[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
INVESTIGATING FINANCIAL MISMANAGEMENT
AT THE U.S. DEPARTMENT OF LABOR
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
COMMITTEE ON EDUCATION
AND THE WORKFORCE
U.S. House of Representatives
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 2, 2011
__________
Serial No. 112-26
__________
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----------
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COMMITTEE ON EDUCATION AND THE WORKFORCE
JOHN KLINE, Minnesota, Chairman
Thomas E. Petri, Wisconsin George Miller, California,
Howard P. ``Buck'' McKeon, Senior Democratic Member
California Dale E. Kildee, Michigan
Judy Biggert, Illinois Donald M. Payne, New Jersey
Todd Russell Platts, Pennsylvania Robert E. Andrews, New Jersey
Joe Wilson, South Carolina Robert C. ``Bobby'' Scott,
Virginia Foxx, North Carolina Virginia
Bob Goodlatte, Virginia Lynn C. Woolsey, California
Duncan Hunter, California Ruben Hinojosa, Texas
David P. Roe, Tennessee Carolyn McCarthy, New York
Glenn Thompson, Pennsylvania John F. Tierney, Massachusetts
Tim Walberg, Michigan Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee David Wu, Oregon
Richard L. Hanna, New York Rush D. Holt, New Jersey
Todd Rokita, Indiana Susan A. Davis, California
Larry Bucshon, Indiana Raul M. Grijalva, Arizona
Trey Gowdy, South Carolina Timothy H. Bishop, New York
Lou Barletta, Pennsylvania David Loebsack, Iowa
Kristi L. Noem, South Dakota Mazie K. Hirono, Hawaii
Martha Roby, Alabama
Joseph J. Heck, Nevada
Dennis A. Ross, Florida
Mike Kelly, Pennsylvania
Barrett Karr, Staff Director
Jody Calemine, Minority Staff Director
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
DAVID P. ROE, Tennessee, Chairman
Joe Wilson, South Carolina Robert E. Andrews, New Jersey
Glenn Thompson, Pennsylvania Ranking Minority Member
Tim Walberg, Michigan Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee David Loebsack, Iowa
Richard L. Hanna, New York Dale E. Kildee, Michigan
Todd Rokita, Indiana Ruben Hinojosa, Texas
Larry Bucshon, Indiana Carolyn McCarthy, New York
Lou Barletta, Pennsylvania John F. Tierney, Massachusetts
Kristi L. Noem, South Dakota David Wu, Oregon
Martha Roby, Alabama Rush D. Holt, New Jersey
Joseph J. Heck, Nevada Robert C. ``Bobby'' Scott,
Dennis A. Ross, Florida Virginia
C O N T E N T S
----------
Page
Hearing held on June 2, 2011..................................... 1
Statement of Members:
Andrews, Hon. Robert E., ranking minority member,
Subcommittee on Health, Employment, Labor and Pensions..... 41
Roe, Hon. David P., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Statement of Witnesses:
Flanagan, Heather Koppe, partner, KPMG, LLP.................. 9
Prepared statement of.................................... 11
Lewis, Elliot P., Assistant Inspector General for Audit,
Office of Inspector General, U.S. Department of Labor...... 6
Prepared statement of.................................... 7
Taylor, James L., Chief Financial Officer, U.S. Department of
Labor...................................................... 13
Prepared statement of.................................... 15
Additional Submissions for the Record:
Mr. Roe:
Memo, dated May 23, 2011, from Elliot P. Lewis, Assistant
Inspector General for Audit, Department of Labor,
pertaining to the FY2010 Independent Auditors' Report.. 31
``Management Assurances,'' dated Nov. 14, 2010, signed by
Labor Secretary Solis, et al........................... 33
``KPMG Independent Auditors' Report of the Department of
Labor's Financial Records for Fiscal Year 2010''....... 35
INVESTIGATING FINANCIAL
MISMANAGEMENT AT THE
U.S. DEPARTMENT OF LABOR
----------
Thursday, June 2, 2011
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Committee on Education and the Workforce
Washington, DC
----------
The subcommittee met, pursuant to call, at 10:01 a.m., in
room 2175, Rayburn House Office Building, Hon. Phil Roe
[chairman of the subcommittee] presiding.
Present: Representatives Roe, DesJarlais, Noem, Roby, Heck,
Ross, Andrews, Kildee, Hinojosa, and Wu.
Also present: Representative Kline.
Staff present: Andrew Banducci, Professional Staff Member;
Katherine Bathgate, Press Assistant/New Media Cordinator; Casey
Buboltz, Coalitions and Member Services Coordinator; Ed Gilroy,
Director of Workforce Policy; Benjamin Hoog, Legislative
Assistant; Marvin Kaplan, Professional Staff Member; Barrett
Karr, Staff Director; Ryan Kearney, Legislative Assistant;
Krisann Pearce, General Counsel; Molly McLaughlin Salmi, Deputy
Director of Workforce Policy; Linda Stevens, Chief Clerk/
Assistant to the General Counsel; Alissa Strawcutter, Deputy
Clerk; Joseph Wheeler, Professional Staff Member; Kate Ahlgren,
Minority Investigative Counsel; Aaron Albright, Minority
Communications Director for Labor; Tylease Alli, Minority
Clerk; Daniel Brown, Minority Junior Legislative Assistant;
Jody Calemine, Minority Staff Director; Brian Levin, Minority
New Media Press Assistant; Megan O'Reilly, Minority General
Counsel; Julie Peller, Minority Deputy Staff Director; Meredith
Regine, Minority Policy Associate, Labor; and Michele
Varnhagen, Minority Chief Policy Advisor and Labor Policy
Director.
Chairman Roe. I would like to call the meeting to order. A
quorum being present, Subcommittee on Health, Employment, Labor
and Pensions will come to order.
Good morning, everyone.
And welcome to our witnesses. Thank you for taking time out
of your schedule to be here today.
Six months ago, under the leadership of Mr. Andrews, this
subcommittee held an independent audit of the Department--
examined an independent audit of the Department of Labor's
financial records. It was our first look at the department's
new financial management system implemented at great cost to
the taxpayers for the understanding that it would improve the
department's ability to track the money it spends.
At the time a number of challenges surrounding
implementation of the new system meant Congress and taxpayers
were unable to receive a full evaluation of the department's
financial management. For the first time in more than a dozen
years the department cannot issue an unqualified report. In
other words, the department failed to produce enough
information for independent auditors to make an informed
judgment on the department's finances.
As I noted in December, any time an organization places a
record system responsible for tracking billions of dollars,
errors, unfortunately, are not uncommon. However, it is up to
the organization's executive management to take responsibility
for the mistakes and work to prevent them in the future.
It appears this was the course the Department of Labor
planned to take last winter. James Taylor, Mr. Taylor is here,
the department's chief financial officer, was with us in
December, and is here again today. He stated the department was
undertaking many steps to overcome the problems that caused
last year's incomplete report.
Mr. Taylor testified, ``We are confident these actions will
prove the 2010 disclaimer a temporary hiccup in what has been
and what will be again a long record of unqualified opinions
and sound financial management at the department.''
We are here today to examine whether the department has
lived up to this promise. Regrettably the answer is no. The
challenges plaguing the Department of Labor's financial
management still persist. The most recent audit found the same
material weaknesses and significant deficiencies identified in
last year's report.
The Department of Labor is the only executive agency to
have multiple new material weaknesses in its financial
management system. According to the independent audit of KPMG,
certified by the department's Office of Inspector General, the
department does not have sufficient controls over financial
reporting and budgetary accounting. It lacks adequate controls
over access to key financial systems, and improvements are
required in how the department prepares and reviews journal
entries.
The problems I have just described only relate to the four
material weaknesses identified in the report. The department
also has significant deficiencies over its payroll, and does
not prevent untimely and inaccurate processing of certain
transactions.
Last, but certainly not least, the department is in
violation of two federal laws intended to promote the integrity
of financial management in the federal government. Despite
having roughly 6 additional months to improve its record,
department's finances have failed to receive a clean bill of
health, the first time since fiscal year 1997.
Some may argue the report we are discussing today signifies
a clean audit. According to this logic, simply completing the
report, albeit 6 months behind schedule, results in a passing
grade. However, the numerous instances of financial--however,
numerous instances of financial mismanagement.
However, such logic is neither supported by standard
accounting practices or a common sense. We should deal with the
facts as presented by the professionals at KPMG, and avoid
underestimating the seriousness of this report.
The department oversees a number of federal efforts aimed
at assisting the nation's workforce, including unemployment
insurance, worker's compensation and various job training
programs. At a time when the national debt exceeds $14 trillion
and more than 13 million individuals are seeking work, every
dollar counts. Any misallocation of scarce resources is a
disservice to taxpayers and workers.
The department's financial mismanagement is evidenced by
the recent independent audit is unacceptable. I hope the
administration can explain the disturbing facts of the recent
audit, and provide a concrete plan to ensure this does not
happen again.
And now we yield to Mr. Andrews, the senior Democratic
member of the subcommittee, for his opening remarks.
[The statement of Mr. Roe follows:]
Prepared Statement of Hon. David P. Roe, Chairman, Subcommittee on
Health, Employment, Labor, and Pensions
Good morning everyone. Welcome to our witnesses; thank you for
taking time out of your busy schedules to be with us today.
Six months ago, under the leadership of Mr. Andrews, this
subcommittee examined an independent audit of the Department of Labor's
financial records. It was our first look at the department's new
financial management system, a system implemented at great cost to
taxpayers with the understanding it would improve the department's
ability to track the money it spends.
At the time, a number of challenges surrounding implementation of
the new system meant Congress and taxpayers were unable to receive a
full evaluation of the department's financial management. For the first
time in more than a dozen years, the department could not issue an
``unqualified report.'' In other words, the department failed to
produce enough information for independent auditors to make an informed
judgment on the department's finances.
As I noted in December, anytime an organization replaces a records
system responsible for tracking billions of dollars, errors are
unfortunately not uncommon. However, it is up to an organization's
executive management to take responsibility for the mistakes and work
to prevent them in the future.
It appears this was the course the Department of Labor planned to
take last winter. James Taylor, the department's chief financial
officer who was with us in December and is with us again today, stated
the department was undertaking ``many steps to overcome the problems''
that caused last year's incomplete report. Mr. Taylor testified, ``We
are confident these actions will prove the 2010 disclaimer a temporary
hiccup in what has been, and will again be, a long record of
unqualified opinions and sound financial management at the
Department.''
We are here today to examine whether the department has lived up to
this promise. Regrettably, the answer is no. The challenges plaguing
the Department of Labor's financial management still persist. The most
recent audit found the same material weaknesses and significant
deficiencies identified in last year's report. The Department of Labor
is the only executive agency to have multiple new material weaknesses
in its financial management system.
According to the independent audit by KPMG, certified by the
department's Office of Inspector General, the department does not have
sufficient controls over financial reporting and budgetary accounting,
it lacks adequate controls over access to key financial systems, and
improvements are required in how the department prepares and reviews
journal entries.
The problems I have just described only relate to the four material
weaknesses identified in the report. The department also has
significant deficiencies over its payroll and does not prevent untimely
and inaccurate processing of certain transactions. Last, but certainly
not least, the department is in violation of two federal laws intended
to promote the integrity of financial management in the federal
government.
Despite having roughly six additional months to improve its record,
the department's finances have failed to receive a clean bill of health
for the first time since fiscal year 1997. Some may argue the report we
are discussing today signifies a ``clean'' audit. According to this
logic, simply completing the report--albeit six months behind
schedule--results in a passing grade, despite the numerous instances of
financial mismanagement. However, such logic is neither supported by
standard accounting practices or commonsense. We should deal with the
facts as presented by the professionals at KPMG, and avoid understating
the seriousness of this report.
The department oversees a number of federal efforts aimed at
assisting the nation's workforce, including unemployment insurance,
workers' compensation, and various job training programs. At a time
when the national debt exceeds $14 trillion and more than 13 million
individuals are searching for work, every dollar counts. Any
misallocation of scare resources is a disservice to taxpayers and
workers. The department's financial mismanagement, as evidenced by the
recent independent audit, is unacceptable. I hope the administration
can explain the disturbing findings of the recent audit, and provide a
concrete plan to ensure this doesn't happen again.
I will now yield to Mr. Andrews, the senior Democrat member of the
subcommittee, for his opening remarks.
______
Mr. Andrews. Thank you. Good morning, Mr. Chairman. Thank
you for your courtesies.
I would like to welcome the witnesses, and welcome back the
witnesses I think in at least two of the cases, maybe three.
On May 23rd of 2011 the Department of Labor received an
unqualified audit letter, which is a clean audit. How we got
there was slower than it should have been.
I want to make two points this morning. The first is the
reason for the delay in getting that clean audit letter. And
the second is to respectfully challenge my friend's assertion
that the existence of exceptions in the clean audit letter are
somehow evidence of financial mismanagement. They most
emphatically are not.
In 1989 the Department of Labor began using a software
system to keep track of its books. And when 2002 rolled around
they were still using that same software system. Now I think it
would be true in most of corporate America or any government
institution in America, if you are using in 2002 a piece of
software generated in 1989, it probably did not work very well.
The Bush Labor Department reached that conclusion. It
reached the conclusion they need to replace that software
system. So in 2002 the prior administration began a process to
replace that software system.
That process was an unmitigated disaster. The prior
administration spent $35 million, and by 2007 they concluded
that that system would never work, and they junked it.
So for the better part of 6 years and $35 million, the
prior administration tried to implement a piece of bookkeeping
software that would give the department and the tax payers
better access to financial data. In 2007 the prior
administration began to correct this remedy and come up with a
third system.
By the time the new administration took office in January
of 2009, that new system, which cost about $25 million, was
partially implemented. It was partially implemented because the
training that was needed to train the department employees on
how to best use that system had not yet been fully done. So
when the new administration took office, it was in the midst of
helping to complete that implementation in that new system.
Mr. Taylor, with whom we are pleased to welcome back to the
committee, I believe, took office in June of 2010 at the
Department of Labor as the chief financial officer. And he
walked into a bit of a difficult situation because that
software system was not yet fully implemented. The employees
were not yet fully trained.
By the time we reached the fall of 2010 it became obvious
that KPMG was not going to be able to do due diligence on the
financial audits because the correct documentation was not in
place.
As was our responsibility under the rules of the Congress,
on December 7th of last year, the subcommittee, which I was
then privileged to chair, and Mr. Roe--Dr. Roe was the senior
minority member at the time, discharged our duty and had a
hearing, and effectively said, when are you going to fix this
problem so we can have an audit? Mr. Taylor made a commitment
to the committee and to the public that he would lead an effort
to make sure that that audit was completed by the spring.
Mr. Taylor, you have honored that commitment. The audit
documents were in place so the audit could be completed by the
spring. And in fact on May 23rd of 2011, KPMG, through the IG's
Office, issued a clean audit letter.
Now, my friend refers to the four exceptions in the clean
audit letter as somehow evidence of financial mismanagement.
Well, if that were the case, we had financial mismanagement in
2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008. Because in
each of those 8 fiscal years there were significant exceptions
made to the audit as well.
As a matter of fact, in those 8 fiscal years where the
prior administration was running the department, there were 64
exceptions in total to the eight clean audit letters that were
issued.
Now, I do think we should focus in these exceptions and fix
them. I would love to see an audit issued, timely audit issued
for the 2011 fiscal year that has no exceptions in it. And I
think that should be our goal. But I do think we should--we
should begin today with a reflection of a record that says that
we are looking at a department that received a clean audit
letter.
And I think we should thank you, Mr. Taylor, for honoring
your commitment to the committee and putting us in position to
produce that clean audit letter.
So at this I would thank the witnesses, and turn back to my
friend, the chairman.
Chairman Roe. I thank the gentleman.
Pursuant to Rule 7(c), all members will be permitted to
submit written statements to be included in the permanent
hearing record. And without objection, the hearing record will
remain open for 14 days to allow such statements and other
extraneous material referenced during the hearing to be
submitted for the official hearing record.
Now it is my pleasure to introduce our distinguished panel
of witnesses.
Mr. Elliot P. Lewis is the assistant inspector general for
audit to the Department of Labor.
Welcome back, Mr. Lewis.
Mr. Lewis has been with the Department of Labor since 1991
serving in a variety of positions within the Inspector
General's Office of Financial Management Audits. Before joining
the Federal Government, he was a partner at T.R. McConnell and
Company, CPAs in Columbia, South Carolina from 1986 to 1991.
And that is a--it was probably about as hot in Columbia, South
Carolina as it was here yesterday.
Heather Flanagan is a partner for audit at KPMG, LLC.
KPMG is an audit, tax and advisory service provider that
has served as independent auditor for DOL since fiscal year
2006. KPMG also prepared audits in fiscal year 2010 for the
Departments of Commerce, Energy, Homeland Security, Interior,
Justice, Treasury, and the DSA, the Office of Personnel
Management and the Small Business Administration.
Mr. James L. Taylor is the chief financial officer of the
Department of Labor. Prior to his work at DOL, Mr. Taylor was
deputy federal inspector for the Department of Homeland
Security where he assisted the Inspector General in managing
over 600 audits, inspectors and investigators. Mr. Taylor has
also served as deputy chief financial officer for the
Department of Commerce and FEMA.
Before I recognize each of you today will be--provide your
testimony let me briefly explain our lighting system. You each
have 5 minutes to present your testimony. When you begin the
light in front of you will turn green. With 1 minute left the
light will turn yellow. And when your time is expired the light
will turn red, at which point I will ask you that you wrap up
your remarks as best as possible.
And after everyone has testified, members will each have 5
minutes to ask questions. And I will try to also adhere to the
5 minutes rule.
We will start now with Mr. Lewis.
STATEMENT OF ELLIOT P. LEWIS, ASSISTANT INSPECTOR GENERAL FOR
AUDIT, U.S. DEPARTMENT OF LABOR
Mr. Lewis. Mr. Chairman and members of the subcommittee,
thank you for the opportunity to discuss the audit of the U.S.
Department of Labor's revised fiscal year 2010 consolidated
financial statements.
As I detailed in my December testimony, following the
implementation of a new financial system known as New Core,
which replaced a 20-year-old accounting system, the department
encountered a significant number of problems and errors
involving data migration, integration with other systems,
reconciliations in system configuration. This resulted in the
department's inability to provide timely and accurate financial
data, and the auditors being unable to give an opinion on the
financial statements.
Since November of last year the department was able to
successfully mitigate the issues it experienced in 2010 to
provide the necessary data for audit, and to revise and reissue
the consolidated financial statements.
In March of 2011 the CFO resubmitted its financial report
and KPMG was able to complete the audit procedures necessary to
render an unqualified, or clean, opinion. It is important to
note the DOL's received an unqualified opinion on its financial
statements for 14 consecutive years.
However, while the opinion is unqualified for 2010, it is
also important to emphasize that this does not guarantee an
unqualified opinion for 2011. KPMG reported deficiencies in the
department's internal controls and made numerous
recommendations to address them. These issues need to be
addressed to help ensure the department's ability to produce
accurate financial statements in the future.
The auditors identified several material weaknesses, which
posed the greatest risk that the department's financial
statements could be incorrect. Specifically, they found that
the department needs to implement and perform routine
reconciliations. Moreover, they need to develop and document
all business processes and controls required to accurately and
timely record certain transactions.
Second, the department needs to ensure that financial
obligations are correct and properly recorded. They also need
to ensure staff are trained and possess the technical knowledge
needed to properly record budgetary transactions.
Third, the department needs to enhance supervision of
adjusting journal entries and improve related documentation.
Finally, the department needs to develop policies and
controls to ensure appropriate access to financial management
systems.
In addition to the material weaknesses, the auditors noted
two significant deficiencies: the need to ensure payroll is
properly processed, and the need to improve the timeliness and
accuracy of the accounting for property plan and equipment. Our
audit of the 2011 statements will be assessing the extent to
which the department has corrected these control weaknesses.
Mr. Chairman, the department continues to make improvements
to the new financial system, and to improve its financial
management business processes. As this will obviously not be
the last IT system the department replaces, it is equally
important to look at this implementation for any lessons that
can be gleaned from a broader project management standpoint.
For example, for future IT system development projects, the
department needs to fully understand and develop system
requirements before beginning the procurement process, ensure
that interfaces with other key departmental systems are built
and tested prior to implementation, identify the proper user
base, ensure that users are properly trained, establish strict
project management oversight responsibility, and establish a
viable funding plan prior to starting the project.
By applying these lessons learned, the department will be
better positioned to efficiently deliver future IT system
development projects that are timely deployed and fully meet
business needs.
Thank you, Mr. Chairman, for the opportunity to present the
results of the audit. I would be pleased to answer any
questions that you or other members of the subcommittee may
have.
[The statement of Mr. Lewis follows:]
Prepared Statement of Elliot P. Lewis, Assistant Inspector General for
Audit, Office of Inspector General, U.S. Department of Labor
Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to discuss the audit of the U.S. Department of Labor's
(DOL's) revised Fiscal Year (FY) 2010 Consolidated Financial
Statements.
Background
The Chief Financial Officers Act of 1990, P.L. 101-576, requires
Offices of Inspectors General (OIG) to audit and report on their
agency's Consolidated Financial Statements in accordance with generally
accepted auditing standards and OMB guidance. In order to fulfill this
responsibility, the DOL OIG contracts with an independent public
accounting firm, KPMG LLP, to conduct the audit. OMB requires that the
audit be completed by November 15 of each year. For an agency as large
as DOL, the complexity of this audit requires that, in order to meet
this deadline and complete all steps necessary to render an opinion on
the statements, the Department must provide significant financial
information and supporting documentation throughout the fiscal year.
Therefore, an inability on the part of the Department to produce the
necessary information in a timely manner can affect the successful
completion of the audit and may result in a less-than-favorable opinion
for the Department or a Disclaimer of Opinion, which is the inability
to render an opinion.
Specific reasons for the disclaimer of opinion
Mr. Chairman, as detailed in my previous testimony in December, it
was the Department's inability to provide timely and accurate financial
data that resulted in the Department receiving a Disclaimer of Opinion
for FY 2010. Following the implementation of a new financial system
known as the New Core Financial Management System (New Core), the
Department encountered a significant number of problems and errors
involving data migration, integration with other systems,
reconciliation, and system configuration. Several examples of the
problems they encountered were:
Data Migration
Internal agency codes and general ledger accounts that were
incorrectly migrated to New Core.
Certain transaction identification and coding that were not
properly captured in New Core when migrated.
Integration with Other Systems
Integration between New Core and other financial systems that were
not properly working subsequent to the implementation. For example, the
Department was unable to record in a timely manner the majority of
transactions related to the Unemployment Trust Fund and the Federal
Employees' Compensation Act.
Reconciliation
Incomplete account reconciliations as of September 30. For example,
the Department could not reconcile its underlying supporting data for
certain Unemployment Trust Fund balances to the general ledger in a
timely manner.
System Configuration
Improper system configurations resulting in the inability to
properly record certain transactions in accordance with the United
States Standard General Ledger requirements. As a result, the
Department had to implement manual processes to correct these errors.
Audit of the Department's revised FY 2010 consolidated financial
statements
In my December testimony, I identified several actions which the
Department needed to take in order to reissue its FY 2010 Consolidated
Financial Statements. In the intervening months, Mr. Chairman, the
Department was able to successfully mitigate the issues it experienced
in FY 2010 to provide the necessary data for audit and to revise and
reissue the Consolidated Financial Statements. Some of the major
adjustments made by the Department since November 15 include:
Resolving integration errors between New Core and other financial
systems by reconciling and investigating differences.
Reviewing all significant transactions to ensure they were in
accordance with United States Standard General Ledger requirements.
Adjusting and providing sufficient documentation for the
Consolidated Financial Statements balances, by correcting material
errors not identified as of November 2010, which impacted fund balance
with treasury and accounts payable.
In March 2011, the CFO submitted a draft of the Department's
revised Consolidated Financial Statements for audit and KPMG was able
to complete the audit procedures necessary to render an unqualified or
``clean'' opinion. The Department has now received an unqualified
opinion on its financial statements for 14 consecutive fiscal years.
Material weaknesses and significant deficiencies
Even though the Department received an unqualified opinion, KPMG
reported deficiencies in the Department's internal controls and made
numerous recommendations to address them. A deficiency in internal
control exists when the design or operation of a control does not allow
management or its employees, in the normal course of performing their
assigned functions to prevent, or detect and correct misstatements on a
timely basis. A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the agency's financial
statements will not be prevented, or detected and corrected on a timely
basis. A significant deficiency is a deficiency, or combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance.
In terms of material weaknesses, the auditors found that the
Department needs to implement and perform routine reconciliations, as
well as develop and document all business processes and controls
required to accurately and timely record transactions, including those
from DOL subsystems and other Federal agencies.
Second, the Department needs to ensure that financial obligations
are correct and properly recorded, as well as ensuring users are
trained and possess the technical knowledge needed to properly record
budgetary transactions.
Third, the Department needs to enhance supervisory monitoring
reviews of adjusting journal entries and related documentation.
Finally, the Department needs to coordinate efforts with individual
DOL agencies to develop policies and controls to address, as well as
monitor, access to financial management systems.
In addition to the material weaknesses, the auditors noted the
following significant deficiencies. The auditors found that the
Department needs to design time and attendance reports that reflect the
necessary information for it to ensure that payroll is properly
processed. Lastly, the Department needs to improve the timeliness and
accuracy of its accounting for property, plant, and equipment.
Lessons learned
Mr. Chairman, the Department continues to make improvements to the
new financial system and to improve its financial management business
processes. As this will obviously not be the last system that the
Department replaces, it is equally important to look at this
implementation for any broader lessons that can be gleaned from a
project management standpoint. For example, in the future the
Department needs to:
Fully understand and develop system requirements before beginning
the procurement process;
Ensure that interfaces with other key Departmental systems are
built and tested prior to implementation;
Identify the proper user base;
Ensure that users are properly trained;
Establish strict project management oversight responsibility;
Establish a viable funding plan prior to starting the project.
Conclusion
Mr. Chairman, the Department has taken sufficient and appropriate
corrective actions to enable KPMG to issue an opinion on the revised
statements. Although the opinion is unqualified, it is important to
emphasize that this does not guarantee an unqualified opinion for the
FY 2011 statements. Our audit of the FY 2011 statements will be
assessing the extent to which the Department has corrected the control
weaknesses recently identified in the 2010 audit.
Thank you, Mr. Chairman, for the opportunity to present the results
of the audit. I would be pleased to answer any questions that you or
other members of the Subcommittee may have.
______
Chairman Roe. Okay. Thank you, Mr. Lewis.
Ms. Flanagan?
STATEMENT OF HEATHER K. FLANAGAN,
PARTNER, KPMG, LLC
Ms. Flanagan. Chairman Roe, Ranking Member Andrews, and
members of the subcommittee, my name is Heather Flanagan, and I
am an audit partner with KPMG. Thank you for the invitation to
come before you today to discuss the two audit engagements of
the U.S. Department of Labor's fiscal year 2010 consolidated
financial statements.
KPMG, under contract to the DOL Office of Inspector
General, was engaged to audit DOL's fiscal year 2010
consolidated financial statements. During fiscal year 2010 DOL
encountered significant functionality and operational issues
related to its new financial accounting and reporting system,
which was implemented in January 2010.
These issues hindered DOL's ability to ensure the accuracy
and completeness of financial statement balances, and to
generate the critical financial statement data necessary to
complete our testing over the consolidated financial statements
during our initial audit engagement. I will discuss the more
significant areas that were impacted by these issues.
The first was the Unemployment Trust Fund. We were unable
to complete testing over the fund's significant accounts
because DOL was unable to provide to us in a timely fashion
complete and accurate data that reflected the balances recorded
in the general ledger.
The second significant area was gross cost. We were unable
to complete testing over certain expenses because a complete
and accurate population of these expenses that agreed to the
balances in the general ledger could not be provided in a
timely fashion.
The third important area was budget accounts. The final
report on budget execution and budgetary resources, known as
the FF-133, for the fourth quarter was not provided to us prior
to the November 15th reporting deadline. Therefore we were
unable to complete our testing of the statement of budgetary
resources.
The fourth significant area was fund balance with Treasury.
DOL was unable to reconcile the net differences that were
identified between its fund balance with Treasury accounts as
of September 30, 2010, and Treasury's records.
The fifth significant area was financial reporting. DOL
management was unable to provide certain representations
regarding consistency with U.S. Generally Accepted Accounting
Principals with respect to the presentation of the fiscal year
2010 financial statements that it issued in November.
It was impractical to extend our procedures sufficiently to
determine whether the financial statements may have been
affected by these issues. As such, we issued a disclaimer of
our opinion on the fiscal year 2010 consolidated financial
statements issued by DOL on November 15th.
Under government auditing standards we are required to
report material weaknesses and significant deficiencies
identified during the engagement. During our initial fiscal
year 2010 engagement we identified the following deficiencies
in internal control over financial reporting that we considered
to be material weaknesses or significant deficiencies:
The lack of sufficient controls over financial reporting, a
lack of significant controls over budgetary accounting,
improvements needed in the preparation and review of journal
entries, lack of adequate controls over access to key financial
and support systems, weakness noted over payroll accounting,
and untimely and inaccurate processing of property, plant and
equipment transactions.
DOL recognized the need for, at a minimum, an audited
consolidated balance sheet as of September 30, 2010 in order to
receive an opinion on all of its consolidated financial
statements in fiscal year 2011. Therefore, DOL decided to
revise and reissue its fiscal year 2010 consolidated financial
statements where certain malaises were performed, errors were
identified and adjusting journal entries were recorded to
correct the previously reported amounts as necessary.
As a result, DOL requested that the OIG perform audit
procedures necessary to report on its revised fiscal year 2010
consolidated financial statements in anticipation of receiving
an updated audit report. In December 2010 the OIG engaged KPMG
to audit these revised financial statements.
We have looked at their efforts on testing the details on
each significant account during the second fiscal year 2010
engagement. As required by government auditing standards, we
will determine during our fiscal year 2011 audit of DOL
consolidated financial statements whether DOL management has
taken appropriate corrective actions to address the findings
and recommendations identified during our fiscal year 2010
audit engagements.
DOL was ultimately able to reconcile accounts and record
necessary adjusting entries to corrective financial statement
balances. In addition, DOL was able to provide the necessary
data for testing and the relevant evidence to support the
balances supported in the financial statement.
As a result, we were able to complete our audit procedures,
and on May 20, 2011 we issued an updated audit report with an
unqualified opinion on DOL's revised fiscal year 2010
consolidated financial statements.
Thank you for the opportunity to discuss the results of
these two fiscal year audit engagements. And I would be happy
to answer any questions you may have.
[The statement of Ms. Flanagan follows:]
Prepared Statement of Heather Koppe Flanagan, Partner, KPMG, LLP
Chairman Roe, Ranking Member Andrews, and Members of the
Subcommittee; thank you for the invitation to come before you today to
discuss the two audit engagements of the U.S. Department of Labor's
(DOL) fiscal year (FY) 2010 consolidated financial statements.
KPMG LLP (KPMG), under contract to the DOL Office of Inspector
General (OIG), was engaged to audit DOL's FY 2010 consolidated
financial statements. During FY 2010, DOL encountered significant
functionality and operational issues related to its new financial
accounting and reporting system, the New Core Financial Management
System (NCFMS), which was implemented in January 2010. These issues
hindered DOL's ability to assure the accuracy and completeness of
consolidated financial statement balances and to provide us the
critical financial data necessary to complete our testing over DOL's FY
2010 consolidated financial statements during our initial audit
engagement. The significant areas that were impacted by these issues
are discussed in more detail below.
Unemployment Trust Fund (UTF)--We were unable to complete testing
over the UTF significant accounts (i.e., unemployment benefit expenses,
accrued benefits, revenue, accounts receivables, advances and
transfers) because DOL was unable to timely provide us complete and
accurate populations of the related data that reflected the balances
recorded in the general ledger. This situation was caused by errors in
recording UTF transactions and failure to perform certain
reconciliations to the general ledger.
Gross Costs (Non-Payroll, Non-Benefits)--In addition to
unemployment benefit expenses, we were unable to complete testing over
certain other expenses because a complete and accurate population of
these expenses that agreed to the related balances recorded in the
general ledger could not be provided timely. In addition, because we
could not test these expenses, our testing over the grant accrual could
not be completed.
Budget Accounts--The final Report on Budget Execution and Budgetary
Resources (SF-133) for the fourth quarter was not provided to us prior
to the November 15, 2010 Office of Management and Budget (OMB)
reporting deadline. Therefore, we were unable to complete our testing
over the fourth quarter reconciliations of the Statement of Budgetary
Resources (SBR) to the SF-133s and reconciliations of the SF-133s to
the Apportionment and Reapportionment Schedule (SF-132s). As a result,
we were unable to conclude on budgetary resources, the status of
budgetary resources, the change in obligated balance, and net outlays
reported in the SBR. Further, a complete and accurate population of
undelivered orders recorded in the general ledger as of September 30,
2010 could not be provided for testing, and we were unable to complete
the procedures necessary to conclude on borrowing authority related to
repayable advances to the UTF.
Fund Balance with Treasury--DOL was unable to reconcile the net
differences that were identified between its fund balance with Treasury
account as of September 30, 2010 and the U.S. Department of the
Treasury's records, which prevented us from completing our testing of
this balance.
Financial Reporting--DOL management was unable to provide certain
representations regarding consistency with U.S. generally accepted
accounting principles with respect to the presentation of the FY 2010
consolidated financial statements that it issued on November 15, 2010.
It was impractical to extend our procedures sufficiently to
determine the extent, if any, to which DOL's FY 2010 consolidated
financial statements may have been affected by the aforementioned
issues. As such, our initial audit engagement resulted in a disclaimer
of an opinion on the FY 2010 consolidated financial statements issued
by DOL on November 15, 2010. A disclaimer of opinion states that the
auditors do not express an opinion on the financial statements as they
were unable to form or have not formed an opinion as to the fairness of
presentation of the financial statements in conformity with generally
accepted accounting principles.
In planning and performing our initial FY 2010 audit engagement, we
considered DOL's internal control over financial reporting by obtaining
an understanding of DOL's internal control, determining whether
internal controls had been placed in operation, assessing control risk,
and performing tests of controls as required by auditing standards
generally accepted in the United States and Government Auditing
Standards. These procedures were designed to assist us in planning our
auditing procedures and contribute to the evidence supporting the
auditors' report on the financial statements. However, the objective of
our engagement was not to express an opinion on the effectiveness of
DOL's internal control over financial reporting and therefore our
procedures were not designed to identify all deficiencies in internal
control. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent, or
detect and correct misstatements on a timely basis.
Under Government Auditing Standards, we are required to report
material weaknesses and significant deficiencies identified during the
audit engagement. A material weakness is a deficiency, or combination
of deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a timely
basis. A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance.
During our initial FY 2010 audit engagement, we identified the
following deficiencies in internal control over financial reporting
that we considered to be material weaknesses or significant
deficiencies.
Material Weaknesses
1. Lack of Sufficient Controls over Financial Reporting
2. Lack of Sufficient Controls over Budgetary Accounting
3. Improvements Needed in the Preparation and Review of Journal
Entries
4. Lack of Adequate Controls over Access to Key Financial and
Support Systems
Significant Deficiencies
5. Weakness Noted over Payroll Accounting
6. Untimely and Inaccurate Processing of Property, Plant, and
Equipment Transactions
DOL recognized the need for, at minimum, an audited consolidated
balance sheet as of September 30, 2010, in order to receive an opinion
on all its consolidated financial statements in FY 2011. Therefore, DOL
decided to revise and reissue its FY 2010 consolidated financial
statements once certain analyses were performed, errors were
identified, and adjusting journal entries were recorded to correct the
previously reported amounts, as necessary.
As a result, DOL requested that the OIG perform audit procedures
necessary to report on its revised FY 2010 consolidated financial
statements, in anticipation of receiving an updated audit report. In
December 2010, the OIG engaged KPMG to audit these revised financial
statements.
Because of the aforementioned control deficiencies, our planned
audit approach for the second FY 2010 audit engagement did not include
additional tests of controls, and we did not rely on internal controls
in the areas requiring audit work. Therefore, we focused our efforts on
testing the details of each significant account during the second FY
2010 audit engagement. As required by Government Auditing Standards for
financial statement audits, we will determine during our FY 2011 audit
of DOL's consolidated financial statements whether DOL management has
taken appropriate corrective action to address the findings and
recommendations identified during our FY 2010 audit engagement.
DOL was ultimately able reconcile accounts and record necessary
adjusting entries to correct its consolidated financial statement
balances. In addition, DOL was able to provide the necessary data for
testing and the relevant evidence to support the balances reported in
the consolidated financial statements. As a result, we were able to
complete our audit procedures, and we issued an updated audit report
with an unqualified opinion on DOL's FY 2010 consolidated financial
statements on May 20, 2011.
Thank you for the opportunity to discuss the results of these two
FY 2010 audit engagements. I would be happy to answer any questions the
Subcommittee may have.
______
Chairman Roe. Thank you.
Mr. Taylor?
STATEMENT OF JAMES L. TAYLOR, CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF LABOR
Mr. Taylor. Good morning, Mr. Chairman, and thank you. And
Ranking Member Andrews and members of the subcommittee, I
really do appreciate this opportunity to come before you today
to provide an update on the financial management activities of
the Department of Labor.
Specifically I will address the department's fiscal year
2010 financial statement audit, a topic about which I testified
before this subcommittee last December. That hearing occurred
because the department was able to achieve an unqualified
opinion on 2010 financial statements.
During the hearing, I, as a deputy chief financial officer,
committed to this subcommittee to recommitting our financial
statements to the department's Office of Inspector General, an
independent auditor in the hopes that the auditor would be able
to issue a new opinion.
As you are aware, the department's independent auditor
issued a disclaimer of opinion in November on the 2010
financial statements. The auditors did not have sufficient time
to complete the audit activities in November, primarily due to
the department's transition to a new financial management
system and the implementation and data conversion issues that
arose from that effort.
At that time our need to focus on supporting the
department's mission and ensure funds were appropriately
obligated at year-end did not allow us time to provide the
auditors the data they required in a timely fashion.
Since then we have continued to work in improving our
financial reporting with the goal of resubmitting our
statements and opinion, a clean opinion. We identified
outstanding issues with our financial data, and established and
met all major milestones in the audit process.
As a result of that effort I am pleased to report that
KPMG, as you just heard, did provide a clean or unqualified
opinion on the department's fiscal year 2010 consolidated
financial statements. An unqualified opinion is the most
favorable of all financial audit outcomes, and means that the
financial statements present fairly in all material aspects the
financial position and operating results of the Department of
Labor.
As a result of the revised opinion we obtained late last
month, the department now has received an unqualified opinion
on its financial statements for 14 consecutive fiscal years.
Both the original and revised 2010 audit reports note four
material weaknesses that remain in need of the department's
attention. Two points should be considered when reviewing these
material weaknesses.
First, every single one of them has been reported
previously. They were reported significant deficiencies, in
some case for as many as 4 years.
In addition, as my colleagues note in their respective
testimonies, these material weaknesses existed as of September
30, 2010. KPMG did not conduct any further review of the status
of these weaknesses as part of the recent financial statement
resubmission effort.
However, KPMG does not in its latest report for each of the
financial management weaknesses, that we did in fact correct
material areas identified, or provide evidence of the proper
reconciliations previously missing.
Over the past 6 months we have continued to work to
normalize the department's financial operations and resolve
outstanding data integrity issues arising from the integration
of a number of existing legacy systems into a modern financial
management cloud environment. We are making operations more
efficient and effective for users, and continuing user outreach
and training efforts.
While there is still work to be done in all these areas, we
are buoyed by the unqualified opinion we received, and we will
build from this experience as we continue to strengthen the
department's financial management environment. And based on the
work already completed, I can not only assure the subcommittee
that we have made substantial efforts in resolving the three
material weaknesses specific to financial management, but I can
also tell you unequivocally that the current financial system
provides the department with unprecedented control over its
financial activities.
In closing, Mr. Chairman, I am pleased that the department
was able to secure an unqualified opinion on the department's
2010 financial statements, and the accompanying assurance the
statements are presented fairly. Our stakeholders can have
confidence in the data we have presented, and that the
department has been financially transparent and accountable.
We have overcome last year's temporary setback. We
recognize there are still improvements we need to make in our
financial operations and our financial reporting. We are
extremely proud and appreciative of the work of our staff, but
also our colleagues in the Office of Inspector General and KPMG
in completing this process. Their expertise has been invaluable
in assessing and addressing the issues we have encountered.
Thank you for your time, sir. And I would be happy to
answer any questions the subcommittee may have.
[The statement of Mr. Taylor follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
------
Chairman Roe. I thank the members. And I will start the
questioning off today.
I was the mayor of Johnson City, Tennessee. And when I
first went on the commission we had 53 audit findings. So I am
very familiar with audit findings. And some were material.
And I appreciate the fact and the history that the ranking
member gave us. But the problem with this is, and I am going to
go through some definitions because I am not a CPA or an
auditor, so that the average people can understand what we are
talking about.
An unqualified audit simply means, as I understand it, that
the auditor has all the information they need to provide an
opinion. I think.
Is that correct? And I have stated that properly, Ms.
Flanagan?
Ms. Flanagan. Yes, that is correct.
Chairman Roe. Okay. So--and clean would refer to me that
there is absolutely nothing wrong. That would be how I would
view it if I heard that. So this verbiage means that
unqualified means that the people looking at it, in your case
KPMG, has the information they need to be able to render an
opinion. It does not mean that everything is okay with what is
going on.
I sort of appreciate the position, Mr. Taylor, you were in.
You came 18 months into this. You lost two of your senior
people, and you had a brand new system. I get that.
And also, Mr. Lewis, you made some great points. I hope
that is not lost on other people that are doing this the five
or six points you brought out that this is how we want to move
forward if you put in somewhere else. It made absolute sense
that this--you could extrapolate this over any department that
may be implementing a new system.
However, if I were in--and so a clean audit and an
unqualified audit means that we have got all the information.
It does not mean that there is not a problem there. And some of
the problems that we looked at in these, especially some that I
viewed in here where there was an ability not to know where
Labor's money and Treasury and the fund balances.
The things that I read about in here about unexpected
appropriations where $10 billion, which is $10,000 million, is
incorrectly presented as something else as an unexpected
appropriation, if this kind of audit were seen in a private, I
were going out and buying a stock in a company and I saw this
kind of audit, that company would be off the board, I think,
because of the lack of confidence people would have. And that
is what we are dealing with here, is the confidence of the
American people. In my case the confidence of the citizens of
Johnson City, Tennessee that we could actually look at this
audit and know that their money was being spent and looked at
just exactly like they would look at their own businesses.
And I think, Mr. Taylor, that is what you are trying to say
today, is that you want to get to that point. But I think these
material weaknesses are very significant. And the fact that
they occurred before does not give me any warm and fuzzy
feeling.
And then in the November 15th, I suppose, Ms. Flanagan, you
will have a chance to look at, which is only 5 months, you will
have a chance to look at this again. And at that point in time
I assume that you will have all the information you need at
that point to make a decision.
Am I right, Mr. Taylor, that you will have all of the data
that she needs, or their company needs I should say----
Mr. Taylor. Yes, sir.
Chairman Roe. So it will not be a situation like we faced
last year in December when Mr. Andrews held a committee
hearing. Am I right on that?
Mr. Taylor. You are correct.
Chairman Roe. And can we expect in 5 months, now that you--
a year is not long. You have been there a short time. But can
we expect these material weaknesses to be rendered. I mean to
be held harmless, to be taken care of?
Mr. Taylor. I am very comfortable that as we stand right
now that at least two of the material weaknesses are resolved.
And in fact we could not have been able to do the resubmission
that we did to get the unqualified opinion if we had not
resolved them.
Chairman Roe. Which are?
Mr. Taylor. One material--I am sorry?
Chairman Roe. Which ones are they?
Mr. Taylor. The one I know on the journal vouchers, the
adjustments that were made, and on budgetary accounting.
On financial reporting I think we made significant
progress. We have a lot of work to do, still have a lot of work
to do there because of the integration issues. But I think we
have made a lot of progress. That will obviously depend on the
independence of the infinite review of the auditors.
The fourth material weakness is, I just want to point out,
is for an overall access issue to systems throughout the
department, not just the financial system. And it is one with
which the department's Office of the CIO does not concur.
So three of those are really financial management. One is
an overall systems access issue that the department has.
Chairman Roe. I guess a question I was confused with on
reading all this information was how can a fund balance in the
Department of Labor and Treasury be not reconciled when you are
talking about billions of dollars?
Ms. Flanagan, I am going to ask you that question. You are
the auditor.
Ms. Flanagan. It is not uncommon to have differences
between an agency's fund balance of treasury accounts and
Treasury. However, normally there is a reconciliation process
that occurs monthly in order to identify and resolve those
differences.
Chairman Roe. Okay. Well, I guess the reason, if I go to
explain it to somebody at a local diner, how can I explain to
them that there are billions of dollars that do not account
from one account to the other? How do I do that?
Ms. Flanagan. That is more of an accounting question versus
an auditing question. I mean the basic analogy is always a bank
statement and does your checking account agree to your bank
statement.
And in the case of the department last year, it did not, by
millions of dollars during the year. And it was eventually
reconciled.
Chairman Roe. Okay. I thank you.
Mr. Andrews?
Mr. Andrews. Thank you, Mr. Chairman.
I thank the witnesses for their testimonies.
I think there is a shared goal here that every dime the
taxpayers send to the department is properly spent and properly
accounted for, and there is no dispute about that.
Ms. Flanagan, what is an unqualified letter? What is the
meaning of that? Explain that to a layperson.
Ms. Flanagan. An unqualified opinion relates solely to the
financial statements themselves and the balances that are
reported in them. An unqualified opinion says that those
balances are materially correct, and that the----
Mr. Andrews. And material----
Ms. Flanagan [continuing]. Users of those statements can
rely on them.
Mr. Andrews. Materially correct means that the
representations on a document match the actual money that was
received and spent. Is that basically right?
Ms. Flanagan. Yes.
Mr. Andrews. Okay.
Now let us, so the clean audit letter that was issued, in
layperson's terms, mean that we have an accurate accounting of
how much the department took in and how much money it spent?
Ms. Flanagan. Correct.
Mr. Andrews. Okay.
Now, Mr. Taylor, let us talk about the four exceptions.
Because the chairman's right, our goal should be zero
exceptions.
And the fact that these are exceptions that existed long
before you got there and long before the administration got
there and Secretary Solis got there, so what?
I mean we want them done. We want them done away with, and
it is our common job to do something about that.
If you were explaining to one of the chairman is
constituents in a diner, we have more diners in New Jersey than
in Tennessee, so we will make it in New Jersey. What these two
exceptions that you think are unresolved mean. What do they
mean? What are we doing wrong that we need to fix?
Mr. Taylor. In the case of the financial reporting we have
for the first time an integrated approach to all of our
financial reporting, which never existed before. When you had
to do an external report it was almost a data call. You almost
had to go out and get data new every time. Now it all comes
into one place.
We have to make sure that the data in all those systems is
moving across the interfaces in an accurate and smooth way.
Mr. Andrews. Can you help me with interfaces?
Mr. Taylor. Sorry.
Mr. Andrews. We just lost the guy in the----
Mr. Taylor [continuing]. It is really about----
Mr. Andrews. Here is what he wants to know. If my tax money
is being used for a job training program in Tennessee, how can
I be sure that they got the amount of money they were supposed
to and they spent the money on what they were supposed to by
the time they were supposed to spend it on?
Do either of these weaknesses relate to that problem?
Mr. Taylor. They do not relate to control over financial
management. They relate to reporting. And we have processes in
place that will provide the reporting required to accurately
manage the financial activities.
In fact, last year even though we could not provide the
auditors with the information they needed to complete their
work, we did not have, after reviewing this twice now, we did
not have a single violation in the Efficiency Act, and we did
not leave any more money unspent that we had in prior years. So
we really focused on that management part.
Mr. Andrews. What is your plan to resolve these two
remaining exceptions that you think are still lingering?
Mr. Taylor. Well, the one exception is the department-wide
issue relating to access to financial systems. As I mentioned,
the Chief Information Officer's Office does not concur with the
finding. It has been there for a number of years.
We believe in the department that we have redundant
controls to resolve it.
Mr. Andrews. Now, is the access problem that people who
maybe should not have access do? Or people who need access do
not? What is the nature of the problem?
Mr. Taylor. It is a security issue. People who do not----
Mr. Andrews. Want to be sure that only people that are
properly secured and checked have access to financial systems.
Mr. Taylor. That is my understanding----
Mr. Andrews. And there is some disagreement over whether
there is a problem there. But I think we all agree that we only
want the people who are supposed to have access to have access.
Mr. Taylor. Absolutely.
Mr. Andrews. And what is the second problem that you are
working on?
Mr. Taylor. And the second one is financial reporting. And
that is the preparation, the accurate preparation of the
timeliness of the financial reporting. And that is where we are
still working.
Mr. Andrews. Is the problem more accuracy or timeliness?
Mr. Taylor. More timeliness, but some accuracy.
Mr. Andrews. Okay. So, and if I understand the timeliness
problem is you got to perform two intermediate tasks at the
final answer that you want?
Mr. Taylor. At the time, yes. That would be correct, yes--
--
Mr. Andrews. You want to try to get it sooner----
Mr. Taylor. More than we--definitely as of the end of 2010.
Mr. Andrews. Is there any disagreement over whether that
problem exists?
Mr. Taylor. No.
Mr. Andrews. Do you concur with the finding of the
exception?
Mr. Taylor. In fact as of 2010 we concur with all of them.
Mr. Andrews. I appreciate it.
I, again, I do want to commend you again that you came here
6months roughly after you started this job, walked into a real
problem, promised the tax payers and the committee that there
will be the documents to have an audit done by the spring. You
delivered on that promise. And the audit came back with an
unqualified opinion. We thank you for your professionalism and
your efforts.
Mr. Taylor. Thank you.
Mr. Andrews. I yield back.
Chairman Roe. I will thank the gentleman for yielding.
Ms. Roby?
Ms. Roby. Thank you, Mr. Chairman.
Thank you to each of our witnesses that are here today. We
really appreciate you taking time to be here.
I have one very, very simple question for Mr. Lewis. And I
would like for you to explain to us, the members of this
committee, the difference between a material weakness and a
significant deficiency. And I want you to tell us which is more
serious.
Mr. Lewis. Okay. Well, first off the material weakness is
the more serious.
Both material weakness and significant deficiencies involve
problems with the design or the operation of your accounting
systems that not only feed the financial statements and produce
the financial statements, but are supporting all of your other
day-to-day operations of running the department and issuing
grants, et cetera, so all the controls and aspects of running
those systems.
If we detect weaknesses in those systems either in how they
are designed, they were not designed properly, they do not have
good controls; or they have good controls but they are not
being utilized as they were meant to be utilized, then we make
note of those exceptions.
The auditors will then evaluate how extensive they think
that problem is, how much is at risk, say in a particular
system, how much money does it process, you know, how much
could go wrong if that control is not working or is not there.
That is how they make their decision of whether it is a
significant deficiency or it is a material weakness.
The material weaknesses are the ones that could most likely
result in you having a significant error in the financial
statements. And these are all being judged against the
department's financial statements at that level.
Ms. Roby. So here we have four material weaknesses. Can you
site other instances where there were four material weaknesses?
How many times were there other material weaknesses like this
in the department over the past 10 years?
Mr. Lewis. In the past 10 years we have not had any
material weaknesses. I think, as someone stated earlier, these
were issues that have been around to some degree, and in some
nature year-after-year. But it was last year, with the, you
know, combination of putting in a new system that triggered
them to what was a significant deficiency from becoming, you
know, to becoming a bigger problem----
Ms. Roby. A larger problem.
Mr. Lewis [continuing]. And becoming a material weakness.
Ms. Roby. Thank you so much.
I yield back, Mr. Chairman.
Chairman Roe. Mr. Kildee?
Mr. Kildee. Thank you, Mr. Chairman.
Mr. Lewis, are there findings in this audit report which
are the same that we discussed in December? Are those findings
uncommon among federal agencies?
Mr. Lewis. I have not done my own comparison to all the
other agencies, but I, you know in my experience in doing other
audits and what I have seen of other agencies I do not suspect
that what we have is highly unusual, what we have seen in other
entities.
Mr. Kildee. As we discussed last December, was there any
indication whatsoever of waste, fraud or abuse or incompetence?
Mr. Lewis. There was nothing that the auditors brought to
our attention that they felt would fit that category.
Mr. Kildee. None of those categories.
In the private sector, I am co-chair of the Automotive
Caucus here in the Congress, and helped lead General Motors and
Chrysler to their problems. How does the auditing within
government, particularly this agency here, compare to the level
of quality in the auditing in the private sector?
Mr. Lewis. I think it is quite comparable. We are operating
under not only the same standards that the commercial auditors
would follow in a commercial entity, but additional standards
that the GAO imposes when you are doing a government audit. So
it is a high standard.
Mr. Kildee. What can we do, and within our system, that you
feel basically is comparable to--in the private sector and
there is no indication of waste, fraud and abuse or competence?
What can we do to get better, a higher level of audits?
Mr. Lewis. Upon interpreting that correctly in terms of
what can we do to better address the problems we are
identifying in the audit? Is that it?
Mr. Kildee. Yes.
Mr. Lewis. Is that fair?
Mr. Kildee. Yes.
Mr. Lewis. I think it is really a matter of having the
attention and the commitment at the highest level in an agency
to address the problems that are identified in the audit, and
to address them when they are hopefully smaller issues. You
know when we bring them as significant deficiencies to really
try to resolve them at that point before you get to a year when
you compound it with other things, and what was a small problem
has now become a larger problem.
Mr. Kildee. So at least in their attitude toward working in
an agency, having responsibility or leadership in the agency
that they have at least mentally a high level of priority to
make sure that it would be able to get an audit that would be
helpful and correctly revealing of what the situation is.
Mr. Lewis. I did not quite catch the question.
Mr. Kildee. Well, there is attitude toward the fact that
you are going to be audited, and that the audit is very, very
important to us.
Mr. Lewis. Yes.
Mr. Kildee. And to the chief executive. That this auditing
is very important is that our level of priority are
sufficiently high that would help these audits reveal better
than they are now.
Mr. Lewis. Yes. I mean that is very important to the, not
just the successful audit, but the successful financial
management in the department and in any department that there
be that commitment and attention to it from the top.
Mr. Kildee. If you have got a regular pattern of problem
auditing, might you trace that then to a lack of prioritizing
within that agency?
Mr. Lewis. You could certainly, I think, draw that
conclusion that if you see things repetitively that it is could
be a commitment to addressing those problems.
Mr. Kildee. Thank you very much.
Chairman Roe. I thank the gentleman for yielding.
Ms. Noem?
Ms. Noem. Yes. I would yield my time to the chairman.
Chairman Roe. Okay. Thank you for yielding.
Just a couple of questions, and I think Mr. Kildee hit on
it, and all of us have here. I think that the reason that a
financial audit is so critical for a couple reasons.
One, it protects the people, Mr. Taylor, in the
organization when you take over that you are not doing anything
wrong.
And secondly, we have a public trust. I know as mayor we
had a public trust so that the people. I mean there is enough
conspiracy out there that people, and we do a good enough job
of wasting people's money anyway, that they do not want to
think there is any fraudulent use of it.
And they see $700 toilets and all of that, and I understand
their frustration when they see this go on in government. We
expect it in the private sector. We expect it in the public
sector. And the bar probably should be even higher in the
public sector. So that is one of the reasons I think this is
absolutely critical so people can trust us, can trust these
departments that their money is being spent properly.
And I guess the question, one of the questions I wanted to
get to, and either Ms. Flanagan or Mr. Lewis, just a question
is that when the KPMG audited this as per request of the OIG,
they found that the DOL failed to comply with two federal laws.
The Federal Financial Management Improvement Act of 1996 and
the Federal Manager's Financial Integrity Act of 1982 was
deficient in its management of $173 billion budget. Could you
all comment on that and what that was?
Ms. Flanagan. Related to the act of 1996, that act requires
financial systems to comply with three requirements. One of
those requirements relates just to financial systems. And an
indicator that there is non-compliance is that the system
cannot produce auditable financial statements in a timely
manner, which was certainly the case in November of 2010.
Also those requirements relate to transactions recorded in
accordance with the U.S. Standard General Ledger, which we
cited non-compliance with in our report. And also accounting,
just federal accounting standards, which in November the
department was unable to represent that their statements were
fairly presented in accordance with those accounting
principles.
Those situations occurred as of September 30th, and we did
not reassess them during our second audit engagement this year.
The other act related--the act of 1982, the deficiencies we
found or non-compliance we found related to that act was the
process that the department has to do its reporting under that
act. And we felt that that reporting was done untimely and was
reliant on obtaining a draft of our internal control report
prior to them issuing their management refreshment statement.
Chairman Roe. Yes. I do not think this was intentional. I
think, I mean I do not think anybody set out to intentionally
do this. I think you discovered it.
And I guess, Mr. Lewis, and you may or may not know this,
are there any penalties associated with it when you break these
laws? I know it is obviously a civil law, but are there any
penalties associated?
Mr. Lewis. I do not know of any penalty associated with it
other than you are in non-compliance. And I would, with the
first one Ms. Flanagan was discussing, you could look at it
that the things that are required in order to get a clean
opinion on your audit are legal requirements in effect. And by
not being able to get the clean opinion, you know, most
entities should be automatically out of compliance with that
act.
Chairman Roe. I think, again, back to my point, and I think
all of us on this panel on both sides want us to have the
public trust. And I think the public feels like if I have to
obey the law then federal agencies should obey the law. And I
think that is the reason that this is extremely important. Not
only to protect the DOL, but to protect the public.
So at this point I will yield the balance of my time to Mr.
Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman.
Chairman Kline and Ranking Member Miller, today's hearing
must focus on the steps that the Department of Labor's taking
to strengthen its financial management system. It is important
to note that between the years 2003 and 2008 the Bush
administration spent approximately $35 million on an effort to
replace a 25-year-old financial system at the Department of
Labor, a system which failed to comply with applicable
statutory and regulatory requirements, and ultimately was
abandoned.
In 2008 the Bush administration made another attempt to
implement Department of Labor's financial management system,
but I understand that there were complications once again.
As a member of this committee it is reassuring to know that
under President Obama's leadership that Secretary Hilda Solis
and her staff have been working diligently to resolve the
issues in a timely manner.
My first question goes to James Taylor. And I apologize
that I came in a bit late because I was at another meeting. So
if this was discussed with somebody before me, I apologize for
that. But I would like to know.
In your testimony, Mr. Taylor, you indicate that the
department's independent auditor has issued a clean opinion on
the department's 2010 consolidated financial statements. Can
you share with us in this committee what some of those issues
and concerns were when you joined DOL?
Mr. Taylor. Well, the implementation had been initiated. It
was behind schedule. Essentially the financial statements had
to be prepared for more than one system because the conversions
in the new system occurred in January of 2010. So the fiscal
year began in the first quarter actually was in the old system.
Media conversions are always a problem. Same thing happened
at the Department of Energy in 2005, and they lost their clean
opinion in GAAP material weakness. It took them 2 years to get
their clean opinion back.
In our case when I came in at the end of January, it was
clear that we could not perform our primary function, which is
supporting the mission of the department and making sure that
our funds were properly expended, in addition to providing the
auditors information they need in a timely basis. And we were
pretty much clear in saying that early on in that last quarter.
So we knew we were not going to get a clean opinion. We
knew we were probably going to get unqualified for a couple
months before it occurred. And so we focused first on the
mission.
The interfaces with the legacy systems--the new financial
system is a cloud environment, or a shared service environment.
We do not have any infrastructure at all for the financial
system within the department. It is the first department to do
this. It is very complicated.
In addition, the existing entities in the department, the
existing systems for procurement, for HR, for travel, all of
those systems were purchased as standalone. It did not really
interface with one another, or were not integrated. This
process integrated all those activities.
On top of that you had a 20 plus year old financial
database, and trying to convert that to the latest, more robust
reporting system was very complicated. We ran into those kinds
of issues during the year. And those were the challenges that
we faced coming in.
Mr. Hinojosa. I have an MBA and I run a business for 25
years, a large one. And I know how difficult it is to make
those changes when the software systems do not interface, and
that you have to run them parallel for a certain number of
months, 3, sometimes 6.
Did you all do that? Were they run parallel so that you
could see how the old system and the new one were going to
interface?
Mr. Taylor. Yes, sir. What we did, it was not really
intentional. The original plan was that the department was
going to convert as of October 1st.
I have done this at the Department of Commerce and at FEMA
previously. When you try to--and usually in IT development
running parallel makes a lot of sense, particularly for
processing systems. When you have a system of record like a
financial system, it is extremely complicated to keep the two
in balance when you are trying to run more than one
simultaneously.
Mr. Hinojosa. If you did that will the Department of Labor
be in compliance with all the federal laws as of the end of
this September 30, 2011?
Mr. Taylor. Well, now this will be the first year on the
new system, totally on the new system. And we are very
confident we will be in total compliance.
Mr. Hinojosa. With that I yield back, Mr. Chairman.
Chairman Roe. Thank the gentleman for yielding.
Dr. DesJarlais?
Mr. DesJarlais. Good morning.
Mr. Taylor, in December you suggested DOL was focused on
resubmitting the fiscal year 2010 statements to OIG for the
audit and normalizing financial operations. How much did this
review process cost?
Mr. Taylor. The review process itself, we did not spend
money, any specific money for the resubmission effort. We have
added about $7 million to the contract itself, and those
required to help resolve issues and do the data conversion.
Mr. DesJarlais. Has that impacted the fiscal year 2011
audit?
Mr. Taylor. No, sir. In fact I think we had to do what we
did. The resubmission was really a milestone, and it was a nice
target to keep us focused. But everything that we did would
have had to be done anyway in order for us to get a clean
opinion in 2011.
Mr. DesJarlais. Okay. Thank you.
Mr. Lewis, beginning in 2006 the Office of the Deputy
Secretary started holding regular quarterly meetings about
operations at the OCFO. From what I understand OIG took part in
these meetings along with the deputy secretary, the assistant
secretary for administration management and the CFO.
Do these meetings continue to occur?
Mr. Lewis. Yes.
Mr. DesJarlais. Okay. And did you find these meetings
beneficial?
Mr. Lewis. Yes. That is, I believe you are referring to the
department's internal control board, and that continues and we
participate in that. And I think that is beneficial and it is a
requirement that they do that to do their own self-assessment
of their operations.
Mr. DesJarlais. Okay.
In 2010 several warnings had been sent out. And I am
interested in hearing about fiscal year 2011 audit, which is
currently under way. Specifically I would like to know where we
are in the process and whether or not your office has issued
any alert memoranda thus far related to the 2011 audit.
Mr. Lewis. We have not issued anything at this point
related to the 2011 audit. It is at a very early stage because
the auditors have been focused on the reissued statements in
2010 and ensuring that we had good beginning balances for 2011.
So now that that has been settled, they are now starting to
just really focus on the 2011 period.
Mr. DesJarlais. Okay. Thank you.
And Mr. Chairman, that is all I have. Would you like me to
yield my time?
Okay. Thank you.
Chairman Roe. Dr. Heck?
Mr. Heck. I have no questions at this time, Mr. Chairman.
Thank you.
Chairman Roe. Mr. Andrews?
Mr. Andrews. We have no further questions, Mr. Chairman. I
would be happy to defer until Noem or whomever else's
questions.
Well, in that case, I want to thank the chairman and my
colleagues and the witnesses for doing boring, non-media
centered, really necessary work. We live in an environment
where the top news story in Capitol Hill seems to get more
bizarre as the weeks go on. I will not comment on this week's
story.
But our real work here is to be good stewards of the public
trust and the taxpayer's money. And it is a very legitimate
question when an audit is delayed as to whether we are, each of
us is discharging that duty responsibly.
And I am encouraged by the news since the December hearing.
And I thank, Mr. Taylor, you and your team who have made that
possible.
And I thank Ms. Flanagan and Mr. Lewis for their continued
vigilance to ensure that we get the right result.
I am hopeful that we will be able to have a totally boring
and non-eventful fiscal year 2011, meaning that we have no
delay in the audit being completed, and a clean letter being
issued, and zero out those exceptions if we can.
But I think that the hard work of government is the boring
work of government. So thank you for doing it in a way that is
not flashy, but important.
And Mr. Chairman, I am glad we had a chance to share these
titillating 56 minutes, but who is counting? I do appreciate
the chance to be with you this morning. And yield back.
Chairman Roe. I thank the gentleman for yielding. And
having spent 6 years in local government, you are right.
It does not make the headlines going from 53 audit findings
to zero. But zero is where we ought to be. That is what we
require in public companies. If public companies come out with
sloppy audits, they go out of business and people lose jobs.
And I think we have a fiduciary responsibility to gain the
public trust.
There is a huge distrust of government now, both sides of
the aisle. It is absolutely imperative that we have that. And
you cannot have that when people pick up a newspaper in the
local diner and say we do not know where billions of dollars
went.
And it does not necessarily mean there has been anything
done wrong with it, but we should be able to count that
competent people can do that. And I think that there are three
competent people sitting in front of us right now.
And I heard Mr. Taylor say that in November the 15th he
expects two of these material findings to be resolved, and
hopefully the other two will be. That is the goal is to have no
findings whatsoever.
And I also appreciate each of you coming here and
presenting this, as the ranking member said, maybe not the most
exciting thing, but I think extremely important, I found in my
previous life. So thank you for being here.
And with no further comments, the meeting is adjourned
[Additional submissions of Mr. Roe follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[Whereupon, at 10:57 a.m., the subcommittee was adjourned.]