U.S. ENVIRONMENTAL PROTECTION AGENCY
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AGENCY FINANCIAL REPORT
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ABOUT THIS REPORT
For fiscal year (FY) 2012, EPA is producing an Agency Financial Report (APR), an Annual Performance
Report (APR), and an FY2012 Financial and Program Performance Highlights, in accordance with
OMB Circular A-136, Financial Reporting Requirements.
EPA's AFR includes fiscal and high-level performance results that allow the President, Congress, and
the public to evaluate the Agency's accomplishments for each fiscal year beginning October 1 through
September 30. The FY 2012 AFR contains EPA's FY 2012 Financial Statements Audit Report and FY
2012 Management Integrity Act Report. These reports present the Administrator's assurance statement
on the soundness of the Agency's internal controls for financial and programmatic activities and report
on progress toward addressing Office of Inspector General audit recommendations.
EPA's FY 2012 APR provides information on the Agency's performance and progress toward achieving
the goals established in its FY 2011-2015 Strategic Plan and FY 2012 performance budget. The APR
is prepared according to the requirements set forth in OMB Circular A-11, Preparation, Submission and
Execution of the Budget. EPA will produce the FY2012 APR in conjunction with the FY 2014
Congressional Budget Justification and will post it on the Agency's website at
http://www.epa.gov/planandbudget/annualplan/fy2014.html by February 4, 2013.
Additionally, EPA will publish an online Financial and Program Performance Highlights presenting key
financial and performance information from both the AFR and APR in a brief, nontechnical, user-friendly
format. The Highlights will be posted on the Agency's website at http://www.epa.gov/planandbudget/.
How the Report Is Organized
Administrator's Letter
The Administrator's letter transmits EPA's FY2012 AFR from the Agency to the President and
Congress. The letter assures financial and performance data presented in the AFR is reliable and
complete. The letter also assures that the report communicates significant internal control weaknesses
and actions the EPA is taking to resolve them.
Section I—Management's Discussion and Analysis
The Management's Discussion and Analysis contains information on EPA's mission and organizational
structure; selected Agency performance results; an analysis of the financial statements and
stewardship figures; information on systems, legal compliance, and controls; and other management
initiatives.
Section II—Financial Section
The Financial Section includes the Message from the Chief Financial Officer and the Agency's financial
statements, related Independent Auditor's Report, and other information on the Agency's financial
management.
Section III—Other Accompanying Information
This section provides additional material, as specified under OMB Circular A-136, Financial Reporting
Requirements. The subsection titled "Management Challenges and Integrity Weaknesses" discusses
EPA's progress toward strengthening management practices to achieve program results and presents
the Inspector General's list of top management challenges and the Agency's response.
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Appendices
The appendices include links to relevant Agency websites and a glossary of acronyms and
abbreviations.
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TABLE OF CONTENTS
About This Report ii
Table of Contents iv
Administrator's Letter vi
SECTION I: MANAGEMENT'S DISCUSSION AND ANALYSIS 1
About EPA 2
History and Purpose 2
Mission 2
Organization 2
Regional Map 4
Collaborating With Partners and Stakeholders 4
A Framework for Performance Management 4
2012 Program Performance 6
Strategic Goals 6
American Recovery and Reinvestment Act of 2009 (ARRA) Reporting 10
Financial Analysis and Stewardship Information 11
Sound Financial Management: Good for the Environment, Good for the Nation 11
Financial Condition and Results 12
Financial Management for the Future 17
Limitations of the Principal Financial Statements 19
Improving Management and Results 20
Office of Inspector General Audits, Evaluations, and Investigations 20
Grants Management 20
Accountability: Systems, Controls, and Legal Compliance 21
Federal Managers' Financial Integrity Act (FMFlA) 21
Management Assurances 22
Federal Financial Management Improvement Act (FFMIA) 22
Federal I nformation Security Management Act (FISMA) 23
Inspector General Act Amendments of 1988—Audit Management 23
DCAA Audits 27
SECTION II: FINANCIAL SECTION 29
Message from the Chief Financial Officer 30
Principal Financial Statements 31
Notes to the Financial Statements 41
Required Supplementary Information (Unaudited) 74
Required Supplemental Stewardship Information (Unaudited) 76
Supplemental Information and Other Reporting Requirements (Unaudited) 78
Audit of the EPA's Fiscal 2012 and 2011 Consolidated Financial Statements 85
SECTION III: OTHER ACCOMPANYING INFORMATION 162
Schedule of Spending 163
Money Management 163
Management I ntegrity and Challenges 164
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Overview of the EPA's Efforts 164
2012 Key Management Challenges 165
Key Management Challenges 166
Progress in Addressing FY 2012 Weaknesses and Significant Deficiencies 191
Material Weaknesses 191
Agency Weaknesses 192
Significant Deficiencies 195
Summary of Financial Statement Audit* 202
Summary of Management Assurance* 202
Improper Payments 204
Risk Assessments 204
Statistical Sampling 204
Corrective Actions 206
I mproper Payment Reporting 207
Table 1: Improper Payment Reduction Outlook 208
Recapture of I mproper Payments 210
Table 2: Payment Recapture Audit Reporting 211
Accountability 214
Agency Information Systems and Other Infrastructure 214
Statutory or Regulatory Barriers 214
Conclusions 214
APPENDICES
APPENDIX A PUBLIC ACCESS 215
APPENDIX B ACRONYMS AND ABBREVIATIONS.. ..217
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ADMINISTRATOR'S LETTER
The President
The White House
Washington, D.C. 20500
Dear Mr. President:
I am pleased to submit the U.S. Environmental Protection Agency's Fiscal Year 2012 Agency Financial
Report, the first of three related reporting components. The remaining two reports, the Fiscal Year 2012
Financial and Program Performance Highlights and the Fiscal Year 2012 Annual Performance Report,
will be available in February 2013. This agency financial report presents the EPA's detailed financial
information, accounting for the use of funds entrusted to us to fulfill our mission to protect human health
and the environment. It also provides information on the agency's priorities, strengths and challenges.
The financial and performance data presented in this report are reliable, complete and up-to-date. The
significant progress the Agency made on high priority work is highlighted below.
Cleaner and More Fuel Efficient Cars and Trucks
The EPA, working closely with the Department of Transportation, finalized a plan that will reduce
greenhouse-gas emissions from model year 2017-25 cars and trucks by 2 billion metric tons, save
consumers between $5,700-$7,400 dollars in fuel costs per vehicle compared to an average increase in
vehicle cost of $1,800, and reduce the United States' use of foreign oil. Overall cars will average 54.5
miles per gallon by 2025. This was all done working together with DOT and the trucking and automobile
industry.
The Chesapeake Bay and Great Lakes
Tremendous progress was made this year with the integration of strong state-level plans into the overall
Chesapeake Bay plan. As these plans are now implemented, the bay will see significantly improved
restoration efforts. With the Great Lakes Restoration Initiative, we have been able to build a strong
interagency effort to make progress in clean-up efforts for the Great Lakes that had been stalled.
Urban Sustainability and Integrated Water Quality Planning
Around the world, cities are facing serious challenges, including growing populations, greater demands
for services, strained infrastructure systems and tighter budgets and resources. Local leaders are
addressing these challenges with innovative investments in sustainable infrastructure projects. The
Joint Initiative on Urban Sustainability - a public-private partnership supporting investment in
sustainable urban infrastructure that President Obama and President Rousseff announced in March
2011 - brings together government, community and industry leaders from the U.S. and Brazil to
generate economic growth, create jobs, eradicate poverty and protect the environment by increasing
investment in green infrastructure and city-scale green-technology strategies. Domestically, the EPA
collaborated with the U.S. Conference of Mayors to develop a new integrated planning process with
cities to facilitate the fuller coordination of waste water and stormwater cleanup work with green
infrastructure. This will enable more sustainable practices, lower costs and improved priority setting.
VI
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Management
At the EPA, we continue to make every effort to be more efficient, effective and accountable and to
eliminate waste wherever it is found. We are strengthening our internal controls to ensure that the EPA
achieves its financial and programmatic objectives in the most cost-effective manner.
During FY 2012, the Office of the Inspector General identified one new material weakness, which has
since been corrected by the agency. We also are addressing a number of less-severe weaknesses and
significant deficiencies for which corrective actions are under way. My assurance statement, provided
under the Federal Managers' Financial Integrity Act, appears in Section I, "Management's Discussion
and Analysis." Section III, "Other Accompanying Information," provides additional information on the
EPA's internal-control weaknesses.
The EPA's strong focus on management and meeting human-health and environmental challenges also
requires collaboration among many parties, including Congress, other federal agencies, states, tribes
and communities. The EPA is committed to working with our partners and stakeholders to address
these challenges.
Future Direction
The EPA will continue to lead our nation's efforts to protect our air, water and land. We will put our
expertise and energy to work to meet our responsibilities for enforcing the nation's environmental laws,
and we will collaborate with our state, tribal and local partners to find solutions for our most significant
environmental challenges. Increased collaboration, stronger focus on prevention and improved
partnerships with states and tribes are a key to the future. Our work as One EPA provides a solid
foundation for our future success, and I have tremendous confidence in the talent and spirit of our work
force. Indeed, the EPA's dedicated men and women are committed to fostering healthier families,
cleaner communities and a stronger America.
Respectfully,
VII
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Section I
Management's Discussion and Analysis
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ABOUT EPA
History and Purpose
EPA was established over 40 years
ago with the purpose of
consolidating a variety of federal
research, monitoring, standard-
setting, and enforcement activities
into one agency to ensure
protection of the environment and
human health. Ever since, EPA has
been a prominent force in fostering
a cleaner, healthier environment for
the nation.
EPA and its federal, state, local,
international and community
partners and stakeholders have
made significant progress in
protecting and sustaining the nation's health and environment, from regulating vehicle emissions to
ensuring that drinking water is safe; from cleaning up toxic waste to assessing and ensuring the safety
of chemicals; and from reducing greenhouse gas emissions to encouraging conservation, reuse, and
recycling. Millions of people across the country have adopted a "greener" way of living. In all sectors of
society, individuals are making choices to conserve resources, prevent pollution, and reduce impacts
on the environment.
The Birth of EPA
Reorganization Plan No. 3 was an
executive order submitted to
Congress on July 9, 1970, by
President Richard Nixon. The order
consolidated components from
different federal agencies to form the
EPA, "a strong, independent agency"
that would establish and enforce
federal environmental protection
laws."Reorganization Plan No. 3
was sent to Congress, consistent
with the provisions of chapter 9 of
title 5 of the United States Code. The
Reorganization Plan was enacted in
Public Law 98-614.
But despite the historic environmental advances EPA has made, much work remains. The
environmental problems the country faces today are often more complex than those of years past, and
implementing solutions—both nationally and globally—is more challenging. These environmental
concerns and other obstacles drive the Agency's commitment to ensure that communities; individuals;
businesses; and state, local, and tribal governments all have access to accurate information to help
them manage human health and environmental risks.
AEPA
Develo
regulatit
Gives grants to states, local
communities and tribes
Studies environmental issut
Sponsors partnerships
Teaches people about the
environment
Publishes information
Mission
EPA's mission is "to protect human health and the environment."
As America's environmental steward, EPA leads the nation's
environmental science, research, education, assessment, and
enforcement efforts. Maintaining its core values of science,
transparency, and the rule of law, the Agency is strongly
committed to meeting growing environmental protection needs.
EPA's science provides the foundation for Agency decision-
making and the basis for understanding and preparing to address
future environmental needs and issues. Increased transparency is
vital for improving programmatic and financial performance. By
making environmental information both available and
understandable, EPA advances its work and furthers public trust
in its operations.
Organization
EPA's headquarters are located in Washington, D.C. Together, EPA's headquarters, 10 regional
offices, and more than a dozen laboratories and field offices across the country employ 17,000 men
and women. The Agency's employees are highly educated and technically trained; more than 50
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percent are engineers, scientists, and policy analysts. Many other talented individuals in scores of vital
occupations—from legal and public affairs to finance and information technology—make up the
Agency's workforce.
U.S. Environmental Protection Agency
Office of Administration
and Resources
Management
and management of many essential
support functions for the Agency-
Office of Enforcement and
Compliance Assurance
crrtf and cnmmd enforcement targeCng
K/ehenicof
by protecting vuJneraWe
Office of International
and Tribal Affairs
VW>rks to protect humon heafth and the
environment white advancing US. ncooncrt
ts through mtemononal envtronwentaf
cofcborotKin ond strengthening
environmental protection m Indian Country.
I
Region I
Boston, MA
Region 5
Chicago, IL
Office of the
Administrator
Provides overotf supervision of the Agency
and is responsible directly to the
President of the Unrted Steles.
Office of Air
and Radiation
pollution and radiation exposure.
Office of Environmental
Information
Maneges the fife cyde of information
to support EPA's rmsswn of protecting
human heofth ond the environment.
Office of Research
and Development
Serves os the science research arm of
EPA. whose leading-edge research heJps
provide the solid underpinning of science
and technology for the Agency.
1
Region 2
New York, NY
Region 6
Dallas, TX
1
Office of Chemical
Safety and
Pollution Prevention
VMjrfs to protect people and the
irwvonVe portnersnips ond collaboration.
and preventing pollution before it begins
Office of
General Counsel
Provides legal support for Agency nik
and po/ioes, cose-oy
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Regional Map
Collaborating With Partners and Stakeholders
Addressing today's complex environmental issues requires transparency and cooperative action;
establishing and enhancing working partnerships among all levels of government and with private
industry and nonprofit organizations; and leveraging EPA's resources with those of other federal
agencies and state, local, and tribal partners. EPA, the states, and the tribes largely share responsibility
for implementing environmental laws and policies to protect human health and the environment. EPA
understands that government alone cannot begin to address all of the nation's environmental
challenges.
A Framework for Performance Management
To carry out its mission to protect human health and the environment, and in compliance with the
Government Performance and Results Modernization Act, EPA develops a five-year Strategic Plan
(http://www.epa.gov/planandbudget/strategicplan.html), which establishes the Agency's long-term
strategic goals, supporting objectives and measures. To promote achievement of the long-term goals,
objectives, and measures, EPA commits the Agency to a suite of annual performance measures
through preparation of an Annual Performance Plan and Budget. EPA reports its results against these
annual performance measures and discusses progress toward longer term objectives and measures in
its Annual Performance Report, which the Agency presents in its Congressional Budget Justification.
More information on EPA's Performance Management Framework can be found at
http://www.epa.gov/aboutepa/ocfo.htmltfPlanning.
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EPA's Performance Management System
Strategic Planning
• FY 2011-2015 Strategic Plan
• Futures
Results Measurement, Reporting,
and Evaluation (Accountability)
• Annual Performance Report/Highlights
• Agency Financial Report
• Program Evaluation
• Cross-Cutting Fundamental Strategy Annual
Progress Reports
* Management Integrity and Audit Management
Annual Planning
and Budgeting
EPA Annual Plan and Budget
Priority Goals
Cross-Cutting Fundamental Strategy
Annual Action Plans
Operations and Execution
• National Program Manager Guidance
• Regional Performance Commitments/
Annual Commitment System (ACS)
• Regional and State Performance
Partnership Agreements
EPA strives to communicate performance results in relation to associated resources. In February 2012,
the Agency further integrated FY 2011 results and performance trend information into its FY2011
Annual Performance Report and FY2013 Congressional Budget Justification, providing additional
context and support for our resource requests.
EPA is also committed to using performance information to manage its programs and inform decision-
making. During FY 2012, EPA's Deputy Administrator held meetings with senior leadership quarterly to
discuss progress on Agency priority goals and twice to review and discuss the full suite of the Agency's
performance measures.
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2012 PROGRAM PERFORMANCE
During FY 2012, EPA and its
partners achieved significant results
under the long-term environmental
goals and cross-cutting fundamental
strategies established in the
Agency's FY 2011-2015 Strategic
Plan.
Detailed FY2012 performance
results by strategic goal will be
presented in EPA's FY 2012 Annual
Performance Report, which the
Agency will issue with its FY2014
Congressional Budget Justification
and post on its website at
http://www.epa.gov/planandbudget7a
nnualplan/fy2014.html by February 4,
2013.
STRATEGIC GOALS
Goal 1: Taking Action on Climate Change and Improving Air Quality
Goal 2: Protecting America's Waters
Goal 3: Cleaning Up Communities and Advancing Sustainable Development
Goal 4: Ensuring the Safety of Chemicals and Preventing Pollution
Goal 5: Enforcing Environmental Laws
CROSS-CUTTING FUNDAMENTAL STRATEGIES
Expanding the Conversation on Environmental ism
Working for Environmental Justice and Children's Health
Advancing Science, Research and Technological Innovation
Strengthening State, Tribal and International Partnerships
Strengthening EPA's Workforce and Capabilities
Strategic Goals
Goal 1: Taking Action on Climate Change and Improving Air Quality
As part of EPA's mission to protect human health and the environment, the Agency develops national
programs, policies, and regulations for controlling air pollution and radiation exposure. In 2009, EPA's
Administrator identified taking action on climate change and improving air quality as a top Agency
priority.
In August 2012, EPA and the Department of Transportation's National Highway Traffic Safety
Administration finalized national greenhouse gas emission standards for light-duty trucks and cars,
representing progress toward reducing carbon pollution in the United States and addressing climate
change. The final standards, which were developed through extensive engagement with automakers,
the United Auto Workers, consumer groups, environmental and energy experts, states, and the public,
increased fuel economy standards to the equivalent of 54.5 mpg and are projected to reduce
greenhouse gas emissions by 6 billion metric tons over the life of the program—more than the total
amount of carbon dioxide emitted by the United States in 2010. EPA anticipates that the new fuel-
efficiency standards will require investment in advanced technologies and support high-quality domestic
jobs in the auto industry.
In June 2012, EPA proposed updates to its national air quality standards for harmful fine particle
pollution, including soot. Based on an extensive body of scientific evidence, including many large
studies, findings suggest fine particle pollution, known as PM^s, causes negative health impacts at
lower levels than previously assumed. Specifically, EPA's proposal would strengthen the annual health
standard for PM2.s to a level within a range of 12 to 13 micrograms per cubic meter from the current
annual standard of 15 micrograms per cubic meter. Reductions in PM2.s, which have major economic
benefits with comparatively low costs, have direct health benefits such as decreased mortality rates and
fewer incidents of heart attack, stroke, and childhood asthma.
In FY 2012, EPA issued final Mercury and Air Toxics Standards (MATS), the first national standards
that require power plants to limit emissions of mercury and other toxic air pollutants, such as arsenic,
acid gas, nickel, selenium, and cyanide. Power plants, the largest U.S. source of several harmful
pollutants, are responsible for about 50 percent of mercury emissions and 77 percent of acid gas
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emissions. They are also the leading source of emissions of other toxics, including arsenic, nickel,
selenium, and hexavalent chromium. MATS will reduce air pollution by relying on widely available,
proven controls already in use at more than half of the nation's coal-fired power plants. EPA estimates
that the new safeguards will prevent as many as 11,000 premature deaths and 4,700 heart attacks per
year. The standards will also help America's children grow up healthier—preventing 130,000 cases of
asthma and about 6,300 fewer cases of acute bronchitis among children each year.
In FY 2011, EPA highlighted the development of the Cross-State Air Pollution Rule (CASPR), which
would require states to significantly improve air quality by reducing power plant emissions that
contribute to ozone and/or fine particle pollution in other states. On August 21, 2012, the U.S. Court of
Appeals for the District of Columbia Circuit issued an opinion that will vacate CASPR. EPA has filed a
petition seeking en bane rehearing of the U.S. Court of Appeals for the D.C. Circuit. By filing a petition,
EPA awaits the court's decision on whether to rehear the case before the full D.C. Circuit Court of
Appeals. In the interim, EPA will continue to implement the Clean Air Interstate Rule.
Goal 2: Protecting America's Waters
EPA coordinates with states, tribes, and other partners to ensure that our drinking water is safe and
that aquatic ecosystems are sustained for economic and recreational activities, while providing a
healthy habitat for fish, plants, and wildlife. In FY 2012, EPA worked to strengthen the technical,
managerial, and financial capabilities of small drinking water systems, thus helping improve drinking
water quality. In FY 2012, EPA exceeded its annual target, ensuring that more than 94 percent of the
population has safe drinking water that meets all applicable health-based standards.
Pollution resulting from wastewater and stormwater runoff and nonpoint sources remains a top priority
for the Agency. Overflowing wastewater systems can release untreated sewage and harmful pollutants
into local waterways, and nonpoint source pollution from agricultural runoff remains the primary cause
of damage in over 75 percent of America's impaired waters. Collectively, these sources of runoff
contain a variety of harmful pollutants that can threaten communities' water quality and contribute to
disease outbreaks, beach and shellfish bed closings, and fishing or swimming advisories.
In June 2012, EPA issued the Integrated Municipal Stormwater and Wastewater Planning Approach
Framework in an effort to assist local governments in meeting their Clean Water Act obligations.
Developed by EPA and a variety of stakeholders, the Framework outlines flexibility in pursuing
innovative, cost-saving solutions, such as green infrastructure, and helps communities develop plans
that prioritize and sequence their investments in storm- and wastewater infrastructure.
In FY 2012, EPA worked closely with the U.S. Department of Agriculture to ensure that federal
resources—including both Section 319 grants and Farm Bill funds—are managed in a coordinated
manner to protect water quality from agricultural pollution sources. EPA is currently revising the 319
grant guidelines to ensure that states have updated Nonpoint Source Management Programs, which
are important for setting state priorities.
Goal 3: Cleaning Up Communities and Advancing Sustainable Development
One of EPA's top priorities is to support sustainable, thriving communities by reducing waste,
minimizing the use of virgin resources, and cleaning up contaminated sites. To date, over 2 million
previously contaminated acres are available for communities to reclaim for ecological, recreational,
commercial, and residential purposes. In FY2012, EPA helped return 10,800 sites previously
contaminated sites to communities for reuse. In addition, the Agency continued to assess its progress
in several key land cleanup programs. For example, while confirmed releases at underground storage
tanks have decreased, EPA's ability to maintain the pace of tanks cleanups faces several major
challenges. To better characterize these challenges, EPA completed the National LUST Cleanup
Backlog: A Study of Opportunities, which reviewed the cleanup program of 14 states across the nation.
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EPA will use the findings of this study to work with states to encourage more efficient ways to address
the backlog of site cleanups. In addition, under the Federal Facilities Site Evaluation Project, EPA
worked closely with other federal agencies and state partners to make cleanup determinations for over
95 percent of the 514 federally owned sites which had not appeared to have been fully assessed.
EPA also developed new tools and policies to enhance its RE-Powering America's Land: Siting
Renewable Energy on Potentially Contaminated Land and Mine Sites Initiative. The purpose of this
program is to encourage siting renewable energy facilities on thousands of current and formerly
contaminated properties across the nation, with the goal of decreasing the amount of green space used
for development, reducing greenhouse gas emissions, and providing economic benefits (including job
creation) to local communities.
In FY 2012, EPA advanced a new sustainable materials management program, an approach that
focuses on reducing the materials we use and their associated environmental impacts over the entire
life cycle. EPA partners with federal agencies and corporate stakeholders through the Food Recovery
Challenge, the Federal Green Challenge, and the Used Electronics Challenge program.
Throughout FY 2012, EPA implemented innovative techniques to address environmental concerns on
tribal lands and with international partners. One such program—Border 2012—is a 10-year
collaboration between the United States and Mexico to improve the environment and protect the health
of the nearly 14 million people living along the U.S.-Mexico border. The program, which has now been
updated to Border 2020, resulted in the cleanup, removal, and proper disposal of more than 12 million
scrap tires and 570 tons of used electronics; improved water quality and environmental health through
the completion of infrastructure projects that benefited more than seven million residents; and improved
air quality through implementation of diesel truck/bus retrofitting programs.
EPA also finalized the Policy on Consultation and Coordination with Indian Tribes on May 4, 2011, after
extensive consultation and coordination with tribes. Since August 2011, EPA has initiated 121 and
completed 98 consultations with tribal governments on such topics as regulations, policies, and
permitting.
Goal 4: Ensuring the Safety of Chemicals and Preventing Pollution
In FY 2012, EPA took a number of actions to ensure that chemicals used for agriculture, manufacturing,
and construction are safe and do not pose potential risks to human health or the environment. EPA also
participated in domestic and international partnerships and collaborations to reduce waste; conserve
energy and natural resources; and leave homes, schools, and workplaces cleaner and safer.
Through FY 2012, EPA and authorized states certified 124,523 firms under the Lead Renovation,
Repair, and Painting Rule, which took effect in April 2010 and aims to protect children from risks
associated with lead-based paint present in many American homes. As one indication of progress, in
FY 2012, the Centers for Disease Control's National Health and Nutrition Examination Survey reported
that the prevalence of elevated blood lead levels (>5ug/dl_) among children under 6 years old has
decreased from 4.1 percent in 2003-2006 to 2.6 percent in 2007-2010.
Also in FY 2012, EPA invested in research activities that better characterize human exposure to
contaminants. One of these activities—finalizing the non-cancer health assessment for dioxins—was
last reviewed in the 1980s and contributes to a range of Agency initiatives, including establishing
cleanup levels at Superfund sites. Dioxins can be released into the environment through forest fires,
backyard burning of trash, certain industrial activities, and residue from past commercial burning of
waste. EPA also reported to Congress on its progress in implementing April 2011 recommendations
made by the National Research Council (NRC) to improve the Integrated Risk Information System
(IRIS), which provides health effects information on chemicals to which the public may be exposed,
providing a critical part of the scientific foundation for EPA's decisions to protect public health.
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Following NRC recommendations, new IRIS assessments are more transparent and concise and
provide detailed information on the evaluation and analysis techniques employed.
In FY 2012, EPA exceeded its annual target for reviewing and, where appropriate, challenging and
declassifying, confidential data claims under the Toxic Substances Control Act (TSCA). To date, more
than 10,000 of the 22,483 existing Confidential Business Information (CBI) cases have been
addressed. EPA also increased the availability of TSCA 8(e) chemical hazard filings through the
Chemical Data Access Tool, which now includes 18,410 submissions, including 612 newly declassified
CBI documents. EPA is also working to promote transparency through its Design for the Environment
(DfE) program by issuing and placing on its website a list of 450 chemicals that meet the criteria for the
DfE Safer Product Labeling Program, which may assist manufacturers in the DfE evaluation process for
their specific products. As part of the Enhanced Chemicals Management Program, the Agency also has
conducted stakeholder meetings to obtain input on potential tools that might be useful to users or
customers of TSCA data, including state and local governments, community groups, and industry.
In FY 2012, EPA participated in the E3: Economy, Energy and the Environment program partnerships,
which help small to medium-sized manufacturers improve operation productivity, energy efficiency, and
environmental performance. E3 brings federal agencies and state and local communities together to
promote sustainable manufacturing and growth through innovative technology, thereby improving
regional economies through job retention and reducing environmental impacts. E3 partnerships are
now in place in 24 states and have resulted in the completion of 160 facility assessments.
In June 2012, the EPA Administrator, as the alternate Head of Delegation for the United States,
attended the United Nations Conference on Sustainable Development, commonly known as Rio+20, a
historic opportunity for world leaders, nongovernmental organizations, the private sector, and
government officials to define pathways to a safer, more equitable, cleaner, greener, and more
prosperous world for all. The EPA Administrator worked to advance U.S. positions and interests in
promoting a global green economy and supported an improved institutional framework for sustainable
development, with a focus on enhanced U.N. operations, including strengthening the United Nations
Environment Programme.
Goal 5: Enforcing Environmental Laws
EPA works to ensure compliance with environmental laws and requirements to protect human health
and the environment and, when warranted, takes civil or criminal enforcement action. Over the past
year, EPA finalized a number of key cases and worked to make environmental information more
accessible to the public. EPA is developing a comprehensive plan to convert to 21st-century electronic
reporting technology. This effort will require some short-term investments but is expected to provide
substantial long-term benefits for industry, states, EPA, and the public, while improving public access to
environmental information.
In February 2012, EPA, the Department of Justice, and the U.S. Coast Guard finalized a $90 million
settlement with MOEX Offshore 2007 LLC for alleged Clean Water Act violations resulting from the
Deepwater Horizon oil spill. According to the settlement, approximately $45 million will go directly to
Mississippi, Texas, Florida, Louisiana, and Alabama in the form of penalties or expedited environmental
projects, including $20 million to facilitate land acquisition projects in several Gulf states. These projects
will preserve and protect habitat and resources important to water quality and other environmental
features of the Gulf of Mexico region. EPA, the Department of Justice, and the U.S. Coast Guard
continue to pursue enforcement actions against those who are responsible for the Deepwater Horizon
oil spill.
In April 2012, EPA and DOJ announced an innovative environmental agreement with Ohio-based
Marathon Petroleum Company (MPC), estimated to reduce harmful air pollution by approximately 5,400
tons per year. In addition to other activities outlined in the consent decree, MPC has agreed to install
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state-of-the-art controls on combustion devices known as flares, and to cap the volume of waste gas it
will send to its flares at the company's six refineries in the United States—marking a first for the refining
industry. MPC will also pay a $450,000 civil penalty to resolve Clean Air Act violations and $10,000 to
resolve violations of the Emergency Planning and Community Right-to-Know Act and the
Comprehensive Environmental Response, Compensation, and Liability Act. As an environmental
mitigation project, MPC is required to control the sludge-handling system at its Detroit refinery,
estimated to reduce at least 15 tons per year of volatile organic compounds and at least one ton per
year of benzene.
In the largest criminal penalty to date under the Federal Insecticide, Fungicide, and Rodenticide Act,
which governs the manufacture, distribution, and sale of pesticides, Scotts Miracle-Gro Company, a
producer of pesticides for commercial and consumer lawn and garden uses, will pay a $4 million fine
and perform community service for 11 violations. In addition to other charges, Scotts pleaded guilty to
illegally applying insecticides that are toxic to birds to its wild bird food products, falsifying pesticide
registration documents, distributing pesticides with misleading and unapproved labels, and distributing
unregistered pesticides. Scotts will also contribute $500,000 to organizations in Ohio that support the
protection of bird populations and habitats through conservation, research, and education.
EPA's enforcement program also launched the Clean Water Act Pollutant Loading Tool, which allows
the public to identify and compare the annual pollutant discharge amounts for Clean Water Act direct
dischargers. This data release is a key component of EPA's Clean Water Act Action Plan, which seeks
to sharpen focus on the most relevant Clean Water Act dischargers. EPA released 2007-2010 data in a
website that includes an interactive mapping application and a comparative feature that helps evaluate
actual releases against other data sources, such as the Toxic Release Inventory. In addition to showing
the actual discharge amounts for each pollutant, the tool provides toxicity-weighted data—allowing
users to normalize pounds released with an accepted EPA hazard ranking model.
American Recovery and Reinvestment Act of 2009 (ARRA) Reporting
Since the end of FY 2009, EPA has tracked program performance for six key ARRA-funded
environmental programs that invest in clean water and drinking water projects, implement diesel
emission reduction technologies, clean up leaking underground storage tanks, revitalize and reuse
brownfields, and clean up Superfund sites. To date, these ARRA-funded programs have:
• Completed construction at 1,336 clean water projects and 915 drinking water projects;
• Retrofitted, replaced, or retired 27,700 diesel engines;
• Made 963 acres of brownfields properties ready for reuse;
• Completed cleanup at 2,449 leaking underground storage tanks; and
• Achieved project completion at 33 Superfund sites.
ARRA-funded projects have provided substantial environmental and economic benefits to communities
across the country and have created several thousand jobs. As of FY 2012, many ARRA-funded grant
and loan programs are coming to a close and will no longer have new results. Some long-term
construction projects will take years to complete, however. To ensure accountability and demonstrate
progress toward meeting the Agency's remaining ARRA goals, EPA will continue to provide quarterly
performance updates at http://www.epa.qov/recoverv/plans.htmltfquarterly.
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FINANCIAL ANALYSIS AND STEWARDSHIP INFORMATION
Sound Financial Management: Good for the Environment, Good for the Nation
EPA carries out its mission to protect human health and the environment while adhering to the highest
standards for financial management.
• Clean audit opinion. For the 13th consecutive year, EPA's Office of Inspector General (OIG) issued
an unqualified ("clean") opinion on the Agency's financial statements. This means that EPA's
financial statements are presented fairly in all material aspects, and they conform to generally
accepted accounting principles used by the federal government. In simple terms, a clean opinion
means the Agency's numbers are reliable and accurate.
• New financial management system. In FY 2012, EPA launched a new financial management
system called Compass, replacing EPA's legacy financial system that had been used for the past
22 years. Compass serves as the foundation for the introduction of future components to establish
a unified and integrated systems infrastructure that will evolve to effectively centralize the resource
footprint, simplify Agency systems architecture, and leverage new features (built in to Compass)
across the national organization.
• Compliance with federal financial systems requirements. EPA is compliant with the Federal
Financial Management Improvement Act, which means the Agency's financial systems substantially
comply with federal system requirements and accounting standards.
Highlighted below are some of EPA's most significant financial achievements in FY 2012:
• Conference spending and oversight. In FY 2012, the Agency implemented guidance to preclude
excess conference spending. This internal control promotes efficiency Agencywide by instituting a
rigorous system for tracking, reviewing, and approving conference-related activities.
• Timely payments. EPA paid 92.69 percent of its invoices on time and 100 percent of its grant
payments electronically. Additionally, the improper payment rate was less than 0.07 percent on
these payments, which means the correct amount was paid to the correct recipient in nearly every
instance.
• Improved Working Capital Fund (WCF) efficiencies. In FY 2012, EPA decreased FY 2012
information technology costs paid through the WCF by $11.5 million. EPA accomplished this by
reconfiguring service contracts paid through the WCF that lowered costs without affecting the
quality of service.
• Integrated performance results in budget justification. EPA developed a new performance
measures table that includes eight years of trend data on performance results and out-year targets.
The table enhanced context for performance and budgeting. The Agency also implemented a new
automated data quality records tool that strengthened the quality, accuracy, completeness, and
transparency of performance data presented in the Annual Performance Report and budget.
• Indirect rate and annual allocation rates. During FY 2012, EPA's continued development and
preparation of cost recovery packages resulted in significant gains for the Agency. EPA recovered
approximately $74 million in Superfund indirect costs and collected $2.7 million in interagency
indirect costs.
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• Balanced checkbook. The Agency general ledger matches the fund balance records maintained
by the Department of the Treasury. This match translates to greater integrity of financial reports and
budget results.
• Improved financial management of contracts. In FY 2012, the Agency launched a new
mandatory Agencywide online training module focused on proper financial management of its
contracts. The purpose of the course is to help the Agency's contracting officer representatives fully
and properly utilize contract funds and reduce the Agency's unpaid balances.
Financial Condition and Results
Financial statements are formal financial records that document the EPA's activities at the transaction
level, where a "financial event" occurs. A financial event is any occurrence having financial
consequences to the federal government related to the receipt of appropriations or other financial
resources; acquisition of goods or services; payments or collections; recognition of guarantees, benefits
to be provided, and other potential liabilities; or other reportable financial activities.
The EPA prepares four consolidated
statements, including: 1) Balance
Sheet, 2) Statement of Net Cost, 3)
Statement of Changes in Net
Position, and 4) Statement of
Custodial Activity, and one
combined statement, the Statement
of Budgetary Resources. Together,
these statements with their
accompanying notes provide the
complete picture of the EPA's
financial situation. Reviewers can
glean a snapshot of the EPA's
overall financial condition by
examining key pieces of information
from these statements. The
complete statements with
accompanying notes, as well as the
auditor's opinion, are available in
Section II of this report.
The Balance Sheet displays assets, liabilities and net position as of September 30, 2012, and
September 30, 2011. The Statement of Net Cost shows the EPA's gross cost to operate, minus
exchange revenue earned from its activities. Together, these two statements provide information about
key components of the EPA's financial condition—assets, liabilities, net position and net cost of
operations. The chart that follows depicts the Agency's financial activity levels since FY 2010.
Key Terms
Assets: What the EPA
owns and manages.
Liabilities: Amounts the
EPA owes because of
past transactions or
events.
Net Position: The
difference between the
EPA's assets and
liabilities.
Net Cost of
Operations: The
difference between the
costs incurred by the
EPA's programs and the
EPA's revenues.
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Balance Sheet Trend
(dollars in billions)
$25
$20
$15
$10
$5
$0
Assets
Liabilities
Net Position NetCost of Operations
Assets—What the EPA Owns and Manages
The EPA's assets totaled $17.26 billion at the end of FY 2012, a decrease of $4.3 billion from the FY
2011 level. In FY 2012, almost 90 percent of EPA's assets fall into two categories: Fund Balance with
Treasury and Investments. All of the EPA's investments are backed by U.S. government securities. The
graphs that follow compare the Agency's FY 2012 and FY 2011 assets by major categories.
FY2012 Composition of Assets
0%
Fund Balance with Treasury,
$10.86 billion
Investments, $4.62 billion
Property, Plant and Equipment
(Net), $1.01 billion
Accounts Receivable (Net), $0.52
billion
Other Assets, $0.26 billion
i Loans Receivable, $.001 billion
13
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FY2011 Composition of Assets
0%
Fund Balance with Treasury,
$12.6 billion
Investments, $7.1 billion
Property, Plant and Equipment
(Net), $0.97 billion
Accounts Receivable (Net), $0.55
billion
Other Assets, $0.25 billion
• Loans Receivable, $.002 billion
Liabilities—What the EPA Owes
The EPA's liabilities were $2.27 billion at the end of FY 2012, marking a decrease of $134 million from
the FY 2011 level. In FY 2012, the EPA's largest liability, its combined accounts payable and accrued
liabilities represents 37 percent of what the Agency owes. The next largest category, representing 32
percent of the EPA's liabilities, covers Superfund cashout advances that include funds paid by the EPA
for cleanup of contaminated sites under the Superfund program. The remaining two categories
represent 31 percent of the Agency's liabilities. Payroll and benefits payable include salaries, pensions
and other actuarial liabilities. Other liabilities include the EPA's debt due to Treasury, custodial liabilities
that are necessary to maintain assets for which the EPA serves as custodian, environmental cleanup
costs and other miscellaneous liabilities. The graphs that follow compare FY 2012 and FY 2011
liabilities by major categories.
FY2012 Composition of Liabilities
37%
Accounts Payable and
Accrued Liabilities, $0.83
billion
CashoutAdvances,
Superfund, $0.74 billion
Other, $0.39 billion
Payroll and Benefits, $0.31
billion
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FY2011 Composition of Liabilities
40%
13%
Accounts Payable and
Accrued Liabilities, $0.97
billion
iCashoutAdvances,
Superfund,$0.79 billion
Other, $0.33 billion
Payroll and Benefits, $0.32
billion
Net Cost of Operations—How the EPA Used Its Funds
The graphs that follow show how the EPA's funds are expended among its five program goal areas in
FY2012andFY2011:
FY 2012 Net Cost by Goal
Clean Air, $1.2 billion
21%
i Clean & Safe Water, $5.52
billion
Land Preservation &
Restoration, $2.2 billion
Healthy Communities &
Ecosystems, $0.73 billion
Compliance &
Environmental
Stewardship, $0.74 billion
15
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FY2011 Net Expenditures by Goal
7%
11%
18%
CleanAir, $1.18 billion
• Clean & Safe Water, $5.37
billion
Land Preservation &
Restoration, $1.95 billion
Healthy Communities &
Ecosystems, $1.57 billion
Compliance & Environmental
Stewardship, $0.80 billion
Responsible Financial Stewardship
EPA serves as a steward on behalf of the American people. The chart below presents two categories of
stewardship: Stewardship Land and Research and Development, Infrastructure, and Human Capital. In
FY 2012, the EPA devoted a total of $4.91 billion to its stewardship activities.
Per Federal Accounting Standards Advisory Board, stewardship investments consist of expenditures
made by the Agency for the long-term benefit of the nation that do not result in the federal government
acquiring tangible assets.
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FY 2012 Stewardship Human
(Dollars in Thousands) Capital,
.$0.039 bilion,
0.8%
Infrastructure,
$4.15 billion,
84.65%
R&D, $0.71
billion,
14.55%
Land, $0
billion,
0%
• Infrastructure efforts focus on clean water and drinking water facilities. The EPA funds construction
of wastewater treatment projects and provides grants to states to support wastewater and drinking
water treatment facilities. The EPA devoted nearly $4.15 billion in FY 2012 to projects to ensure
that people have clean, safe drinking water.
• Research and development activities enable the EPA to identify and assess important risks to
human health and the environment. This critical research investment provides the basis for the
EPA's regulatory work, including regulations to protect children's health and at-risk communities,
drinking water, and the nation's ecosystems.
• Human capital includes the EPA's educational outreach and research fellowships, both of which are
designed to enhance the nation's environmental capacity.
• Land includes contaminated sites to which the EPA acquires title under the Superfund authority.
This land needs remediation and cleanup because its quality is well below any usable and
manageable standards. To gain access to contaminated sites, the EPA acquires easements that
are in good and usable condition. These easements also serve to isolate the site and restrict usage
while the cleanup is taking place.
A detailed discussion of this information is available in the Required Supplementary Stewardship
Information located in Section III of this report.
Financial Management for the Future
As challenges to the environment grow, sound stewardship of EPA's financial resources becomes
increasingly critical to the Agency's ability to protect the environment and human health locally,
nationally, and internationally. Reliable, accurate, and timely financial information is essential to ensure
cost-effective decisions for addressing land, water, air and ecosystem issues.
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To strengthen EPA's financial stewardship capabilities, EPA's Office of the Chief Financial Officer
focuses on the fundamental elements of financial management: people and systems.
People: EPA leverages every available tool to recruit the best people with the necessary skills to meet
tomorrow's financial challenges. Staff members are trained in financial analysis and forecasting to
understand financial data and what the data means. EPA is integrating financial information into
everyday decision-making so that the Agency maximizes the use of its resources.
Systems: In FY 2012, EPA implemented a component-based approach to managing its financial
systems. The Agency put in place a new financial system designed to improve EPA's financial
stewardship by strengthening accountability, data integrity, and internal controls. The system, called
Compass, is based on a commercial-off-the-shelf software solution that addresses EPA's most critical
business needs, including:
• General Ledger
• Accounts Payable
• Accounts Receivable
• Property
• Project Cost
• Intra-Governmental Transactions
• Budget Execution
Compass provides core budget execution and accounting functions, including posting updates to
ledgers and tables as transactions are processed and generating source data for the preparation of
financial statements and budgetary reports. Compass is integrated with 15 Agency systems that
support diverse functions, such as budget planning, execution, and tracking; recovery of Superfund
site-specific cleanup costs; property inventory; Agency travel; payroll time and attendance; document
and payment tracking; and research planning. Compass is a web-based, open architecture application
managed at the CGI Federal Phoenix Data Center, a certified shared service provider in compliance
with the Financial Management Line of Business.
Beyond the launch of the core financial system, the financial systems modernization strategy builds
upon Compass through the implementation of additional components, subject to future review by OMB:
• Human Resources, Payroll, and Time and Attendance
• Budget Formulation
• Superfund Imaging and Cost Accounting
• Payment Systems
EPA plans to migrate its human resources, payroll, and time and attendance systems to an OMB
Human Resources Line of Business approved shared service provider.
Compass is leveraging increases in the EPA's wide area network bandwidth, as well as its
implementation of a trusted Internet connection, to facilitate more efficient transaction processing.
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Limitations of the Principal Financial Statements
EPA prepared the principal financial statements to report the financial position and results of operations
of the Agency, pursuant to the requirements of 31 U.S.C. 3515 (b). While EPA has prepared the
statements from the books and records of the entity in accordance with U.S. generally accepted
accounting principles for federal entities and the formats prescribed by OMB, the statements are in
addition to the financial reports used to monitor and control budgetary resources that are prepared from
the same books and records. The statements should be read with the understanding that they are for a
component of the U.S. government, a sovereign entity.
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IMPROVING MANAGEMENT AND RESULTS
Office of Inspector General Audits, Evaluations, and Investigations
EPA's OIG contributes to the Agency's mission to protect human health and the environment by
assessing the efficiency and effectiveness of EPA's program management and results; ensuring that
Agency resources are used as intended; developing recommendations for improvements and cost
savings; and providing oversight and advisory assistance in helping EPA carry out its Recovery Act
objectives. In FY 2012, OIG identified key management challenges and internal control weaknesses
and provided over 1,216 recommendations accounting for more than $475 million in potential savings
and recoveries and more than 234 actions taken by EPA for improvement from OIG recommendations.
OIG audits, evaluations, and investigations accounted for 148 criminal, civil, or administrative
enforcement actions.
OIG also contributes to the integrity of and public confidence in the Agency's programs and to the
security of its resources by preventing and detecting possible fraud, waste, and abuse and pursuing
judicial and administrative remedies. For example, in response to OIG recommendations, the Agency:
agreed to establish and enforce expectations for Radiation Network (RadNet) operations readiness;
improve planning and management of parts availability and monitor the installation of the remaining
RadNet monitors; develop and implement policies and procedures for the Great Lakes National
Program Office that address establishing accounts receivable, recording in-kind contributions,
completing final accounting, and reviewing the financial capability of nonfederal sponsors; issue
guidance requiring that the results of all grant improper payment determinations and recaptures be
reported; correct the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) financial statements
to reflect the proper payroll and benefits payable amounts and closely monitor the payroll and benefit
accruals for FIFRA at year-end; include in the annual regional review of states' checklists an
assessment of the coordination between state Drinking Water State Revolving Funds (DWSRF) and
enforcement programs; create a national intended-use plan review checklist that includes a
requirement to assess coordination between state DWSRF and enforcement programs; identify and
implement actions to enhance coordination among regional and state DWSRF and Public Water
System Supervision programs; establish a process to resolve disagreements with regions on
protectiveness determinations; and improve the consistency, thoroughness, and communication of
Office of Superfund Remediation and Technology Innovation reviews and better define protectiveness
determinations. Additionally, OIG Recovery Act work accounted for cost savings, questioned costs,
recoveries, and forfeitures of $16.8 million during FY 2012, and more than $28.3 million cumulatively
since FY 2009.
Grants Management
EPA met or exceeded major performance metrics, including grant closeout and competition goals,
under its second long-term Grants Management Plan (2009-2013), which builds on the progress made
under the first Grants Management Plan (2003-2008) and will prevent the recurrence of a grants
management weakness.
Grants Management Performance Measures for EPA
Performance Measure
Percentage of eligible
grants closed out
Percentage of new grants
subject to the competition
policy that are competed
Target
90%
99%
90%
Progress in FY2012
94% in 201 1
99% in 2010 and earlier
97%
Progress in FY2011
93.4% in 2010
99.5% in 2009 and earlier
96%
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ACCOUNTABILITY: SYSTEMS, CONTROLS, AND LEGAL COMPLIANCE
Federal Managers' Financial Integrity Act (FMFIA)
FMFIA requires agencies to conduct annual evaluations of their internal controls over programs and
financial systems and report the results to the President and Congress. In addition, agencies are
required to report on the effectiveness of internal controls over financial reporting, which includes
safeguarding of assets and compliance with applicable laws and regulations in accordance with the
requirements of Appendix A of OMB Circular A-123.
Each year, EPA's national program and regional offices conduct assessments and submit annual
assurance letters attesting to the soundness of the internal controls within their organizations. These
assurance letters provide the basis for the Administrator's annual statement of assurance on the
adequacy of EPA's internal controls over programmatic operations and financial systems. Over the past
three years, the Agency has taken several actions that strengthened its compliance with FMFIA For
instance, the Agency completed comprehensive on-site Management Integrity Compliance Reviews of
all regional and program offices. This three-year effort helped ensure that the Agency better complies
with the five GAO internal control standards, and yielded results used to improve the Agency's technical
guidance to senior managers. Additionally, the Agency developed mandatory on-line training for senior
managers and the Agency's management integrity advisors. The training was designed to help EPA
senior managers fulfill their responsibilities for developing and strengthening EPA's internal controls
over financial, administrative, and programmatic operations, and to enhance management integrity
advisors understanding of the Agency's management integrity program.
To evaluate its internal controls over financial reporting (as required by OMB Circular A-123, Appendix
A), the Agency reviewed 10 key financial processes and 266 key controls. Based on this evaluation, no
new material weaknesses were identified. Subsequent to the Agency's review, EPA's OIG identified
one new material weakness, which was corrected by the Agency, and 10 new significant deficiencies
during the FY 2012 financial statement audit. But based on the Administrator's FY 2012 statement of
assurance is provided below. Based on the results of the Agency's and OIG's FY 2012 evaluations, the
Administrator can provide reasonable assurance on the adequacy and effectiveness of EPA's internal
controls over programs and financial systems, and the Agency's internal controls over financial
operations were found to be operating effectively and efficiently.
Fiscal Year 2012 Annual Assurance Statement
The U.S. Environmental Protection Agency conducted its FY 2012 assessment of the effectiveness of
internal controls over programmatic operations and financial activities, as well as conformance of
financial systems to government-wide standards. The assessment was conducted in compliance with the
Federal Managers' Financial Integrity Act; OMB Circular A-123, Management's Responsibility for
Internal Control; and other applicable laws and regulations.
Based on the results of the EPA's assessment and no findings of material weaknesses, I am providing
reasonable assurance that the agency's internal controls over programmatic operations were operating
effectively and financial systems conformed to government-wide standards as of September 30,2012.
In addition, the EPA assessed the effectiveness of internal controls over financial activities and found no
material weaknesses as of June 30, 2012. Subsequently, the agency's Inspector General identified
Compass System Limitations as a material weakness. The EPA has corrected this weakness. As a result,
internal controls were operating effectively as of September 30, 2012, and no other material weaknesses
were found in the design or operation of the internal controls over financial reporting. I am providing
reasonable assurance that the EPA's internal controls over financial activities were operating effectively.
if/
Lisa'-PrJackson
Administrator
Date'
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Management Assurances
For FY 2012, one material weakness was identified by the OIG and subsequently corrected by the
Agency. EPA is addressing a number of less severe weaknesses for which corrective actions are
underway. Section III of this report
provides details about corrective
actions underway to rectify
weaknesses and deficiencies. EPA will
continue monitoring progress toward
correcting these issues. The
accompanying graph depicts EPA's
progress toward correcting its material
and Agency-level weaknesses since
2008.
EPA continues to emphasize the
importance of maintaining effective
internal controls. In FY 2012, the
Agency conducted internal program
compliance reviews of program and
regional offices to help inform and
strengthen its FMFIA implementation.
Additionally, the Agency provided
online training for senior managers and
designated staff designed to help them
fulfill their roles and responsibilities for
maintaining an effective internal
controls program.
Five-Year Trend of Material and Agency
Weaknesses
Remaining at Year-End
I
j
2 --
Material
Agency
2008 2009 2010 2011
Fiscal Year
2012
Federal Financial Management Improvement Act (FFMIA)
FFMIA requires that agencies implement and maintain financial management systems that comply with
1) federal financial management system requirements, 2) applicable federal accounting standards, and
3) the U.S. Government Standard General Ledger. Annually, Agency heads are required to assess and
report on whether these systems comply with FFMIA.
EPA's FY 2012 assessment included the following:
• A-123 review found no significant deficiencies.
• OIG's FY 2012 financial statement audit identified one new material weaknesses related to financial
management systems. (Section II of this AFR includes the OIG's audit report. Section III of this AFR
discusses the Agency's position on OIG's finding.)
• The Agency's annual Federal Information Security Management Act Report did not disclose any
material weaknesses.
• The Agency conducted other systems-related activities, including:
o Third-party control assessments and documentation quality assurance checks.
o Network scanning for vulnerabilities.
o Annual certification for access to the Agency's accounting system
o Completion of security self-assessments with the online Automated System Security
Evaluation and Remediation Tracking tool for the accounting system
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Based on the assessment described above, the Agency is in compliance with the FFMIA for FY 2012.
Federal Information Security Management Act (FISMA)
FISMA directs federal agencies to annually evaluate the effectiveness of their information security
programs and practices and submit a report—including an independent evaluation by the Inspector
General (IG)—to the Department of Homeland Security (DHS), OMB, and Congress. Agencies also
report quarterly and monthly to DHS and OMB on the status of particular aspects of the information
security program.
EPA's Chief Information Officer, senior Agency program officials, and the IG's FY 2012 FISMA Report
and FY 2012 FISMA audit status meetings cite no material weakness in information security. The FY
2012 report, however, noted where EPA needs to make significant improvements in continuous
monitoring management, configuration management, and risk management. EPA has been making
improvements through FY 2012 and will continue to focus efforts through FY 2013 in these areas. The
Agency plans to focus on the other Administration Priorities (APs) for information security in FY 2013 to
progress on meeting the AP standards.
Inspector General Act Amendments of 1988—Audit Management
EPA uses the results of OIG audits and evaluations to assess its progress toward meeting its strategic
goals and to make corrections and adjustments to improve program effectiveness and efficiency. The
Agency is continuing to strengthen its audit management, addressing audit follow-up issues and
working to complete corrective actions expeditiously and effectively to improve environmental results.
During FY 2012, for example, EPA revised its audit management policy, "EPA Manual 2750, Audit
Management Procedures," to clarify roles and responsibilities; ensure consistent audit management
and follow-up practices Agencywide; and promote timely, efficient, and effective resolution of OIG as
well as Government Accountability Office and Defense Contract Audit Agency (DCAA) findings and
recommendations. Completion of this manual culminates an 18-month joint effort between the Agency
and OIG. EPA continued the effort it initiated in FY 2009 to conduct quality assurance reviews of
national program and regional offices to promote sound audit management and increase Agency
awareness of, accountability for, and completion of outstanding unimplemented OIG recommendations.
The end of FY 2012 marked EPA's completion of a full round of regional and headquarters office
reviews. Additionally, the Agency continues to issue quarterly reports highlighting the status of
management decisions and corrective actions. Shared with program office and regional managers
throughout EPA, the quarterly reports promote timely audit follow-up and completion of corrective
actions.
In FY 2012, EPA was responsible for addressing OIG recommendations and tracking follow-up
activities for 433 OIG reports. The Agency achieved final action (completing all corrective actions
associated with the audit) on 198 audits, including program evaluation/program performance,
assistance agreement, and single audits. This total excludes DCAA audits issued after January 1,
2009; these audits are discussed in a separate section below. EPA's FY 2012 management activities
for audits along with associated dollars are represented in the following table*:
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Category
A. Audits with management decisions but
without final action at the beginning of the period
B. Audits for which management decisions were
made during the period
(i) Management decisions with disallowed costs
(18) and with better use funds (3)
(ii) Management decisions with no disallowed
costs (79) and with no better use funds (44)
C. Total audits pending final action during the
period (A+B)
D. Final action taken during the period:
(i) Recoveries
a) Offsets
b) Collection
c) Value of Property
d) Other
(ii) Write-Offs
(iii) Reinstated Through Grantee Appeal
(iv) Value of recommendations completed
(v) Value of recommendations management
decided should/could not be completed
E. Audits without final action at end of period (C-
D)
Disallowed Costs
(Financial Audits)
Number Value
48 $ 22,829,725
162 $ 2,475,708
210 $25,305,433
161 $ 6,304,701
$ 4,532
$ 273,239
$ 0
$ 614,737
$ 100
$ 5,412,093
49 $19,000,732
Funds Put To Better
Use
(Performance Audits)
Number Value
67* $109,637,195
53 $ 47,262,147
119 $ 156,889,342
37 $ 16,586,000
$ 16,586,000
82 $140,313,342
*Any differences in number of reports and amounts of disallowed costs or funds put to better use between this report and our
previous APR results from corrections made to data in our audit tracking system.
EPA's FY 2012 management activities for audits without final corrective action are summarized below:
• Final Corrective Action Not Taken. Of the 433 audits that EPA tracked, a total of 219—including
program evaluation/program performance, assistance agreement, contracts, and single audits—
were without final action and not yet fully resolved at the end of FY 2012. (The 16 audits with
management decisions under administrative appeal by the grantee are not included in the 219 total;
see discussion below.)
• Final Corrective Action Not Taken Beyond One Year. Of the 219 unresolved audits, EPA
officials had not completed final action on 56 (five of which involve multiple offices) within one year
of the management decision (the point at which OIG and the Action Official reach agreement on the
corrective action plan). Because the issues to be addressed may be complex, Agency managers
often require more than one year after management decisions are reached with the OIG to
complete the agreed-on corrective actions. These audits are listed below by category—audits of
program performance, single audits, and assistance agreements—and identified by title and
responsible office. Additional details are available on EPA's website at
http://www.epa.gov/planandbudget/.
Audits of Program Performance. Final action for program performance audits occurs when all corrective
actions have been implemented, which may require more than a year if corrections are complex and
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lengthy. Some audits include recommendations requiring action by more than one office. EPA is
tracking 40 audits in the program performance category (five of which involve multiple offices):
Office of Administration and Resources Management
9-P00087+ EPA Plans for Managing Counter Terrorism/Emergency Response Equipment and Protecting
Critical Assets
10-P00002 Review of Hotline Complaint on Employee Granted Full-Time Work-at-Home Privilege
11-P00015+ Audit of EPA's Fiscal 2010 and 2009 Consolidated Financial Statements
11-P00031+ EPA Needs to Strengthen Internal Controls for Determining Workforce Levels
Office of Air and Radiation
2005-P00010 Evaluation of CAA Title V Operating Permit Quality
9-P00087+ EPA Plans for Managing Counter Terrorism/Emergency Response Equipment and Protecting
Critical Assets
10-P00154 Key Activities in EPA's Integrated Urban Air Toxics Strategy Remain Unimplemented
11-P00010 Energy Star Label Needs to Assure Superior Energy Conservation Performance
11-R00179 EPA Needs to Better Document Project Delays for Recovery Act Diesel Emission Reduction Act
Grants
Office of Chemical Safety and Pollution Prevention
10-P00066 EPA Needs a Coordinated Plan to Oversee Its Toxic Substances Control Act Responsibilities
Office of the Chief Financial Officer
9-P00087+ EPA Plans for Managing Counter Terrorism/Emergency Response Equipment and Protecting
Critical Assets
10-100029 Audit of 2009 and 2008 (Restated) Consolidated Financial Statements
10-P00177+ Appointment Business Process
11-100015+ Audit of EPA's Fiscal 2010 and 2009 Consolidated Financial Statements
11-P00031+ EPA Needs to Strengthen Internal Controls for Determining Workforce Levels
11-P00223 Review of Travel Controls
11-P00362 EPA Needs to Reexamine How It Defines Its Payment Recapture Audit Program
Office of Enforcement and Compliance Assurance
2001-P00013 State Enforcement Effectiveness- National Audit
2005-P00024 Priority Enforcement and Compliance Assurance Universe
2007-P00027 Benchmarking Other Organizations Statistically Valid Compliance Practices
10-P00007 EPA Oversight and Policy for High Priority Violations of Clean Air Act Need Improvement
10-P00224+ EPA Should Revise Outdated or Inconsistent EPA-State Clean Water Act Memoranda of
Agreement
10-P00230 Data Quality Audit of ECHO System Phase II
Office of Environmental Information
2007-P00008 EPA Could Improve Controls over Mainframe Software
10-P00146 Improvements Needed in Key EPA Information System Security Practices
10-P00177+ Appointment Business Process
11-P00277 EPA Has Taken Steps to Address Cyber Threats but Key Actions Remain Incomplete
Office of Research and Development
10-P00176 EPA's Office of Research and Development Performance Measures Need Improvement
11-N00199 EPA's Small Business Innovative Research Awards Should Include Additional Certifications to
Reduce Risk
11-P00333 Office of Research and Development Needs to Improve Its Method of Measuring Administrative
Savings
11-P00386 Office of Research and Development Should Increase Awareness of Scientific Integrity Policies
Office of Solid Waste and Emergency Response
2007-P00002 Asbestos Cleanup in Libby Montana
8-P00265 EPA Should Continue Efforts to Reduce Unliquidated Obligations in Brownfields Pilot Grants
10-P00042 Lack of Final Guidance on Vapor Intrusion Impedes Efforts to Address Indoor Air Risks
25
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11-P00171 EPA Needs an Agency-Wide Plan to Provide Tribal Solid Waste Management Capacity
Assistance
11-P00173 EPA Promoted the Use of Coal Ash Products With Incomplete Risk Information
Office of Water
9-P00223 EPA Needs to Accelerate Adoption of Numeric Nutrient Water Quality Standards
10-P00081 EPA Needs Procedures to Address Delayed Earmark Projects
10-P00224+ EPA Should Revise Outdated or Inconsistent EPA-State Clean Water Act Memoranda of
Agreement
11-P00001 EPA Lacks Internal Controls to Prevent Misuse of Emergency Drinking Water Facilities
Region 1
2009-P00119 Improved Management of Special Accounts Will Make More Funds Available
Region 2
2007-P00016 Ringwood Mines/Landfill Superfund Site
Region 3
10-P00055
Region 4
11-P00221
11-P00228
Changes in Conditions at Wildcat Landfill Superfund Site in Delaware Call for Increased EPA
Oversight
Oversight of North Carolina's Renewals of Thermal Variances
EPA Should Reduce Unliquidated Obligations Under Expense Reimbursements Grants
Region 9:
2008-P00196 Making Better Use of Stringfellow SF Special Accounts
+ Indicates audits involving more than one office
Single Audits. Final action for single audits occurs when nonmonetary compliance actions are
completed. Achieving final action may require more than a year if the findings are complex or the
grantee does not have the resources to take corrective action. Single audits are conducted of nonprofit
organizations, universities, and state and local governments. EPA is tracking completion of corrective
action on 12 single audits for the period beginning October 1, 2012.
Region 2
2007-300139 State of New York, FY 2006
Region 6
11-300322
Region 9:
9-300234
10-300164
10-300208
New Mexico Environment Department FY2010
Guam Waterworks Authority FY 2008
Guam Waterworks Authority FY 2009
City of Nogales FY 2008
Region 10
2002-300009 Iliama Village Council
2002-300042 Iliama Village Council
2003-300047 Stevens Village Council
2003-300117 Stevens Village Council
2003-300145 Circle Village Council
2006-300167 State of Alaska - FY 2003
2006-300168 State of Alaska - FY 2004
26
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Audits of Assistance Agreements. Reaching final action for assistance agreement audits may require
more than a year, as the grantee may appeal, refuse to repay, or be placed on a repayment plan that
spans several years. EPA is tracking four audits in this category:
Region 2
1989-901299
1990-001119
Region 3
2001-100101
Region 5
2008-200039
Nassau County, NY
Nassau County NY
Center for Chesapeake Communities (CCC) Assist. Agreements
Village of Laurelville, Ohio
Audits Awaiting Decision on Appeal. EPA regulations allow grantees to appeal management decisions
on financial assistance audits that seek monetary reimbursement from the recipient. In the case of an
appeal, EPA must not take action to collect the account receivable until the Agency issues a decision
on the appeal. At the end of FY 2012, 16 audits were in administrative appeal. When these audits are
out of appeal and all issues have been resolved, they will be captured in audit follow-up data reported
in EPA's APR.
DCAA Audits
Prior to January 1, 2009, DCAA audits of EPA contracts were requested by EPA's OIG and the results
included in OIG's Semiannual Report to Congress. EPA will continue to track and report on these and
other OIG audits (included in the IG Act summary above) until they are resolved and final actions are
taken. Beginning January 1, 2009, however, EPA's Office of Acquisition Management assumed
responsibility for requesting DCAA audits. Accordingly, these audits are now reported separately from
OIG audits. Following is an overview of DCAA audit activity for the period October 1, 2011, through
September 30, 2012.
Summary of Audit Activities for the Period Ending September 30, 2012
During this reporting period, Agency management was accountable for monitoring 71 DCAA audits.
The Agency achieved final action on 25 audits. EPA's FY 2012 management activities for DCAA audits
and associated dollars are represented in the following table:
Category
A. Audits with management decisions but
without final action at the beginning of the period
B. Audits for which management decisions were
made during the period
(i) Management decisions with disallowed costs
(8)
(ii) Management decisions with no disallowed
costs (18)
C. Total audits pending final action during the
period (A+B)
Disallowed Costs
(Financial Audits)
Number Value
0 $ 0
26 $ 333,704
26 $ 333,704
Funds Put To Better
Use
(Performance Audits)
Number Value
0 $ 0
0 $ 0
0 $ 0
27
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D. Final action taken during the period:
(i) Recoveries
a) Offsets
b) Collection
c) Value of Property
d) Other
(ii) Write-Offs
(iii) Reinstated Through Grantee Appeal
(iv) Value of recommendations completed
(v) Value of recommendations management
decided should/could not be completed
E. Audits without final action at end of period
(C-D)
25 $ 333,704
$ 0
$ 0
$ 0
$ 333,704
$ 0
$ 0
1 $ 0
0 $ 0
$ 0
$ 0
0 $ 0
Final Corrective Action Not Taken on DCAA Audit Report
Of the 71 DCAA audits that EPA tracked, a total of 46 were without final action and not yet fully
resolved at the end of FY 2012.
DCAA Audits Awaiting Decision on Appeal
As of September 30, 2012, no management decisions were in administrative appeal status.
DCAA Audits Without Management Decision in 180 Days
As of September 30, 2012, EPA was tracking no DCAA reports for which EPA is the cognizant Agency
and for which a management decision has not been reached more than 180 days from the date of the
report.
28
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Section II
Financial Section
29
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Message from the Chief Financial Officer
The EPA's Agency Financial Report presents the performance and financial results that
the agency achieved during fiscal year 2012. It provides information on the agency's
accomplishments and challenges in protecting human health and the environment, use of
the financial resources entrusted to us, and progress toward addressing key management
challenges. During FY 2012, the agency continued to demonstrate efficient, effective and
accountable administration and make innovative improvements to increase efficiency and
reduce costs.
As required by Office of Management and Budget Circular A-123 and the Federal Managers' Financial
Integrity Act, we conducted an annual assessment of the effectiveness of internal controls over financial
reporting and programmatic operations. Based on the results of the agency's FY 2012 evaluation and
reviews, the Administrator can provide reasonable assurance on the adequacy and effectiveness of the
agency's internal controls over programs, financial activities and financial systems.
In FY 2012, the EPA launched Compass, the agency's new, re-scoped financial system on time and within
budget. Compass serves as the foundation for a unified and integrated systems infrastructure for the agency
to support sound financial management. Redesigned policies and procedures led to the successful
conversion of over 11 million records (or 100 percent of the target legacy system data) to Compass, helping
to ensure smooth operations for the agency.
To strengthen agency programs and operations, the EPA issued the newly revised policy for agency audit
management and follow-up during FY 2012. The updated manual provides a consolidated resource for audit
management guidance, ensuring consistent procedures across the agency. The updated manual - designed
to promote timely, efficient and effective resolution of audit findings and recommendations - reflects a
collaborative effort among agency program offices and regions, along with our Office of Inspector General.
During FY 2012, the agency developed a new payment process in response to an OMB directive requiring
agencies to expedite payments to small businesses within 15 calendar days. Given our excellent on-time
payment record and ability to elevate small business invoices for fast-track processing, the EPA was able to
comply with this directive prior to the OMB deadline while maintaining effective management controls.
To ensure that the agency is effectively managing its resources, the EPA developed and implemented
guidance to reduce conference spending during the fiscal year. This guidance establishes new internal
controls that promote efficiency agencywide by instituting a rigorous system for tracking, reviewing and
approving conference-related activities.
As Chief Financial Officer, I take seriously my responsibility to provide informed financial analysis to agency
leaders and the public. As we start the new fiscal year, we will uphold our commitment to financial
excellence, move money out faster for projects and ensure taxpayers' dollars are utilized effectively in
fulfilling our mission to protect human health and the environment. We achieved great things this fiscal year,
and I look forward to continuing our success through collaboration with our partners and stakeholders and
implementing innovative, cross-cutting strategies to help meet the challenges ahead.
Barbara J. Bennett
Chief Financial Officer
November 15, 2012
30
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Principal Financial Statements
Financial Statements
1. Consolidated Balance Sheet
2. Consolidated Statement of Net Cost
3. Consolidated Statement of Net Cost by Goal
4. Consolidating Statement of Changes in Net Position
5. Combined Statement of Budgetary Resources
6. Statement of Custodial Activity
Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Fund Balance with Treasury (FBWT)
Note 3. Cash and Other Monetary Assets
Note 4. Investments
Note 5. Accounts Receivable, Net
Note 6. Other Assets
Note 7. Loans Receivable, Net
Note 8. Accounts Payable and Accrued Liabilities
Note 9. General Property, Plant and Equipment, Net
Note 10. Debt Due to Treasury
Note 11. Stewardship Land
Note 12. Custodial Liability
Note 13. Other Liabilities
Note 14. Leases
Note 15. FECA Actuarial Liabilities
Note 16. Cashout Advances, Superfund
Note 17. Unexpended Appropriations - Other Funds
Note 18. Commitments and Contingencies
Note 19. Earmarked Funds
Note 20. Intragovernmental Costs and Exchange Revenue
Note 21. Cost of Stewardship Land
Note 22. Environmental Cleanup Costs
Note 23. State Credits
Note 24. Preauthorized Mixed Funding Agreements
Note 25. Custodial Revenues and Accounts Receivable
Note 26. Reconciliation of President's Budget to Statement of Budgetary Resources
Note 27. Recoveries and Resources Not Available, Statement of Budgetary Resources
Note 28. Unobligated Balances Available
Note 29. Undelivered Orders at the End of the Period
Note 30. Offsetting Receipts
Note 31. Transfers-ln and Out, Statement of Changes in Net Position
Note 32. Imputed Financing
Note 33. Payroll and Benefits Payable
Note 34. Other Adjustments, Statement of Changes in Net Position
31
-------
Notes to Financial Statements (continued)
Note 35. Non-exchange Revenue, Statement of Changes in Net Position
Note 36. Reconciliation of Net Cost of Operations to Budget
Note 37. Amounts Held By Treasury (Unaudited)
Note 38. Antideficiency Act Violations
Required Supplementary Information (Unaudited)
1. Deferred Maintenance
2. Stewardship Land
3. Supplemental Combined Statement of Budgetary Resources
Required Supplementary Stewardship Information (Unaudited)
Supplemental Information and Other Reporting Requirements (Unaudited)
Superfund Financial Statements and Related Notes
32
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Environmental Protection Agency
Consolidated Balance Sheet
As of September 30, 2012 and 2011
(Dollars in Thousands)
FY2012
FY2011
ASSETS
Intragovernmental:
Fund Balance With Treasury (Note 2)
Investments (Note 4)
Accounts Receivable, Net (Note 5)
Other (Note 6)
Total Intragovernmental
Cash and Other M onetary Assets (Note 3)
Accounts Receivable, Net (Note 5)
Loans Receivable, Net - Non-Federal (Note 7)
Property, Plant & Equipment, Net (Note 9)
Other (Note 6)
Total Assets
Stewardship PP& E (Note 11 )
LIABILITIES
Intragovernmental:
Accounts Payable and Accrued Liabilities (Note 8)
Debt Due to Treasury (Note 10)
Custodial Liability (Note 12)
Other (Note 13)
Total Intragovernmental
Accounts Payable & Accrued Liabilities (Note 8)
Pensions & Other Actuarial Liabilities (Note 15)
Environmental Cleanup Costs (Note 22)
Cashout Advances, Superfund (Note 16)
Commitments & Contingencies (Note 18)
Payroll & Benefits Payable (Note 33)
Other (Note 13)
Total Liabilities
NET POSITION
Unexpended Appropriations - Other Funds (Note 17)
Cumulative Results of Operations - Earmarked Funds (Note 19)
Cumulative Results of Operations - Other Funds
Total Net Position
Total Liabilities and Net Position
10,856,475
4,620,231
28,216
252,837
15,757,759
10
491,122
136
1,010,021
3,134
17,262,182 S
55,021
1,063
118,900
117,520
292,504
775,281
46,905
21,560
735,837
25,180
266,727
105,068
2,269,062
9,811,870
4,504,199
677,051
14,993,120
12,662,541
7,112,197
35,518
251,803
20,062,059
10
514,190
2,107
966,799
2,566
21,547,731
52,448
2,593
56,703
132,910
244,654
916,766
44,833
20,838
790,069
10,180
272,335
103,989
2,403,664
11,462,598
7,027,163
654,306
19,144,067
17,262,182 S
21,547,731
The accompanying notes are an integral part of these financial statements.
33
-------
Environmental Protection Agency
Consolidated Statement of Net Cost
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
FY2012
FY2011
COSTS
Gross Costs (Note 20) $
Less:
Earned Revenue (Note 20)
NET COST OF OPERATIONS (Note 20) $
10,905,272 $
521,826
11,577,224
698,331
10,383,446 $
10,878,893
The accompanying notes are an integral part of these financial statements.
34
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Environmental Protection Agency
Consolidated Statement of Net Cost by Goal
For the Period Ending September 30, 2012
(Dollars in Thousands)
Land Healthy Compliance &
Clean & Safe Preservation & Communities & Environmental
Clean Air Water Restoration Ecosystems Stewardship
Costs:
Intragovemmental $ 184,695 $ 380,760 $ 358,603 $ 184,459 $ 216,865
With the Public 1,027,551 5,177,804 2,175,713 593,659 605,163
Total Costs (Note 20) 1,212,246 5,558,564 2,534,316 778,118 822,028
Less:
Earned Revenue, Federal 12,171 8,220 79,371 12,092 5,877
Earned Revenue, non Federal 1,372 33,654 255,421 37,106 76,542
Total Earned Revenue
(Notes 20) 13,543 41,874 334,792 49,198 82,419
NET COST OF OPERATIONS
(Note 20) $ 1,198,703 $ 5,516,690 $ 2,199,524 $ 728,920 $ 739,609
Costs:
Intragovemmental
With the Public
Total Costs (Note 20)
Less:
Earned Revenue, Federal
Earned Revenue, non Federal
Total Earned Revenue
(Notes 20)
NET COST OF OPERATIONS
(Note 20)
Consolidated
Totals
$ 1,325,382
9,579,890
10,905,272
117,731
404,095
521,826
$10,383,446
The accompanying notes are an integral part of these financial statements.
35
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Environmental Protection Agency
Consolidated Statement of Net Cost by Goal
For the Period Ending September 30, 2011
(Dollars in Thousands)
Land Healthy Compliance &
Clean & Safe Preservation & Communities & Environmental
Clean Air Water Restoration Ecosystems Stewards hip
Costs:
Intragovemmental $ 159,456 $ 252,748 $ 390,431 $ 335,757 $ 192,243
With the Public 1,035,680 5,125,894 2,180,996 1,289,505 614,514
Total Costs (Note 20) 1,195,136 5,378,642 2,571,427 1,625,262 806,757
Less:
Earned Revenue, Federal 13,586 7,333 124,874 12,010 3,607
Earned Revenue, non Federal 1,034 1,458 494,249 38,725 1,455
Total Earned Revenue
(Notes 20) 14,620 8,791 619,123 50,735 5,062
NET COST OF OPERATIONS
(Note 20) $ 1,180,516 $ 5,369,851 $ 1,952,304 $ 1,574,527 $ 801,695
Costs:
Intragovemmental
With the Public
Total Costs (Note 20)
Less:
Earned Revenue, Federal
Earned Revenue, non Federal
Total Earned Revenue
(Notes 20)
NET COST OF OPERATIONS
(Note 20)
Consolidated
Totals
$ 1,330,635
10,246,589
11,577,224
161,410
536,921
698,331
$10,878,893
The accompanying notes are an integral part of these financial statements.
36
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Environmental Protection Agency
Consolidating Statement of Changes in Net Position
For the Period Ending September 30, 2012
(Dollars in Thousands)
Cumulative Results of Operations:
Net Position - Beginning of Period
Beginning Balances, as Adjusted
Budgetary Financing Sources:
Appropriations Used
Nonexchange Revenue - Securities Investment (Note 35)
Nonexchange Revenue - Other (Note 35)
Transfers In/Out (Note 31)
Trust Fund Appropriations
Total Budgetary Financing Sources
Other Financing Sources (Non-Exchange)
Imputed Financing Sources (Note 32)
Other Financing Sources
Total Other Financing Sources
Net Cost of Operations
Net Change
Cumulative Results of Operations
FY2012
Earmarked
Funds
7,027,163
7,027,163
FY2012
All Other
Funds
654,306
654,306
(1,055,883) $ 8,771,043
26,337 141,806
(76) -
26,261 $ 141,806
(1,493,342) (8,890,104)
(2,522,964) 22,745
FY2012
Consolidated
Total
7,681,469
7,681,469
-
87,454
200,069
(2,418,773)
1,075,367
9,814,392
-
-
32,018
(1,075,367)
9,814,392
87,454
200,069
(2,386,755)
-
7,715,160
168,143
(76)
4,504,199
677,051
168,067
(10,383,446)
(2,500,219)
5,181,250
FY2012
Earmarked
Funds
Unexpended Appropriations:
Net Position - Beginning of Period
Beginning Balances, as Adjusted
Budgetary Financing Sources:
Appropriations Received
Appropriations Transferred In/Out (Note 31)
Other Adjustments (Note 34)
Appropriations Used
Total Budgetary Financing Sources
Total Unexpended Appropriations
TOTAL NET POSITION
FY2012
All Other
Funds
11,462,598
11,462,598
8,251,902
5
(88,243)
(9,814,392)
(1,650,728)
9,811,870
4,504,199 $ 10,488,921 $
FY2012
Consolidated
Total
11,462,598
11,462,598
8,251,902
5
(88,243)
(9,814,392)
(1,650,728)
9,811,870
14,993,120
The accompanying notes are an integral part of these financial statements.
37
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Environmental Protection Agency
Consolidating Statement of Changes in Net Position
For the Periods Ending September 30, 2011
(Dollars in Thousands)
Cumulative Results of Operations:
Net Position - Beginning of Period
Beginning Balances, as Adjusted
Budgetary Financing Sources:
Appropriations Used
Nonexchange Revenue - Securities Investment (Note 35)
Nonexchange Revenue - Other (Note 3 5)
Transfers In/Out (Note 31)
Trust Fund Appropriations
Total Budgetary Financing Sources
Other Financing Sources (Non-Exchange)
Donations and Forfeitures of Property
Transfers In/Out (Note 31)
Imputed Financing Sources (Note 32)
Total Other Financing Sources
Net Cost of Operations
Net Change
Cumulative Results of Operations
FY2011
Earmarked
Funds
7,152,382
FY2011 All
Other Funds
617,456
FY2011
Consolidated
Total
7,769,838
7,152,382 $
120,429
184,984
(17,068)
1,156,073
617,456 $
10,287,988
35,410
(1,156,073)
1,444,418 $ 9,167,325 $
1
29,661
50
76
148,993
10,287,988
120,429
184,984
18,342
50
77
178,654
29,662 $ 149,119 $ 178,781
(1,599,299) (9,279,594) (10,878,893)
(125,219) 36,850 (88,369)
7,027,163 $ 654,306 $ 7,681,469
Unexpended Appropriations:
Net Position - Beginning of Period
Beginning Balances, as Adjusted
Budgetary Financing Sources:
Appropriations Received
Appropriations Transferred In/Out (Note 31)
Other Adjustments (Note 34)
Appropriations Used
Total Budgetary Financing Sources
Total Unexpended Appropriations
TOTAL NET POSITION
FY2011
Earmarked FY2011 All
Funds Other Funds
FY2011
Consolidated
Total
13,342,784
$ 13,342,784 $
8,583,238
1,750
(177,186)
(10,287,988)
(1,880,186)
11,462,598
13,342,784
13,342,784
8,583,238
1,750
(177,186)
(10,287,988)
(1,880,186)
11,462,598
7,027,163 $ 12,116,904 $
19,144,067
The accompanying notes are an integral part of these financial statements.
38
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Environmental Protection Agency
Combined Statement of Budgetary Resources
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
FY2012
FY2011
BUDGETARY RESOURCES
Unobligated Balance, Brought Forward, October 1:
Unobligated balance brought forward, October 1, as adjusted
Recoveries of Prior Year Unpaid Obligations (Note 27)
Other changes in unobligated balance
Unobligated balance fromprioryear budget authority, net
Appropriations (discretionary and mandatory)
Spending authority from offsetting collections (discretionary and mandatory)
Total Budgetary Resources (Note 26)
STATUS OF BUDGETARY RESOURCES
Obligations incurred (Note 26)
Unobligated balance, end of year:
Apportioned (Note 28)
Unapportioned
Total unobligated balance, end of period
Total Status of Budgetary Resources
CHANGE IN OBLIGATED BALANCE
Unpaid Obligations, Brought Forward, October 1 (gross)
Uncollected customer payments fromFederal Sources, brought forward, October 1
Obligated balance, start of year (net), before adjustments
Obligated balance, start of year (net), as adjusted
Obligations incurred
Outlays (gross)
Change in uncollected customer payments fromFederal sources
Recoveries of prioryear unpaid obligations
Obligated balance, end of period
Unpaid obligations, end of year (gross)
Uncollected customer payments fromFederal sources, end ofyear
Obligated balance, end of period (net)
BUDGET AUTHORITY ANDOUTLAYS, NET:
Budget authority, gross (discretionary and mandatory)
Actual offsetting collections (discretionary and mandatory)
Change in uncollected customer payments fromFederal sources (discretionary and mandatory)
Budget authority, net (discretionary and mandatory)
Outlays, gross (discretionary and mandatory) (Note 26)
Actual offsetting collections (discretionary and mandatory) (Note 26)
Outlays, net (discretionary and mandatory)
Distributed offsetting receipts (Notes 26 and 30)
Agency outlays, net (discretionary and mandatory)
3,497,850
3,497,850
571,576
(31,639)
4,037,787
11,948,399
583,051
16,569,237
13,782,833
4,626,341
4,626,341
270,664
(179,693)
4,717,312
10,020,838
750,277
15,488,427
11,990,577
2,609,127
177,277
2,786,404
16,569,237 $
12,774,894 $
(438,428)
12,336,466
12,336,466
13,782,833
(14,674,309)
(132,914)
(571,576)
11,311,842
(305,514)
11,006,328 $
12,531,450 $
(715,965)
(132,914)
11,682,571 $
14,674,309 $
(715,965)
13,958,344
(1,163,736)
12,794,608 $
3,326,812
171,038
3,497,850
15,488,427
13,872,909
(439,956)
13,432,953
13,432,953
11,990,577
(12,817,928)
1,528
(270,664)
12,774,894
(438,428)
12,336,466
10,771,115
(751,805)
1,528
10,020,838
12,817,928
(751,805)
12,066,123
(1,291,761)
10,774,362
The accompanying notes are an integral part of these financial statements.
39
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Environmental Protection Agency
Statement of Custodial Activity
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
FY2012
FY2011
Revenue Activity:
Sources of Cash Collections:
Fines and Penalties
Other
Total Cash Collections
Accrual Adjustment
Total Custodial Revenue (Note 25)
Disposition of Collections:
Transferred to Others (General Fund)
Increases/Decreases in Amounts to be Transferred
Total Disposition of Collections
Net Custodial Revenue Activity (Note 25)
$
$
$
172,938
(51,707)
121,231
62,980
184,211
$
$
$
126,212
(4,024)
122,188
4,163
126,351
121,234
62,977
122,910
3,441
184,211
126,351
The accompanying notes are an integral part of these financial statements.
40
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Environmental Protection Agency
Notes to the Financial Statements
Fiscal Year Ended September 30, 2012 and 2011
(Dollars in Thousands)
Note 1. Summary of Significant Accounting Policies
A. Reporting Entities
The EPA was created in 1970 by executive reorganization from various components of other federal
agencies to better marshal and coordinate federal pollution control efforts. The Agency is generally
organized around the media and substances it regulates - air, water, hazardous waste, pesticides, and
toxic substances.
The FY 2012 financial statements are presented on a consolidated basis for the Balance Sheet,
Statements of Net Cost, Changes in Net Position and Custodial Activity and a combined basis for the
Statement of Budgetary Resources. These financial statements include the accounts of all funds
described in this note by their respective Treasury fund group.
B. Basis of Presentation
These accompanying financial statements have been prepared to report the financial position and
results of operations of the U. S. Environmental Protection Agency (EPA or Agency) as required by the
Chief Financial Officers Act of 1990 and the Government Management Reform Act of 1994. The
reports have been prepared from the financial system and records of the Agency in accordance with
Office of Management and Budget (OMB) Circular No. A-136, Financial Reporting Requirements, and
the EPA accounting policies, which are summarized in this note. The Statement of Net Cost has been
prepared with cost segregated by the Agency's strategic goals.
C. Budgets and Budgetary Accounting
1. General Funds
Congress adopts an annual appropriation for State and Tribal Assistance Grants (STAG),
Buildings and Facilities (B&F), and for Payments to the Hazardous Substance Superfund to be
available until expended, as well as annual appropriations for Science and Technology (S&T),
Environmental Programs and Management (EPM) and for the Office of Inspector General (OIG)
to be available for 2 fiscal years. When the appropriations for the General Funds are enacted,
Treasury issues a warrant to the respective appropriations. As the Agency disburses obligated
amounts, the balance of funds available to the appropriation is reduced at Treasury.
The Asbestos Loan Program is a commercial activity financed from a combination of two
sources, one for the long term costs of the loans and another for the remaining non-subsidized
portion of the loans. Congress adopted a 1 year appropriation, available for obligation in the
fiscal year for which it was appropriated, to cover the estimated long term cost of the Asbestos
loans. The long term costs are defined as the net present value of the estimated cash flows
associated with the loans. The portion of each loan disbursement that did not represent long
term cost is financed under permanent indefinite borrowing authority established with the
Treasury. A permanent indefinite appropriation is available to finance the costs of subsidy re-
estimates that occur in subsequent years after the loans were disbursed.
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Funds transferred from other federal agencies are processed as non-expenditure transfers. As
the Agency disburses the obligated amounts, the balance of funding available to the
appropriation is reduced at Treasury.
Clearing accounts and receipt accounts receive no appropriated funds. Amounts are recorded
to the clearing accounts pending further disposition. Amounts recorded to the receipt accounts
capture amounts collected for or payable to the Treasury General Fund.
2. Revolving Funds
Funding of the Reregistration and Expedited Processing Fund (FIFRA) and Pesticide
Registration Funds (PRIA) is provided by fees collected from industry to offset costs incurred by
the Agency in carrying out these programs. Each year the Agency submits an apportionment
request to OMB based on the anticipated collections of industry fees.
Funding of the Working Capital Fund (WCF) is provided by fees collected from other Agency
appropriations and other federal agencies to offset costs incurred for providing Agency
administrative support for computer and telecommunication services, financial system services,
employee relocation services, and postage.
3. Special Funds
The Environmental Services Receipt Account obtains fees associated with environmental
programs.
Exxon Valdez uses funding collected from reimbursement from the Exxon Valdez settlement.
4. Deposit Funds
Deposit accounts receive no appropriated funds. Amounts are recorded to the deposit accounts
pending further disposition. These are not EPA's funds.
5. Trust Funds
Congress adopts an annual appropriation amount for the Superfund, Leaking Underground
Storage Tank (LUST) and the Oil Spill Response Accounts to remain available until expended.
A transfer account for the Superfund and LUST Trust Fund has been established for purposes
of carrying out the program activities. As the Agency disburses obligated amounts from the
transfer account, the Agency draws down monies from the Superfund and LUST Trust Fund at
Treasury to cover the amounts being disbursed. The Agency draws down all the appropriated
monies from the Principal Fund of the Oil Spill Liability Trust Fund when Congress adopts the
Inland Oil Spill Programs appropriation amount to EPA's Oil Spill Response Account.
D. Basis of Accounting
Generally Accepted Accounting Principles (GAAP) for Federal entities is the standard prescribed by the
Federal Accounting Standards Advisory Board (FASAB), which is the official standard-setting body for
the Federal government. The financial statements are prepared in accordance with GAAP for Federal
entities.
Transactions are recorded on an accrual accounting basis and on a budgetary basis (where budgets
are issued). Under the accrual method, revenues are recognized when earned and expenses are
recognized when a liability is incurred, without regard to receipt or payment of cash. Budgetary
accounting facilitates compliance with legal constraints and controls over the use of federal funds.
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E. Revenues and Other Financing Sources
The following EPA policies and procedures to account for inflow of revenue and other financing sources
are in accordance with Statement of Federal Financial Accounting Standards (SFFAS) No. 7,
"Accounting for Revenues and Other Financing Sources."
The Superfund program receives most of its funding through appropriations that may be used within
specific statutory limits for operating and capital expenditures (primarily equipment). Additional
financing for the Superfund program is obtained through: reimbursements from other federal agencies,
state cost share payments under Superfund State Contracts (SSCs), and settlement proceeds from
Potentially Responsible Parties (PRPs) under CERCLA Section 122(b)(3) placed in special accounts.
Cost recovery settlements that are not placed in special accounts continue to be deposited in the Trust
Fund.
Most of the other funds receive funding needed to support programs through appropriations which may
be used within statutory limits for operating and capital expenditures. However, under Credit Reform
provisions, the Asbestos Loan Program receives funding to support the subsidy cost of loans through
appropriations which may be used within statutory limits. The Asbestos Direct Loan Financing fund
4322, an off-budget fund, receives additional funding to support the outstanding loans through
collections from the Program fund 0118 for the subsidized portion of the loan.
The FIFRA and Pesticide Registration funds receive funding through fees collected for services
provided and interest on invested funds. The WCF receives revenue through fees collected for services
provided to Agency program offices. Such revenue is eliminated with related Agency program
expenses upon consolidation of the Agency's financial statements. The Exxon Valdez Settlement Fund
receives funding through reimbursements.
Appropriated funds are recognized as Other Financing Sources expended when goods and services
have been rendered without regard to payment of cash. Other revenues are recognized when earned
(i.e., when services have been rendered).
F. Funds with the Treasury
The Agency does not maintain cash in commercial bank accounts. Cash receipts and disbursements
are handled by Treasury. The major funds maintained with Treasury are Appropriated Funds, Revolving
Funds, Trust Funds, Special Funds, Deposit Funds, and Clearing Accounts. These funds have
balances available to pay current liabilities and finance authorized obligations, as applicable.
G. Investments in U.S. Government Securities
Investments in U.S. Government securities are maintained by Treasury and are reported at amortized
cost net of unamortized discounts. Discounts are amortized over the term of the investments and
reported as interest income. No provision is made for unrealized gains or losses on these securities
because, in the majority of cases, they are held to maturity (see Note 4).
H. Notes Receivable
The Agency records notes receivable at their face value and any accrued interest as of the date of
receipt.
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I. Marketable Securities
The Agency records marketable securities at cost as of the date of receipt. Marketable securities are
held by Treasury and reported at their cost value in the financial statements until sold (see Note 4).
J. Accounts Receivable and Interest Receivable
The majority of receivables for non-Superfund funds represent penalties and interest receivable for
general fund receipt accounts, unbilled intragovernmental reimbursements receivable, allocations
receivable from Superfund (eliminated in consolidated totals), and refunds receivable for the STAG
appropriation.
Superfund accounts receivable represent recovery of costs from PRPs as provided under CERCLA as
amended by SARA. Since there is no assurance that these funds will be recovered, cost recovery
expenditures are expensed when incurred (see Note 5).
The Agency records accounts receivable from PRPs for Superfund site response costs when a consent
decree, judgment, administrative order, or settlement is entered. These agreements are generally
negotiated after at least some, but not necessarily all, of the site response costs have been incurred. It
is the Agency's position that until a consent decree or other form of settlement is obtained, the amount
recoverable should not be recorded.
The Agency also records accounts receivable from states for a percentage of Superfund site remedial
action costs incurred by the Agency within those states. As agreed to under SSCs, cost sharing
arrangements may vary according to whether a site was privately or publicly operated at the time of
hazardous substance disposal and whether the Agency response action was removal or remedial. SSC
agreements are usually for 10 percent or 50 percent of site remedial action costs, depending on who
has the lead for the site (i.e., publicly or privately owned). States may pay the full amount of their share
in advance or incrementally throughout the remedial action process.
K. Advances and Prepayments
Advances and prepayments represent funds advanced or prepaid to other entities both internal and
external to the Agency for which a budgetary expenditure has not yet occurred.
L. Loans Receivable
Loans are accounted for as receivables after funds have been disbursed. Loans receivable resulting
from obligations on or before September 30, 1991, are reduced by the allowance for uncollectible
loans. Loans receivable resulting from loans obligated on or after October 1, 1991, are reduced by an
allowance equal to the present value of the subsidy costs associated with these loans. The subsidy
cost is calculated based on the interest rate differential between the loans and Treasury borrowing, the
estimated delinquencies and defaults net of recoveries offset by fees collected and other estimated
cash flows associated with these loans.
M. Appropriated Amounts Held by Treasury
For the Superfund and LUST Trust Funds and for amounts appropriated from the Superfund Trust Fund
to the OIG, cash available to the Agency that is not needed immediately for current disbursements
remains in the respective Trust Funds managed by Treasury.
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N. Property, Plant, and Equipment
EPA accounts for its personal and real property accounting records in accordance with SFFAS No. 6,
"Accounting for Property, Plant and Equipment." For EPA-held property, the Fixed Assets Subsystem
(FAS) automatically generates depreciation entries monthly based on in-service dates.
A purchase of EPA-held or contract personal property is capitalized if it is valued at $25 thousand or
more and has an estimated useful life of at least 2 years. For contractor held property, depreciation is
taken on a modified straight-line basis over a period of 6 years depreciating 10 percent the first and
sixth year, and 20 percent in years 2 through 5. Detailed records are maintained and accounted for in
contractor systems, not in FAS for contractor held property. Acquisitions of EPA-held personal property
are depreciated using the straight-line method over the specific asset's useful life, ranging from 2 to 15
years.
Personal property also consists of capital leases. To be defined as a capital lease, it must, at its
inception, have a lease term of two or more years and the lower of the fair value or present value of the
minimum lease payments must be $75 thousand or more. Capital leases may also contain real
property (therefore considered in the real property category as well), but these need to meet an $85
thousand capitalization threshold. In addition, the lease must meet one of the following criteria:
transfers ownership to EPA, contains a bargain purchase option, the lease term is equal to 75 percent
or more of the estimated economic service life, or the present value of the lease and other minimum
lease payments equal or exceed 90 percent of the fair value.
Superfund contract property used as part of the remedy for site-specific response actions is capitalized
in accordance with the Agency's capitalization threshold. This property is part of the remedy at the site
and eventually becomes part of the site itself. Once the response action has been completed and the
remedy implemented, EPA retains control of the property (i.e., pump and treat facility) for 10 years or
less, and transfers its interest in the facility to the respective state for mandatory operation and
maintenance - usually 20 years or more. Consistent with EPA's 10 year retention period, depreciation
for this property is based on a 10 year life. However, if any property is transferred to a state in a year or
less, this property is charged to expense. If any property is sold prior to EPA relinquishing interest, the
proceeds from the sale of that property shall be applied against contract payments or refunded as
required by the Federal Acquisition Regulations.
An exception to the accounting of contract property includes equipment purchased by the Working
Capital Fund (WCF). This property is retained in FAS and depreciated utilizing the straight-line method
based upon the asset's in-service date and useful life.
Real property consists of land, buildings, capital and leasehold improvements and capital leases. Real
property, other than land, is capitalized when the value is $85 thousand or more. Land is capitalized
regardless of cost. Buildings are valued at an estimated original cost basis, and land is valued at fair
market value if purchased prior to FY 1997. Real property purchased after FY 1996 is valued at actual
cost. Depreciation for real property is calculated using the straight-line method over the specific asset's
useful life, ranging from 10 to 102 years. Leasehold improvements are amortized over the lesser of
their useful life or the unexpired lease term. Additions to property and improvements not meeting the
capitalization criteria, expenditures for minor alterations, and repairs and maintenance are expensed
when incurred.
Software for the WCF, a revenue generating activity, is capitalized if the purchase price is $100
thousand or more with an estimated useful life of 2 years or more. All other funds capitalize software if
those investments are considered Capital Planning and Investment Control (CPIC) or CPIC Lite
systems with the provisions of SFFAS No. 10, "Accounting for Internal Use Software." Once software
enters the production life cycle phase, it is depreciated using the straight-line method over the specific
asset's useful life ranging from 2 to 10 years.
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O. Liabilities
Liabilities represent the amount of monies or other resources that are more likely than not to be paid by
the Agency as the result of an Agency transaction or event that has already occurred and can be
reasonably estimated. However, no liability can be paid by the Agency without an appropriation or other
collections. Liabilities for which an appropriation has not been enacted are classified as unfunded
liabilities and there is no certainty that the appropriations will be enacted. Liabilities of the Agency
arising from other than contracts can be abrogated by the Government acting in its sovereign capacity.
P. Borrowing Payable to the Treasury
Borrowing payable to Treasury results from loans from Treasury to fund the Asbestos direct loans
Periodic principal payments are made to Treasury based on the collections of loans receivable.
Q. Interest Payable to Treasury
The Asbestos Loan Program makes periodic interest payments to Treasury based on its debt.
R. Accrued Unfunded Annual Leave
Annual, sick and other leave is expensed as taken during the fiscal year. Sick leave earned but not
taken is not accrued as a liability. Annual leave earned but not taken as of the end of the fiscal year is
accrued as an unfunded liability. Accrued unfunded annual leave is included in Note 33 as a
component of "Payroll and Benefits Payable."
S. Retirement Plan
There are two primary retirement systems for federal employees. Employees hired prior to January 1,
1987, may participate in the Civil Service Retirement System (CSRS). On January 1, 1984, the Federal
Employees Retirement System (FERS) went into effect pursuant to Public Law 99-335. Most
employees hired after December 31, 1983, are automatically covered by FERS and Social Security.
Employees hired prior to January 1, 1984, elected to either join FERS and Social Security or remain in
CSRS. A primary feature of FERS is that it offers a savings plan to which the Agency automatically
contributes one percent of pay and matches any employee contributions up to an additional four
percent of pay. The Agency also contributes the employer's matching share for Social Security.
With the issuance of SFFAS No. 5, "Accounting for Liabilities of the Federal Government," accounting
and reporting standards were established for liabilities relating to the federal employee benefit
programs (Retirement, Health Benefits, and Life Insurance). SFFAS No. 5 requires that the employing
agencies recognize the cost of pensions and other retirement benefits during their employees' active
years of service. SFFAS No. 5 requires that the Office of Personnel Management (OPM), as
administrator of the CSRS and FERS, the Federal Employees Health Benefits Program, and the
Federal Employees Group Life Insurance Program, provide federal agencies with the actuarial cost
factors to compute the liability for each program.
T. Prior Period Adjustments and Restatements
Prior period adjustments, if any, are made in accordance with SFFAS No. 21, "Reporting Corrections of
Errors and Changes in Accounting Principles." Specifically, prior period adjustments will only be made
for material prior period errors to: (1) the current period financial statements, and (2) the prior period
financial statements presented for comparison. Adjustments related to changes in accounting principles
will only be made to the current period financial statements, but not to prior period financial statements
presented for comparison.
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U. Recovery Act Funds
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009
(Recovery Act). The Act was enacted to create jobs in the United States, encourage technical
advances, assist in modernizing the nation's infrastructure, and enhance energy independence. The
EPA was charged with the task of distributing funds to invest in various projects aimed at creating
advances in science, health, and environmental protection that will provide long-term economic
benefits.
EPA manages almost $7.22 billion in Recovery Act funded projects and programs that will help achieve
these goals, offer resources to help other "green" agencies, and administer environmental laws that will
govern Recovery activities. As of September 30, 2012, EPA has paid out $6.9 billion.
EPA, in collaboration with states, tribes, local governments, territories and other partners, is
administering the funds it received under the Recovery Act through four appropriations. The funds
include:
• State and Tribal Assistance Grants (STAG) that in turn include:
o $4 billion for assistance to help communities with water quality and wastewater
infrastructure needs and $2 billion for drinking water infrastructure needs (Clean Water
and Drinking Water State Revolving Fund programs and Water Quality Planning
program);
o $100 million for competitive grants to evaluate and clean up former industrial and
commercial sites (Brownfields program);
o $300 million for grants and loans to help regional, state and local governments, tribal
agencies, and non-profit organizations with projects that reduce diesel emissions (Clean
Diesel programs);
• $600 million for the cleanup of hazardous sites (Superfund program);
• $200 million for cleanup of petroleum leaks from underground storage tanks (Leaking Underground
Storage Tank program); and
• $20 million for audits and investigations conducted by the Inspector General (IG).
The vast majority of the contracts awarded under the Recovery Act will be entered into using
competitive contracts. EPA is committed fully to ensuring transparency and accountability throughout
the Agency in spending Recovery Act funds in accordance with OMB guidance.
EPA set up a Stimulus Steering Committee that meets to review and report on the status of the
distribution of the Recovery Act Funds to ensure transparency and accuracy. EPA also developed a
Stewardship Plan which is an Agency-level risk mitigation plan that sets out the Agency's Recovery Act
risk assessment, internal controls and monitoring activities. The Stewardship Plan is divided into seven
functional areas: grants, interagency agreements, contracts, human capital/payroll, budget execution,
performance reporting and financial reporting. The Stewardship Plan was developed around
Government Accountability Office (GAO) standards for internal control. Under each functional area,
risks are assessed and related control, communication and monitoring activities are identified for each
impacted program. The Plan is a dynamic document and will be updated as revised OMB guidance is
issued or additional risks are uncovered.
EPA has the three-year EPM treasury symbol 6809/100108 that was established to track the
appropriate operation and maintenance of the funds. EPA's other Recovery Act programs are the
following: Office of Inspector General, treasury symbol 6809/120113; State and Tribal Assistance
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Grants, treasury symbol 6809/100102; Payment to the Superfund, treasury symbol 6809/100249;
Superfund, treasury symbol 6809/108195; and Leaking Underground Storage Tank, treasury symbol
6809/108196.
V. Deepwater Horizon Oil Spill
On April 20, 2010 the Deepwater Horizon drilling rig exploded, releasing large volumes of oil into the
Gulf of Mexico. As a responsible party, BP is required by the 1990 Oil Pollution Act to fund the cost of
the response and cleanup operations. In FY 2011, the EPA worked on the cleanup effort in conjunction
with the U.S. Coast Guard who was named the lead Federal On-Scene Coordinator and continues to
assist the Department of Justice on the pending civil litigation.
W. Use of Estimates
The preparation of financial statements requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates.
Note 2. Fund Balance with Treasury (FBWT)
Fund Balance with Treasury as of September 30, 2012 and 2011, consists of the following:
Trust Funds:
Superfund
LUST
Oil Spill & Misc.
Revolving Funds:
FIFRA/Tolerance
Working Capital
Cr. Reform Finan.
Appropriated
Other Fund Types
Total
Entity
Assets
95,604
35,310
4,682
4,808
68,319
599
10,300,004
338,748
FY2012
Non-Fjitity
Assets
8,401
Total
10,848,074
8,401
95,604
35,310
4,682
4,808
68,319
599
10,300,004
347,149
10,856,475 $ 12,653,212
Entity
Assets
114,540 $
60,558
4,085
3,571
68,776
390
12,086,770
314,522
FY2011
Non-Fjitity
Assets
- $
-
-
-
-
-
-
9,329
Total
114,540
60,558
4,085
3,571
68,776
390
12,086,770
323,851
9,329 $ 12,662,541
Entity fund balances, except for special fund receipt accounts, are available to pay current liabilities and
to finance authorized purchase commitments (see Status of Fund Balances
below). Entity Assets for Other Fund Types consist of special purpose funds and special fund receipt
accounts, such as the Pesticide Registration funds and the Environmental Services receipt account.
The Non-Entity Assets for Other Fund Types consist of clearing accounts and deposit funds, which are
either awaiting documentation for the determination of proper disposition or being held by EPA for other
entities.
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Status of Fund Balances:
FY2012
FY2011
Unobligated Amounts in Fund Balance:
Available for Obligation
Unavailable for Obligation
Net Receivables from Invested Balances
Balances in Treasury Trust Fund (Note 37)
Obligated Balance not yet Disbursed
Non-Budgetary FBWT
Totals
2,609,126 $
177,277
(3,269,572)
(994)
11,005,812
334,826
3,326,812
171,038
(3,485,275)
1,310
12,336,466
312,190
10,856,475 $
12,662,541
The funds available for obligation may be apportioned by OMB for new obligations at the beginning of
the following fiscal year. Funds unavailable for obligation are mostly balances in expired funds, which
are available only for adjustments of existing obligations. For FY 2012 and FY 2011 no differences
existed between Treasury's accounts and EPA's statements for fund balances with Treasury.
Note 3. Cash and Other Monetary Assets
As of September 30, 2012 and 2011, the balance in the imprest fund was $10 thousand.
Note 4. Investments
As of September 30, 2012 and 2011 investments related to Superfund and LUST consist of the
following:
Intragowrnmental Securities:
Non-Marketable FY2012 $
Non-Marketable FY2011 $
Cost
4,509,646
6,959,480 $
(Premium)
Discount
(103,614)
(137,103) $
Interest
RecehaMe
6,971
15,614
Inwstments,
Net
4,620,231
7,112,197
Market
Value
4,620,231
7,112,197
CERCLA, as amended by SARA, authorizes EPA to recover monies to clean up Superfund sites from
responsible parties (RPs). Some RPs file for bankruptcy under Title 11 of the U.S. Code. In bankruptcy
settlements, EPA is an unsecured creditor and is entitled to receive a percentage of the assets
remaining after secured creditors have been satisfied. Some RPs satisfy their debts by issuing
securities of the reorganized company. The Agency does not intend to exercise ownership rights to
these securities, and instead will convert them to cash as soon as practicable (see Note 6). All
investments in Treasury securities are earmarked funds (see Note 19).
The Federal Government does not set aside assets to pay future benefits or other expenditures
associated with earmarked funds. The cash receipts collected from the public for an earmarked fund
are deposited in the U.S. Treasury, which uses the cash for general Government purposes. Treasury
securities are issued to EPA as evidence of its receipts. Treasury securities are an asset to EPA and a
liability to the U.S. Treasury. Because EPA and the U.S. Treasury are both parts of the Government,
these assets and liabilities offset each other from the standpoint of the Government as a whole. For
this reason, they do not represent an asset or liability in the U.S. Government-wide financial
statements.
Treasury securities provide EPA with authority to draw upon the U.S. Treasury to make future benefit
payments or other expenditures. When EPA requires redemption of these securities to make
expenditures, the Government finances those expenditures out of accumulated cash balances, by
raising taxes or other receipts, by borrowing from the public or repaying less debt, or by curtailing other
expenditures. This is the same way that the Government finances all other expenditures.
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Note 5. Accounts Receivable, Net
The Accounts Receivable as of September 30, 2012 and 2011 consist of the following:
FY2012 FY2011
35,518
Intragovernmental:
Accounts & Interest Receivable
Less: Allowance for Uncollectibles
Total
Non-Federal:
Unbilled Accounts Receivable
Accounts & Interest Receivable
Less: Allowance for Uncollectibles
Total
29,027 $
(811) $
28,216 $
139,138 $
2,036,177
(1,684,193)
491,122 $
35,518
159,170
2,176,215
(1,821,195)
514,190
The Allowance for Uncollectible Accounts is determined both on a specific identification basis, as a
result of a case-by-case review of receivables, and on a percentage basis for receivables not
specifically identified.
Note 6. Other Assets
Other Assets as of September 30, 2012 and 2011 consist of the following:
Intragovernmental:
Advances to Federal Agencies
Advances for Postage
Total
FY2012
252,537 $
300
252,837 $
FY2011
251,649
154
251,803
Non-Federal:
Travel Advances
Other Advances
Operating Materials and Supplies
Inventory for Sale
Total
202 $
2,625
140
167
486
1,838
140
102
3,134 $
2,566
Note 7. Loans Receivable, Net
Loans Receivable consists of Asbestos Loan Program loans disbursed from obligations made prior to
FY 1992 and are presented net of allowances for estimated uncollectible loans, if an allowance was
considered necessary. Loans disbursed from obligations made after FY 1991 are governed by the
Federal Credit Reform Act, which mandates that the present value of the subsidy costs (i.e., interest
rate differentials, interest subsidies, anticipated delinquencies, and defaults) associated with direct
loans be recognized as an expense in the year the loan is made. The net loan present value is the
gross loan receivable less the subsidy present value. The amounts as of September 30, 2012 and 2011
are as follows:
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FY2012 FY2011
Loans Value of Assets Loans Value of Assets
Receivable, Allowance* Related to Receivable, Allowance* Related to
Gross Direct Loans Gross Direct Loans
Direct Loans
Obligated Prior to $ - - $ - $ 44 $ - $ 44
FY1992
Direct Loans
Obligated After FY 496 (36°) 136 2>194 d31) 2>063
1991
Total $ 496 $ (360) $ 136 $ 2,238 $ (131) $ 2,107
* Allowance for Pre-Credit Reform loans (prior to FY 1992) is the Allowance for Estimated Uncollectible Loans,
and the Allowance for Post Credit Reform Loans (after FY 1991) is the Allowance for Subsidy Cost (present
value).
During FY 2008, the EPA made a payment within the U.S. Treasury for the Asbestos Loan Program
based on an upward re-estimate of $33 thousand for increased loan financing costs. It was believed
that the payment only consisted of "interest" costs and, as such, an automatic apportionment, per OMB
Circular A-11, Section 120.83, was deemed appropriate. However, approximately one third ($12
thousand) of the $33 thousand re-estimate was for increased "subsidy" costs which requires an
approved apportionment by OMB before any payment could be made. Therefore, the payment resulted
in a minor technical Antideficiency Act (ADA) violation. On October 13, 2009, EPA transmitted, as
required by OMB Circular A-11, Section 145, written notifications to the (1) President, (2) President of
the Senate, (3) Speaker of the House of Representatives, (4) Comptroller General, and (5) the Director
of OMB. On May 18, 2011, EPA sent a supplemental letter to the OMB Director to further identify the
names of the persons responsible for the violation, and that they were not suspected of willfully or
knowingly violating the ADA.
Subsidy Expenses for Credit Reform Loans (reported on a cash basis):
Interest Rate Technical Total
Re-estimate Re-estimate
Upward Subsidy Reestimate - FY2012 $ 247 $ 85 $ 332
Downward Subsidy Reestimate - FY2012
FY2012 Totals $ 247 $ 85 $ 332
Upward Subsidy Reestimate-FY 2011 $ 104 $ 39 $ 143
Downward Subsidy Reestimate-FY2011 -
FY2011 Totals $ 104 $ 39 $ 143
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Schedule for Reconciling Subsidy Cost Allowance Balances
(Post-1991 Direct Loans)
FY2012 FY2011
Beginning balance of the subsidy cost allowance $ (131) $ (222)
Add: subsidy expense for direct loans disbursed during the
reporting years by component:
Interest rate differential costs
Default costs (net of recoveries)
Fees and other collections
Other subsidy costs
Total of the above subsidy expense components $ - $
Adjustments:
Loan Modification
Fees received
Foreclosed property acquired
Loans written off
Subsidy allowance amortization $ 103 234
Other
End balance of the subsidy cost allowance before reestimates $ 103 $ 234
Add or subtract subsidy reestimates by component:
(a) Interest rate reestimate (247) (104)
(b) Technical/default reestimate (85) (39)
Total of the above reestimate components $ (332) (143)
Ending Balance of the subsidy cost allowance $ (360) $ (131)
EPA has not disbursed Direct Loans since 1993.
Note 8. Accounts Payable and Accrued Liabilities
The Accounts Payable and Accrued Liabilities are current liabilities and consist of the following
amounts as of September 30, 2012 and 2011:
FY2012 FY2011
Intragovernmental:
Accounts Payable $ 2,610 $ 62
Accrued Liabilities 52,411 52,386
Total $ 55,021 $ 52,448
Non-Federal: FY2012 FY2011
Accounts Payable $ 107,294 $ 69,505
Advances Payable 11 3
Interest Payable 7 7
Grant Liabilities 460,835 503,249
Other Accrued Liabilities 207,134 344,002
Total $ 775,281 $ 916,766
Other Accrued Liabilities primarily relate to contractor accruals.
52
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Note 9. General Property, Plant, and Equipment, Net
General property, plant, and equipment (PP&E) consist of software, real property, EPA and contractor-
held personal property, and capital leases.
As of September 30, 2012 and 2011, General PP&E consist of the following:
EPA -Held Equipment $
Software
Contractor Held Equip.
Land and Buildings
Capital Leases
Total $
Acquisition
Value
261,279 $
615,090
59,812
672,096
35,440
1,643,717 $
FY2012
Accumulated
Depreciation
(157,259) $
(231,599)
(18,711)
(201,140)
(24,987)
(633,696) $
Net Book Value
104,020 $
383,491
41,101
470,956
10,453
1,010,021 $
Acquisition
Value
255,049 $
527,603
66,808
653,518
35,440
1,538,418 $
FY2011
Accumulated
Depreciation
(147,219) $
(190,302)
(22,104)
(188,382)
(23,612)
(571,619) $
Net Book
Value
107,830
337,301
44,704
465,136
11,828
966,799
Note 10. Debt Due
to Treasury
The debt due to Treasury consists of borrowings to finance the Asbestos Loan Program. The debt to
Treasury as of September 30, 2012 and 2011 is as follows:
All Other Funds
Intragovernmental:
Debt to Treasury
FY2012 FY2011
Beginning Net Ending Beginning Net Ending
Balance Borrowing Balance Balance Borrowing Balance
2,593
(1,530) $
1,063 $
4,844
(2,251) $
2,593
Note 11. Stewardship Land
The Agency acquires title to certain property and property rights under the authorities provided in
Section 104(j) CERCLA related to remedial clean-up sites. The property rights are in the form of fee
interests (ownership) and easements to allow access to clean-up sites or to restrict usage of
remediated sites. The Agency takes title to the land during remediation and transfers it to state or local
governments upon the completion of clean-up. A site with "land acquired" may have more than one
acquisition property. Sites are not counted as a withdrawal until all acquired properties have been
transferred under the terms of 104(j).
As of September 30, 2012, the Agency possesses the following land and land rights:
53
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FY2012 FY2011
Superfund Sites with
Easements
Beginning Balance 36 35
Additions 0 1
Withdrawals 0 0
Ending Balance 36_ 36_
Superfund Sites with
Land Acquired
Beginning Balance 34 32
Additions 0 4
Withdrawals 0 2
Ending Balance 34 34
Note 12. Custodial Liability
Custodial Liability represents the amount of net accounts receivable that, when collected, will be
deposited to the Treasury General Fund. Included in the custodial liability are amounts for fines and
penalties, interest assessments, repayments of loans, and miscellaneous other accounts receivable.
As of September 30, 2012 and 2011, custodial liability is approximately $119 million and $57 million,
respectively.
Note 13. Other Liabilities
Other Liabilities consist of the following as of September 30, 2012:
54
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Other Liabilities - Intragovernmental
Current
Employer Contributions & Payroll Taxes
WCF Advances
Other Advances
Advances, HRSTF Cashout
Deferred HRSTF Cashout
Non-Current
Unfunded FECA Liability
Payable to Treasury Judgment Fund
Total Intragowrnmental
Other Liabilities - Non-Federal
Current
Unearned Advances, Non-Federal
Liability for Deposit Funds, Non-Federal
Non-Current
Capital Lease Liability
Total Non-Federal
Cow r e d by Not Cove re d by
Budgetary Budgetary
Resources Resources
72,728
9,335
23,005
Total
25,304 $
1,294
23,505
34,341
604
_
-
85,048 $
- $
-
-
-
-
10,472
22,000
32,472 $
25,304
1,294
23,505
34,341
604
10,472
22,000
117,520
72,728
9,335
23,005
82,063 $
23,005 $
105,068
Other Liabilities consist of the following as of September 30, 2011:
Other Liabilities - Intragowrnmental
Current
Employer Contributions & Payroll Ta?es
WCF Advances
Other Advances
Advances, HRSTF Cashout
Resources Payable to Treasury
Non-Current
Unfunded FECA Liability
Payable to Treasury Judgment Fund
Total Intragowrnmental
Other Liabilities - Non-Federal
Current
Unearned Advances
Liability for Deposit Funds
Non-Current
Capital Lease Liability
Total Non-Federal
Cow red by
Budgetary
Resources
Not Covered by
Budgetary
Resources
Total
25,495
1,337
38,981
34,979
3
100,795 $
70,084
9,194
10,115
22,000
32,115 $
24,711
25,495
1,337
38,981
34,979
3
10,115
22,000
132,910
70,084
9,194
24,711
79,278 $
24,711 $
103,989
55
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Note 14. Leases
Capital Leases:
The value of assets held under Capital Leases as of September 30, 2012 and 2011 are as follows:
Summary of Assets Under Capital Lease: FY2012 FY2011
Real Property $ 35,285 $ 35,285
Personal Property 155 155
Total $ 35,440 $ 35,440
Accumulated Amortization $ 24,987 $ 23,612
EPA had two capital leases for land and buildings housing scientific laboratories and computer facilities.
Both leases include a base rental charge and escalation clauses based upon either rising operating
costs and/or real estate taxes. The base operating costs are adjusted annually according to escalators
in the Consumer Price Indices published by the Bureau of Labor Statistics, U.S. Department of Labor.
The two leases terminate in FY 2013 and FY 2025.
The total future minimum capital lease payments are listed below.
Future Payments Due:
Fiscal Year Capital Leases
2013 $ 5,714
2014 4,215
2015 4,215
2016 4,215
After 5 y ears 35,125
Total Future Minimum Lease Payments 53,484
Less: Imputed Interest $ (30,479)
Net Capital Lease Liability 23,005
Liabilities not Covered by Budgetary Resources $ 23,005
(See Note 13)
Operating Leases:
The GSA provides leased real property (land and buildings) as office space for EPA employees. GSA
charges a Standard Level User Charge that approximates the commercial rental rates for similar
properties.
EPA had two direct operating leases for land and buildings housing scientific laboratories and computer
facilities. The leases include a base rental charge and escalation clauses based upon either rising
operating costs and/or real estate taxes. The base operating costs are adjusted annually according to
escalators in the Consumer Price Indices published by the Bureau of Labor Statistics. Two leases
expire in FY 2017 and FY 2020. These charges are expended from the EPM appropriation.
The total minimum future operating lease costs are listed below:
56
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Operating Leas es, Land and
Buildings
Fiscal Year
2013 $ 89
2014 89
2015 89
2016 89
Beyond 2017 195
Total Future Minimum Lease Payments $ 551
Note 15. FECA Actuarial Liabilities
The Federal Employees' Compensation Act (FECA) provides income and medical cost protection to
covered Federal civilian employees injured on the job, employees who have incurred a work-related
occupational disease, and beneficiaries of employees whose death is attributable to a job-related injury
or occupational disease. Annually, EPA is allocated the portion of the long term FECA actuarial liability
attributable to the entity. The liability is calculated to estimate the expected liability for death, disability,
medical and miscellaneous costs for approved compensation cases. The liability amounts and the
calculation methodologies are provided by the Department of Labor.
The FECA Actuarial Liability as of September 30, 2012 and 2011 was $46.9 million and $44.8 million,
respectively. The FY 2012 present value of these estimated outflows is calculated using a discount
rate of 2.293 percent in the first year, and 3.138 percent in the years thereafter. The estimated future
costs are recorded as an unfunded liability.
Note 16. Cashout Advances, Superfund
Cashout advances are funds received by EPA, a state, or another PRP under the terms of a settlement
agreement (e.g., consent decree) to finance response action costs at a specified Superfund site. Under
CERCLA Section 122(b)(3), cashout funds received by EPA are placed in site-specific, interest bearing
accounts known as special accounts and are used for potential future work at such sites in accordance
with the terms of the settlement agreement. Funds placed in special accounts may be disbursed to
PRPs, to states that take responsibility for the site, or to other Federal agencies to conduct or finance
response actions in lieu of EPA without further appropriation by Congress. As of September 30, 2012
and 2011, cashouts are approximately $736 million and $790 million respectively.
Note 17. Unexpended Appropriations- Other Funds
As of September 30, 2012 and 2011, the Unexpended Appropriations consist of the following:
Unexpended Appropriations: FY2012 FY2011
Unobligated
Available $ 602,413 $ 1,151,603
Unavailable 82,346 74,517
Undelivered Orders 9,127,111 10,236,478
Total $ 9,811,870 $ 11,462,598
57
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Note 18. Commitments and Contingencies
EPA may be a party in various administrative proceedings, actions and claims brought by or against it.
These include:
• Various personnel actions, suits, or claims brought against the Agency by employees and others.
• Various contract and assistance program claims brought against the Agency by vendors, grantees
and others.
• The legal recovery of Superfund costs incurred for pollution cleanup of specific sites, to include the
collection of fines and penalties from responsible parties.
• Claims against recipients for improperly spent assistance funds which may be settled by a reduction
of future EPA funding to the grantee or the provision of additional grantee matching funds.
As of September 30, 2012 and 2011 total accrued liabilities for commitments and potential loss
contingencies is $25.2 million and $10.2 million, respectively. Further discussion of the cases and
claims that give rise to this accrued liability are discussed immediately below.
Litigation Claims and Assessments
There is currently one legal claim which has been asserted against the EPA pursuant to the Federal
Tort Claims and Fair Labor Standards Acts. This loss has been deemed probable, and the unfavorable
outcome is estimated to be between $10 million and $15 million. EPA has accrued the higher
conservative amount as of September 30, 2012. The maximum amount of exposure under the claim
could range as much as $15 million in the aggregate.
Superfund
Under CERCLA Section 106(a), EPA issues administrative orders that require parties to clean up
contaminated sites. CERCLA Section 106(b) allows a party that has complied with such an order to
petition EPA for reimbursement from the fund of its reasonable costs of responding to the order, plus
interest. To be eligible for reimbursement, the party must demonstrate either that it was not a liable
party under CERCLA Section 107(a) for the response action ordered, or that the Agency's selection of
the response action was arbitrary and capricious or otherwise not in accordance with law.
Judgment Fund
In cases that are paid by the U.S. Treasury Judgment Fund, EPA must recognize the full cost of a claim
regardless of which entity is actually paying the claim. Until these claims are settled or a court
judgment is assessed and the Judgment Fund is determined to be the appropriate source for the
payment, claims that are probable and estimable must be recognized as an expense and liability of the
Agency. For these cases, at the time of settlement or judgment, the liability will be reduced and an
imputed financing source recognized. See Interpretation of Federal Financial Accounting Standards
No. 2, "Accounting for Treasury Judgment Fund Transactions."
As of September 30, 2012, there are no material claims pending in the Treasury's Judgment Fund.
However, EPA has a $22 million liability to the Treasury Judgment Fund for a payment made by the
Fund to settle a contract dispute claim.
58
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Other Commitments
EPA has a commitment to fund the United States Government's payment to the Commission of the
North American Agreement on Environmental Cooperation between the Governments of Canada, the
Government of the United Mexican States, and the Government of the United States of America
(commonly referred to as CEC). According to the terms of the agreement, each government pays an
equal share to cover the operating costs of the CEC. EPA paid $3 million to the CEC in the period
ended September 30, 2012 and $3 million in the period ended September 30, 2011.
EPA has a legal commitment under a non-cancellable agreement, subject to the availability of funds,
with the United Nations Environment Program (UNEP). This agreement enables EPA to provide funding
to the Multilateral Fund for the Implementation of the Montreal Protocol. EPA made payments totaling
$9.48 million in FY 2012. Future payments totaling $11 million have been deemed reasonably possible
and are anticipated to be paid in fiscal years 2013 through 2015.
Note 19. Earmarked Funds
Balance sheet as of September 30,2012
Assets
Fund Balance with Treasury
Investments
Accounts Receivable, Net
Other Assets
Total Assets
Other Liabilities
Total Liabilities
Cumulative Results of Operations
Total Liabilities and Net Position
Statement of Changes in Net Cost for the
Period Bided September 30, 2012
Gross Program Costs
Less: Earned Revenues
Net Cost of Operations
Statement of Changes inNetPosition for the
Period ended September 30, 2012
Net Position, Beginning of Period
Nonexchange Revenue- Securities Investments
Nonexchange Revenue
Other Budgetary Finance Sources
Other Financing Sources
Net Cost of Operations
Change in Net Position
Net Position
Environmental
Services
LUST
Superfimd
Other Earmarked
Funds
Total Earmarked
Funds
$
$
$
$
$
325,719 $
-
325,719
- $
- $
325,719 $
325,719 $
35,310 $
1,315,101
332
1,350,743
13,837 $
13,837 $
1,336,906 $
1,350,743 $
95,604 $
3,305,130
374,791
1 14,354
3,889,879
1,055,191 $
1,055,191 $
2,834,688 $
3,889,879 $
22,518 $
10,017
3,924
36,459
29,573 $
29,573 $
6,886 $
36,459 $
479,151
4,620,231
384,808
118,610
5,602,800
1,098,601
1,098,601
4,504,199
5,602,800
$ 302,677 $ 3,575,201 $
60,572
23,042 170,497
(2,400,000)
402
(69,766)
23,042 $ (2,238,295) $
81,780 $
58,796
12
23,345
844
(22,984)
1,220 $
1,924,907
431,565
7,027,163
87,454
200,068
(1,343,405)
26,261
(1,493,342)
(2,522,96*9
1,336,906 $
6,886 $
4,504,199
59
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Balance sheet as of September 30,2011
Assets
Fund Balance with Treasury
Investments
Accounts Receivable, Net
Other Assets
Total Assets
Other Liabilities
Total Liabilities
Cumulative Results of Operations
Total Liabilities and Net Position
Statement of Changes in Net Cost for the
Period Ended September 30,2011
Gross Program Costs
Less: Earned Revenues
Net Cost of Operations
Statement of Changes in Net Position for the
Period ended September 30,2011
Net Position, Beginning of Period
Nonexchange Revenue- Securities Investments
Nonexchange Revenue
Other Budgetary Finance Sources
Other Financing Sources
Net Cost of Operations
Change in Net Position
Net Position
Environmental
Services
LUST
Superfund Other Earmarked Total Earmarked
Funds Funds
$ 302,677 $
-
-
302,677
$ - $
$ - $
$ 302,677 $
$ 302,677 $
60,558 $
3,535,052
-
347
3,595,957
20,757 $
20,757 $
3,575,200 $
3,595,957 $
114,540 $
3,577,145
445,303
118,355
4,255,343
1,111,724 $
1,111,724 $
3,146,619 $
4,258,343 $
19,500 $
16,866
4,415
40,781
35,114 $
35,114 $
5,667 $
40,781 $
497,275
7,112,197
462,169
123,117
8,194,758
1,167,595
1,167,595
7,030,163
8,197,758
$ 273,416
29,261
29,261 $
209,613 $
209,613 $
1,908,317 $
532,006
1,376,311 $
3,539,217 $
93,156
152,127
314
(209,613)
35,984 $
3,340,498 $
27,266
3,596
1,120,663
27,907
(1,376,311)
(196,879) $
3,575,201 $
3,143,619 $
124,214 $
110,839
13,375 $
(749) $
7
18,342
1,441
(13,375)
2,242,144
642,845
1,599,299
7,152,382
120,429
184,984
1,139,005
29,662
(1,599,299)
5,666 $
7,027,163
Earmarked funds are as follows:
Environmental Services Receipt Account: The Environmental Services Receipt Account authorized
by a 1990 act, "To amend the Clean Air Act (P.L. 101-549),", was established for the deposit of fee
receipts associated with environmental programs, including radon measurement proficiency ratings and
training, motor vehicle engine certifications, and water pollution permits. Receipts in this special fund
can only be appropriated to the S&T and EPM appropriations to meet the expenses of the programs
that generate the receipts if authorized by Congress in the Agency's appropriations bill.
Leaking Underground Storage Tank (LUST) Trust Fund: The LUST Trust Fund, was authorized by
the Superfund Amendments and Reauthorization Act of 1986 (SARA) as amended by the Omnibus
Budget Reconciliation Act of 1990. The LUST appropriation provides funding to respond to releases
from leaking underground petroleum tanks. The Agency oversees cleanup and enforcement programs
which are implemented by the states. Funds are allocated to the states through cooperative
agreements to clean up those sites posing the greatest threat to human health and the environment.
Funds are used for grants to non-state entities including Indian tribes under Section 8001 of the
Resource Conservation and Recovery Act.
Superfund Trust Fund: In 1980, the Superfund Trust Fund, was established by CERCLA to provide
resources to respond to and clean up hazardous substance emergencies and abandoned, uncontrolled
hazardous waste sites. The Superfund Trust Fund financing is shared by federal and state
governments as well as industry. The EPA allocates funds from its appropriation to other Federal
agencies to carry out CERCLA. Risks to public health and the environment at uncontrolled hazardous
waste sites qualifying for the Agency's National Priorities List (NPL) are reduced and addressed
through a process involving site assessment and analysis and the design and implementation of
cleanup remedies. NPL cleanups and removals are conducted and financed by the EPA, private
60
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parties, or other Federal agencies. The Superfund Trust Fund includes Treasury's collections, special
account receipts from settlement agreements, and investment activity.
Other Earmarked Funds:
Oil Spill Liability Trust Fund: The Oil Spill Liability Trust Fund, was authorized by the Oil Pollution Act
of 1990 (OPA). Monies are appropriated from the Oil Spill Liability Trust Fund to EPA's Oil Spill
Response Account each year. The Agency is responsible for directing, monitoring and providing
technical assistance for major inland oil spill response activities. This involves setting oil prevention and
response standards, initiating enforcement actions for compliance with OPA and Spill Prevention
Control and Countermeasure requirements, and directing response actions when appropriate. The
Agency carries out research to improve response actions to oil spills including research on the use of
remediation techniques such as dispersants and bioremediation. Funding for specific oil spill cleanup
actions is provided through the U.S. Coast Guard from the Oil Spill Liability Trust Fund through
reimbursable Pollution Removal Funding Agreements (PRFAs) and other inter-agency agreements.
Miscellaneous Contributed Funds Trust Fund: The Miscellaneous Contributed Funds Trust Fund
authorized in the Federal Water Pollution Control Act (Clean Water Act) as amended P.L 92-500 (The
Federal Water Pollution Control Act Amendments of 1972), includes gifts for pollution control programs
that are usually designated for a specific use by donors and/or deposits from pesticide registrants to
cover the costs of petition hearings when such hearings result in unfavorable decisions to the petitioner.
Pesticide Registration Fund: The Pesticide Registration Fund authorized by a 2004 Act,
"Consolidated Appropriations Act (P.L. 108-199),", and reauthorized in 2007 for five more years, for the
expedited processing of certain registration petitions and associated establishment of tolerances for
pesticides to be used in or on food and animal feed. Fees covering these activities, as authorized
under the FIFRA Amendments of 1988, are to be paid by industry and deposited into this fund group.
Reregistration and Expedited Processing Fund: The Revolving Fund, was authorized by the FIFRA
of 1972, as amended by the FIFRA Amendments of 1988 and as amended by the Food Quality
Protection Act of 1996. Pesticide maintenance fees are paid by industry to offset the costs of pesticide
re-registration and reassessment of tolerances for pesticides used in or on food and animal feed, as
required by law.
Tolerance Revolving Fund: The Tolerance Revolving Fund, was authorized in 1963 for the deposit of
tolerance fees. Fees are paid by industry for Federal services to set pesticide chemical residue limits in
or on food and animal feed. The fees collected prior to January 2, 1997 were accounted for under this
fund. Presently collection of these fees is prohibited by statute, enacted in the Consolidated
Appropriations Act, 2004 (P.L. 108-199).
Exxon Valdez Settlement Fund: The Exxon Valdez Settlement Fund authorized by P.L. 102-389,
"Making appropriations for the Department of Veterans Affairs and Housing and Urban Development,
and for sundry independent agencies, boards, commissions, corporations, and offices for the fiscal year
ending September 30, 1993,", has funds available to carry out authorized environmental restoration
activities. Funding is derived from the collection of reimbursements under the Exxon Valdez settlement
as a result of an oil spill.
Note 20. Intragovernmental Costs and Exchange Revenue
Exchange, or earned revenues on the Statement of Net Cost, include income from services provided to
Federal agencies and the public, interest revenue (with the exception of interest earned on trust fund
investments), and miscellaneous earned revenue. Intragovernmental costs relate to the source of
goods or services, not the classification of the related revenue.
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FY2012
Clean Air
Pro gram Costs
Earned Revenue
NET COST
Clean and Safe Water
Program Costs
Earned Revenue
NET COSTS
Land Preservation &
Restoration
Program Costs
Earned Revenue
NET COSTS
Healthy Communities &
Ecosystems
Program Costs
Earned Revenue
NET COSTS
Compliance &
Environmental
Stewardship
Program Costs
Earned Revenue
NET COSTS
Total
Program Costs
Earned Revenue
NET COSTS
litragovernm
ental
184,695
12,171
172,524
380,760
8,220
372,540
358,603
79,371
279,232
184,459
12,092
172,367
216,865 $
5,877
210,988 $
1,325,382
117,731
1,207,651
With the
Public
Total
1,027,551 $
1,372
1,026,179 $
5,177,804
33,654
5,144,150
2,175,713
255,421
1,920,292
593,659
37,106
556,553
605,163
76,542
528,621
9,579,890
404,095
9,175,795
1,212,246
13,543
1,198,703
5,558,564
41,874
5,516,690
2,534,316
334,792
2,199,524
778,118
49,198
728,920
822,028
82,419
10,905,272
521,826
10,383,446
FY2011
Intragovernm With the
ental Public
Total
159,456 $
13,586
390,431 $
124,874
192,243
3,607
188,636 $
1,035,680 $ 1,195,136
1,034 14,620
145,870 $ 1,034,646 $
1,180,516
252,748 $ 5,125,894 $ 5,378,642
7,333 1,458 8,791
245,415 $ 5,124,436 $ 5,369,851
2,180,996 $ 2,571,427
494,249 619,123
1,686,747 $
265,557
335,757 $ 1,289,505 $ 1,625,262
12,010 38,725 50,735
1,250,780 $ 1,574,527
614,514 $ 806,757
1,455 5,062
613,059 $ 801,695
1,330,635 $ 10,246,589 $ 11,577,224
161,410 536,921 698,331
1,169,225 $ 9,709,668 $ 10,878,893
Note 21. Cost of Stewardship Land
There were no costs related to the acquisition of stewardship land for September 30, 2012 and $438
thousand for September 30, 2011. These costs are included in the Statement of Net Cost.
Note 22. Environmental Cleanup Costs
As of September 30, 2012, EPA has 2 sites that require clean up stemming from its activities. Two
claimants' chances of success are characterized as probable with costs amounting to $180 thousand,
may be paid out of the Treasury Judgment Fund. For sites that had previously been listed, it was
determined by EPA's Office of General Counsel to discontinue reporting the potential environmental
liabilities for the following reasons: (1) although EPA has been put on notice that it is subject to a
contribution claim under CERCLA, no direct demand for compensation has been made to EPA; (2) any
demand against EPA will be resolved only after the Superfund cleanup work is completed, which may
be years in the future; and (3) there was no legal activity on these matters in FY 2012 or in FY 2011.
Accrued Cleanup Cost:
EPA has 14 sites that will require permanent closure, and EPA is responsible to fund the environmental
cleanup of those sites. As of September 30, 2012 and 2011, the estimated costs for site cleanup were
$21.6 million and $20.84 million, respectively. Since the cleanup costs associated with permanent
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closure were not primarily recovered through user fees, EPA has elected to recognize the estimated
total cleanup cost as a liability and record changes to the estimate in subsequent years.
Note 23. State Credits
Authorizing statutory language for Superfund and related Federal regulations requires states to enter
into Superfund State Contracts (SSC) when EPA assumes the lead for a remedial action in their state.
The SSC defines the state's role in the remedial action and obtains the state's assurance that it will
share in the cost of the remedial action. Under Superfund's authorizing statutory language, states will
provide EPA with a 10 percent cost share for remedial action costs incurred at privately owned or
operated sites, and at least 50 percent of all response activities (i.e., removal, remedial planning,
remedial action, and enforcement) at publicly operated sites. In some cases, states may use EPA-
approved credits to reduce all or part of their cost share requirement that would otherwise be borne by
the states. The credit is limited to state site-specific expenses EPA has determined to be reasonable,
documented, direct out-of-pocket expenditures of non-Federal funds for remedial action.
Once EPA has reviewed and approved a state's claim for credit, the state must first apply the credit at
the site where it was earned. The state may apply any excess/remaining credit to another site when
approved by EPA. As of September 30, 2012 and 2011, the total remaining state credits have been
estimated at $24.7 million and $22.2 million, respectively.
Note 24. Preauthorized Mixed Funding Agreements
Under Superfund preauthorized mixed funding agreements, PRPs agree to perform response actions at
their sites with the understanding that EPA will reimburse them a certain percentage of their total
response action costs. EPA's authority to enter into mixed funding agreements is provided under
CERCLA Section 111(a)(2). Under CERCLA Section 122(b)(1), as amended by SARA, PRPs may
assert a claim against the Superfund Trust Fund for a portion of the costs they incurred while
conducting a preauthorized response action agreed to under a mixed funding agreement. As of
September 30, 2012, EPA had 3 outstanding preauthorized mixed funding agreements with obligations
totaling $4.7 million. As of September 30, 2011, EPA had 4 such agreements for $11.5 million. A
liability is not recognized for these amounts until all work has been performed by the PRP and has been
approved by EPA for payment. Further, EPA will not disburse any funds under these agreements until
the PRP's application, claim, and claims adjustment processes have been reviewed and approved by
EPA.
Note 25. Custodial Revenues and Accounts Receivable
FY2012 FY2011
Fines, Penalties and Other Mscellaneous Receipts $ 184,211 $ 126,351
Accounts Receivable for Fines, Penalties and Other
Miscellaneous Receipts:
Accounts Receivable $ 214,530 $ 236,313
Less: Allowance for Uncollectible Accounts (99,606) (184,366)
Total $ 114,924 $ 51,947
EPA uses the accrual basis of accounting for the collection of fines, penalties and miscellaneous
receipts. Collectability by EPA of the fines and penalties is based on the PRPs' willingness and ability
to pay.
63
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Note 26. Reconciliation of President's Budget to the Statement of Budgetary Resources
Budgetary resources, obligations incurred and outlays, as presented in the audited
FY 2012 Statement of Budgetary Resources will be reconciled to the amounts included in the FY 2013
Budget of the United States Government when they become available. The Budget of the United
States Government with actual numbers for FY 2012 has not yet been published. We expect it will be
published by early 2013, and it will be available on the OMB website at http://www.whitehouse.gov/.
The actual amounts published for the year ended September 30, 2011 are listed immediately below:
FY2011
Statement of Budgetary Resources
Expired and Immaterial Funds*
Rounding Differences**
Budgetary
Resources
Obligations
Offsetting
Receipts
15,488,427 $ 11,990,577 $ 1,291,761 $
(172,802)
375
Net Outlays
12,066,123
423
5,239
877
Reported in Budget of the U. S. Government $ 15,316,000 $ 11,991,000 $ 1,297,000 $ 12,067,000
* Expired funds are not included in Budgetary Resources Available for Obligation in the Budget Appendix (lines
23.90 and 10.00). Also, minor funds are not included in the Budget Appendix.
** Balances are rounded to millions in the Budget Appendix.
Note 27. Recoveries and Resources Not Available, Statement of Budgetary Resources
Recoveries of Prior Year Obligations, Temporarily Not Available, and Permanently Not Available on the
Statement of Budgetary Resources consist of the following amounts for September 30, 2012 and 2011:
Recoveries of Prior Year Obligations -Downward
adjustments of prior years' obligations
Temporarily Not Available - Rescinded Authority
Permanently Not Available:
Payments to Treasury
Rescinded authority
Canceled authority
Total Permanently Not Available
FY2012
571,576
(450)
(1,529)
(58,203)
(30,116)
FY2011
270,664
(553)
(2,508)
(157,166)
(20,019)
(179,693)
Note 28. Unobligated Balances Available
Unobligated balances are a combination of two lines on the Statement of Budgetary Resources:
Apportioned, Unobligated Balances and Unobligated Balances Not Available. Unexpired unobligated
balances are available to be apportioned by the OMB for new obligations at the beginning of the
following fiscal year. The expired unobligated balances are only available for upward adjustments of
existing obligations.
The unobligated balances available consist of the following as of September 30, 2012 and 2011:
Unexpired Unobligated Balance
Expired Unobligated Balance
Total
FY2012
2,609,303 $
177,101
2,786,404 $
FY2011
3,325,991
171,859
3,497,850
64
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Note 29. Undelivered Orders at the End of the Period
Budgetary resources obligated for undelivered orders at September 30, 2012 and 2011 were $10.60
billion and $11.91 billion, respectively.
Note 30. Offsetting Receipts
Distributed offsetting receipts credited to the general fund, special fund, or trust fund receipt accounts
offset gross outlays. For FY 2012 and 2011, the following receipts were generated from these
activities:
Trust Fund Recoveries $
Special Fund Environmental Service
Trust Fund Appropriation
Miscellaneous Receipt and Clearing Accounts
Total $
FY2012
45,413 $
23,271
1,075,367
19,685
1,163,736 $
FY2011
97,623
29,257
1,156,073
8,808
1,291,761
Note 31. Transfers-ln and Out, Statement of Changes in
Net Position
Appropriation Transfers, In/Out:
For FY 2012 and 2011, the Appropriation Transfers under Budgetary Financing Sources on the
Statement of Changes in Net Position are comprised of non-expenditure transfers that affect
Unexpended Appropriations for non-invested appropriations. These amounts are included in the
Budget Authority, Net Transfers and Prior Year Unobligated Balance, Net Transfers lines on the
Statement of Budgetary Resources. Details of the Appropriation Transfers on the Statement of
Changes in Net Position and reconciliation with the Statement of Budgetary Resources follows for
September 30, 2012 and 2011:
Transfers In/Out Without Reimbursement, Budgetary:
Fund/Type of Account FY2012 FY2011
Army Corps of Engineers $ 5 $ 1,750
U.S. Navy
Total Appropriation Transfers (Other $ 5$ 1,750
Funds)
Net Transfers from Invested Funds $ 3,683,571$ 1,370,349
Transfers to Another Agency - 1,750
Allocations Rescinded 389 476
Total of Net Transfers on Statement of
Budgetary Resources $ 3,683,960 $ 1,372,575
For FY 2012 and 2011, Transfers In/Out under Budgetary Financing Sources on the Statement of
Changes in Net Position consist of transfers between EPA funds. These transfers affect Cumulative
Results of Operations. Details of the transfers-in and transfers-out, expenditure and nonexpenditure,
follows for September 30, 2012 and 2011:
65
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Type of Transfer/Fluids FY2012 FY2011
Earmarked Other Funds Earmarked Other Funds
Transfers-in (out) nonexpenditure,
Earmark to S&T and OIG funds $ (32,018) 32,018 $ (35,410) $ 35,410
Capital Transfer (5,000)
Transfers-in nonexpenditure, Oil Spill 23,344 18,342
Transfers-out, Superfund to Oil Spill (5,099)
Transfer-out LUST (2,400,000) -_ -_
Total Transfer in (out) without
Reimbursement, Budgetary $ (2,418,773) $ 32,018 $ (17,068) $ 35,410
Transfers In/Out Without Reimbursement, Other Financing Sources:
For FY 2012 and 2011, Transfers In/Out without Reimbursement under Other Financing Sources on the
Statement of Changes in Net Position are comprised of transfers of property.
The amounts reported on the Statement of Changes in Net Position are as follows for September 30,
2012 and 2011:
Type of Transfer/Funds FY2012 FY2011
Earmarked Other Funds Earmarked Other Funds
Transfers-in property $ - $ - $ (1) $ 180
Transfers (out) of prior year negative
subsidy to be paid following year (256)
Total Transfer in (out) without
Reimbursement, Budgetary $ - $ - $ (1). $ (76)
Note 32. Imputed Financing
In accordance with SFFAS No. 5, "Accounting for Liabilities of the Federal Government," Federal
agencies must recognize the portion of employees' pensions and other retirement benefits to be paid
by the OPM trust funds. These amounts are recorded as imputed costs and imputed financing for each
agency. Each year the OPM provides Federal agencies with cost factors to calculate these imputed
costs and financing that apply to the current year. These cost factors are multiplied by the current
year's salaries or number of employees, as applicable, to provide an estimate of the imputed financing
that the OPM trust funds will provide for each agency. The estimates for FY2012 were $151.6 million
($24.1 million from Earmarked funds, and $127.5 million from Other Funds). For FY2011, the
estimates were $164.4 million ($25.8 million from Earmarked funds, and $138.6 million from Other
Funds).
SFFAS No. 4, "Managerial Cost Accounting Standards and Concepts" and SFFAS No. 30, "Inter-Entity
Cost Implementation," requires Federal agencies to recognize the costs of goods and services received
from other Federal entities that are not fully reimbursed, if material. EPA estimates imputed costs for
inter-entity transactions that are not at full cost and records imputed costs and financing for these
unreimbursed costs subject to materiality. EPA applies its Headquarters General and Administrative
indirect cost rate to expenses incurred for inter-entity transactions for which other Federal agencies did
not include indirect costs to estimate the amount of unreimbursed (i.e., imputed) costs. For FY 2012
total imputed costs were $6.5 million ($2.2 million from Earmarked funds, and $4.3 million from Other
Funds).
66
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In addition to the pension and retirement benefits described above, EPA also records imputed costs
and financing for Treasury Judgment Fund payments made on behalf of the Agency. Entries are made
in accordance with the Interpretation of Federal Financial Accounting Standards No. 2, "Accounting for
Treasury Judgment Fund Transactions." For FY 2012 entries for Judgment Fund payments totaled
$10.0 million (Other Funds). For FY 2011, entries for Judgment Fund payments totaled $2.6 million
(Other Funds).
The combined total of imputed financing sources for FY 2012 and FY 2011 is $168.1 million and $178.6
million, respectively.
Note 33. Payroll and Benefits Payable
Payroll and benefits payable to EPA employees for the years ending September 30, 2012 and 2011
consist of the following:
Cow red by Not Covered
FY2012 Payroll & Benefits Payable Budgetary by Budgetary Total
Resources Resources
Accrued Funded Payroll & Benefits $ 72,799 $ - $ 72,799
Withholdings Payable 31,511 - 31,511
Enployer Contributions Payable-TSP 4,163 - 4,163
Accrued Unfunded Annual Leave -_ 158,254 158,254
Total - Current $ 108,473 $ 158,254 $ 266,727
FY2011 Payroll & Benefits Payable
Accrued Funded Payroll and Benefits $ 73,432 $ - $ 73,432
Withholdings Payable 32,050 - 32,050
Enployer Contributions Payable-TSP 4,008 - 4,008
Accrued Unfunded Annual Leave -_ 162,845 162,845
Total - Current $ 109,490 $ 162,845 $ 272,335
Note 34. Other Adjustments, Statement of Changes in Net Position
The Other Adjustments under Budgetary Financing Sources on the Statement of Changes in Net
Position consist of rescissions to appropriated funds and cancellation of funds that expired 5 years
earlier. These amounts affect Unexpended Appropriations.
Other Funds Other Funds
FY2012 FY2011
Rescissions to General
Appropriations $ 64,991 $ 157,208
Canceled General Authority 23,252 19,978
Total Other Adjustments $ 88,243 $ 177,186
67
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Note 35. Non-exchange Revenue, Statement of Changes in Net Position
Non-exchange Revenue, Budgetary Financing Sources, on the Statement of Changes in Net Position
as of September 30, 2012 and 2011 consists of the following items:
Interest on Trust Fund $
TaxRevenue, Net of Refunds
Fines and Penalties Revenue
Special Receipt Fund Revenue
Total Nonexchange Revenue $
Earmarked Funds
FY2012
87,454 $
170,392
6,624
23,053
287,523 $
Earmarked Funds
FY2011
120,429
152,437
3,286
29,261
305,413
68
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Note 36. Reconciliation of Net Cost of Operations to Budget
FY2012
RESOURCES USED TO FINANCE ACTIVITIES
Budgetary Resources Obligated
Obligations Incurred
Less: Spending Authority from Offsetting Collections and Recoveries
Obligations, Net of Offsetting Collections
Less: Offsetting Reciepts
Net Obligations
Other Resources
Donations of Property
Transfers In/Out without Reimbursement, Property
Imputed Financing Sources
Other Resources to Finance Activities
Net Other Resources Used to Finance Activities
Total Resources Used to Finance Activities
RES OURCES US ED TO FINANCE ITEMS
NOT PART OF THE NET COST OF OPERATIONS:
Change in Budgetary Resources Obligated
Budgetary Offsetting Collections and Receipts that
Do Not Affect Net Cost of Operations:
Credit Program Collections Increasing Loan Liabilities for
Guarantees or Subsidy Allowances:
Offsetting Reciepts Not Affecting Net Cost
Resources that Finance Asset Acquisition
Other Resources Not Affecting Net Cost
Total Resources Used to Finance Items Not Part of the Net Cost of Operations
Total Resources Used to Finance the Net Cost of Operations
COMPONENTS OF THE NET COST OF OPERATIONS THAT WILL
NOT REQUIRE OR GENERATE RES OURCES IN THE CURRENT PERIOD:
Components Requiring or Generating Resources in Future Periods:
Increase in Annual Leave Liability
Increase in Environmental and Disposal Liability
Increase in Unfunded Contingencies
Upward/ Downward Reestimates of Credit Subsidy Expense
Increase in Public Exchange Revenue Receivables
Increase in Workers Compensation Costs
Other
Total Components of Net Cost of Operations that Require or
Generate Resources in Future Periods
Components Not Requiring/ Generating Resources:
Depreciation and Amortization
Expenses Not Requiring Budgetary Resources
Total Components of Net Cost that Will Not Require or Generate Resources
Total Components of Net Cost of Operations That Will Not Require or
Generate Resources in the Current Period
13,782,833
(1,154,627)
12,628,206
(3,544,465)
9,083,741
168,142
(76)
168,066
9,251,807
1,138,862
6,777
69,098
(145,656)
76
1,069,157
10,320,964
FY2012
(4,590)
722
15,000
189
(35,266)
2,429
1,242
(20,274)
96,481
(13,725)
82,756
62,482
FY2011
11,990,577
(1,020,941)
10,969,636
(1,282,958)
9,686,678
50
(178)
178,654
178,526
9,865,204
1,031,615
2,759
126,885
(190,101)
971,158
10,836,362
FY2011
(823)
484
5,807
394
(231,519)
(221)
1,563
(224,315)
73,640
193,206
266,846
42,531
Net Cost of Operations
10,383,446
10,878,893
69
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Note 37. Amounts Held by Treasury (Unaudited)
Amounts held by Treasury for future appropriations consist of amounts held in trusteeship by Treasury
in the Superfund and LUST Trust Funds.
Superfund
Superfund is supported by general revenues, cost recoveries of funds spent to clean up hazardous
waste sites, interest income, and fines and penalties.
The following reflects the Superfund Trust Fund maintained by Treasury as of September 30, 2012 and
2011. The amounts contained in these notes have been provided by Treasury. As indicated, a portion
of the outlays represents amounts received by EPA's Superfund Trust Fund; such funds are eliminated
on consolidation with the Superfund Trust Fund maintained by Treasury.
SUPERFUND FY2012
Undistributed Balances
Uninvested Fund Balance
Total Undisbursed Balance
Interest Receivable
Investments, Net
Total Assets
Liabilities & Equity
Equity
Total Liabilities and Equity
Receipts
Corporate Environmental
Cost Recoveries
Fines & Penalties
Total Revenue
Appropriations Received
Interest Income
Total Receipts
Outlays
Transfers to/from EPA, Net
Total Outlays
Net Income
EPA
Treasury
3,171,409
3,171,409
3,171,409
3,171,409
1,221,693
1,221,693
1,723
1,723
4,530
129,191
135,444
135,444
135,444
(104)
45,413
1,176
46,485
1,075,367
26,879
1,148,731
1,221,693
(1,221,693)
(1,221,693)
(72,962)
Combined
1,723
1,723
4,530
3,300,600
3,306,853
3,306,853
3,306,853
(104)
45,413
1,176
46,485
1,075,367
26,879
1,148,731
1,148,731
In FY 2012, the EPA received an appropriation of $1.08 billion for Superfund. Treasury's Bureau of
Public Debt (BPD), the manager of the Superfund Trust Fund assets, records a liability to EPA for the
amount of the appropriation. BPD does this to indicate those trust fund assets that have been assigned
for use and, therefore, are not available for appropriation. As of September 30, 2012 and 2011, the
Treasury Trust Fund has a liability to EPA for previously appropriated funds of $3.17 billion and $3.37
billion, respectively.
70
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LUST
SUPERFUNDFY2011
Undistributed Balances
Uninvested Fund Balance
Total Undisbursed Balance
Interest Receivable
Investments, Net
Total Assets
Liabilities & Equity
Receipts and Outlays
Equity
Total Liabilities and Equity
Receipts
Corporate Environmental
Cost Recoveries
Fines & Penalties
Total Revenue
Appropriations Received
Interest Income
Total Receipts
Outlays
Transfers to/from EPA, Net
Total Outlays
Net Income
EPA
Treasury
Combined
3,368,754
3,368,754 $
15 $
15
4,362
204,030
208,407 $
15
15
4,362
3,572,784
3,577,161
3,368,754 $
3,368,754 $
.
-
-
-
-
-
- $
1,292,883 $
1,292,883
1,292,883 $
208,407 $
208,407 $
310
97,623
1,755
99,688
1,156,073
27,266
1,283,027 $
(1,292,883) $
(1,292,883)
(9,856) $
3,577,161
3,577,161
310
97,623
1,755
99,688
1,156,073
27,266
1,283,027
-
1,283,027
LUST is supported primarily by a sales tax on motor fuels to clean up LUST waste sites. In FY 2012
and 2011, there were no fund receipts from cost recoveries. Revenue provisions in section 40201 of
Public Law 112-141 transferred and appropriated $2.4 billion of LUST funds to the Highway Trust Fund.
The amounts contained in these notes are provided by Treasury. Outlays represent appropriations
received by EPA's LUST Trust Fund; such funds are eliminated on consolidation with the LUST Trust
Fund maintained by Treasury.
71
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LUSTFY2012
Undistributed Balances
Uninvested Fund Balance
Total Undisbursed Balance
Interest Receivable
Investments, Net
Total Assets
Liabilities & Equity
Equity
Receipts
Highway TF Tax
Airport TF Tax
Inland TF Tax
Total Revenue
Interest Income
Total Receipts
Outlays
Transfers to/from EPA, Net
Total Outlays
Net Income
LUSTFY2011
Undistributed Balances
Uninvested Fund Balance
Total Undisbursed Balance
Interest Receivable
Investments, Net
Total Assets
Liabilities & Equity
Equity
Receipts
Highway TF Tax
Airport TF Tax
Inland TF Tax
Total Revenue
Interest Income
Total Receipts
Outlays
Transfers to/from EPA, Net
Total Outlays
Net Income
EPA
Treasury
Combined
- $
-
- $
- $
- $
-
- $
2,504,142 $
2,504,142
2,504,142 $
EPA
- $
-
- $
- $
- $
-
- $
112,875 $
112,875
112,875 $
(2,717) $
(2,717)
2,442
1,312,659
1,312,384 $
1,312,384 $
159,325 $
11,082
90
170,497
128,040
298,537 $
(2,504,142) $
(2,504,142)
(2,205,605) $
Treasury
1,295 $
1,295
11,252
3,523,800
3,536,347 $
3,536,347 $
141,301 $
10,751
75
152,127
93,156
245,283 $
(112,875) $
(112,875)
132,408 $
(2,717)
(2,717)
2,442
1,312,659
1,312,384
1,312,384
159,325
11,082
90
170,497
128,040
298,537
-
298,537
Combined
1,295
1,295
11,252
3,523,800
3,536,347
3,536,347
141,301
10,751
75
152,127
93,156
245,283
-
245,283
72
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Note 38. Antideficiency Act Violations
The EPA experienced an Antideficiency Act violation on November 18 and 19, 2010 in the agency's Oil
Spill Response Account in the amount of $502,215. The violation occurred when the EPA made an
expenditure in excess of the funds available in the account. The EPA was participating in the response
to the Deepwater Horizon oil spill while simultaneously responding to a major inland oil spill in
Enbridge, Michigan. The violation was rectified on November 20, 2010, when the EPA was reimbursed
with funds from the U.S. Coast Guard. On October 25, 2011 EPA transmitted, as required by OMB
Circular A-11, Section 145, written notifications to the (1) President, (2) President of the Senate, (3)
Speaker of the House of Representatives, (4) Comptroller General, and (5) the Director of OMB.
73
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Environmental Protection Agency
Required Supplementary Information (Unaudited)
As of September 30, 2012
(Dollars in Thousands)
1. Deferred Maintenance
Deferred maintenance is maintenance that was not performed when it should have been, that was
scheduled and not performed, or that was delayed for a future period. Maintenance is the act of
keeping property, plant, and equipment (PP&E) in acceptable operating condition and includes
preventive maintenance, normal repairs, replacement of parts and structural components, and other
activities needed to preserve the asset so that it can deliver acceptable performance and achieve its
expected life. Maintenance excludes activities aimed at expanding the capacity of an asset or otherwise
upgrading it to serve needs different from or significantly greater than those originally intended.
The EPA classifies tangible property, plant, and equipment as follows: (1) EPA-Held Equipment, (2)
Contractor-Held Equipment, (3) Land and Buildings, and, (4) Capital Leases. The condition
assessment survey method of measuring deferred maintenance is utilized. The Agency adopts
requirements or standards for acceptable operating condition in conformance with industry practices.
The deferred maintenance as of September 2012 is:
2012
As set Category:
Buildings $ 4,927
EPA Held Equipment 70
Total Deferred Maintenance $ 4,997
2. Stewardship Land
Stewardship land is acquired as contaminated sites in need of remediation and clean-up; thus the
quality of the land is far-below the standard for usable and manageable land. Easements on
stewardship lands are in good and usable condition but acquired in order to gain access to
contaminated sites.
74
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Environmental Protection Agency
Required Supplementary Information (Unaudited)
As of September 30, 2012
(Dollars in Thousands)
3. Supplemental Combined Statement of Budgetary Resources
For the Period Ending September 30, 2012
EPM
HERA
LUST
S&T
STAG
OTHER
TOTAL
BUDGETARY RES OURCES
Unobligated Balance, Brought Forward, October 1:
Unobligated balance brought forward, October 1, as adjusted
Recoveries of Prior Year Unpaid Obligations
Other changes in unobligated balance
Unobligated balance fromprior year budget authority, net
Appropriations (discretionary and mandatory)
Spending authority from offsetting collections (discretionary and mandatory)
Total Budgetary Resources
STATUS OF BUDGETARY RES OURCES
Obligations incurred
Unobligated balance, end ofyear:
Apportioned
Un apportioned
Total unobligated balance, end of period
Total Status of Budgetary Resources
CHANGE IN OBLIGATED BALANCE
Unpaid Obligations, Brought Forward, October 1 (gross)
Uncollected customer payments fromFederal Sources, brought forward, October 1
Obligated balance, start ofyear (net), before adjustments
Obligated balance, start ofyear (net), as adjusted
Obligations incurred
Outlays (gross)
Change in uncollected customer payments fromFederal sources
Recoveries of prior year unpaid obligations
Obligated balance, end of period
Unpaid obligations, end ofyear (gross)
Uncollected customer payments fromFederal sources, end ofyear
Obligated balance, end of period (net)
BUDGET AUTHORITY AND OUTLAYS, NET:
Budget authority, gross (discretionary and mandatory)
Actual offsetting collections (discretionary and mandatory)
Change in uncollected customer payments fromFederal sources
Budget authority, net (discretionary and mandatory)
Outlays, gross (discretionary and mandatory)
Actual offsetting collections (discretionary and mandatory)
Outlays, net (discretionary and mandatory)
Distributed offsetting receipts
Agency outlays, net (discretionary and mandatory)
$ 293,816 $
293,816
169,984
(14,536)
449,264
2,678,222
50,824
$ 3,178,310 $
$ 2,876,321 $
183,217
118,772
301,989
$ 3,178,310 $
$ 1,406,648 $
1 (123,384)
1,283,264
1,283,264
2,876,321
(2,813,687)
(13,380)
(169,984)
1,299,298
(110,004)
$ 1,189,294 $
$ 2,729,046 $
(64,203)
(13,380)
$ 2,651,463 $
$ 2,813,687 $
(64,203)
2,749,484
2,141 $
2,141
9
-
2,150
-
22,011
24,161 $
21,781 $
2,380
-
2,380
24,161 $
1,430 $
1,430
1,430
21,781
(20,771)
(9)
2,431
2,431 $
22,011 $
(22,011)
$
20,771 $
(22,011)
(1,240)
7,834 $
7,834
4,373
-
12,207
2,504,142
157
2,516,506 $
2,508,755 $
4,072
3,679
7,751
2,516,506 $
167,950 $
167,950
167,950
2,508,755
(2,543,892)
(4,373)
128,440
128,440 $
2,504,299 $
(156)
2,504,143 $
2,543,892 $
(156)
2,543,736
188,313 $
188,313
40,865
(7,281)
221,897
793,728
34,783
1,050,408 $
870,817 $
145,400
34,191
179,591
1,050,408 $
421,966 $
(38,781)
383,185
383,185
870,817
(864,502)
(7,316)
(40,865)
387,416
(31,465)
355,951 $
828,511 $
(42,100)
(7,316)
779,095 $
864,502 $
(42,100)
822,402
858,529 $
858,529
166,688
(6,788)
1,018,429
3,567,937
970
4,587,336 $
4,268,252 $
306,662
12,422
319,084
4,587,336 $
9,011,098 $
9,011,098
9,011,098
4,268,252
(5,223,536)
(166,688)
7,889,126
7,889,126 $
3,568,907 $
(970)
3,567,937 $
5,223,536 $
(970)
5,222,566
2,147,217 $
2,147,217
189,657
(3,034)
2,333,840
2,404,370
474,306
5,212,516 $
3,236,907 $
1,967,396
8,213
1,975,609
5,212,516 $
1,765,802 $
(276,263)
1,489,539
1,489,539
3,236,907
(3,207,921)
(112,218)
(189,657)
1,605,131
(164,045)
1,441,086 $
2,878,676 $
(586,525)
(112,218)
2,179,933 $
3,207,921 $
(586,525)
2,621,396
(1,163,736)
3,497,850
3,497,850
571,576
(31,639)
4,037,787
11,948,399
583,051
16,569,237
13,782,833
2,609,127
177,277
2,786,404
16,569,237
12,774,894
(438,428)
12,336,466
12,336,466
13,782,833
(14,674,309)
(132,914)
(571,576)
11,311,842
(305,514)
11,006,328
12,531,450
(715,965)
(132,914)
11,682,571
14,674,309
(715,965)
13,958,344
(1,163,736)
$ 2,749,484 $ (1,240) $ 2,543,736 $ 822,402 $ 5,222,566 $ 1,457,660 $ 12,794,608
75
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Environmental Protection Agency
Required Supplemental Stewardship Information
For the Year Ended September 30, 2012
(Dollars in Thousands)
INVESTMENT IN THE NATION'S RESEARCH AND DEVELOPMENT:
EPA's Office of Research and Development provides the crucial underpinnings for EPA decision-
making by conducting cutting-edge science and technical analysis to develop sustainable solutions to
our environmental problems and employ more innovative and effective approaches to reducing
environmental risks. Public and private sector institutions have long been significant contributors to our
nation's environment and human health research agenda. EPA, however, is unique among scientific
institutions in this country in combining research, analysis, and the integration of scientific information
across the full spectrum of health and ecological issues and across the risk assessment and risk
management paradigm. Research enables us to identify the most important sources of risk to human
health and the environment, and by so doing, informs our priority-setting, ensures credibility for our
policies, and guides our deployment of resources. It gives us the understanding, the framework, and
technologies we need to detect, abate, and avoid environmental problems.
Among the Agency's highest priorities are research programs that address: the development of
alternative techniques for prioritizing chemicals for further testing through computational toxicology; the
environmental effects on children's health; the potential risks and effects of manufactured
nanomaterials on human health and the environment; the impacts of global change and providing
information to policy makers to help them adapt to a changing climate; the potential risks of unregulated
contaminants in drinking water; the health effects of air pollutants such as particulate matter; the
protection of the nation's ecosystems; and the provision of near-term, appropriate, affordable, reliable,
tested, and effective technologies and guidance for potential threats to homeland security. EPA also
supports regulatory decision-making with chemical risk assessments.
For FY 2012, the full cost of the Agency's Research and Development activities totaled approximately
$714M. Below is a breakout of the expenses (dollars in thousands):
FY2008 FY2009 FY2010 FY2011 FY2012
Programmatic Expenses 597,080 600,552 590,790 597,558 580,278
Allocated Expenses 103,773 119,630 71,958 80,730 133,637
See Section II of the PAR for more detailed information on the results of the Agency's investment in
research and development. Each of EPA's strategic goals has a Science and Research Objective.
INVESTMENT IN THE NATION'S INFRASTRUCTURE.
The Agency makes significant investments in the nation's drinking water and clean water infrastructure.
The investments are the result of three programs: the Construction Grants Program which is being
phased out and two State Revolving Fund (SRF) programs.
Construction Grants Program: During the 1970s and 1980s, the Construction Grants Program was a
source of Federal funds, providing more than $60 billion of direct grants for the construction of public
wastewater treatment projects. These projects, which constituted a significant contribution to the
nation's water infrastructure, included sewage treatment plants, pumping stations, and collection and
intercept sewers, rehabilitation of sewer systems, and the control of combined sewer overflows. The
construction grants led to the improvement of water quality in thousands of municipalities nationwide.
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Congress set 1990 as the last year that funds would be appropriated for Construction Grants. Projects
funded in 1990 and prior will continue until completion. After 1990, EPA shifted the focus of municipal
financial assistance from grants to loans that are provided by State Revolving Funds.
State Revolving Funds: EPA provides capital, in the form of capitalization grants, to state revolving
funds which state governments use to make loans to individuals, businesses, and governmental entities
for the construction of wastewater and drinking water treatment infrastructure. When the loans are
repaid to the state revolving fund, the collections are used to finance new loans for new construction
projects. The capital is reused by the states and is not returned to the Federal Government.
The Agency also is appropriated funds to finance the construction of infrastructure outside the
Revolving Funds. These are reported below as Other Infrastructure Grants.
The Agency's investments in the nation's Water Infrastructure are outlined below (dollars in thousands):
FY 2008 FY 2009 FY2010 FY2011 FY2012
Construction Grants 11,517 30,950 18,186 35,339 14,306
Clean Water SRF 1,063,825 836,5022,966,4792,299,7211,925,057
Drinking Water SRF 816,038 906,8031,938,2961,454,2741,240,042
Other Infrastructure Grants 388,555 306,366 264,227 269,699 196,085
Allocated Expenses 396,253 414,460 631,799 548,375 777,375
See the Goal 2 - Clean and Safe Water portion in Section II of the PAR for more detailed information
on the results of the Agency's investment in infrastructure.
HUMAN CAPITAL
Agencies are required to report expenses incurred to train the public with the intent of increasing or
maintaining the nation's economic productive capacity. Training, public awareness, and research
fellowships are components of many of the Agency's programs and are effective in achieving the
Agency's mission of protecting public health and the environment, but the focus is on enhancing the
nation's environmental, not economic, capacity.
The Agency's expenses related to investments in the Human Capital are outlined below (dollars in
thousands):
FY 2008 FY 2009 FY2010 FY2011 FY2012
Training and Awareness Grants 30,768 37,981 25,714 23,386 21,233
Fellowships 9,650 6,818 6,905 9,538 10,514
Allocated Expenses 7,025 8,924 3,973 4,448 7,311
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Environmental Protection Agency
Supplemental Information and Other Reporting Requirements
Balance Sheet for Superfund Trust Fund
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
(Unaudited)
FY2012
FY2011
ASSETS
Intrago vernmental:
Fund Balance With Treasury (Note SI)
Investments
Accounts Receivable, Net
Other
Total Intragovernmental
Accounts Receivable, Net
Property, Plant & Equipment, Net
Other
Total Assets
95,604
3,305,130
6,353
7,595
3,414,682 $
368,438
105,921
838
3,889,879 S
114,540
3,577,146
10,560
8,076
454,606
109,272
1,006
4,275,206
LIABILITIES
Intragovernmental:
Accounts Payable and Accrued Liabilities
Other
Total Intragovernmental
Accounts Payable & Accrued Liabilities
Pensions & Other Actuarial Liabilities
Cashout Advances, Superfund (Note S2)
Payroll & Benefits Payable
Other
Total Liabilities
NET POSITION
Cumulative Results of Operations
Total Net Position
Total Liabilities and Net Position
40,941
48,662
89,603 $
137,260 $
8,137
735,837
47,546
36,808
1,055,191
2,834,688
2,834,688
53,778
61,080
114,857
141,464
7,778
790,069
47,174
30,244
1,131,587
3,143,619
3,143,619
3,889,879 S
4,275,206
The accompanying notes are an integral part of these financial statements.
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Environmental Protection Agency
Supplemental Information and Other Reporting Requirements
Statement of Net Cost for Superfund Trust Fund
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
(Unaudited)
FY2012 FY2011
COSTS
Gross Costs $ 1,705,893 $ 1,908,317
Expenses from Other Appropriations (Note S5) 161,844 71,457
Total Costs 1,867,737 1,979,774
Less:
Earned Revenue 305,301 532,006
NET COST OF OPERATIONS $ 1,562,436 $ 1,447,768
The accompanying notes are an integral part of these financial statements.
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Environmental Protection Agency
Supplemental Information and Other Reporting Requirements
Statement of Changes in Net Position for Superfund Trust Fund
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
(Unaudited)
Cumulative Results of Operations:
Net Position - Beginning of Period
Beginning Balances, as Adjusted
Budgetary Financing Sources:
Nonexchange Revenue - Securities Investment
Nonexchange Revenue - Other
Transfers In/Out
Trust Fund Appropriations
Income from Other Appropriations (Note S5)
Total Budgetary Financing Sources
Other Financing Sources (Non-Exchange)
Transfers In/Out
Imputed Financing Sources
Total Other Financing Sources
Net Cost of Operations
Net Change
Cumulative Results of Operations
FY2012
Earmarked
Funds
3,143,619
3,143,619
26,879
6,517
(42,117)
1,075,367
161,844
1,228,490
25,015
25,015
(1,562,436)
(308,931)
2,834,688
FY2011
Earmarked
Funds
3,340,498
3,340,498
27,266
3,596
(35,410)
1,156,073
71,457
1,222,982
1
27,906
27,907
(1,447,768)
(196,879)
3,143,619
The accompanying notes are an integral part of these financial statements.
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Environmental Protection Agency
Supplemental Information and Other Reporting Requirements
Statement of Budgetary Resources for Superfund Trust Fund
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
(Unaudited)
FY2012
FY2011
BUDGETARYRESOURCES
Unobligated Balance, Brought Forward, October 1:
Unobligated balance brought forward, October 1, as adjusted
Recoveries of Prior Year Unpaid Obligations
Other changes in unobligated balance
Unobligated balance fromprior year budget authority, net
Appropriations (discretionary and mandatory)
Spending authority from offsetting collections (discretionary and mandatory)
Total Budgetary Resources
STATUS OFBUDGETARYRESOURCES
Obligations incurred
Unobligated balance, end of year:
Apportioned
Unapportioned
Total unobligated balance, end of period
Total Status of Budgetary Resources (Note S6)
CHANGE IN OBLIGATED BALANCE
Unpaid Obligations, Brought Forward, October 1 (gross)
Uncollected customer payments from Federal Sources, brought forward, October 1
Obligated balance, start of year (net), before adjustments
Obligated balance, start of year (net), as adjusted
Obligations incurred
Outlays (gross)
Change in uncollected customer payments from Federal sources
Recoveries of prior year unpaid obligations
Obligated balance, end of period
Unpaid obligations, end of year (gross)
Uncollected customer payments from Federal sources, end of year
Obligated balance, end of period (net)
BUDGET AUTHORITY AND OUTLAYS, NET:
Budget authority, gross (discretionary and mandatory)
Actual offsetting collections (discretionary and mandatory)
Change in uncollected customer payments from Federal sources (discretionary and mandatory)
Budget authority, net (dis cretionary and mandatory)
Outlays, gross (discretionary and mandatory) (Note S6)
Actual offsetting collections (discretionary and mandatory) (Note S6)
Outlays, net (discretionary and mandatory)
Distributed offs etting receipts (Notes S6)
Agency outlays, net (discretionary and mandatory)
2,035,484
2,035,484
168,015
2,203,499
1,211,593
230,695
3,645,787
2,059,687
2,059,687
154,843
1
2,214,531
1,292,883
375,452
3,882,867
1,847,383
1,875,277
4,133
1,879,410
3,645,787 $
1,570,749 $
(122,402)
1,448,347
1,448,347
1,766,377
(1,767,406)
(107,125)
(168,015)
1,401,705
(15,277)
1,386,428 $
1,442,288 $
(337,820)
(107,125)
997,344 $
1,767,406 $
(337,820)
1,429,586
(45,413)
1,384,173 $
2,033,533
1,951
2,035,484
3,882,867
1,692,915
(123,366)
1,569,549
1,569,549
1,847,383
(1,814,706)
(965)
(154,843)
1,570,749
(122,402)
1,448,347
1,668,336
(751,805)
(965)
915,566
1,814,706
(376,417)
1,438,289
(97,623)
1,340,666
The accompanying notes are an integral part of these financial statements.
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Environmental Protection Agency
Supplemental Information and Other Reporting Requirements
Related Notes to Superfund Trust Financial Statements
For the Periods Ending September 30, 2012 and 2011
(Dollars in Thousands)
(Unaudited)
Note S1. Fund Balance with Treasury for Superfund Trust
Fund Balance with Treasury for the Superfund as of September 30, 2012 and 2011 is $95.6 million and
$114.5 million, respectively. Fund balances are available to pay current liabilities and to finance
authorized purchase commitments (see Status of Fund Balances below).
Status of Fund Balances:
FY2012
FY2011
Unobligated Amounts in Fund Balance:
Available for Obligation
Unavailable for Obligation
Net Receivables from Invested Balances
Balances in Treasury Trust Fund
Obligated Balance not yet Disbursed
Totals
1,875,277 $
4,133
(3,171,409)
1,723
1,385,880
95,604 $
2,033,533
1,951
(3,368,754)
15
1,447,795
114,540
The funds available for obligation may be apportioned by the OMB for new obligations at the beginning
of the following fiscal year. Funds unavailable for obligation are mostly balances in expired funds,
which are available only for adjustments of existing obligations.
Note S2. Cashout Advances, Superfund
Cashout Advances are funds received by EPA, a state, or another PRP under the terms of a settlement
agreement (e.g., consent decree) to finance response action costs at a specified Superfund site. Under
CERCLA Section 122(b)(3), cashout funds received by EPA are placed in site-specific, interest bearing
accounts known as special accounts and are used for potential future work at such sites in accordance
with the terms of the settlement agreement. Funds placed in special accounts may be used by EPA or
disbursed to PRPs, to states that take responsibility for the site, or to other Federal agencies to conduct
or finance response actions in lieu of EPA without further appropriation by Congress. As of September
30, 2012 and 2011, cashout advances are $736 million and $790 million.
Note S3. Superfund State Credits
Authorizing statutory language for Superfund and related Federal regulations require states to enter
into SSCs when EPA assumes the lead for a remedial action in their state. The SSC defines the state's
role in the remedial action and obtains the state's assurance that they will share in the cost of the
remedial action. Under Superfund's authorizing statutory language, states will provide EPA with a 10
percent cost share for remedial action costs incurred at privately owned or operated sites, and at least
50 percent of all response activities (i.e., removal, remedial planning, remedial action, and
enforcement) at publicly operated sites. In some cases, states may use EPA approved credits to
reduce all or part of their cost share requirement that would otherwise be borne by the states. Credit is
limited to state site-specific expenses EPA has determined to be reasonable, documented, direct out-
of-pocket expenditures of non-Federal funds for remedial action.
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Once EPA has reviewed and approved a state's claim for credit, the state must first apply the credit at
the site where it was earned. The state may apply any excess/remaining credit to another site when
approved by EPA. As of September 30, 2012, the total remaining state credits have been estimated at
$24.7 million. The estimated ending credit balance on September 30, 2011 was $22.2 million.
Note S4. Superfund Preauthorized Mixed Funding Agreements
Under Superfund preauthorized mixed funding agreements, PRPs agree to perform response actions at
their sites with the understanding that EPA will reimburse them a certain percentage of their total
response action costs. EPA's authority to enter into mixed funding agreements is provided under
. CERCLA Section 111(a)(2). Under CERCLA Section 122(b)(1), as amended by SARA, PRPs may
assert a claim against the Superfund Trust Fund for a portion of the costs they incurred while
conducting a preauthorized response action agreed to under a mixed funding agreement. As of
September 30, 2012, EPA had 3 outstanding preauthorized mixed funding agreements with obligations
totaling $4.7 million. As of September 30, 2011, EPA had 4 such agreements for $11.5 million. A
liability is not recognized for these amounts until all work has been performed by the PRP and has been
approved by EPA for payment. Further, EPA will not disburse any funds under these agreements until
the PRP's application, claim, and claims adjustment processes have been reviewed and approved by
EPA.
Note S5. Income and Expenses from other Appropriations; General Support Services Charged
to Superfund
The Statement of Net Cost reports costs that represent the full costs of the program outputs. These
costs consist of the direct costs and all other costs that can be directly traced, assigned on a cause and
effect basis, or reasonably allocated to program outputs.
During FYs 2012 and 2011, the EPM appropriation funded a variety of programmatic and
non-programmatic activities across the Agency, subject to statutory requirements. This appropriation
was created to fund personnel compensation and benefits, travel, procurement, and contract activities.
This distribution is calculated using a combination of specific identification of expenses to Reporting
Entities, and a weighted average that distributes expenses proportionately to total programmatic
expenses. As illustrated below, this estimate does not impact the consolidated totals of the Statement
of Net Cost or the Statement of Changes in Net Position.
Superfund
All Others
Total
Income from
Other
Appropriations
161,844
(161,844)
-
FY 2012
Expenses from
Other
Appropriations
(161,844) $
161,844
S - S
Income from
Net Other
Effect Appropriations
- $ 71,457
(71,457)
- S
FY2011
Expenses from
Other Net
Appropriations Effect
(71,457) $
71,457
S - S -
Note S6. Reconciliation of the Statement of Budgetary Resources to the President's Budget
Budgetary resources, obligations incurred, and outlays, as presented in the audited FY 2012 Statement
of Budgetary Resources, will be reconciled to the amounts included in the FY 2013 Budget of the
United States Government when they become available. The Budget of the United States Government
with actual numbers for FY 2012 has not yet been published. We expect it will be published by early
2013, and it will be available on the OMB website at http://www.whitehouse.gov. The actual amounts
published for the year ended September 30, 2011 are listed immediately below:
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FY2011
Statement of Budgetary Resources
Rounding Differences**
Reported in Budget of the U. S. Government
Budgetary
Resources
3,882,867
133
Obligations
1,847,384
616
Offsetting
Receipts
97,623 $
377
$ 3,883,000 $ 1,848,000 $
Balances are rounded to millions in the Budget Appendix.
Net Outlays
1,438,289
(289)
98,000 $ 1,438,000
Note S7. Superfund Eliminations
The Superfund Trust Fund has intra-agency activities with other EPA funds which are eliminated on the
consolidated Balance Sheet and the Statement of Net Cost. These are listed below:
Advances
Expenditure Transfer Payable
Accrued Liabilities
Expenses
Transfers
FY2012
$ 6,152
$ 18,243
$ 1,765
30,060
32,018
$
FY2011
$ 5,506
$ 28,663
$ 950
25,337
35,410
$
84
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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Audit of EPA's
Fiscal 2012 and 2011
Consolidated Financial
Statements
Report No. 13-1-0054
November 15, 2012
Scan this code to
learn more about
theEPAOIG.
85
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Abbreviations
CFC Cincinnati Finance Center
EPA U.S. Environmental Protection Agency
FFMIA Federal Financial Management Improvement Act of 1996
FMFIA Federal Managers' Financial Integrity Act of 1982
FY Fiscal Year
GAO U.S. Government Accountability Office
GL General Ledger
IFMS Integrated Financial Management System
LVFC Las Vegas Finance Center
OARM Office of Administration and Resources Management
OCFO Office of the Chief Financial Officer
OEI Office of Environmental Information
OIG Office of Inspector General
OMB Office of Management and Budget
RMDS Resource Management Directive System
RSSI Required Supplementary Stewardship Information
RTPFC Research Triangle Park Finance Center
SOD Statement of Differences
SSP System Security Plan
Hotline
To report fraud, waste, or abuse, contact us through one of the following methods:
e-mail: OIG Hotline@epa.gov
phone: 1-888-546-8740
fax: 202-566-2599
online: http://www.epa.Qov/oiQ/hotline.htm
write: EPA Inspector General Hotline
1200 Pennsylvania Avenue NW
Mailcode2431T
Washington. DC 20460
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
13-1-0054
November 15, 2012
Why We Did This Review
We performed this audit in
accordance with the Government
Management Reform Act, which
requires the U.S. Environmental
Protection Agency (EPA) to
prepare, and the Office of
Inspector General to audit, the
Agency's financial statements
each year. Our primary objectives
were to determine whether:
EPA's consolidated financial
statements were fairly stated
in all material respects.
EPA's internal controls over
financial reporting were in
place.
EPA management complied
with applicable laws and
regulations.
The requirement for audited
financial statements was enacted
to help bring about improvements
in agencies' financial
management practices, systems,
and controls so that timely,
reliable information is available
for managing federal programs.
This report addresses the
following EPA Goal or
Cross-Cutting Strategy:
« Strengthening EPA's
Workforce and Capabilities
For further information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.
The full report is at:
www.epa.gov/oig/reports/2013/
20121115-13-1.Q054.Ddf
Audit of EPA's Fiscal 2012 and 2011
Consolidated Financial Statements
EPA Receives an Unqualified Opinion
We rendered an unqualified opinion on EPA's consolidated financial
statements for fiscal 2012 and 2011, meaning that they were fairly presented
and free of material misstatements.
Internal Control Material Weakness/Sianificant Deficiencies Noted
In October 2011, EPA replaced the Integrated Financial Management System
with a new system, Compass Financials (Compass), and we determined that
Compass reporting and system limitations represented a material weakness. In
addition, we noted the following significant deficiencies, some of which involve
Compass and contributed to the material weakness:
• Posting models in Compass materially misstated general ledger activity
and balances.
• Compass reporting limitations impair accounting operations and internal
controls.
EPA did not reverse approximately $108 million in expense accruals.
Compass system limitations impair internal controls of financial operations.
Accounts receivable internal controls contained numerous deficiencies.
EPA did not timely clear Fund Balance with Treasury Statement of
Differences transactions.
Compass did not have sufficient controls over personal property entries.
Compass and the Maximo property system cannot be reconciled.
EPA did not monitor the testing of networked information technology assets
to identify commonly known vulnerabilities.
EPA lacks reliable information on security controls for financial systems.
Noncompliance With Laws and Regulations Noted
EPA has limited assurance that its Compass service provider's controls are
designed and operating as intended.
Recommendations and Planned Aaencv Corrective Actions
The Agency disagreed with most of our findings but accepted many of our
recommendations. In particular, the Agency stated it identified and then fixed or
remediated most of the limitations of its new Compass system and, thus, there
were no material issues during the preparation of the financial statements. The
Agency characterized the errors we found as normal problems during collection
and verification activities. However, we disagree that was the case. The errors
we found occurred primarily because of posting models deficiencies in the new
system and the failure of internal controls to detect and correct the errors.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
THE INSPECTOR GENERAL
November 15,2012
MEMORANDUM
SUBJECT: Audit of EPA's Fiscal 2012 and 201 1 Consolidated Financial Statements
Report No. 13-1-0054
FROM: Arthur A. Elkins, Jr.
TO: Barbara J. Bennett
Chief Financial Officer
Craig E. Hooks
Assistant Administrator for Administration and Resources Management
Cynthia Giles
Assistant Administrator for Enforcement and Compliance Assurance
Attached is our report on the U.S Environmental Protection Agency's (EPA's) fiscal 2012 and
2011 consolidated financial statements We are reporting a material weakness and 10 significant
deficiencies. We also identified an instance of noncompliance with laws and regulations related
to reviewing controls over financial reporting. Attachment 3 contains the status of
recommendations related to significant deficiencies reported in prior years' reports.
The significant deficiencies included in attachment 3 also apply for fiscal 2012.
This audit report represents the opinion of the Office of Inspector General, and the findings in
this report do not necessarily represent the final HPA position. EPA managers, in accordance
with established EPA audit resolution procedures, will make final determinations on the findings
in this audit report. Accordingly, the findings described in this audit report arc not binding upon
EPA in any enforcement proceeding brought by EPA or the Department of Justice. We have no
objections to the further release of this report to the public. This report will be available at
h ttp: /'/vv w w. epa. gov/oi g.
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 60 calendar days of the final report date. The response should address all issues and
recommendations contained in attachments 1 and 2. For corrective actions planned but not
88
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completed by the response date, reference to specific milestone dates will assist us in deciding
whether to close this report in our audit tracking system. Your response will be posted on the
OIG's public website, along with our memorandum commenting on your response. Your
response should be provided as an Adobe PDF file that complies with the accessibility
requirements of Section 508 of the Rehabilitation Act of 1973, as amended. The final response
should not contain data that you do not want to be released to the public, if your response
contains such data, you should identify the data for redaction or removal along with
corresponding justification.
Should you or your staff have any questions about the report, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0899; or Paul Curtis, Director, Financial
Statement Audits, at (202) 566-2523.
Attachments
cc: See appendix III, Distribution
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Audit of EPA's Fiscal 2012 and 2011 13-1 -0054
Consolidated Financial Statements
Table of Contents
Inspector General's Report on EPA's Fiscal 2012 and
2011 Consolidated Financial Statements 1
Review of EPA's Required Supplementary Stewardship Information,
Required Supplementary Information, Supplemental Information, and
Management's Discussion and Analysis 2
Evaluation of Internal Controls 2
Tests of Compliance With Laws and Regulations 7
Prior Audit Coverage 8
Agency Comments and OIG Evaluation 9
Attachments 10
1. Internal Control Material Weakness and Significant Deficiencies 10
Material Weakness
Compass System Limitations Are a Material Weakness to
EPA's Accounting Operations and Internal Controls 11
Significant Deficiencies
Posting Models in Compass Materially Misstated GL Activity and Balances 13
Compass Reporting Limitations Impair Accounting Operations and
Internal Controls 17
EPA Should Improve Controls Over Expense Accrual Reversals 22
Compass System Limitations Impair Internal Controls of Financial Operations... 24
EPA Should Improve Compliance With Internal Controls for
Accounts Receivable 27
EPA Is Not Clearing Fund Balance with Treasury Statement of
Differences Timely 31
Property Internal Controls Need Improvement 33
Compass and Maximo Cannot Be Reconciled 34
EPA Needs to Remediate System Vulnerabilities That Place
Financial Data at Risk 35
OCFO Financial Systems Security Documentation Needs Improvement 38
2. Compliance With Laws and Regulations 40
EPA's Compass Service Provider Needs to Assess Controls
Over Business Processes Affecting EPA 41
-continued-
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Audit of EPA's Fiscal 2012 and 2011 13-1 -0054
Consolidated Financial Statements
3. Status of Prior Audit Report Recommendations 43
4. Status of Current Recommendations and Potential Monetary Benefits 45
Appendices 48
I. EPA's Fiscal 2012 and 2011 Consolidated Financial Statements 48
II. Agency Response to Draft Report 113
III. Distribution 134
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Inspector General's Report on EPA's Fiscal 2012
and 2011 Consolidated Financial Statements
The Administrator
U.S. Environmental Protection Agency
We have audited the consolidated balance sheet of the U.S. Environmental Protection Agency
(EPA) as of September 30, 2012, and September 30, 2011, and the related consolidated
statements ofnet cost, net cost by goal, changes in net position, and custodial activity'; and the
combined statement of budgetary resources for the years then ended. These financial statements
are the responsibility of EPA management. Our responsibility is to express an opinion on these
financial statements based upon our audit.
We conducted our audit in accordance with U.S. generally accepted auditing standards, the
standards applicable to financial statements contained in Government Auditing Standards, issued
by the Comptroller General of the United States; and Office of Management and Budget (OMB)
Bulletin 07-04, AH Jit Requirements for l-'eJeral financial Statements. These standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a test basis.
evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
The financial statements include expenses of grantees, contractors, and other federal agencies
Our audit work pertaining to these expenses included testing only within EPA. The U.S.
Treasury collects and accounts for excise taxes that arc deposited into the Leaking Underground
Storage Tank Trust Fund. The U.S. Treasury is also responsible for investing amounts not
needed for current disbursements and transferring funds to EPA as authorized in legislation.
Since the U.S. Treasury, and not EPA, is responsible for these activities, our audit work did not
cover these activities.
The Office of Inspector General (OIG) is not independent with respect to amounts pertaining to
OIG operations that are presented in the financial statements. The amounts included for the OIG
are not material to EPA's financial statements. The OIG is organizationally independent with
respect to all other aspects of the Agency's activities.
Tn our opinion, the consolidated financial statements, including the accompanying notes, present
fairly, in all material respects, the consolidated assets, liabilities, net position, net cost, net cost
by goal, changes in net position, custodial activity, and combined budgetary resources of F.P.A as
of and for the years ended September 30, 2012 and 2011, in conformity with accounting
principles generally accepted in the United States of America.
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Review of EPA's Required Supplementary Stewardship Information,
Required Supplementary Information, Supplemental Information, and
Management's Discussion and Analysis
We obtained information from EPA management about its methods for preparing Required
Supplementary Stewardship Information (RSSI), Required Supplementary Information,
Supplemental Information, and Management's Discussion and Analysis, and reviewed this
information for consistency with the financial statements. The Supplemental Information
includes the unaudited Superfund Trust Fund financial statements for fiscal 2012 and 2011,
which are being presented for additional analysis and are not a required part of the basic financial
statements. However, our audit was not designed to express an opinion and, accordingly, we do
not express an opinion on EPA's RSSI, Required Supplementary Information, Supplemental
Information, and Management's Discussion and Analysis.
We did not identify any material inconsistencies between the information presented in EPA's
consolidated financial statements and the information presented in EPA's RSSI, Required
Supplementary Information, Supplemental Information, and Management's Discussion and
Analysis.
Evaluation of Internal Controls
As defined by OMB, internal control, as it relates to the financial statements, is a process,
affected by the Agency's management and other personnel, that is designed to provide
reasonable assurance that the following objectives are met:
Reliability of financial reporting—Transactions are properly recorded, processed, and
summarized to permit the preparation of the financial statements in accordance with
generally accepted accounting principles, and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition.
Compliance with applicable laws, regulations, and government-wide policies—
Transactions are executed in accordance with laws governing the use of budget authority,
government-wide policies, laws identified by OMB, and other laws and regulations that
could have a direct and material effect on the financial statements.
In planning and performing our audit, we considered EPA's internal controls over financial
reporting by obtaining an understanding of the Agency's internal controls, determining whether
internal controls had been placed in operation, assessing control risk, and performing tests of
controls. We did this as a basis for designing our auditing procedures for the purpose of
expressing an opinion on the financial statements and to comply with OMB audit guidance, not
to express an opinion on internal control. Accordingly, we do not express an opinion on internal
control over financial reporting nor on management's assertion on internal controls included in
Management's Discussion and Analysis. We limited our internal control testing to those controls
necessary to achieve the objectives described in OMB Bulletin No. 07-04, Audit Requirements
for Federal Financial Statements. We did not test all internal controls relevant to operating
objectives as broadly defined by the Federal Managers' Financial Integrity Act of 1982
(FMFIA), such as those controls relevant to ensuring efficient operations.
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Our consideration of the internal controls over financial reporting would not necessarily disclose
all matters in the internal control over financial reporting that might be significant deficiencies.
Under standards issued by the American Institute of Certified Public Accountants, a significant
deficiency is a deficiency, or combination of deficiencies, that is less severe than a material
weakness, yet important enough to merit attention by those charged with governance. A material
weakness is a deficiency, or combination of deficiencies, 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 in a timely manner. Because of inherent limitations in internal controls,
misstatements, losses, or noncompliance may nevertheless occur and not be detected. We noted
certain matters discussed below involving the internal control and its operation that we consider
to be significant deficiencies, four of which contribute to an overall material weakness. The
material weakness and significant deficiencies are summarized below and detailed in
attachment 1.
Material Weakness
Compass System Limitations are a Material Weakness to EPA's
Accounting Operations and Internal Controls
In October 2011, EPA replaced the Integrated Financial Management System (IFMS)
with a new system, Compass Financials (Compass). The Agency operated IFMS but a
contractor manages Compass. EPA replaced IFMS to improve the operation of financial
management systems, standardize business processes, and strengthen internal controls.
The system replacement required a major systems conversion and data migration to
Compass. As with any major system conversion, problems were to be expected. We
found that when the Agency converted its accounting system, it had not yet developed all
the reports and functions required to generate all the information it needs. The lack of
useful reports and system limitations significantly impaired the effectiveness of EPA's
accounting operations and internal controls. We determined that the Compass reporting
and system limitations represented a material weakness. Several significant internal
control deficiencies contributed to the material weakness:
• Posting model errors caused multiple misstatements. We found several material
errors, caused by posting model errors, in the draft financial statements that could
have potentially materially misstated the financial statements if not detected.
• Compass could not produce the reports EPA needed for many accounting
applications, which caused delays in completing some accounting functions and
material errors in general ledger (GL) balances.
• Material amounts of expense accruals did not reverse properly because of a
Compass system configuration error.
• EPA discontinued the GL account analysis for fiscal year (FY) 2012. Without
performing account analysis, EPA did not have an effective monitoring control to
assess the accuracy and reasonableness of GL accounts and detect errors.
The Agency has over 8,000 posting models for posting transactions in the financial
system. We found errors in multiple posting models that we examined. However, the
financial system has many other posting models that we were not able to examine. Our
test work and analyses indicate that while the Agency has been able to correct some
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posting model errors during the year, there are additional posting models the Agency
needs to evaluate.
These significant deficiencies in accounting operations and internal controls resulted in
material misstatements of the draft financial statements that were not prevented or
detected, thus, they represent a material internal control weakness. Further details on each
significant deficiency follow below.
Significant Deficiencies
Posting Models in Compass Materially Misstated GL Activity and Balances
EPA's Compass system materially misstated GL activity and balances due to incorrect
posting models. We found incorrect posting models in numerous accounts for
obligations, disbursements, receivables, collections, and revenue. EPA did not properly
and thoroughly review the posting models before migration from TFMS to Compass.
Further, EPA did not properly review balances in the financial statements that were a
result of incorrect posting models; a posting model is a reference for document entry that
provides default values for posting business transactions in GL accounts. Incorrect
posting models reflect an internal control weakness and an indication that EPA did not
exercise proper oversight over how transactions are processed in its GL. As a result, the
draft financial statements contained material errors that were undetected by the Agency.
We noted $331 million in misstatements in the draft financial statements that Agency
management did not detect.
Compass Reporting Limitations Impair Accounting Operations and
Internal Controls
EPA has been unable to obtain the reports it needs from Compass for many accounting
applications in FY 2012. OMB requires financial management systems to provide
complete, reliable, consistent, timely, and useful financial information. Compass
reporting limitations prevented EPA from producing many reports it needed for
accounting operations. When the Agency converted its accounting system to Compass, it
had not yet developed all the reports and functions required to generate all the
information it needs. The lack of useful reports and information significantly impairs the
effectiveness of EPA's accounting operations and internal controls.
EPA Should Improve Controls Over Expense Accrual Reversals
EPA did not reverse approximately $108 million of FY 2011 year-end expense accruals
in FY 2012. EPA policy requires the liability reported in the financial statements to
reflect the value of goods and services received and accepted but unpaid. The Agency did
not reverse the accrual transactions because the Compass posting configuration for the
applicable fund category was inaccurate and staff recorded the FY 2011 accrual entries
without including the reversal period. By not reversing the accruals timely, EPA
overstated the accrued liability and expense amounts by $108 million and materially
misstated the quarterly financial statements.
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Compass System Limitations Impair Internal Controls of Financial
Operations
Compass experienced several impairments to processing financial transactions. The
impacted transactions included five payment accounting lines that exceeded the related
obligation accounting lines, three transactions posted to an incorrect accounting period,
and a payment against a canceled appropriation. U.S. Government Accountability Office
(GAO) guidance states that application controls should ensure completeness, accuracy,
authorization, and validity of all transactions during application processing. The
Department of the Treasury Financial Management Manual states that canceled
appropriation account balances are not available for obligation or expenditure for any
purpose. Compass did not prevent the posting of these invalid transactions because EPA
did not have system controls in place to reject them. The Compass impairments limit
EPA's assurance that account balances are accurate and Agency managers have useful
and reliable financial information for managing day-to-day operations.
EPA Should Improve Compliance With Internal Controls for Accounts
Receivable
We found numerous deficiencies in EPA's compliance with accounts receivable internal
controls in FY 2012. Various factors contributed to EPA not properly following its
internal control procedures to ensure timely and accurate recording of accounts
receivable EPA policies require accurate and timely recording of accounts receivable and
proper separation of duties Noncompliance with accounts receivable controls affects the
reliability and integrity of accounts receivable on the financial statements.
EPA Is Not Clearing Fund Balance with Treasury Statement of Differences
Timely
EPA did not clear Fund Balance with Treasury differences reported on the U.S.
Department of the Treasury's Statement of Differences within 2 months. Treasury-
guidance requires that the Agency clear deposit and disbursement activity differences
within "two months of occurrence." However, various problems resulting from the
Agency's conversion from IFMS to Compass contributed to the failure to timely clear
Statement of Differences transactions. The problems included the Agency being unable to
process transactions, and encountering posting and accounting model deficiencies with
the new system. EPA reported a combined total of $6,1 15.632 in differences from
October 2011 through February 2012. The failure to clear Statement of Differences
transactions compromises the reliability of EPA's account balances and misstates
disbursement and deposit activity reported monthly to the Treasury.
Property Internal Controls Need Improvement
Compass does not sufficiently reject personal property information entries that are not
accurate. As a result, the Agency could lose accountability and control over property.
FMFIA, 31 U.S.C. § 3512(c)( 1 )(B), requires that property and other assets be safeguarded
against waste, loss, unauthorized use, or misappropriation. However, we identified
personal property items for which the location was not properly identified, as well as
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personal property items for which the last recorded inventory dates or acquisition dates
were in the future. The failure to properly configure Compass data fields to reject
unreasonable entries contributed to the inaccurate property records.
Compass and Maximo Cannot Be Reconciled
EPA cannot reconcile capital equipment property management data within its property
management subsystem—Maximo—to relevant financial data within Compass. OMB
Circular A-123, Management's Responsibility for Internal Controls, states that one of the
objectives of internal control is the reliability of financial reporting. The inability to
reconcile the property subsystem with Compass can compromise the effectiveness and
reliability of financial reporting. Maximo and Compass primarily cannot be reconciled
because historical property data did not migrate properly from IFMS to Compass.
EPA Needs to Remediate System Vulnerabilities That Place Financial Data
at Risk
Office of the Chief Financial Officer (OCFO) officials did not monitor the testing of its
networked information technology assets to identify commonly known vulnerabilities or
take action to remediate those weaknesses. EPA policy requires senior Agency officials
to ensure security control reviews are performed for general support systems and major
applications under their organization's responsibility. We found that the lack of
monitoring exists, in part, because EPA's Office of Environmental Information took
almost 3 years to resolve a long-standing recommendation to define duties and
responsibilities for testing networked resources managed under EPA's service support
contract. Also, OCFO officials should improve the office's process to ensure known
vulnerabilities are remediated for the equipment it uses to access the Agency's core
financial application. Information technology assets used by finance center personnel
contained 286 commonly known vulnerabilities that, if exploited, could potentially
undermine EPA's financial reporting capability and serve as available points to
compromise the Agency's network.
OCFO Financial Systems Security Documentation Needs Improvement
EPA lacks reliable information on the implementation of required security controls for
key financial applications at the Research Triangle Park Finance Center. Our analysis
disclosed that key applications' system security plans contained numerous instances of
incomplete or inaccurate information for the four minimally required control areas
reviewed. Federal guidance requires key documents such as system security plans and
contingency plans to be annually reviewed and updated as needed. OCFO had not
implemented a process to review the completeness and accuracy of system security plans
information, delineated what organizations within OCFO were responsible for
maintaining this documentation, or ensured that personnel performing key information
security duties were trained to assume those duties. Inaccurate information calls into
question the veracity and credibility of the processes OCFO uses to authorize its systems
to operate, and places into doubt whether OCFO implemented security controls necessary
to protect the confidentiality, integrity, and availability of EPA's financial data.
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Attachment 3 contains the status of issues reported in prior years' reports. The issues included in
attachment 3 should be considered among F.PA's significant deficiencies for FY 2012. We
reported to the Agency on less significant internal control matters in writing during the course of
the audit. We will not issue a separate management letter.
Comparison ofEPA's FMFIA Report With Our Evaluation of Internal Controls
OMB Bulletin No. 07-04. Audit Requirements for l-'edercil Hnoncial Statements, requires us to
compare material weaknesses disclosed during the audit with those material weaknesses reported
in the Agency's FMFIA report that relate to the financial statements, and identify material
weaknesses disclosed by the audit that were not reported in the Agency's FMFIA report.
For financial statement audit and financial reporting purposes, OMB defines material weaknesses
in internal control as a deficiency or combination of deficiencies in internal control such that
there is a reasonable possibility that a material misstatement of the financial statements will not
be prevented, or detected and corrected on a timely basis.
The Agency reported that no material weaknesses had been found in the design or operation of
internal controls over financial reporting as of June 30. 2012. We identified several significant
deficiencies related to EPA's Compass system that, when considered together, represent a
material internal control weakness. Details concerning our findings on the material weakness and
significant deficiencies can be found in attachment 1
Tests of Compliance With Laws and Regulations
EPA management is responsible for complying with laws and regulations applicable to the
Agency. As part of obtaining reasonable assurance about whether the Agency's financial
statements are free of material misstatement, we performed tests of its compliance with certain
provisions of laws and regulations, noncompliance with which could have a direct and material
effect on the determination of financial statement amounts, and certain other laws and
regulations specified in OMB Bulletin No. 07-04, Audit Requirements far l^deral l-'hiancial
Statements. The OMB guidance requires that we evaluate compliance with federal financial
management system requirements, including the requirements referred to in the Federal Financial
Management Improvement Act of 1996 (FFM1A). We limited our tests of compliance to these
provisions and did not test compliance with all laws and regulations applicable to EPA.
Providing an opinion on compliance with certain provisions of laws and regulations was not an
objective of our audit and, accordingly, we do not express such an opinion. A number of ongoing
investigations involving EPA's grantees and contractors could disclose violations of laws and
regulations, but a determination about these cases has not been made. The results of our tests of
compliance with laws and regulations are summarized below and detailed in attachment 2.
EPA's Compass Service Provider Needs to Assess Controls Over
Business Processes Affecting EPA
F.PA has limited assurance that its Compass service provider's controls over business
processes affecting EPA are designed and operating as intended. Compass, EPA's new
core financial application, is managed and hosted by a service provider through a
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contract Federal guidance requires agencies using service providers for financial
management to ensure that these service providers assess the design and operating
effectiveness of internal controls over financial reporting. Industry accounting standards
require service providers to evaluate controls over those activities affecting its customers'
financial reporting. EPA did not identify its critical business processes that impact
financial reporting or require its service provider to identify and assess those processes it
performs on the Agency's behalf. Without an assessment of its service provider's control
environment, EPA faces the potential that a critical business failure by the service
provider could impact the Agency's ability to provide reliable financial reporting
FFMIA Compliance
Under FFMIA. we are required to report whether the Agency's financial management
systems substantially comply with the federal financial management systems
requirements, applicable federal accounting standards, and the United States Government
Standard General Ledger at the transaction level. To meet the FFMIA requirement, we
performed tests of compliance with FFMIA Section 803(a) requirements and used the
OMB guidance. Memorandum M-09-06, Implementation Guidance for the Federal
Financial Management Improvement Act, dated January 9, 2009, for determining
substantial noncompliance with FFMIA. The results of our lesls did not disclose any
instances in which the Agency's financial management systems did not substantially
comply with FFMIA requirements.
No other significant matters involving compliance with laws and regulations came to our
attention during the course of the audit. We will not issue a separate management letter.
Our audit work was also performed to meet the requirements in 42 U.S. Code §961 l(k) with
respect to the Hazardous Substance Superfund Trust Fund, to conduct an annual audit of
payments, obligations, reimbursements, or other uses of the fund. The significant deficiencies
reported above also relate to Superfund
Prior Audit Coverage
During previous financial or financial-related audits, we reported weaknesses that impacted our
audit objectives in the following areas:
• Financial system user account management.
• Accounts receivable documentation not provided timely
• Uncollectible debt misstated.
Attachment 3 summarizes the current status of corrective actions taken on prior audit report
recommendations related to these issues.
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Agency Comments and OIG Evaluation
The Agency disagreed with most of our findings but accepted many of our recommendations.
The Agency stated it identified and then fixed or remediated most of the limitations of its new
Compass system and, thus, there were no material issues during the preparation of the financial
statements. The Agency characterized the errors we found as normal problems during collection
and verification activities. However, we disagree that was the case. Further, along with the errors
that we found and communicated to the Agency during the course of our audit, we found
additional errors at year end. We maintain that the Agency materially misstated quarterly
financial reports to OMB and the draft financial statements. Because the errors were not detected
during the year or during the preparation of the quarterly and draft financial statements, we do
not agree with the Agency's position that it would have identified the errors. The errors we found
were not detected by the Agency because they were part of everyday postings in the Compass
system and occurred primarily because of posting models deficiencies in the new system and the
failure of internal controls to detect and correct the errors.
This report is intended solely for the information and use of the management of EPA, OMB, and
Congress, and is not intended to be and should not be used by anyone other than these specified
parties.
Paul C. Curtis
Director, Financial Statement Audits
Office of Inspector General
U.S. Environmental Protection Agency
November 15, 20 12
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Attachment 1
Internal Control Material Weakness and
Significant Deficiencies
Table of Contents
Material Weakness
1— Compass System Limitations Are a Material Weakness to
EPA's Accounting Operations and Internal Controls 11
Significant Deficiencies
2— Posting Models in Compass Materially Misstated GL Activity
and Balances 13
3— Compass Reporting Limitations Impair Accounting Operations and
Internal Controls 17
4— EPA Should Improve Controls Over Expense Accrual Reversals 22
5— Compass System Limitations Impair Internal Controls of
Financial Operations 24
6— EPA Should Improve Compliance With Internal Controls for
Accounts Receivable 27
7— EPA Is Not Clearing Fund Balance with Treasury Statement of
Differences Timely 31
8— Property Internal Controls Need Improvement 33
9— Compass and Maximo Cannot Be Reconciled 34
10— EPA Needs to Remediate System Vulnerabilities That Place
Financial Data at Risk 35
11— OCFO Financial Systems Security Documentation Needs Improvement 38
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1—Compass System Limitations Are a Material Weakness to
EPA's Accounting Operations and Internal Controls
Tn October 2011, EPA replaced TFMS with Compass. Although the Agency had operated TFMS
a contractor manages Compass. EPA replaced TFMS to improve the operation of financial
management systems, standardize business processes, and strengthen internal controls. The
system replacement required a major systems conversion and data migration to Compass. As
with any major system conversion, problems were to be expected. We found that when the
Agency converted its accounting system, it had not yet developed all the reports and functions
required to generate all the needed information. The lack of useful reports and system limitations
significantly impaired the effectiveness of EPA's accounting operations and internal controls.
We determined that the Compass reporting and system limitations represented a material
weakness. Several significant internal control deficiencies contributed to the material weakness:
• Posting model errors caused multiple misstatements. We found several material errors,
caused by posting model errors, in the draft financial statements that could have
potentially materially misstated the financial statements if not detected.
• Compass could not produce the reports EPA needed for many accounting applications,
which caused delays in completing some accounting functions and material errors in GL
balances.
• Material amounts of expense accruals did not reverse properly because of a Compass
system configuration error.
• EPA discontinued the GL account analysis for FY 2012. Without performing account
analysis, EPA did not have an effective monitoring control to assess the accuracy and
reasonableness of GL accounts and detect errors.
The Agency has over 8,000 posting models for posting transactions in the financial system. We
found errors in multiple posting models that we examined. However, the financial system has
many other posting models that we were not able to examine. Our test work and analyses
indicate that while the Agency has been able to correct some posting model errors during the
year, there are additional posting models the Agency needs to evaluate.
The significant deficiencies in accounting operations and internal controls resulted in material
misstatements of the financial statements that were not prevented or detected; thus, they
represent a material internal control weakness. Further details on each significant deficiency
follow.
Agency Comments and OIG Evaluation
The Agency did not concur with our finding that Compass system limitations are a material
weakness. The Agency believes it has fixed or remediated the Compass limitations so that only
normal problems of information collection and verification existed during the preparation of the
financial reports. EPA stated that during the fiscal year it dedicated resources to:
• Creating alternate methods of obtaining and analyzing data
• Reviewing and correcting the posting logic
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• Updating its methods of GL account analytical review
• Identifying and correcting system and user errors.
We believe that EPA focused on correcting errors to present accurate year-end financial
statements. However, EPA did not acknowledge the high risk of material errors that may have
occurred in FY 2012 and had not been detected. EPA emphasized its efforts to review posting
models and correct errors, but it did not comment on the specific multiple misstatements and
several material errors caused by posting model errors. EPA highlighted Compass' robust
reporting capacity, but it did not acknowledge that it could not produce reports for many
accounting applications. EPA claimed that it did not discontinue its GL account analysis process,
but prepared a quarterly account analysis at the financial statement line-item level. We believe
EPA's account analysis process was not effective because our analyses at the GL account level
uncovered material misstatements that EPA did not detect.
We found many significant deficiencies in EPA's accounting operations and internal controls.
Regardless of EPA's efforts to correct the errors we identified, the Compass system limitations
are a material weakness because there were material undetected errors in the draft financial
statements and, accordingly, there was more than a remote chance that errors could occur and not
be detected.
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2—Posting Models in Compass Materially Misstated
GL Activity and Balances
Compass materially misstated GL activity and balances due to incorrect posting models. We
found incorrect posting models in numerous accounts for obligations, disbursements,
receivables, collections, and revenue. EPA did not properly and thoroughly review the posting
models before migration from TFMS to Compass. Further, EPA did not properly review
balances in the financial statements that were a result of incorrect posting models; a posting
model is a reference for document entry that provides default values for posting business
transactions in GL accounts. Incorrect posting models reflect an internal control weakness and
an indication that EPA did not exercise proper oversight over how transactions are processed in
its GL. As a result, the draft financial statements contained material errors that were undetected
by the Agency. We noted $331 million in misstatements in the draft financial statements that
Agency management did not detect.
GAO's Standards for Internal Control in the Federal Government require accurate and
timely recording of transactions and events. The FMFIA Act emphasizes the need for
Agencies to provide reasonable assurance that accounts are properly recorded and accounted
for to ensure reliability of financial reporting.
EPA's Contract for the Financial System Modernization Project states the Transaction
Definitions Maintenance table is used to define and store document type, transaction type,
and process activity for use across EPA. The GL Accounting Entry is an EPA-defmed code
that dictates what debits and credits are posted for a transaction. The United States Standard
GL accounting guidance on budget policy defines "Upward Adjustments of Prior-Year
Undelivered Orders - Obligation" as the amount of upward adjustments during the current
fiscal year to obligations that were originally recorded in a prior fiscal year in "Undelivered
Orders - Obligations." The Treasury Financial Manual states "Upward Adjustments of Prior
Year Undelivered Orders" is credited when the expended amount is more than the
undelivered order. Conversely, "Downward Adjustments of Prior-year Undelivered Orders"
is debited when the expended amount is less than the undelivered order.
During our audit we found multiple posting errors. Posting models were incorrect for upward
adjustments, downward adjustments, obligations with miscellaneous vendor codes, receivables,
collections, revenue, and revenue and expenses for EPA's Working Capital Fund. The Agency
was able to fix some of the errors that we found before the draft financial statements were
prepared. However, our later analysis of the draft financial statements found more posting
model errors that resulted in material misstatements to the draft financial statements. The errors
resulted in the following misstatements:
• Earned Revenue was overstated by $184 million.
• Net Costs, intra-entity operating expenses was overstated by $184 million.
• Miscellaneous Receipt Revenue was understated by $87 million.
• Obligations Incurred and Recoveries of Prior Year Unpaid Obligations were misstated by
$52 million
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• EPA's Gain on Sale of Investments was overstated by $7 million.
• EPA's Working Capital Advance account was overstated by $1 million.
In addition to the misstatements identified above, we found the following:
• Earned Revenue for the Federal Insecticide, Fungicide, and Rodenticide Act fund was
understated by SI4.9 million.
• Earned Revenue for the Pesticide Registration Improvement Act fund was understated by
$7.2 million.
• Earned Revenue for Supeifund special accounts was understated by $3.3 million.
• Supeifund federal accounts receivable transactions totaling about $20 million did not post
to the correct GL accounts.
• Over $236 million in Superfund cost recovery accounts receivable were recorded in an
improper GL account
• Collection transactions totaling about $29 million that impacted incorrect cash, advance,
and allowance GL accounts were recorded incorrectly
• Intergovernmental payment transactions totaling about S81 million were not recorded to
the correct GL account.
• EPA did not post the proper entry to record about $3 million in a loan from its
Environmental Program Management fund to its reimbursable Oil Spill fund.
• EPA did not properly record about $3 million of earned revenue related to Superfund
cashouts.
• Current year new obligations totaling about S368 million were incorrectly recorded in
upward adjustment accounts (These transactions represent our sample items and are not
representative of all transactions improperly recorded to the upward adjustment accounts.)
• Federal obligations of about S234 million were incorrectly recorded as non-federal
obligations.
• Accrued liabilities totaling about $14 million were not properly recorded.
EPA did not verify that the posting models in Compass were accurate prior to migration from
IFMS. Specific reasons include:
• Mapping errors posted intra-entity activity to incorrect revenue and expense accounts;
when EPA eliminated the intra-entity activity for financial statement purposes, those
accounts were understated. The error was not caught on management review.
• New obligations with a prior budget fiscal year were recorded as upward adjustments to
prior-year obligations.
• Accounting models for reimbursable payroll disbursements, accruals, and grant refunds
failed to recognize corresponding revenue and reduce unearned advances.
• Adjustments to obligations with a prior budget fiscal year were recorded as Upward and
Downward Adjustments of Prior-Year Undelivered Orders, increasing both.
• Obligations with a vendor name "Miscellaneous" were recorded by default as a non-
federal entity even if it was a federal obligation. The error is highlighted in the GL when
expenditures are made against the obligation, creating an ever growing negative balance.
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• Compass contains flexible definitions for posting entries based on whether transactions
are, for example, federal versus non-federal or exchange versus non-exchange. The
default entries should not be used and transactions should be recorded within specified
and defined accounting entries.
• EPA incorrectly set up accounting models for reimbursable payroll disbursements,
accruals, and grant refunds as non-exchange transactions rather than as reimbursable
expenditures.
• EPA did not perform analytical reviews of account activity to identify unusual activity
resulting from incorrect posting models
We found S330.9 million in misstatements on F.PA's draft financial statements, caused by
incorrect transactional postings. The transactions posted incorrectly because the posting
models associated with those transactions were not mapped to the correct accounts and
internal controls failed to detect and correct the errors. The misstatements in the draft
financial statements are listed below:
Table 1: Draft financial statement misstatements
Financial statement line items
Earned revenue and net costs
Miscellaneous receipt revenue understated
Obligations incurred and recoveries of prior year unpaid obligations
Gain on sale of investments
Working capital advance
Total
Amount
(millions)
$18
87
52
7
1
$331
Source: OIG analysis
1 Estimated amount
Incorrect posting models also distort the use of funds as they do not differentiate between
current and prior year activity and federal and non-federal activity, and do not represent
accurate activity.
Recommendations
We recommend the Chief Financial Officer:
1. Perform a thorough review of all posting models to ensure the proper accounts
are impacted
2. Correct activity in accounts incorrectly impacted by improper posting models.
3. Develop internal control procedures to confirm the proper accounts are impacted for
all transactions.
4. Perform analytical reviews of account activity on a quarterly basis to verify
account activity is reasonable.
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Agency Comments and OIG Evaluation
The Agency concurred with our recommendations. However, the Agency did not agree that
incorrect posting models resulted in materially misstated GL activity and balances or that the
significant GI. errors and misstatements in the draft financial statements were internal control
weaknesses. The Agency stated that posting models were not the cause of certain errors and
misstatements and provided alternative reasons for the errors and misstatements. We do not
believe thai EPA's alternative reasons are consistent with our audit findings. Regardless of the
origin of the error or misstatement, the numerous significant GL errors and misstatements
represent a material weakness.
The Agency also stated that it would have caught the errors in its year-end analysis, but the
Agency did not detect the errors we found in the draft financial statements or in its quarterly
financial statement submissions to OMB. We do not believe the Agency would have prevented the
material misstatements had we not brought them to the Agency's attention.
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3—Compass Reporting Limitations Impair
Accounting Operations and Internal Controls
EPA has been unable to obtain the reports it needs from Compass for many accounting
applications in FY 2012. OMB requires financial management systems to provide complete,
reliable, consistent, timely, and useful financial information. Compass reporting limitations
prevented EPA from producing many reports it needed for accounting operations. When the
Agency converted its accounting system to Compass, it had not yet developed all the reports and
functions required to generate all the information it needs. The lack of useful reports and
information significantly impairs the effectiveness of EPA's accounting operations and internal
controls.
OMB Circular A-127, Financial Management Systems, requires financial management systems
to provide complete, reliable, consistent, timely, and useful financial information for federal
government operations. GAO' s Standards for Internal Control in the Federal Government states
that internal control should provide reasonable assurance that the objectives of the agency are
being achieved in the following categories:
• Effectiveness and efficiency of operations, including the use of the entity's resources.
• Reliability of financial reporting, including reports on budget execution, financial
statements, and other reports for internal and external use.
• Compliance with applicable laws and regulations.
EPA could not obtain needed reports from Compass in several accounting areas:
• Accounts Receivable - The Compass Business Objects GL report did not contain the
beginning balances at the security organization (finance center) level which finance
centers need to reconcile accounts receivable reports. The Cincinnati Finance Center
(CFC), Las Vegas Finance Center (LVFC), and Research Triangle Park Finance Center
(RTPFC) could not properly perform monthly accounts receivable reconciliations from
October 2011 through March 2012. LVFC submitted non-certifications to the Reporting
and Analysis Staff for their reconciliations. RTPFC submitted certifications documenting
that it could not perform the reconciliations. CFC did not submit certifications but
notified headquarters by e-mail of its difficulties with validating accounts receivable
balances.
• Allowance for Doubtful Accounts - Compass reports needed to estimate allowances,
such as allowance for doubtful accounts and GL reports, were not available at the finance
center level. EPA has not developed the reports or functions CFC needed to update its
collectibility estimates for past due accounts receivable. For the first and second quarters
of FY 2012, CFC updated the allowance estimates only for its new FY 2012 receivables
greater than $100,000, and did not update allowance estimates for any prior year accounts
receivable converted from 1FMS to Compass. LVFC and RTPFC did not update the
allowance for doubtful accounts estimates for the first two quarters of FY 2012.
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• Fund Balance with Treasury - EPA was not able to obtain accurate data from Compass
for sections II and III of the monthly Statement of Transactions (SF-224) report. Compass
could not read the Treasury-formatted data files necessary to generate accurate monthly
activity reports. We identified this problem at CFC, LVFC, Washington Finance Center,
Reporting and Analysis Staff, and headquarters payroll (security organization PYRL).
The problem began at the beginning of FY 2012 and still existed when we reviewed
internal controls during the third quarter of FY 2012. EPA staff manually reconciled and
reported Sections II and III of the SF-224 report submitted to Treasury.
• Suspense Accounts - Compass does not have the capability to generate the suspense
account detailed report for tracking the transactions in suspense accounts 68F3875 and
68F3885. CFC generates the suspense report by obtaining suspense transactions from the
system and comparing them to transactions in the Interagency Document Online
Tracking System. LVFC maintains a hard copy of each suspense transaction processed
along with the supporting documentation in a folder and manually tracks every suspense
transaction to ensure they are cleared timely. RTPFC manually checks the Statement of
Transactions and the cash difference reports to identify transactions not cleared within
60 days. The Washington Finance Center did not generate suspense reports. Reporting
and Analysis Staff have been unable to provide the finance centers a monthly report of
balances in the suspense accounts. This problem hinders the finance centers' ability to
classify and transfer transactions in suspense to the appropriate GL account. We found
that the problem began at the beginning of FY 2012 and still existed when we reviewed
the February and March 2012 suspense reports.
• Property - Compass cannot produce a property report by security organization (location).
Maximo, a fixed asset subsystem of Compass, accepts only one security organization
(EPA) and does not recognize the individual finance centers. Therefore, EPA cannot
reconcile property management data within Maximo to the relevant financial data within
Compass for accountable personal property. We identified this limitation at RTPFC and
LVFC.
• Direct Asbestos Loans - Compass cannot produce the direct loans Treasury Report on
Receivables. LVFC tracked individual asbestos loans in Compass via debt accounts as
recommended during migration planning by the contractor that developed Compass.
However, Compass cannot use debt accounts to produce a Treasury Report on
Receivables. LVFC must manually produce the direct loans Treasury Report on
Receivables, which it submits to the Reporting and Analysis Staff for Treasury reporting.
• GL Account Analysis - The finance centers have not performed a GL account analysis
since the implementation of Compass at the beginning of FY 2012. In prior years, the
finance centers conducted annual 6-month, 9-month, and year-end GL account analyses.
EPA used the GL account analysis to monitor and assess the accuracy and reasonableness
of its GL accounts and the effectiveness of internal controls. Compass could not produce
FY 2012 GL data for account analysis comparable to FY 2011 data. Compass does not
have beginning balances by finance office, and the transaction codes and types were not
comparable between FYs 2011 and 2012. OCFO temporarily discontinued the GL
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account analysis for FY 2012, except for CFCs quarterly analysis of Agency activity for
intragovernmental balances
Compass reporting limitations prevented EPA from producing many reports it needed. When the
Agency converted its accounting system from 1FMS lo Compass in October 2011, it had not yet
developed all the reports and functions required to generate all the information needed, OC'FO's
FY2012 annual assurance letter to the Administrator dated August 20, 2012, stated that
".. .Compass is being modified to correct defects and meet certain requirements that were not
expressed during system development." OCFO's FY 2012 assurance letter further stated that
"OCFO continues to work with NPMs [National Program Managers] and regions to identify any
residual problems and implement solutions. OCFO anticipates that the majority of the remaining
implementation issues will be resolved in the coming months."
The lack of useful reports and information significantly impairs the effectiveness of EPA's
accounting operations and internal controls. We found the following impairments:
• The inability to perform some accounting functions. This adversely impacted EPA's
OMB Circular A-123 internal control reviews by limiting the number of effective
controls available for testing. For example, LVFC and RTPFC were not able to perform
the first quarter allowance for doubtful accounts calculations because the Compass
GL reports did not have the beginning balances at the finance center level, which finance
centers need to reconcile accounts receivable reports to the GL. Therefore, EPA omitted
tests of the allowance for doubtful account calculation and the allowance adjustment
transaction approval.
CFC omitted some OMB Circular A-123 tests of accounts receivable because CFC could
not perform monthly accounts receivable reconciliations Compass could not provide an
accurate report of accounts receivable opening balances needed for the reconciliations.
OCFO reported on October 11, 2012, that reports needed for accounts receivable
reconciliations are now in Compass. However, the reports were not available during
A-123 testing conducted from January through June 2012, and EPA did not test the
related internal controls.
In the area of cost recovery accounting, RTPFC omitted A-123 tests to confirm
appropriate documents were scanned into the Superfund Cost Recovery Package Imaging
and On-Line System (known as SCORP1OS) and to confirm all invoices were
redistributed. RTPFC was unable to perform Compass queries to obtain the needed
reports Therefore, invoices may not be redistributed properly, resulting in inaccurate
expenses reported in the financial statements.
For the first and second quarters of FY 2012, RTPFC omitted A-123 property tests
performed to verify that EPA properly recorded assets in the Fixed Assets Subsystem and
Compass, and to confirm that quarterly financial statements were reviewed and
confirmed to be accurate. RTPFC could not perform monthly property reconciliations
because Compass could not provide reports with GL beginning balances. OCFO reported
on October 11, 2012, that "the majority of reports related to this process are now in
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Compass. Additional reports are under review and undergoing system testing." However,
the reports were not available during A-123 testing, and EPA did not test the related
internal controls.
• Delays in the accurate completion of some accounting functions. For example, OCFO
temporarily discontinued the GL account analysis for FY 2012. CFC delayed the
calculation of Superfund unbilled oversight cost accruals until year-end because it was
not able to retrieve billings reports from Compass needed to complete the accrual
spreadsheet. CFC worked around the problem by posting quarterly accruals based on the
average of the previous four quarterly accruals.
• Material errors in GL balances. We identified errors in GL balances totaling over $600
million in our 7-month testing and documented them in our audit difference entries. The
net effect of the errors did not materially misstate the financial statements but indicates
the potential for material misstatements.
• The expenditure of time and resources on workarounds. EPA personnel in finance centers
spent time preparing workarounds for Sections II and III of the SF-224 reports to
Treasury, tracking the suspense accounts, and generating accurate numbers for the direct
loans Treasury Report on Receivables.
When taken as a whole, the Compass reporting limitations and the resulting impairments of
EPA's accounting operations and internal controls represent a material internal control weakness.
Several factors impact the effectiveness of EPA's internal controls and increase the risk of a
material misstatement to the financial statements:
• Lack of reliable reports
• Impairment of accounting operations
• Exclusion of some internal control tests
• Delays in the accurate completion of some accounting functions
• Material errors in GL balances
• Time and resources expended on workarounds
These deficiencies in accounting operations and internal controls resulted in material
misstatements of the draft financial statements that were not prevented or detected; thus, they
represent a material internal control weakness.
Recommendation
We recommend that the Chief Financial Officer:
5. Identify Compass reporting problems and develop reports to provide users with accurate
data on a timely basis.
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Agency Comments and OIG Evaluation
The Agency concurred with our recommendation However, the Agency did not agree that the
reporting limitations we identified in several accounting areas significantly impair the
effectiveness of the Agency's accounting operations and internal controls. EPA claimed that it was
not impaired in the following areas that we addressed:
• Accounts receivable
• Allowance for doubtful accounts
• Fund Balance with Treasury
• Suspense accounts
• Property
• Direct asbestos loans
• GL account analysis
• A-123 internal control reviews
• Delays in completion of some accounting functions
• Material errors in GL balances
• Expenditure of time and resources on workarounds
EPA characterized Compass reporting limitations as an opportunity to take advantage of the many
features of the modern system to best meet the Agency's business needs. For example, when
Compass did not have the reports EPA needed to reconcile receivables at the servicing finance
office level, EPA reported that Compass allowed it to streamline accounts receivable processes by
moving to a centralized approach EPA canceled its policy that required finance centers to perform
monthly receivable reconciliations We believe that EPA's response weakened its internal controls
instead of strengthening them.
EPA emphasized the alternative approaches it developed, the eventual creation of useful reports,
and the correction of errors EPA characterized the conditions that it experienced with Compass
reporting limitations as "quite normal" in the implementation of a new system. We disagree with
F.PA's assessment. Proper planning before the system implementation could have reduced the
significant impairments to EPA's accounting operations and internal controls.
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4—EPA Should Improve Controls Over Expense Accrual Reversals
EPA did not reverse approximately S108 million of FY 2011 year-end expense accruals in
FY 2012 EPA policy requires the liability reported in the financial statements to reflect the value
of goods and sewices received and accepted but unpaid The Agency did not reverse the accrual
transactions because the Compass posting configuration for the applicable fund category was
inaccurate and staff recorded the FY 2011 accrual entries without including the reversal period.
By not reversing the accruals timely, EPA overstated the accrued liability and expense amounts
by $108 million and materially misstated the quarterly financial statements.
HPA Policy Announcement No. 95-11, Policies and Procedures for Recognizing Year-End
Accounts Payable and Related Accruals, requires EPA "to recognize and report all accounts
payable and related accruals in its year-end financial reports. The liability reported in the annual
financial statements shall reflect the value of all goods and services received and accepted but
unpaid regardless of whether an invoice has been received.... Accruals and unvouchered accounts
payable shall be input using the reversal period field in IFMS [since replaced by Compass]."
OMB Circular A-l 23, Management's Responsibility for Internal Control, states, "Management
is responsible for establishing and maintaining internal control to achieve the objectives of
effective and efficient operations, reliable financial reporting, and compliance with applicable
laws and regulations.... In addition, periodic reviews, reconciliations or comparisons of data
should be included as part of the regular assigned duties of personnel."
We notified the Agency that numerous expense accrual transactions from FY 2011 accounting
periods 12 through 15 did not reverse in FY 2012. EPA found that $107,812,171 of the
$820,113,515 in total automated accruals did not reverse and post to the proper GL accounts in
FY 2012. EPA stated that it updated the Compass configuration and subsequent posting logic in
the second quarter of FY 2012. We found that first quarter automated accruals reversed properly
in the second quarter. In addition, we identified $44,957 ofFY 2011 year-end expense accruals
that did not reverse in FY 2012. EPA recorded the accrual reversals of $107,812,171 and
$44,957 in Compass at the FY 2012 year-end and the beginning of FY 2013, respectively.
Table 2 illustrates the expense accruals not reversed timely in Compass.
Table 2: Expense accruals not reversed in Compass
Expense
accrual
amount
3820,113,515
$44,957
Accrual amount
reversed
in FY 2012
$712,301,344
$0
Accrual amount
not reversed
in FY 2012
$107,812.171'
S44.9571
Source: OIG analysis of EPA data
1 EPA reversed the $107,812,171 and $44,957 accrual
amounts by recording manual standard voucher adjustments
in the FY 2012 fourteenth month accounting period and
FY 2013 first month accounting period respectively.
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Compass did not reverse the accrual transactions for the trust fund category because, in the
implementation of Compass, EPA set the trust fund category configuration to null post (do not
post) to the GL. These accruals did not automatically reverse in the first quarter of FY 2012. The
system posted the accrual reversals for the trust fund category to the transaction and accounting
journals but not the general journal. EPA did not:
• Check the "Should Post to General Journal Flag" in the accounting journal record.
• Reverse accruals that did not have the reversal period for the FY 2011 accrual
transactions in IFMS.
• Detect the omission of the reversal period when Compass processed the accrual reversals.
• Have adequate internal controls in place to monitor the accrual reversals and reconcile
the accruals and reversals.
By not reversing the accruals timely, EPA overstated the accrued liability and expense amounts
by approximately $108 million and materially misstated the FY 2012 quarterly financial
statements. EPA reversed the accruals when we notified it of the error. If we had not brought the
error to EPA's attention, it might have materially misstated the year-end financial statements.
Recommendation
We recommend that the Chief Financial Officer:
6. Update EPA's policy for recognizing year-end accruals to require reconciliations of
accruals and accrual reversals.
Agency Comments and OIG Evaluation
The Agency concurred with our finding and recommendation.
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5—Compass System Limitations Impair
Internal Controls of Financial Operations
EPA's new Compass system experienced several impairments to processing financial
transactions. The impacted transactions included five payment accounting lines that exceeded
the related obligation accounting lines, three transactions posted to an incorrect accounting
period, and a payment against a canceled appropriation. GAO guidance slates that application
controls should ensure completeness, accuracy, authorization, and validity of all transactions
during application processing. The Department of the Treasury Financial Management Manual
states that canceled appropriation account balances are not available for obligation or
expenditure for any purpose. Compass did not prevent the posting of these invalid transactions
because EPA did not have system controls in place to reject them. The Compass impairments
limit EPA's assurance that account balances are accurate and Agency managers have useful and
reliable financial information for managing day-to-day operations.
Grant Payments Exceeded the Related Obligation Accounting Lines
We found five grant payment accounting lines that exceeded the related obligation accounting
lines. EPA did not set the proper controls and tolerance levels to reject a payment over the
obligation line amount to prevent grant payments from exceeding obligated line amounts.
GAO's Standards for Internal Control in the Federal Government states that with respect to
control activities for information systems. "This category of control is designed to help ensure
completeness, accuracy, authorization, and validity of all transactions during application
processing." None of the expenditures exceeded the total amounts obligated for each grant.
However when payment accounting lines exceed the obligation accounting lines, the financial
system may not accurately reflect the obligation account balances. Project officers and grant
specialists may not have accurate information to manage grant funds. EPA prepared journal
vouchers to correct the overpaid accounting lines, as illustrated in table 3.
Table 3: Grant payments exceeding obligation line amounts
Journal
voucher
3312SV121
3312SV122
3312SV120
3312SV119
3312SV117
Document
number
IOOE24007
C999467405
XAOOE79301
XP99574309
L96683801
Line
number
2
1
1
3
2
Total
Obligation
line amount
S169.900
3,194.600
55,000
959,627
273.445
$4,652,572
Expended
line amount
$171,666
3,194,794
57,795
1,097,138
273.880
54,795,273
Source: OIG analysis
Transactions Posted to an Incorrect Accounting Period
Compass allowed redistribution disbursement transactions to post to an incorrect accounting
period. EPA's accounting periods correspond to the calendar months, with additional periods for
year-end adjustments. CFC posted the April 2012 transactions to redistribute payments,
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illustrated in table 4, to the U.S. Department of Justice. The transactions posted to the March
2012 accounting period because F.PA left the March accounting period open in April. GAO's
Standards for Internal Control in the Federal Government, states that "Transactions should be
promptly recorded to maintain their relevance and value to management in controlling operations
and making decisions. This applies to the entire process or life cycle of a transaction or event
from the initiation and authorization through its final classification in summary' records. In
addition, control activities help to ensure that all transactions are completely and accurately
recorded." EPA's posting to an incorrect accounting period overstated the March balances and
understated April balances. Because Compass did not prevent the improper posting, FPA cannot
ensure that it records transactions in the proper period, closes accounting periods timely, and
prohibits adjustments to prior period balances.
Table 4: April transactions posted to the March accounting period
Compass document
number
IGB2001 140563
IGB2001 140589
IGB2001 140571
Agency
location code
68010727
68010727
68010727
Total
Dollar
amount
$20.868
64.316
54666
5139,851
Payment
date
April 10,2012
April 10,2012
April 10, 2012
Source: OIG analysis
Payment Against a Canceled Appropriation
EPA made a payment against a canceled appropriation RTPFC recorded a payment for $3,338
on May 14, 2012 against appropriated funds that EPA canceled in FY 2011. RTPFC recorded the
payment in document number B2094647550. to treasury symbol 6803/040108, budget fiscal year
2003/2004, fund B.
OMB Circular A-l 1, Preparation, Submission, and Execution of the Budget, Section 130-14,
provides guidance on the payment process for obligations with canceled funds. According to
A-l 1, "Legitimately incurred obligations that have not been disbursed (i.e., paid) at the time a
TAFS [Treasury Appropriation Fund Symbol! is canceled cannot be disbursed from the canceled
obligated or unobligated balances of the canceled TAFS."
According to Treasury Financial Management Manual 2-4200, Agency Reporting on
Unexpended Balances of Appropriations and Funds, Section 4245, "Canceled appropriation
account balances are not available for obligation or expenditure for any purpose "
When EPA canceled the funds at the end of FY 2011, the funds should not have been available
for obligation or expenditure. However. Compass did not have the system controls in place to
prevent their availability. EPA cannot ensure that Compass prevents payments against canceled
appropriations.
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Recommendation
We recommend that the Chief Financial Officer:
7. Correct the Compass system limitations that allowed (a) payments to exceed the related
obligation accounting lines, (b) transactions to post to an incorrect accounting period, and
(c) a payment to impact a canceled appropriation.
Agency Comments and OIG Evaluation
The Agency did not concur with our recommendation because it has already made the
corrections. The Agency stated that in December 2011 it updated proper controls and tolerance
levels to prevent grant payments from exceeding the related obligation accounting lines. In May
2012, EPA corrected the issue of preventing the improper posting of transactions to prior
accounting periods. EPA confirmed that it fixed the Compass table to prevent spending against
canceled appropriations. Therefore, we concluded that no further action is required.
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6—EPA Should Improve Compliance With Internal Controls for
Accounts Receivable
We found numerous deficiencies in EPA's compliance with accounts receivable internal controls
in FY 2012. Various factors contributed to EPA not properly following its internal control
procedures to ensure timely and accurate recording of accounts receivable. EPA policies require
accurate and timely recording of accounts receivable and proper separation of duties.
Noncompliance with accounts receivable controls affects the reliability and integrity of accounts
receivable on the financial statements.
EPA Resources Management Directive Systems (RMDS) 2540-9-1, Billing and Collecting,
requires the originating offices/action officials to forward all action documents to the finance
center within 5 business days. Finance centers must establish an accounts receivable in the
Agency financial system of record within 3 business days of receiving documentation from the
originating offices. RMDS Policy Number 2540-09 requires that EPA maintain records at the
transaction level that "provide clear audit trails of financial transactions, which include all
materials created in support of a financial transaction or event." RMDS 2550D, Chapter 14, Tl,
Superfund Accounts Receivable and Billings, also requires forwarding all action documents to
the finance center within 5 business days. RMDS 2550D, Chapter 14, includes requirements
similar to RMDS 2540-09 as discussed above, and further provides that all delinquent statutory
Superfund accounts receivable arising under judicial or administrative order be referred to the
U.S. Department of Justice for enforcement or collection.
RMDS 2540-9-P2, Non-Federal Delinquent Debt, state that finance centers must "maintain a
debt/accounts receivable file that includes copies of all bills, demand letters, and all other
correspondence with the debtor." The finance center is responsible for reviewing debt/accounts
receivable files and the referral to Treasury of any uncollectible debt/accounts receivable monthly.
RMDS 2540-02, Internal Controls: Separation of Duties, states that EPA employees must not be
in a position to both perpetrate and conceal errors or irregularities by controlling multiple key
aspects of a financial transaction. Separation of duties is one of the fundamental elements of
internal controls that reduce risks.
RMDS 2540-09-P1, states that a letter of Final Determination is issued by the Action Official
who disallows grant expenses and determines that EPA is owed funds. This letter demands
payment and advises the debtor that if payment is not made within thirty (30) days, any
applicable interest, penalty, and administrative costs will accrue on the debt/accounts receivable.
In addition, "the LVFC records the debt/accounts receivable into Agency Financial System of
Record for billings."
Our review of EPA's compliance with its internal controls for establishing accounts receivable
found a number of instances of noncompliance with accounts receivable control procedures,
which indicates that noncompliance is prevalent. Specifically, we found that EPA did not:
• Accurately record a $38 million Superfund receivable in the proper fund. EPA staff
incorrectly recorded the transaction as a Superfund special account past cost receivable
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instead of a future cost receivable. Superfund special account past cost receivables impact
a different fund, different GL accounts, and sections of the financial statements than
future cost receivables.
• Timely receive 33 legal documents for receivables totaling $31,971,741, which resulted
in late recording of receivables.
• Timely record 15 accounts receivable totaling $40,555,244 in the financial accounting
system (within 3 business days).
• Accurately record 2 installment civil penalties in the financial accounting system. EPA
had received the collections for both receivables, which were recorded in liability
accounts for several months.
• Follow procedures when recording accounts receivable in the financial accounting
system. EPA established a $1,220,000 receivable prior to receiving the official action
document that represented EPA's claim to the receivable. Staff established the receivable
based only on an e-mail from the project officer.
• Maintain adequate separation of duties for some interagency agreement billings and
collections.
• Maintain adequate supporting documentation in the accounts receivable files for
correction transactions.
• Adequately pursue collection efforts for 4 accounts receivable.
• Include in grant final determination letters the required provisions for interest, handling,
and penalties if payment was not made within 30 days.
Various factors contributed to EPA's noncompliance with accounts receivable controls.
• Staff did not correctly interpret the language in the settlement agreement.
• Regional counsel, enforcement, and program offices did not timely provide legal
documents to the finance center within 5 workdays of the document effective date.
• The EPA accountant was unfamiliar with the type of the bankruptcy claim and did not
realize the claim should be recorded as a receivable until performing a review of the files
a few months later.
• Staff were not aware of the requirement to document when changes were made to
accounts receivable.
• Staff did not consider the process of billing and collecting interagency agreements as a
separation of duties issue because interagency collections are processed through the
Treasury system. However, personnel then control multiple aspects of a financial
transaction, the processing of interagency agreement receivables, collections, and cash.
• Staff did not properly maintain accounts receivable files.
• Finance center staff did not obtain and examine the official action document to verify the
validity of the receivable prior to recording the receivable.
• EPA's conversion of its accounting system from IFMS to Compass put additional
demands on finance center staff. As a result, finance center staff did not review files
monthly and did not include on file "all other correspondence with the debtor" relating to
collection efforts. Finance center staff did not monitor the status of delinquent debts on
an ongoing basis and adjust the overdue status code accordingly.
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• EPA's Office of Grants and Debarment, within the Office of Administration and
Resources Management, does not have guidance or procedures to ensure that grant final
determination letters are provided to the finance center. As a result, the audit follow-up
coordinator was unaware of the requirements to provide the final determination letter to
the finance center or to include provisions for late payment.
Untimely and inaccurate recording of receivables misstates accounts receivable in the financial
statements and affects the quality of data available to manage EPA resources. Without accurate
data, management cannot make informed decisions. Violation of the separation of duties
principle increases the risk that errors and irregularities will not be identified and corrected. Lack
of adequate supporting documentation may raise questions about the validity and integrity of
financial information in the accounting system. Without adequate documentation, EPA does not
have an adequate audit trail, and without an adequate audit trail EPA lacks transparency and
increases the risk of fraud.
Recommendations
We recommend the Assistant Administrator for Enforcement and Compliance Assurance:
8. Forward judicial documents to the financial center.
We recommend that the Chief Financial Officer:
9. Reinforce procedures to monitor all tracking reports. Follow up with regional offices and
the U.S. Department of Justice to obtain legal documents to ensure accounts receivable
are recorded timely in the financial accounting system.
10. Institute standard operating procedures for entering, tracking, and monitoring accounts
receivable, and ensure adherence to EPA policies and procedures for entering receivables
timely and maintaining adequate and easily accessible source documentation.
11. Ensure proper separation of duties by having separate individuals perform billing and
collection functions.
We recommend that the Assistant Administrator for Administration and Resources Management
direct the Director of the Office of Grants and Debarment to:
12. Create guidance to ensure that grant final determination letters contain required
provisions for late payment and a process for forwarding final determination letters to
finance centers within 5 days of the effective date.
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Agency Comments and OIG Evaluation
The Agency disagreed with our finding and recommendation for the Office of Enforcement and
Compliance Assurance to forward judicial documents to the finance center. However, the
Agency responded that the Office of Enforcement and Compliance Assurance will engage
U.S. Department of Justice management to assess the extent to which improvements are needed
to ensure the timely transmittal of judicial documentation to the finance center. The Agency also
responded that the Office of Enforcement and Compliance Assurance takes responsibility for
working with the regions and headquarters offices, where applicable, to ensure that
administrative penalty documentation is provided to the finance office within 5 business days.
The Office of Enforcement and Compliance Assurance will concentrate additional efforts on
those regions whose performance needs improvements.
The Agency also disagreed with our finding and recommendation about ensuring proper
separation of duties. The Agency cited receiving a waiver on October 11, 2012, after the end of
the audit period, and that reimbursable collections do not involve physical cash or checks. The
OIG believes that separation of duties is a sound internal control practice and should not be
waived.
The Agency agreed with our other findings and recommendations and stated it already began
taking corrective action.
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7—EPA Is Not Clearing Fund Balance with Treasury
Statement of Differences Timely
EPA did not clear Fund Balance with Treasury differences reported on the U.S. Department of
the Treasury's Statement of Differences (SOD) within 2 months. Treasury guidance requires that
the Agency clear deposit and disbursement activity differences within "two months of
occurrence." However, various problems resulting from the Agency's conversion from IFMS to
Compass contributed to the failure to timely clear SOD transactions. The problems included the
Agency being unable to process transactions, and encountering posting and accounting model
deficiencies with the new system. EPA reported a combined total of $6,115,632 in differences
from October 2011 through February 2012. The failure to clear SOD transactions compromises
the reliability of EPA's account balances and misstates disbursement and deposit activity
reported monthly to the Treasury.
The Treasury Financial Manual Reconciliation Procedures, require that the Agency identify and
clear disbursement and deposit differences between EPA and Treasury transaction activity within
2 months of occurrence. OMB Circular A-127, Financial Management Systems, requires
financial management systems to provide reliable and timely financial management information
of federal government operations.
We found that EPA did not clear differences reported on Treasury's SOD within 2 months as
required. Specifically, LVFC, CFC, RTPFC, Office of Financial Services, and Reporting and
Analysis Staff did not clear or provide explanations for differences reported to Treasury. These
SOD transactions, totaling $6,115,632, occurred between October 2011 and February 2012. The
transactions reported on the SOD were not cleared prior to May 2012. Some finance centers took
as long as 5 months to clear differences reported to the Treasury.
Various problems occurred as a result of the Agency's conversion from IFMS to Compass.
Specifically:
• CFC was unable to timely clear refund transactions reported on the SOD because there
was no accounting model in Compass to record refunds for advanced payments from the
U.S. Army Corp of Engineers.
• SOD delays at LVFC were the result of Compass' inability to process cancelled checks
issued by RTPFC. When Treasury cancels un-cashed checks, the funds are returned to
EPA through the Intra-governmental Payment and Collection system. Compass has the
capability to process the transaction, but closed miscellaneous obligation documents over
1-year old were not converted to Compass.
• RTPFC was unable to clear SOD transactions because Intra-governmental Payment and
Collection collections could not be processed in Compass. The Compass GL posting
model caused the Intra-governmental Payment and Collection collections to reject.
• Both the Office of Financial Services (Washington Finance Center) and Reporting and
Analysis Staff said the unreconciled disbursement and deposit differences were the result
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of timing differences. However, no additional explanations were provided. Also, Office
of Financial Services staff responsible for payroll said a posting error in Compass caused
differences.
The FMS-224, Statement of Transactions, is a monthly report required by Treasury that shows an
agency's disbursement, collections, and receipts. The report uses transactional data that impact
the agency's Funds Balance with Treasury GL accounts. These transactions include Treasury
payment confirmations, Tntra-governmental Payment and Collection system collections and
payments, and manual collections and payments. On the last day of every month, agencies are
required to reconcile transactions recorded in their GLs with the Treasury and identify and
resolve any deposit and disbursement differences within a 2-month period. Failure to timely
resolve SOD transactions impacts the effectiveness of EPA's internal controls and increases the
risk of mis statements on the financial statements. In addition, unresolved differences
compromise the reliability of Fund Balance with Treasury balances and financial reports
submitted to the Treasury.
Recommendation
We recommend that the Chief Financial Officer:
13. Require the Director, Office of Financial Management, to correct the Compass
accounting and posting model errors so that users have the ability to process
Fund Balance with Treasury transactions to clear SODs accurately and timely.
Agency Comments and OIG Evaluation
The Agency retracted its initial concurrence to the finding and recommendation dated
November 5, 2012. OCFO explained that in December 2011 it proactively discovered and
disclosed all of the issues cited by the OIG. Early in the year, the Agency was in the midst of
learning the intricacies of the new system and applying this knowledge to reengineer day-to-day
business processes. The Agency explained that while there were initial delays, it is now able to
clear differences in a timely manner. OCFO said it updated the accounting model and resolved
the SOD backlogs by the end of September 2012.
We acknowledge the learning curve imposed upon OCFO with the intricacies of a new financial
system and reengineering business processes. We also acknowledge the actions that OCFO has
taken to reduce the backlog of SOD in September, and appreciate the actions that the finance
centers have taken to clear these differences. However, we believe that a problem still exists with
processing the SOD transactions in Compass since the Agency is still working with the
contractor for Compass to clear transactions reported on the SOD. We believe OCFO should
verify that all accounting and posting models for processing Fund Balance with Treasury
transactions have been updated.
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8—Property Internal Controls Need Improvement
Compass does not sufficiently reject personal property information entries that are not accurate
As a result, the Agency could lose accountability and control over property. FMFIA, 31 U.S.C. §
3512(c)( I )(B), requires that property and other assets be safeguarded against waste, loss,
unauthorized use, or misappropriation. However, we identified personal property items for which
the location was not properly identified, as well as personal property items for which the last
recorded inventory dales or acquisition dates were in the future. The failure to properly configure
Compass data fields to reject unreasonable entries contributed to the inaccurate property records.
OMB Circular A-123, Management's Responsibility for Internal Controls, states that the three
objectives of internal control are (1) effectiveness and efficiency of operations, (2) reliability of
financial reporting, and (3) compliance with laws and regulations. The safeguarding of assets is a
subset of all of these objectives. Accurate property records are an essential element of proper
internal control and are necessary for the safeguarding of assets. In our audits of EPA's
FYs 2011 and 2010 financial statements, we reported that EPA headquarters could not account
for 1,284 and 1,134 personal property items, respectively. Inaccurate property records can
contribute to an inability to account for personal property items.
We found that EPA property records contained 135 personal property items, with total
acquisition costs of $2.9 million that were physically located in accountable areas different than
the locations identified in EPA's property system. We also found that EPA property records
contained 15 personal property items in which the property records showed that the items were
last inventoried on a date sometime in the future, and 13 additional personal property' items
whose recorded acquisition dates were in the future. These examples show that EPA does not
have adequate internal control over its personal property, which could result in the loss or
unauthorized use of its assets.
When we brought these problems to the attention of Agency officials, we were told that Compass
data fields were not configured correctly to prevent such errors. The 135 property items that were
physically located in accountable areas different than the locations identified in EPA's property
system resulted either from users not notifying their custodial officers or custodial officers not
accurately updating the property system
Recommendations
We recommend that the Chief Financial Officer:
14. Require the Director, Office of Technology Solutions, to work with the contractor that
developed Compass to build defaults into the Compass software that will eliminate or
minimize property record errors.
15. Correct the property data errors described above.
Agency Comments and OIG Evaluation
The Agency concurred with our finding and recommendations.
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9—Compass and Maximo Cannot Be Reconciled
EPA cannot reconcile capital equipment property management data within its property
management subsystem—Maximo—to relevant financial data within Compass. OMB Circular
A-123, Management '.v Responsibilityfor Internal Controls, states that one of the objectives of
internal control is the reliability of financial reporting. The inability to reconcile the property
subsystem with Compass can compromise the effectiveness and reliability of financial reporting.
Maximo and Compass primarily cannot be reconciled because historical property data did not
migrate properly from 1FMS to Compass.
OMB Circular A-123, states that the three objectives of internal control are (1) effectiveness and
efficiency of operations, (2) reliability of financial reporting, and (3) compliance with laws and
regulations. The inability to reconcile capital equipment as recorded in the property management
subsystem with its core financial system can result in inaccurate or incomplete properly records,
and compromise the reliability of HPA's financial reporting and accountability for Agency
property.
EPA has had a requirement since 2001—as set out in Comptroller Policy Announcement
No. 01-06—that the Agency must conduct a monthly reconciliation for capitalized property
between its property subsystem (Fixed Asset Subsystem) and the 1FMS capital equipment
GL accounts. The primary purpose of this reconciliation is to ensure that all capitalized property
is properly recorded. This reconciliation is the responsibility of the property management offices,
financial management offices, and offices within OCFO. Compass limitations do not allow a
reconciliation of capitalized property between Compass and Maximo. Because of these
limitations the OCFO rescinded the Comptroller Policy that requires capital property
reconciliation.
Recommendation
We recommend that the Chief Financial Officer:
16. Develop procedures to reconcile capitalized property in the Agency's financial system
with Maximo.
Agency Comments and OIG Evaluation
The Agency did not agree with our finding but agreed with our recommendation. The Agency
stated that capital equipment within its property management subsystem (Maximo) can be
reconciled to relevant data within Compass and that the finance centers recently completed this
reconciliation. The Agency indicated the Office of Financial Management will develop these
reconciliation procedures by the second quarter of FY 2013. Once these procedures have been
developed we will evaluate their effectiveness.
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10—EPA Needs to Remediate System Vulnerabilities
That Place Financial Data at Risk
OCFO officials did not monitor the testing of its networked information technology assets to
identify commonly known vulnerabilities or take action to remediate those weaknesses. EPA
policy requires senior Agency officials to ensure security control reviews are performed for
general support systems and major applications under their organization's responsibility. We
found that the lack of monitoring exists, in part, because EPA's Office of Environmental
Information (OEI) took almost 3 years to resolve a long-standing recommendation to define
duties and responsibilities for testing networked resources managed under EPA's service support
contract. Also, OCFO officials should improve the office's process to ensure known
vulnerabilities are remediated for the equipment it uses to access the Agency's core financial
application. Information technology assets used by finance center personnel contained 286
commonly known vulnerabilities that, if exploited, could potentially undermine EPA's financial
reporting capability and serve as available points to compromise the Agency's network.
While OCFO personnel are not directly responsible for managing the desktop equipment, EPA's
Information Security Policy places with the Senior Information Official the responsibility "to
ensure that effective processes and procedures and other directives as necessary are established
to implement the policies, procedures, control techniques, and other countermeasures identified
under the EPA Information Security Program and enforced within their respective offices or
regions." As such, OCFO needed to establish a collaborative process with OEI, which is
responsible for overseeing the desktop service provider contractors, to ensure that OCFO offices
received regular information regarding the identification and remediation of vulnerabilities.
GET officials had not sufficiently taken steps until September 2012 to act on a long-standing
recommendation to define the responsibilities of its service support contractor responsible for
managing the desktops and printers used at EPA finance centers. As reported in OIG Report No.
10-P-0028, Improved Security Planning Needed for the Customer Technology Solutions Project,2
November 16, 2009, EPA did not have a process in place to test equipment for known
vulnerabilities. The cornerstone for putting a process in place was for OEI to define the
contractor's responsibilities so that EPA offices could better monitor the security practices
protecting its networked resources. However, OEI took almost 3 years to define the
responsibilities and this left the finance centers without standards with which they could hold the
service provider accountable for delivering the desired results. While we consider OEI's actions
sufficient to address the outstanding recommendation, ongoing oversight by OCFO is warranted
to ensure vulnerabilities are remediated and its personnel can safely use the provided equipment
to conduct its mission.
As noted in table 5, our tests identified 286 critical-risk, high-risk, and medium-risk
vulnerabilities at EPA finance centers. Our tests disclosed critical vulnerabilities at each finance
center where OCFO personnel remotely access EPA's core financial application. If these
2 Customer Technology Solutions was the Agency's Working Capital Fund service provider for providing and
coordinating all information technology end user support and sendees for EPA headquarters program offices until
September 30, 2012. On October 1. 2012, EZ Tech replaced Customer Technology Solutions as the Agency's
provider of information technology end user support and services.
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vulnerabilities are not eliminated, they could be exploited to cause critical system flaws that are
likely to have a catastrophic impact on financial data and reporting. These weaknesses could also
be used to compromise the credentials that finance center personnel use to access the Agency's
core financial application. Furthermore, these vulnerabilities could result in unauthorized access
to the financial application and unauthorized processing of financial transactions that may go
undetected because the transactions were processed using an authorized account.
Table 5: Number of vulnerabilities identified at each finance center
Finance center
CFC
LVFC
RTPFC
Total
Critical-risk
14
2
4
20
High-risk
18
2
12
32
Medium-risk
131
59
44
234
Total
163
63
60
286
Source: OIG analysis
It is incumbent upon OCFO officials to have a process to closely monitor the contractor to ensure
it conducts its responsibilities for testing the finance centers" networked resources as prescribed
and that the contractor immediately remediates all noted vulnerabilities.
Recommendations
We recommend that the Chief Financial Officer direct the Senior Information Official to:
17. Document a review of OCFO's processes for conducting vulnerability assessments and
create oversight procedures for monitoring the service provider's testing of networked
resources and the remediation of any identified weaknesses.
18. Request and monitor to ensure that OEI provides a status update for all identified
critical-risk, high-risk, and medium-risk vulnerabilities contained in this report. The
status update should include the date when OF.l will remediate all the identified
vulnerabilities.
19. Request and monitor to ensure that OEI creates plans of action and milestones for all
vulnerabilities that cannot be corrected within 30 days of this report.
20. Request and monitor to ensure that OEI performs a technical vulnerability assessment
test of the finance centers" network resources to confirm completion of remediation
activities and provide written certification to OCFO that vulnerabilities have been
remediated.
Agency Comments and OIG Evaluation
The Agency did not concur with our finding and recommendations OCFO stated that it currently
conducts vulnerability assessments for all general support systems and major applications under
its ownership as directed by National Institute of Standards and Technology guidelines. OCFO
also stated that OEI is responsible for vulnerability discovery and remediation and believes that it
is not incumbent upon OCFO officials to have process to closely monitor the contractor to ensure
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it conducts its responsibilities for testing the finance centers' networked resources as prescribed
and that the contractor immediately remediates all noted vulnerabilities. OIG analysis disclosed
that Agency finance center information security officers had been responsible for working with
OEI to remediate identified vulnerabilities. This process led to inconsistent remediation of
vulnerabilities in some cases and no remediation of vulnerabilities in others. The OIG believes that
OCFO officials must ensure that vulnerabilities are identified and remediated by its contractor
because EPA's Information Security Policy places responsibility with program office senior
information officials to ensure that information systems under its control are secure.
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11—OCFO Financial Systems Security Documentation
Needs Improvement
EPA lacks reliable information on the implementation of" required security controls for key
financial applications at RTPFC. Our analysis disclosed that key applications' system security
plans (SSPs) contained numerous instances of incomplete or inaccurate information for the four
minimally required control areas reviewed Federal guidance requires key documents such as
SSPs and contingency plans to be annually reviewed and updated as needed. OCFO had not
implemented a process to review the completeness and accuracy of SSI' information, delineated
what organizations within OCFO were responsible for maintaining this documentation, or
ensured that personnel performing key information security duties were trained to assume those
duties. Inaccurate information calls into question the veracity and credibility of the processes
OCFO uses to authorize its systems to operate, and places into doubt whether OCFO
implemented security controls necessary to protect the confidentiality, integrity, and availability'
of EPA's financial data.
Review of SSPs for key financial applications at RTPFC contained numerous instances of
inaccurate or incomplete information for the minimally required information security controls
reviewed. Table 6 provides a summary of our analysis. Until August 2012, OCFO operated these
applications from a server room maintained by OARM that was in the same building as RTPFC
and subsequently moved these applications into EPA's datacenter also located on the Research
Triangle Park campus.
Table 6. Summary of information system security documentation deficiencies
System reviewed
Fellowship Payment System (FPS)
Grants Payment System (GPAS)
Contract Payment System (CPS)
Small Purchase Information Tracking
System (SPITS)
Access
control
X
X
X
X
Contingency
planning
X
X
X
X
Continuous
monitoring
X
X
Software
integrity
X
X
X
X
Source: OIG analysis
National Institute of Standards and Technology Special Publication 800-18, Cniidefor
Developing Security Plans for federal Information Systems, states that it is important to assess
SSPs when system changes occur and that SSPs must be reviewed at least annually and updated
as needed. Also, Special Publication 800-53, Re c•oriime mle d Security Controls for Federal
Information Systems and Organizations, requires that the information systems be reviewed on an
ongoing basis including documenting changes to the system or its environment of operation.
The lack of updated SSP information resulted, in part, because OCFO did not implement a
process to proactively keep SSP information current for applications at RTPFC. We noted that
OARM was responsible for documenting security controls for two OCFO applications. However,
this ovcrreliance on OARM to maintain security documentation resulted in OCFO not taking
steps to maintain an SSP with the new security controls protecting the application's data.
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Furthermore, during FY 2012, OCFO made organizational changes that moved the OCFO
technical staff responsible for the maintenance and operation of these applications from under
the direction of RTPFC to OCFO's Office of Technology Solutions. When this change occurred,
OCFO had not directed who would maintain and update security documentation. As a result,
OCFO was not able to provide us with information regarding who was responsible for updating
information security documentation for these applications. This also caused RTPFC to appoint a
new Information Security Officer to oversee the computer security program within the center,
but OCFO had not ensured that the person performing this key information security duty was
trained as required by OMB guidance.
Without proper oversight of security documentation for OCFO systems, OCFO cannot state with
certainty that information security controls for these systems are designed and operating
effectively. Likewise, without establishing clear responsibilities for handling critical tasks such
as maintaining SSP documentation for key financial systems, OCFO risks making flawed risk-
based decisions regarding the continued operations of its applications. Furthermore, having
trained Information Security Officers is important because they serve as the first line of defense
for monitoring the office's computer security program. As such, untrained personnel pose the
risks that the Agency will be delayed in responding to attacks against its network because
personnel are not sufficiently familiar with common threats for which they should alert
management.
Recommendations
We recommend that the Chief Financial Officer direct the Senior Information Official to:
21. Develop and implement a process to review SSP information for accuracy and
completeness.
22. Issue a memorandum to the Office of Technology Solutions Director outlining the roles
and responsibilities for reviewing and maintaining the SSP documentation for financial
applications formerly maintained by the RTPFC technical personnel.
23. Document a review of the skills and qualifications of OCFO Information Security
Officers and provide necessary specialized training that would equip them to perform
their duties as required by federal government policy.
24. Document a review of SSPs for all OCFO-owned and managed financial applications
located at Research Triangle Park and have them updated to reflect current information
as required by the National Institute of Standards and Technology.
Agency Comments and OIG Evaluation
The Agency concurred with our recommendation.
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Attachment 2
Compliance With Laws and Regulations
Table of Contents
12—EPA's Compass Service Provider Needs to Assess Controls
Over Business Processes Affecting EPA 41
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12—EPA's Compass Service Provider Needs to Assess Controls
Over Business Processes Affecting EPA
EPA has limited assurance that its Compass service provider's controls over business processes
affecting EPA are designed and operating as intended. Compass is managed and hosted by a
service provider through a contract. Federal guidance requires agencies using service providers
for financial management to ensure that these service providers assess the design and operating
effectiveness of internal controls over financial reporting. Industry accounting standards require
service providers to evaluate controls over those activities affecting its customers' financial
reporting. EPA did not identify its critical business processes that impact financial reporting or
require its service provider to identify and assess those processes it performs on the Agency's
behalf. Without an assessment of its service provider's control environment, EPA faces the
potential that a critical business failure by the service provider could impact the Agency's ability
to provide reliable financial reporting.
Currently, EPA has limited assurance that its Compass service provider's controls over business
processes affecting EPA are designed and operating effectively. OMB Circulars A-127,
Financial Management Systems, and A-123, Management's Responsibility for Internal Control,
outline agencies' responsibilities for providing reliable financial information and maintaining
and reporting on the effectiveness of internal controls. The guidance requires external providers
or service organizations to provide its customers with an audit report that assesses internal
controls over financial reporting. Furthermore, in 2011, the American Institute of Certified
Public Accountants published expanded guidance, in Statement on Standards for Attestation
Engagements No. 16, that requires service providers to test internal controls over financial
reporting. This standard also outlines a broader range of information service providers must
provide its customers as a result of this testing. Although Compass is managed and hosted by a
contractor (a third-party service provider), EPA's former core financial application (IFMS) was
managed and hosted by the Agency.
Prior to the deadline for EPA to certify the sufficiency of controls over financial reporting, the
OIG met with OCFO representatives to discuss the office's plans for testing controls over
financial reporting. OCFO representatives acknowledged that the new accounting guidance
required its service provider to expand the scope of controls testing beyond that of previous
years. OCFO further specified that its service provider would perform the expanded controls
review stipulated under the American Institute of Certified Public Accountants guidance and
provide a report of those findings by July 2012.
We noted that the service provider's report provided an assessment of the information
technology controls surrounding the data center that hosts Compass. However, the report did not
contain an assessment of the critical business processes, such as software change management;
database administration and management; and data input, processing, and transmission controls
that EPA relies upon the contractor to perform on its behalf. These vital processes directly
impact the underlying integrity of the financial data that EPA uses and typically are not
performed within the data center that was assessed. As such, the provided report did not contain
a sufficient testing of controls that EPA could rely upon to know whether controls over financial
reporting were effective.
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EPA relies upon its service provider to provide a range of software support services for its core
financial application. In this regard, assessing how the service provider delivers these services
and understanding whether these services work as intended is critical for EPA to ensure it can
perform financial reporting as required by federal guidance. Without an assessment that tests
effectiveness of internal controls impacting financial reporting, EPA cannot make risk-based
decisions for continued operation of its financial systems, or implement compensating controls to
help mitigate risks resulting from critical failures of its service provider.
Recommendations
We recommend that the Chief Financial Officer direct the Director of the Office of Technology
Solutions to:
25. Identify the critical business processes performed by the service provider upon which
EPA relies for financial reporting.
26. Require the service provider to assess the identified critical business process controls
and report the results as part of the annual review of controls over financial reporting.
Agency Comments and OIG Evaluation
The Agency did not concur with our finding and recommendations. The Agency stated it owns
Compass and, implicitly, the reporting functionality therein. Therefore, the Agency believes that
its service provider has no impact on Agency financial reporting. The Agency also stated that
internal controls over financial reporting were evaluated during the Agency's A-123 review and
no material weaknesses or significant deficiencies were identified. The OTG agrees that Compass
is owned by EPA, but its service provider performs development, hosting, and maintenance
duties for Compass on behalf of EPA. In order to perform these duties, EPA's service provider
must have access to Compass testing and production environments. In particular, the production
environment is where EPA financial data used by the Agency for financial reporting resides. The
OIG believes that EPA must ensure that its service provider has adequate controls over processes
performed by its service provider that could impact EPA financial data maintained within
Compass. Therefore, in the opinion of the OIG, EPA must work with its service provider to
identify the processes performed by its service provider that could impact EPA financial data and
assess the design and operation of controls over those processes.
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Attachment 3
Status of Prior Audit Report Recommendations
EPA is continuing to strengthen its audit management to address audit follow-up issues and
complete corrective actions expeditiously and effectively to improve environmental results. The
Chief Financial Officer is the Agency audit follow-up official and is responsible for ensuring that
corrective actions are implemented. During FY 2012, OCFO completed an update of EPA Order
2750, EPA 's Audit Management Process. This update, EPA Manual 2750, Audit Management
Procedures, is a comprehensive audit management guide that addresses OIG, GAO, and Defense
Contract Audit Agency audits. OCFO continued to issue a quarterly report that highlights the
status of management decisions and corrective actions. This report is shared with program office
and regional managers throughout the Agency to keep them informed of the status of progress on
their audits. Additionally, OCFO continued to conduct reviews of national and program offices,
which it initiated in fiscal 2009. The reviews focus on offices' audit follow-up procedures and
their use of the Management Audit Tracking System, or MATS. The reviews are designed to
promote sound audit management, increase Agency awareness of, and accountability for
completing unimplemented corrective actions; and ensure that audit follow-up data are accurate
and complete. OCFO completed five of these on-site reviews in FY 2012, including three
regional offices and two national program offices. These reviews will be performed on an
ongoing, rotating basis.
The Agency has continued to make progress in completing corrective actions from prior years.
The status of issues from prior financial statement audits and other audits with findings and
recommendations that could have an effect on the financial statements, and have corrective
actions that are not completed or have not been demonstrated to be fully effective, are listed in
the following table.
Table 7: Significant deficiencies—issues not fully resolved
Financial Management System User Account Management Needs Improvement
EPA has made significant strides to complete corrective actions associated with the segregation of
duties issue noted during the fiscal 2009 financial statement audit (recommendation 27). To date, the
Agency has implemented a segregation of duties policy, detective systems controls, and automated
segregation of duties controls for the general ledger of Compass. However, automated segregation of
duties controls have not been implemented for other Compass modules beyond the general ledger.
This deficiency exists because the Agency did not expend resources to complete agreed-upon
corrective actions to ensure that the Agency's new financial system includes automated controls to
enforce separation of duties. Additionally, the OIG recommended that the new financial management
system include automated controls to link to human resources data (recommendation 32 in the fiscal
2009 financial statement audit report). To date, EPA has not implemented any corrective actions in
response to this recommendation.
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• Accounts Receivable Source Documentation Not Provided Timely
During fiscal 2011, we found that EPA regional and headquarters offices did not timely submit
accounts receivable supporting documentation to CFC. EPA made significant progress in completing
the corrective actions to improve the timeliness of these submissions in fiscal 2012, but has not yet
completed all corrective actions. In fiscal 2012, EPA issued guidance creating a metric for
headquarters and regional offices to provide documentation to CFC within the 5-business-day
requirement 95 percent of the time. EPA provided training and presented a webinarto reinforce the
process and the importance of providing accounts receivable source documents timely to CFC. EPA
also prepared quarterly reports and began following up with regional offices that did not meet the
timeliness performance measure. In December 2012, EPA is scheduled to provide an annual report
to senior enforcement managers on headquarters and regional office performance in meeting the
fiscal 2012 performance metric.
EPA Misstated Uncollectible Debt and Other Related Accounts
In our fiscal 2011 audit we found that EPA did not review the collectibility of 10 federal receivables
outstanding from 4 to 11 years totaling $793 thousand. CFC did not document efforts to collect the
federal debt or determine the debt's status after the 3-year delinquent period. In fiscal 2012, we found
that CFC established allowances for the 10 receivables. We did not receive the file support
documenting CFC's collection effort in time to be considered in this report.
Source: OIG analysis.
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Attachment 4
Status of Current Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in SOOOs)
Rec.
No.
1
2
3
4
Page
No.
K
15
15
15
Subject
Perform a thorough review of all posting models to
ensure the proper accounts are impacted
Correct activity in accounts incorrectly impacted
by improper posting models
Develop internal control procedures to confirm the
proper accounts are impacted for all transactions
Perform analytical reviews of account activity on a
Status1
U
J
II
U
Action Official
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Planned
Completion
Date
quarterly basis to verify account activity is
reasonable
20 Identify Compass reporting problems and develop U
reports to provide users with accurate dais on a
timely basis.
23 Update F PA s policy for recogni7ing year-end U
accruals to require reconciliations of accruals and
accrual reversals.
26 Correct the Compass system limitations tat C
allowed (a) payments to exceed the related
obligation accounting lines, (h) transactions to
post la an incorrect accounting period, and (c)a
payment lo impact a canceled appropriation.
29 Forward judicial documents to the financial center U
9 29 Reinforce procedures to monitor all tracking
reports Follow up with regional offices and Ihe
US Department of Justice lo obtain legal
documents lo ensure accounts receivable are
recorded limey in Ihe financial accounting
system.
"0 29 Instilute standard operating procedures for
entering tracking, and monitoring accounts
receivable, and ensure adherence to EPA policies
and procedures [or entering receivables timely
and maintaining adequate and easily accessible
source documentation
11 29 Ensure proper separation of duties by having
separate individuals perform billing and collection
functions
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Assistant Administrator
for Enforcement and
Compliance Assurance
Chief Financial Officer
Chief Financial Office!
Chief Financial Officer
Claimed
Amount
Agreed To
Amount
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136
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RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in SOOOs)
Rec.
No.
Page
No.
Subject
Planned
Completion
Status1 Action Official Date
Claimed
Amount
Agreed To
Amount
1? ?S Direct the Director ol the Office of Grants and
Determent to create guidance to ensure lhal
grant final determination letters contain required
provisions for late payment and a process for
forwarding final determination letters to finance
centers wilftin 5 days of Itie effective date
13 32 Require the Director, Office of Financial
Management to correct the Compass accounting
and posting model errors so trial users have Hie
ability to process Fund Balance with Treasury
transactions to clear SODs accurately and timely
H 33 Require the Director, Office of Technology
Solutions, to work with the contractor that
developed Compass to build defaults into the
Compass software that will eliminate or minimize
properly record errors.
15 33 Correct trie properly data errors described above
16 34 Develop procedures to reconcile capitalized
property in the Agencys financial system with
Maximo.
17 36 Direct the Senior Information Official to document
a review of OCFO s processes for conducting
vulnerability assessments and create oversight
procedures for monitoring the service provider s
testing of networked resources and ttie
remediation of any identified weaknesses
18 36 Direct Ihe Senior Information Official to request
and monitor to ensure that OEI provides a status
update for all identified critcal-nsk, high-nsk, and
neojn-i.sk vulnerabilities contained in this
leporl. The status update should include the dale
when OEI will remediate all the identified
vulnerabilities
19 36 Direct the Senior Information Official to request
and monitor to ensure that OEI creates plans of
action and milestones for stt vulnerabilities that
cannot be corrected within 30 days of this report.
20 36 Direct Ihe Senior Information Official to request
and monitor to ensure Dial OEI performs a
technical vulnerability assessment test of the
finance centers network resources to confirm
complete of remediation activities and provide
written certification to OCFO that vulnerabilities
have been remediated
21 39 Direct Ihe Senior Information Official to develop
and implement 3 process to review SSP
information for accuracy and completeness
Assistant Administrator
for Administration and
Resources Management
Cliief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
Chief Financial Officer
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137
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Rec.
No.
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in SOOOs)
Page
No.
Subject
Status1
Planned
Completion
Action Official Date
Claimed
Amount
Agreed To
Amount
7> 39 Direct the Senior Information Official to issue a
memorandum to Ihe Office of Technology
Solutions Director outlining the roles and
responsibilities for reviewing and maintaining the
SSP documentation tor financial applications
formerly maintained by the RTPFC technical
personnel
23 39 Direct Ihe Senior Information Official to document
a review of Ihe skills and qualifications of OCFO
Information Security Officers and provide
necessary specialized training that would equp
them to perform their duties as required by federal
government policy
24 39 Direct Ihe Senior Information Official to document
a review of SSPs for all OCFO-cwned and
managed financial applications located at
Research Triangle Park and have tnem updated
to reflecl curient information as required by Ihe
Natonal Institute of Standards and Technology
25 42 Direct Ihe Director of Ihe Office of Technology
Solutions to identify trie critical business
processes performed by tne service provider upon
which EPA relies for financial reporting
26 42 Direct the Director of the Office ofTechndogy
Solutions to require the service provider to assess
the identified crilical business process controls
and report the results as part of the annual review
of controls ever financial reporting
OiieffinancialOfticer 101/13
Chief Financial Officer 3fl1/13
Chief Financial Officer 430/1213
Chief Financial Officer
Chief Financial Officer
Note We identified SO 9 million in inactive funds lhal
are no longer needed and can be deobbgaled
S9CO
0 - recommendation is open wiji agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is unresolved with resolution efforts in progress
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138
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Appendix I
EPA's Fiscal 2012 and 2011
Consolidated Financial Statements
Provided separately.
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139
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Appendix II
Agency Response to Draft Report
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
November 9, 2012
OFFICE OF THE
CHIEF FINANCIAL OFFICER
MEMORANDUM
SUBJECT: Audit of EPA's Fiscal Year 2012 and 2011 Consolidated Financial Statements
FROM: Barbara J. Bennett /«/ Original Signed liy Maryann Froehlich for:
Chief Financial Officer
TO: Arthur A. Elkins, Jr.
Inspector General
This memorandum transmits the agency's response to the Office of Inspector General's Draft
Audit Report, dated November 6, 2012 Detailed corrective action plans will be provided to you
and your staff within 90 days of the issuance of the final audit report
Implementing our new financial system, Compass, was a tremendous undertaking for the agency
this year. While implementation of the system presented its challenges, it also presented
opportunities for the EPA to develop business process changes and enhancements that will
strengthen the EPA's financial management. We worked with our agency partners with a focus
on strengthening fiscal integrity, enhancing core business operations and contributing to
agencywide performance management systems. We engaged all parts of the agency in fiscal
stewardship yielding significant results. We arc proud of the accomplishments we made during
this period of transition.
Thank you for identifying additional areas for improvement in the Draft Audit Report. The audit
work performed will help shape the agency's future financial management initiatives. Please let
me know if you have any questions or your staff can contact Stefan Silzer, Director, Office of
Financial Management of (202) 564-5389 regarding the audit.
Attachment
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cc: Craig Hooks, Assistant Administrator, Office of Administration and Resources Management
Cynthia Giles, Assistant Administrator, Office of Enforcement and Compliance Assurance
Melissa Heist, Assistant Inspector General for Audit
Mary ami Froehlich, Deputy Chief Financial Officer
Nanci Gelb, Principal Deputy Assistant Administrator, OARM
Lawrence Starfield, Principal Deputy Assistant Administrator, OECA
Joshua Bayl son, Associate Chief Financial Officer
Stefan Silzer, Director, Office of Financial Management
Raffael Stein, Director, Office of Financial Services
Quentin Jones, Director, Office of Technology Solutions
Robert Hill, Deputy Director, Office of Technology Solutions
David Bloom, Director, Office of Budget
Ruth Soward, Director, Office of Resources Information Management
Kathy O'Brien, Director, Office of Planning Analysis & Accountability
Renee Page, Director, Office of Administration
Howard Corcoran, Director, Office of Grants and Debarment
Jeanne Conklin, Deputy Director, Office of Financial Management
Paul Curtis, Director, Financial Statements Audit
Jim Wood, Director, Cincinnati Finance Center
Doug Barrett, Director, RTP Finance Center
Dany Lavergne, Director, LV Finance Center
Christopher Osborne, Staff Director, Reporting and Analysis Staff
John O'Connor, Staff Director, Financial Policy and Planning Staff
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Attachment
Response to Draft O1G Audit of EPA's Fiscal 2012 and 2011 Consolidated Financial
Statements
I - Compass System Limitations are a Material Weakness to EPA's Accounting Operations
and Internal Controls
"In October 2011, EPA replaced the Integrated Financial Management System (IFMS) with a new
system. Compass Financial* (Compass). The Agency operated IFMS, but a contractor manages
Compass. EPA replaced IFMS to improve the operation of financial management systems,
standardize business processes, and strengthen internal controls. The system replacement required a
major systems conversion and data migration to Compass. As with any major system conversion,
problems were to he expected. We found that when the Agency converted its accounting system, it
had not yet developed all the reports and functions required to generate all the information it needs.
The lack of useful reports and system limitations significantly impaired the effectiveness of EPA 's
accounting operations and internal controls. We determined that the Compass reporting and system
limitations represented a material weakness. "
Response: Do Not Concur.
Agency Position on Finding: We disagree with this conclusion Initial challenges with
implementation of a new financial system were overcome during the fiscal year Resources were
fully dedicated to create alternate methodologies for obtaining and analyzing data. Posting logic was
reviewed and corrected. The methods for GL account review and analysis were updated and we
continue to analyze GL accounts. System-created and new-to-Compass-user errors were identified
and corrected. The general limitations of a new system and changes to the "old way" of doing things
were challenges that required additional effort and interim manual procedures. The limitations were
the early problems of the implementation These limitations have been effectively identified and
fixed or mediated so that there were no material issues during the preparation of the financial
reports, only the normal problems that occur in the collections and verification of information to be
included.
> Posting models - The OP A conducted a thorough review of the system's accounting
models to ensure the integrity of the accounting transactions and financial statements.
This was a priority and a major area of focus prior to and post system migration We
completed a review of the accounting models prior to Compass implementation by
October 18, 2011. Our verification activities, included:
• verifying that all accounting models were USSGL compliant;
• validating the "tie point" accounting model relationships for the posting models;
• validating that budgetary accounts were only offset by other budgetary accounts and
validating that proprietary accounts were only offset by other proprietary accounts;
• validating that each current-year appropriation level posting model was accurate to
ensure that the agency's current-year authority postings were properly set up for
accurate reporting in Compass and in FACTS II;
• tracing individual general ledger accounts through the accounting models to ensure
that they were posted consistently though all documents (e.g., EPA verified that the
13-1-0054 115
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general ledger accounts posted by each level of the budget were consistent with
adjacent levels.); and
• validating agency-specific postings for accuracy.
After migration, EPA continued to proactively analyze and validate accounting models.
During the first and second quarters of FY 2012, EPA identified accounting model issues,
corrected them, and made any necessary adjustments in Compass. In May 2012, OCFO
proactively established an internal weekly meeting to continue the identification of
accounting model issues. OCFO prioritized and tracked progress in resolving accounting
model issues. Our accounting model tracker spreadsheet documents this effort. An earlier
version of the tracker was provided to the OIG after the July 31, 2012 audit status
meeting. We continue to remain vigilant in our efforts to ensure that Compass accounting
models are properly recording transactions.
> Compass Reports - The EPA has over 300 reports that are available for our financial
community. On June 5, 2012, at OTG's request, EPA provided a complete inventory of
financial reports that existed for Compass at that time. New and existing reports are
continually developed or refined based on user requirements. During the learning and
transition process, EPA experienced some challenges initially, but adapted as our
understanding grew of Compass' more robust reporting capacity. Where tools and reports
were no longer available in some areas, manual processes and reviews were implemented
to ensure the same level of support for processing transactions, completing functions and
detecting errors. EPA uses a combination of Compass financial reports, business objects
reports, and analytical review software to review and reconcile accounting activities.
EPA missed no major reporting deadlines related to completion of accounting functions.
Additionally, there are no material errors in the EPA's general ledger balances.
> Expense Accruals - EPA uses Flexible Definition functionality in Compass. This allows
specific posting entries to be assigned based on transaction data. The SV 17 document
type and transaction type is configured to post by Fund Category. For Fund Category of
TF, the posting model was configured to post to a NULL accounting entry that does not
update the General Ledger. The posting model was corrected to remove the NULL to
SV17 accounting entry. The postings associated with the SV reversals with Fund
Category TF that used the NULL accounting entry were processed in FY 2012 Q4 and
included in the Final Statements.
This eliminated any impact that the initial NULL posting may have had on the FY 2012
Financial Statements. To date, there have been no other impacted transactions identified
related to this posting model issue.
> GL Account Analysis - EPA did not discontinue its GL account analysis processes. The
Reporting and Analysis Staff in the Office of Financial Management does a quarterly
comparative GL account analysis at the financial statement line-item level as well as
other analysis, as needed.
2 - Posting Models in Compass Materially Misstated General Ledger Activity and Balances
"EPA 's Compass system materially misstated GL activity and balances due to incorrect posting
models. We found incorrect posting models in numerous accounts for obligations, disbursements,
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receivables, collections, and revenue. EPA did not properly and thoroughly review the posting
models before migration from IFMS to Compass. Further, EPA did not properly review balances in
the financial statements that were a result of incorrect posting models; a posting model is a
reference for document entry that provides default values for posting business transactions in GL
accounts. Incorrect posting models reflect an internal control weakness and an indication that EPA
did not exercise proper oversight over how transactions are processed in its GL. As a result, the
draft, financial statements contained material errors thai were undetected by the Agency (the final
financial statements were not completed at the time of our review). We noted $331 million in
misstatements in the draft financial statements that Agency management did not detect. "
We recommend that the Chief Financial Officer:
1. Perform a thorough review of all posting models to ensure the proper accounts are impacted.
2. Correct activity in accounts incorrectly impacted by improper posting models.
Response to Recommendations 1 and 2: Concur.
Agency Position on Finding: EPA does not agree that incorrect posting models resulted in material
misstated GL activity and balances. EPA has aggressively reviewed posting models to ensure that
transactions are properly posting to the EPA's financial accounts and will continue to do so.
However, we will continue to hold weekly meetings with the Finance Centers and other OCFO
offices to address accounting model issues. This approach has served the agency well in 2012 and
resulted in over 130 model issues and related transactions being identified and corrected. Finally,
per milestones agreed upon with the O1G, the agency delivered the draft financial statements prior to
completing its variance analysis, which likely would have identified these errors.
3. Develop internal control procedures to confirm the proper accounts are impacted for all
transactions.
Response to Recommendation 3: Concur.
Agency Position on Finding: The EPA already has in place a number of internal control
procedures. For instance, the Finance Center staff compares feeder system interfaced transactions to
hard copy documentation and approves them. We also periodically review the status of all
documents in Compass to make sure all transactions processed properly. None of these reviews
revealed any significant problems or issues with internal controls. When errors are found, they are
reviewed, corrective actions identified, approved and entered into Compass. OFM will continue to
evaluate and by March 2013 develop internal control procedures to confirm the proper accounts are
impacted for all transactions.
OFM provides oversight and development of accounting models and their impacts through GL
analyses. If discrepancies are found, they are investigated and reviewed for their impact on
transactions and the GL to determine the nature of the matter. Issues are tracked through the
resolution and validation processes. These activities provide reasonable assurance that our GL
balances are correct.
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4. Perform analytical reviews of account activity on a quarterly basis to verify account activity is
reasonable.
Response to Recommendation 4: Concur.
Agency Position on Finding: OFM already performs a quarterly comparative analysis based on the
financial statement line. This analysis highlights unusual variances between fiscal years. The EPA
will continue to conduct these analytical reviews of account activity on a quarterly basis and more
frequently, if deemed necessary.
In addition, the agency does not agree with significant internal controls deficiencies identified in
the report as contributing internal control weaknesses based on the below reasons.
> Posting models were incorrect for upward/downward adjustments - The Momentum system,
upon which Compass is based, is fully compliant with federal requirements for processing
upward and downward adjustments, and is performing this activity correctly per the confirmed
Compass configuration implemented for this process. In the case of the $54M in Table 2, OIG
has to view spending adjustment data differently in Compass than in IFMS. Adjustments must be
viewed individually by the system date and time minute, not aggregated by day. For example, in
below table showing adjustment data, on July 20, 2012, a user made two separate corrections to
the Grant Obligation. At 11:52AM, the user decreased the obligation lines. At 12:OOPM, the user
increased the obligation lines. The system determines the spending adjustments as transactions
process.
Table 1: Example of pending adjustment data
IO
TO
IO
10
IO
IO
IO
IO
IO
IO
GO
GO
GO
GO
GO
GO
GO
GO
GO
GO
V96558801
V96558801
V96558801
V96558801
V96558801
V96558801
V96558801
V96558801
V96558801
V96558801
1
2
3
4
5
1
3
4
2
5
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
Correct
7/20/2012
1 11:52
7/20/2012
1 11:52
7/20/2012
1 11:52
7/20/2012
1 11:52
7/20/2012
1 11:52
7/20/2012
1 12:00
7/20/2012
1 12:00
7/20/2012
1 12:00
7/20/2012
1 12:00
7/20/2012
1 12:00
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
48710012
48710012
48710012
48710012
48710012
48810012
48810012
48810012
48810012
48810012
Dcbil
Debit
Debit
Debit
Debit
Credit
Credit
Credit
Credit
Credit
$500,000.00
$500,000.00
$139,666.00
$3,600,000.00
$4,300,000.00
($500,000.00)
($139,666.00)
($3,600,000.00)
($500,000.00)
($4,300,000.00)
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Misstatements in the EPA's Draft Financial Statements
Table 2: Financial Statement Line Items identified by the O1G
Financial Statement Line Items
Earned Revenue and Net Cost
Miscellaneous receipt revenue understated
Obligations incurred and recoveries of prior year unpaid obligations
Gain on sale of investments
Working capital advance
Total
Amount
(millions)
$184
87
54
7
2
$331
Earned Revenue and Net Cost: The error resulted from a failure by OFM to do one of two required
elimination entry adjustments for WCF revenue. This was human error and not a posting model
issue. The need for the elimination entry was identified in the 3rd quarter variance analysis and
shared with OIG. Compass has two ledgers that needed to be eliminated, whereas IFMS only had
one. We failed to do the elimination entry for the second ledger. It is highly likely we would have
caught this mistake in our year-end variance analysis. Going forward we will ensure that we make
both elimination entries.
Miscellaneous Receipt Revenue understated and Gain on Sale of Investments overstated: OFM
corrected the $87 million and $7 million identified in Table 3 in the 15th Month on documents
RAS12568JAN and RAS12569JAN, respectively. These errors were not the result of accounting
model issues. These errors occurred because the Finance Center filled out the input forms in
COMPASS incorrectly. They were provided with the wrong transaction type, entered months as
years causing depreciation errors and followed IFMS practices for disposal causing revenue to be
earned and recorded. OFM processed JV's in the 15th Month to correct the errors.
Table 3: From OFM 3rd Quarter Analysis
5200
Revenue From Services Provided
95,904,042.17
0.47
The variance is primarily due to the
elimination entry adjustments for the
working capital intra-agency activity
where the balance eliminated was much
lower in the FY 2012 3rd quarter
compared to the FY 2011 3rd quarter.
3 - Compass Reporting Limitations Impair Accounting Operations and Internal Controls
"EPA has been unable to obtain (he reports it needs from Compass for many accounting
applications in FY 2012. OMB requires financial management systems to provide complete, reliable,
consistent, timely, and useful financial information. Compass reporting limitations prevented EPA
from producing many reports it needed for accounting operations. When the Agency converted its
accounting system to Compass, it had not yet developed all the reports and functions required to
generate all the information it needs. The lack of useful reports and information significantly
impairs the effectiveness of EPA 's accounting operations and internal controls. "
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We recommend that the Chief Financial Officer:
5. Identify Compass reporting problems to provide users with accurate data on a timely basis.
Response to Recommendation 5: Concur.
Agency Position on Finding: OCFO already analyzes the agency's financial reports, identifies any
concerns and develops new reports for users as needed and will continue to do so.
All of the issues cited by the DIG were based upon observations made during the first six months of
the operation of Compass Financials, the agency's new financial system. At that time, EPA was in
the midst of learning the intricacies of the new system and applying this knowledge to reengineer
day-to-day business processes. This allowed the agency to take advantage of the many features of
the modern system to best meet the agency's business needs. F.PA disclosed and discussed this
approach with the OIG in December 2011.
To the maximum extent practicable, EPA adapted our business practices to take immediate
advantage of the new system. For example, Compass allowed us to streamline accounts receivable
processes by moving from reconciliation of accounts receivable based on Servicing Finance Offices
to a centralized approach. Reconciliation of ARs at the SFO level was a "hold over" practice prior to
the establishment of our current finance center structure when our regional offices performed
accounting functions. As we adopted a centralized approach, we found that we were able to cancel a
policy on
July 11, 2012, that required the finance centers to perform monthly reconciliations of ARs. See
http://intranct.cpa. gov/ocfo/policics/dircct/2540-09-t2.pdf
In other cases, we decided to defer adoption of automated features available in Compass. For
example, we deferred adoption of the full capabilities of Compass to support the Fund Balance with
Treasury Instead, we utilized a process within Compass very similar to the process used in the
Integrated Financial Management System, the agency's previous financial management system. The
EPA adopted this approach based on hands-on daily experience with Compass gained during the first
six months of operations and in consideration of change management principles for the successful
implementation of financial systems.
In addition, the agency does not agree that reporting limitations identified in the report significantly
impair the effectiveness of the agency's accounting operations and internal controls in the following
areas.
^ Accounts receivable reconciliation - EPA successfully corrected the accounts receivable
beginning balances along with interest penalty and handling charges in Compass. The Finance
Centers manually computed beginning balances for interest and handling penalty charges. CGI
made configuration changes to calculate the FY 2012 amounts. Although the Finance Centers did
not perform monthly accounts receivable reconciliations and certifications, they reconciled, at
the detail level, the beginning balances and current year activities to the accounts receivable
documents for FY 2012 As discussed in an August 24, 2012 meeting, The OFM performed and
completed in August a reconciliation that verified the general ledger balances to the subsidiary
ledger balances. Additionally, the OFM issued Resource Management Directive System 2540-9,
"Receivables and Billings, Technical Release 2," to rescind the requirement for monthly
reconciliations and certification while a new procedure is being developed for Compass in FY
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2013. A copy of RMDS 2540-9-T2 is available online at
http://intranet epa.gov/ocfo/policies/direct/2540.htm
>• Allowance for doubtful accounts - Allowances for Doubtful Accounts reports were never
automatically generated in 1FMS; Finance Centers manually computed the ADA in spreadsheets.
There is, however, an ADA report in CBOR which is now available as of the end of FY 2012
and in use. Issues preventing calculation and recording of ADA were resolved. All Finance
Center accounts receivable, now reflect the correct balances for principal, interest, penalty and
handling charges. For FY 2012, we booked the ADA for year end
> Fund balance with Treasury - EPA agrees with the stated condition that sections 11 and 111 of
the Compass SF-224 are inaccurate. However, the EPA has historically manually reconciled and
reported data from sections 11 and 111. The fact that the EPA continues to use manual
reconciliation in the Compass environment is consistent with the EPA's past practices and does
not create vulnerability or any workload impacts. Due to the changing Treasury reporting
process, a determination not to automate the Compass SF-224 was made at this time. The agency
will continue to use a manual process.
"f Suspense accounts - The monthly CBOR report that allows Finance Centers to review and clear
suspense accounts is now available. The OFM will provide the first FY 2013 report to Finance
Centers in November 2012, and reports subsequent to November 2012 will be provided by the
I0lh of the following month. In FY 2012, the EPA Finance Centers tracked their suspense
accounts manually and currently they are being cleared in a timely manner. The OFS
Certification was provided to the OIG on October 18, 2012.
> Property - The security organization problem was fixed in July 2012. We now have the
capability to reconcile property from Maximo to Compass.
'r Direct asbestos loans - The Direct Loans Treasury Report on Receivables was not generated
automatically in IFMS. Since all remaining asbestos loans are scheduled to be collected by the
end of FY 2013, the EPA determined it was not cost effective to pursue automating the Direct
Asbestos Loans TROR and preferred to manually produce it. Manually creating the report does
not pose a significant workload to staff nor have any errors been identified because of the lack of
an automated report.
r General Ledger account analysis - OFM performed GL analysis in all four quarters of FY
2012. However, at Compass conversion GL analysis by SFO was stopped due to change in
Compass business procedures. To replace GL analysis by SFO, OFM developed procedures to
conduct reconciliation in Compass. Compass capabilities allow a central organization to conduct
GL analysis. GL analysis is one of the areas where we created new reporting tools and adapted
business methods to meet the agency's financial management needs. The Agency piloted and
finalized a new methodology in the last two quarters of FY 2012 and will perform on a routine
quarterly basis starting in FY 2013.
> A-123 internal control reviews - The agency conducted A-l 23 reviews as scheduled, and met
with process owners to identify areas where internal controls needed strengthening. During
internal EPA review, the agency observed and documented areas where testing could not be
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performed because previously designed tools used to conduct internal control reviews were no
longer compatible with the Compass environment. This approach is consistent with A-123
principles, and was a tremendous undertaking. The agency was able to establish and maintain
internal controls to achieve the objectives of reliable financial reporting and compliance with
applicable laws and regulations.
> Delays in the completion of some accounting functions - The EPA did not discontinue its GL
account analysis processes. The Reporting and Analysis Staff in the Office of Financial
Management does a quarterly comparative GL account analysis at the financial statement line-
item level as well as other analysis, as needed. Also, CFC posted an estimate for the Unbilled
Oversight Accrual for quarters 1 through 3 for fiscal 2012. For the fourth quarter of fiscal 2012
CFC was provided the report needed to complete the Unbilled Oversight Accrual under normal
procedures. In addition to completing the fourth quarter accrual, CFC staff updated the accrual
spreadsheet for quarters 1 through 3.
> Material errors in GL balances - Though there were errors, EPA detected most and corrected
all the material GL errors. We understand there is always a potential for misstatement, regardless
of the controls in place, but we were vigilant in our stewardship over GL accounts and balances
to detect any anomalies and errors. In fact, we detected the majority of the GL adjustments and
corrections that were needed during the internal review processes before they were discovered or
reported by others.
> The expenditure of time and resources on workarounds - The EPA has historically manually
reconciled and reported data from sections 11 and 111. The fact that the EPA continues to use
manual reconciliation in the Compass environment is consistent with the EPA's past practices
and does not create vulnerabilities or workload impacts. Due to the changing Treasury reporting
process, a determination not to automate the Compass SF-224 was made at this time. In terms of
the Direct Loans Treasury Report on Receivables, it was not generated automatically in FFMS.
The Agency determined it was not cost effective to pursue automating the Direct Asbestos Loans
TROR because all remaining asbestos loans are scheduled to be collected by the end of FY 2013.
Manually creating the report does not pose a significant workload to staff nor have any errors
been identified as a result of the lack of an automated report.
> When taken as a whole, the Compass reporting limitations and the resulting impairments
of the EPA's accounting operations and internal controls represent a material internal
control weakness - These conditions are quite normal in the implementation of a new system for
accounting and reporting. Though they may stress or even strain the internal controls, it does not
indicate that the controls are not working. The risk does increase, but risk is not a criterion in the
evaluation of the accuracy and completeness of the published information of the reports or
effectiveness of internal controls. It is the existence rather than the possibility of existence that is
taken into consideration. Risk determines the intensity of the audit testing required to validate the
data is presented correctly and fairly represents the financial condition of the reporting entity.
The discovery and correction of a large number of errors is also perfectly normal in a new
system implementation of large magnitude. This does not mean the resulting reports are in error
because they were challenges to produce them and that it required extra manual review and
correction.
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4 - EPA Should Improve Controls Over Expense Accrual Reversals
"EPA did not reverse approximately $108 million ofFY 2011 year-end expense accruals in FY
2012. EPA policy requires the liability reported in the financial statements to reflect the value of
goods and services received and accepted but unpaid. The Agency did not reverse the accrual
transactions because the Compass posting configuration for the applicable fund category was
inaccurate and staff recorded the FY 2011 accrual entries without including the reversal period. By
not reversing the accruals timely, EPA overstated the accrued, liability and. expense amounts by
$108 million and materially misstated the quarterly financial statements. "
We recommend that the Chief Financial Officer:
6. Update EPA 's policy for recognizing year-end accruals to require reconciliation of accruals
and accrual reversals.
Response to Recommendation 6: Concur.
Agency Position on Finding: EPA has already updated its internal control to ensure automated
accrual reversals to occur. EPA posted the necessary adjustments. The agency will update EPA
Policy Announcement Number No. 95-11, "Policies and Procedures for Recognizing Year-End
Accounts Payable and Related Accruals, " by March 2013.
5 - Compass System Limitations Impair Internal Controls of Financial Operations
"Compass experienced several impairments to processing financial transactions. The impacted
transactions included five payment accounting lines that exceeded the related obligation accounting
lines, three transactions posted to an incorrect accounting period, and a payment against a canceled
appropriation. U.S. Government Accountability Office (GAO) guidance states that application
controls should ensure completeness, accuracy, authorization, and validity of all transactions during
application processing. The Department of the Treasury Financial Management Manual states that
canceled appropriation account balances are not available for obligation or expenditure for any
purpose. Compass did not prevent the posting of these invalid transactions because EPA did not
have system controls in place lo reject them. The Compass impairments limit EPA 's assurance that
account balances are accurate and Agency managers have useful and reliable financial information
for managing day-to-day operations. "
We recommend that the Chief Financial Officer:
7. Correct the Compass system limitations that allowed (a) payments lo exceed the related
obligation accounting lines, (b) transactions to post to an incorrect accounting period, and (c) a
payment to impact a canceled appropriation.
Response to Recommendation 7: Do Not Concur.
Agency Position on Finding: The OCFO has already made the corrections. Proper controls and
tolerance levels to prevent grant payments from exceeding the related obligation accounting lines
were updated in December 2011 (Remedy #316877). In May 2012, the issue of preventing the
improper posting of transactions to prior accounting periods, except via SV and JV transactions, was
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corrected (Remedy #359953). OCFO confirmed the Compass table was fixed to prevent spending
against canceled appropriations
6 - EPA Should Improve Compliance with Internal Controls for Accounts Receivable
" We found numerous deficiencies in EPA '.v compliance with accounts receivable internal controls in
f-'Y 2012. Various factors contributed to EPA not properly following its internal control procedures
to ensure timely and accurate recording of accounts receivable. F.PA policies require accurate and
timely recording of accounts receivable and proper separation of duties. Noncompliance with
accounts receivable controls affects the reliability and integrity of accounts receivable on the
financial statements."
We recommend that the Assistant Administrator for Enforcement and Compliance Assurance:
8. Forward judicial documents to the financial center.
Response to Recommendation 8: Do Not Concur.
Agency Position on Finding: In Recommendation 8, the O1G recommends thai the Office of
Enforcement and Compliance Assurance (OECA), presumably the Regions, as appropriate, forward
judicial documents to the Financial Centers. Underlying this recommendation is the assumption that
the EPA's attorneys first receive and then provide to the Department of Justice (DOJ) documentation
of civil judicial obligations requiring the payment of amounts certain Such payments to the United
States include civil penalties, amounts due in the recovery of costs incurred under the
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA also known
as "Superfund"), or cash-out payments to resolve CERCLA liability.
In fact, DOJ and not the EPA first receives entered consent decrees or other civil judicial orders that
require the payment of sums certain in enforcement cases filed on behalf of the F.PA. Typically, the
DOJ attorney of record in a civil environmental enforcement case receives a copy of the order
entering a civil judicial consent decree or other order imposing the obligation for the defendant to
pay an amount certain. The DOJ attorney of record then provides the consent decree or other order to
the EPA attorney assigned to the case, which can take several days. Accordingly, DOJ, not the EPA,
is in the best position to provide documentation in civil judicial cases to the Cincinnati Finance
Center (CFC) within five business days of the date on which the consent decree or other order is
entered by the court.
For this reason, the EPA already has a process in place whereby DOJ's Environment and Natural
Resources Division (ENRD) has agreed to transmit judicial documents to CFC. In the case of
payments due to the U.S. under cases referred to DOJ under CERCLA, the EPA has an Interagency
Agreement (LAG) in place with DOJ. Under the 1AG, once a case has been settled under the terms of
an entered consent decree or other court judgment, DOJ is responsible for transmitting the
supporting documentation to CFC so that it can promptly record the required accounts receivable for
those cases. Specifically, the IAG requires that "[w]ithin seven [calendar] days of receipt of notice of
entry of a consent decree or other Federal court judgment that requires payment of a sum certain to
the El1 A, DOJ ENRD will send electronic notification of such entry, and attach a copy of the consent
decree and/or judgment, as entered, to accountsreceivable.cinwd@epa.gov."
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In the case of non-CERCLA cases referred to DOJ, ENRD has also agreed to provide civil judicial
documents to CFC under the same process followed for CERCLA cases. Indeed, 2540-9-P3
(Procedure 3) of the Resource Management Directive System (RMDS), which governs non-
CERCLA cases, provides that it is the responsibility of the DOJ to email CFC supporting
documentation for all penalty payments owed to the U.S. pursuant to a judicial order.
Rather than require all the EPA attorneys who are involved in civil judicial matters to duplicate the
work of DOJ in providing documentation to CFC, OECA will engage DOJ management on whether
and the extent to which improvements are needed to ensure the timely transmittal to CFC of judicial
documentation of accounts receivable arising from civil judicial enforcement cases.
Unlike civil judicial cases, administrative enforcement actions are initiated and managed exclusively
by the EPA, usually in the Regional offices. Accordingly, OECA takes responsibility for working
with the Regions and Headquarters offices, where applicable, to ensure that penalty documentation
in CERCLA and non-CERCLA administrative enforcement actions is provided to CFC within 5
business days. Headquarters and the Regions have made significant progress in meeting the 5-
business standard. From May through September 2011, the EPA met this standard 77 percent of the
time. As a result of OECA/CFC-provided training, OECA's communications with senior Regional
management, and mid-course process improvements, the national performance level has risen from
80 percent for the first half for FY 2012 to an annual average of 85 percent for 3rd and 4th quarters of
FY 2012. Because most of the Regions are now meeting or exceeding the 95 percent performance
level, OECA will be concentrating its additional efforts on those Regions whose performance is not
yet at the 95 percent level.
We recommend that the Chief Financial Officer:
9. Reinforce procedures to monitor all tracking reports. Follow up with regional offices and the l/.S.
Department of Justice to obtain legal documents to ensure accounts receivable are recorded timely
in the financial accounting system.
Response to Recommendation 9: Concur.
Agency Position on Finding: CFC already utilizes the DOJ Debt Assessed Report, DOJ 30 Day
Tracking Reports, and the Integrated Compliance Information System (TCIS) Tracking Reports to
review and follow up on documents not received by CFC. CFC compares these reports to the
Compass Data Warehouse (CDW) to determine if receivables have been established. While there
were some delays early in the year due to obtaining CDW query information, these reconciliations
were completed timely by the 4th quarter. CFC will work with staff to ensure these reports are
reviewed timely and fully utilized in obtaining missing documentation.
10. Institute standard operating procedures for entering, tracking, and monitoring accounts
receivable, and ensure adherence to EPA policies and procedures for entering receivables timely
and, maintaining adequate and, easily accessible source documentation.
Response to Recommendation 10: Concur.
Agency Position on Finding: The CFC will develop standard operating procedures, by June 2013,
for the various types of receivables managed within the office, and will ensure these procedures are
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in line with agency policy. This has been a transition year for CFC in that some files are now
electronically maintained in Compass. CFC will clarify to staff the requirements for electronic files.
11. Ensure proper separation of duties by having separate individuals perform billing and collecting
functions.
Response to Recommendation 11: Do Not Concur.
Agency Position on Finding: On October 11, 2012, CFC obtained a waiver for IA staff to input
reimbursable billing and collection documents. This waiver was based on the fact that reimbursable
collections do not involve physical cash or checks; they are processed through the Intergovernmental
Payment and Collection (IP AC) System. There are controls in place to ensure that IP AC collections
are recorded in Compass correctly and that the SF-224 is not out of balance.
We recommend that the Assistant Administrator for Administration and Resources Management
direct the Director of the Office of Grants and Debarment to:
12. Create guidance to ensure that grant final determination letters contain required provisions for
late payment and a process for forwarding final determination letters to finance center within 5 days
of the effective date.
Response to Recommendation 12: Concur.
Agency Position on Finding: The OARM's Office of Grants and Debarment (OGD) and OCFO
already created guidance in place to address the issues raised by this recommendation. Specifically,
Part II Section B.3 of the recently revised EPA Audit Manual 2750, Assistance Agreement Audits,
contains, among other things:
• A provision requiring the Agency Action Official to ensure that the appropriate Financial
Management Officer is notified of Management Decisions having disallowed costs so that debt
collection can occur (Section B.3., page 55); and
• Provisions requiring the Agency Action Official, when notifying a recipient in writing of the
Agency's Management Decision, to include standard payment instructions and notification of
the appropriate Finance Center of any disallowed costs so that an accounts receivable can be
established in accordance with the requirements of RMDS 2540-9 (Section B.4., page 67).
• OGD will highlight these provisions in revised IPERA guidance issued to the Agency's Grants
Management Officers. This will include emphasizing the need for standard payment instructions
and a reminder to copy the Las Vegas Finance Center on Management Decision Letters to
recipients to ensure compliance with the 5-day requirement in RMDS 2540-9-1.
7 - EPA Is Not Clearing Fund Balance with Treasury Statement of Differences Timely
"EPA did not clear Fund Balance with Treasury differences reported on the U.S. Department of the
Treasury's Statement of Differences within 2 months. Treasury guidance requires that the Agency
clear deposit and disbursement activity differences within "two months of occurrence. " However,
various problems resulting from the Agency's conversion from IFMS to Compass contributed to the
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failure to timely clear Statement of Differences transactions. The problems included the Agency
being unable to process transactions, and encountering posting and accounting model deficiencies
with the new system. EPA reported a combined total of $6,115,632 in differences from October 2011
through February 2012. The failure to clear Statement of Differences transactions compromises the
reliability of EPA 's account balances and misstates disbursement and deposit activity reported
monthly to the Treasury. "
We recommend that the Chief Financial Officer:
13. Require the Director, Office of Financial Management, to correct the Compass accounting and
posting model errors so that users have the ability to process Fund Balance with Treasury
transactions to clear SODs accurately and timely.
Response to Recommendation 13: Do Not Concur.
Agency Position on Finding: In December 2011, OCFO proactively discovered and disclosed all
of the issues cited by the OIG. Early in the year, the EPA was in the midst of learning the intricacies
of the new system and applying this knowledge to reengineer day-to-day business processes. There
was a significant learning curve. The Finance Centers experienced a high volume of rejects because
of tighter budget controls and project notebook edits that occur in Compass. The Centers are now
proficient at resolving rejects and as a result clear cash difference more timely. We also designed
new reports to assist our accountants in performing the reconciliation. In July 2012, we updated the
accounting model and by end of September 2012, the agency resolved the backlog of all the
transactions that required clearing and submitted SF224 reports to Treasury. While there were delays
initially, we are now able to clear differences in a timely manner. The majority of the SOD
differences were the result of timing differences (i.e. difference in reported month of activity) rather
than dollar differences. Since the reported values in the financial reports agreed exactly with the
Treasury balance, the discrepancies in the SOD did not affect the accuracy of the financial reports.
8 - Property Internal Controls Need Improvement
"Compass does not sufficiently reject personal properly information entries that are not accurate.
As a result, the Agency could lose accountability and control over property valued in the millions of
dollars. FMFIA, 31 U.S.C. § 3512(c)(l)(fi), requires that property and other assets be safeguarded
against waste, loss, unauthorized, use, or misappropriation. However, we identified personal
property items for which the location was not properly identified, as well as personal property; items
for which the last recorded inventory dates or acquisition dates were in the future. The failure to
properly configure Compass data fields to reject unreasonable entries contributed to the inaccurate
property records."
We recommend that the Chief Financial Officer:
14. Require the Director, Office of 'Technology Solutions, to work with the contractor that developed
Compass to build defaults into the Compass software that will eliminate or minimize property record
errors.
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Response to Recommendation 14: Concur.
Agency Position on Finding: The OTS is already working with the contractor to build the default
into Maximo that will eliminate property record errors and will continue to do so. OARM submitted
a remedy ticket to the Help Desk (Ticket #456982).
75. Correct the property data error described above.
Response to Recommendation 15: Concur.
Agency Position on Finding: Corrective action was taken in August 2012 to reflect correct
inventory dates for the 28 property items that had future acquisition dates (Reference OARM/David
Shelby's response to Point Sheets 2 & 3). In September 2012, Agency Property Officers reconciled
property records to ensure that the system reflected the correct location for the $2.9 million in assets.
Agency Property Officers will continue to manually monitor until the automated fix is implemented.
In September 2012, OARM conducted a system analysis to ensure that no other assets had the same
discrepancy, none were discovered.
9 - Compass and Maximo Cannot be Reconciled
"EPA cannot reconcile capital equipment property management data within its property
management subsystem—Maximo—to relevant financial data within Compass. OMB Circular A-
123, Management's Responsibility for Internal Controls, states that one of the objectives of internal
control is the reliability of financial reporting. The inability to reconcile the property subsystem with
Compass can compromise the effectiveness and reliability of financial reporting. Maximo and
Compass primarily cannot be reconciled because historical property data did not migrate properly
from 1FMS to Compass. "
We recommend that the Chief Financial Officer:
16. Develop procedures to reconcile capitalized property in the Agency's financial system with
Maximo.
Response to Recommendation 16: Concur.
Agency Position on Finding: The EPA can reconcile property in Maximo and will document the
procedures for reconciling capitalized property. The Office of Financial Management will develop
these procedures by the second quarter of FY 2013. EPA can reconcile capital equipment within its
property management subsystem - Maximo - to relevant data within Compass. The Finance Centers
recently completed this reconciliation.
10 - EPA Needs to Remediate System Vulnerabilities That Place Financial Data At Risk
"Office of the Chief Financial Officer (OCFO) officials did not monitor the testing of its networked
information technology assets to identify commonly known vulnerabilities or take action to
remediate (hose weaknesses. EPA policy requires senior Agency officials lo ensure security control
reviews are performed for general support systems and major applications under their
organization's responsibility. We found that the lack of monitoring exists, in part, because EPA 's
Office of Environmental Information took almost 3 years to resolve a long-standing recommendation
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to define duties and responsibilities for testing networked resources managed under EPA 's service
support contract. Also, OCFO officials should improve the office's process to ensure known
vulnerabilities are remediated for the equipment it uses to access the Agency \s core financial
application. Information technology assets used by finance center personnel contained 286
commonly known vulnerabilities that, if exploited, could potentially undermine EPA 's financial
reporting capability and serve as available points to compromise the Agency 's network. "
We recommend that the Chief Financial Officer direct the Senior Information Official to:
J 7. Document a review of OCFO's processes for conducting vulnerability assessments and create
oversight procedures for monitoring the service provider's testing of networked resources and the
remediation of any identified weaknesses.
18. Request and monitor to ensure that OEIprovides a status update for all identified crucial-risk,
high-risk, and medium-risk vulnerabilities contained, in the report. The status update should include
the date when OEI will remediate all the identified vulnerabilities.
19. Request and monitor to ensure that OEI creates plans of action and mile stones for all
vulnerabilities that cannot be corrected within 30 days of (his report.
20. Request and monitor to ensure that OEI performs a technical vulnerability assessment test of the
finance centers' network resources to confirm completion of remediation activities and provide
written certification to OCFO that vulnerabilities have been remediate.
Response to Recommendation 17,18,19 and 20: Do Not Concur.
Agency Position on Finding: OCFO currently conducts vulnerability assessments for all our
general support systems and major applications as directed by National Institutes of Standards and
Technology (NIST) guidelines, specifically adhering to NIST 800-37, "Guide for Applying the Risk
Management Framework to Federal Information Systems," and NIST 800-53, "Recommended
Security Controls for Federal Information Systems and Organizations." All general support systems
and major applications undergo risk assessments (as mandated by NIST Risk Management
Framework certification) every three years or as the affected application or system implements
major modifications. Per the NTST guidelines and EPA policy, a Plan of Action and Milestones are
created to address and remediate any weakness or threats identified by the scans.
OEI is responsible for providing continuous monitoring assessments for the network and general
support system that OCFO relies on. The description of the Working Capital Fund Customer
Technology Solutions Service (CT) clearly states that "CTS support services provide procurement,
configuration, installation, and asset management of all personal computing and printing services for
all EPA Headquarters Program Offices, their respective remote locations, and on-site contractors."
Moreover, the technical terms and conditions state that "CTS equipment is installed with the latest
EPA approved software and up-to-date computer security protection." It is not in OCFO's purview
to monitor OEFs contractors. Therefore it is not "incumbent upon OCFO officials to have a process
to closely monitor the contractor to ensure it conducts its responsibilities for testing the finance
center's networked resources as prescribed and that the contractor immediately remediates all noted
vulnerabilities."
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11 - OCFO Financial Systems Security Documentation Needs Improvement
"EPA lacks reliable information on the implementation of required security controls for key
financial applications at the Research Triangle Park Finance Center. Our analysis disclosed that
key applications' system security plans contained numerous instances of incomplete or inaccurate
information for the four minimally required control areas reviewed. Federal guidance requires key
documents such as system security plans and contingency plans to be annually reviewed and,
updated as needed. OCFO had not implemented a process to review the completeness and accuracy
of system security plans information, delineated what organizations within OCFO were responsible
for maintaining this documentation, or ensured that personnel performing key information security
duties were trained to assume those duties. Inaccurate information calls into question the veracity
and credibility of the processes OCFO uses to authorize its systems to operate, and places into doubt
whether OCFO implemented security controls necessary to protect the confidentiality, integrity, and
availability of EPA 's financial data. "
We recommend that the Chief Financial Officer direct the Senior Information Official to:
21. Develop and implement a process to review SSP information for accuracy and completeness.
Response to Recommendation 21: Concur.
Agency Position on Finding: OCFO already has a process in place and is using it. The Application
Security Officer prepares the SSP. The individual office Information Security Officer (ISO); e.g.,
OTS, reviews the document before it is forwarded to the OCFO Information Security Officer,
Information Management Officer, and Senior Information Official for review and approval.
22. Issue a memorandum to the Office of Technolog).' Solutions Director outlining the roles and
responsibilities for reviewing and maintaining the SSP documentation for financial applications
formerly maintained by the RTPFC technical personnel.
Response to Recommendation 22: Concur.
Agency Position on Finding: The S1O will issue this memorandum by January 2013.
23. Document a review of the skills and qualifications of the OCFO Information Security Officers
and provide necessary specialized training that would equip them to perform their duties as required
by federal government policy.
Response to Recommendation 23: Concur.
Agency Position on Finding: The OCFO will conduct and document such a review by March
2013.
24. Document a review of SSP s for all OCFO-owned and managed financial applications located at
Research Triangle Park and have them updated to reflect current information as required by the
National Institute of Standards and Technology.
Response to Recommendation 24: Concur.
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Agency Position on Finding: The OTS, as the system owner for the RTF systems, will review the
consolidated SSP under development for the payment systems by April 2013.
12 - EPA Needs To Improve Its Process for Reviewing Controls Over Financial Reporting
"EPA has limited assurance that Compass internal controls over financial reporting are designed
and operating as intended. Compass, EPA 's new core financial application, is managed and hosted
by a service provider through a, contract. Federal guidance requires agencies using service
providers for financial management to ensure that these service providers assess the design and
operating effectiveness of internal controls over financial reporting. Industry accounting standards
require service providers to evaluate controls over those activities affecting its customers 'financial
reporting. EPA did not identify its critical business processes that impact financial reporting or
require its service provider to identify and assess those processes it performs on the Agency's behalf.
Without an assessment of its service provider's control environment, EPA faces the potential that a
critical business failure by the service provider could impact the Agency's ability to provide reliable
financial reporting. "
We recommend thai the Chief Financial Officer direct the Director of (he Office of Technology
Solutions to:
25. Identify the critical business processes performed by the service provider upon which EPA relies
for financial reporting.
Response to Recommendation 25: Do Not Concur.
Agency Response to Finding: The EPA owns Compass and implicitly, the reporting functionality
therein. Therefore, the EPA does not rely on the service provider for financial reporting.
Compass is COTS software EPA procured from CGI and modified to meet the Agency's
requirements. Compass has a life of two years or more, is not intended for sale, and has been
constructed with the intention of being used by the EPA only.
Compass falls under the definition in SFFAS #10 paragraph 9 as internal use software. Under
SFFAS #10 paragraph 15 entities should capitalize the cost of software when such software meets
the criteria of general, plant, and equipment. In its basis for conclusion (SFFAS #10 paragraph #38),
the FASAB board clarified that internal use software meets the criteria of PP&E specifically
identifiable, can have determinate lives of 2 years or more, is not intended for sale in the ordinary
course of operations, and has been acquired or constructed with the intention of being used by the
entity
• SFFAS Paragraph 9 Definition of Internal Use Software
This definition of internal use software encompasses the following:
a. Commercial off-the-shelf (COTS) software: COTS software refers to software that is
purchased from a vendor and is ready for use with little or no changes
b. Developed software: (1) Internally developed software refers to software that employees of
the entity are actively developing, including new software and existing or purchased software
that are being modified with or without a contractor's assistance. (2) Contractor-developed
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software refers to software that a federal entity is paying a contractor to design, program, install,
and implement, including new software and the modification of existing or purchased software.
• SFFAS Software Used as General PP&E Paragraph 15
15. Entities should capitalize the cost of software when such software meets
The criteria for general property, plant, and equipment (PP&E). General PP&E is any property,
plant, and equipment used in providing goods and services.
• Basis for Conclusion Paragraph #38
The Board believes that the cost of software acquired or developed for internal use that meets the
SFFAS No. 6 criterion for general PP&E should be capitalized. Internal use software is
specifically identifiable, can have determinate lives of 2 years or more, is not intended for sale in
the ordinary course of operations, and has been acquired or constructed with the intention of
being used by the entity.
26. Require the service provider to assess the identified critical business process controls and report
the results as part of the annual review of controls over financial reporting.
Response to Recommendation 26: Do Not Concur.
Agency Position on Finding: Compass internal controls were evaluated during the Office of
Technology Solution's FY 2012 A-123 review and no material weaknesses or significant
deficiencies were identified.
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Responsible Managers:
Original Signed By: November 9, 2012
Signature/Date
Stefan Silzer, Director, Office of Financial Management
Original Signed By: November 9, 2012
Signature/Date
Raffael Stein, Director, Office of Financial Services
Original Signed By Robert Hill for: November 8,2012
Signature/Date
Quentin X. Jones, Director, Office of Technology Solutions
Original Signed By Nanci Gelbfor: November 8,2012
S i gn ature/D ate
Craig Hooks, Assistant Administrator for Administration and Resources Management
Original Signed By: November 8, 2012
Signature/Date
Cynthia Giles, Assistant Administrator for Enforcement and Compliance Assurance
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Appendix III
Distribution
Office of the Administrator
Chief Financial Officer
Assistant Administrator for Administration and Resources Management
Assistant Administrator for Enforcement and Compliance Assurance
Assistant Administrator for Environmental Information and Chief Information Officer
Assistant Administrator for Solid Waste and Emergency Response
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Deputy Chief Financial Officer
Associate Chief Financial Officer
Director, Office of Policy and Resource Management, Office of Administration and
Resources Management
Director, Office of Grants and Debarment, Office of Administration and Resources Management
Director, Office of Administration, Office of Administration and Resources Management
Director, Office of Civil Enforcement, Office of Enforcement and Compliance Assurance
Director, Office of Site Remediation Enforcement, Office of Enforcement and Compliance
Assurance
Director, Office of Technology Operations and Planning, Office of Environmental Information
Director, Office of Budget, Office of the Chief Financial Officer
Director, Office of Financial Management, Office of the Chief Financial Officer
Director, Office of Financial Services, Office of the Chief Financial Officer
Director, Research Triangle Park Finance Center, Office of the Chief Financial Officer
Director, Cincinnati Finance Center, Office of the Chief Financial Officer
Director, Las Vegas Finance Center, Office of the Chief Financial Officer
Director, Office of Planning, Analysis, and Accountability, Office of the Chief Financial Officer
Director, Reporting and Analysis Staff, Office of the Chief Financial Officer
Director, Office of Technology Solutions, Office of the Chief Financial Officer
Director, Financial Policy and Planning Staff, Office of the Chief Financial Officer
Acting Director, Accountability and Control Staff, Office of the Chief Financial Officer
Director, Payroll Management and Outreach Staff, Office of the Chief Financial Officer
Agency Audit Follow-Up Coordinator
Audit Follow-Up Coordinator, Office of the Administrator
Audi tFol low-Up Coordinator, Office of the Chief Financial Officer
Audit Follow-Up Coordinator, Office of Administration and Resources Management
Audit Follow-Up Coordinator, Office of Enforcement and Compliance Assurance
Audit Follow-Up Coordinator, Office of Solid Waste and Emergency Response
Audit Follow-Up Coordinator, Office of Environmental Information
Audit Follow-Up Coordinator, Office of Grants and Debarment, Office of Administration and
Resources Management
Audi tFol low-Up Coordinator, Office of Financial Management, Office of the
Chief Financial Officer
Audit Follow-Up Coordinator, Office of Financial Services, Office of the Chief Financial Officer
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Section III
Other Accompanying Information
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SCHEDULE OF SPENDING
Money Management
The Schedule of Spending (SOS) presents an overview of how and where EPA is spending money.
The SOS that follows reflects total budgetary resources available to the Agency, gross outlays, and
fiscal year-to-date total obligations for the Agency.
FY 2012
What Money is Available to Spend?
Total Resources
Less Amount Available but Not Agreed to be Spent
Less Amount Not Available to be Spent
Total Amounts Agreed to be Spent
How was the Money Spent?
Goal
Contracts
Financial Transfers
Grants
Payroll
Rent, Communications and Utilities
Structures and Equipment
Travel
Total Spending
Total Spending
Amounts Remaining to be Spent
Total Amounts Agreed to be Spent
$ 16,569,237
2,609,127
177,277
$ 13,782,833
Land Healthy Compliance &
Clean & Preservation & Communities & Environmental
Clean Air
$
$
$
$
255,815
438,205
512,031
3,582
10,963
4,558
1,225,154
14,674,309
(891,476)
13,782,833
Safe Water Restoration Ecosystems Stewardship
$ 401,296 $
4,686,426
565,306
1,998
6,209
5,969
$5,667,204 $
2,313,558 $
2,400,000
634,774
762,946
2,355
9,690
13,919
6,137,242 $
156,773 $
70,841
555,550
1,816
4,529
4,140
793,649 $
99,987
35,983
704,365
1,836
2,699
6,190
851,060
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MANAGEMENT INTEGRITY AND CHALLENGES
Overview of the EPA's Efforts
Management challenges and integrity weaknesses represent vulnerabilities in program operations that
may impair EPA's ability to achieve its mission and threaten the agency's safeguards against fraud,
waste, abuse and mismanagement. These areas are identified through internal agency reviews and
independent reviews by EPA's external evaluators, such as the Office of Management and Budget, the
Government Accountability Office, and the EPA's Office of Inspector General. This section of the APR
discusses in detail two components related to challenges and weaknesses: 1) key management
challenges identified by the EPA's OIG, followed by the Agency's response and 2) a brief discussion of
the EPA's progress in addressing its FY 2012 integrity weaknesses.
Under the FMFIA, all federal agencies must provide reasonable assurance that policies, procedures
and guidance are adequate to support the achievement of their intended mission, goals and objectives.
(See Section I, "Management Discussion and Analysis," for the Administrator's assurance statement.)
Agencies also must report any material weaknesses identified through internal and/or external reviews
and their strategies to remedy the problems. Material weaknesses are vulnerabilities that could
significantly impair or threaten fulfillment of the Agency's programs or mission. In FY 2012, one new
material weakness was identified by the OIG. (See following subsection for a discussion of new,
existing and corrected weaknesses and significant deficiencies.)
The Agency's senior managers remain committed to maintaining effective and efficient internal controls
to ensure that program activities are carried out in accordance with applicable laws and sound
management policy. Agency leaders meet periodically to review and discuss EPA's progress in
addressing issues raised by OIG and other external evaluators, as well as progress in addressing
current weaknesses and emerging issues. The Agency will continue to address its remaining
weaknesses and report on its progress.
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2012 KEY MANAGEMENT CHALLENGES
The EPA's Top Major Management Challenges
As Identified and Reported by the Office of Inspector General
The Need for a National Environmental Policy: Environmental quality depends on
policies related to farming, energy, water, transportation and federal land management.
A national environmental policy would help the EPA and other federal agencies go
beyond existing, fragmented coordination efforts to set national environmental goals
and set regulatory standards, particularly for problems that cross state or national
borders or pose risks to future generations.
Water and Wastewater Infrastructure: Many drinking water and wastewater systems
across the country are unable to maintain compliance with federal water standards due
to needed repairs and new constructions. Over the next 20 years, the EPA estimates
that approximately $633 billion will be needed to pay for water and wastewater
infrastructure. The EPA needs to lead in developing a coherent Federal strategy with
states and local governments to assess and organize resources to meet water and
wastewater infrastructure needs.
Oversight of Delegations to States: Due to differences between state and federal
policies, interpretation, strategies and priorities. The EPA needs to more consistently
and effectively oversee its delegation of programs to the states assuring that delegated
programs are achieving their intended goals.
Safe Reuse of Contaminated Sites: The common practice of not removing all
sources of contamination from hazardous sites is inhibited by a regulatory structure
that places key responsibilities for monitoring and enforcing the long-term safety of
contaminated sites on non-EPA parties that may lack necessary resources,
information, and skill; changes in site risks as site conditions change overtime; and
existing weaknesses in the EPA's oversight of the long-term safety of sites as well
funding deficiencies.
Limited Capability to Respond to Cyber Security Attacks: The EPA is highly
vulnerable existing external network threats, despite reports from security experts that
Advanced Persistent Threats, designed to steal or modify information without detection
are becoming more prevalent throughout the government. Currently, the EPA has
reported that over 5,000 servers and user workstations may have been compromised
from recent cyber security attacks along with national security and confidential
business and personal data. (Previous years reported under Homeland Security)
Reducing Domestic Greenhouse Gas: In response to a Supreme Court ruling in
April 2007, the EPA issued an endangerment finding that current and projected
atmospheric concentrations of six GHGs threaten the public health and welfare of
current and future generations. However, the EPA must take significant actions to
address the adverse impacts of these air pollutants.
EPA's Framework for Assessing and Managing Chemical Risks: The EPA's
effectiveness in assessing and managing chemical risks is limited by its authority to
regulate chemicals under the Toxic Substances Control Act. Chemicals manufactured
before 1976 were not required to develop and produce data on toxicity and exposure,
which are needed to properly and fully assess potential risks.
Workforce Planning: EPA's human capital is an internal control weakness in part due
to requirements released under the President's Management Agenda. The OIG
identified significant concerns with EPA's management of human capital. EPA has not
developed analytical methods, or collected data needed to measure its workload and
the corresponding workforce levels necessary to carry out that workload.
FY
2010
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FY
2011
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FY
2012
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Link to
Agency
Strategic
Goal
Cross-Goal
Goal 2
Cross-Goal
Goal 3
Cross Goal
Goal 1
Goal 4
Goal 5
Cross-Goal
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Key Management Challenges
The Reports Consolidation Act of 2000 requires OIG to identify, briefly assess and report annually the
most serious management and performance challenges facing the Agency. In FY 2012, OIG identified
five areas it considers EPA's most pressing management challenges. EPA has made progress in
addressing the issues OIG identified and will continue to work diligently in assessing and resolving
vulnerabilities before they become serious management issues. The following pages provide the entire
OIG's Management Challenges report along with EPA's response to each challenge.
166
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53E
^^•••p^i^^
r
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D,C, 20-:
JJL -5 m
MEMORANDl M
SUBJECT; EPA's Fiscal Year 2012 Management Challenges
TO:
Lisa P. Jackson
Administrator
We are pleased to provide you with a. list of areas the Office of Inspector General considers as
key management challenges confronting the U.S. Environmental Protection Agency (HPA).
According to the Government Performance and Results Act Modernization Act of 2010, major
management challenges are programs or management functions, within or ariws agencies, that
have greater vulnerability lo waste, fraud, abuse, and mismanagement and a failure to perform
well could seriously affect the ability of an agency or the federal government to achieve its
mission or goals-,
The Reports Consolidation Aci of 2000 requires our office to report what we consider ihe
most serious management and performance challenges facing the Agency. Given this
requirement, our list includes management challenges and significant performance issues facing
lip A. We used audit, evaluation, and investigative work, as well as additional analysis of Agency
operations, to identify challenges and weaknesses. Additional challenges find weaknesses may
exist in areas that we have not yet reviewed, and other significant findings could result from
additional work. We provide detailed summaries of each challenge in the attachment.
Management Challenges
Oversight of Delegations to States
Safe Reuse of Contaminated Sites
Limited Capability to Respond to Cyber Security Attacks
EPA's Framework for Assessing and Managing Chemical Risks
Workforce Planning
Pag*
1
3
8
13
16
This year we deleted one management challenge from lire prior year (Need for Greater
Coordination of Environmental Efforts) because we recognize lha! cross-Agency coordination is
not something over which EPA has exclusive control. We have begun an effort to update our
Catalog of Federal Environmental Programs which, along with wnrk by doe U.S. Government
Accountability Office on duplicativc federal programs, could identify duplicativc programs that
warrant consideration as a future management challenge.
. •
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We welcome the opportunity to discuss our list of challenges and any comments you might
have.
A, Elkins, Jr.
Attachment
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Oversight of Delegations to States
The I :-S. Fn\ :r*iTimcnEal Protection Agency's I EPA's) oversight of stale programs remains a
key management challenger. The U.S. Government Accountabiliiy Office (GAO) and our
office have reported that EPA has made same progress in this area but the effectiveness of
Agency oversight still has a number of limitations.
To accomplish its mission to protect human health and the environment, tPA develops
regulations and establishes programs that implement environmental laws. Many of the federal
statutes establish federal and state regulatory programs in which slates are given the opportunity
to enact and enforce such laws, meeting minimum federal criteria, to achieve the regulatory
objectives which Congress lias established. As such, EPA may authorize state, local, or tribal
governments lo implement these taws when they request authorization and HI'A deems that
government capable of operating the program consistent with federal standards. KPA relies
heavily on authorized slate and tribai agencies to obtain performance data and lo implement
compliance and enforcement programs.
EPA does not abrogate its oversight responsibility when it has delegated implementation and
enforcement responsibility. Federal intent is to ensure national minimum level environmental
protection standards. In addition, federal requirements establish consistency for businesses and
within industries nationwide. States' discretion adds flexibility to address specific circumstances
and local issues, but joint implementation and enforcement leads to special challenges in
interpretations, strategies, and priorities. Therefore, EPA performs oversight of slate, local, and
tribal programs to provide reasonable assurance that they achieve national goals.
Improving EPA-slaic relationships is a priority' for EPA,1 and EPA has begun to improve its
oversight by implementing the State Review Framework. However, GAO reported that while
EPA has made substantial progress in improving priority setting and enforcement planning with
states, its oversight needed further enhancement." The framework is intended to provide a
consistent approach for overseeing programs and identifying weaknesses and areas for
improvement, but EPA has not implemented it in a consistent manner. For example, evaluations
of the State Review Framework show that EPA has limited ability lo determine whether states
are performing appropriate enforcement in a timely manner, and whether penalties ore applied in
environmental violators in a fair and consistent manner within and among stales. In response to
these findings, EPA mode changes lo ilic State Review Framework and initiated a Clean Water
Act Action Plan, which among other things is aimed ai strengthening Agency oversight of state
water quality compluaiee and enforcement,3
We have continued our work on this topic over the past year, and our recent reports demonstrate
that this challenge persists. Most apparent ihroughoui these reports is EPA's inadequate and
inconsistent oversight of a variety of state activities—from state revolving fund projects to state
enforcement of major environmental laws. Oversight of state activities requires that EPA
establish consistent national baselines that state programs must meet, and monitor state programs
' EPA, Admmtsfrailor Lisa Jaelaon's Seven Priorities far EPA 's f-'ultm.
: GAO. EPA-Stau EaforceiHfnt PafSnenltip Mm Improved, but LPA "s Oversight YIAN& Farther Entumcmwt,
GACM)?-m July 2007.
' EPA. Clean Water Act Action Plan. October li, 2M».
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IP determine whether they meet federal standards. Our work identified the absence of national
baselines and a lack nt'consistent and robust state oversight of multiple programs within the
Clean Water Act (CWAK Clean Air Acl. and Resource Conservation and Recovery Act
• EPA's m'tjrsight of stales did not ensure that requirements of the American Recovery and
Reinvestment Act of 2009 (ARRA) were met on Oean Water Slate Revolving Fund
projects. We found that the ARRA inspection checklist did not include enough detailed
questions to facilitate EPA oversight of slate programs. Further^ the Office of Water was
not conducting and documenting reviews of state programs in a timely manner and did not
us* the resulting reports to make national program decisions. Office of Water management
did not make completion of the review reports a priority and did not use all of the ARRA
funding Congress allocated for oversight. As a result, the EPA oversight process could not
ensure that states were complying with ARRA program requirements.J
* EPA takes a variety of approaches to correcting underperforming stale programs. These
include making recommendations under the Slate Review Framework process, ovcrfllmg
cm states, and taking independent actions when states choose not to act. We found that EPA
d<»es not maximize its resources so that it can lake the most stringent step—revoking state
auihonzauon—when a state is underperfoitnmg. EPA primarily identifies underpcrforming
state programs through the Stale Review Framework process. While ehe process is
generally positive, it is not consistent. HPA's criteria for state performance varied from
region to region and stale to state, depending on factors tike state resources and varying
environmental priorities. This means that citizens in different states cannot expect the saute
baseline of protection from pollution and human health risks. By establishing stronger
organizational structures. EPA can directly implement a national enforcement strategy thai
ensures all citizens have, and industries adhere to. a baseline level of environmetilaf
protection. EPA could make more effective use of its resources by directing a single
national workforce instead of 10 inconsistent regional enforcement programs.5
• Region 4 gave Georgia's. Concentrated Animal Feeding Operation (CAFO) program a
positive assessment. I iowever. an KPA Office of Inspector General (OLG) review identified
CAFOs that -were operating without National Pollulanl Discharge Elimination System
(NPDES) permits or Nutrient Management Plans, inspection reports were missing required
components, and tbc stale was not assessing compliance with permit conditions. The report
recommended implementing controls U> require enforcement data tracking between EPA
and the state, assuring CAFO inspections are complete, and taking timely and appropriate
enforcement actions.*
* EPA Region 4 has not adequately implemented management controls to assure thai North
CarolinaNFDF.S permits, comply with CWA and applicable federal, regulations
concerning thermal discharges. Region 4 determined tiiat the thermal limits for four of the
six facilities reviewed were renewed based on insufficient documentation. Most of the
* EPA DIG report, EPA and Slaiei Should Strengthen (.fvtrtij-kl oft. 'lean Water Stain RgwJvmg Fund Recovery Act
Project*, Report No. I l-R-0519. Augusl 24,2011.
5 EPA DIG, EPA MKSI Improve Oversight of State Enforcfment. Report No. I2-P-OI L3. January 30, 2012.
" EPA DIG, Rexirm •» Should Strengthen Oi-erxigtu ofGeotgia's Concentrated Animai Feeding Operation
Report No. I l-P-0274. Jime 23. 2011.
2
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draft permits we reviewed were missing critical information needed to allow HP A and the
public an opportunity for review and comment as required Public notices for live draft
permits did not contain the required statements describing Ihe proposed thermal variance.7
While KPA has renewed its attention to the oversight of programs delegated to stoics, much work
remains. The Agency musi address limitations in the availability, quality, and robustness of
program data, and (imitations in implementation across environmental statutes to provide
effective oversight, [{ffective oversight of delegations to stales also requires an organizational
structure capable of maintaining clear lines or" accountability. If EPA does not adequately
oversee states' authorized enforcement programs., u cannot hold stales uccouniuhlc for meeting
their enforcement responsibilities. As a result, KPA would not be able lo ensure Americans thai
stales maintain a baseline level of environmental protection- Significant improvements arc
required before this challenge can be removed. We arc continuing to review these issues and will
provide addiimml ruoimrrKriJjlions H- UP A in I be future.
Safe Reuse of Contaminated Sites
In the last decade, EPA has Increasingly emphasised the reuse of contaminated or once-
contaminated properties. In Us 201 1 2015 Strategic Plan, EPA announced a shift in the
definition of success al a Superfund site from "construction complete" of a site cleanup to when
a site is "ready for anticipated use."1 EPA's fiscal year (FY) 2013 budget Mates thai it will
continue to place emphasis on promoting site reuse in affected communities,9 and Agency
guidance slates that revitalizing communities and ensuring the long-term prelection of human
health end the environment remains a high priority for EPA at Supcrfund sites.'* The Agency
currently ha* an active effort to encourage communities, developers, industry, states, and local
governments, or anyone interested to reuse contaminated sites for renewable energy development
(e.g., wind, solar, biomass) facilities."
EPA has successfully turned some actual or perceived problem sites into properties that
reinvigoraied communities and created jobs. Contaminated properties have hccnme viable
again as retail stores, public recreation areas, housing complexes, spans stadiums, and
commercial office space. Recycling and reusing contaminated property ears produce measured
economic benefits, provide environmental benefits that result from preserving undeveloped
lands, and improve quality of lite for communities. While EPA's recycle and reuse goals are
notable and may have made positive contributions in difficult economic times, EPA's duty is to
ensure that contaminated sites are safe for humans and the environment. EPA faces significant
and increasing challenges in this area due to: ( 1 ) the common practice of not removing all
contamination sources from ha/jirdous sites; (2) a regulator) structure thai places key
responsibilities for monitoring and enforeinu the long-term safety of contaminated sites on
non-EPA parties that may lack net-e.ssan resources, information, and skill; (,\| varying risks as
site conditions change over time; and (4) weaknesses in EPA's oversight of long-term site safely.
7 EPA O1G. Oversigto tf North Carotina'i Kenrwais of Thermal Variances. Report No. t I-P-O22I. May 9, 2011.
1 P.P.*. FT2Qn-»l) Sraqk Plan. pa$e 38.
' EPA, FT 2013 EFA Sutiga la Brief
10 EPA. Office of Solid MOM and Etatrgf»i.y Response. f1'20iJ Naiional frogrtta Managfr's Guidance, Drift-
February 17, 3012 Publication Number S30P1200I, page 25
" EPA »*bsitc. "RE-Pmrertng Amnrica 'i Land."
n EPA website. "S
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Many contaminated sites, such as Supofund sites, must be monitored in ihe long term
{i.e., 30 years or more) because known contamination is often not fully removed or remediated,
and controls that prevent prohibited activities at sites musl be maintained and enforced. New
controls or monitoring may be required if previously undetected or new comaminants emerge,1'
which can be a direct result of site changes brought about by reuse. Ineffective or missing long-
term safety controls at reused contaminated sites can pose significant risks to human health and
the environment. The New York Department of Environmental Conservation released a report
listing hundreds of "old" Superfund. brownficlds. and other cleanup eases thai were reopened lo
investigate potential new threats from vapor intrusion-N Improvements in analytic techniques
and knowledge gained from site investigations has increased awareness of soil vapor as a
medium Dl'toncem and of the potential for human exposure from the soil vapor intrusion
pathway.'3 However, HP A has yet to fina!i?e guidance on assessing or addressing potential risks
from vapor intrusion and does not estimate thut it will do so until late 2012.'*
EPA has acknowledged challenges to ensuring the long-term safety of contaminated sites. In 2005,
the Agency released a report ihat examined a range of Icing-term stewardship issues'7 and
challenges ii fated, us well as the role of non-HPA parlies (e.g.. states, tribes, and other federal
agencies) in ensuring long-term safely of contaminated sites. EPA identified five categories of
challenges: (1) understanding roles and responsibilities: (2) implementing and enforcing
institutional controls;" (3) implementing, enforcing, and monitoring engineering controls;1"
(4) estimating long-term stewardship costs and obtaining funding and resources; and (5) managing
and communicating information to prevent breaches of controls and ensuring consistent
information in databases. The report made a number of recommendations that generally rciy on
partnerships and relationships to share, communicate, and exchange necessary information on
roles, responsibilities, and costs associated with long-term stewardship responsibilities. The report
encouraged non-EPA parties to adbtrre to legal provisions for implementing institutional controls
where applicable (e.g.. Uniform Environmental Covenants Act)."'
11 EPA. Browttfieids Techntsla&> fritter: l-'apor latnainn CvrnideratuttK for Redevelopment, EPA 542-R-OSOO I .
Mwth 2W18
1 ' New York State Department of Environmental Conservation. Status of I'opor Intnaitm Evaluations Eraarlnst Envirattmttual Sile Cleanups Remain Protective Over Time' Challenges
jn d OfiftanirKinf!, Fating EPA 's dtafiup Programs. EPA 500-R-(tJ-CKI 1 , September 2005 ,
:° Insdrutiotul controls arc legal or administrative councils intended TO minimize the potential far human exposure lo
ccmuintination b>' limiting land at resoure* us
implenseiii certain types of institutional conlrols (e.g.. ZCOJEDE ftstrictM)ns>
;" Engineeruig controls art the engineered ^t>?toil bsrriers ot siruclures designed to monitor and prevcnl ur limit
exposure to tils; towamitwrwn.
:l TTic Uniform Environmental Covenants Act confirms Ihe vdidity orefivironrii«nta[ tuvewuils (i.e., institutiotHl
controb''land UK vonlroU) bv ensuring thai iaaiti ase restrtcrioos, mandated cr vijDnmeirtai laoniloring recniiremenis,
and A (*ide rnni* ofcommoft engiiwering c
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In response lo a GAO report on institutional controls, EPA has also taken some steps to better
manage the implementation (.^'institutional controls at Superfund sites. ^ However, many sites
remain for which the implementation stalus of institutional controls is not available.23 In 2010,
EPA completed an internal evaluation to determine whclhcr the required and necessary
institutional controls were hi place al national priority Superfun or stewardship of contaminated sites. We found
that some states were not financially prepared to take over their long-term monitoring and
maintenance responsibilities for Superfurjd cleanups.2 In 2010, Michigan's Department of
Environmental Quality believed it would run out of money tor iui hazardous waste cleanup
program.2* We have reported on state failures ir> enforce cleanup agreements,29 EPA's failure to
follow Supcrfund site deletion guidance"11''and Five-Year Reviewjwocttiures,''1 and EPA's tack
of systems to determine whether a site tleanup is nnncompliant. In our February 2011 report.'1
we found that FPA relies on the seEf-certilication. of a shird-party environmental professional to
determine whether staiutorily required environmental due diligence has been performed al
:s GAO. Hicartiaia Wane Sites: Improved Ejfetliveness of Controls at Sim CtmU Keller Protect tht Public,
GAG 05-163, January 2S. 2005, S*e alw) WA's wubsius "liuiiiuaiunal Controls."
B EPA weteiw, "Published fnsiitutional Comrnls."
3* EPA, Summery of Program EvaluaHutis for FY1QIQ Annual Performance Report.
21OSWER «55.0-«9 EPA-540-R-
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Brownfields sites funded by EPA grants. In a sample of environmental due diligence
investigations we reviewed, environmental professional certifications failed to meet federal
requirements and therefore failed to assure that a proper environmental investigation occurred.
EPA also conducts no oversight of the requirement lo meet "continuing obligations" at
Brownfields properties funded by El'A. Continuing obligations include land use controls Hid
institutional controls designed in prevent unacceptable use of contaminated properties.34
Weaknesses or lapses in meeting environmental due diligence or continuing obligations
requirements can result in undetected or undisclosed contamination and property reuse that may
pose unacceptable risk in humans. In response lo our February 2011 report. EPA agreed lo
develop outreach materials and conduct training far Brownfields grantees and regional
IhLAvrillelds stall"ut increase uimpliancc with federal requirement.? for environmental due
diligence investigations, FPA committed to completing these activities by the enitin- ami *li Apprafnalt l*j«iritt.
EPA S60-F-C9-026, Apnl 2
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incentives, such as establishing specific program goals for site reuse, without investing in tools
needed to ensure the safe, long-term use of these sites, Many Superfund sites are now moving to
(he long-term monitoring phase, with more sites- expected to do so in the future.4 HI'A's
December 2008 report on fulure Superfund workload needs states thai the "post-construe! ion"
workload will require the greatest increase in coming years and will increase by S9 percent aver
the ciurent full-time equivalent (FTE) distribution. EPA will continually need to assess
challenges it faces, as well as challenges among the diverse group of non-FPA panics it must
work with, lo ensure that sites are safely reused- In its assessmL-nis, FPA should consider new or
expanded authorities and regulations, new urbanizations, measures and goals, new methods of
sharing information, and dedicated funding and resources for long-term stewardship activities.
In 2009, FPA agreed with this chatlenge.'111 In its 201041 and 201141 responses to this challenge.
EPA stated that it had several tools it actively promotes to ensure appropriate and safe reuse of
sites and that it will continue to explore new tools and approaches to sharing risk information to
ensure thai sites remain safe in their future ust.s. EPA has slated that its Superfund Five-Year
Review process addresses the vast majority of "emerging contaminant" situations observed ai
Superfund National Priorities List sites and conveyed that the Five-Year Review process worked
well. Specific "tools" EPA has said il promotes to ensure appropriate and safe reuse of sites are;
(1} RfR determinations, (2) comfort and status letters. (3) prospective purchaser inquiry calls,
(4) EPA-funded reuse planning offers, and (5) silc reuse fact sheets45 In 2011.1-PA also
identified these toots as things they can offer to ensure that reuse is appropriate and will enhance
long-term protectivcness.44
While the above tools appear to serve a purpose in enhancing reuse, reducing possible stigma
associated with a contaminated property, or addressing legal obligations, their use and
effectiveness as management controls for ensuring king-term human health protection has not
been evaluated. However, EPA has recently taken significant steps to address and remedy
vulnerabilities in the Superfund Five-Year Review process. Several actions have been in
response to our findings. In 2009, EPA completed a review of the quality of Five-Year
Reviews.49 The Agency identified many reviews that needed additional support and some ihai
needed to modify their safety determinations. Additional actions such as modifying the Agency's
200! puidance on Five-Year Reviews may be forthcoming. In a February 2012 report, we
recognised important improvements in EPA's review and oversight of Five-Year Reviews."
I-PA has implemented, national review of Five-Year Reviews to improve iheir consistency and
quality. Still, in our February 2012 report, we identified additional opportunities for EPA lo
'* tPA. f."Kg- Ttrm filewanbliip f.muring bm-inatmemal Situ Cleanups, Remain Protective Over Time. Challenges
anJOppuriuntHfx Filing EPA 'st Cleanup Programs, EPA 50EX-R-05-OOI. September 200S,
1(1 EPA, SuperfitHd IForUtiatf Assessment Report, OSWER Documcjil 9200-2*81, December 2, 2008. Posl-
consfruction workload can refer to all activities after a cleanup remedy t* constructed flncluding Usnjj-tara
monitoring ami reuse activities)
'" I I1 A. I'grfnrmaniv and Acfsianiabtlity Report for Fiscal Yew JOT9, section IV. page 43.
1' EPA, Fiscal Year 2010 Agency Financial Report, section til, pages 37-40.
45 EPA, Fiscal Year 2011 Agency Financial fttport, page 17-1.
" EPA, fiscal Yeta-26W.igency Financial ftepan, section III, page 39.
" EPA, Fufdl Year 30U Igeniy Financial Report, pages If 4-175.
" EPA, Attesting Frottdivvntafor Asbestta $ii 6,2012.
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improve its national review process to ensure Five-Year Reviews conducted in the regions are
based on quality data and adhere to Agency guidance. We bch'evc thai the SuperFund Five-Year
Review process is and shtnild be a -'safety-net" fot detecting new contamination or other
changing site conditions that may identify new potential human health risks. I lowever, our
rcvicw-s of the Five-Year Review process and conditions at deleted Superfund sites continue to
demonstrate that the Five-Year Review process needs u> be a stronger safety-net.
We will review and recognize EPA efforts to address the significant challenge of ensuring the
long-term safety of contaminated sites. Our work and the Agency's work have shown thai EPA
can address some of the iniemal challenges through improved oversight and management of
EPA-directod activities inherent to successful long-term stewardship of contaminated sites.
However, successful long-term stewardship also depends on having properly resourced and
informed non-EPA parties who have ongoing access to current information, are actively involved
in compliance, and conduct appropriate due diligence and oversight of contaminated site*. EPA
is highly limited in addressing this challenge when stale or local governments with primary
responsibility for addressing many long-term safety issues Have neither (he mmej mr the
apparent will to do so The lessons from recent issues such as vapor intrusion show that site reuse
can generate new environmental risks. In its 2011-2015 Strategic Plan, HP A notes:
Complication)! can iirise when new scientific information curttemirty
contaminant;: at a site suggests that a risk assessment that was protective when
a remedy was selected is no longer protective given the contaminant levels
remaining at a site and their potential exposure pathways. . .. EPA musi
incorporate emerging science into decision making to maintain its commitment
to provide permanent solutions-^
EPA needs new strategies trust take the Agency beyond merely encouraging the acL-uimtable
parties to fulfil! requirements, and focus on providing F.PA and other accountable parties the
information, resources, and authorities to ensure long-term safety of reused sites.
Limited Capability to Respond to Cyber Security Attacks
As technology continues lo advance and the Agency increases its use of automated systems 10
further integrate EPA data and services with exicmal users via the Internet,'" having a .strong
information technology' (IT) infrastructure ihm adJrcssL-s security at the enterprise architecture
level is critical to protecting the Agency against cyber-atlacks. This growth in computer
connectivity places EPA at increased risks of disruption to its critical operations as well as the
possibility of unauthorized access to sensitive data, As such, it is imperative that EPA
management continues efforts to strengthen practices to guard against Advanced Persistent
Threats (APTs). Security experts continue to report that such attacks remain prevalent against
government networks.
EPA acknowledges that APTs pose a significant challenge for the Agency and has committed to
making significant progress in enhancing situational awareness across the infrastructure and
'" I I'A. I- Y It'll 1 Mtf .ftrutfgK flan, paje 25.
" The Environmental Enfimnaticra Exchange Network presentation "Introduction to ihe Exdmngje N«wt>rk "
'" InfoWorid. "Massive 'Lurid' APT snack largete downs of government agencies," S«rm™l*r 26, 2011.
a
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increasing visibility into network activities. Management stated that to address this challenge, it
has identified specific automated tools to deal with cyber security concerns in a secure manner.
Management also indicated it fully deployed a Security Information and Event Management
(SIEM1 toot to facilitate greater vigilance in log reviews and activity monitoring. Additionally.
the Agency indicated that its Computer Security Incident Response Capability (CSIRC) team is
working u> build stronger relationships with internal organizations, such as the Office of
f Eomeland Security, lor threat intelligence sharing.™
EPA uses a vast array of security devices and software such as firewalls, intrusion detection
systems, ami (he SIEM tool to monitor its network in conjunction with the CSIRC to ensure the
availability, integrity, and confidentiality of network services. Our ongoing analysis shows that
EPA has made great strides in addressing the cyber security challenge over the last 2 years.
However, our audit work continues to identify areas where management must close the gaps
between putting in place basic infrastructure for monitoring security over Agency assets to
building a strong cyber security capability and using it to effectively and efficiently reduce
security risk. In particular:
Enhancing Siruational Aw»renm; EPA continues to take steps to address the need to
monitor network traffic (lowing within and into the Agency's network boundaries. To
this end, EPA has completed the transition u> the Managed Trusted Internet Protncul (IP)
Services, which now gives si the ability to monitor network traffic flowing through both
of its Internet points of presence. However. EPA still needs !o lake steps to improve its
operational practices to belter and more quickly synthesize information obtained from the
variously deployed monitoring tools in order to prepare an effective response to network
attacks." Management indicated that part of its situational awareness strategy was to
establish a Network Security Operations Center,*1 which it did in April 2012- EPA
officials indicated that co-locating its incident response capability and network security
operations would enhance information exchange between the two units and reduce the
time needed to respond to attacks. However, management has not yet defined or
developed service level agreements for the two contractors running the incident response
capability and Ehe network security operations center. Nor has management developed its
internal agreements between the two EPA organisations responsible for providing
contractor oversight. Lastly, for EPA to be able to share relevant situational information
with senior leaders, it must first strengthen the Agency's asset management capability in
order to associate IP addresses to the critical network assets and associated data. In 2008,
we reported that EPA needed to improve management of IP addresses in order to
associate discovered attacks and vulnerabilities with network assets for a more timely and
effective incidence response/3 As such. MPA implemented a market leading solution for
automating IP address management services across the Agency's network.'4 EPA
pUkuls brie led us on its plans for updating the network infrastructure and shared with us
M FY 2011 Agency ftiunnal Report, page 18J.
' I I1 A OtO. Improvement* XeeJctf in EFA'i Netuork Traffic Management Practices. Report No II-P-OI59,
March 14.201!.
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strategic planning documents.*' However, continued management vigilance is required to
ensure the remaining outlined actions come to fruition.
Ttmlx: F PA acknowledged that many uf its continuous
monitoring efforts pivoi around the successful implemeniatiun of its SIMM tool. In our
draft audii report released to the Agency in March 2012. we (bund that F.PA lucks a fully
developed strategy w include the Agency's headquarters offices within the SIKM's
environment'' While EPA documents showed a strategy that included each of EPA's
regional offices within the SIEM's environmcrii,58 our ongoing analysis disclosed that
efforts to include headquarters offices fell short due to turnover of technical staff and
EPA's discontinued meetings with headquarters personnel. '* EPA officials indicated they
have since updated the SIEM project plan and have also hired two new personnel within
the CS1RC and headquarters to become subject matter experts on the tool, EPA officials
indicated that this should also help facilitate implementing the SIEM tool in headquarters,
Building Greater Relationships: EPA has made progress in increasing its ability to
process intelligence information and has taken steps to widen ils relationships with other
federal agencies by participating in working groups, task forces, and national exercises.
However, more must be done to increase the sharing of security incident information
within the Agency. The need for increased information sharing lo combat cyber threats is
necessary1 and emphasized as a major effort within proposed legislative language. In
particular, the proposed Cybersecurity Act of 2012 prescribes that agencies must develop
policies and procedures that include reporting information security incidents to relevant
OIGs.w Currently, EPA is working on a. Memorandum of Understanding (MOD) with the
EPA OKi to define roles and responsibilities in coordinating responses to intrusion
activities associated with EPA's networks. Hie implementation of this MOU and the
information gathered by the Agency's IT staff is not only necessary for the continued
protection of F.PA's operational mission but is necessary to preserve the crime scene
associated with the intrusion event to allow us to employ our investigative mission.
Developing a Vulnerability Remediation Program: In September 2009, we reported
that project delays continued to prevent EPA from implementing an Agency-wide
information security vulnerability management program. Our audit highlighted both the
need for the Agency to implement a tool to continuously monitor Agency assets for
vulnerabilities and a management process to ensure identified vulnerabilities arc
remediated.61 Since this audit, EPA lias laken steps to procure a vulnerability
management (nol and established an Agency-wide methodology for continuously
" Technology & tnfwnnwjon Security Staff Sfrflegk Plan, FY 201 [-2016. vereicni 1.0.
* Fiscal 2011 Agency Financial Report, page 183.
^ EPA GIG, Draft flrpwr Imprm-entfats Art \**ifa/ in F.PA 'n Security Manttari»g Program. Project No.
OMS-FY11-0005.
sl EPA Security Information «nd tveitt ManajpeiHeffl (SIEM) Infrastructure, SIEM Concept of Operations
(CONORS}, June 12,1011
*' EPA GIG, Dntfi Report Imprtwetntnu Are Xned&l in EPA's StatrOy Monitoring Program, Pfujtct No,
OMS-FY11-0005
** Cyberaecurity AaofiQU, Section 3.15-t. Agency Rcspoivsibilitics.
" EPA GIG, Praject Delays Prevent EPA from Implementing an AKmcy-widt Information Security
Program, Report No W».K-024(t, September 21, 200?
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identifying vulnerabilities on Agency assets, However, current audit work disclosed that,
despite this effort EPA offices continue lo face challenges in eradicuitng knnwn
vulnerabilities from its assets.'"1 This happens, in part, because the Agency has not
implemented a process thai requires offices to remediate identified vulnerabilities.
Current discussions Vrith EPA officials indicate thai management plans to establish a
Patch and Vulnerability Management Group U> address this issue. However, formal
policies, procedures, and organization structure we not yet approved. Until then, EPA
will continue to provide potential attackers an unnecessarily large wjruluw ofopportunity
to exploit system weaknesses, which could ultimately compromise the Agency's network.
As such, closing the time behind vulnerability identification and remediation is Key in
protecting EPA's critical assets and data.
Implementing Information Sccuriit at Ihc Rnterpritc l.nch During 2011, we
reported that EPA has not clearly dclinctl the Information Management segment within
its current Enterprise Transition Pian (ETP). The Information Management segment,
which addresses information security at an enterprise architecture level, is identified as
"notional," or not in planning. The ETP describes EPA's overarching strategy for
modernizing the Agency's infrastructure to achieve its target architecture. The ETP does
not clearly define the actions it will take to achieve its security target architecture, Given
ihu rapid rise of APTs on EPA's network, the absence of a clearly defined plan for
implementing the Information Management segment shows a lack of commitment on the
part of the Agency Uj address information security from an enterprise-wide perspective.
Without this strategy, EPA executives may not be able to make proper investment
decisions regarding the necessary tools to combat APTs with an Agency-wide
approach.w In its September 26. 2011, response to this finding, EPA indicated that during
FY 2012 it would take steps to achieve the security target architccrurc. As such, the
Agency indicated it has baselincd the information security architecture and dratted the
target architecture. However, management emphasis is still needed lo ensure completion
of the needed gap analysis and implementation plans, as outlined in the Agency's
corrective action plan,*4
Increasing Skills fur Personnel with Significant Security Responsibilities: Our
ongoing analysts disclosed [hat while lil'A suspects that skill gaps exists. EPA has not
undertaken studies to develop strategies to align the Agency's needs and priorities with
those of its workforce to ensure it can meet its legislative, regulatory, and organizational
objectives. Having personnel with the right skills in the right position is critical for EPA
to respond effectively to tyber-attacks. EPA recognizes that not all Information Security
Officers (ISOs) perform the same Junctions nor do they possess comparable technical
knowledge ami abilities.65 We initiated an audil to evaluate the qualifications, skills, and
" EPA OJG website listing FYs 2009-2012 reports on technical vulnerability assessments of EPA'i network.
" EPA O1G. EPA Has Taken Steps to Address Cyber TVraU ton Kn}' Actions Remain Inconpieee, Allocation of
Controls Based on Ealerprae StcwO? ttnAlifL-lur^ Report No. I l-P-0277. June 23, 2011
** Memorandum From EPA AssiHarn Adniinistraior for Environmental Information to tPA Inspector General.
Subject: OEI [Office of Er viitmmtnial [nformation! Corrective Action Plan for QtG Audit: I l-P-fl277.
EPA Has Token Slfftt ta AJJra* Cyhef Threats hut Kay Actions Remain IfKompJWr. September 16, 2011.
" EPA OEI, Powcrpoint Presentation, Dual ISO Designationi. pmenwd » September 20,3011. Quality and
Inforraalion Council Meeting.
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l with significant inlormatiuo security responsibilities.** As
implcmcntcrs c»f the Agency's inf'ormatjcm security program, [SOs as well as others with
significant security responsibility are key to ensuring dial risk mitigation processes are
carried GUI as prescribed by organizationa:! policy. As results of this audit become
available, the Agency should take steps to close any identified gaps within its information
security program,
Increasing \ \cr AwargaHi; Our on-going analv sis nnics that F PA has made great
strides in ensuring user awareness of security threats and establishing the organizational
processes ii>r reporting security incidents. liPA official.* cited the new awareness videos
that have appeared on the Agency's Intranet as one of the many actions taken and
outlined other key actions planned to increase users' exposure to awareness information.
As cyber-attacks become more advanced and targeted, it is vita] that EPA officials
continue their ej'lbris to promote personal responsibility and influence positive behavioral
Changes throughout it* user population. As such, mana^'eiiier.! should commit itself to
completing plans to establish rotating awareness messages displayed on the EPA Intranet
home page and work to conduct social engineering tests for users. This would help to
ensure that all personnel, regardless of their specific job responsibilities, know how to
apply information security basics necessary lo protect vita] Agency information
Improving the Overall Information Security ProEraro: In the broader context of its
information security program, EPA officials indicated that they have begun steps to
strengthen the Agency risk management governance by: { 1 ) providing EPA executive
reports on system authorizations and plans of actions and milestones in order to elevate
the level of review and awareness of system statuses; (2J transitionlng to conducting third
party control assessments annually, with all Agencv s\ stems expected in he on this cycle
hy the end of FY 20 14; and (3) defining an enterprise level risk management process and
taking steps to implement a Risk Executive Board to ensure acceptable and cost effective
system authorizations, While we arc encouraged by management efforts in these critical
areas, our ongoing analysis disclosed that a significant amount of the data reported under
these new processes derive from an EPA information source thai is unreliable for
assessing the Agency's information security program, Our audit work disclosed that
unsubstantiated responses for self-reported information contribute to data quality
problems and that EPA conducts limited independent reviews or follow-up lo correct dsta
inaccuracies,*" EPA indicated it would not remediate the report's recommendations until
the first quarter of 2G13.68 Without taking steps lo improve data used in EPA's risk
management program, it is doubtful that senior executives would be provided sufficient.
reliable information to make informed decisions over system authorization*!.
As a continuation of this management challenge from last yew. EPA leadership must continue to
meet this challenge head-on by sufficiently funding the development of a real lime capability to
identity and investigate attacks against EPA's computer and network systems. Not only is taking
w EPA O1G Memorandum, fttxtfictUMUi Mtamramium for Prqtct ,Vo. OM5./TJ2-0006, Assessment cflke
Qualifications of Em-irntimenlai Protection Agency Personnel wah Significant Security Responsibilities.
February \S, 2012
" EPA DIG. Self-reported Data Unreliable far Assessing EPA "s Gwnpirter Sctwjfy Program. Report No
IO-P-005S. February 3, 2010.
" EPA OEI, Memorandum, Request for Extension afCorrecttve Action, Janusr> 31. 2012.
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steps to address these issues paramount. but EPA must ensure it establishes a robust cyber
security program that is adaptive to (he myriad challenges facing the Agency. Whether it is
integrating smartcards into the operating environment, providing secure access to network
resources as agencies expand die use of unscheduled llexiplaoe, or the .securing of die new types
of smart devices provided to Agency employees, these various access points, from sometimes
unknown origins, provide multiple potential gateways into the Agency's network. Until EPA
moves beyond deploying tools to being able to use the generated information for effective
decision-making and nsk management, the Agency will continue to be at risk as cyber-attacks
grow in sophistication and persistency,
EPA's Framework for Assessing and Managing Chemical Risks
In 1976, Congress pa>sed the Toxic Substances Control Act (TSCA), authorizing I-PA U> collect
information on, and to regulate the production and distribution of, chemicals. TSCA required EPA
to (1) create an inventory of "existing u'ticmicals" already in commerce,, (2) regulate unreasonable
risk from '"new chemicals" introduced into commerce subsequent to the act, and (3) make health
and safety information available for csamination while protecting manufacturers' confidential
business information. The TSCA inventory of chemicals in commerce now exceeds
84.000 chemicals,M Periodic TSCA chemical data reporting indicates that there are approximately
7,000 chemicals currently produced it volumes of 25,000 pounds or greater. Under TSCA. FPA is
charged with the responsibility of assessing the safety of these commercial chemicals and acting
upon those chemicals if there are significant risks to human health or Hie environment. EPA
believes that this significant and long-term challenge can best be met via legislative reform of
TSCA to improve EPA's chemical management authorities. However, until reform is achieved,
EPA's responsibility to create a sustained and effective existing chemicals program must be
carried out under current authorities. Given the vast number of chemicals, the high cost 10 HP A of
performing comprehensive risk assessments, the need for risk management, and the Agency's
responsibility to protect human health ami the environment, RPA has developed the following
multi-pronged approach for its existing chemicals management program:
I) Risk assessment and risk reduction
2) Data collection and screening
3) Public access to chemical data and information
The Agency intends to perform risk assessments and, if appropriate, risk management for those
chemicals with well-characterized hazard concents and which present the possibility of
significant exposure. These are likeiy to be a relatively small number of chemicals, compared to
the si/e of the universe of commercial chemicals. While risk assessments are being conducted
for this small ifroup of chemicals, EPA will be developing an approach to screen tie thousands
of other compounds to determine which ones warrant further attention, which could include
comprehensive risk assessments or additional data development addressing either hazard or
exposure. Many chemicals will likely be judged as being of lower concern. Finally. tPA will
work toward making chemical information available. In particular, the Agency will work to
ensure that hazard and exposure data arc available to the public in a manner that is most useful to
those who will be using the information. Taking this approach to address multiple aspects of the
w EPA. TSCA Chemical Substance Inventory "Basse Informalitm" w«to,iie "Backgrfnutd" link.
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chemicals management challenge simultaneously should allow the Agency to be more
comprehensive in its efforts despite the large number of high-production chSTnieals,
In the absence of new legislation. \ve found thai EPA could better manage existing authorities. In
2010, we published a report on the New Chemicals Program thai showed that EPA did not have
integrated procedures and measures in place to ensure that new chemicals do not pose on
unreasonable risk to human health and 1he environment,70 We recommended that EPA betlcr
coordinate risk assessment and oversight activities by establishing u management plan that
contains new goals and measures that demonstrate the results of EPA actions. Additionally, we
recommended that HP A establish criteria for selecting chemicals or classes of chemicals far low-
level exposure snd cumulative risk assessments, and develop confiderrtial business information
classification criteria to improve t-!PA"s transparency and information sharing. Finally, we
recommended lhal EPA develop a management plan Fur Core TSCA enforcement that includes
training, consistent enforcement strategies atross regions for monitoring and inspection
protocols, and a list uf rnonufoc tuners and importers of chemicals for strategic targeting. The
Agency agreed with our recommendations, and in November 2010 we accepted the Agency's
corrective action plan outlining the steps it intends to take to address our recommendations.
In 20il. we continued to identify challenges to EPA's ability to assess and manage chemical
risks. When we evaluated how effectively EPA manages the human health and environmental
risks of nanomaterials, we found that it does not currently have sufficient information or
processes U> effectively manage human health and environmental risks. Though EPA has (he
statutory authority in regulate nanomaterials, it lacks the environmental and human health
exposure and lexicological data to do so effectively. HP A has proposed mandatory reporting
rules for nanomalerials tinder the Federal Insecticide, Fungicide, and Rodentieide Act (FIFRA)
and is also developing prnposu-d rules under TSCA. After we found that EPA lacked a formal
process to coordinate the dissemination and utilization of the potentially mandated information,
the Agency agreed to our ra-ommerKlatifin ta establish a pnice-ss.
This past year we also evaluated EPA's efforts to identify and manage the unique chemical risks
u> children. Specifically, \ve evaluated whether the outcomes of tPA's Voluntary Children's
Chemical Ed valuation Program (VC'CHP J met its original goal and the goals outlined under the
Chemical Riyht-to-Know Initiative.'1 TTie goal of the initiative was to give citizens information
on the effects of chemicals to enable them to make informed chokes in the home and
marketplace. The initiative directed f'PA to undertake testing of chemicals to which children are
disproportionately exposed. EPA accordingly established the VCCEP pilot. We found that the
VCCEP psloi did not achieve its goals to design a process to assess and report on the safety of
chemicals to children. The pilot's design did not allow for desired ouicumes to be produced.
Specifically, the pilot had a flawed chemical selection process and lacked an effective
communication strategy. Programmatic effectiveness was hampered by industry partners who
chose not to voluntarily collect and submit information, and EPA's decision not to exercise its
regulatory authorities under TSCA to compel data collection. EPA has not demonstrated that it
can achieve children's health goals with a voluntary program.
10 EPA OIG, EPA Needs a Coordinate! Han H> Ovfrsft fa Toxic fiabotmoa Control Act Responsibilities, Report
No KKP-0066. Frtttiary 17,2010.
71 EPA OIG, EPA '.i I'oltoitaiy Cltetaical Evaluation Program Did Not Achieve Children's Htaith froltaion Goats,
Rcpon No. 1 l-P-0379, Jul> 21.2Ct I.
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As we concluded in previous years. EPA's framework for assessing and managing chemical
risks has not yet achieved the goal of protecting human health and the environment.52 EPA's
in assessing and managing chemical risks is hampered in part by limitations on
the Agency's authority to regulate chemicals under TSCA. ^lien TSCA was enacted, it
authorized the manufacture aod use, without any evaluation, of all chemicals that were
produced for conm:er»:ial purposes in 1976 or earlier years. Thus, manufacturers of tlwse
grandfathered chemicals were not required to develop acid produce data an toxscity and
exposure, which are ntcdcd to properly and i'ully assess potential risks. Further compDunding
this problem, the statute never provided adequate authority for EPA to evaluate existing
chemicals as new concerns arose or as new scientific information became available. As
enforcement is critical to ensuring environmental protection, while TSCA authorizes EPA to
conduct inspections, issue subpoenas, and impose civil penalties for violations, the statute
lacks the broad information-gathering and enforcement provisions found in other major
environmental protection statutes. For example. TSCA does not provide EPA the
administrative authority to seek injunctive relief, issue administrative orders, collect samples,
and quarantine and release chemical stocks.
EPA's framework for assessing and managing chemical risks from endocrine disrupters is also
failing to show results. In August 1 996, Congress passed both the Food Quality Protection Act'"'
and anu-ndmcTUs Kt the Safe Drinking Water Act, ' calling for the screening and testing of
chemicals ami pesticide* for possible endocrine-disrupting effects (i.e., adverse effects on the
development of the brain and nervous system, the growth and function of the reprotiucm L-
system, and the metabolism and blood-sugar levels). EPA established the Endocrine Disrupter
Screening Programin 1998- to use validated methods for the screening and testing of chemicals to
identify potential endocrine disruptors. In 2000, EPA estimated that approximately 87.000
chemicals would need lo be screened for potential endocrine-disrupting effects. As of
February 25. 2010, EPA issued test orders to industry for 67 pesticide active ingredients and
high-production volume chemicals with some pesticide inert uses. Thus. 1 4 years after the
passage of the Food Quality Protection Act and amendments to the Safe Drinking Water Act,
EPA has yel to regulate- the endocrine-disrupting effects of any chemicals. 7S
We continue to evaluate FP A tools, procedures, and practices for assessing and managing
chemical risks, One current effort includes reviewing EPA's use of the Integrated Risk
Information System (IRJS). The objective is to determine how EPA program offices and regions
utilize IRIS in their work and products.'6 We arc also evaluating management of EPA's TSCA
and FIFRA enforcetnent tools to determine whether the intended outcomes are efficiently and
effectively achieved,1"7 Given our completed and ongoing work, coupled with the significance of
this issue, we believe this issue warrants being retained as an Agency management challenge.
I2 EPA GIG, EPA's Key Management Challenges in 2010 and 2011.
71 EPA, "Peslicisfes Regulating Pestrcides" webstle, background on the r'ttod Quality PnowoJon Act of 1996.
74 EPA, "Water Safe Drinking Wat« Act" website, background on the Safe Drinking Water An Amendments of
1996.
•' EPA DIG, EFA "s Endocrine Disruptar Scraeaing Prvgram Should Establish Managamini Cfuamls lo Ensuff
Mo™ Timely fttsvlis, Report No. 11 -P-0215, May 3,2011.
T'' EPA OIQ, Caagresstattjl fitquin' Rt%tifiling EPA 'i integrated Risk Information Systrm, Project No.
OP6-FYI2-2734
77 EPA QIC, £v«too/i(w nf Penailif.i fa FIFKA ttnJ 75TA Project No. OPE-FYI1-OOIS.
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Workforce Planning
In 2002, EPA acknowledge*! human capita! as an Agency internal control weakness in pan due
to requirements released under the- President's Management Agenda'8 and audii findings that
identified significant concerns with EPA's management ofhuman capital.™ Since that time, EPA
developed a number of strategic documents to direct its human capital efforts focusing on the
skills, competencies, and occupations needed to carry out its mission,80 While knowing the
required skills and competencies is useful, EPA has not developed analytical methods, nor docs
it collect data needed, to measure its workload and the corresponding workforce levels necessary
to cany out that workload. In 2008, EPA removed human capital from the lisl of Agency
weaknesses and added the more specific topic of Workforce Planning as an Office of the Chief
Financial Officer (OCFO) office-level weakness. Both our office and GAO have recommended
in previous reports that EPA strengthen internal controls—policies, procedures, and methods—
for workforce planning. However, the need for systematic Agency-wide analysis of wtirkload
and workforce levels is broader than OCFO and impacts (he ability of FPA programs to
efficiently and effectively carry out their mission. For example, EPA's December 2008 report on
future Superfund workload needs states that the "post-construction" workload will require the
greatest increase in coming years and will increase by 89 percent over the current full-time
equivalent distribution.*1 Due to the broad implications of workforce planning on accomplishing
EPA's mission, we are including it as an Agency management challenge for 2012.
In December 2010, we reported that EPA did not have controls or a defined methodology to
determine workforce levels titled upon the workload of the Agency."* EPA's OCKO establishes
budget workforce levels based on the prior year's levels and proposed funding levels. EPA's
program and regional offices are not conducting systematic workload analysis or identifying
workforce needs for budget justification purposes and have not done so in over 20 years.
In 2011. we reported*1 that EPA docs not require program offices to collect and maintain
workload data, and the programs do not have databases or cost accounting systems in place to
collect data on time spent on specific mission-related outputs. Without such data, program
offices are limited in their ability to analyze their workload and justify resource needs,
GAO also reported that F.PA's process for budgeting and allocating resources does not fully
consider the Agency's Lun-L-ni workload. In March 2010, OAO reported that it has brought this
issue lo the attention of EPA nfFiuials in suec-essi* e reports in 2001, 2005, 2008, and 2009.'" In
response, EPA staled that it recognized the rased to improve its ability to understand and quantify
n| EPA. F.PA Sirasegic Alignment - Human Capttai flaming. January 3. 2008, page 1
^ EPA. OCFO. 200?Performance Accomaatadly Report, pages 105-0*.
** EPA, EPA Strategic Alignment - Hainan i'dpUsd Planning, Green Summon. January 3,2fiOS, page ].
"EPA, Sapaflaid Watttoad Assessment Report. O5WER Document 9200-2-81. December 3,2008.
Posl-construction workload can refer lo ill activities after a cleanup remedy i* wwwucwd (includuij; long-torn
monitoring and tieust sciivi'ic-,1
" EP A OIO, EPA \vttk in Sintugthen Internal Control far Determining Workforce Levels. Report No.lt -P-0031.
December 20,2010.
" F.PA Old, EPA Ncetb Workload Doto tu Better Justify f-'ulwe Wortforce Levels, ReBWT No. 1 l-P-0630,
September 14. 2i: 11
"GAO, Wortyorce Planning. Interior EPA. and tht forest &n icg Should Sirengthen /. labtgor HI Their Srr aiegtc
flam and Improve Evaluation, GAO-1W13, March 31, 2fi 10, page J 9.
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the relative workload of its component organizations and to make allocation decisions based on
those assessments. EPA said that it was committed to improving its analytical capabilities and
examining appropriate measures of workload to support the resource allocation process.
In February 2010, we reported that EPA does not enforce a coherent program ofposition
management to assure ihe efficient and effective use of its a%'atJable workforce."' Without an
Agency-wide position management program, EPA leadership lacks reasonable assurance that it is
using personnel in an effective and efficient manner to achieve mission results. For example, in
our report issued in 20 tt .M we found that EPA's Office of Enforcement and Compliance
Assurance (OECA) is constrained from actively managing its resources to direct them to the most
important stale enforcement problems. Under the current resource planning structure, EPA regions
divide their resources among several enforcement priorities, including state oversight. If EPA
regions report )hal they are having problems with state enforcement. OECA cannot reallocate
FTEs among regions to address the problems because OECA does not control enforcement
resources in the regions. Therefore, priority enforcement issues may not receive needed resources.
Since 2005, various EPA offices have attempted to assess their workloads. EPA paid contractors
nearly S3 million, but EPA generally did not take action or widely share the results of these
efforts. For example, in 20O6. OCFO awarded a contract to gather information on methods that
other government agencies used to assess workload and staffing needs, identify their advantages
and disadvantages, and gauge their rele%fanee to EPA. KPA planned to use this information to
develop methods for assessing staffing in relation to workload validate current levels, and
identify areas of concern, as well as explore alternative ways to assess and benchmark staffing
levels against workload shifts. The results of the analysis showed that there were not significant
similarities among agencies. The contractor recommended that OCFO develop its own approach
for assessing and adjusting workforce allocation to align with workload Various offices within
EPA conducted other studies. In 2009, OCFO awarded another contract to conduct a workload
assessment to assist EPA in exploring ways to better assess and benchmark uurraii stall levels
against workload shifts. The analysis targeted key Junctions that P.PA shares with other federal
agencies, such as (1) regulatory ik-vdopmenl, (2) scientific research, (?) enforcement,
(4) financial management, (5) environmental moniloring, and (6) permitling. The contractor
completed this most recent effort in September 2011.
In April 2012, EPA issued a repnrt"7 that highlights fumlumenla] changes EPA is planning to
develop a mane robust civil rights program. One of the key recommendations from this effort was
developing a staffing plan for Agency civil rights functions. The recommendation calls for the
same types of workforce actions we have been encouraging the Agency to undertake, including:
* Identifying the essential functions based upon data
• Determining the skills and numbers of employees to carry out those functions
• Developing a staffing plan
• Requesting needed FlTis/resources through the budget process
: I l' \ OIG. UFA Needs B
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While this process is just getting underway, we believe it is a step in the right direction.
EPA has recently developed draft Kwls and circulated these Un>Is among Agency subject matter
experts for input and feedback. The timls will subsequently he ciri:ulaied for senior managemenl
review. EPA is also in the process dt'develciping options fnr implementing wwkl'urce planning
hut has yet to implement \varkfbrce analysis Agency-wide. EPA's ability to assess its workload
and jccuniiely estimate workforce levels necessary to carry out that workload is critically
important 10 mission accomplishment. Given the significance of this issue and the need for
progress Agency-wide, we have elevated workforce planning from an internal control weakness
to an Agency management challenge.
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Challenge #1 - Oversight of Delegations to State
Agency Response: EPA acknowledges that state oversight is a very complex and changeable arena.
Through federal statutes, implementing regulations, and program design, states are allowed flexibility in
how they manage and implement environmental programs. Within EPA, national program managers
are directly responsible for state oversight of individual programs. The Agency has committees,
workgroups, special projects, and initiatives to continuously improve Agency programs delegated to
states.
In FY 2012, the Agency identified the oversight of state delegations as a strategic priority and
developed a key performance indicator (KPI) in the FY 2012 Action Plan for Strengthening State, Tribal,
and International Partnerships. Specifically, the KPI requires EPA to establish an Agencywide
workgroup (national program managers, regions, and HQ support offices) to plan and implement an
Agencywide effort to collect available information to define, describe, and assess EPA's processes,
practices, and tools for overseeing state delegations and authorizations. The workgroup will report its
findings to the Deputy Administrator and propose options for next steps, as needed, to ensure that the
Agency is carrying out its oversight responsibilities in a coordinated, transparent, and accountable
manner. The Agency believes establishing a KPI for state oversight will help sustain senior
management attention and is a strategic and coordinated approach to address the issue.
Challenge #2 - Safe Reuse of Contaminated Sites
Agency Response: Cleaning up contaminated sites and ensuring their safe reuse over the long term is
an Agency priority and central to EPA's mission. EPA and state and tribal response programs continue
to make progress in cleaning sites to protect public health and the environment and support the safe
use of cleaned and stabilized properties. The Agency believes that it is communicating site risks and
remedies and information needed to ensure protectiveness.
Whenever waste is left in place at sites on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Act requires that the remedy at the site be
reviewed at least once every five years to ensure its continued protectiveness. EPA's national
Superfund program reviews five-year reports at all sites and tracks any recommendations for necessary
further action to ensure implementation.
EPA and our state and tribal co-implementers may select institutional controls to control land and
resource use where residual contamination remains in place. Institutional controls (ICs) help minimize
the potential for exposure to contamination and/or protect the integrity of engineered components. As
remedial actions, ICs are subject to five-year reviews as well as other periodic monitoring. The Agency
has developed cross-program guidance, Institutional Controls: A Guide to Planning, Implementing,
Maintaining and Enforcing Institutional Controls at Contaminated Waste Sites, which stresses the need
for EPA site managers and attorneys to coordinate with tribes, state and local governments,
communities, and other stakeholders to ensure that ICs are properly implemented, maintained, and
enforced over their lifetime. The Agency will continue to encourage state and tribal response program
funding of tracking and management systems for land use and institutional controls.
The Agency has developed general education and outreach materials about institutional controls and
their importance in supporting safe land reuse. EPA continues to include training sessions on
institutional controls, as well as panel discussions between local government and state programs, as
part of its national brownfields conference. EPA will also continue to develop and maintain information
systems like "Cleanups in My Community" (http://www.epa.gov/cimc) to educate and inform the public
regarding federally funded contaminated site assessment and cleanup activities.
Promoting reuse involves communities in cleanup and reuse discussions. EPA will continue to explore
new tools to ensure appropriate reuse and enhance long-term protectiveness, including:
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• Ready for Reuse Determinations (environmental status reports on site reuse)
• Comfort and Status Letters (which convey status of the site remediation and liability issues)
• EPA Funded Reuse Planning (which helps ensure sites are put into productive use after cleanup)
• Site Reuse Fact Sheets (which highlight critical remedial components in place, long-term
maintenance activities, and institutional controls)
Challenge #3 - Limited Capability to Respond to Cyber Security Attacks
Agency Response: EPA acknowledges that advanced persistent threats pose a significant challenge
to itself and to all federal agencies. Many of the OIG's concerns and assertions are based on an audit
report that has not been released to the Agency and proposed legislation that has cleared neither the
Senate nor the House of Representatives.
EPA continues to make significant progress toward enhancing situational awareness across the
Agency and increasing visibility into network activities. EPA continues to build strong alliances with
other Agency partners, as well as coordinating internally.
Challenge #4- EPA's Framework for Assessing and Managing Chemical Risks
Agency Response: The GAO continues to identify "Transforming EPA's Processes for Assessing and
Controlling Chemicals" as a high-risk area, and the OIG continues to identify "EPA's Framework for
Assessing and Managing Chemical Risks" as a management challenge. In October 2009, EPA
acknowledged "Streamlining Chemical Assessments Under IRIS" as an Agency-level weakness under
FMFIA and has made progress in addressing concerns raised by both oversight organizations.
Improving IRIS. In May 2009, the Agency released a new IRIS process for completing health
assessments. The goals of the new process are to strengthen program management, increase
transparency, and expedite the timeliness of health assessments. Since then, the Agency's National
Center for Environmental Assessment has completed over 20 assessments, more than the number of
assessments completed in the previous five years. Key major assessments recently posted include
trichloroethylene and dichloromethane.
The Agency is making significant progress on health hazard assessments of numerous high-priority
chemicals (i.e., trichloroethylene, perchloroethylene, dichloromethane, chromium VI, methanol,
benzo[a]pyrene, and Libby asbestos), including the completion of milestones for interagency science
consultation, external review, or posting on the IRIS website. Progress on these assessments and other
IRIS assessments is available at http://www.epa.gov/IRIS/. In addition, EPA's IRIS program is
developing assessments of health effects for chemicals found in environmental mixtures, including
PAHs, dioxins, phthalates, and PCBs. These cumulative assessments will increase the number of
chemicals that are addressed by IRIS and are based on the expressed needs of the Agency. The
Human Health Risk Assessment Program will continue to lead innovation in risk assessment science
based on expanding scientific knowledge.
EPA continues to implement the new database that facilitates public access to the scientific studies that
underpin key regulatory decisions. The Health and Environmental Research Online database contains
the key studies that EPA uses to develop environmental risk assessments and makes them available to
the public. It includes references and data supporting IRIS, which supports critical Agency policymaking
for chemical regulation. Draft IRIS assessments now routinely include HERO links and cited references.
The HERO database is publicly accessible, so anyone can review the scientific literature behind EPA's
science assessments. The HERO database strengthens the transparency of the science supporting
Agency decisions.
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Assessing and Managing Chemical Risks. EPA has taken a number of steps over the past several
years to strengthen related programs within existing authorities. The Agency has announced its
principles to strengthen U.S. chemical management laws, initiated a comprehensive effort to enhance
its current chemical management program within the limits of existing authorities, and is proposing an
expansion of that effort in the FY 2013 President's Budget. (A listing of the principles is available at
http://www.epa.gov/oppt/existingchemicals/pubs/principles.html.) This new approach was introduced in
EPA's FY 2011-2015 Strategic Plan and further developed and implemented during FY 2010 and FY
2011. In February 2012, EPA issued its Existing Chemicals Program Strategy, explaining that the
Agency intends to pursue a multi-pronged approach focusing on risk assessment and risk reduction,
data collection, and screening, and furthering public access to chemical data and information. (See
http://www.epa.gov/oppt/existingchemicals/pubs/Existing Chemicals Strategy Web.2-23-12.pdf.)
As part of this effort, EPA identified a group of TSCA Work Plan Chemicals for risk assessment to help
focus and direct the activities of the Existing Chemicals Program over the next several years
(http://www.epa.gov/oppt/existingchemicals/pubs/workplans.html). These activities are supported by
EPA's FY 2013 budget request, which will allow the Agency to sustain its success in managing the
potential risks of new chemicals entering commerce and to continue making substantial progress in
assessing and ensuring the safety of existing chemicals.
In addition, in FY 2013, EPA will continue preventing the entry into the U.S. market of chemicals that
pose unreasonable risks to human health or the environment. Each year, EPA's New Chemicals
Program reviews and manages the potential risks from approximately 1,000 new chemicals, products of
biotechnology, and chemical nanoscale materials prior to their entry into the marketplace.
Endocrine Disruptor Screening Program (EDSP) Comprehensive Management Plan. More recently, in
response to the OIG's May 2011 evaluation report, "EPA's Endocrine Disruptor Screening Program
Should Establish Management Controls to Ensure More Timely Results," on June 28, 2012, the Agency
issued its EDSP Comprehensive Management Plan (www.epa.gov/endo). The EDSP management
plan describes a three-part plan for implementing the EDSP: 1) scientific advancement of Tier 1 data
reviews and Tier 2 assay development and validation (including advancing the state of the science in
chemical priority setting and screening); 2) test order management and implementation, including
prioritizing chemicals, developing policies and procedures, and issuing and managing test orders; and
3) data management by developing an enhanced and consolidated information infrastructure.
Challenge #5 - Workforce Planning
Agency Response: Examining EPA's workforce to improve the Agency's resource planning is a broad
and lengthy process requiring extensive reporting and analysis. EPA continually reviews how to
maximize the productivity of its limited staff and other resources. As part of its annual budget process,
EPA plans and tracks the use of resources at a detailed level in terms of organization and media and
by strategic planning goals. These data are analyzed to inform the relative allocation of resources,
staffing, and funding. EPA complements these management and planning efforts and data by
strengthening both workforce planning (Agency-led research into the type of staff and skills needed)
and workload analytics (Agency-led efforts to understand and calculate the level of staffing needed for
particular tasks). In both these efforts, the lead program offices worked extensively with experts in all
the Agency's program offices.
In FY 2010, the Agency surveyed more than 1,000 managers to capture their best estimates of their
unit levels of work required to complete six critical functions (scientific research, environmental
monitoring, regulatory development, permitting, enforcement, and financial management) as well as
major tasks within each function, work drivers, and products. In FY 2011, the Agency benchmarked
workload analytical efforts of 23 other federal agencies. In FY 2012, the Agency led a collaborative
workforce planning initiative that focused on identifying the critical occupations required to meet current
and future mission objectives. Each program/regional office linked its occupations to Strategic Plan
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goals and projected occupational shifts through FY 2015. This information was used to 1) analyze
future gaps, 2) plan for projected growth in scientific and specialized technical occupations and
projected reductions in unspecialized and administrative roles, 3) develop position management
options, and 4) design strategies to recruit for needed skills and develop these skills internally (e.g.,
training, succession planning). Additionally, in FY2012, the Agency developed mid-level workload
analyses for the air and water permitting programs and is working to develop one for Superfund cost
recovery. This work has created a process and template for EPA to perform additional analyses.
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PROGRESS IN ADDRESSING
FY 2012 WEAKNESSES AND SIGNIFICANT DEFICIENCIES
In FY 2012, EPA continued to address its
Agency-level internal control weaknesses
and significant deficiencies. This section
discusses the weaknesses and significant
deficiencies EPA resolved in FY 2012, as
well as those that are new or for which
corrective actions are still underway.
Material Weaknesses
Compass System Limitations
The OIG identified the material weakness,
"Compass System Limitations are a
Material Weakness to EPA's Accounting
Operations and Internal Controls," in their
FY 2012 Financial Statement Audit. In its
report, the OIG stated that when the
agency converted its accounting system, it
had not yet developed all the reports and
functions required to generate all the
information it needs. The EPA disagrees
with this conclusion.
For much of FY 2012, EPA was in the
midst of learning the intricacies of the new
system, including reporting and business
process changes, necessary to effectively
utilize the new Compass Financials
system. The Agency undertook an
aggressive effort to identify, prioritize and
resolve issues and modify business
processes.
By the end of FY 2012, the vast majority of
system implementation issues, including
those that could materially impact the
financial statements, were resolved. The
agency will continue to analyze the
agency's financial reports and business
processes, identify any concerns and
develop or improve reports or modify
business processes as needed.
FY 2012 Weaknesses and
Significant Deficiencies
Material Weaknesses
1. Compass System Limitations*/*
Aaencv Weaknesses
. Strengthening the Agency's Implementation of
FMFIA*
2. Permit Compliance System
3. Streamlining EPA's Process for Developing
Chemical Assessments Under IRIS
\ Electronic Content Management
Sianificant Deficiencies
'. Reconciling Unearned Revenue for Superfund
State Contract Costs*
',. Collectability of Federal Receivables*
3. Headquarters Personal Property Controls
4. EPA Double Counted Contractor-Held Property
5. Federal Reimbursable Costs Not Billed Timely
6. EPA Is Withholding Payments Related to
Deepwater Horizon Oil Spill Cleanup*
7. EPA Recognized Earned Revenue in Excess of
Expenditures*
8. Accounts Receivable Detail Not Provided Timely
By Regions
9. Posting Models in Compass Materially Misstated
GL Activities and Balances** (mw)
10. Compass Reporting Limitations Impair Accounting
Operations and Internal Controls** (mw)
11. EPA Should Improve Controls Over Expense
Accrual Reversals** (mw)
12. Compass System Limitations Impair Internal
Controls of Financial Operations** (mw)
13. EPA Should Improve Compliance With Internal
Controls for Accounts Receivable**
14. EPA Is Not Clearing Fund Balance With Treasury
Statement of Differences Timely**
15. Property Internal Controls Need Improvement**
16. Compass and Maximo Cannot Be Reconciled**
17. EPA Needs to Remediate System Vulnerabilities
That Place Financial Data at Risk**
18. OCFO Financial Systems Security Documentation
Needs Improvement**
* All corrective actions were completed in FY2012
** Items identified as new in FY 2012
(mw) Contributed to new material weakness in FY 2012
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Strengthening the Agency's Implementation of the Federal Managers' Financial Integrity Act
(FMFIA)
In FY 2009, EPA declared Strengthening the Agency's Implementation of FMFIA as an Agency-level
weakness. The Office of Inspector General believed that the Agency's management integrity guidance
for FY 2008 and FY 2009 did not require adequate reporting on compliance with all five of the
Government Accountability Office's (GAO's) "Standards for Internal Control in the Federal
Government," as referenced in OMB Circular A-123.
The Agency has taken steps to strengthen its FMFIA process and address OIG concerns. Specifically,
the Agency has:
• Enhanced senior management engagement. The Administrator (in February 2010) and Deputy
Administrator (in January 201 land February 2012) issued "kickoff" messages to senior managers
calling attention to the FMFIA program, emphasizing the importance of maintaining effective internal
controls over programmatic operations and financial activities, and clarifying expectations for senior
leadership personal oversight and accountability.
• Completed onsite compliance reviews in all regions and national program offices. This
comprehensive three-year effort involved FMFIA presentations, face-to-face interviews with senior
managers/staff, and information exchanges on current practices and opportunities for improvement.
The reviews provided training opportunities for Management Integrity Advisors and program
managers and resulted in Agency questions, concerns, and best practices, which the Agency used
to develop its FY 2010, 2011, and 2012 management integrity guidance.
• Improved technical guidance. In March 2010, the Agency issued new technical guidance to senior
resource officials to ensure compliance with the five GAO standards and to help establish a solid
foundation for reviewing internal controls over program operations and preparing Assistant
Administrator (AA) and Regional Administrator (RA) annual assurance letters to the Administrator.
The guidance included templates for developing program review strategies (which require reporting
on all five GAO standards) and multiyear review plans. FY 2011 and FY 2012 management integrity
guidance built on that foundation and further clarified national program versus regional office roles
and responsibilities for conducting reviews and assessing internal controls over programmatic
operations.
• Instituted mandatory training. In March 2011, the Agency delivered new online mandatory FMFIA
training for Agency senior managers and for all Management Integrity Advisors. More than 2,000
individuals—100 percent of those required to take the training—completed the course. In response
to Agency feedback, the online training was updated in FY 2012 to include a new risk assessment
module. AAs and RAs certified in their FY 2011 and 2012 annual assurance letters that appropriate
managers/staff completed the training.
• Strengthened communication. The Agency revised and improved its management integrity intranet
site to provide tools and materials for MIAs and Agency staff, and developed a new wiki site to
facilitate communication between MIAs and the Agency's Management Integrity Team. In March
2011, EPA held a training workshop for Agency MIAs to enhance their knowledge of internal
controls, risk assessment, and the Agency's management integrity program.
The Agency has completed all corrective actions in response to the OIG's 2009 Early Warning Report
recommendations. With contractor support, the Agency validated changes/improvements in EPA's
implementation of FMFIA based on data gathered and assessed through the program compliance
reviews and applying a policy compliance verification tool. The Agency will continue to analyze regional
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and program offices' FY 2010, FY 2011, and FY 2012 assurance letters to assess progress and ensure
that statements on the effectiveness of controls over programmatic and financial operations are
adequately supported and documented. In particular, the Agency is developing an inventory of and
database tool for the Agency's program review strategies and multiyear plans to enable review and
analysis in FY2013 and beyond, and to facilitate effective communications between national programs
and regions. The Agency will also use reviews conducted by OIG and other oversight agencies, as
appropriate, to determine the effectiveness of corrective actions.
The Agency intends to continue conducting program compliance reviews in national program and
regional offices to assess Agency FMFIA implementation and the needs for guidance, training, and
other tools and assistance. In addition, EPA will update online training periodically and establish a
mandatory training schedule.
With contractor support, the Agency gathered data (through its program compliance reviews) and
applied a policy compliance verification tool that validated changes/improvements in the Agency's
implementation of FMFIA and progress toward strengthening the FMFIA process. The Agency will
continue to analyze regional and program offices' FY 2010, FY 2011, and FY 2012 assurance letters to
assess progress and ensure that statements on the effectiveness of controls over programmatic and
financial operations are adequately supported and documented. In particular, the Agency is developing
an inventory and database tool of the Agency's Program Review Strategies and multiyear plans to
enable review and analysis in FY 2012 and beyond, and to facilitate effective communications between
national programs and regions. The Agency will also use reviews conducted by the OIG and other
oversight agencies, as appropriate, to determine the effectiveness of corrective actions.
Permit Compliance System (PCS)
In FY 1999, EPA declared PCS as an Agency-level weakness. The weakness focuses on the need for
EPA to revitalize or replace PCS to provide an information system that both the states and EPA can
use to ensure complete and accurate National Pollutant Discharge Elimination System (NPDES) permit
and discharge data.
Although EPA has now developed and successfully implemented a modern, national information
system designed to meet the needs of today's NPDES permitting and enforcement program, not all the
states have been migrated from PCS to the new system, Integrated Compliance Information System
(ICIS). Currently, 35 states, two tribes, eight territories, and the District of Columbia are using the new
system. That leaves 15 states remaining to be migrated to ICIS, all of which are authorized to manage
the NPDES program. The plan is to complete the modernization of PCS and migrate those 15 states
from PCS to ICIS in FY 2013.
In FY 2012, the Agency implemented the second release of the full batch component of ICIS. The
development of the second release of the "full batch" component of ICIS allows for the electronic
submission of NPDES inspection data from state systems to ICIS via the National Environmental
Information Exchange Network and CDX. One additional state was migrated and incorporated into ICIS
in a March 2012 "full batch" release. Specific actions taken in FY 2012 include:
• Implemented Wave 2 of ICIS-NPDES Full Batch (electronic reporting of NPDES inspection data
from states to ICIS-NPDES) functionality.
• Migrated Delaware to ICIS-NPDWES from PCS
• Completed Software Development for Wave 3 of ICIS-NPDES Full Batch functionality.
• Began functional and integration testing of Wave 3 of ICIS-NPDES Full Batch functionality.
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• Continued work with remaining 15 PCS Wave 3 states to meet their data threshold for data
migration from Legacy PCS to ICIS-NPDES.
• Began user validation and acceptance testing for Wave 3 of ICIS-NPDES Full Batch functionality.
The closure date for this Agency-level weakness is projected to be the end of fourth quarter FY 2013.
This completion date is based on various assumptions and estimates.1
Streamlining EPA's Process for Developing Chemical Assessments Under IRIS
In FY 2009, EPA declared Streamlining EPA's Process for Developing Chemical Assessments Under
Integrated Risk Information System (IRIS) as an Agency-level weakness. GAO identified "Transforming
EPA's Processes for Assessing and Controlling Toxic Chemicals" as a high-risk area in its January
2009 High-Risk Series. In its report, GAO states that the Agency needs to take actions to increase the
transparency of IRIS and enhance its ability under the Toxic Substances Control Act (TSCA) to obtain
health and safety information from the chemical industry.
In May 2009, the Agency released a new IRIS process for completing health assessments. The goal of
the new process is to strengthen program management, increase transparency, and expedite the
timeliness of health assessments. Since that time, the Agency's National Center for Environmental
Assessment has completed 16 assessments, more than the number of assessments completed in the
previous three years. Additionally, the Agency is making significant progress on health hazard
assessments of numerous high-priority chemicals (e.g. formaldehyde, trichloroethylene,
perchloroethylene, dichloromethane, arsenic, chromium VI, methanol, benzo[a]pyrene and Libby
asbestos), including the completion of milestones for interagency science consultation, external review,
or posting on the IRIS Web page. Progress on these and other IRIS assessments is available at
http://www.epa.gov/IRIS/. In addition, the Agency is developing assessments of health effects for
chemicals found in environmental mixtures, including Polycyclic Aromatic Hydrocarbons (PAH), dioxins,
phthalates, and Polychlorinated Biphenyls (PCB). These cumulative assessments will increase the
number of chemicals that are addressed by IRIS and are based on the expressed needs of the Agency.
EPA's Human Health Risk Assessment program will continue to lead innovation in risk assessment
science based on expanding scientific knowledge.
EPA continues to implement the new database that facilitates public access to the scientific studies that
underpin key Agency decisions. The Health Environmental Research Online database contains the key
studies EPA uses to develop environmental risk assessments for the public. It includes references and
data supporting IRIS, which supports critical Agency policymaking. The Healthy Environmental
Research Online (HERO) database is publicly accessible, so anyone is able to review the scientific
literature behind the EPA science assessments. The HERO database strengthens the transparency of
the science supporting Agency decisions.
The Agency has asked the Science Advisory Board to develop an independent, standing subcommittee
to review IRIS assessments, and it has contracted with the National Academy of Sciences to review the
IRIS assessment development process. EPA will continue to track progress to determine if new
timelines need adjustment. The closure date for this Agency-level weakness is projected to be FY
2015.
1 This completion date is based on various assumptions about the future and, therefore, any changes to the assumptions
would impact the schedule. For FY 2012 and beyond, we assumed that annual funding will continue at $ 7.5 million. (If the
President's budget level of only $6.7 continues in FY 2012 and beyond, the schedule would likely move several quarters into
the future, with a shut down date for PCS delayed until FY 2014). Further, as with any project, extended timelines for
completion add risk to the project, and predictions about when the project will be completed become more speculative.
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Electronic Content Management
In FY 2009, the EPA declared Electronic Content Management at EPA as an Agency-level weakness.
Although the Agency has a formal, structured, and vigorously managed records management program
in place that has met past records management requirements, its roots can be found in traditional
paper-based records management, maintenance, and access. The Agency's inconsistencies in how
electronic content is stored, maintained, and assessed have started to have an impact on critical
processes related to electronic records management.
To implement effective changes to content management practices within the Agency, corrective actions
must be addressed enterprisewide. An enterprise approach will allow for integration with the Agency's
lines of business and replace current piecemeal or ad hoc approaches. To accomplish this, the Agency
is implementing a system for the effective management of its information assets that will include a
governance structure for content management and the selection of enterprise tools, as well as the
formulation of new policies for content management responsibilities and processes.
The Agency has taken the following corrective actions to address this weakness:
• Established a new Quality Information Council Electronic Content Subcommittee
• Developed a charter for the subcommittee
• Established two enterprisewide workgroups under the subcommittee
• Developed interim procedures to address the storage and preservation of electronically stored
information.
• Launched two pilot projects to evaluate tools for eDiscovery and the management of email records.
The results of the pilot projects will be used to inform the subcommittee's decisions on future policy
or tool implementation.
The Agency will develop a validation strategy to assess the effectiveness of various activities
undertaken to redress the identified weakness. The validation strategy will consist of processes that
allow the Agency to review and determine whether policies and tools are being implemented and
utilized. The closure date for this Agency-level weakness is projected to be FY 2013.
Significant Deficiencies
Improvement Needed in Billing Costs and Reconciling Unearned Revenue for Superfund State
Contract Costs
During the FY 2009 Financial Statement Audit, the OIG identified as a material weakness the failure of
EPA to properly review the calculations used to reconcile unearned revenue for Superfund State
Contract (SSC) costs. To remedy the material weakness, the Agency improved accountability for the
SSC contract requirements and site status information by researching transactions in older funds to
determine validity, strengthening the review/verification process for reconciling Superfund site costs,
and ensuring data and calculations used are consistent and properly supported. In FY 2010, based on
the corrective actions taken, the issue was downgraded to a significant deficiency.
In FY 2011, the Agency continued to provide instructions to the regions for careful review of the
"closed" sites and the steps necessary to complete the closure activity. Extra measures and
verifications were taken to ensure that data entered on the spreadsheets were correctly transferred into
the financial system. For instance, the review of the SSC spreadsheets was added to the FY 2011
regional review of internal controls over financial activities. The regional review process included
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ensuring that the spreadsheets were completed for all sites; that contract values and percentages were
updated; and that credits were not only included, but were for the correct amounts.
As part of the quarterly SSC accrual process, the Agency continues to send requests to the regions
emphasizing the need to review all sites they have listed as "closed" to make sure they are taking care
of all actions. This includes, but is not limited to, billing a particular state for its share of the costs,
adjusting the contract values and/or percentages, and reclassifying appropriated disbursements where
applicable. The Agency includes language in its quarterly call for regional input into the spreadsheets to
ensure billings are done in a timely manner.
The Agency has completed all corrective actions for this significant deficiency. The Agency will continue
to review the SSC process as part of its review of internal controls over financial activities.
Assess Collectability of Federal Receivables and Record Any Needed Allowances for Doubtful
Accounts
During the FY 2010 financial statement audit, the OIG found that EPA overstated federal accounts
receivable by not establishing an allowance for doubtful accounts or processing write-off entries for
uncollectable federal debt. This finding was largely related to several Superfund debts with the
Department of the Army for their liability related to the Twin City Army Ammunition Dump sites, in which
the OIG recommended that an allowance should be established. Historically, EPA has not established
allowances for delinquent federal debts because it considered all federal debts to be collectible.
To remedy this significant deficiency, the Agency reviewed its open federal debts to ensure accurate
status. Additionally, the Agency established new procedures to bill federal agencies in a timely manner
and issued a new policy to address delinquent federal receivables, Resources Management Directives
System, 2540-12- P1, Intragovernmental Business Rules - Delinquent Federal Accounts Receivable. In
2011, the Agency established an allowance for the delinquent Department of the Army debt for the
Twin Cities Superfund sites. The debts were settled at a reduced amount in the fourth quarter of FY
2011, and the remaining balance, deemed uncollectable, was written off.
The Agency has completed all corrective actions for this significant deficiency. On an annual basis, the
Agency will send requests for updates to collectability assessments on outstanding debts for the
purpose of calculating the allowance for doubtful accounts.
Improvements Needed in Controls for Headquarters Personal Property
During the FY 2010 financial statement audit, the OIG identified improvements needed in the controls
for EPA headquarters. The Agency acknowledged several significant challenges with tracking personal
property in the headquarters accountable area.
To remedy this significant deficiency, the Agency developed mandatory training for all managers and
supervisors that is being monitored and tracked by the Agency property management officer. In FY
2012, the Agency conducted "wall to wall" inventory and significantly reduced the unaccounted assets
identified in 2010 and 2011 by more than 250 assets. Over the past two years, this process has
recovered approximately 1,700 items representing an asset value exceeding $6 million. The Agency's
property management workgroup has analyzed and addressed current industry best practices to
ensure that current business practices are reflected in the forthcoming revised policy and procedures
manual.
The Agency anticipates that all remaining corrective actions for this significant deficiency will be
completed in FY2013.
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EPA Double Counted Contractor-Held Property
During the FY 2011 Financial Statement Audit, the OIG stated that EPA double counted contractor-held
property in its financial system because it did not remove from its financial system property that had
been transferred to contractors.
To remedy this issue, EPA reviewed current policies and procedures and revised them as needed to
ensure that the Agency addresses responsibilities for removing from its financial system property that is
transferred to contractors. In FY 2012, the Agency has taken the following actions to address this
deficiency:
• Completed 10 desk audits on contracts with contractor-held property to ensure property items
assigned to the contract did not appear in the Agency's inventory. Property duplications identified
were corrected.
• Developed draft guidance for inclusion in the Property Management Manual to reflect changes in
the April 2, 2012 Federal Acquisition Regulations. The guidance will assist contracting officers and
property managers in deciding whether property should be assigned to a contract or included in the
Agency inventory.
• Conducted two webinars for contracting officers and property managers to review parameters for
contractor-held property management.
The Agency will continue to perform desk audits during the fiscal year to ensure that contractor-held
property is not being double reported and counted. The Agency anticipates that all remaining corrective
actions for this significant deficiency will be completed in FY 2013.
Federal Reimbursable Costs Not Billed Timely
During the FY 2011 Financial Statement Audit, the OIG stated that EPA did not bill other federal
agencies for reimbursable costs in a timely manner. The Agency works diligently to research, resolve,
and bill outstanding reimbursable costs and will continue to research and resolve unbilled costs,
particularly before the funding period is cancelled.
To remedy this significant deficiency, the Agency reviews interagency agreements quarterly and will
continue processing bills for new expenses to individual agreements. The Agency is working to use
functionality within its financial system so that all costs charged will be linked to a reimbursable
agreement, thereby eliminating unidentified reimbursable costs.
The Agency will work to resolve unbilled costs by billing for costs prior to cancellation of the fund. The
Agency will pursue collectability information for those not identified with an agreement to move or write
off costs that cannot be billed. Additionally, the Agency will create a process for removing reimbursable
cost in cancelling funds if they cannot be reconciled to a reimbursable agreement. The Agency will
review and clear prior year charges before cancelling the funds.
The Agency anticipates that all remaining corrective actions for this significant deficiency will be
completed in FY2013.
EPA Is Withholding Payments Related to the Deepwater Horizon Oil Spill Cleanup
During the FY 2011 Financial Statement Audit, the OIG stated that EPA withheld payments related to
the Deepwater Horizon Oil Spill. The delay of the payments was due to the Agency not having cash
available to make the payments without going into a negative balance.
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To remedy this significant deficiency, the Agency resumed payments to the oil spill contractors as soon
as adequate funds were available; informed the contractor of the interest penalties prescribed by the
Prompt Payment Act (this was included in the payments to the contractor); and developed a
Memorandum of Understanding with the U.S. Coast Guard that includes a description of acceptable
cost documentation in an effort to streamline and expedite reimbursements. The Agency paid
$20,112.82 in interest penalties on invoices totaling $2,817,256.99 (less than 1 percent).
The Agency has completed all corrective actions for this significant deficiency.
EPA Recognized Earned Revenue in Excess of Expenditures
During the FY 2011 Financial Statement Audit, the OIG stated that EPA recorded earned revenue
without recognizing corresponding expenses.
To remedy this issue, the Agency reviewed and verified that the General Ledger (GL) postings and
accounting models in the financial system (Compass) are proper. Additionally, the Agency performed
preliminary reconciliations on September 30, 2012, and a final reconciliation on October 3, 2012, of
federal revenues and expenses to ensure that revenue adjustments were posted for expenses that
have not yet been matched. The Agency reviewed the GL postings in the financial system and found
that in most cases, revenue and expenses were posted simultaneously.
The Agency has completed all corrective actions for this significant deficiency.
Accounts Receivable Detail Not Provided Timely By Regions
During the FY 2011 Financial Statement Audit, the OIG found that the Agency was not timely in
providing supporting documentation of penalty debts to the Cincinnati Finance Center to ensure prompt
recording of accounts receivable for all penalty debts.
In response to this finding, and to remedy the significant deficiency, the Agency developed new
procedures, issued in April 2011, which require regions and/or headquarters to provide documentation
of penalty debts to CFC within five business days of receipt of the final administrative penalty order.
Specifically, within five business days, the final order is filed with the Regional Hearing Clerk,
Headquarters Hearing Clerk, or the Clerk for the Environmental Appeals Board. Under annual
guidance, the Agency is required to meet this five business day standard 95 percent of the time. Also
the Agency created corrective actions to improve EPA-wide performance in providing timely accounts
receivable, which has resulted in improved performance and is expected to continue in the coming
fiscal year.
Additionally, the Agency has completed numerous activities to improve EPA-wide performance in
providing timely accounts receivable. For example, in November 2011 and May 2012, webinars were
held on "Improving EPA's Financial Integrity by Financial Reporting of Administrative Penalty Accounts
Receivable". The Agency worked internally to provide FY 2012 performance data to regions to identify
inaccuracies and enable needed changes to improve performance.
The Agency will continue to monitor performance and will engage with senior regional and
headquarters management to ensure that this deficiency is corrected. The Agency anticipates that all
remaining corrective actions for this significant deficiency will be completed in FY 2013.
Posting Models in Compass Materially Misstated GL Activities and Balances
During the FY 2012 Financial Statement Audit, the OIG declared that Compass materially misstated GL
activity and balances due to incorrect posting models. EPA has already aggressively reviewed posting
models to ensure that transactions are properly posting to the Agency's financial accounts. Additionally,
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weekly meetings are held with Agency Financial Centers and other offices to address known and
potential accounting model issues. This approach has served the agency well in 2012, identifying and
correcting more than 30 models and related transactions.
The Agency has in place a number of internal control procedures. For instance, the Finance Center
staff compares feeder system interfaced transactions to hard copy documentation and approves them.
Periodic status reviews are performed on all documents in Compass to make sure all transactions
processed properly. None of these reviews revealed any significant problems or issues with internal
controls. When errors are found, they are reviewed, corrective actions identified, approved and entered
into Compass. The Agency will continue to evaluate and by March 2013 develop internal control
procedures to confirm the proper accounts are impacted for all transactions. In addition, EPA provides
oversight and development of accounting models and their impacts through GL analyses. If
discrepancies are found, they are investigated and reviewed for their impact on transactions and the GL
to determine the nature of the matter. Issues are tracked through the resolution and validation
processes. These activities provide reasonable assurance that our GL balances are correct.
The Agency also performs a quarterly comparative analysis based on the financial statement line. This
analysis highlights unusual variances between fiscal years. EPA will continue to conduct these
analytical reviews of account activity on a quarterly basis and more frequently, if deemed necessary.
Compass Reporting Limitations Impair Accounting Operations and Internal Controls
During the FY 2012 Financial Statement Audit, the OIG declared that EPA has been unable to obtain
the reports it needs from Compass for many accounting applications.
The Agency continues to analyze agency financial reports, identifies any concerns and develops new
reports for users as needed. For much of FY 2012, EPA was in the midst of learning the intricacies of
the new system and applying this knowledge to reengineer day-to-day business processes and fix the
errors that resulted in reporting discrepancies. The reengineering and advanced user training will allow
the agency to take advantage of the many features of the modern system to best meet the agency's
business needs. The Agency disclosed and discussed this approach with the OIG in December 2011.
To the maximum extent practicable, EPA adapted its business practices to take immediate advantage
of the new system. As we adopted a centralized approach, we found that we were able to cancel a
policy on July 11, 2012, that required the finance centers to perform monthly reconciliations of ARs.
In other cases, the Agency decided to defer adoption of automated features available in Compass. For
example, we deferred adoption of the full capabilities of Compass to support the Fund Balance with
Treasury. Instead, we utilized a process within Compass very similar to the process used in the
Integrated Financial Management System, the agency's previous financial management system. EPA
adopted this approach based on hands-on daily experience with Compass gained during the first six
months of operations and in consideration of change management principles for the successful
implementation of financial systems.
EPA Should Improve Controls over Expense Accrual Reversals
During the FY 2012 Financial Statement Audit, the OIG declared that the agency did not reverse
approximately $18 million of FY 2011 year-end expense accruals in FY 2012. The Agency is updating
its policy for recognizing year-end accruals to require reconciliation of accruals and accrual reversals.
The Agency anticipates completing corrective actions for this significant deficiency in FY 2013.
Compass System Limitations Impair Internal Controls of Financial Operations
During the FY 2012 Financial Statement Audit, the OIG declared that Compass experienced several
impairments to processing financial transactions. The EPA has already corrected the impairments.
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Proper controls and tolerance levels to prevent grant payments from exceeding the related obligation
accounting lines were updated in December 2011. In May 2012, the issue of preventing the improper
posting of transactions to prior accounting periods, except via Standard Voucher and Journal Voucher
transactions, was corrected. The Agency confirmed the Compass table was fixed to prevent spending
against canceled appropriations.
EPA Should Improve Compliance With Internal Controls for Accounts Receivable
During the FY 2012 Financial Statement Audit, the OIG found numerous deficiencies in EPA's
compliance with accounts receivable internal controls in FY 2012.
The Agency already has a process in place whereby the Department of Justice Environment and
Natural Resources Division transmits judicial documents to EPA's Cincinnati Finance Center. Rather
than require all EPA attorneys involved in civil judicial matters to duplicate DOJ's provision of
documentation to CFC, the Agency's Office of Enforcement and Compliance Assurance will engage
with DOJ management to determine whether and the extent to which improvements are needed to
ensure the timely transmittal to the Agency of judicial documentation of accounts receivable arising
from civil judicial enforcement cases.
Additionally, EPA already utilizes the DOJ Debt Assessed Report, DOJ 30 Day Tracking Reports, and
the Integrated Compliance Information System Tracking Reports to review and follow up on documents
not received by the Agency. The appropriate Finance Center compares these reports to the Compass
Data Warehouse to determine if receivables have been established. While there were some delays
early in the year due to obtaining CDW query information, these reconciliations were completed timely
by the 4th quarter. The CFC will work with staff to ensure these reports are reviewed timely and fully
utilized in obtaining missing documentation.
The Agency anticipates completing corrective actions for this significant deficiency in FY 2013.
EPA Is Not Clearing Fund Balance with Treasury Statement of Differences Timely
During the FY 2012 Financial Statement Audit, the OIG found EPA did not clear Fund Balance with
Treasury differences reported on the U.S. Department of Treasury's Statement of Differences within
two months.
The Agency has already taken steps to remedy these timing differences. Early in the year, EPA was
involved in learning the intricacies of the new Compass system and applying this knowledge to
reengineer day-to-day business processes. There was a significant learning curve. The Agency
experienced a high volume of rejects because of tighter budget controls and project notebook edits that
occur in Compass. New reports have been designed to assist the Agency in performing the
reconciliation. In July 2012, the Agency updated the accounting model and by end of September 2012,
resolved the backlog of all the transactions that required clearing and submitted SF224 report to
Treasury. While there were delays initially, the Agency is now able to clear differences in a timely
manner. The majority of the Statement of Differences (SOD) were the result of timing differences (i.e.
difference in reported month of activity) rather than dollar differences. Since the reported values in the
financial reports agreed exactly with the Treasury balance, the discrepancies in the SOD did not affect
the accuracy of the financial reports. Through diligent effort, this was fully corrected and is no longer an
issue with either the posting logic or reconciliation process.
Property Internal Controls Need Improvement
During the FY 2012 Financial Statement Audit, the OIG declared that Compass does not sufficiently
reject inaccurate personal property information entries.
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The Agency is already working with its contractor to build into Maximo the default which will eliminate
property record errors. Corrective action was taken in August 2012 to reflect correct inventory dates for
the 28 property items that had future acquisition dates. In September 2012, Agency Property Officers
reconciled property records to ensure that the system reflected the correct location for the $2.9 million
in assets, and will continue to monitor manually until the automated fix in implemented. In September
2012, the OARM conducted a system analysis to ensure that no other assets had the same
discrepancy; none were discovered.
The agency anticipates completing remaining corrective actions for this significant deficiency in FY
2013.
Compass and Maximo Cannot be Reconciled
During the FY 2012 Financial Statement Audit, the OIG found that EPA cannot reconcile capital
equipment property management data within its property management subsystem, Maximo.
The Agency can reconcile property in Maximo and will document the procedures for reconciling
capitalized property during FY 2013. Additionally, the Agency can reconcile capital equipment within its
property management subsystem - Maximo - to relevant data within Compass; the Agency's Finance
Centers recently completed this reconciliation.
EPA Needs to Remediate System Vulnerabilities That Place Financial Data at Risk
During the FY 2012 Financial Statement Audit, the OIG found that EPA officials did not monitor the
testing of the Agency's networked information technology assets to identify commonly known
vulnerabilities or take action to remediate those weaknesses. The Agency currently conducts
vulnerability assessments for all our general support systems and major applications as directed by
National Institutes of Standards and Technology (NIST) guidelines, specifically adhering to NIST 800-
37, "Guide for Applying the Risk Management Framework to Federal Information Systems," and NIST
800-53, "Recommended Security Controls for Federal Information Systems and Organizations." All
general support systems and major applications undergo risk assessments (as mandated by NIST Risk
Management Framework certification) every three years or as the affected application or system
implements major modifications. Per the NIST guidelines and EPA policy, a Plan of Action and
Milestones is developed to address and remediate any weakness or threats identified by the scans.
OCFO Financial Systems Security Documentation Needs Improvement
During the FY 2012 Financial Statement Audit, the OIG found the EPA lacks reliable information on the
implementation of required security controls for key financial applications at the Research Triangle Park
Finance Center.
The Agency has already established and is using a process covering security controls for key financial
applications. The Application Security Officer prepares the System Security Plans, and office
Information Security Officers, review the documents before they are forwarded to EPA's Office of the
Chief Financial Officer Information Security Officer, Information Management Officer, and Senior
Information Official for review and approval.
The agency anticipates completing remaining corrective actions for this significant deficiency in FY
2013.
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Summary of Financial Statement Audit*
Audit Opinion
Restatement
Unqualified
No
Material Weaknesses
Compass Systems Limitations
Total Material Weaknesses
Beginning
Balance
0
0
New
1
1
Resolved
0
0
Consolidated
0
0
Ending
Balance
1
1
Summary of Management Assurance*
Effectiveness of Internal Control Over Financial Reporting (FMFIA § 2) (A-123 Appendix A)
Statement of Assurance
Unqualified
Material Weaknesses
Compass System Limitations
Total Material Weaknesses
Beginning
Balance
0
0
New
1
1
Resolved
1
1
Consolidated
0
0
Reassessed
0
0
Ending
Balance
0
0
Effectiveness of Internal Control Over Operations (FMFIA § 2)
Statement of Assurance
Unqualified
Material Weaknesses
Total Material Weaknesses
Beginning
Balance
0
New
0
Resolved
0
Consolidated
0
Reassessed
0
Ending
Balance
0
Conformance With Financial Management System Requirements (FMFIA § 4)
Statement of Assurance
Systems Conform to Financial Management System Requirements
Non-Conformances
Total Non-Conformances
Beginning
Balance
0
New
0
Resolved
0
Consolidated
0
Reassessed
0
Ending
Balance
0
Compliance With FFMIA
Overall Substantial Compliance
1 . System Requirement
2. Accounting Standards
3. USSGL at Transaction Level
Agency
YES
Auditor
NO*
YES
YES
YES
NOTE: See "EPA Holds Itself Accountable" in Section I of this report for additional information on FMFIA 2, FMFIA 4
and FFMIA presented in the summary graphs above."
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*Explanation of Summary Differences - The OIG identified the material weakness, "Compass
System Limitations are a Material Weakness to EPA's Accounting Operations and Internal Controls," in
their FY 2012 Financial Statement Audit. In its report, the OIG stated that when the agency converted
its accounting system, it had not yet developed all the reports and functions required to generate all the
information it needs. The EPA disagrees with this conclusion. Many of the issues cited by the OIG to
support the finding of a material weakness were identified in the Spring of 2012. At that time, the
agency was still working out system implementation issues, including reporting and business process
changes, necessary to effectively utilize the new Compass Financials system. The agency undertook
an aggressive effort to identify, prioritize and resolve issues and modify business processes. By the end
of FY 2012, the vast majority of system implementation issues, including those that could materially
impact the financial statements, were resolved. The agency will continue to analyze the agency's
financial reports and business processes, identify any concerns and develop or improve reports or
modify business processes as needed.
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IMPROPER PAYMENTS
In accordance with the Improper Payments Elimination and Recovery Act of 2010 (IPERA), which
amends the Improper Payments Information Act (IPIA) of 2002, EPA reviews its programs and activities
for improper payments. The Agency is committed to improving program performance by taking
corrective action for any programs that are determined to be susceptible to significant improper
payments. IPERA defines an improper payment as "any payment that should not have been made or
that was made in an incorrect amount under statutory, contractual, administrative, or other legally
applicable requirements. Incorrect amounts are overpayments or underpayments that are made to
eligible recipients (including inappropriate denials of payment or service, any payment that does not
account for credit for applicable discounts, payments that are for the incorrect amount, and duplicate
payments). An improper payment also includes any payment that was made to an ineligible recipient for
an ineligible good or service, or payments for goods or services not received (except for such payments
authorized by law). In addition, when an agency's review is unable to discern whether a payment was
proper as a result of insufficient or lack of documentation, this payment must also be considered an
improper payment." Improper payment reviews are conducted in accordance with OMB Circular A-123,
Management's Responsibility for Internal Control, Appendix C, Requirements for Effective
Measurement and Remediation of Improper Payments.
Risk Assessments
OMB Circular A-123, Appendix C, requires executive agencies to conduct risk assessments of their
programs or activities to determine if they are susceptible to significant improper payments. Given the
unique nature of EPA's programs, OMB has approved the Agency's method of reporting on improper
payments by payment stream. Every year, the Agency conducts quantitative risk assessments of its
principal payment streams, which include grants, contracts, commodities, and the Clean and Drinking
Water State Revolving Funds (SRFs). For improper payment reporting purposes, the SRF program is a
combination of the Clean Water SRF and the Drinking Water SRF. It is also a former Section 57
program for which OMB requires detailed reporting. Results from the Agency's risk assessments are
published in Section IV, "Improper Payment Reporting." The quantitative risk assessments determine
whether the Agency's payment streams are "susceptible to significant improper payments," defined by
IPERA and OMB guidance as exceeding both $10 million of improper payments and 2.5 percent of
program outlays or $100 million of improper payments, regardless of the rate.
Statistical Sampling
A) State Revolving Funds
The SRFs are state-administered programs that provide federal funds to the states and Puerto Rico to
capitalize revolving loan fund programs. The states receive invoices from fund recipients, review them
for eligibility and accuracy, and electronically submit cash draw requests for batches of invoices to EPA.
The Agency makes payments to the revolving loan funds and conducts annual onsite reviews in each
state. The Agency also conducts transaction testing, reviews invoices for eligibility, confirms that the
total amount of invoices matches the amount of cash draw, and examines accounting records to
confirm that the states made matching deposits.
The American Recovery and Reinvestment Act of 2009 (ARRA) provided the SRFs with an additional
$6 billion of spending authority. As a result, during the FY 2010 and FY 2011 improper payments
reporting cycles, the SRF program broadened its sampling process to include state expenditures of
ARRA funds. This involved testing eight ARRA cash draws in addition to the four base appropriation
cash draws per state, per year. A cash draw is a disbursement from Treasury for the payment of state
grants. Each disbursement can refer to a single invoice or a batch of invoices, which are reviewed by
the Agency for improper payments. During the FY 2012 improper payments review, SRF sampling was
reduced to reflect the testing of two ARRA cash draws in states that had yet to disburse all ARRA
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funds, while continuing to test four base cash draws per state. Of the total $2.7 billion in SRF outlays
during FY 2012, approximately $450 million consisted of ARRA funds. Furthermore, of the total $13.38
million of improper payments identified by transaction testing, approximately $400,000 originated from
ARRA funding while $13.0 million originated from base appropriations. As of September 30, 2012,
approximately 97 percent of SRF ARRA dollars have been disbursed.
It should be noted that as a result of the Office of the Inspector General's FY 2011 report on IPERA
compliance, the Agency has revised its methodology for computing the SRF improper payment rate.
The error rate is now based on the dollar value of amounts tested rather than the full universe of SRF
outlays.
Finally, transaction testing conducted by the Agency during FY 2012 pertains to expenditures made by
the states during state fiscal year 2011. In most cases, the state fiscal year begins on July 1 and ends
on June 30. Given the time lapse between the states' expenditures of SRF funds and the initiation of
EPA's onsite reviews, the Agency has obtained OMB's approval to use the preceding state fiscal year
rather than the current federal fiscal year as its alternative 12-month reporting period for SRF improper
payments.
B) Grants
Each November, the Agency's Office of Grants and Debarment randomly selects a number of its
recipients with active grant awards for advanced monitoring reviews. The Agency stratifies its active
grant recipients into five categories: states, local governments, tribes, universities, and nonprofits. It
then selects a proportionate number from each group for review during the following calendar year
(CY). Using a standard protocol, the Agency performs an onsite or desk review and examines each
selected recipient's administrative and financial management of their grant projects. The review
includes an examination of the recipient's administrative policies and procedures and testing of a
number of transactions of grant funds drawn for the period.
The final results of advanced monitoring reviews, enforcement actions, and decisions for Single Audit
Act (SAA) and Office of Inspector General audits completed and closed in CY 2011 are presented in
Section IV B, "Improper Payments Reporting - Grants." In FY 2012, the Agency is publishing the
results of grantee reviews conducted during CY 2011. Due to the amount of time involved in the
appeals process, the Agency previously obtained OMB's approval to use an alternative 12-month
period for reporting improper payments in grants. As a result, EPA uses the prior calendar year as its
12-month reporting period for grants.
The CY 2012 grants advanced monitoring reviews are currently underway, as are the Agency's
continuous enforcement and audit resolution actions. Results of the reviews and audits that are final
and closed in CY 2012 will be published in the Agency's FY 2013 improper payments report.
C) Commercial Payments (contracts and commodities)
In February 2006, EPA centralized all commercial payments at the Research Triangle Park Finance
Center. The consolidation resulted in much greater discipline with regard to management and internal
controls through the Center's Standard Operating Procedures and sophisticated payment systems.
The Agency does not use a statistical sampling methodology in its audit of commercial improper
payments, as each payment is subject to financial review, invoice approval, and payment certification.
Various post-audits are performed as well. Below is a brief summary of process controls in place on the
Agency's commercial invoice payment process.
The payment processing cycle requires that all invoices be subjected to rigorous review and approval
by separate entities. Steps taken to ensure payment accuracy and validity, which serve to prevent
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improper payments from occurring, include: 1) the Finance Center's review for adequate funding and
proper invoice acceptance; 2) comprehensive system edits to guard against duplicate payments,
exceeding ceiling cost and fees, billing in wrong period of performance dates, and payment to wrong
vendor; 3) electronic submission to Agency Project Officers and Approving Officials, with a copy of the
invoice, for validation of proper receipt of goods and services, period of performance dates, labor rates,
appropriateness of payment, citing disallowances or disapprovals of costs if appropriate; and 4) review
by the Finance Center of suspensions and disallowances, if taken, prior to the final payment
certification for Treasury processing. Additional preventive reviews are performed by the Finance
Center on all credit and re-submittal invoices. Additionally, EPA Contracting Officers perform annual
review of invoices on each contract they administer, and the Defense Contract Audit Agency (DCAA)
performs audits on cost-reimbursable contracts at the request of the Agency.
Furthermore, monthly Finance Center Improper payment reports are provided to Agency management.
This information tracks the number and dollar amount of improper payments, the source and reason for
the improper payment, the number of preventive reviews conducted, and the dollar amount of
recoveries made for current and prior years.
According to IPERA, an improper payment includes "any payment that does not account for credit for
applicable discounts." In applying this definition, EPA considers that an improper payment would arise if
the wrong percentage discount were taken or if a discount were taken beyond the specified discount
period. Discounts not taken are detected during the monthly review process for commercial payments
and are reported as improper payments if it is both advantageous and within the Agency's control to
take the discount. There are certain situations beyond the Agency's control that may prevent EPA from
taking a discount. Since these situations are beyond the Agency's control, EPA does not consider them
to be improper payments. For example, the late receipt of an invoice from the vendor could prevent the
Agency from claiming the discount within the specified discount period. Similarly, project officers are
required to conduct their due diligence by thoroughly reviewing invoices and are sometimes unable to
approve an invoice before the discount period expires. EPA does not consider these situations to be
improper payments. However, the Agency makes every effort to claim offered discounts. In FY 2012,
the Agency claimed 56% of all offered discounts, and the remaining $122,000 in missed discounts were
determined not to be improper payments.
Corrective Actions
Since the enactment of the Improper Payments Information Act of 2002, OMB has always considered
the SRF program to be risk susceptible due to the large dollar volume of payments associated with the
program. However, FY 2012 was the first year in which the SRFs actually exceeded the threshold for
significant improper payments set forth by IPERA and OMB guidance ($10 million and 2.5 percent of
program outlays or $100 million of improper payments, regardless of the rate). This was partially due to
the adoption of a more stringent approach to calculating the error rate, as well as the identification of
high dollar errors in each of a few states largely resulting from incorrect state/federal proportionality
ratios and confusion over overhead eligibility.
All improper payments identified in the SRF program are Administrative and Documentation errors,
which are defined as being "caused by the absence of supporting documentation necessary to verify
the accuracy of the claim; or inputting, classifying, or processing applications or payments incorrectly by
a relevant Federal agency, State agency, or third party who is not the beneficiary." Since the errors
were discovered, corrective actions have been put into place to prevent a recurrence including
clarifying state match and proportionality ratio guidance, updating model spreadsheets, modifying the
"group project" approach to draw downs, strengthening state procedures and standard operating
procedures for internal controls, and providing training on eligible overhead costs. The SRF program is
the only EPA program that is susceptible to significant improper payments, and in FY 2013, the Agency
will work with OMB to refine its methodology for sampling and estimating improper payments in the
SRFs in order to ensure that these types of errors are identified early in the performance period.
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Improper Payment Reporting
A) State Revolving Funds
Prior to IPERA, EPA established an overall improper payment target of 0.30 percent for the SRFs. This
target remains an ambitious one, and the Agency had been consistent in meeting it over the years.
However, this target was based in part on an old methodology that the OIG recommended for revision.
Previously, the SRF error rate was calculated by dividing the amount of improper payments identified in
the sample by the amount of outlays in the entire payment stream. This led to underreporting of SRF
improper payments. Based on the OIG's recommendation, the Agency revised its methodology for
calculating the SRF error rate and now divides the amount of improper payments identified in the
transaction testing sample by the dollar value of the sample.
Transaction testing conducted in FY 2012 identified $13.38 million in improper payments out of $459
million of SRF disbursements reviewed, which equates to an error rate of 2.91 percent. As previously
discussed, an abnormality was detected during FY 2012 transaction testing in the Puerto Rico CWSRF
program, in which approximately $3.5 million of ineligible overhead and interest payments was
identified in the sample of cash draws reviewed for improper payments. The $3.5 million is included as
part of the $13.38 million of improper payments identified by transaction testing in the SRF program.
The Agency initiated a secondary review to determine the full extent of the issue. An additional $29.5
million of ineligible payments was identified in the Clean Water program, as well as an additional $2.8
million of ineligible overhead payments in the Drinking Water program. These errors are reported in
Table 6, "Overpayments Recaptured Outside of Payment Recapture Audits" but do not factor into the
FY 2012 improper payment rate calculation since they were identified in secondary reviews conducted
outside the scope of the current transaction testing methodology.
SRF improper payment data for the past five fiscal years are summarized in Figure 1, "Clean Water and
Drinking Water SRFs." It should be noted that Tables 1-6 in this report correspond with Tables 1-6 in
OMB Circular A-136, and Figures 1 through 4 are supplementary tables provided by EPA to
demonstrate results of the Agency's internal payment recapture audit program.
Figure 1 : Clean Water and Drinking Water SRFs
(Figures 1-4 provide information on EPA's payment streams, supplementing Tables 1-6 from OMB Circular A-1 36 )
Fiscal Year
2008
2009
2010
2011
2012
Outlays
$2.1 billion
$1.9 billion
$4.8 billion
$3.64 billion
$2.67 billion
Outlays
Tested
n/a
n/a
n/a
n/a
$459.7
million
Improper
Payments
$8.3 million
$1.1 million
$1.8 million
$14.18 million
$13. 38 million
Estimated
Improper
Payments (1)
n/a
n/a
n/a
n/a
$77.96 million'2'
Error Rate
0.39 percent
0.06 percent
0.04 percent
0.39 percent
2.91 percent (3)
(1) In previous fiscal years, the SRF error rate was not extrapolated to the full universe of SRF outlays. In FY 2012, EPA began
extrapolating the error rate in order to determine an overall estimate of improper payments in the SRFs.
(2) Calculated by multiplying "Outlays" of $2,677,600,000 by "Error Rate."
(3) Reflects the new methodology for calculating the SRF improper payment rate, based on an OIG recommendation
from the FY 2011 IPERA compliance audit. Calculated by dividing "Improper Payments" by "Outlays Tested."
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Table 1: Improper Payment Reduction Outlook
(Dollars in Millions; Tables 1-6 refer to the corresponding tables in OMB Circular A-136)
Program
Clean
Water and
Drinking
Water
SRFs(1)
FY11 FY11 FY11
Outlays IP% IP$
$3,645
030
target
039
actual
$14.2
FY12 FY12
FY12 FY12 FY12 Over- Under-
Outlays IP% IP$ pmt pmt
$2,678
030
target
2.91
actual
$77.96
$77.96
$0
FY13 FY13 FY13
Outlays IP% IP$
$2,585
[est.]
0.30
target
$7.76
[est.]
FY14 FY14 FY14
Outlays IP% IP$
$2,525
[est.]
0.30
target
$7.56
[est.]
FY15 FY15 FY15
Outlays IP% IP$
$2,439
[est.]
0.30
target
$7.32
[est.]
(1) Per OMB Circular A-136, this chart shows information on the Agency's risk susceptible programs.
B) Grants
The Agency continues to monitor grantees to ensure payment accuracy and respond to SAA and OIG
audits to recover improper payments when they are found. In CY 2011, the Agency closed 229 grant
recipient and SAA and OIG audit reviews, including 36 ARRA reviews, to identify improper payments.
Of these 229 reviews and audits, 23 had actual improper payments or unallowable costs.
Results from the past five annual improper payment reviews are provided in Figure 2, which also
updates information on recovered costs for these years. For CY 2011, results of the Agency's grant
recipient reviews, enforcement actions, and audits that were final and closed that year are presented.
Nonprofit Grantees
Review/Audit
Results
Totally grant outlays
less SRFs
Total dollars tested
Actual erroneous
payments
(unallowable costs)
Costs that have
been recovered
Percent of
erroneous payments
Estimated improper
payments
Figure 2: Grantees Review/Audit Results
CY 2007
Review
n/a
$22,544,462
$13,433
$13,433
0.059%
n/a
CY 2008
Review
n/a
$120,209,284
$111,329
$111,329
0.093%
n/a
CY 2009
Review
n/a
$10,258,129
$12,697
$4,647
0.124%
n/a
CY2010
Review
n/a
$21,242,755
$7,110
$7,110
0.033%
n/a
CY 201 1
Review
$2,283,853,375
$118,531,428
$610,131
$465,462
0.515%
$11,761,845
(1) For CY2006-CY2010, the amounts reported were the total dollars drawn by the sampled recipients.
(2) In previous fiscal years, grants improper payments were not extrapolated across the full universe of grants outlays. For the
CY 2011 review, EPA began extrapolating to determine an estimate of improper payments from all non-SRF grants.
In addition to the sampling process described above, the Agency maintains internal controls to help
prevent the occurrence of improper payments in grants. Since 2008, EPA has implemented annual
"baseline" monitoring of all active assistance agreements that review fund drawdowns for
appropriateness. As part of the baseline monitoring, each assistance agreement is reviewed
programmatically by a Project Officer and administratively by a Grants Specialist, both of whom review
financial drawdowns for consistency with the project's duration and progress. Any irregularities found
are examined with the recipient and further scrutinized when warranted. Project Officers also review
quarterly reports submitted by recipients, to ensure projects are on schedule and progress matches the
amount of funding used. Additionally, the agency's Las Vegas Finance Center (LVFC) routinely
monitors grant payments made under the Agency's Automated Standard Application Payment system
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for irregularities, and in FY 2013, LVFC will institute daily payment cross checks and weekly vendor
cross checks against the Department of Treasury's "Do Not Pay" solution.
C) Commercial Payments
Due to the historical low percentage of improper payments in the contracts and commodities payment
streams, the Agency relies on its internal review process to detect and recover improper payments.
EPA reviews all payments processed rather than using a sampling methodology, which reduces the
potential for improper payments. Additional post-audit findings (OIG, A-123, DCAA) that identify
improper payments are captured in Table 6, "Overpayments Recaptured Outside of Payment
Recapture Audits." The agency continues to use its monthly improper payment reports for contracts
and commodities as its primary tool for monitoring improper payments. Contracts and commodities data
for the past five fiscal years are summarized below.
Contracts:
Figure 3: Results of EPA's Improper Contract Payments Report
Fiscal Year
2008
2009
2010
2011
2012 (1)
Number of Erroneous
Payments
12 (of 32,043)
31 (of 35,929)
35 (of 39,060)
21 (of 38,965)
29 (of 33,473)
Erroneous Payments
(Dollars in Thousands)
$324.0
$716.4
$882.6
$162.9
$953.7
Error Rate for
Dollars
0.03%
0.05%
0.08%
0.01%
0.06%
(1) DCAA audit results are presented in Table 6.
Commodities:
Figure 4: Results of EPA's Improper Commodity Payments Report
Fiscal Year
2008
2009
2010
2011
2012
Number of Erroneous
Payments
48 (of 43,629)
32 (of 41, 585)
34 (of 39,571)
44 (of 40, 083)
50 (of 34,908)
Erroneous Payments
(Dollars in Thousands)
$215.4
$193.7
$166.3
$2,178.5
$363.6
Error Rate for
Dollars
0.08%
0.07%
0.05%
0.67%
0.13%
D) ARRA Policy Verification Review
In addition to the agency's existing improper payment reviews, EPA initiated an agency-wide effort in
FY 2011 to review and verify implementation of the Recovery Act Stewardship Plan (RASP), which is
the agency's comprehensive risk assessment and risk mitigation strategy for its ARRA-funded
activities. Title XV of the Recovery Act established a stringent framework for government-wide
accountability and transparency. In response to these provisions and to ensure the sound financial
management and oversight of ARRA-funded activities, the Agency developed the RASP and reviewed
ARRA expenditures for improper payments. The ARRA Policy Verification Review included a statistical
random sample of 110 awards across seven functional areas, including grants, contracts, and
interagency agreements. The agency developed a review protocol based on the risks identified in the
RASP and the policies and procedures designed to mitigate these risks. Detailed, onsite reviews were
conducted for each sample award in all EPA regions, finance centers and headquarters program
offices.
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In FY 2011, the OCFO, in collaboration with the agency's Regional Comptrollers, initiated an agency-
wide effort to review and verify implementation of the RASP. The population of ARRA awards subject to
review consisted of 850 awards, totaling $7.18 billion. Based on guidance established in OMB
Memorandum M-03-13 (issued May 21, 2003), the Agency contracted with a statistician to draw a
sample of 110 awards totaling $3.88 billion, which included 79 grants ($3.72 billion), 25 contract actions
($94 million) and six interagency agreements ($68.5 million).
During the onsite visits, the agency reviewed documentation associated with each sample award for
evidence demonstrating that each control activity established in the RASP was completed
appropriately. Results provided an impartial review of internal controls, as well as an assessment of
improper payments in ARRA awards. Although the final report is pending, approximately $11.7 million
of improper payments was identified. The agency has already instituted corrective actions and
recovered all funds. Results from the ARRA Policy Verification review are published in Table 6,
"Overpayments Recaptured Outside of Payment Recapture Audits."
Recapture of Improper Payments
EPA maintains an internal payment recapture audit program run by Agency employees who
continuously monitor the Agency's payment streams to prevent, identify, and recover improper
payments. The Agency's payment recapture audit program reviews grants, contracts, commodities, and
the SRFs for improper payments, and no programs or activities are excluded from these reviews.2
The agency's internal payment recapture audit program has recovered approximately $32.3 million
across all payment streams over time. This amount consists of approximately $2.7 million from
contracts and $4.3 million from commodities (beginning in FY 2004 for each), $622,000 from grants
(beginning with the CY 2006 review), and $24.7 million from the SRFs (beginning with the state fiscal
year 2009 review).
2
A-123 reviews of payroll, travel, and purchase card efforts are an integral internal control mechanism for reducing improper payments, but
these areas are not required for reporting under IPERA. Because they involve payments to federal employees, they are exempt from the
definition of improper payments, per OMB M-11-16, question 2.
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Table 2: Payment Recapture Audit Reporting
(Tables 1-6 refer to the corresponding tables in OMB Circular A-136)
Program
or Activity
SRFsd)
Grants (2>
Contracts (3>
Commodities (4>
Type of
Payment
grants
grants
contracts
small
purchases
Amount
Subject to
Review for
CY Reporting
2,677,600,000
2,283,853,375
1 ,496,607,743
289,557,789
Actual Amount
Reviewed and
Reported (CY)
459,666,551
118,431,528
1 ,496,607,743
289,557,789
Amount
Identified
for
Recovery
(CY)
13,382,373
610,131
929,457
296,603
Amount
Recovered
(CY)
9,857,237
465,462
898,259
265,326
%of
Amount
Recovered
of Amount
Identified
(CY)
73.7%
76.3%
96.6%
89.5%
Amount
Outstanding
(CY)
3,525,136
144,669
31,199
31,278
%of
Amount
Out-
standing
of Amount
Identified
(CY)
26.3%
23.7%
3.4%
10.5%
Amount
Determined
Not to be
Collectable
(CY)
$0
83,71 4 (5>
$0
$0
% of Amount
Determined
Not to be
Collectable of
Amount
Identified
(CY)
0%
13.7%
0%
0%
Amounts
Identified for
Recovery
(PYs)
14,892,375
183,736
1 ,792,780
3,999,032
Amounts
Recovered
(PYs)
14,892,375
156,317
1 ,792,780
3,993,998
Cumulative
Amounts
Identified for
Recovery (CY
+ PYs)
28,274,748
793,867
2,722,237
4,259,635
Cumulative
Amounts
Recovered
(CY + PYs)
24,749,612
621,779
2,691 ,039
4,259,324
Cumulative
Amounts
Outstanding
(CY+PYs)
3,525,136
1 72,088 (5>
31,199
34,745
Cumulative
Amounts
Determined
Not to be
Collectable
(CY+PYs)
$0
83,71 4 (6>
$0
1,217
(1) In Tables 2 through 6, "Current Year" results are from state FY 2011 transaction testing, and "Prior Year" results are from transaction testing for state FY 2009 and 2010.
(2) For grants, in Tables 2 through 6, "Current Year" results are from reviews performed in CY 2011, and "Prior Year" results are from reviews performed in CYs 2006 through
2010.
(3) For contracts and commodities, "Current Year" refers to FY 2012, and "Prior Year" refers to FY2004-2011.
(4) Prior year amounts have changed slightly from FY 2011 reporting due to recalculation.
(5) In certain instances, recipients continue to appeal the Agency's unallowed cost determinations for prior years.
(6) This debt has been referred to the Cincinnati Finance Center Claims Processer / Department of Treasury for collection per OCFO procedure 2540-9-P2 on delinquent debts.
Table 3: Payment Recapture Audit Targets
Program or
Activity
SRFs
Grants
Contracts
Commodities
Type of
Payment
grants
grants
contracts
small purchases
CY
Amount
Identified
$13,382,373
$610,131
$929,457
$296,603
CY
Amount
Recovered
$9,857,237
$465,462
$898,259
$265,326
CY
Recovery Rate (Amount
Recovered / Amount
Identified)
73.7%
76.3%
96.6%
89.5%
CY+1
Recovery
Rate
Target
89%
85%
91%
91%
CY + 2
Recovery
Rate Target
90%
87%
92%
92%
CY + 3
Recovery Rate Target
90%
87%
92%
92%
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Table 4: Aging of Outstanding Overpayments
Program or
Activity
SRFs (n)
Grants w
Contracts
Commodities
Type of
Payment
grants
grants
contracts
small purchases
CY Amount Outstanding
(0 to 6 months)
$3,525,136
$0
$31,199
$31,277
CY Amount Outstanding
(6 months to 1 year)
$0
$0
$0
$0
CY Amount Outstanding
(over 1 year)
$0
$144,669IJ)
$0
$0
(1) For the SRFs, "Current Year" refers to state FY2011. This table shows amounts outstanding for the SRFs, beginning Oct. 1, 2010.
(2) For grants, "Current Year" results are from reviews and audits closed in CY 2011.
(3) $83,714 of this amount has been referred to the Department of Treasury for collection, per Office of the Chief Financial Officer (OCFO) procedure
2540-9-P2 on delinquent debts.
Table 5: Disposition of Recaptured Funds '
Program or
Activity
SRFs (Z>
Grants
Contracts
Commodities
Type of
Payment
grants
grants
contracts
small purchases
Agency Expenses to
Administer the Program
$54,900
$32,200
$38,600 IJ)
$38,600
Payment
Recapture
Auditor Fees
$0
$0
$0
$0
Financial
Management
Improvement
Activities
$0
$0
$0
$0
Original
Purpose
$0
$0
$0
$0
Office of
Inspector
General
$0
$0
$0
$0
Returned to
Treasury
$0
$0
$0
$0
(1) No recoveries originated from expired funds appropriated after the enactment of IPERA. Therefore, all recoveries were returned to their original appropriation.
(2) Since the SRFs are revolving loan funds, all SRF recoveries automatically return to the program (per OMB Circular A-123, Appendix C, Part I).
(3) The same cost estimate applies to both contracts and commodities.
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Table 6: Overpayments Recaptured Outside of Payment Recapture Audits
Source of
Recovery
SRF Single Audits
SRF State Reporting
DCAA Audits
Grant OIG and Single
Audits (1)
Secondary Review in
Puerto Rico (Clean
Water SRF)®
Secondary Review in
Puerto Rico (Drinking
Water SRF)
ARRA Policy
Verification Review
Amount
Identified
(CY)
$0
$5,413,070
$0
$100,980
$29,985,095
$2,827,209
$11,684,171
Amount
Recovered
(CY)
$0
$5,413,070
$0
$100,980
$0
$0
$11,684,171
Amount
Identified
(PY)
$10,504
$379,758
$97,198
n/a
n/a
n/a
n/a
Amount
Recovered
(PY)
$10,504
$379,758
$97,198
n/a
n/a
n/a
n/a
Cumulative
Amount
Identified
(CY+PYs)
$10,504
$5,792,828
$97,198
$100,980
$29,985,095
$2,827,209
$11,684,171
Cumulative
Amount
Recovered
(CY+PYs)
$10,504
$5,792,828
$97,198
$100,980
$0
$0
$11,684,171
(1) These amounts are included in the Table 2 values for Grants.
(2) Puerto Rico secondary reviews were conducted as a follow-up to the $3.5 million in improper payments identified through SRF transaction testing.
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Accountability
As previously outlined, the Agency continues to strengthen internal controls in key payment processes.
Information on erroneous payments from reviews and audits of the two SRFs, the Agency's largest
grant programs, is reported semi-annually to management in two headquarters offices at EPA. In all
cases, action is taken with the appropriate officials to ensure that improper payments are recovered
and to help prevent future improper payments.
Agency Information Systems and Other Infrastructure
The Agency's internal controls, human capital, information systems, and other infrastructure are
sufficient to monitor the reduction of improper payments to targeted levels.
In FY 2013, EPA plans to implement the Do Not Pay solution, which is a government-wide tool
designed to ensure that awardees meet federal funding eligibility criteria. The Agency's vendor file and
payment file will be regularly checked against the Do Not Pay databases, and any matches will be
investigated to determine whether future payments should be stopped.
In addition, the Agency is using GSA's System for Award Management (SAM) to verify the eligibility of
recipients before an award is made. SAM consolidates nine award management systems into one
centralized acquisition and award support system. This streamlines pre-award processes, eliminating
the need to enter the same data multiple times, and consolidates hosting to make the process of doing
business with the government more efficient.
EPA's adoption and use of both SAM and the Do Not Pay solution will achieve efficiencies in pre-award
eligibility verification and will help prevent improper payments from being made to ineligible recipients.
Statutory or Regulatory Barriers
None.
Conclusions
The Agency commits to the following activities in FY 2013:
Report results from the expanded CY 2012 review of state and local government, university, tribe, and
nonprofit grantees.
Expand statistical sampling of the SRF programs to be consistent with levels required of "risk
susceptible" programs in OMB Circular A-136.
Institute daily payment cross checks and weekly vendor cross checks with the Department of
Treasury's "Do Not Pay" solution to help prevent improper payments.
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Appendix A
Public Access
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The EPA invites the public to access its website at www.epa.gov to obtain the latest environmental
news, browse Agency topics, learn about environmental conditions in their communities, obtain
information on interest groups, research laws and regulations, search specific program areas, or
access the EPA's historical database.
American Recovery and Reinvestment Act of 2009: www.epa.gov/recovery
EPA newsroom: www.epa.gov/newsroom
News releases: www.epa.gov/newsroom/newsreleases.htm
Regional newsrooms: www.epa.gov/newsroom/tfregions
Laws, regulations, guidance and dockets: www.epa.gov/lawsregs
Major environmental laws: www.epa.gov/lawsregs/laws/index.html
EPA's Federal Register website: www.epa.gov/fedrgstr
Where you live: www.epa.gov/epahome/whereyoulive.htm
Search your community: www.epa.gov/epahome/commsearch.htm
EPA regional offices: http://www.epa.gov/epahome/regions.htm
Information sources: www.epa.gov/epahome/resource.htm
Hotlines and clearinghouses: www.epa.gov/epahome/hotline.htm
Publications: www.epa.gov/epahome/publications.htm
Education resources: www.epa.gov/epahome/students.htm
Office of Environmental Education: www.epa.gov/enviroed
About EPA: www.epa.gov/epahome/aboutepa.htm
EPA organizational structure: www.epa.gov/epahome/organization.htm
EPA programs with a geographic focus: www.epa.gov/epahome/places.htm
Partnerships: www.epa.gov/partners
Central Data Exchange: www.epa.gov/cdx
Business Guide to Climate Change Partnerships:
www.epa.gov/partners/Biz guide to epa climate partnerships.pdf
EPA for business and nonprofits: www.epa.gov/epahome/business.htm
Small Business Gateway: www.epa.gov/smallbusiness
Grants, fellowships, and environmental financing: www.epa.gov/epahome/grants.htm
Budget and performance: www.epa.gov/performance/
Careers: www.epa.gov/careers
EZ Hire: www.epa.gov/ezhire
EPA en Espanol: www.epa.gov/espanol
EPA *$%.: 1^{HIJi£: www.epa.gov/chinese
EPA ¥%.• fg)tffi£: www.epa.gov/chinese/simple/
EPA tiing Viet: www.epa.gov/vietnamese
EPA t>^-°1: www.epa.gov/korean
216
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Appendix B
A cronyms and A bbre viations
217
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APR Agency Financial Report
APR Annual Performance Report
ARRA American Recovery and Reinvestment Act
ASSERT Automated System Security Evaluation and Remediation Tracking
BPD Bureau of Public Debt
CBI Confidential Business Information
CERCLA Comprehensive Environmental Response Compensation and Liability Act
CFC Cincinnati Finance Center
CFO Chief Financial Officer
CO Contracting Officer
CPC Contractor Property Coordinator
CPIC Capital Planning and Investment Control
CWA Clean Water Act
DCAA Defense Contract Audit Agency
DHS U.S. Department of Homeland Security
DOJ U.S. Department of Justice
DOT U.S. Department of Transportation
DWSRF Drinking Water State Revolving Fund
EAS U.S. Environmental Protection Agency Acquisition System
ECHO Enforcement and Compliance History Online
EPA U.S. Environmental Protection Agency
EPM Environmental Programs and Management
FAS Fixed Assets Subsystem
FASAB Federal Accounting Standards Advisory Board
FBWT Fund Balance with Treasury
FECA Federal Employees Compensation Act
FERS Federal Employees Retirement System
FFDCA Federal Food, Drug and Cosmetic Act
FFMIA Federal Financial Management Improvement Act of 1996
FIFRA Federal Insecticide, Fungicide and Rodenticide Act
FISMA Federal Information Security Management Act
FMFIA Federal Managers' Financial Integrity Act of 1982
FQPA Food Quality Protection Act
FSSRC Federal Standing Science Review Committee
FY Fiscal Year
GAAP Generally Accepted Accounting Principles
GAO Government Accountability Office
GIS Geographical Information System
GSA U.S. General Services Administration
HPV High Production Volume
ICIS Integrated Compliance Information System
ICR Information Collection Request
IFMS Integrated Financial Management System
IP Improper Payment
IPERA Improper Payments Elimination and Recovery Act
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I PI A Improper Payments Information Act
IRIS Integrated Risk Information System
IUR Inventory Update Reporting
LUST Leaking Underground Storage Tank
MAS National Academy of Sciences
NPDES National Pollutant Discharge Elimination System
NPL National Priorities List
OCFO Office of the Chief Financial Officer
ODD Operating Division Director
OECA Office of Enforcement and Compliance Assurance
OEI Office of Environmental Information
OFM Office of Financial Management
OIG Office of the Inspector General
OMB Office of Management and Budget
OPM Office of Personnel Management
ORD Office of Research and Development
PAH Polyaromatic Hydrocarbon
PAR Performance and Accountability Report
PCBs Polychlorinated Biphenyls
PCOWS Partnership Council of the Office of Water and States
PCS Permit Compliance System
PM Performance Measure
PMN Pre-Manufacture Notice
PP&E Plant, Property and Equipment
PRP Potential Responsible Parties
QIC Quality Assurance/Quality Control
R&D Research and Development
RA Remedial Action
RAM Regional Acquisition Manager
RASP Recovery Act Stewardship Plan
RCRA Resource Conservation and Recovery Act
RMDS Resource Management Directives System
RP Responsible Party
RTP Research Triangle Park
SARA Superfund Amendments and Reauthorization Act of 1986
SDWA Safe Drinking Water Act
SDWIS Safe Drinking Water Information System
SFFAS Statement of Federal Financial Accounting Standards
SNUR Significant New Use Rule
SRF State Revolving Fund
SSC Superfund State Contracts
STAG State and Tribal Assistance Grants
TMDL Total Maximum Daily Load
TSCA Toxic Substances Control Act
TVA Tennessee Valley Authority
TWG Targeted Watershed Grants
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LIST Underground Storage Tanks
UV Ultraviolet
WCF Working Capital Fund
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WE WELCOME YOUR COMMENTS!
Thank you for your interest in the U.S. Environmental Protection Agency's Fiscal Year 2012 Agency
Financial Report. We welcome your comments on how we can make this report a more informative
document for our readers. Please send your comments to:
Office of the Chief Financial Officer
Office of Financial Management
Environmental Protection Agency
1200 Pennsylvania Ave., NW
Washington, D.C. 20460
ocfoinfo@epa.gov
This report is available at
http://www.epa.gov/planandbudget/results.html
Printed copies of this report are available from the EPA's National Service Center for Environmental
Publications at 1-800-490-9198 or by email at nscep@bps-lmit.com.
U.S. Environmental Protection Agency
Fiscal Year 2012 Agency Financial Report
EPA-190-R-12-006
November 15, 2012
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