Office of Special Trustee for American Indians
Financial Statement Audit Recommendations and the Audit Follow-Up Process Gao ID: GAO-07-295R January 19, 2007In 1994, Congress enacted the American Indian Trust Fund Management Reform Act, Pub. L. No. 103-412, recognizing the federal government's fiduciary responsibilities toward American Indians. The act called for more effective management of the Department of the Interior's (Interior) fiduciary responsibilities, required an annual audit of Indian trust funds, and created the Office of Special Trustee for American Indians (OST) in Interior. In 1996, the Secretary of the Interior ordered the transfer of responsibility for trust fund management, including preparation of the financial statements of the Tribal and Other Trust Funds and Individual Indian Monies Trust Funds (Indian trust funds), from the Bureau of Indian Affairs (BIA) to OST. Since then, OST has prepared and independent public accountants have audited the financial statements of the Indian trust funds. The auditors have issued qualified audit opinions each year since 1996 because of inadequacies in Interior's trust-related systems, controls, and processes, disagreements between Interior and the trust funds' beneficiaries on amounts owed, and potential claims against the government. Congress expressed concern about deficiencies identified and reported in the Indian trust funds' annual financial statement audits for fiscal years 1996 through 2005. Congress asked us to determine (1) the reported status of OST management's responses to financial statement audit recommendations from fiscal years 1996 through 2005 and (2) whether financial statement audit follow-up procedures and controls for OST are designed to meet the requirements of applicable guidance and whether controls are in place to reasonably assure that audit follow-up objectives are achieved. This letter transmits our slides we used to brief Congressional staff on October 5, 2006.
Financial statement audit follow-up procedures and controls for OST are designed to meet the requirements of the Office of Management and Budget's (OMB) Circular No. A-50, Audit Follow-up, and internal controls are in place to reasonably assure that audit follow-up objectives are achieved. OMB Circular No. A-50 prescribes standards for audit follow-up. We identified Interior policies addressing each of the standards. We also found that OST, Interior, and Interior's Office of Inspector General (OIG) have implemented specific control procedures directed at assuring effective audit follow-up. At the same time, we did not see evidence that Interior is conducting a periodic evaluation of its entire audit follow-up system. Such an evaluation is required by OMB Circular No. A-50 to assure efficient, prompt, and proper resolution of audit recommendations. However, the independent auditors of the Indian trust funds may mitigate any associated risks for financial statement audits because they annually validate whether OST's previously identified underlying deficiencies, which were the basis for the recommendations, have been corrected.
GAO-07-295R, Office of Special Trustee for American Indians: Financial Statement Audit Recommendations and the Audit Follow-Up Process
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January 19, 2007:
The Honorable Byron L. Dorgan:
Chairman:
Committee on Indian Affairs:
United States Senate:
The Honorable Daniel K. Inouye:
United States Senate:
The Honorable Tim Johnson:
United States Senate:
Subject: Office of Special Trustee for American Indians: Financial
Statement Audit Recommendations and the Audit Follow-up Process:
In 1994, Congress enacted the American Indian Trust Fund Management
Reform Act, Pub. L. No. 103-412, recognizing the federal government's
fiduciary responsibilities toward American Indians. The act called for
more effective management of the Department of the Interior's
(Interior) fiduciary responsibilities, required an annual audit of
Indian trust funds, and created the Office of Special Trustee for
American Indians (OST) in Interior. In 1996, the Secretary of the
Interior ordered the transfer of responsibility for trust fund
management, including preparation of the financial statements of the
Tribal and Other Trust Funds and Individual Indian Monies Trust Funds
(Indian trust funds), from the Bureau of Indian Affairs (BIA) to OST.
Since then, OST has prepared and independent public accountants have
audited the financial statements[Footnote 1] of the Indian trust funds.
The auditors have issued qualified audit opinions each year since 1996
because of inadequacies in Interior's trust-related systems, controls,
and processes, disagreements between Interior and the trust funds'
beneficiaries on amounts owed, and potential claims against the
government.
You expressed concern about deficiencies identified and reported in the
Indian trust funds' annual financial statement audits for fiscal years
1996 through 2005. You asked us to determine (1) the reported status of
OST management's responses to financial statement audit recommendations
from fiscal years 1996 through 2005 and (2) whether financial statement
audit follow-up procedures and controls for OST are designed to meet
the requirements of applicable guidance and whether controls are in
place to reasonably assure that audit follow-up objectives are
achieved. This letter transmits our slides we used to brief your staff
on October 5, 2006.[Footnote 2] The slides from that briefing are
presented in their entirety in enclosure I.
The independent auditors of the Indian trust funds' financial
statements issued numerous recommendations from fiscal years 1996
through 2005 to address identified financial audit weaknesses. In
performing their annual audits for 1996 through 2000, independent
auditors Griffin and Associates, P.C. (Griffin) determined that a
majority of the recommendations could be closed based on OST management
actions. The successor auditors, KPMG, LLP (KPMG), reassessed the
outstanding recommendations in 2001, closed or downgraded some
recommendations based on additional audit work, and consolidated the
remaining 12 recommendations into 2 overall recommendations addressing
issues considered to be material weaknesses. KPMG also added a third
recommendation in 2001 to address a reportable condition which was
subsequently downgraded in severity to advisory comments based on OST
management actions. Consequently, 2 broad recommendations addressing
material weaknesses[Footnote 3] remain open as of September 30, 2005.
The first material weakness, concerning unresolved financial reporting
matters from prior audit periods, encompasses five deficiencies, all
outstanding since before 1996. The second material weakness, concerning
OST reliance on processing of Indian trust transactions at BIA
encompasses seven deficiencies and was first reported as an overall
weakness in 2001, although related deficiencies had been noted earlier.
Financial statement audit follow-up procedures and controls for OST are
designed to meet the requirements of the Office of Management and
Budget's (OMB) Circular No. A-50, Audit Follow-up, and internal
controls are in place to reasonably assure that audit follow-up
objectives are achieved. OMB Circular No. A-50 prescribes standards for
audit follow-up. We identified Interior policies addressing each of the
standards. We also found that OST, Interior, and Interior's Office of
Inspector General (OIG) have implemented specific control procedures
directed at assuring effective audit follow-up. At the same time, we
did not see evidence that Interior is conducting a periodic evaluation
of its entire audit follow-up system. Such an evaluation is required by
OMB Circular No. A-50 to assure efficient, prompt, and proper
resolution of audit recommendations. However, the independent auditors
of the Indian trust funds may mitigate any associated risks for
financial statement audits because they annually validate whether OST's
previously identified underlying deficiencies, which were the basis for
the recommendations, have been corrected.
Agency Comments and Our Evaluation:
The Department of the Interior provided written comments on a draft of
this briefing. In responding to our observation that we did not see
evidence of a periodic evaluation of Interior's entire audit follow-up
system, as required by OMB Circular No. A-50, Interior stated that it
has policies and procedures in place and carries out periodic audit
follow-up evaluations to meet OMB requirements. To support its
position, Interior cited its semiannual status meetings and lessons
learned meetings held at year-end with its bureaus, procedures directed
at analyzing bureau progress reporting, and its use of annual goals for
resolving corrective actions to measure effectiveness. Interior also
cited its financial statement audit results, updated internal control
handbook, executive performance agreements, and comparisons of
recommendation tracking information with similar OIG information. As we
recognized in our briefing, for financial statement audit
recommendations, the independent public accountants provide an
independent assessment of whether OST's underlying deficiencies have
been corrected.
However, we do not agree that the specific audit follow-up evaluative
activities cited by Interior constitute the comprehensive assessment of
audit recommendation resolution and corrective action called for in OMB
Circular No. A-50. Specifically, Interior's cited policies, procedures,
and practices do not provide a department-level evaluation of the
overall effectiveness of Interior's audit follow-up activities.
Instead, the department relies on indirect measures, such as the number
of corrective actions reported as resolved by its bureaus, as a
surrogate measure of its effectiveness. In addition, we found no
evidence that Interior verifies the veracity of bureau-reported
corrective actions. Also, as discussed in our briefing, Interior
provided us a study completed in 1993 as evidence of its most recent
assessment of its compliance with requirements of OMB Circular No. A-
50.
Along with its comments, Interior provided an updated summary of the
latest corrective action plans for OST's 12 open financial statement
audit deficiencies as of September 30, 2005. Interior also provided
some technical corrections, which we have incorporated as appropriate.
Interior's comments are reprinted in enclosure II.
Scope and Methodology:
To determine the reported status of OST management's responses to
financial statement audit recommendations from fiscal years 1996
through 2005, we obtained and reviewed the Indian trust funds'
financial audit reports and management letters for fiscal years 1996
through 2005 and identified and summarized the status of
recommendations from the auditors' reports. We also reviewed
information from OST's corrective action plans and Interior
recommendation status reports related to the financial statement audits
of the Indian trust funds. We interviewed officials from the
independent financial statement auditors--Griffin & Associates, P.C.,
the auditors of the Indian trust funds' financial statements for fiscal
years 1996 through 2000, and KPMG, LLP, the auditors for fiscal years
2001 through 2005.
To determine whether financial statement audit follow-up procedures and
controls for OST are designed to meet the requirements of applicable
guidance and whether controls are in place to reasonably assure that
audit follow-up objectives are achieved, we interviewed officials from
OST, Interior, OIG, Griffin and Associates, P.C., and KPMG to
understand their respective roles in the process. We obtained and
reviewed all OIG follow-up audit reports and verification and status
reports issued from fiscal years 2000 through 2005 to identify any
systemic audit follow-up issues related to financial statement audits.
We reviewed Interior's departmental policy manual, audit follow-up
policies in Interior's Management Control and Audit Follow-up handbook,
and Guidelines for Fiscal Year 2005 Internal Control and Audit Follow-
up Program relative to OMB Circular No. A-50, Audit Follow-up, in the
context of financial statement audits. We assessed aspects of
Interior's and OST's internal control related to audit follow-up in the
context of financial statement audits.
OST's ability to prepare and report on Indian trust funds' financial
statements that are fairly stated depends on correcting material
weaknesses identified in the financial statement audits and
establishing historical beginning trust fund balances. Our work focused
on the recommendations arising from the annual financial statement
audits for fiscal years 1996 through 2005. While several of these
recommendations are affected by Interior's efforts to establish
historical beginning trust fund balances, the status of those efforts
was beyond the scope of this review.
We performed our work at the Department of the Interior's headquarters,
in Washington, D.C., including interviewing key OST management
officials who were visiting from their offices in Albuquerque, New
Mexico. We performed our work from August 2005 though July 2006 in
accordance with U.S. generally accepted government auditing standards.
As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report until
14 days from the report date. At that time, we will send copies of this
report to interested congressional committees, the Secretary of the
Interior, the Special Trustee for American Indians, and other
interested parties. We will also make copies available to others upon
request. In addition, this report will be available at no charge on
GAO's Web site at www.gao.gov. Should you or your staff have any
questions about this report, please contact me at (202) 512-9508 or
martinr@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs can be found on the last page of this
report. Robert E. Martin, Mary Arnold Mohiyuddin, and Paul Caban made
key contributions to this report.
Signed by:
Robert E. Martin:
Director, Financial Management and Assurance:
Enclosures:
Enclosure I: October 5, 2006 Briefing:
A Briefing for Senator Byron L. Dorgan, Senator Daniel K. Inouye, and
Senator Tim Johnson:
Office of Special Trustee for American Indians Financial Statement
Audit Recommendations and the Audit Follow-up Process:
October 5, 2006:
Briefing Agenda:
Introduction:
Objectives:
Scope and Methodology:
Results in Brief:
Background:
Status of Financial Statement Audit Recommendations:
Audit Follow-up Process:
Conclusions:
Agency Comments and Our Evaluation:
Introduction:
In 1994, Congress enacted the American Indian Trust Fund Management
Reform Act, Pub. L. No. 103-412, recognizing the federal government's
trust responsibilities toward American Indians.
The act called for more effective management of the Department of the
Interior's (Interior) trust responsibilities, required an annual audit
of Indian trust funds, and created the Office of Special Trustee for
American Indians (OST) in Interior.
The Secretary of the Interior implemented the transfer of the Office of
Trust Funds Management from the Bureau of Indian Affairs (BIA) to OST
by secretarial order in 1996.
Beginning with its first financial statement audit of Indian trust
funds for fiscal year 1996, OST has received a qualified audit opinion
each year because of inadequacies in Interior's trust-related systems
and processes, disagreements between Interior and beneficiaries on
amounts owed, and potential claims against the government.
Objectives:
You asked us to determine:
the reported status of OST management's responses to financial
statement audit recommendations from fiscal years 1996 through 2005
and:
whether financial statement audit follow-up procedures and controls for
OST are designed to meet the requirements of applicable guidance and
whether controls are in place to reasonably ensure that audit follow-up
objectives are achieved.
Scope and Methodology:
To fulfill our first objective on the status of reported financial
statement audit recommendations, we:
obtained and reviewed the Indian trust funds financial statement audit
reports and auditor management letters for fiscal years 1996 through
2005;
identified and summarized the status of recommendations from the
auditors' reports;
reviewed information from OST's corrective action plans and Interior
recommendation status reports related to the financial statement audits
of the Indian trust funds; and:
interviewed officials from independent financial statement auditors
Griffin & Associates, P.C. (fiscal years 1996-2000) and KPMG, LLP
(fiscal years 2001-2005).
To fulfill our second objective on audit follow-up for financial
statement audits, we:
interviewed officials from OST, Interior, the Office of the Inspector
General (OIG), Griffin & Associates, P.C., and KPMG to understand their
respective roles in the process;
obtained and reviewed OIG follow-up audit reports and verification and
status reports to identify any systemic audit follow-up issues related
to financial statement audits;
reviewed Interior's policy manual and other guidance relative to Office
of Management and Budget (OMB) Circular No. A-50, Audit Followup, in
the context of financial statement audits; and:
assessed aspects of Interior's and OST's internal control in the
context of financial statement audit follow-up.
We performed our work at Interior headquarters, in Washington, D.C.,
including interviewing key OST management officials who were visiting
from their offices in Albuquerque, New Mexico.
We performed our work from August 2005 through July 2006 in accordance
with U.S. generally accepted government auditing standards.
Results in Brief:
The independent auditors of the Indian trust funds financial statements
made numerous recommendations to address the financial statement audit
weaknesses they identified.
In performing their annual testing, independent auditors determined
that a majority of the recommendations could be closed based on OST
management actions.
Two broad recommendations addressing material weaknesses remain open as
of and for the year ending September 30, 2005.
1. Unresolved financial reporting matters from prior audit periods
2. OST reliance on processing of Indian trust funds transactions at
BIA:
Unresolved Financial Reporting Matters from Prior Audit Periods
This material weakness relates to five deficiencies, all outstanding
since before 1996.
1. Lack of reliable Individual Indian Money (IIM) balance:
2. Trust fund balances tribal:
3. Cash tribal:
4. Special deposit accounts (SDA) inconsistent practices:
5. Trust fund balances -IIM:
OST Reliance on Processing of Indian Trust Funds Transactions at BIA:
This material weakness relates to seven deficiencies, which were first
reported comprehensively in 2001, but related deficiencies existed
earlier.
1. Trust systems:
2. Segregation of duties:
3. Accounts receivable:
4. Probate backlog:
5. Untimely deposits:
6. Supervised and restricted accounts:
7. Appraisal review:
Financial statement audit follow-up procedures and controls for OST are
designed to meet the requirements of OMB Circular No. A-50, and
controls are in place to reasonably ensure that audit follow-up
objectives are achieved.
OMB Circular No. A-50 prescribes standards for audit follow-up, and
Interior policy addresses each of the standards.
We noted control activities were in place at OST, Interior, and OIG to
support audit follow-up.
We did not see evidence of periodic evaluation of the audit follow-up
system, as required by OMB Circular No. A-50 and Interior's own policy;
however, the role of the independent auditors may mitigate any
associated risk for financial statement audits.
In its response to our observation that we did not see evidence of a
periodic evaluation of the audit follow-up process as required by OMB
Circular No. A-50 and in its own policy, Interior stated that it
carries out periodic evaluations as required by OMB. Interior listed
various policies and procedures to support its position.
Interior does not evaluate the effectiveness of its audit follow-up
activities directly. Instead, it relies on the number of corrective
actions reported as resolved by its bureaus to measure its own
effectiveness. In addition, we found no evidence that Interior verifies
this bureau-reported information.
As a result, we do not believe the activities cited by Interior
constitute the comprehensive assessment of the audit follow-up system
for efficiency, promptness, and proper resolution and corrective action
called for in OMB Circular No. A-50.
Background:
Weaknesses in the management and accounting practices of the Indian
trust funds have been a long-standing issue.
As early as 1928, and in numerous subsequent reports, GAO,
congressional committees, and others have highlighted weak accounting
practices and other problems in trust fund management.
In Interior's fiscal year 1987 supplemental appropriations act,
Congress directed BIA to provide an accounting to the account holders
and Congress.
In 1994, Congress enacted the American Indian Trust Fund Management
Reform Act of 1994, requiring a full accounting for Indian trust funds.
In 1996, Interior became a defendant in a class action lawsuit, Cobell
v. Babbitt, associated with the department's historical management of
funds held in trust for individual Indians, the IIM.
In January 2003, Interior filed with the U.S. District Court for the
District of Columbia its Historical Accounting Plan for Individual
Indian Money Accounts to reconstruct historical balances in the IN
statements.
OST's ability to prepare and report on Indian trust funds financial
statements that are fairly stated depends on correcting material
weaknesses identified in the financial statement audits and
establishing historical beginning trust fund balances.
This work focuses on the recommendations arising from the annual
financial statement audits beginning with those in fiscal year 1996.
Efforts to establish historical beginning trust fund balances are
beyond the scope of this review.
OST reports directly to the Secretary of the Interior and oversees and
coordinates Indian trust asset reform efforts across Interior.
OST also performs financial trust services on behalf of individual
Indian and tribal account holders.
OST depends on receiving timely and accurate information from financial
and other transaction records maintained by BIA, the Minerals
Management Service, and other Interior offices to allocate receipts and
disbursements to trust beneficiaries.
As of September 30, 2005, OST maintained approximately 1,450 accounts
with reported assets exceeding $2.8 billion, and over 277,000 IN
accounts with reported assets of about $420 million.
Income is generated from the leasing of Indian-owned land, the sales of
natural resources, royalties from oil and gas exploration and
production, judgment awards and settlements of claims, and interest
earned on invested funds.
Since 1996, OST has prepared annual financial statements for the Indian
trust funds, and independent public accountants have audited the
financial statements.
The financial statements are prepared on cash (tribal) and modified
cash (IIM) bases, which are comprehensive bases of accounting other
than U.S. generally accepted accounting principles.
Griffin & Associates, P.C., performed the financial statement audits
for fiscal years 1996 through 2000.
KPMG, LLP, performed the financial statement audits for fiscal years
2001 through 2005 and continues to be the auditor for the Indian trust
funds financial statements.
Status of Financial Statement Audit Recommendations:
Griffin & Associates, P.C., made approximately 60 recommendations to
OST based on its audits of the Indian trust funds financial statements
from fiscal years 1996 through 2000.
OST's corrective action plans and other internal documents indicate
that OST management's actions corrected 37 of the 60 internal control
and compliance recommendations.
Accordingly, Griffin closed these 37 recommendations.
In 2001, KPMG:
reassessed the outstanding recommendations made by Griffin;
closed or downgraded some based on additional audit testing;
consolidated 12 others into two broad areas, each of which it
considered to be a material weakness, and issued two recommendations
thereon; and:
added a third recommendation for a reportable condition on information
technology (IT) controls.
KPMG concluded that OST management actions from fiscal years 2001
through 2005 had corrected most deficiencies making up the IT
reportable condition; hence, KPMG downgraded it to an advisory comment
in 2005.
During the audit period:
A material weakness resulted when internal control did not reduce to a
relatively low level the risk that material errors, fraud, or
noncompliance could occur and not be promptly detected by the audited
entity.
A reportable condition resulted when significant deficiencies in the
design or operation of internal control could adversely affect
information presented in the financial statements.
An advisory comment resulted when other deficiencies existed that were
not reportable conditions and were not clearly inconsequential.
The first outstanding recommendation is for a material weakness labeled
as unresolved financial reporting matters from prior audit periods.
This material weakness consists of five deficiencies which, based on
our analysis, have been outstanding in one form or another since before
1996.
1. Lack of reliable IIM balance:
2. Trust fund balances tribal:
3. Cash tribal:
4. SDAs inconsistent practices:
5. Trust fund balances-IIM:
Unresolved Financial Reporting Matters from Prior Audit Periods:
1. Lack of reliable IN balance: Control account balance for IN account
holders did not agree with the subsidiary ledger.
2. Trust fund balances tribal: Proper recipients of interest for tribal
accounts have not been determined.
3. Cash tribal: Overdrafted payments and improper accounting left 12
tribal trust fund accounts with negative cash balances.
4. SDAs: SDA moneys have not been distributed to recipients.
5. Trust fund balances IIM: Proper recipients of interest for IN
accounts have not been determined.
The second outstanding recommendation is for a material weakness
labeled as OST reliance on processing of Indian trust funds
transactions at BIA.
This weakness was first reported comprehensively in 2001 and presently
consists of seven financial statement reporting deficiencies.
1. Trust systems:
2. Segregation of duties:
3. Accounts receivable:
4. Probate backlog:
5. Untimely deposits:
6. Supervised and restricted accounts:
7. Appraisal review:
OST Reliance on Processing of Indian Trust Funds Transactions at BIA:
1. Trust systems: BIA did not consistently implement automated systems
for Indian trust assets.
2. Segregation of duties: Indian trust processing responsibilities at
BIA were not properly separated to prevent or detect errors.
3. Accounts receivable: BIA did not fully develop and communicate
standardized policies and procedures for accounts receivable.
4. Probate backlog: BIA did not always enter probate orders for land
title into the trust management systems in a timely way.
5. Untimely deposits: BIA did not consistently forward trust receipts
in a timely manner to OST for deposit.
6. Supervised and restricted accounts: BIA did not consistently
maintain documentation for supervised accounts or consistently perform
annual reviews of active accounts.
7. Appraisal review: Approval controls over tribally performed
appraisals conducted through self-determination or self-governance
contracts/compacts were not in place.
Several outstanding issues are complex and will not be fixed by OST
alone.
Both Griffin and KPMG have noted the historical nature of issues,
arising primarily from lack of adequate financial reporting systems and
inadequate controls.
Some balances that are part of OST's unresolved matters from prior
periods are affected by years of accumulated errors.
OST has stated that some corrective actions would require legislative
fixes because OST is not authorized to use current appropriations to
fund differences arising from prior years.
Factors affecting ownership records are complex.
System and data fixes depend on joint efforts with BIA.
Audit Follow-up Process:
Interior policy for follow-up on financial statement audit
recommendations addresses each of the required standards under OMB
Circular No. A-50.
We saw evidence of control activities to support audit follow-up by
OST, Interior, and the Interior OIG.
We did not see evidence of periodic evaluation of the audit follow-up
system, as required by OMB Circular No. A-50 and Interior's own policy.
However, for financial statement audits, the independent auditors
annually validate whether OST's underlying deficiencies previously
identified, and which were the basis for the recommendations, have been
corrected.
OST control activities related to financial statement audit follow-up
include:
issuing quarterly and monthly corrective action plans and status
reports to Interior,
designating a senior OST official to review and approve status reports,
designating an OST audit liaison officer as the focal point for OST
status reporting to Interior headquarters,
participating in semiannual issue resolution meetings with Interior and
its OIG,
submitting closure documents to Interior headquarters and retaining
supporting documentation on actions taken, and:
drafting policy on OST audit follow-up activities.
Interior's audit follow-up control activities include:
a policy clearly defining audit follow-up roles and responsibilities
for OST, Interior, and the Interior OIG;
an official designated with overall responsibility for audit follow-up
and resolving differences with the auditors;
a management council of senior executives to resolve audit issues that
may not otherwise be resolved routinely;
monthly and quarterly reporting by OST to Interior and semiannual
status meetings between Interior and OST staff; and:
a tracking database used to monitor and report OST's progress on
implementation and resolution of audit deficiencies.
OIG control activities related to financial statement audit follow-up
include:
referring findings and recommendations identified by the independent
auditor as part of the annual financial statement audit to Interior;
performing quality reviews of the work of the independent pendent
auditors, who determine if actions reported by OST management have
corrected the underlying deficiency;
maintaining a database for tracking and reporting on the status of
referred recommendations and reconciling it with Interior's database;
and:
reporting semiannually on the status of outstanding financial and other
recommendations to Congress.
Conclusions:
The majority of the recommendations on financial statement reporting
deficiencies issued from fiscal years 1996 through 2005 related to the
independent audit of the Indian trust funds financial statements are
closed. The two remaining recommendations relate to 12 deficiencies
that have been outstanding for some time.
Effective corrective actions and audit follow-up processes are key to
resolution of identified audit deficiencies. OST's and Interior's
procedures and controls are designed to meet the requirements of
applicable guidance, and controls are in place to reasonably ensure
that audit follow-up objectives are achieved for financial statement
audits.
Timely and effective responses to correct the remaining deficiencies
will depend on OST's sustained efforts to implement its corrective
actions over time and on Interior's and the OIG's oversight efforts as
part of the audit follow-up process.
Agency Comments and Our Evaluation:
The Department of the Interior provided written comments on a draft of
this briefing.
In responding to our observation that we did not see evidence of a
periodic evaluation of the audit follow-up system, as required by OMB
Circular No. A-50 and Interior's own policy, Interior stated that it
carries out periodic evaluations as required by OMB.
Interior listed several policies and procedures to support its
position, some of which we have cited previously as audit follow-up
control activities. Interior also made reference to its audit follow-up
performance measures, financial statement audits, updated internal
control handbook, and its executive performance agreements.
Interior stated it analyzed bureau progress reports, identified lessons
learned, and used annual goals for resolved corrective actions to
measure effectiveness.
Interior does not evaluate the effectiveness of its audit follow-up
activities directly. Instead, it relies on the number of corrective
actions reported as resolved by its bureaus to measure its own
effectiveness. In addition, we found no evidence that Interior verifies
this bureau-reported information.
As a result, we do not believe the activities cited by Interior
constitute the comprehensive assessment to determine if the audit
follow-up system results in efficient, prompt, and proper resolution
and corrective action on audit recommendations called for in OMB
Circular No. A-50. Instead, the activities cited are part of the audit
follow-up system and not a comprehensive assessment of it.
However, as we state in this briefing, for financial statement audit
recommendations, the independent public accountants annually determine
whether OST's underlying deficiencies have been corrected.
Also, as part of our review, we requested the results of the most
recent OMB Circular No. A-50 evaluation. Interior provided a May 1993
report assessing compliance by three Interior bureaus with the Federal
Managers' Financial Integrity Act of 1982. The report did not include
an assessment of the audit follow-up system with respect to Indian
Trust Fund audit recommendations.
Along with its comments, Interior provided an updated summary of the
latest corrective action plans for OST's 12 open financial statement
audit recommendations as of September 30, 2005. Interior also provided
some technical corrections, which we have incorporated as appropriate.
Interior's comments are reprinted in enclosure I.
[End of section]
Enclosure II: Comments from the Department of the Interior:
United States Department Of The Interior:
Office Of The Assistant Secretary:
Policy, Management And Budget:
Washington, DC 20240:
Take Pride In America:
Sep 13 2006:
Robert E. Martin:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Martin:
Thank you for providing the Department of the Interior the opportunity
to review and comment on the draft U.S. Government Accountability
Office report entitled, "Office of the Special Trustee for American
Indians: Financial Statement Audit Recommendations and the Audit
Followup Process" dated August 4, 2006.
The Department and the Office of the Special Trustee for American
Indians have thoroughly reviewed the Draft Report and provide the
following comments on GAO's observations:
Audit Follow-up Process:
GAO Statement: We did not see evidence of periodic evaluation of the
audit follow-up process, as required by OMB Circular A-50 and
Interior's own policy.
Response: The Department of the Interior and its bureaus and offices
carry out periodic evaluations throughout the year as required by OMB
Circular A-50. In fact, in the scorecard status for December 2005, OMB
noted:
"DOI received a clean audit opinion for FY 2005 and reduced the most
auditor-reported material weaknesses compared to all other CFO Act
agencies without reporting any new auditor weaknesses."
The Department established policy and procedures and carries out
specific activities to ensure the effectiveness of audit follow-up
throughout the year. First, the Department has a GPRA goal to measure
the effectiveness of the audit follow-up program. DOI's established
GPRA management excellence performance goal each year requires
correction of 100 percent of the audit recommendations scheduled for
implementation that fiscal year. This goal includes GAO, OIG, and
financial audit recommendations. This goal is reported annually in the
Department's Performance Accountability Report which is audited each
year by KPMG as part of the annual financial audit. There have been no
notices of findings or deficiencies in that process or other aspects of
the program reported by KPMG.
The SES performance agreements of all bureau and office responsible
program _ executives and CFO's annually evaluate the individual
executive's effectiveness in this area.
Each quarter the OIG and the Office of Financial Management (PFM)
review and compare their separate tracking systems on audits referred
to PFM by the OIG for monitoring and resolution. In instances where
there were discrepancies between the two systems, we worked with the
OIG to resolve them.
In addition, bureau and office directors are required to send monthly
and quarterly reports to their Assistant Secretaries and PFM on their
progress in correcting audit recommendations. Reports are analyzed and
follow-up guidance is provided to ensure the effectiveness of bureau
programs to implement audit recommendations by established deadlines.
PFM provides monthly and quarterly summaries of these reports to the
Department's Management Control and Audit Follow-up Council (MCAF
Council) noting areas for additional action at that level.
Each year, PFM holds Mid-Year and Year-End Internal Control and Audit
Follow-up meetings with all bureaus and offices. Results from those
meetings are reported to the Assistant Secretary for Policy, Management
and Budget and to the MCAF Council who directly communicates best
practices or areas of concern with Assistant Secretaries and bureau and
office directors. At the end of the year, a Department-wide lessons-
learned meeting is held and the next year's departmental guidance
reflects the lessons learned and discussions held during the meeting.
At the beginning of FY 2005, the Department's "Internal Control and
Audit Follow-up Handbook" was substantially revised to comply with the
new requirements of OMB's revised Circular A-123 and Appendix A, and to
reflect lessons learned in 2005. This draft guidance is currently being
edited based on lessons learned from implementing the revised Circular
in FY 2006.
We hope these comments and the enclosed technical comments prepared by
the Office of the Special Trustee will assist you in preparing the
final report.
Sincerely,
Signed by:
R Thomas Weimer:
Assistant Secretary:
Enclosure:
Office of the Special Trustee for American Indians:
General Comments On U.S. Government Accountability Draft Report
Entitled, "Office of the Special Trustee for American Indians:
Financial Statements Audit Recommendations And the Audit Followup
Process"
Financial Statement Audit Recommendations:
B. Financial Reporting - Unresolved Matters from Prior Periods -
(Subpart I) Lack of Reliable IIM Balance:
This problem requires approximately $6 million to resolve this
discrepancy. OST is currently in discussions with congressional
staffers to reconcile the issue. After the issue is resolved OST will
post all correcting entries, which will bring the HM assets in balance
with the IIM liabilities. The target date for completion is September
2007, dependent on enactment of legislation.
(Subpart 2) Trust Fund Balances - Tribal:
OST contracted to research, identify, and proposed corrective entries
to clean up this account and to provide management with recommendations
for distribution of the remaining funds. The report has been delivered
and distributions are targeted to be completed by September 30, 2006.
(Subpart 3) Cash -Tribal:
OST has verified the details associated with each account. Recoupment
letters have been sent to the affected Tribes. OST has received funds
and cleared one account to date. Additional options will be pursued in
FY 2007. The target date for completion is September 2007.
(Subpart 4) Special Deposit Accounts - Inconsistent Practices - Tribal
and IIM:
Timely distribution of funds deposited in Special Deposit Accounts
(SDA) is dependent on two primary factors: (1) identify deposits to
trust land leases and allotments, (2) having current and accurate trust
allotment ownership recorded in the BIA automated realty systems. These
factors are controlled by BIA.
By continuing to work in partnership with the BIA and by implementing
the initiatives - listed in the Fiduciary Trust Model (FTM), most
notably conversion to the leasing module of the Trust Asset and
Accounting Management System (TAAMS), we will eliminate the use of
SDAs.
Target date for distribution of SDA activity post 1/1/2003 is 12/21/
2007. This date is the target date for BIA to be completely migrated to
the TAAMS - Leasing module. The December 31, 2007 target date is the
date when no further receipts will be deposited into SDA. By December
31, 2007 it is envisioned that due to the BIA-wide implementation of
TAAMS-Leasing, along with the TAAMS-Trust Funds Accounting System
(TFAS) interface, trust funds will be automatically posted to
beneficiary accounts. In coordination with BIA pre-1/1/2003 activity is
targeted to be completed by the Office of Historical Trust Accounting
(OHTA) in 2009.
(Subpart 5) Trust Fund Balances - IIM:
OST will seek legislation to set these funds aside permanently to earn
additional interest for monthly distribution to current IIM account
holders. One potential option would be to permanently set aside the
balances to earn additional interest distributions to IIM account
holders. The target date for completion is September 2007, dependent on
legislation.
A. Reliance on Processing of Trust Transactions at the Bureau of Indian
Affairs:
a) Trust Systems: OST's participation in this predominately BIA issue
is in the form of supplying contract assistance in validating data
prior to conversion of BIA Agencies to a model Agency based on the FTM.
b) Segregation of Duties: OST has implemented new procedures, whereby
Indian trust remittances are received directly at a commercial lockbox
facility and deposited directly into the U.S. Department of Treasury
rather than being received at field locations.
Checks received through the mail at field locations are forwarded to
the lockbox for deposit.
c) Accounts Receivable: With each conversion to TAAMS - Leasing module
which interfaces to the TFAS, (BIA Pilot Agencies converted in June
2005) an automated Trust Funds Receivable (TFR) module is established.
d) Probate Backlog: With the conversion to TAAMS, all probate orders
related to land title will be brought up to date and maintained in a
timely fashion.
e) Untimely Deposits: With the implementation of the automated lockbox,
the conversion to TAAMS (which will alleviate the need for Special
Deposit Accounts) and use of the TFR, there should no longer be
untimely deposits.
f) Supervised and Restricted Accounts: The BIA has developed a
Corrective Action Plan addressing this issue with a completion date of
09/30/2006.
g) Appraisal Review: A policy memorandum dated October 6, 2005, was
issued by the Director of the BIA. This memorandum directed the BIA
Approving Official to ensure that the appropriate OST appraisal review
had been completed prior to approval of a trust land or resource
transaction.
In addition, the following technical corrections to the report content
should be addressed:
Page 3; Bullet 3:
GAO Statement: The Secretary of the Interior implemented the OST
requirement of the Act by Secretarial Order in 1996.
Correction: The Secretary of the Interior implemented the transfer of
OTFM from the BIA to OST by Secretarial Order in 1996.
Page 23; Nos. 2 and 7:
GAO Statement #2: Segregation of Duties: Indian trust processing
responsibilities are not properly separated to prevent or detect
errors.
Correction: Segregation. of Duties: Indian trust processing
responsibilities at the BIA are not properly separated to prevent or
detect errors.
GAO Statement #7: Appraisal Review: Approval controls over Indian
performed appraisals were not in place.
Correction: Appraisal Review: Approval controls over Tribally performed
appraisals conducted through Self-determination or Self Governance
contracts/compacts were not in place.
[End of section]
(197007):
FOOTNOTES
[1] The Indian trust funds' financial statements contain the tribal
accounts, which are reported on a cash basis and Individual Indian
Monies accounts, which are reported on a modified cash basis. These are
comprehensive bases of accounting other than U.S. generally accepted
accounting principles.
[2] On December 8, 2006, we briefed a staff member who was not able to
attend our October 5, 2006, briefing.
[3] For the financial reporting periods covered by the audits in our
review, Statement on Auditing Standard (SAS) No. 60, Communicating
Internal Control Related Matters Noted in an Audit, defined a material
weakness as resulting when internal control did not reduce to a
relatively low level the risk that material errors, fraud, or
noncompliance could occur and not be promptly detected by the audited
entity. It further defined a reportable condition as resulting when
significant deficiencies in the design or operation of internal control
could adversely affect information presented in the financial
statements. Finally, it defined an advisory comment as resulting when
other deficiencies existed that were not reportable conditions and were
not clearly inconsequential. For subsequent financial reporting
periods, SAS No. 112, Communicating Internal Control Related Matters
Identified in an Audit, changed the terminology and definitions used by
auditors in communicating internal control matters.
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