Independent Auditors’ Report on Internal Control over Financial Reporting and on Compliance (continued)

The Government Accountability Office (GAO)’s Standards for Internal Control in the Federal Government (the Green Book) applies to each of the three objectives of internal control: effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. Internal control should be designed to provide reasonable assurance regarding the reliability of financial reporting.

Recommendation

We recommend that AOC review lease classifications and develop processes to strengthen internal control to ensure that lease transactions are properly classified and reported in conformity with GAAP.

Management’s Response

Management concurs with the finding and recommendation.

Finding 2: Untimely Contract Closeouts and Liquidation of Obligations

Summary Status: Significant Deficiency New

AOC does not have adequate internal controls to ensure that undelivered orders (UDOs) are reviewed in a timely manner to identify and de-obligate balances that are no longer valid. We tested sample populations of 56 and 36 UDOs as of June 30 and September 30, 2014, respectively. We noted four instances in which the goods or services had been delivered per the contract/agreement and the period of performance had ended, but the remaining obligated balances, which were no longer valid, had not been de-obligated. As a result, the total reported on the Statement of Budgetary Resources for the Unobligated Balance, Exempt from Apportionment line item and the total reported for the Unpaid Obligations, end of year line item were overstated and understated, respectively, by $3.85 million as of September 30, 2014.

GAO’s Principles of Federal Appropriations Law (the Red Book), Volume II, Chapter 7, Section E defines the term “de-obligation” as an agency’s cancellation or downward adjustment of previously incurred obligations. It cites examples of reasons for de-obligations as:

• Liquidation in amount less than amount of original obligation.

• Cancellation of project or contract.

• Initial obligation determined to be invalid.

• Reduction of previously recorded estimate.

• Correction of bookkeeping errors or duplicate obligations.

In addition, the Green Book states that internal control activities occur at all levels and functions of the entity. They include a wide range of diverse control activities that management should establish, such as approvals, reconciliations, authorizations, and verifications, to ensure that all transactions are completely and accurately recorded. They also include the creation and maintenance of related records that provide evidence of execution of these activities, as well as appropriate documentation. The Green Book states that transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. Without effective controls over monitoring open obligations for ongoing validity, AOC is at increased risk of inaccurately reporting its budgetary resources.

According to AOC Order 30-01, Funds Control Administration, jurisdictional managers are required to perform a formal review of UDOs with dormant obligations more than 180 days old at least once per year to validate recorded obligations. Obligations that could not be substantiated or validated should be communicated to the Procurement Division.

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