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

According to AOC Order 32-10, Quarterly Financial Reviews, the Accounting Office or Budget Office staff will investigate differences identified in the quarterly financial review of UDO balances, follow up with the jurisdictions, and notify the appropriate parties if changes are required.

Recommendation

We recommend that AOC’s Procurement Office strengthen its internal controls to ensure that UDO balances for invalid obligations are de-obligated after the goods and services have been delivered and/or the period of performance has ended. In addition, the Accounting Office should work with the Procurement Office to validate information contained in the financial management system and ensure that UDO balances identified as invalid during the quarterly financial reviews are resolved timely.

Management’s Response

Management concurs with the finding and recommendation:

The AOC has long recognized the lack of speed in closing out completed obligations. The AOC has increased staffing for the closeout process by hiring contractors to assist with the closeout process. The backlog of unclosed orders is large but the AOC is committed to closing these orders. The AOC has self- identified this issue and are well on the way to correcting it.

When contractual assistance was brought on in August 2012, they began the task of de-obligating/closing out contracts/task orders from as far back as 2002. In concert with the contractors and AMMD personnel, the expectation is that by the end of FY ’15, the AOC will be nearly caught up if not completely caught up with de-obligating old contracts/task orders. Some historical information below from the last two fiscal years:

Fiscal Year 2013: total contracts/task orders de-obligated/closed – 1,468. Total funds de-obligated: $8,265,542.63.

Fiscal Year 2014: total contracts/task orders de-obligated/closed – 4,473. Total funds de-obligated: $22,435,191.66.

Finding 3: Improperly Recorded Costs Associated With the O’Neill Building Leasehold Improvements

Summary Status: Significant Deficiency New

AOC does not have adequate internal controls to ensure that costs incurred related to construction work-in-progress (CWIP) for leasehold improvements are recorded timely and accurately. AOC entered into Reimbursable Work Authorization (RWA) agreements with the General Services Administration (GSA) for leasehold improvements related to an operating lease for the O’Neill Building. GSA billed AOC on a monthly basis in accordance with the terms of the RWA for costs incurred (e.g., accruals, vendor payments), including a 4 percent project management fee. On April 1, 2014, the leasehold improvements were completed, and the accumulated costs were reclassified from a CWIP account into a capital asset account and depreciated; however, the incurred costs related to the five GSA RWAs for the O’Neill Building leasehold improvements were incorrectly reported as a UDO as of September 30, 2014. Based on the misstatement identified by the auditors, AOC recorded an accounts payable accrual to recognize the $16.9 million in unpaid costs related to the leasehold improvements.

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

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