ITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
DEC 23 1967
OF
THE INSPECTOR GENEHAL
MEMORANDUM
SUBJECT: EPA's Implementation of the
Federal Managers' Financial
Integrity Act in Fiscal 1987
Audit Report E1L48-11-0021-80373
FROM: /^Kenneth D. Hockman^^TT'U '*&{-
C Divisional Inspector General for Audit
<-\ Internal Audit Division (A-109)
<0
U TO: David P. Ryan
K Comptroller (PM-225)
SCOPE AND OBJECTIVES
Agency Order 1000.24, dated February 23, 1984, requires the
Inspector General to annually report on whether the Agency
implemented the Federal Managers' Financial Integrity Act
(FMFIA) in a reasonable and prudent manner. In order to
fulfill this requirement, we audited the process used to
implement the FMFIA for fiscal 1987. The objectives of the
audit were to determine:
1. what actions were taken by EPA offices to fulfill
their FMFIA responsibilities;
2. what modifications were made to the FMFIA process to
address the August 4, 1986, changes in Office of
Management and Budget (OMB) Circular A-123;
3. whether the Office of the Comptroller (OC) effectively
monitored and directed the Agency's FMFIA activities;
4. whether EPA offices disclosed internal control
weaknesses and what actions were planned or
implemented to correct the weaknesses; and
U.S. iUiviroomentaJ .Protection
T.i^riary. BOOB 240-i n-S
•ni J.t Street, 3.W.
. DO 8O480
-------
5. whether Agency actions were taken to respond to
the recommendations in our 1985 FMFIA report and the
concerns noted in our 1986 FMFIA audit.
Our audit focused on the adequacy of the OC's process to guide
and monitor the Agency's actions taken to comply with sections
2 and 4 of the FMFIA. Since our audit centered on'the Agency's
process to implement the FMFIA, we did not attempt to indepen-
dently verify the Agency's system of internal controls through
an in-depth review of activities completed by primary organiza-
tions. In addition, while we reviewed assurance letters from
primary organization heads to determine the weaknesses identified,
we did not attempt to evaluate whether all material weaknesses
in internal controls had been identified and reported.
We conducted our audit at EPA Headquarters during November and
December 1987, and concentrated on the actions taken by the OC
to coordinate the Agency-wide FMFIA activities. To accomplish
our objectives, we: (1) interviewed key personnel in the Resource
Management Division who evaluated Agency activities required
under section 2 of FMFIA; (2) interviewed key personnel in the
Financial Management Division who evaluated Agency activities
under section 4 of FMFIA; (3) reviewed Agency documentation of
the process, as well as guidance provided by OMB and the General
Accounting Office (GAO); and. (4) examined the OC's controls for
implementing the FMFIA, including policies and procedures relating
to the work of the primary organizations.
We conducted the audit in accordance with the Standards for
Audit of Governmental Organizations. Programs, Activities, and
Functj.ong (1981 Revision) issued by the Comptroller General of
the United States. Our conclusions and observations are
summarized below and detailed later in the report. The issues
which came to our attention did not warrant expanding the scope
of the audit beyond that described in this section.
RESULTS OF AUDIT
Within the scope of the audit, we believe the Agency implemented
its FMFIA process during fiscal 1987 in a reasonable and prudent
manner. The OC provided guidance to. Agency officials for accom-
plishing key activities such as conducting risk assessments,
developing management control plans, performing internal control
evaluations, and certifying the accounting system. The OC
monitored the completion of each step in the process against
established milestone dates and ensured that the requirements of
the FMFIA were met. The key activities addressed in the OMB and
GAO guidance were included in the Agency's FMFIA process. Finally,
the Agency has made satisfactory progress in implementing our
recommendations and concerns from prior FMFIA audits.
-------
ACTION REQUIRED
Since we are not making any recommendations, we are closing
this report on issuance. The OC is not required to provide us
with a formal response.
BACKGROUND
In 1982, Congress passed the FMFIA (P.L.97-255) in order to make
Federal managers responsible for the overall financial integrity
of programs under their supervision, and to strengthen the
controls needed to prevent fraud, waste, and abuse. Under the
FMFIA, each executive agency must annually evaluate its internal
accounting and administrative controls in accordance with the
guidelines prescribed by OMB Circular A-123. Within the FMFIA,
section 2 addresses the .internal accounting and administrative
controls, and section 4 addresses the accounting system's
conformance with GAO requirements.
Section 2 of the FMFIA requires executive agencies to evaluate
their systems of internal accounting and administrative
controls. The Agency head is required to submit an annual
statement to the President and Congress on whether the system
fully complies with the internal control objectives set forth
in the FMFIA and the internal control standards prescribed by
the Comptroller General. The annual statement is based on an
evaluation conducted in accordance with guidance provided by
OMB. At EPA, the 22 primary organization heads are responsible
for conducting the evaluations and improving the internal
controls when necessary. Within each primary organization, an
Internal Control Coordinator (ICC) is assigned to oversee the
FMFIA activities.
Section 4 of the FMFIA requires the Agency head to include in
his/her annual statement a separate report on whether the
Agency's accounting system conforms to the principles, standards,
and related requirements prescribed by the Comptroller General.
Like section 2, this separate report must be based on an evalua-
tion conducted in accordance with guidance provided by OMB. At
EPA, the 14 financial management offices were responsible for
conducting the evaluations.
GENERAL COMMENTS
The OC implemented EPA's fiscal 1987 FMFIA process in a
reasonable and prudent manner. Overall, the process complied
with sections 2 and 4 of the FMFIA, was conducted in accordance
with OMB and GAO guidance, and met the milestone dates for each
activity conducted. However, our evaluation of the process did
identify three concerns that should be addressed by the OC
to enhance future FMFIA efforts. Specifically, we believe that
the OC should: (1) continue its efforts to ensure that all
performance agreements for managers contain internal control
-------
responsibilities; (2) ensure that internal control documentation
is completed and reviewed; and (3) confirm that all appropriate
reports issued by the Office of Inspector General (OIG), GAO,
and other oversight groups were considered when the assurance
letter from each primary organization head was prepared. We
believe that implementing' these suggestions in fiscal 1988 will
further increase the confidence in the conduct of the Agency's
FMFIA process.
1. FMFIA Responsibilities We.re Omitted Front Some Performance
Agreements
The Agency has improved in its efforts to ensure that
performance agreements of all Senior Executive Service
(SES), Merit Pay, or equivalent employees with significant
management responsibility include internal control respon-
sibilities, as required by OMB Circular A-123. Including
internal control responsibilities in performance agreements
helps ensure that adequate management attention is given to
the internal control evaluation and improvement process.
During our 1984 and 1986 FMFIA reviews, we noted that not
all such performance agreements included internal control
responsibilities. In 1986, the assurance letters we reviewed
showed that the performance agreements of 90 percent of the
Agency's SES and 83 percent of the Merit Pay employees
included internal control responsibilities. Our review of
the 1987 assurance letters indicated a noticeable improve-
ment, such that the performance agreements of 94 percent of
the SES and 89 percent of the Merit Pay employees included
internal control responsibilities.
We encourage the OC to continue its efforts to ensure full
Agency compliance with this OMB requirement.
2. Internal Control Documentation Was Not Prepared And Reviewed
For All Assessable Units
The draft EPA assurance letter to the President implies that
internal control documentation was prepared for all 232 assess-
able units. However, our review of the OC internal control
evaluation process, including the quality control evaluation
report, identified four instances in which documentation did
not exist, was not formatted per Agency guidance, or had not
been reviewed on an annual basis. Further, the Internal
Control Staff (ICS) review of the quality control evaluation
reports identified seven other instances in which the documenta-
tion requirements were not met.
-------
Specifically, our review identified the following:
1. Region 1 had not yet prepared formal internal
control documentation for three newly created
programs;
2. Region 8 reviewed its internal control- documenta-
tion and identified changes needed, but postponed
reviewing each assessable unit until fiscal 1988;
3. Region 9 stated that its internal control documenta-
tion was not prepared in accordance with Agency
guidance, and will not be reviewed until fiscal
1988; and
4. the Office of Pesticides and Toxic Substances
stated that it had not included some new activities
when updating its internal control documentation.
Although these concerns were presented in a chart attached
to the Presidential assurance letter, the letter's narrative
implies that these conditions did not exist. We discussed
this with ICS officials, who stated they would address our
concern during the fiscal 1988 FMFIA process.
3, Audit Report findings Need To Be Addressed Ip All
Assurance Letters
On February 6, 1987, the Acting Director, Internal Control
Staff issued guidance to the ICCs on implementing the 1987
FMFIA process. The guidance included the observations and
suggestions made in our 1986 FMFIA report. One such
observation dealt with the recognition of OIG and GAO audit
reports in each assessable unit's assurance letter.
Our evaluation of the fiscal 1987 FMFIA process noted that
only one primary organization had not addressed in its
assurance letter to the OC the existence of audit reports
concerning its programs. In some cases this may not be very
significant. However, in this instance, the primary organiza-
tion was the Office of Solid Waste and Emergency Response
(OSWER), and this particular office had been listed in the
1986 and 1987 Agency assurance letters as having Presidential
weaknesses.
We identified at least two GAO reports which should have been
cited in the OSWER assurance letter to the OC. GAO's findings
would not have impacted the Agency's letter to the President.
However, we believe that since OSWER was identified as having
material internal control weaknesses in the Agency's assurance
letter to the President, the office's ICC should have acknow-
ledged the GAO reports in the letter to the OC.
-------
APPENDIX
DISTRIBUTION OF AUDIT REPORTS
Comptroller (PM-225)
Assistant Administrator for Administration
and Resources Management (PM-208)
Director, Resource Management Division (PM-225)
Director, Financial Management Division (PM-226)
------- |