary Resources, and
  Financing for the fiscal year ended September 30, 1999.   
  
  -  Our tests of internal controls identified three material weaknesses related to the design of
  internal controls.  Specifically, FWS (1) had not designed  the interface between the Federal
  Finance System (FFS) and the subsidiary Federal aid grants management system to produce
  accurate and timely undelivered orders information, (2) did not require Federal aid  grantees
  to submit documentation to show that grant payments were for costs actually incurred, and
  (3) did not have procedures to charge the Construction-in-Progress account with only FWS
  real property construction costs and to transfer completed projects out of the account
  promptly and into capitalized property or expense accounts as appropriate. FWS responded
  to the report on July 5, 2000 (Appendix 1)  and generally concurred with the findings and
  recommendations  to correct the material internal control  weaknesses.
   
  -  Our tests of compliance with laws and regulations identified no instances of 
  noncompliance  that are required to be reported.
  
  Our conclusions are detailed in the sections that follow.
  
  OPINION ON PRINCIPAL FINANCIAL STATEMENTS
  
  In accordance with the Chief Financial Officers Act of 1990, we audited  FWS's principal
  financial statements for the fiscal year ended September 30, 1999 as contained in FWS's
  accompanying 1999 Annual Report.  These financial statements are the responsibility of
  FWS, and our responsibility is to express an opinion, based on our audit, on these principal
  financial statements.
  
  Our audit was conducted in accordance with the "Government Auditing Standards," issued
  by the Comptroller General of the United States, and with Office of Management and Budget
  Bulletin 98-08, "Audit Requirements for Federal Financial Statements," as amended.  These
  audit standards require that we plan and perform the audit to obtain reasonable assurance as
  to whether the accompanying principal financial statements are free of material
  misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts
  and disclosures contained in the principal financial statements and the accompanying notes. 
  An audit also includes assessing the accounting principles used and the significant estimates
  made by management.  We believe that our audit work provides a reasonable basis for our
  opinion.
  
  In our opinion, the principal financial statements (pages 40-45) present fairly, in all material
  respects, the financial position of FWS as of September 30, 1999 and its consolidated net
  cost, changes in net position, budgetary resources and outlays, and financing for the fiscal
  year ended September 30, 1999 in conformity with generally accepted accounting principles. 
  
  REPORT ON INTERNAL CONTROLS
  
  Our audit was conducted in accordance with the "Government Auditing Standards," issued
  by the Comptroller General of the United States, and with Office of Management and Budget
  Bulletin 98-08.  
  
  Management of FWS is responsible for establishing and maintaining an internal control
  structure which provides reasonable assurance that the following objectives are met:
  
  -  Transactions are properly recorded, processed, and summarized to permit the preparation
  of the principal financial statements and the required supplementary stewardship information
  in accordance with Federal accounting standards. 
  
  -  Assets are safeguarded against loss from unauthorized acquisition, use, or disposition.
  
  -  Transactions are executed in accordance with (1) laws governing the use of budget
  authority and with other laws and regulations that could have a direct and material effect on
  the principal financial statements and the supplemental statements of net cost and changes
  in net position and (2) any other laws, regulations, and Governmentwide  policies identified
  by the Office of Management and Budget.
  
  -  Transactions and other data that support reported performance measures are properly
  recorded, processed, and summarized to permit the preparation of performance information
  in accordance with criteria stated by management.
  
  Because of inherent limitations in any internal control structure, errors or fraud may occur
  and not be detected.  Also, projections of any evaluation of the internal controls over
  financial reporting to future periods are subject to the risk that the internal controls may
  become inadequate because of changes in conditions or that the degree of compliance with
  the policies or procedures may deteriorate. 
  
  In planning and performing our audit, we considered FWS's internal controls over financial
  reporting by obtaining an understanding of FWS's internal controls, determined whether
  these internal controls had been placed in operation, assessed control risks, and performed
  tests of controls in order to determine our auditing procedures for the purpose of expressing
  an opinion on the principal financial statements and the supplemental statements of net cost
  and changes in net position and not to provide assurance on the internal controls over
  financial reporting.  Consequently, we do not express an opinion on internal controls. 
  
  Our consideration of the internal controls over financial reporting would not necessarily
  disclose all matters in the internal control structure over financial reporting that might be
  reportable conditions.  Under standards established by the American Institute of Certified
  Public Accountants and by Office of Management and Budget Bulletin 98-08, reportable
  conditions are matters coming to our attention relating to significant deficiencies in the
  design or operation of the internal controls that, in our judgment, could adversely affect
  FWS's ability to record, process, summarize, and report financial data consistent with the
  assertions made by management in the principal financial statements.  Material weaknesses
  are reportable conditions in which the design or operation of one or more of the internal
  control components does not reduce to a relatively low level the risk that misstatements in
  amounts that would be material in relation to the financial statements being audited may
  occur and not be detected within a timely period by employees in the normal course of
  performing their assigned functions.  However, we noted matters concerning internal controls
  and their operation that we consider to be material weaknesses as defined in the preceding
  sentence.  These material weaknesses are described in the paragraphs that follow.
  
  A.  Design of Interface for Federal Aid Undelivered Orders
  
  FWS did not have procedures to accurately and timely update the Undelivered Orders
  general ledger account related to Federal aid grants to states.  Federal Aid Program personnel
  accounted for the grants to states in a subsidiary system maintained in each FWS regional
  office and  used it to manage the Program.  The subsidiary system recorded the original entry
  for the amount of each new grant and disbursements of grant funds to states based on
  information from the Department of Health and Human Services Payment Management
  System on a daily basis.  States accessed the Payment Management System for grant
  disbursements once the FWS regional offices input the grant data into the Payment
  Management System and authorized the personnel at Health and Human Services to begin
  the disbursement process.  FWS had designed an electronic interface between the Payment
  Management System and the official financial system (FFS), but the interface did not 
  recognize reductions in undelivered orders resulting from grant closeouts or grant
  amendments.  Additionally, there was a 1-month delay before Payment Management System
  data updated FFS.  This led to additional errors in FFS when regional Program personnel
  tried to reconcile the subsidiary system with FFS each month because many entries recorded
  in the subsidiary system had not yet been recorded in FFS.  When Program personnel found
  a missing transaction in FFS, they would initiate manual adjustments to FFS to correct what
  they perceived to be errors.  Later, FFS would be updated with the electronic interface, which
  resulted in many transactions being duplicated in FFS.  To identify and correct the errors,
  FWS, in October 1999, established a team of finance and Program personnel to reconcile
  FFS to the subsidiary system.  This effort resulted in a net adjustment to decrease the
  Undelivered Orders account by $23.9 million.            
  
  Recommendation
  
  We recommend that the Director, FWS, redesign the electronic interface between FFS and
  the Payment Management System to produce accurate and timely information to update the
  Undelivered Orders general ledger account.   Also, the delay in  updating FFS with the
  electronic interface should be eliminated, and written procedures should be developed to
  reconcile FFS to the subsidiary system.  Management should also conduct reviews to ensure
  that data are accurate.
  
  FWS Response:  FWS concurred with this finding, stating that  it has "completely
  redesigned" the interface program and that it is "currently being tested."  FWS said  the new
  system is scheduled for implementation in July 2000.
  
  B.  Documentation To Support Federal Aid State Grant Costs Incurred
  
  During fiscal year 1999, FWS allowed Federal aid grantees to draw down $424 million on
  letters of credit for approved grant amounts without requiring all grantees to periodically
  submit documentation on costs actually incurred.  According to the draft Grant Financial
  System Requirements Manual, published by the Joint Financial Management Improvement
  Program, an agency's grant financial management system should document the timing of
  grantees' cash flows, the amounts disbursed to grantees during the year, and the costs
  actually incurred by the grantees.  Although FWS obtained documentation for the
  approximately 1,300 grants that were closed out during the year, it did not obtain
  documentation that costs were incurred prior to cash drawdowns for the approximately 3,500
  grants that remained open at fiscal year-end.  Consequently, FWS could not verify that the
  payments were for costs incurred or for advances.  To provide support for the grant payments
  on open grants that we sampled, FWS, in a special mailing to grantees, requested grantees
  to confirm that the drawdowns were for costs actually incurred.  The grantees verified that
  the drawdowns were for costs incurred.  
  
  Recommendation   
  
  We recommend that the Director, FWS, develop and implement procedures for the Federal
  Aid Program to validate, for financial reporting purposes, that costs were incurred by all
  grantees prior to drawing down cash.
  
  FWS Response:  FWS did not agree with this recommendation, stating that it has controls
  to ensure that grantees  withdraw funds only for  costs  incurred previously. FWS further said
  that its controls included "[m]onthly reconciliations of withdrawals with documentation of
  costs incurred provided to Service officials."  FWS also said that the system "as  a whole 
  provides reasonable assurance that the drawdowns are for costs incurred" and that it planned 
  to "consider additional steps to increase assurance that grantees drawdowns are for costs
  incurred."  FWS further said it would consider the feasibility of sampling a limited number
  of FY [fiscal year] 2000 drawdowns  to verify that "withdrawls were for costs incurred."
  
  OIG Reply:  We believe that as part of FWS's financial records, documentation of the fact
  that disbursements were used only for costs previously incurred is essential, and the actions
  proposed by FWS meet  the intent of this recommendation.
  
  C.  Procedures To Ensure Accurate Construction in Progress
  
  The Construction-in-Progress general ledger account was overstated by $114.5  million. The
  account was used to accumulate building and structure construction project costs that had not
  been completed as of the date of the financial statements.  The overstatement occurred
  because FWS did not have procedures to ensure that charges to the account were reviewed
  promptly and that the charges were for FWS's  building and structure assets (real property)
  that would meet FWS's $50,000 capitalization threshold.  As a result, the account contained
  costs of $13.8 million that were for completed projects that had not been moved to real
  property accounts or that had not been expensed as appropriate; costs of $17.9 million that
  were for misclassified operations, maintenance, and expendable property costs; and costs of
  $82.8  million that were not for  real property, such as hazardous waste cleanup costs.  On
  December 15, 1999, FWS issued additional real property reconciliation procedures that
  addressed these issues.  
  
  Recommendation   
  
  We recommend that the Director, FWS, ensure that the additional real property procedures
  are implemented as designed.
  
  FWS Response:  FWS stated that it had designed and implemented the real property
  reconciliation procedures in December 1999. 
  
  STEWARDSHIP AND PERFORMANCE MEASURES
  
  We considered FWS's internal controls over the required supplementary stewardship
  information (pages 23-35) by obtaining an understanding of FWS's internal controls relating
  to the preparation of the required supplementary stewardship information to determine
  whether these internal controls had been placed in operation and performed tests of these
  controls as required by Bulletin 98-08.  However, providing assurance on these internal
  controls was not an objective of our audit, and accordingly, we do not provide assurance on
  such controls.
    
  With respect to the internal controls related to the performance measures reported in FWS's
  program highlights (pages 1-21), we obtained an understanding of the design of significant
  internal controls related to the existence and completeness assertions  as required by Bulletin
  No. 98-08.  Our procedures were not designed to provide assurance on  internal controls over
  reported performance measures, and accordingly, we do not provide an opinion on such
  controls.  
  
  REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS
  
  Our audit was conducted in accordance with the "Government Auditing Standards," issued
  by the Comptroller General of the United States, and with Office of Management and Budget
  Bulletin 98-08.  
  
  Management of FWS is responsible for complying with laws and regulations applicable to
  that agency.  As part of obtaining reasonable assurance about whether FWS's principal 
  financial statements are free of material misstatement, we performed tests of FWS's
  compliance with certain provisions of laws and regulations, noncompliance with which could
  have a direct and material effect on the determination of  financial statements amounts and
  certain other laws and regulations specified in Bulletin 98-08, including the requirements
  referred to in the Federal Financial Management Improvement Act of 1996.  However,
  providing an opinion on compliance with certain provisions of laws and regulations was not
  an objective of our audit, and accordingly, we do not express such an opinion.  
  
  The results of our tests of compliance with laws and regulations discussed in the preceding
  paragraph exclusive of the Federal Financial Management Improvement Act disclosed no
  instances of noncompliance that are required to be reported under the "Government Auditing
  Standards" or Bulletin 98-08.
  
  Under the Federal Financial Management Improvement Act, we are required to report
  whether FWS's financial management systems were in substantial compliance with
  requirements for Federal financial management systems, Federal accounting standards, and
  the U.S. Government Standard General Ledger at the transaction level.  To meet these 
  requirements, we performed tests of compliance using the implementation guidance for the
  Federal Financial Management Improvement Act included in Appendix D of Bulletin 98-08. 
  The results of our tests disclosed no instances in which FWS's financial management system
  was not in substantial compliance with these three requirements. 
  
  CONSISTENCY OF OTHER INFORMATION
  
  We reviewed the financial information presented in FWS's program highlights (pages 1-21)
  and supplementary information (pages 23-35) to determine whether the information was
  consistent with the principal financial statements.  Based on our review, we determined that
  the information in the overview was consistent with the principal financial statements.
  
  PRIOR AUDIT COVERAGE
  
  We reviewed  prior Office of Inspector General and General Accounting Office audit reports
  related to FWS's financial statements to determine whether these reports contained any
  unresolved or unimplemented recommendations that were significant to FWS's financial
  statements or internal controls.  We found that there were no reports issued by the Office of
  Inspector General that contained significant unresolved or unimplemented recommendations
  related to FWS's financial statements or internal controls.  The General Accounting Office,
  however, issued, in February 2000, the  letter "Financial Management Review of the U.S.
  Fish and Wildlife Service's Reported Allocation of Resources for its Refuge Program and
  New Assistant Regional Manager Positions." The letter stated that FWS did not use its
  accounting system to track the costs of the refuge program on a full-cost basis, as required
  by Department of the Interior policy and Statement of Federal Financial Accounting
  Standards No. 4, "Managerial Cost Accounting Standards."  The General Accounting Office
  recommended that FWS identify and accumulate direct and indirect costs, distribute indirect
  costs, and monitor and evaluate the full cost of its outputs.  FWS agreed with and, at the time
  of our review, was implementing the recommendation as it related to its three mission goals
  but not as it related to its refuge program.
  
  OBJECTIVE, SCOPE, AND METHODOLOGY
  
  Management of FWS is responsible for the following:
  
  -  Preparing the principal financial statements and the required supplemental information
  referred  to in the Consistency of Other Information section of this report in conformity with
  generally accepted accounting principles and for preparing the other information contained
  in the 1999 Annual Report.
  
  -  Establishing and maintaining an internal control structure over financial reporting.  In
  fulfilling  this responsibility, estimates and judgments are required to assess the expected
  benefits and related costs of internal control structure policies and procedures.  
  
  -  Complying with applicable laws and regulations.
  
  We are responsible for the following:  
  
  -  Expressing an opinion on FWS's principal financial statements.  
  
  -  Obtaining an understanding regarding the effectiveness  of the internal controls based upon
  the internal control objectives contained in Bulletin 98-08, which require that transactions
  be properly recorded, processed, and summarized to permit the preparation of the principal
  financial statements and the required supplemental information in accordance with Federal
  accounting standards; that assets be safeguarded against loss from unauthorized acquisition,
  use, or disposal; and that transactions and other data that support reported performance
  measures be properly recorded, processed, and summarized to permit the preparation of
  performance information in accordance with criteria stated by management. 
  
  -  Testing FWS's compliance with selected provisions of laws and regulations that could
  materially affect the principal financial statements or the required supplementary
  information.
  
  To fulfill these responsibilities, we took the following actions:  
  
  -  Examined, on a test basis, evidence supporting the amounts disclosed in the principal
  financial statements.
  
  -  Assessed the accounting principles used and the significant estimates made by
  management.  
  
  -  Evaluated the overall presentation of the financial statements.  
  
  -  Obtained an understanding of the internal control structure related to safeguarding of
  assets; compliance with laws and regulations, including the execution of transactions in
  accordance with budget authority; financial reporting; and certain performance measure
  information reported in the Program Highlights.  
  
  -  Tested relevant internal controls over the safeguarding of assets; compliance with laws and
  regulations, including the execution of transactions in accordance with budget authority; and
  financial reporting.  
  
  -  Reviewed the internal controls relevant to the existence and completeness assertions for
  systems producing the performance measures reported in the Program Highlights.  
  
  -  Tested compliance with selected provisions of laws and regulations.
  
  We did not evaluate all of the internal controls related to the operating objectives as broadly
  defined in the Federal Managers' Financial Integrity Act, such as those controls related to
  preparing statistical reports and ensuring efficient operations.  We limited our internal
  control testing to those controls necessary to achieve the objectives outlined in our report on 
  internal controls.
  
  We also identified other issues  that, in our judgment, were not required to be included in this
  audit report but that should be communicated to management.  We have included these
  issues in a management letter that was issued separately. 
  
  Based on FWS's  July 5, 2000, response,  we consider Recommendations A.1, B.1, and C.1
  resolved and  implemented.
  
  Since the recommendations are considered resolved and implemented, no further response
  to this report  is required (see Appendix 2).
  
  Section 5(a) of the Inspector General Act (5 U.S.C. app. 3) requires the Office of Inspector
  General to list this report in its semiannual report to the Congress. In addition, the Office of
  Inspector General provides audit reports to the Congress.
  
  This report is intended for the information of management of FWS and the Office of
  Management and Budget and the Congress.  However, this report is a matter of public
  record, and its distribution is not limited.
  
  
   
  Roger La Rouche
  Acting Assistant Inspector General
  for Audits
  
  
  [CONTACT THE U.S. FISH AND WILDLIFE SERVICE FOR INFORMATION ON ITS 
  FINANCIAL STATEMENTS FOR FISCAL YEAR 1999, WHICH ARE NOT INCLUDED]
  
  
  APPENDIX 1
  
  Comments on Draft Auditor's Report on U.S. Fish and Wildlife Service Financial Statements
  for Fiscal Year 1999
  
  NOT INCLUDED BY OIG.
  
  
  
  APPENDIX 2