# Q I® | U.S. ENVIRONMENTAL PROTECTION AGENCY %%PR0^ OFFICE OF INSPECTOR GENERAL Operating efficiently and effectively EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements Report No. 18-F-0039 November 15, 2017 ------- Abbreviations EPA U.S. Environmental Protection Agency FAC-P/PM Federal Acquisition Certification for Program and Project Managers 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 IT Information Technology OCFO Office of the Chief Financial Officer OIG Office of Inspector General OMB Office of Management and Budget SFFAS Statement of Federal Financial Accounting Standards U.S.C. United States Code Are you aware of fraud, waste or abuse in an EPA program? EPA Inspector General Hotline 1200 Pennsylvania Avenue, NW (2431T) Washington, DC 20460 (888) 546-8740 (202) 566-2599 (fax) OIG Hotline@epa.gov Learn more about our OIG Hotline. EPA Office of Inspector General 1200 Pennsylvania Avenue, NW (2410T) Washington, DC 20460 (202) 566-2391 www.epa.gov/oiq Subscribe to our Email Updates Follow us on Twitter @EPAoig Send us your Project Suggestions ------- • B \ U.S. Environmental Protection Agency Office of Inspector General At a Glance 18-F-0039 November 15, 2017 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's (EPA's) Office of Inspector General to audit the financial statements prepared by the agency each year. Our primary objectives were to determine whether: • The EPA's consolidated financial statements were fairly stated in all material respects. • The 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 control so that timely, reliable information is available for managing federal programs. This report addresses the following: • Operating efficiently and effectively. Send all inquiries to our public affairs office at (202) 566-2391 or www.epa.gov/oia. EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements EPA Receives an Unmodified Opinion We rendered an unmodified opinion on the EPA's consolidated financial statements for fiscal years 2017 and 2016, meaning they were fairly presented and free of material misstatement. Internal Control Material Weaknesses and Significant Deficiencies Noted We noted the following material weaknesses: • The EPA's accounting for software continues to be a material weakness. • The EPA incorrectly recorded unearned revenue for Superfund special accounts and did not reconcile unearned revenue for those accounts. We noted the following significant deficiencies: • Additional efforts are needed to resolve the EPA's cash difference with the U.S. Treasury. • The EPA needs to appoint a Project Manager to oversee the management of Compass Financials, which is the agency's accounting system, and to improve acquisition planning. Compliance With Laws and Regulations We did not note any significant noncompliance with laws and regulations. Recommendations and Planned Agency Corrective Actions The EPA agreed with our findings and recommendation and expects to complete the corrective action in fiscal year 2018. We found the EPA's financial statements to be fairly presented and free of material misstatement. Listing of OIG reports. ------- ^EDSX * Q \ I® J November 15, 2017 MEMORANDUM SUBJECT: EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements Report No. 18-F-0039 FROM: Paul C. Curtis, Director Financial Statement Audits TO: David Bloom, Acting Chief Financial Officer Attached is our report on the U.S. Environmental Protection Agency's (EPA's) fiscal years 2017 and 2016 consolidated financial statements. The project number for this audit was OA-FY17-0206. We are reporting two internal control material weaknesses and two significant deficiencies. Attachment 1 contains details on the material weaknesses and significant deficiencies. We did not note any instances of noncompliance. This audit report represents the opinion of the Office of Inspector General, and the findings in this report do not necessarily represent the final EPA 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 are not binding upon the EPA in any enforcement proceeding brought by the EPA or the Department of Justice. Action Required The agency agreed with the recommendation in this report and, therefore, no further response is required. If you nonetheless choose to provide a response, your response will be posted on the Office of Inspector General'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. This report will be available at www.epa.gov/oig. UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D.C. 20460 OFFICE OF INSPECTOR GENERAL Attachments ------- EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements 18-F-0039 Table of Contents Inspector General's Report on EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements 1 Report on the Financial Statements 1 Review of EPA's Required Supplementary Stewardship Information, Required Supplementary Information, Supplemental Information, and Management's Discussion and Analysis 2 Report on Internal Control Over Financial Reporting 3 Tests of Compliance With Laws, Regulations, Contracts and Grant Agreements 6 Prior Audit Coverage 7 Agency Comments and OIG Evaluation 7 Attachments 1. Internal Control Material Weaknesses and Significant Deficiencies 9 Material Weaknesses PROPERTY EPA's Accounting for Software Continues to Be a Material Weakness 10 SPECIAL ACCOUNTS EPA Did Not Properly Record or Reconcile Unearned Revenue for Superfund Special Accounts 12 Significant Deficiencies CASH Additional Efforts Needed to Resolve EPA's Cash Differences With Treasury 13 INFORMATION TECHNOLOGY EPA Needs to Appoint a Project Manager to Oversee Management of Compass Financials and Improve Acquisition Planning 15 -continued- ------- EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements 18-F-0039 2. Status of Prior Audit Report Recommendations 19 3. Status of Current Recommendations and Potential Monetary Benefits 23 Appendices I. EPA's FYs 2017 and 2016 Consolidated Financial Statements II. Agency Response to Draft Report III. Distribution ------- Inspector General's Report on EPA's Fiscal Years 2017 and 2016 Consolidated Financial Statements The Administrator U.S. Environmental Protection Agency Report on the Financial Statements We have audited the accompanying financial statements of the U.S. Environmental Protection Agency (EPA), which comprise the consolidated balance sheet, as of September 30, 2017, and September 30, 2016, and the related consolidated statements of net cost, net cost by major program, changes in net position, and custodial activity; the combined statement of budgetary resources for the years then ended; and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based upon our audit. We conducted our audit in accordance with generally accepted government 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 No. 17-03, Audit Requirements for Federal 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 18-F-0039 1 ------- The financial statements include expenses of grantees, contractors and other federal agencies. Our audit work pertaining to these expenses included testing only within the EPA. The U.S. Treasury collects and accounts for excise taxes that are 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 the EPA as authorized in legislation. Since the U.S. Treasury, and not the 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 the EPA's financial statements. The OIG is organizationally independent with respect to all other aspects of the agency's activities. Opinion In our opinion, the consolidated financial statements, including the accompanying notes, presents fairly, in all material respects, the consolidated assets, liabilities, net position, net cost, net cost by major program, changes in net position, custodial activity, and combined budgetary resources of the EPA as of and for the years ended September 30, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America. Emphasis of Matter—Software Capitalization As described in Note 1 to the financial statements, in fiscal year (FY) 2017, the agency changed its capitalization policy by increasing the capitalization threshold from $250,000 to $5 million for new purchases in FY 2017 and thereafter. Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software, allows for agencies to select their own capitalization threshold. However, the standard states that agencies should consider whether period cost would be distorted or asset values understated by expensing the purchase. We found that the EPA did not consider the cost impact on the financial statements and instead relied mainly on the capitalization policy of several other agencies that also have adopted a higher capitalization threshold. We could not independently determine the impact that the change in the capitalization threshold will have on the agency's statements. In addition, the agency wrote off approximately $300 million in software development costs that could not be readily charged to a project or for projects abandoned. Such costs were unrelated to the change in capitalization threshold. Our opinion is not modified in respect to this matter. Review of EPA's Required Supplementary Stewardship Information, Required Supplementary Information, Supplemental Information, and Management's Discussion and Analysis Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The Required Supplementary Stewardship Information, Required Supplementary Information, Supplemental Information, and Management's Discussion and Analysis are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information is the responsibility of management. We obtained information from the EPA 18-F-0039 2 ------- management about its methods for preparing Required Supplementary Stewardship Information, Required Supplementary Information, Supplemental Information, and Management's Discussion and Analysis, and we reviewed this information for consistency with the financial statements. We did not identify any material inconsistencies between the information presented in the EPA's consolidated financial statements and the information presented in the EPA's Required Supplementary Stewardship Information, Required Supplementary Information, Supplemental Information, and Management's Discussion and Analysis. Our audit was not designed to express an opinion and, accordingly, we do not express an opinion on the EPA's Required Supplementary Stewardship Information, Required Supplementary Information, Supplemental Information, and Management's Discussion and Analysis. Report on Internal Control Over Financial Reporting Opinion on Internal Control. In planning and performing our audit, we considered the EPA's internal control over financial reporting by obtaining an understanding of the agency's internal control, determining whether internal control 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 control 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. 17-03, 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). Material Weaknesses and Significant Deficiencies. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or to detect and correct misstatements on a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected in a timely manner. A significant deficiency is a deficiency or a combination of deficiencies in internal control that is less severe than a material weakness yet is important enough to merit attention by those charged with governance. Because of inherent limitations in internal control, 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, two of which we consider to be material weaknesses. These issues are summarized below and detailed in Attachment 1. 18-F-0039 3 ------- Material Weaknesses PROPERTY EPA's Accounting for Software Continues to Be a Material Weakness We previously reported the EPA's accounting for software as a material weakness in our FYs 2014 through 2016 audits. While we note that the agency has taken steps to address its software material weakness, the EPA continues to experience problems in adequately documenting capitalized software transactions. In FY 2017, we found that the EPA had misposted entries leading to misstated depreciation and amortization expense and loss on disposal of asset costs. Federal standards require that transactions be appropriately documented and that internal control be maintained. Failure to properly record capital software transactions in the agency's property management system and Compass Financials—the agency's accounting system—compromises the accuracy of the EPA's property accounts and depreciation and operating expenses, as well as the accuracy of the agency's financial statements. Consequently, we continue to report accounting for software as a material weakness. SPECIAL ACCOUNTS EPA Did Not Properly Record or Reconcile Unearned Revenue for Superfund Special Accounts The EPA did not modify the accounting model in the accounting system to properly record all Superfund special accounts activity or perform a comprehensive reconciliation of Superfund special accounts general ledger balances to the special accounts database detail during FY 2017. In OIG Report No. 17-F-0046. Audit of EPA's Fiscal Years 2016 and 2015 Consolidated Financial Statements, issued November 15, 2016, we reported as a material weakness that the EPA did not properly record or reconcile unearned revenue for Superfund special accounts in FY 2016. During FY 2017, we found that the EPA did not implement the corrective actions to complete the new posting model change, nor did the agency perform a comprehensive reconciliation of special accounts. As a result, the EPA cannot ensure the accuracy of the unearned revenue and financial statements. Significant Deficiencies CASH Additional Efforts Needed to Resolve EPA's Cash Differences With Treasury As of September 30, 2017, there was $2.2 million in cash differences between the EPA and U.S. Treasury cash balances. We previously reported the EPA's long-standing cash differences with Treasury as a significant deficiency in our FYs 2015 and 2016 audit reports on the financial statements. Treasury's guidance requires the EPA to correct and resolve any differences between the Treasury's and EPA's Fund Balance with Treasury. However, the EPA's Office of the Chief Financial Officer (OCFO) did not have effective 18-F-0039 4 ------- internal control to adequately monitor the internal cash differences and ensure that the EPA resolved the differences with Treasury. Unresolved differences may result in misstatements of the EPA's Fund Balance with Treasury and financial statements, as well as increase the risk of fraud. INFORMATION TECHNOLOGY EPA Needs to Appoint a Project Manager to Oversee Management of Compass Financials and Improve Acquisition Planning EPA's Compass Financials application—a major information technology (IT) investment—lacks an oversight structure to ensure that personnel implement agency policies and procedures and guide the project through the acquisition process. OMB Circular A-130, Managing Information as a Strategic Resource, Appendix I-13-j(2), requires agencies to provide oversight of information systems that are used by contractors or that collect or maintain federal information. This oversight includes the responsibility to implement policies and procedures for security controls and accountability for information systems. Paragraph 7.1.1.2 of the EPA's Acquisition Guide requires acquisition planning for all acquisitions. The guide defines "acquisition planning" as the process by which all personnel responsible for an acquisition coordinate to fulfill agency needs in a timely manner and at a reasonable cost. Attachment 2 contains the status of issues reported in prior years' reports. The issues included in the attachment should be considered among the EPA's significant deficiencies for FY 2017. We reported less significant internal control matters to the agency during the course of the audit. We will not issue a separate management letter. Comparison of EPA's FMFIA Report With Our Evaluation of Internal Control OMB Bulletin No. 17-03, Audit Requirements for Federal Financial Statements, requires the OIG 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. The OIG is also required to 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 entity's financial statements will not be prevented or detected and corrected on a timely basis. The agency reported Capitalized Software and Accounting for Unearned Revenue as material weaknesses in FY 2017. Capitalized software continues to be reported as a material weakness in the design or operation of internal control. The agency is in the process of developing a corrective action plan for Accounting for Unearned Revenue. 18-F-0039 5 ------- Tests of Compliance With Laws, Regulations, Contracts and Grant Agreements EPA management is responsible for complying with laws, regulations, contracts and grant agreements 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, including those governing the use of budgetary authority, regulations, contracts and grant agreements that have a direct effect on the determination of material amounts and disclosures in the financial statements. We also performed certain other limited procedures as described in Codifications of Statements on Auditing Standards, AU-C 250.14-16, "Consideration of Laws and Regulations in an Audit of Financial Statements." OMB Bulletin 17-03, Audit Requirements for Federal Financial Statements, requires that we evaluate compliance with federal financial statement system requirements, including the requirements referred to in the Federal Financial Management Improvement Act of 1996 (FFMIA). We limited our tests of compliance to these provisions and did not test compliance with all laws and regulations applicable to the EPA. Opinion on Compliance With Laws, Regulations, Contracts and Grant Agreements Providing an opinion on compliance with certain provisions of laws, regulations, contracts and grant agreements was not an objective of our audit and, accordingly, we do not express such an opinion. A number of ongoing investigations involving the EPA's grantees and contractors could disclose violations of laws and regulations, but a determination about these cases has not been made. We did not identify any significant matters involving compliance with laws and regulations that came to our attention during the course of the audit. Federal Financial Management Improvement Act Noncompliance 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 Memorandum M-09-06-23, Implementation Guidance for the Federal Financial Management Improvement Act, dated January 9, 2009, to determine substantial noncompliance with FFMIA. The results of our tests did not disclose any instances of noncompliance with FFMIA requirements, including where the agency's financial management systems did not substantially comply with the applicable federal accounting standard. We did not identify any significant matters involving compliance with laws and regulations related to the agency's financial management systems that came to our attention during the course of the audit. 18-F-0039 6 ------- Audit Work Required Under the Hazardous Substance Superfund Trust Fund Our audit work was also performed to meet the requirements in 42 U.S.C. § 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: • The EPA undercapitalized software costs, leading to restated FY 2013 financial statements and a continued material weakness. • The EPA did not capitalize lab renovation costs. • The EPA's internal controls over the accountable personal property inventory process need improvement. • The EPA's property management system does not reconcile to its accounting system. • The EPA did not properly record or reconcile unearned revenue for Superfund special accounts. • Originating offices did not forward accounts receivable source documents in a timely manner to the finance center. • The EPA should improve controls over expense accrual reversals. • The EPA should improve its efforts to resolve its long-standing cash differences with the U.S. Treasury. • Financial management system user account management needs improvement. • The OCFO lacks internal controls when assuming responsibility for account management procedures of financial systems. • Financial and mixed-financial applications did not comply with required account management controls. • The EPA needs controls to monitor direct access to its accounting system. Attachment 2 summarizes the current status of corrective actions taken on prior audit report recommendations related to these issues. We found during our audit that the issues reported in prior audits and listed in Attachment 2 still exist and should be considered as outstanding significant deficiencies and noncompliance issues unless otherwise noted. Agency Comments and OIG Evaluation In a memorandum dated November 13, 2017, the Chief Financial Officer responded to our draft report. The EPA agreed with our findings and recommendation and expects to complete the corrective action in FY 2018. The rationale for our conclusions and a summary of the agency comments are included in the appropriate sections of this report, and the agency's complete response is included as Appendix II to this report. 18-F-0039 7 ------- This report is intended solely for the information and use of the management of the EPA, OMB and Congress, and it is not intended to be and should not be used by anyone other than these specified parties. Paul C. Curtis Certified Public Accountant Director, Financial Statement Audits Office of Inspector General U.S. Environmental Protection Agency November 14, 2017 18-F-0039 8 ------- Attachment 1 Internal Control Material Weaknesses and Significant Deficiencies Table of Contents Material Weaknesses PROPERTY 1 EPA's Accounting for Software Continues to Be a Material Weakness 10 SPECIAL ACCOUNTS 2 EPA Did Not Properly Record or Reconcile Unearned Revenue for Superfund Special Accounts 12 Significant Deficiencies CASH 3 Additional Efforts Needed to Resolve EPA's Cash Differences With Treasury 13 INFORMATION TECHNOLOGY 4 EPA Needs to Appoint a Project Manager to Oversee Management of Compass Financials and Improve Acquisition Planning 15 18-F-0039 9 ------- 1 - EPA's Accounting for Software Continues to Be a Material Weakness We previously reported the EPA's accounting for software as a material weakness in our FYs 2014 through 2016 audits. While we note that the agency has taken steps to address its software material weakness, the EPA continues to experience problems in adequately documenting capitalized software transactions. In FY 2017, we found that the EPA had misposted entries, leading to misstated depreciation and amortization expense and loss on disposal of asset costs. Federal standards require that transactions be appropriately documented and that internal control be maintained. Failure to properly record capital software transactions in the agency's property management system and Compass Financials—the agency's accounting system—compromises the accuracy of the EPA's property accounts and depreciation and operating expenses, as well as the accuracy of the agency's financial statements. Consequently, we continue to report accounting for software as a material weakness. SFFAS No. 10, Accounting for Internal Use Software, requires entities to capitalize the costs of software that meet the criteria for general property, plant and equipment. Software life cycle includes three phases: planning, development and operations. Capitalized software costs should include the full costs (direct and indirect) incurred during the software development stage. The Software-In-Development general ledger account represents costs incurred in the software development.1 Upon completion, costs incurred are capitalized and transferred to the Internal- Use Software general ledger account.2 The SSFAS also requires that entities amortize in a systematic and rational manner over the estimated useful life of the software; amortization should begin when that module or component has been successfully tested. The agency's practice is to capitalize software costs exceeding its annual capitalization threshold of $250,000 over 7 years. In FY 2017, the agency increased its capitalization threshold for new software projects to $5 million. Beginning in FY 2015, the EPA took steps to improve its internal accounting and controls over software costs. In FY 2017, the EPA stated that it reviewed software projects and met with program offices to validate software costs in development and asset values in production. During its efforts to validate software costs, the EPA wrote off approximately $300 million in software development costs, $295 million in capitalized software, and $181 million in associated amortization by reversing entries and creating large abnormal balances in depreciation and amortization expense and other accounts. The agency subsequently corrected the abnormal balance in depreciation and amortization expense, an account that is listed in Note 35, Reconciliation of Net Cost of Operations to Budget. Other accounts that were not corrected are included as components of gross costs in the statement of net costs and have no material impact. The U.S. Government Accountability Office's (GAO's) Standards for Internal Control in the Federal Government defines the five standards for the minimum level of quality acceptable for internal control in government. Management should design control activities to achieve objectives and respond to risks. The standard for control activities requires appropriate documentation of transactions and internal control. Management is to clearly document internal 1 Treasury Financial Manual, United States Standard General Ledger Bulletin No. 2017-06, Part 1, Section II: Accounts and Definitions. 2 Ibid. 18-F-0039 10 ------- control, all transactions and other significant events in a manner that allows the documentation to be readily available for examination. Because the audit trail of supporting documentation was insufficient in determining the validity of the actions taken on the software projects analyzed, our ability to conclude that the entries made were accurately recorded was affected. Failure to properly record property transactions in the agency's property management system and Compass compromises the accuracy of the EPA's property accounts, depreciation and operating expenses, as well as the accuracy of the agency's financial statements. The agency indicated that it does not expect to complete corrective actions on this material weakness until 2018; thus, we continue to report this material weakness but have no additional recommendations. Agency Comments and OIG Evaluation The agency plans to complete corrective actions on this material weakness in FY 2018. 18-F-0039 11 ------- 2 - EPA Did Not Properly Record or Reconcile Unearned Revenue for Superfund Special Accounts The EPA did not modify the accounting model in the accounting system to properly record all Superfund special accounts activity or perform a comprehensive reconciliation of Superfund special accounts general ledger balances to the special accounts database detail during FY 2017. In OIG Report No. 17-F-0046. Audit of EPA's Fiscal Years 2016 and 2015 Consolidated Financial Statements, issued November 15, 2016, we reported, as a material weakness, that the EPA did not properly record or reconcile unearned revenue for Superfund special accounts in FY 2016. During FY 2017, we found that the EPA did not implement the corrective actions to complete the new posting model change, nor did the agency perform a comprehensive reconciliation of special accounts. As a result, the EPA cannot ensure the accuracy of the unearned revenue and financial statements. Federal guidance directs agencies to record cash advances received for long-term projects as unearned revenue: • The SFFAS applies to general purpose financial reports of the U.S. Government reporting entities. SFFAS No. 7 is the accounting standard for revenue and other financing sources and directs agencies to record a cash advance for long-term projects as unearned revenue. Revenue should be recognized as costs are incurred to provide the goods and services. • Section 122(b)(3) of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. 9622(b)(3)) and Executive Order 12580 authorize the EPA to retain and use funds received through an agreement with potentially responsible parties to address past and/or future response costs. The EPA retains these funds in site-specific accounts called "special accounts." The EPA should record special account settlement funds received as unearned revenue, and the agency should reduce unearned revenue and recognize earned revenue as expenses are incurred. • The GAO's Standards for Internal Control in the Federal Government requires accurate and timely recording of transactions and events, as well as comparison of file totals with control totals. Attachment 2 includes our FY 2016 recommendations to the OCFO and the status of the EPA's corrective actions. The agency does not expect to complete corrective actions on this material weakness until 2018; thus, we continue to report this material weakness but have no additional recommendations. Agency Comments and OIG Evaluation The agency concurred with our findings and recommendations and plans to complete corrective actions in FY 2018. 18-F-0039 12 ------- 3 - Additional Efforts Needed to Resolve EPA's Cash Differences With Treasury As of September 30, 2017, there was $2.2 million in cash differences between the EPA and U.S. Treasury cash balances. We previously reported the EPA's long-standing cash differences with Treasury as a significant deficiency in our FYs 2015 and 2016 audit reports of the financial statements. Treasury's guidance requires the EPA to correct and resolve any differences between the Treasury's and EPA's Fund Balance with Treasury. However, the EPA's OCFO did not have effective internal controls to adequately monitor the internal cash differences and ensure that the EPA resolved the differences with Treasury. Unresolved differences may result in misstatements of the EPA's Fund Balance with Treasury and financial statements, as well as increase the risk of fraud. The Treasury Financial Manual, Volume 1, Section 3335, "Reconciling FMS 224, Section II," states that agencies should reconcile regional finance center transactions separately from Intra-governmental Payments and Collections transactions by comparing transactions reported in their accounting systems with the transactions reported to Treasury by the regional finance centers and through the Intra-governmental Payment and Collection system. In the month following the reporting month, agencies should correct any disclosed differences. Therefore, for our review, we considered cash differences to be long-standing if they were unresolved for more than 1 month after the initial reporting month. The EPA's Resource Management Directive System No. 2540-03-P1, Fund Balance with Treasury Management Standard Form 224 Reconciliation, requires the EPA to review and track monthly the differences between the Treasury's and EPA's Fund Balance. The directive requires the OCFO's General Ledger Analysis and Reporting Branch to review monthly the agency financial system of record and to report issues to the respective finance center. The General Ledger Analysis and Reporting Branch is responsible for tracking all budget clearing account items from posting to final disposition. The EPA finance centers are required to provide comments, as needed, to the General Ledger Analysis and Reporting Branch on the monthly cash differences report. The OCFO prepares a monthly cash difference report by accounting point and treasury symbol to identify and resolve differences between the Treasury and EPA records. We found that the EPA's Washington Finance Center continues to have long-standing unresolved cash differences. As of September 30, 2017, the General Ledger Analysis and Reporting Branch reported $73.5 million in cash differences, including long-standing differences of $2.2 million, at the Washington Finance Center. These long-standing differences remained unresolved for at least 4 months. The OCFO did not adequately monitor the internal cash differences at the transaction level to ensure that the EPA resolved the differences with Treasury. The General Ledger Analysis and Reporting Branch relied on the accounting points to resolve individual cash differences. However, the Washington Finance Center did not resolve its long-standing differences. Therefore, the General Ledger Analysis and Reporting Branch did not have effective internal controls to resolve the individual cash differences. 18-F-0039 13 ------- By not adequately monitoring and resolving all cash differences, the EPA increases the risk of unrecorded transactions and fraud. Unrecorded transactions misstate the EPA's Fund Balance with Treasury and the financial statements. During our FY 2015 financial statements audit, we found that the EPA had not resolved $2.6 million in long-standing cash differences between the EPA and Treasury balances. Based on our findings, we recommended in our FY 2015 report— OIG Report No. 16-F-0040. Audit of EPA's Fiscal Years 2015 and 2014 Consolidated Financial Statements, issued November 16, 2015—that the OCFO do the following: • Require the General Ledger Analysis and Reporting Branch to monitor and work with the finance centers to resolve all internal cash differences to ensure the EPA resolves all of the differences with Treasury. • Require the Payroll accounting point and Washington Finance Center to research and resolve cash differences. During our FY 2016 audit, we found that the EPA had made efforts to identify and resolve its long-standing cash differences. Furthermore, the EPA was still working on completing its corrective action to require the Payroll accounting point and the Washington Finance Center to research and resolve cash differences. We therefore did not make any additional recommendations regarding this issue in our FY 2016 financial audit report, OIG Report No. 17-F-0046. EPA's Fiscal Years 2016 and 2015 Consolidated Financial Statements, issued November 15, 2016. During our current audit, we noted major improvements, but long-standing unresolved cash differences of $2.2 million remain at the Washington Finance Center. However, since the EPA is still working on resolving cash differences and completing its corrective action, we do not make any new recommendations in our FY 2017 financial audit report. Agency Comments and OIG Evaluation The agency responded that it will continue to research efforts to resolve the remaining differences. 18-F-0039 14 ------- 4 - EPA Needs to Appoint a Project Manager to Oversee Management of Compass Financials and Improve Acquisition Planning The EPA's Compass Financials application—a major IT investment—lacks an oversight structure to ensure that personnel implement agency policies and procedures and guide the project through the acquisition process. OMB Circular A-130, Managing Information as a Strategic Resource, at Appendix I-13-j(2), requires agencies to provide oversight of information systems that are used by contractors or that collect or maintain federal information. This oversight includes the responsibility to implement policies and procedures for security controls and accountability for information systems. Paragraph 7.1.1.2 of the EPA's Acquisition Guide requires acquisition planning for all acquisitions. The guide defines "acquisition planning" as the process by which all personnel responsible for an acquisition coordinate to fulfill agency needs in a timely manner and at a reasonable cost. Hiring a Project Manager for Compass Financials As of April 9, 2017, the EPA did not have a Project Manager assigned to oversee the management of Compass Financials. During the audit and after inquires by the OIG, the EPA issued a public and internal vacancy announcement on June 28, 2017, to recruit and fill the IT Project Manager position within the OCFO. OCFO representatives attributed the delay in hiring a Project Manager for Compass Financials to EPA restrictions and a hold placed on hiring. However, despite these restrictions and hold, the EPA could have appointed an internal employee to serve as the acting Project Manager until the office was capable of filling the position permanently. The OMB specifies that major acquisitions be overseen by personnel possessing the Federal Acquisition Certification for Program and Project Managers (FAC-P/PM). Attachment 1, Section 5, of OMB's December 16, 2013, memorandum regarding the FAC-P/PM outlines the certification requirements that managers must meet to oversee major acquisitions: Program managers assigned to programs considered major acquisitions by their agency, and as defined by Office of Management and Budget (OMB) Circular A-l 1 (IT and non-IT), must be senior-level certified unless an extension is granted by the appropriate agency official. ... Project managers assigned to lead projects within these major acquisitions must be, at a minimum, mid-level certified. In addition, Attachment 4 (Sections 4 and 5) of OMB's 2013 memorandum emphasizes that Program and Project Managers "managing major IT investments shall hold senior level FAC-P/PM-IT specialization." This memorandum also indicates that Project Managers who do not already have their FAC-P/PM-IT must obtain it within 1 year of being assigned to a relevant project. The absence of a Project Manager leaves the EPA without a knowledgeable expert to fulfill critical oversight responsibilities, including coordinating with agency representatives, making technical and programmatic decisions, and reviewing legislation and authoritative issuances for Compass Financials and other systems. 18-F-0039 15 ------- Issuing a Follow-On Contract for Hosting Compass Financials The lack of an assigned Project Manager contributed, in part, to the OCFO not having a permanent contract to manage costs for operating Compass Financials. The original contract for Compass Financials, which was awarded in February 2007, provided for licensing, hosting and maintenance services under a sole source procurement. As a result of the EPA's Federal Information Technology Acquisition Reform Act3 process in August 2015, the agency's Chief Information Officer decided to split the hosting from the licensing and maintenance of Compass Financials into separate contracts. The Office of Environmental Information estimated that the EPA could achieve $3 million in cost savings over 7 years by procuring the most competitive hosting solution for Compass Financials. The Federal Information Technology Acquisition Reform Act puts federal agency Chief Information Officers in control of IT investments and seeks to enable effective planning and budgeting for IT resources. Although the original contract expired in February 12, 2017, a solicitation for the hosting of Compass Financials was not released until December 2016. To maintain the services of the incumbent vendor until a new contract was awarded, the Office of Acquisition Management—within the EPA's Office of Administration and Resources Management—had to procure sole source extensions of the original contract. Figure 1 shows the timeline of contract renewal events. Figure 1: Timeline of contract renewal events 4th Extension 07/31/2017— 11/30/2017 2nd Extension DS12/17- 05130/17 3rd Extension 07/01/2017- 07/30/2017 1st Extension 02/12/17- 05/11/17 Source; OIG-generated diagram. As of September 30, 2017, the original contract was on its fourth extension. These extensions cost the EPA over $7.4 million (Table 1). The cost of the fourth extension increased SI 1,703 over the average cost per day of the first three extensions, from $21,003 to $32,706; therefore, the total cost of the fourth extension was $1,416,118 more than the average cost of the first three extensions. The fourth extension covered the software license and operations and maintenance, in addition to "change requests and enhancements arising from new, previously unidentified, missed, or incomplete Compass Financials requirements." 3 The Federal Information Technology Acquisition Reform Act became law as part of the National Defense Authorization Act for FY 2015 (Title VIII, Subtitle D. H.R. 3979). February 2017 The original Compass Financials contract expired. / \ August 2015 The EPA decided to spilt the hosting and maintenance of Compass Financials into two separate contracts. December 2016 The EPA approved a sole source procurement to extend the original Compass Financials contract due to delays in the acquisition process for the new contract. Additionally., the EPA released the solicitation for the new contract for Compass Financials hosting services. 18-F-0039 16 ------- Table 1: Summary of extensions Extension Period Cost Number of days extended Cost per day 1st extension 02/12/17-05/11/17 $1,857,628 88 $21,109.41 2nd extension 05/12/17-06/30/17 1,059,353 49 21,619.45 3rd extension 07/01/17-07/31/17 608,438 30 20,281.27 4th extension 08/01/17-11/30/17 3,957,527 121 $32,706.83 Total Cost $7,482,946 Source: OIG-generated table based on contract task orders. In addition, based on the Office of Environmental Information's $3 million cost-savings estimate for competitively procuring hosting services for Compass Financials, the EPA may have overspent $250,000 by having to extend the sole source contract. The Contracting Officer for the Compass Financials contract indicated that the Office of Acquisition Management had to accommodate requests from lawyers, perform several market research efforts, and revise the new solicitation several times. These initiatives all delayed the solicitation and award of the new hosting contract. Information obtained from the Office of Environmental Information indicates that 17 of the EPA's systems are currently hosted by contractors. The EPA should therefore be familiar with the acquisition process for hosting services and should have been able to implement a timely acquisition plan to contract the hosting of Compass Financials. We attribute this deficiency to the EPA not developing an agencywide acquisition planning strategy for all the agency's systems. We did not make a recommendation regarding this issue in this report. On June 24, 2016, the OIG initiated an audit of EPA's acquisition planning. The findings and recommendations resulting from that audit are detailed in OIG Report No. 18-P-0038, Improved Acquisition Planning Will Help EPA Reduce Hundreds of Millions of Dollars in High-Risk Contracts, issued November 15, 2017. Action Taken as a Result of Our Audit As a result of this audit finding, the OCFO outlined corrective actions and provided a completion date for its corrective action. The EPA indicated that a Project Manager for Compass Financials was appointed on October 1, 2017. However, it is incumbent upon the OCFO to monitor the Project Manager's progress in obtaining the FAC-P/PM-IT within the 1-year deadline and to take corrective actions if the Project Manager is unable to complete the certification requirements. Recommendation We recommend that the Chief Financial Officer: 1. Require the Compass Financials Project Manager to obtain the Federal Acquisition Certification for Program and Project Managers with the Information Technology specialization within the 1-year deadline, as required by the Office of Management and Budget, and take corrective actions if the Project Manager is not able to complete the certification requirements by the deadline. 18-F-0039 17 ------- Agency Comments and OIG Evaluation The OCFO agreed with our finding and recommendation. The office stated it would complete the corrective action by October 1, 2018. We consider this recommendation resolved with corrective action pending. 18-F-0039 18 ------- Attachment 2 Status of Prior Audit Report Recommendations The EPA is working to strengthen its audit management procedures to address audit findings in a timely manner and to complete corrective actions expeditiously and effectively. Strengthened procedures will also help improve environmental results. In FY 2017, the EPA's acting Chief Financial Officer, as the Agency Follow-Up Official, issued a memorandum to senior agency leadership, reminding senior managers of their stewardship responsibilities for developing and promptly implementing effective corrective actions. The agency also accomplished these other notable actions to strengthen its audit management procedures: • Completed the revised EPA Manual 2750, Audit Management Procedures, effective March 28, 2017. EPA Manual 2750 is a comprehensive audit management guide that addresses OIG, GAO and Defense Contract Audit Agency audits. The document was posted on the EPA intranet on May 5, 2017. • Issued progress reports by the OCFO highlighting the status of management decisions and corrective actions. The reports are shared with program office and regional managers throughout the agency to keep them informed of the status of progress on their audits. In addition, the EPA maintained its commitment to engage early with the OIG on audit findings and to develop effective corrective actions that address OIG recommendations. Table 2 outlines the status of past significant deficiency findings that have not been resolved to date. Table 2: Significant deficiency issues not fully resolved • EPA's Accounting for Software Continues to Be a Material Weakness In our FYs 2014, 2015 and 2016 audits, we identified the agency's accounting for software as a material weakness. In FY 2014, the agency found it had undercapitalized software by expensing approximately $255 million in software costs over a 7-year period. The undercapitalized software and related equity accounts indicate that the agency has a material weakness in internal control over identifying and capitalizing software; internal control failed to detect and correct the errors, resulting in a misstatement of the FY 2013 financial statements. During FY 2017, the agency continued to take corrective actions to improve its accounting for software. While the agency has made progress and taken steps to correct weaknesses, not all corrective actions have been completed. Corrective actions for the remaining recommendations are not due to be completed until 2018. • EPA Did Not Capitalize Lab Renovation Costs In our FY 2014 audit, we found that the EPA did not capitalize approximately $8 million of Research Triangle Park lab renovations. As a result, the EPA did not properly classify the lab renovations as a capital improvement. The agency capitalized and booked the Research Triangle Park lab renovation costs and related depreciation. One corrective action was partially completed: The EPA Office of General Counsel believed that the 1999 legal opinion was still a viable legal opinion but did not provide examples to guide the agency's determinations of when renovation work should be funded from agency program appropriations or Building and Facilities funds. Corrective actions for other recommendations related to this finding were not due until September 2017; however, the agency revised the expected completion date to February 28, 2018. 18-F-0039 19 ------- • EPA's Internal Controls Over Accountable Personal Property Inventory Process Need Improvement In our FY 2014 audit, we noted that the EPA reported a $2.6 million difference between the amount of accountable personal property recorded in the property management system (Maximo) and the amount of physical inventory for FY 2014. The EPA also identified 573 property items not recorded in Maximo. During our FY 2015 audit, we found that the agency made progress and took steps to correct the differences between the amount of personal property recorded in Maximo and the amount of physical inventory. However, although the agency implemented its corrective actions, we have not assessed the effectiveness of these actions. • EPA's Property Management System Does Not Reconcile to Its Accounting System (Compass) During our FY 2014 audit, we found that the EPA did not reconcile $100 million of capital equipment within its property management subsystem (Maximo) to relevant financial data within its accounting system (Compass). The inability to reconcile the property subsystem with Compass can compromise the effectiveness and reliability of financial reporting. We previously reported on this issue in our FYs 2012 and 2013 financial statement audit reports. In FY 2014, the agency issued procedures to reconcile capital property. The agency stated that it had begun to resolve the differences between Maximo and Compass; however, problems continue to exist. In FYs 2015 and 2016, we again reported this weakness as a significant deficiency; therefore, the EPA's corrective actions were not yet effective. In FY 2017, the agency informed us that this corrective action was actually completed in September 2016; however, no supporting documentation has been provided to date. Therefore, we were not able to assess the effectiveness of the action. • EPA Did Not Properly Record or Reconcile Unearned Revenue for Superfund Special Accounts During FY 2015, the EPA misstated earned and unearned revenue for Superfund special accounts. The EPA changed its accounting practice in FY 2015 to record settlement proceeds in Superfund special accounts as unearned revenue. However, in our FY 2016 audit, we found that the EPA did not properly record $168 million of unearned revenue for Superfund special accounts or perform a comprehensive reconciliation of Superfund special accounts unearned revenue general ledger balances to the special accounts database detail. The EPA made these errors because it did not modify the accounting model for special accounts in Compass Financials. During our FY 2017 audit, we found that the EPA would not be able to complete its corrective actions to modify the accounting model or reconcile Superfund special accounts unearned revenue general ledger balances to the special accounts database detail until FY 2018. • Originating Offices Did Not Timely Forward Accounts Receivable Source Documents to the Finance Center In FY 2014, we found that the EPA and the Department of Justice did not forward accounts receivable source documents to the finance center in a timely manner. During FY 2015, the EPA's Office of Enforcement and Compliance Assurance issued a memorandum reminding the regions to provide accounts receivable enforcement documentation to the finance center in a timely manner. In addition, the OCFO updated the EPA's Superfund guidance to direct originating offices to send accounts receivable control forms to the finance center in a timely manner. While we have noted some improvements in the Cincinnati Finance Center's timely receipt of legal documents, we still identified instances of untimely receipt during FYs 2015, 2016 and 2017. Therefore, the agency's corrective actions are not completely effective, and we will continue to evaluate how timely the receipt of accounts receivable source documents is in FY 2018. 18-F-0039 20 ------- • EPA Should Improve Controls Over Expense Accrual Reversals In FY 2012, the EPA did not reverse approximately $108 million of FY 2011 year-end expense accruals. The EPA did not reverse the accrual transactions because the Compass posting configuration for the applicable fund category was inaccurate. By not reversing the accruals in a timely manner, the EPA materially overstated the accrued liability and expense amounts in the quarterly financial statements. The EPA's Policy Announcement No. 95-11, Policies and Procedures for Recognizing Year-End Accounts Payable and Related Accruals, requires the agency to "recognize and report all accounts payable and related accruals in its year-end financial reports." In our audit report issued November 16, 2012, we recommended that the EPA update Policy Announcement No. 95-11 to require reconciliations of accruals and accrual reversals. EPA officials concurred with our finding and recommendation and took corrective action by implementing an independent review of the FY 2012 accruals and reversals. The EPA also performed accrual reviews prior to the issuance of the FY 2013 quarterly financial statements. During the FY 2013 audit, the EPA extended the target completion date for updating Policy Announcement No. 95-11 to June 2014. During our FY 2014 audit, the EPA extended the target completion date again to December 31, 2015, due to workload and resource constraints. In FY 2015, the EPA again revised the date to December 31, 2016, to explore new methods to streamline the accrual processes and take advantage of efficiencies available in the Compass upgrade scheduled for February 2016. During our FY 2016 audit, the EPA anticipated being able to meet its targeted completion date (December 31, 2016). In FY 2017, the EPA developed Resource Management Directive System 2540-04-P3, Accounts Payable Policies and Procedures for Recognizing Year-End Accrued Liabilities for Grants, which superseded Policy Announcement No. 95-11. Resource Management Directive System 2540-04-P3 addresses the EPA's requirements for recording accrued liabilities for grants in the EPA's financial system. In addition, the EPA stated that it updated the policy for the accounts payable grants and it started drafting the policy for other types of accruals in April 2017. The policy drafting process entails identification of accrual process holders with primary points of contact, documentation gathering, development of the policy for each type of accrual by working with primary points of contact, and final review of the policy document. The EPA projected a June 2018 completion date for updating the policy for all accruals. • EPA Should Improve Its Efforts to Resolve EPA's Long-Standing Cash Differences With Treasury During our FY 2015 audit, we found that the EPA had not resolved $2.6 million in long-standing cash differences between the EPA and Treasury balances. Based on our findings, we recommended that the Chief Financial Officer require the General Ledger Analysis and Reporting Branch to monitor and work with the finance centers to resolve all internal cash differences to enable the EPA to resolve all differences with Treasury. We also recommended that the Chief Financial Officer require the Payroll accounting point and Washington Finance Center to research and resolve cash differences. The agency agreed with our finding and recommendations. According to the agency's corrective action status report, as of November 2, 2016, the agency completed its corrective action for the first recommendation. During our FY 2016 audit, we found that the EPA made efforts to identify and resolve its long-standing cash differences and that the agency was working on completing its corrective action to require the Payroll accounting point and the Washington Finance Center to research and resolve cash differences. We did not make any additional recommendations regarding this issue in our FY 2016 financial audit report but included it as an unresolved significant deficiency. During our FY 2017 audit, we noted major improvements, but long-standing unresolved cash differences of $2.2 million remain at the Washington Finance Center. Since the EPA is still working on resolving cash differences and completing its corrective action, we did not make any new recommendations in our FY 2017 financial audit report. • Financial Management System User Account Management Needs Improvement During our FY 2009 audit, we found that the EPA had not established policies that clearly define incompatible functions and associated processes to ensure that proper separation of duties are enforced within the financial system application. Based on our findings, we recommended in our FY 2009 report that the OCFO ensure that all new and updated financial management systems include an automated control to enforce separation of duties. The agency agreed with our finding and recommendation. The EPA had considered this recommendation closed; however, the OCFO agreed in FY 2016 to develop alternative corrective actions for this recommendation, with a planned completion date of December 31, 2017. In FY 2017, the OCFO extended the completion date to December 31, 2018. 18-F-0039 21 ------- • OCFO Lacks Internal Controls When Assuming Responsibility for Account Management Procedures of Financial Systems During our FY 2015 audit, we found that the OCFO's Application Management staff assumed responsibility for managing oversight of users' access to the Payment Tracking System without ensuring that the system had documentation covering key account management procedures. Based on our findings, we recommended in our FY 2015 report that the Chief Financial Officer implement an internal control process for transferring the management of an application's user access to the Application Management staff. We also recommended that the Chief Financial Officer conduct an inventory of OCFO systems managed by the Application Management staff and create or update supporting access management documentation for each application. Further, we recommended that the Chief Financial Officer work with the Contracting Officer to update applicable contract clauses and distribute updated access management documentation to contractors supporting the user account management function for applications managed by the Application Management staff. The agency agreed with our finding and recommendations. In FY 2017, the OCFO extended the completion date for the first and second recommendations to December 31, 2018, In addition, the OCFO modified the corrective action for the third recommendation but is adhering to the original expected completion date of March 31, 2018. • Financial and Mixed-Financial Applications Did Not Comply With Required Account Management Controls During our FY 2015 audit, we found that the EPA lacked management oversight to ensure that responsible individuals fully develop and implement required account management controls for the EPA's financial and mixed-financial systems. Based on our finding, we recommended in our FY 2015 report that the Chief Financial Officer review and update account management documentation and establish procedures for financial systems. We also recommended that the Chief Financial Officer issue a memorandum emphasizing the need to follow access control procedures, conduct an inventory of financial systems to ensure the systems are entered into Xacta to monitor compliance with required information systems security controls, and implement a process to notify the OCFO of the status of corrective actions entered into Xacta. The agency agreed with our finding and recommendations. According to the agency's corrective action status report, as of June 27, 2016, the agency completed corrective actions for all but the first recommendation. The EPA is currently working on reviewing and updating account management documentation and establishing procedures for financial systems, but in FY 2017, the OCFO extended the completion date for this corrective action to December 31, 2018. • EPA Needs Controls to Monitor Direct Access to the Compass Financials Database During our FY 2016 audit, we found that the EPA did not establish controls to monitor direct access to data within the Compass Financials database. Based on our findings, we recommended in our FY 2016 report that the Chief Financial Officer work with the Compass Financials service provider to establish controls for creating and locking administrative accounts. We also recommended that the Chief Financial Officer work with the Compass Financials service provider to develop and implement a methodology to monitor accounts with administrative capabilities. Further, we recommended that the Chief Financial Officer enter the Continuous Monitoring Assessment recommendations into the agency's system used for monitoring the remediation of information security corrective actions. The agency concurred with our recommendations. According to the agency's corrective action status report, as of August 1, 2017, the agency is adhering to the planned completion date of September 30, 2021, for the first and second recommendations. Corrective actions for the third recommendation have been completed. Source: OIG analysis. 18-F-0039 22 ------- Attachment 3 Status of Current Recommendations and Potential Monetary Benefits RECOMMENDATIONS Potential Planned Monetary Rec. Page Completion Benefits No. No. Subject Status1 Action Official Date (In $000s) 1 17 Require the Compass Financials Project Manager to obtain the R Chief Financial Officer 10/1/18 Federal Acquisition Certification for Program and Project Managers with the Information Technology specialization within the 1-year deadline, as required by the Office of Management and Budget, and take corrective actions if the Project Manager is not able to complete the certification requirements by the deadline. 1 C = Corrective action completed. R = Recommendation resolved with corrective action pending. U = Recommendation unresolved with resolution efforts in progress. 18-F-0039 23 ------- Appendix I EPA's FYs 2017 and 2016 Consolidated Financial Statements 18-F-0039 ------- EPA's Fiscal 2017 and 2016 Consolidated Financial Statements Financial Section 18-F-0039 ------- Table of Contents Principal Financial Statements 1 CONSOLIDATED BALANCE SHEET 1 CONSOLIDATED STATEMENT 01 NET COST 2 CONSOLIDATED STATEMENT OF NET COST BY MAJOR PROGRAM 3 CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION 4 COMBINED STATEMENT OF BUDGETARY RESOURCES 6 STATEMENT 01 CUSTODIAL ACTIVITY 7 Notes to the Financial Statements 8 Note 1. Summary of Significant Accounting Policies 8 Note 2. Fund Balance with Treasury (FBWT) 16 Note 3. Cash and Other Monetary Assets 17 Note 4. Investments 17 Note 5. Accounts Receivable, Net 18 Note 6. Other Assets 18 Note 7. Loans Receivable, Net 18 Note 8. Accounts Payable and Accrued Liabilities 20 Note 9. General Property, Plant, and Equipment, Net 20 Note 10. Debt Due to Treasury 21 Note 11. Stewardship Property Plant & Equipment 21 Note 12. Custodial Liability 21 Note 13. Other Liabilities 22 Note 14. Leases 23 Note 15. FECA Actuarial Liabilities 25 Note 16. Cashout Advances, Superfund 25 Note 17. Commitments and Contingencies 25 Note 18. Fund from Dedicated Collections (Unaudited) 27 Note 19. Intragovernmental Costs and Exchange Revenue 31 Note 20. Cost of Stewardship Land 31 Note 21. Environmental Cleanup Costs 32 Note 22. State Credits 33 Note 23. Preauthorized Mixed Funding Agreements 33 Note 24. Custodial Revenues and Accounts Receivable 33 Note 25. Reconciliation of President's Budget to the Statement of Budgetary Resources 35 Note 26. Recoveries and Resources Not Available, Statement of Budgetary Resources 35 Note 27. Unobligated Balances Available 35 18-F-0039 1 ------- Note 28. Undelivered Orders at the End of the Period 36 Note 29. Offsetting Receipts 36 Note 30. Transfers-In and Out, Statement of Changes in Net Position 36 Note 31. Imputed Financing 37 Note 32. Payroll and Benefits Payable 38 Note 33. Other Adjustments, Statement of Changes in Net Position 38 Note 34. Non-Exchange Revenue, Statement of Changes in Net Position 38 Note 35. Reconciliation of Net Cost of Operations to Budget 39 Note 36. Amounts Held by Treasury (Unaudited) 40 Note 37. Miscellaneous Receipts Violation, Anti-Deficiency Act Violations and Potential Anti-Deficiency Act Violations 43 Note 38. Other Information 44 Required Supplementary Information (Unaudited) 45 Deferred Maintenance 45 Stewardship Land 48 Supplemental Combined Statement of Budgetary Resources 49 Required Supplemental Stewardshiplnformation (Unaudited) 50 Investment in The Nation's Research and Development: 50 Investment in The Nation's Infrastructure: 51 Human Capital 52 18-F-0039 ------- Principal Financial Statements United States Environmental Protection Agency CONSOLIDATED BALANCE SHEET As of September 30, 2017, and 2016 (Dollars in Thousands) FY 2017 FY 2016 Assets: Intragovernmental: Fund Balance with Treasury (Note 2) $ 8,464,107 $ 8,341,156 Investments (Note 4) 5,326,013 5,308,734 Accounts Receivable, Net (Note 5) 17,804 7,210 Other (Note 6) 200,822 206,693 Total Intragovernmental 14,008,746 13,863,793 Cash and Other Monetary Assets (Note 3) 10 10 Accounts Receivable, Net (Note 5) 508,171 486,814 Property, Plant & Equipment, Net (Note 9) 719,488 1,041,200 Other (Note 6) 8,241 7,074 Total Assets $ 15,244,656 $ 15,398,891 Stewardship PP& E (Note 11) Liabilities: Intragovernmental: Accounts Payable and Accrued Liabilities (Note 8) $ 97,035 $ 73,891 Debt Due to Treasury (Note 10) - - Custodial Liability (Note 12) 22,548 42,579 Other (Notes 13) 134,983 82,412 Total Intragovernmental 254,566 198,882 Accounts Payable & Accrued Liabilities (Note 8) 523,713 521,056 Pensions & Other Actuarial Liabilities (Note 15) 45,245 45,037 Environmental Cleanup Costs (Note 21) 39,544 36,103 Cash-out Advances, Superfund (Note 16) 3,514,426 3,264,224 Commitments & Contingencies (Note 17) - - Payroll & Benefits Payable (Note 32) 205,632 210,797 Other (Note 13) 145,328 425,621 Total Liabilities $ 4,728,454 $ 4,701,720 Net Position: Unexpended Appropriations - Funds from Dedicated Collections (Note 18) 3,697 4,080 Unexpended Appropriations - Other Funds 7,302,077 7,263,400 Cumulative Results of Operations - Funds from Dedicated Collections (Note 18) 2,638,364 2,577,360 Cumulative Results of Operations - Other Funds 572,065 852,331 Total Net Position 10,516,203 10,697,171 Total Liabilities and Net Position $ 15,244,656 $ 15,398,891 The accompanying notes are an integral part of these statements. 18-F-0039 1 ------- United States Environmental Protection Agency CONSOLIDATED STATEMENT OF NET COST For the Fiscal Years Ended September 30, 2017 and 2016 (Dollars in Thousands) FY 2017 FY 2016 Costs: Gross Costs (Note 19) $ 9,024,232 $ 9,176,572 Less: Earned Revenue (Note 19) 532,663 448,388 Net cost of operations (notes 25 and 35) $ 8,491,569 $ 8,728,184 The accompanying notes are an integral part of these statements. 18-F-0039 ------- United States Environmental Protection Agency CONSOLIDATED STATEMENT OF NET COST BY MAJOR PROGRAM For the Fiscal Years Ended September 30, 2017 (Dollars in Thousands) Environ. Programs & Mgmt. Leaking Underground Storage Science & Tanks Technology Superfund State and Tribal Assistance Agreements Other Consolidated Totals Costs: Intragovernmental WCF Eliminations With the Public $ 924,012 2,093,973 4,437 200,358 275,695 85,996 612,169 1,219,020 54,159 3,395,913 112,492 (211,512) 257,520 1,571,153 (211,512) 7,664,591 Total Costs $ 3,017,985 90,433 812,527 1,494,715 3,450,072 158,500 9,024,232 Less: Earned Revenue, Federal WCF Eliminations Earned Revenue, non-Federal $ 40,400 10,275 7,356 26,733 1,274 389,103 - 231,229 (211,290) 37,583 305,718 (211,290) 438,235 Total Earned Revenue (Note 19) 50,675 8,630 415,836 . 57,522 532,663 Net Cost of Operations S 2,967,310 90,433 803,897 1,078,879 3,450,072 100,978 8,491,569 The accompanying notes are an integral part of these statements. United States Environmental Protection Agency CONSOLIDATED STATEMENT OF NET COST BY MAJOR PROGRAM For the Fiscal Year Ended September 30, 2016 (Dollars in Thousands) Environ. Programs & Mgmt. Leaking Underground Storage Science & Tanks Technology Superfund State and Tribal Assistance Agreements Other Consolidated Totals Costs: Intragovernmental With the Public $ 942,545 1,764,864 4,820 195,740 65,405 95,761 596,663 1,147,693 57,263 3,927,269 65,317 313,132 1,331,090 7,845,482 Total Costs $ 2,707,409 100,581 792,403 1,213,098 3,984,632 378,449 9,176,572 Less: Earned Revenue, Federal Earned Revenue, non-Federal $ 29,960 1,575 7,217 43,894 1,084 302,087 - 22,933 39,638 104,004 344,384 Total Earned Revenue (Note 19) 31,535 8,301 345,981 . 62,571 448,388 Net Cost of Operations S 2,675,874 100,581 784,102 867,117 3,984,632 315,878 8,728,184 The accompanying notes are an integral part of these statements. 18-F-0039 3 ------- United States Environmental Protection Agency CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION For the Fiscal Years Ended September 30, 2017 (Dollars in Thousands) FY 2017 Funds from Dedicated Collections FY 2017 All Other Funds FY 2017 Consolidated Total Cumulative Results of Operations: Net Position - Beginning of Period $ 2,577,361 $ 852,331 $ 3,429,692 Beginning Balances, as Adjusted 2,577,361 852,331 3,429,692 Budgetary Financing Sources: Appropriations Used Non-exchange Revenue - Securities Invest. (Note 34) Non-exchange Revenue - Other (Note 34) Transfers In/Out (Note 30) Trust Fund Appropriations Total Budgetary Financing Sources 2,991 47,445 246,289 (13,211) 953,850 1,237,364 7,945,939 24,041 (1,038,131) 6,931,849 7,948,930 47,445 246,289 10,830 (84,281) 8,169,213 Other Financing Sources (Non-Exchange): Imputed Financing Sources (Note 31) 13,425 89,669 103,094 Total Other Financing Sources Net Cost of Operations Net Change 13,425 (1,189,785) 61,004 89,668 (7,301,784) (280,266) 103,094 (8,491,569) (219,262) Cumulative Results of Operations $ 2,638,364 $ 572,065 $ 3,210,429 FY 2017 Funds from Dedicated Collections FY 2017 All Other Funds FY 2017 Consolidated Total Unexpended Appropriations: Net Position - Beginning of Period Beginning Balances, as Adjusted $ 4,080 4,080 $ 7,263,400 7,263,400 $ 7,267,480 7,267,480 Budgetary Financing Sources: Appropriations Received Other Adjustments (Note 33) Appropriations Used Total Budgetary Financing Sources Total Unexpended Appropriations 3,178 (570) (2,991) (383) 3,697 8,107,870 (123,254) (7,945,939) 38,677 7,302,077 8,111,048 (123,824) (7,948,930) 38,294 7,305,774 Total Net Position $ 2,642,061 $ 7,834,599 $ 10,516,203 The accompanying notes are an integral part of these statements. 18-F-0039 4 ------- United States Environmental Protection Agency CONSOLIDATED STATEMENT OF CHANGES IN NET POSITION For the Fiscal Year Ended September 30, 2016 (Dollars in Thousands) FY 2016 Funds from Dedicated Collections FY 2016 All Other Funds FY 2016 Consolidated Total Cumulative Results of Operations: Net Position - Beginning of Period Beginning Balances, as Adjusted $ 2,776,112 2,776,112 $ 783,828 783,828 $ 3,559,940 3,559,940 Budgetary Financing Sources: Appropriations Used Non-exchange Revenue - Securities Invest. (Note 34) Non-exchange Revenue - Other (Note 34) Transfers In/Out (Note 30) Trust Fund Appropriations Total Budgetary Financing Sources 1,807 38,303 231,305 (9,600) 711,684 973,499 8,263,715 28,789 (811,684) 7,480,820 8,265,522 38,303 231,305 19,189 (100,000) 8,454,319 Other Financing Sources (Non-Exchange) Transfers In/Out (Note 30) Imputed Financing Sources (Note 31) 23,954 119,663 143,617 Total Other Financing Sources 23,954 119,663 143,617 Net Cost of Operations (1,196,204) (7,531,980) (8,728,184) Net Change (198,751) 68,503 (130,248) Cumulative Results of Operations $ 2,577,361 $ 852,331 $ 3,429,692 FY 2016 Funds from Dedicated Collections FY 2016 All Other Funds FY 2016 Consolidated Total Unexpended Appropriations: Net Position - Beginning of Period $ 16,579 $ 7,783,251 $ 7,799,830 Beginning Balances, as Adjusted 16,579 7,783,251 7,799,830 Budgetary Financing Sources: Appropriations Received Appropriations Transferred In/Out (Note 30) Other Adjustments (Note 33) Appropriations Used 3,674 (13,294) (1,072) (1,807) 7,783,578 12,716 (52,429) (8,263,716) 7,787,252 (577) (53,501) (8,265,522) Total Budgetary Financing Sources (12,499) (519,851) (532,350) Total Unexpended Appropriations 4,080 7,263,400 7,267,482 Total Net Position $ 2,581,442 $ 8,115,732 $ 10,697,174 The accompanying notes are an integral part of these statements. 18-F-0039 5 ------- United States Environmental Protection Agency COMBINED STATEMENT OF BUDGETARY RESOURCES For the Fiscal Year Ended September 30, 2017 and 2016 (Dollars in Thousands) FY 2017 FY 2016 BUDGETARY RESOURCES Unobligated balance, brought forward, October 1: $ 4,242,051 $ 4,350,630 Adjustment to Un-Obligation Balance (Allocation Transfer Agencies) 21,150 961 Unobligated Balance Brought Forward, October 1, as adjusted 4,263,201 4,351,591 Recoveries of prior year unpaid obligations (Note 26) 330,486 234,361 Other changes in unobligated balance (42,261) (13,622) Unobligated balance from prior year budget authority, net 4,551,426 4,572,330 Appropriations (discretionary and mandatory) 9,370,266 9,096,422 Spending Authority from offsetting collection (discretionary and mandatory) 680,152 610,181 Total Budgetary Resources $ 14,601,844 $ 14,278,933 STATUS OF BUDGETARY RESOURCES New obligations and upward adjustments (total) $ 10,354,618 $ 10,036,882 Unobligated Balance, end of year: Apportioned 4,152,585 4,086,727 Unapportioned 1,992 36,008 Total Unobligated balance, end of period (Note 27) 4,154,577 4,122,735 Expired unobligated balance, end of year 92,649 119,316 Total Status of Budgetary Resources $ 14,601,844 $ 14,278,933 CHANGE IN OBLIGATED BALANCE Unpaid Obligations: Unpaid obligations, brought forward, October 1 (gross) $ 8,694,969 $ 9,104,831 Obligations incurred, net 10,354,618 10,036,882 Outlays (gross) (9,916,836) (10,212,494) Recoveries of prior year unpaid obligations (330,486) (234,361) Unpaid obligations, end of year (gross) $ 8,802,265 $ 8,694,858 Uncollected Payments Uncollected customer payments from Federal Sources, brought forward, October 1) (248,640) (235,529) Change in uncollected customer payments from federal sources (56,729) (13,111) Uncollected customer payments from Federal Sources, end of year (305,369) (248,640) Memorandum entries: Obligated balance, start of year $ 8,446,218 $ 8,869,302 Obligated balance, end of year (net) $ 8,496,895 $ 8,446,218 BUDGET AUTHORITY AND OUTLAYS, NET: Budget authority, gross (discretionary and mandatory) $ 10,050,418 $ 9,706,603 Actual offsetting collections (discretionary and mandatory) (644,573) (597,070) Change in uncollected customer payments from Federal sources (discretionary and mandatory) (56,729) (13,111) Budget Authority, net (discretionary and mandatory) $ 9,349,116 $ 9,096,422 Outlays, gross (discretionary and mandatory) $ 9,916,836 $ 10,212,494 Actual offsetting collections (discretionary and mandatory) (644,573) (597,070) Outlays, net (discretionary and mandatory) 9,272,263 9,615,424 Distributed offsetting receipts (Note 29) (1,109,453) (886,453) Agency outlays, net (discretionary and mandatory) $ 8,162,810 $ 8,728,971 The accompanying notes are an integral part of these statements. 18-F-0039 6 ------- United States Environmental Protection Agency STATEMENT OF CUSTODIAL ACTIVITY For the Fiscal Year Ended September 30, 2017 and 2016 (Dollars in Thousands) Revenue Activity: Sources of Cash Collections: Fines and Penalties Other Total Cash Collections Accrual Adjustment Total Custodial Revenue (Note 24) FY 2017 FY 2016 $ 1,571,258 $ 95,473 29,301 (4,333) 1,600,559 91,140 (19,545) 7,786 1,581,014 98,926 Disposition of Collections: Transferred to Others (General Fund) Increases/Decreases in Amounts Yet to be Transferred Total Disposition of Collections Net Custodial Revenue Activity 1,600,593 (19,579) 1,581,014 91,140 7,786 98,926 The accompanying notes are an integral part of these statements. 18-F-0039 ------- Environmental Protection Agency Notes to the Financial Statements Fiscal Year Ended September 30, 2017 and September 30, 2016 (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 2017 financial statements are presented on a consolidated basis for the Balance Sheet, Statement of Net Cost, Statement of Net Costs by Major Program, Statement of Changes in Net Position, Statement of Custodial Activity and a combined basis 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 (the 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-13 6, Financial Reporting Requirements, and the EPA accounting policies, which are summarized in this note. C. Budgets and Budgetary Accounting I. General Funds Congress enacts 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 two fiscal years. When the appropriations for the General Funds are enacted, Treasury issues a warrant for the respective appropriations. As the Agency disburses obligated amounts, the balance of funds available in the appropriation is reduced at the U.S. Treasury (Treasury). The EPA provided support for hurricane and wildfire relief via reimbursable agreements with other federal agencies. As of September 30, 2017, reimbursable agreements for Hurricane's Harvey, Irma, Maria, and Nate totaled $75.4 million. Reimbursable agreements for wildfire response totaled $51.0 million. These transactions are recorded in the Environmental Programs and Management appropriation. The EPA has one three-year appropriation account to provide funds to carry out section 3024 of the Solid Waste Disposal Act, including the development, operation, maintenance, and upgrading of the hazardous waste electronic manifest system. The Agency is authorized to establish and collect user fees for this account that will be used for the electronic manifest system. 18-F-0039 8 ------- The Water Infrastructure Finance and Innovation Act of 2014 (WIFIA) established a Federal credit program administered by the EPA for eligible water and wastewater infrastructure projects. The program is financed from appropriations to cover the estimated long-term cost of the loan. The long-term cost of the loans are defined as the net present value of the estimated cash flows associated with the loans. A permanent indefinite appropriation is available to finance the costs of re-estimated loans that occur in subsequent years after the loans were disbursed. The Agency received a two-year appropriation in fiscal year 2017 to finance the administration and subsidy portions of the program. As of September 30, 2017, no loan amounts have been obligated or disbursed. Funds transferred from other federal agencies are processed as non-expenditure transfers. 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. II. Revolving Funds Funding of the Reregi strati on 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 the Agency administrative support for computer and telecommunication services, financial system services, employee relocation services, background investigations, continuity of operations, and postage. The Natural Resource Damages Trust Fund (NRDA) was established for funds received for critical damage assessments and restoration of natural resources injured as a result of the Deepwater Horizon oil spill. III. Special Funds The Environmental Services Receipts Account Fund obtains fees associated with environmental programs. IV. Deposit Funds Deposit accounts receive no appropriated funds. Amounts are recorded to the deposit accounts pending further disposition. Until a determination is made, these are not the EPA's funds. The amounts are reported to the US Treasury through the Government-Wide Treasury Account Symbol Adjusted Trial Balance System V. Trust Funds Congress enacts an annual appropriation for the Superfund, Leaking Underground Storage Tank (LUST) and the Inland Oil Spill Programs accounts to remain available until expended. Transfer accounts for the Superfund and LUST Trust Funds have 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 Funds held 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 enacts the Inland Oil Spill Programs appropriation amount to the EPA's Inland Oil Spill Programs account. In 2015, the EPA established a receipt account for Superfund special account collections. Special accounts are comprised of reimbursements from other federal agencies, state cost share payments under Superfund State Contracts (SSCs), and settlement proceeds from Potentially Responsible Parties (PRPs) under 18-F-0039 9 ------- Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Section 122(b)(3). This allows the Agency to invest the funds until draw down is needed for special accounts disbursements. 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 and the American Institute of Certified Public Accountants (AICPA). The financial statements are prepared in accordance with GAAP for federal entities. Transactions are recorded on an accrual accounting basis and a budgetary basis. 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 posted in accordance with OMB directives and the U.S. Treasury regulations. EPA uses a modified matching principle since federal entities recognize unfunded (without budgetary resources) liabilities in accordance with FASAB Statement of Federal Financial Accounting Standards (SFFAS) No. 5 "Accounting for Liabilities of the Federal Government." E. Revenues and Other Financing Sources The following the EPA policies and procedures to account for inflow of revenue and other financing sources are in accordance with SFFAS No. 7, "Accounting for Revenues and Other Financing Sources." I. Superfund 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 PRPs under Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Section 122(b)(3) which are placed into Special Accounts. Special Accounts and corresponding interest are classified as mandatory appropriations due to the 'retain and use' authority under CERCLA 122(b) (3). Cost recovery settlements that are not placed in special accounts are deposited in the Superfund Trust Fund. II. Other Funds Funds under the Federal Credit Reform Act of 1990 receive program guidance and funding needed to support loan programs through appropriations which may be used within statutory limits for operating and capital expenditures. The WIFIA program receives additional funding to support the awarding, servicing and collections of loans and loan guarantees through application fees collected in the program fund. WIFIA authorizes the EPA to charge fees to recover all or a portion of the Agency's cost of providing credit assistance and the costs of retaining expert firms, including financial engineering, and legal services, to assist in the underwriting and servicing of Federal credit instruments. The fees are to cover costs to the extent not covered by congressional appropriations. The FIFRA and PRIA funds receive funding through fees collected for services provided and interest on invested funds. The WCF receives revenue through fees collected for services provided from the Agency program offices. Such revenue is eliminated with related Agency program expenses upon consolidation of the Agency's financial statements. 18-F-0039 10 ------- 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. 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 Superfund accounts receivable represent recovery of costs from PRPs as provided under CERCLA as amended by Superfund Amendments and Reauthorization Act of 1986 (SARA). Since there is no assurance that these funds will be recovered, cost recovery expenditures are expensed when incurred (see Note 5). The Agency also records allocations receivable from the Superfund Trust Fund, which are eliminated in the consolidated totals. 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 primary responsibility 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. The majority of remaining receivables for non-Superfund funds represent penalties and interest receivable for general fund receipt accounts, unbilled intragovernmental reimbursements receivable, and refunds receivable for the STAG appropriation. 18-F-0039 11 ------- K. Advances and Prepayments Advances and prepayments represent funds paid to other entities both internal and external to the Agency for which a budgetary expenditure has not yet occurred. L. Appropriated Amounts Held by Treasury Cash available to the Agency that is not needed immediately for current disbursements of the Superfund and LUST Trust Funds and amounts appropriated from the Superfund Trust Fund to the OIG, remains in the respective Trust Funds managed by Treasury. M. Property, Plant, and Equipment The EPA accounts for its personal and real property accounting records in accordance with SFFAS No. 6, "Accounting for Property, Plant and Equipment" as amended. For EPA-held property, the Fixed Assets Subsystem (FAS) maintains the official records and automatically generates depreciation entries monthly based on in-service dates. A purchase of EPA-held or contractor-held personal property is capitalized if it is valued at $25 thousand or more and has an estimated useful life of at least two years. For contractor-held property, depreciation is taken on a modified straight-line basis over a period of six years depreciating 10 percent the first and sixth year, and 20 percent in years two through five. 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 two to 15 years. Personal property includes 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 projected 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 $150 thousand capitalization threshold. In addition, the lease must meet one of the following criteria: transfers ownership at the end of the lease to the 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 projected cash flows of the lease and other minimum lease payments is equal to or exceeds 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, the 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 the 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 the 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 WCF. This property is retained in FAS, depreciated utilizing the straight-line method based upon the asset's in- service date and useful life and is reflected on the WCF statements. Real property consists of land, buildings, capital and leasehold improvements and capital leases. In FY 2017, the EPA increased the capitalization threshold for real property, other than land, to $150 thousand from $85 thousand for buildings and improvements and $25 thousand for plumbing, heating, and sanitation projects. 18-F-0039 12 ------- The new threshold will be applied prospectively. 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 50 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. Internal use software includes purchased commercial off-the-shelf software, contractor-developed software, and software that was internally developed by Agency employees. In FY 2017, the EPA reviewed its capitalization threshold levels for PP&E. The Agency performed an analysis of the values of software assets, reviewed capitalization of other federal entities, and evaluated the materiality of software account balances. Based on the review, the Agency increased the capitalization threshold from $250 thousand to $5 million to better align with major software acquisition investments. The $5 million threshold will be applied prospectively to software acquisitions and modifications/enhancements placed into service after September 30, 2016. Software assets placed into service prior to October 1, 2016 were capitalized at the $250 thousand threshold. Internal use software is capitalized at full cost (direct and indirect) and amortized using the straight-line method over its useful life, not exceeding five years. Internal use software purchased or developed for the working capital fund is capitalized at $250 thousand and is amortized using the straight-line method over its useful life, not exceeding 5 years N. 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 authorized for retention. 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. O. Borrowing Payable to the Treasury Borrowing payable to Treasury results from loans from Treasury to fund the WIFIA direct loans. Periodic principal payments are made to Treasury based on the collections of loans receivable. As of September 30, 2017, no loans have been disbursed. P. Accrued Unfunded Annual Leave Annual, sick and other leave is expensed as taken during the fiscal year. Annual leave earned but not taken at the end of the fiscal year is accrued as an unfunded liability. Accrued unfunded annual leave is included in the Balance Sheet as a component of "Payroll and Benefits Payable." Sick leave earned but not taken is not accrued as a liability. It is expensed as it is used. Q. 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, 1987, the Federal Employees Retirement System (FERS) went into effect pursuant to Public Law 99-335. Most employees hired after December 31, 1986, are automatically covered by FERS and Social Security. Employees hired prior to January 1, 1987, elected to either join FERS and Social Security or remain in CSRS. A primary feature of 18-F-0039 13 ------- 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. R. Prior Period Adjustments 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. S. 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. On September 10, 2012, the President designated the EPA and United States Department of Agriculture as additional trustees for the Natural Resource Damage and Assessment Council for restoration solely conjunction with injury to, destruction of, loss of, or loss of the use of natural resources, including their supporting ecosystems, resulting from the Deepwater Horizon Oil Spill. In FY 2016, the EPA received an advance of $184 thousand from BP and $2 million from the U.S. Coast Guard, to participate in addressing injured natural resources and service resulting from the Deepwater Horizon Oil Spill. In FY2017, the EPA returned the reminder of the fund amount of $440 thousand. T. Hurricane Sandy On January 29, 2013, President Obama signed into law the Disaster Relief Appropriations Act (Disaster Relief Act) which provided aid for Hurricane Sandy disaster victims and their communities. Because relief funding of this magnitude often carries additional risk, the Disaster Relief Act required federal agencies supporting Sandy recovery and other disaster-related activities to write and implement and Internal Control Plan to prevent waste, fraud and abuse of these funds. The EPA Hurricane Sandy Internal Control Plan was reviewed and approved by OMB, GAO and the IG in FY 2013. The EPA received a post sequestration appropriation of $577 million in Hurricane Sandy funds for the following programs (all amounts are post sequestration): a) The Clean Water State Revolving Fund received $475 million for work on clean water infrastructure projects in New York and New Jersey. b) The Drinking Water State Revolving Fund received $95 million for work on drinking water infrastructure projects in New York and New Jersey. c) The Leaking Underground Storage Tanks program received $5 million for work on projects impacted by Hurricane Sandy. 18-F-0039 14 ------- d) The Superfund program received $2 million for work on Superfund sites impacted by Hurricane Sandy. e) The EPA also received $689 thousand to make repairs to the EPA facilities impacted by Hurricane Sandy and conduct additional water quality monitoring. U. Puerto Rico Insolvency In February 2016, the Puerto Rico Aqueduct and Sewer Authority (PRASA) requested a restructuring of the Clean Water and Drinking Water SRF debt due to a lack of cash flows and inability to access the municipal bond market. PRASA is the primary utility for Puerto Rico and, at the time of their request, the debt outstanding to the SRFs was $547 million. Annual debt service to the SRFs is approximately $37 million per year. In June 2016, the EPA and the Puerto Rico SRFs agreed to a 1 year forbearance on principal and interest payments. In June 2017, the 1 year forbearance which was to end on June 30, 2017, was extended for an additional 6 months, ending December 30, 2017. In May, following PRASA's fiscal plan approval by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) oversight board created by Congress, the EPA and the Puerto Rico SRFs began negotiations with PRASA on restructuring current debt and setting terms for future debt. If a restructuring agreement between the SRFs and PRASA is reached prior to the end of current forbearance, the restructuring agreement will supersede the forbearance. PRASA continues to work with the EPA in its fiduciary and oversight capacity, the Commonwealth SRF Agencies, and private debt holders to restructure its debt obligations owed the Commonwealth SRF Agencies. V. 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, including environmental and grant liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 18-F-0039 15 ------- Note 2. Fund Balance with Treasury (FBWT) Fund Balance with Treasury as of September 30, 2017 and September 30, 2016, consists of the following: Entity Assets FY 2017 Non-Entity Assets Total Entity Assets FY 2016 Non-Entity Assets Total Fund Balances Trust Funds: Superfund $ 155,259 - 155,259 $ 113,897 - 113,897 LUST 68,266 - 68,266 52,354 - 52,354 Oil Spill & Misc. 11,129 - 11,129 9,835 - 9,835 Revolving Funds: FIFRA/Tolerance 43,614 - 43,614 31,654 - 31,654 Working Capital 101,524 - 101,524 116,853 - 116,853 E-Manifest 5,385 - 5,385 5,230 - 5,230 NRDA 2,729 - 2,729 3,027 - 3,027 Appropriated 7,604,790 - 7,604,790 7,558,470 - 7,558,470 Other Fund Types 467,626 3,785 471,411 444,471 5,335 449,826 Total $ 8,460,322 3,785 8,464,107 $ 8,335,801 5,335 8,341,156 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 the EPA for other entities. Status of Fund Balances with Treasury: Unobligated Amounts in Fund Balance: FY 2017 FY 2016 Available for Obligation $ 4,154,001 $ 4,086,786 Unavailable for Obligation 94,641 155,324 Net Receivables from Invested Balances (4,797,519) (4,826,953) Balances in Treasury Trust Fund (Note 36) 15,112 14,268 Obligated Balance not yet Disbursed 8,496,895 8,446,266 Non-Budgetary FBWT 500,977 465,465 Totals $ 8,464,107 $ 8,341,156 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 2017 and FY 2016 no differences existed between Treasury's accounts and the EPA's statements for fund balances with Treasury. 18-F-0039 16 ------- Note 3. Cash and Other Monetary Assets As of September 30, 2017, and September 30, 2016, the balance in the imprest fund was $10 thousand. Note 4. Investments As of September 30, 2017, and September 30, 2016, investments related to Superfund and LUST consist of the following: Amortized (Premium) Interest Investments, Market Cost Discount Receivable Net Value Intragovernmental Securities: Non-Marketable FY 2017 $ 5,329,067 6,455 3,401 5,326,013 5,326,013 Non-Marketable FY 2016 $ 5,298,243 (7,209) 3,282 5,308,734 5,308,734 CERCLA, as amended by SARA, authorizes the 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, the 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. All investments in Treasury securities are funds from dedicated collections (see Note 18). The Federal Government does not set aside assets to pay future benefits or other expenditures associated with funds from dedicated collections. The cash receipts collected from the public for dedicated collection funds are deposited in the U.S. Treasury, which uses the cash for general Government purposes. Treasury securities are issued to the EPA as evidence of its receipts. Treasury securities are an asset to the EPA and a liability to the U.S. Treasury. Because the 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 the EPA with authority to draw upon the U.S. Treasury to make future benefit payments or other expenditures. When the 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. 18-F-0039 17 ------- Note 5. Accounts Receivable, Net The Accounts Receivable as of September 30, 2017 and September 30, 2016 consist of the following: FY 2017 FY 2016 Intragovernmental: Accounts & Interest Receivable $ 19,227 $ 8,618 Less: Allowance for Un-collectibles (1,423) (1,408) Total $ 17,804 $ 7,210 Non-Federal: Unbilled Accounts Receivable $ 206,044 $ 150,538 Accounts & Interest Receivable 2,413,358 2,395,903 Less: Allowance for Un-collectibles (2,111,231) (2,059,627) Total $ 508,171 $ 486,814 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, 2017 and September 30, 2016 consist of the following: FY 2017 FY 2016 Intragovernmental: Advances to Federal Agencies $ 200,703 $ 206,597 Advances for Postage 119 96 Total $ 200,822 $ 206,693 Non-Federal: Travel Advances $ 79 $ 187 Securities from Debt Settlement 1,863 - Other Advances 6,196 6,598 Inventory for Sale 103 289 Total $ 8,241 $ 7,074 Note 7. Loans Receivable, Net Loans Receivable generally consists of 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. As of September 30, 2017, the EPA has not disbursed any loans for the WIFIA program, but has incurred $1.79 million in administrative expenses. 18-F-0039 18 ------- Schedule for Reconciling Subsidy Cost Allowance Balances (Post-1991 Direct Loans) FY2017 FY2016 Beginning balance of the subsidy cost allowance $ S 337 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 337 Adjustments: Loan Modification - Fees received - Foreclosed property acquired - Loans written off - Subsidy allowance amortization - Other (337) End balance of the subsidy cost allowance before reestimates - Add or subtract subsidy reestimates by component: (a) Interest rate reestimate - (b) Technical/default reestimate - Total of the above reestimate components - Ending Balance of the subsidy cost allowance $ - J EPA has not disbursed Direct Loans since 1993. 18-F-0039 19 ------- 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, 2017 and September 30, 2016: FY 2017 FY 2016 Intragovernmental: Accounts Payable $ 4,199 $ 2,157 Allocation Liability - 578 Accrued Liabilities 92,836 71,156 Total $ 97,035 $ 73,891 FY 2017 FY 2016 Non-Federal: Accounts Payable $ Advances Payable Interest Payable Grant Liabilities Other Accrued Liabilities Total $ 58,212 17 5 296,157 169,322 523,713 63,833 19 5 309,716 147,483 521,056 Other Accrued Liabilities are mostly comprised of contractor accruals. 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, 2017, and September 30, 2016, General PP&E consisted of the following: FY 2017 FY 2016 Acquisition Accumulated Net Book Acquisition Accumulated Net Book Value Depreciation Value Value Depreciation Value EPA-Held Equipment ! S 304,068 (198,897) 105,171 3 5 296,381 (196,484) 99,897 Software (production) 437,334 (364,300) 73,034 733,326 (545,672) 187,654 Software (development) 47,377 - 47,377 267,355 - 267,358 Contractor-Held Equip. 39,759 (24,117) 15,642 37,261 (25,579) 11,682 Land and Buildings 742,932 (269,779) 473,153 721,809 (253,182) 468,627 Capital Leases 24,485 (19,374) 5,111 24,485 (18,500) 5,985 Total ! $ 1,595,955 (876,467) 719,488 5 5 2,080,617 (1,039,417) 1,041,200 In FY 2015, the Agency initiated an intensive remediation effort to address the material weakness in how the Agency accounts for software. The Agency disclosed a material weakness through its internal control review of software capitalization processes in FY 2014. The material weakness was cited in the, "Audit of the EPA's Fiscal Year's 2014 and 2013 (Restated) Consolidated Financial Statements" report, dated November 17, 2014. The significant decrease in software acquisition value from FY 2016 to FY 2017 is attributable to the Agency's ongoing software material weakness remediation efforts. A key part of this remediation effort has been improving procedures for validating expenditures that require capitalization and improving communications between Agency program offices and the accounting office. In FY 2017, there was an increase in software acquisition values totaling $46.8 million. There were also decreases totaling $562.8 million due to software disposals, reclassification of capitalized software costs to expense, and adjustments to asset values, including depreciation. The increase in the Agency's capitalization threshold was effective on October 1, 2016 and did not have a material effect in the change in software asset values. 18-F-0039 20 ------- Note 10. Debt Due to Treasury As of September 30, 2017, the EPA does not have any debt due to Treasury. In FY 2017, the EPA did not borrow funds to finance the WIFIA Loan Program. The debt to Treasury as of September 30, 2017 and September 30, 2016 is as follows: All Other Funds FY 2017 FY 2016 Beginning Net Ending Beginning Net Ending Balance Borrowing Balance Balance Borrowing Balance Intragovernmental: Debt to Treasury $ - - - $ 34 (34) Note 11. Stewardship Property Plant & Equipment 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, 2017, and 2016, the Agency possessed the following land and land rights: FY 2017 FY2016 Superfund Sites with Easements: Beginning Balance Additions Withdrawals Ending Balance Superfund Sites with Land Acquired: Beginning Balance Additions Withdrawals Ending Balance 38 1 39 34 $ 1 1 34 $ 36 2 ~38~ 35 1 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, 2017, and September 30, 2016, custodial liability is approximately $22.5 million and $42.6 million, respectively. 18-F-0039 21 ------- Note 13. Other Liabilities Other Liabilities consist of the following as of September 30, 2017: Covered by Not Covered by ' 1 '/\f ol Budgetary Resources Budgetary Resources 1 Oldl Other Liabilities - Intragovernmental: Current Employer Contributions & Payroll Taxes $ 19,119 - 19,119 WCF Advances 1,676 - 1,676 Other Advances 9,235 - 9,235 Advances, Superfund Cash-out 65,807 - 65,807 Deferred Superfund Cash-out 7,853 - 7,853 Liability for Deposit Funds 53 - 53 Non-Current Unfunded FECA Liability - 8,839 8,839 Unfunded Unemployment Liability - 401 401 Payable to Treasury Judgment Fund - 22,000 22,000 Total Intragovernmental $ 103,743 31,240 134,983 Other Liabilities - Non-Federal: Current Unearned Advances, Non-Federal $ 121,339 - 121,339 Liability for Deposit Funds, Non-Federal 6,441 - 6,441 Non-Current Capital Lease Liability - 17,548 17,548 Total Non-Federal $ 127,780 17,548 145,328 Other Liabilities consist of the following as of September 30, 2016: Covered by Not Covered by ' 1 4- 4 k 1 Budgetary Resources Budgetary Resources 1 Otiil Other Liabilities - Intragovernmental Current Employer Contributions & Payroll Taxes $ 14,879 - 14,879 WCF Advances 2,354 - 2,354 Other Advances 6,709 - 6,709 Advances, Superfund Cash-out 51,259 - 51,259 Deferred Superfund Cash-out (24,359) - (24,359) Non-Current Unfunded FECA Liability - 9,295 9,295 Unfunded Unemployment Liability - 276 276 Payable to Treasury Judgment Fund - 22,000 22,000 Total Intragovernmental $ 50,841 31,571 82,412 Other Liabilities - Non-Federal Current Unearned Advances, Non-Federal $ 399,766 - 399,766 Liability for Deposit Funds, Non-Federal 7,200 - 7,200 Non-Current Capital Lease Liability - 18,655 18,655 Total Non-Federal $ 409,966 18,655 425,621 In FY 2017, the EPA reclassified liabilities from "Other" to "Superfund Cashout Advances" for presentation purposes, leading to a variance of $280.2 million between fiscal years 2016 and 2017. 18-F-0039 22 ------- Note 14. Leases A. Capital Leases: The value of assets held under Capital Leases as of September 30, 2017 and 2016 are as follows: FY 2017 FY 2016 Summary of Assets Under Capital Lease: Real Property $ 24,485 $ 24,485 Personal Property - Total $ 24,485 $ 24,485 Accumulated Amortization $ 19,374 $ 18,500 The EPA has one capital lease for land and buildings housing scientific laboratories. This lease includes 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 EPA's lease will terminate in FY 2025. Future Payments Due: Fiscal Year Capital Leases 2018 $ 4,215 2019 4,215 2020 4,215 2021 4,215 2022 4,215 After 5 Years 9,835 Total Future Minimum Lease Payments 30,910 Less: Imputed Interest (13,362) Net Lease Liability 17,548 Liability not Covered by Budgetary Resources $ 17,548 B. Operating Leases: The GSA provides leased real property (land and buildings) as office space for the EPA employees. GSA charges a Standard Level User Charge that approximates the commercial rental rates for similar properties. The EPA has three 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. These charges are expended from the EPM appropriation. The total minimum future operating lease costs are listed below: Operating Leases, Land Fiscal Year and Buildings 2018 $ 84 2019 53 2020 9 Total Future Minimum Lease Payments $ 146 18-F-0039 ------- ------- 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, the 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, 2017 and 2016 was $45.2 million and $45.0 million, respectively. The estimated future costs are recorded as an unfunded liability. The FY 2017 present value of these estimated outflows is calculated using a discount rate of 2.683 percent in the first year, and 2.683 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 the EPA, a state, or another responsible party 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), cash-out funds received by the 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 the EPA without further appropriation by Congress. As of September 30, 2017, and September 30, 2016, cash-out advances are $3.5 billion and $3.3 billion respectively. Note 17. Commitments and Contingencies The EPA may be a party in various administrative proceedings, actions and claims brought by or against it. These include: a) Various personnel actions, suits, or claims brought against the Agency by employees and others. b) Various contract and assistance program claims brought against the Agency by vendors, grantees and others. c) The legal recovery of Superfund costs incurred for pollution cleanup of specific sites, to include the collection of fines and penalties from responsible parties. d) 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, 2017, and 2016 there were no accrued liabilities for commitments and potential loss contingencies. 18-F-0039 25 ------- A. Gold King Mine On August 5, 2015, the EPA was conducting an investigation of the Gold King Mine near Silverton, Colorado. While excavating part of the mine, pressurized water began leaking above the mine tunnel, spilling about three million gallons of contaminated water stored behind the collapsed material in Cement Creek, a tributary of the Animas River. In fiscal year 2017 and subsequent fiscal years, the Agency has received and anticipates receiving administrative tort legal claims for compensation from individuals and entities who may have suffered personal injury or property damage from the spill. Subject to the materiality threshold, the Agency will begin to report on such matters when claims are filed and contingent legal liabilities are known. See Section B in regards to cases that have been filed under CERCLA relating to Gold King Mine. B. Superfund Under CERCLA Section 106(a), the 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 the 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. As of September 30, 2017, there is one case pending against the EPA that is reported under Environmental Liabilities below: Bob's Home Service Landfill ($900 thousand) is reported as a reasonably possible liability. There are six matters concerning Land O' Lakes (Hudson Oil Refinery Superfund Site), CERCLA 106(b) Petition No. 15-01, CERCLA, New Mexico v. EPA et al., Navajo Nation v. EPA et al., McDaniel et al., and Jan Burgess et al. The amounts are estimated at $18 million, $20 million, $154 million, $160 million, $70 million and $722 million respectively but they are only reasonably possible and the final outcomes are not probable. C. Judgment Fund In cases that are paid by the U.S. Treasury Judgment Fund, the 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." The EPA has a $22 million liability to the Treasury Judgment Fund for a payment made by the Fund to settle a contract dispute claim. As of September 30, 2017, there is no other case pending in the court. 18-F-0039 26 ------- Note 18. Fund from Dedicated Collections (Unaudited) Environmental Services LUST Superfund Other Funds from Dedicated Collections Total Funds from Dedicated Collections Balance sheet as of September 30, 2017 Assets Fund Balance with Treasury Investments Accounts Receivable, Net Other Assets $ 444,637 68,265 529,482 37,647 699 155,260 4,796,531 416,861 20,558 85,847 26 599 754,009 5,326,013 454,534 21,856 Total Assets $ 444,637 636,093 5,389,210 86,472 6,556,412 Other Liabilities 44,841 3,789,256 80,254 3,914,351 Total Liabilities $ 44,841 3,789,256 80,254 3,914,351 Unexpended Appropriation Cumulative Results of Operations 444,637 591,252 (2) 1,599,956 3,699 2,519 3,697 2,638,364 Total Liabilities and Net Position $ 444,637 636,093 5,389,210 86,472 6,556,412 Statement of Net Cost for the Period Ended September 30,2017 Gross Program Costs Less: Earned Revenues $ 90,432 1,495,192 416,036 67,414 47,217 1,653,038 463,253 Net Cost of Operations $ 90,432 1,079,156 20,197 1,189,785 Statement of Changes in Net Position for the Period ended September 30,2017 Net Position, Beginning of Period $ 421,406 546,543 1,608,142 5,350 2,581,441 Non-exchange Revenue- Securities Investments Non-exchange Revenue Other Budgetary Finance Sources Other Financing Sources Net Cost of Operations 23,231 3,048 225,193 (93,100) (90,432) 44,166 (701) 1,014,090 13,413 (1,079,156) 230 (1,434) 22,257 12 (19,721) 47,444 246,289 943,247 13,245 (1,189,785) Change in Net Position 23,231 44,709 (8,188) 868 60,620 Net Position $ 444,637 591,252 1,599,954 6,218 2,642,061 18-F-0039 27 ------- Environmental Services LUST Superfund Other Funds from Dedicated Collections Total Funds from Dedicated Collections Balance sheet as of September 30, 2016 Assets Fund Balance with Treasury $ 421,414 52,354 113,898 72,802 660,468 Investments - 500,831 4,807,903 - 5,308,734 Accounts Receivable, Net - 52,806 362,806 30 415,642 Other Assets - 426 79,923 2,882 83,231 Total Assets $ 424,414 606,417 5,364,530 75,714 6,468,075 Other Liabilities 9 59,874 3,756,388 70,364 3,886,635 Total Liabilities $ g 59,874 3,756,388 70,364 3,886,635 Unexpended Appropriation - - 4 4,076 4,080 Cumulative Results of Operations 421,405 546,543 1,608,138 1,274 2,577,360 Total Liabilities and Net Position $ 421,414 606,417 5,364,530 75,714 6,468,075 Statement of Net Cost for the Period Ended September 30,2016 Gross Program Costs $ 100,581 1,422,150 69,449 1,592,180 Less: Earned Revenues 5 - 345,981 49,990 395,976 Net Cost of Operations $ (5) 100,581 1,076,169 19,459 1,196,204 Statement of Changes in Net Position for the Period ended September 30, 2016 Net Position, Beginning of Period $ 397,831 543,481 1,844,999 6,379 2,792,690 Non-exchange Revenue- Securities Investments - 960 37,311 32 38,303 Non-exchange Revenue 23,569 202,681 8,490 (3,435) 231,305 Other Budgetary Finance Sources - (100,000) 769,602 21,790 691,392 Other Financing Sources - 2 23,909 43 23,954 Net Cost of Operations 5 (100,581) (1,076,169) (19,459) (1,196,204) Change in Net Position 23.574 3,062 (236,857) (1,029) (211,250) Net Position $ 421,405 546,543 1,608,142 5,350 2,581,440 18-F-0039 28 ------- A. Funds from Dedicated Collections are as follows i. 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. ii. Leaking Underground Storage Tank (LUST) Trust Fund: The LUST Trust Fund, was authorized by the 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 and prevention grants 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. iii. 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 the Department of Justice 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 parties, or other Federal agencies. The Superfund Trust Fund includes Treasury's collections, special account receipts from settlement agreements, and investment activity. B. Other Funds from Dedicated Collections i. Inland Oil Spill Programs Account: The Inland Oil Spill Programs Account was authorized by the Oil Pollution Act of 1990 (OPA). Monies are appropriated from the Oil Spill Liability Trust Fund to the EPA's Inland Oil Spill Programs 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. ii. Pesticide Registration Fund: The Pesticide Registration Fund authorized by a 2004 Act, "Consolidated Appropriations Act (P.L. 108- 199)," and reauthorized until September 30, 2019, 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. 18-F-0039 29 ------- hi. 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. iv. 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). 18-F-0039 30 ------- Note 19. 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 (apart from interest earned on trust fund investments), and miscellaneous earned revenue. FY2017 FY2016 Intragovern With the Intragovern With the -mental Public Total -mental Public Total Env. Programs & Management: Program Costs $ $924,012 2,093,973 3,017,985 ! S 942,545 1,764,864 2,707,409 Earned Revenue 40,400 10,275 50,675 29,960 1,575 31,535 NET COSTS 883,612 2,083,698 2,967,310 912,585 1,763,289 2,675,874 Leaking Underground Storage Tanks: Program Costs 4,437 85,996 90,433 4,820 95,761 100,581 Earned Revenue - - - - - - NET COSTS 4,437 85,996 90,433 4,820 95,761 100,581 Science & Technology: Program Costs 200,358 612,169 812,527 195,740 596,663 792,403 Earned Revenue 7,356 1,274 8,630 7,217 1,084 8,301 NET COSTS 193,002 610,895 803,897 188,523 595,579 784,102 Superfund: Program Costs 275,695 1,219,020 1,494,715 65,405 1,147,693 1,213,098 Earned Revenue 26,733 389,103 415,836 43,894 302,087 345,981 NET COSTS 248,962 829,917 1,078,879 21,511 845,606 867,117 State and Tribal Assistance Agreements: Program Costs 54,159 3,395,913 3,450,072 57,263 3,927,369 3,984,632 Earned Revenue - - - - - - NET COSTS 54,159 3,395,913 3,450,072 57,263 3,927,369 3,984,632 Other: Program Costs 112,492 257,520 343,721 65,317 313,132 378,449 WCF Eliminations (211,512) - (211,512) - - - Earned Revenue 231,229 37,583 295,103 22,933 39,638 62,571 WCF Eliminations (211,290) - (211,290) - - - NET COSTS (118,959) 219,937 100,978 42,384 273,494 315,878 Total Program Costs 1,359,641 7,664,591 9,024,232 1,331,090 7,845,482 9,176,572 Earned Revenue 94,428 438,235 532,663 104,004 344,384 448,388 NET COSTS $ 1,265,213 7,226,356 8,491,569 I S 1,227,086 7,501,098 8,728,184 Intragovernmental costs relate to the source of goods or services not the classification of the related revenue. Note 20. Cost of Stewardship Land The EPA had one acquisition of Superfund site with Easements, and one acquisition of Superfund site with Land acquired as of September 30, 2017. The acquisition of Superfund site with Easements contains four 20 year easements at the site, with no acquisition cost. The acquisition of Superfund site with land acquired was valued at $36 thousand with an option for an additional 12 months ($18 thousand). The EPA also had a property transfer of ownership via a Quit Claim Deed. 18-F-0039 ------- Note 21. Environmental Cleanup Costs Annually, the EPA is required to disclose its audited estimated future costs associated with: a) Clean up of hazardous waste and restoration of the facility when a facility is closed, and b) Costs to remediate known environmental contamination resulting from the Agency's operations. The EPA has 19 sites responsible for clean-up cost incurred under federal, state, and/or local regulations to remove from, contain, or dispose of hazardous material fund located at these facilities. The EPA is required to report the estimated costs related to: a) Clean-up from federal operations resulting in hazardous waste b) Accidental damage to nonfederal property caused by federal operations, and c) Other damage to federal property caused by federal operations or natural forces. The key to distinguishing between future clean-up costs versus an environmental liability is to determine whether the event (accident, damage, etc.) has already occurred and whether we can reasonably estimate the cost to remediate the site. The EPA has elected to recognize the estimated total clean-up cost as a liability and record changes to the estimate in subsequent years. As of September 30, 2017, the EPA has 1 site that requires clean-up stemming from its activities. The claimants' chances of success are characterized as reasonably possible with costs amounting to $900 thousand that may be paid out of the Treasury Judgment Fund. For sites that had previously been listed, it was determined by the EPA's Office of General Counsel to discontinue reporting the potential environmental liabilities for the following reasons: (1) although the 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 the EPA; (2) any demand against the EPA will be resolved only after the Superfund clean-up work is completed, which may be years in the future; and (3) there was no legal activity on these matters in FY 2017 and FY 2016. A. Accrued Clean-up Cost The EPA has 19 sites and is required to fund the environmental clean-up of those sites. As of September 30, 2017, the estimated costs for site clean-up were $39.5 million unfunded, and $500 thousand funded, respectively. In 2016 the estimated costs for site clean-up were $36.1 million unfunded, $1.1 million funded, respectively. Since the clean-up costs associated with permanent closure were not primarily recovered through user fees, the EPA has elected to recognize the estimated total clean-up cost as a liability and record changes to the estimate in subsequent years. In FY 2017, the estimate for unfunded clean-up cost increased by $3.4 million from the FY 2016 estimate. This increase is primarily due to the closure of several EPA buildings in various regions. 18-F-0039 32 ------- Note 22. State Credits Authorizing statutory language for Superfund and related Federal regulations requires states to enter into Superfund State Contracts (SSC) when the 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 the 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 the EPA has determined to be reasonable, documented, direct out-of-pocket expenditures of non- Federal funds for remedial action. Once the 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 the EPA. As of September 30, 2017, and September 30, 2016, the total remaining state credits have been estimated at $22.2 million, and $22.2 million, respectively. Note 23. Preauthorized Mixed Funding Agreements Under Superfund preauthorized mixed funding agreements, PRPs agree to perform response actions at their sites with the understanding that the EPA will reimburse them a certain percentage of their total response action costs. The 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, 2017, the EPA had 4 outstanding preauthorized mixed funding agreements with obligations totaling $1.4 million. As of September 30, 2016, the EPA had 4 outstanding preauthorized mixed funding agreements with obligations totaling $4.7 million. A liability is not recognized for these amounts until all work has been performed by the PRP and has been approved by the EPA for payment. Further, the 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 the EPA. Note 24. Custodial Revenues and Accounts Receivable FY 2017 FY 2016 Fines, Penalties and Other Miscellaneous Receipts Accounts Receivable for Fines, Penalties and Other Miscellaneous Receipts: Accounts Receivable $ 1,581,014 $ 98,926 149,522 195,188 (124,493) (150,599) Less: Allowance for Uncollectible Accounts Total $ 25,029 $ 44,589 18-F-0039 33 ------- The EPA uses the accrual basis of accounting for the collection of fines, penalties and miscellaneous receipts. Collectability by the EPA of the fines and penalties is based on the respondents' willingness and ability to pay. In FY 2017, Volkswagen paid a civil penalty to the EPA of $1.5 billion to resolve allegations that Volkswagen violated the Clean Air Act by selling approximately 590 thousand model year 2009 to 2016 diesel motor vehicles equipped with "defeat devices" that circumvented emissions testing. These funds were transferred to the U.S. Treasury on September 30, 2017. 18-F-0039 34 ------- Note 25. Reconciliation of President's Budget to the Statement of Budgetary Resources Budgetary resources, obligations incurred and outlays, as presented in the audited FY 2017 Statement of Budgetary Resources, will be reconciled to the amounts included in the FY 2017 Budget of the United States Government when they become available. The Budget of the United States Government with actual numbers for FY 2017 has not yet been published. We expect it will be published by early 2018, and it will be available on the Office of Management and Budget website at Office of Management and Budget website at https://www.whitehouse.gov/ The actual amounts published for the year ended September 30, 2016 are listed immediately below (dollars in millions): FY 2016 Budgetary Offsetting Resources Obligations Receipts Net Outlays Statement of Budgetary Resources $ 14,154 10,031 886 9,615 Reported in Budget of the U. S. $ Government 14,154 10,031 886 9,615 Note 26. 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, 2017 and September 30, 2016: FY 2017 FY 2016 Recoveries of Prior Year Obligations - Downward adjustments of prior years' obligations $ 330,486 $ 234,361 Temporarily Not Available - Rescinded Authority (10,555) (2,855) Permanently Not Available: Payments to Treasury - (34) Rescinded authority (90,348) (40,000) Canceled authority (46,483) (13,589) Total Permanently Not Available $ (136,831) $ (53,623) Note 27. 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, 2017 and September 30, 2016: Unexpired Unobligated Balance Expired Unobligated Balance Total FY 2017 FY 2016 $ 4,154,577 $ 4,122,735 92,649 119,316 $ 4,247,226 $ 4,242,051 18-F-0039 35 ------- Note 28. Undelivered Orders at the End of the Period Budgetary resources obligated for undelivered orders at September 30, 2017 and September 30, 2016 were $8.32 billion and $8.26 billion, respectively. Note 29. Offsetting Receipts Distributed offsetting receipts credited to the general fund, special fund, or trust fund receipt accounts offset gross outlays. For September 30, 2017 and September 30, 2016, the following receipts were generated from these activities: FY 2017 FY 2016 Trust Fund Recoveries $ (49,379) $ 30,833 Special Fund Environmental Service 23,222 23,577 Trust Fund Appropriation 1,135,527 811,684 Miscellaneous Receipt and Clearing Accounts 83_ 20,359 Total $ 1,109,453 $ 886,453 Note 30. Transfers-In and Out, Statement of Changes in Net Position A. Appropriation Transfers, In/Out: For September 30, 2017 and September 30, 2016, 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, and 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 follow for September 30, 2017 and September 30, 2016: FY 2017 FY 2016 Fund/Type of Account Net Transfers from Invested Funds $ 1,195,715 $ 1,183,737 Transfer from LUST to DOT Highway Trust Fund 93,100 100,000 Transfers to Another Agency 870 981 Allocations Rescinded 6,900 Total of Net Transfers on Statement of Budgetary Resources $ 1,296,585 $ 1,284,718 18-F-0039 36 ------- B. Transfers In/Out Without Reimbursement, Budgetary: For September 30, 2017 and September 30, 2016, 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 non- expenditure, follow for September 30, 2017 and September 30, 2016: FY 2017 FY 2016 Type of Transfer/Funds Transfers-in (out) non-expenditure, Earmark to S&T and OIG funds Capital Transfer Transfers-in non-expenditure, Oil Spill Transfers-in (out) non-expenditure, Superfund Transfers-in non-expenditure, NRDA Transfer-out LUST Total Transfer in (out) without Reimbursement, Budgetary Fund from Dedicated Collections (24,274) (18,209) 54,464 (870) 100 13,211 Other Funds 24,041 $ 24,041 $ Fund from Dedicated Collections (28,789) (18,209) (43,402) 100,000 9,600 Other Funds 28,789 28,789 Note 31. 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 FY 2017 were $77.3 million. For FY 2016, the estimates were $116.4 million. 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. The 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. The 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 2017 total imputed costs were $22.2 million. In addition to the pension and retirement benefits described above, the 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 2017 entries for Judgment Fund payments totaled $3.6 million. For FY 2016, entries for Judgment Fund payments totaled $5.9 million. 18-F-0039 37 ------- Note 32. Payroll and Benefits Payable Payroll and benefits payable to the EPA employees for the years ending September 30, 2017 and September 30, 2016 consist of the following: Covered by Not Covered Budgetary by Budgetary Total Resources Resources FY 2017 Payroll & Benefits Payable Accrued Funded Payroll & Benefits Withholdings Payable Employer Contributions Payable-TSP Accrued Unfunded Annual Leave $ 31,095 32,311 638 31,095 32,311 638 141,588 141,588 Total - Current $ 64,044 141,588 205,632 FY 2016 Payroll & Benefits Payable Accrued Funded Payroll and Benefits Withholdings Payable Employer Contributions Payable-TSP Accrued Unfunded Annual Leave $ 40,899 19,230 597 40,899 19,231 597 150,071 150,071 Total - Current $ 60,726 150,071 210,797 Note 33. 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 7 years earlier. These amounts affect Unexpended Appropriations. Other Funds FY 2017 Other Funds FY 2016 Canceled General Authority Total Other Adjustments 123,824 $ 123,824 53,501 $ 53,501 Note 34. 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, 2017 and September 30, 2016 consists of the following Funds from Dedicated Collections items: Funds from Dedicated Collections FY 2017 Funds from Dedicated Collections FY 2016 Interest on Trust Fund $ 47,445 $ 38,303 Tax Revenue, Net of Refunds 225,194 202,681 Fines and Penalties Revenue (701) 8,490 Special Receipt Fund Revenue 21,796 20,134 Total Non-Exchange Revenue $ 293,734 $ 269,608 18-F-0039 38 ------- Note 35. Reconciliation of Net Cost of Operations to Budget FY 2017 FY 2016 RESOURCES USED TO FINANCE ACTIVITIES: Budgetary Resources Obligated: Obligations Incurred S 10,354,618 $ 10,036,882 Less: Spending Authority from Offsetting Collections and Recoveries (1,031,789) (844,542) Obligations, Net of Offsetting Collections 9,322,829 9,192,340 Less: Offsetting Receipts (1,109,453) (886,453) Net Obligations 8,213,376 8,305,887 Other Resources: Imputed Financing Sources 103,093 143,616 Total Resources Used to Finance Activities S 8,316,469 $ 8,449,503 RESOURCES USED TO FINANCE ITEMS NOT PART OF THE NET COST OF OPERATIONS: Change in Budgetary Resources Obligated S (66,195) $ 307,188 Resources that Fund Prior Periods Expenses - - Budgetary Offsetting Collections and Receipts that Do Not Affect Net Cost of Operations: Credit Program Collections Increasing Loan Liabilities for Guarantees or Subsidy Allowances 31 497 Offsetting Receipts Not Affecting Net Cost 72,980 53,730 Resources that Finance Asset Acquisition (121,053) (85,805) Adjustments to Expenditure Transfers that Do Not Affect Net Cost (8,819) - Total Resources Used to Finance Items Not Part of the Net Cost of Operations (123,056) 275,610 Total Resources Used to Finance the Net Cost of Operations S 8,193,413 $ 8,725,113 COMPONENTS OF THE NET COST OF OPERATIONS THAT WILL NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD: Components Requiring or Generating Resources in Future Periods: Increase in Annual Leave Liability S (8,483) $ 5,990 Increase in Environmental and Disposal Liability 3,441 (62) Increase in Unfunded Contingencies - (901) Upward/Downward Re-estimates of Credit Subsidy Expense - 2,151 Increase in Public Exchange Revenue Receivables (159,362) (108,262) Increase in Workers Compensation Costs (123) (1,347) Other 105 (88) Total Components of Net Cost of Operations that Require or Generate Resources in Future Periods (164,422) (102,519) Components Not Requiring/Generating Resources: Depreciation and Amortization 108,927 91,604 Expenses Not Requiring Budgetary Resources 353,651 13,986 Total Components of Net Cost that Will Not Require or Generate Resources 462,578 105,590 Total Components of Net Cost of Operations That Will Not Require or Generate Resources in the Current Period 298,156 3,071 Net Cost of Operations S 8,491,569 $ 8,728,184 18-F-0039 39 ------- Note 36. 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. A. 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, 2017 and September 30, 2016. The amounts contained in these notes have been provided by Treasury. As indicated, a portion of the outlays represents amounts received by the EPA's Superfund Trust Fund; such funds are eliminated on consolidation with the Superfund Trust Fund maintained by Treasury. EPA Treasury Combined SUPERFUND FY 2017 Undistributed Balances Un-invested Fund Balance $ 1,422 1,422 Total Undisbursed Balance Interest Receivable Investments, Net 4,704,616 1,422 3,387 88,528 1,422 3,387 4,793,144 Total Assets $ : 4,704,616 93,337 4,797,953 Liabilities & Equity Equity $ : 4,704,616 93,337 4,797,753 Total Liabilities and Equity $ : 4,704,616 93,337 4,797,753 Receipts Cost Recoveries $ Fines & Penalties 49,379 2,592 49,379 2,592 Total Revenue Appropriations Received Interest Income - 51,971 1,038,131 44,166 51,971 1,038,131 44,166 Total Receipts $ 1,134,268 1,134,268 Outlays Transfers to/from EPA, Net $ : 1,119,857 (1,119,857) Total Outlays 1,119,857 (1,119,857) - Net Income $ 1,119,857 14,411 1,134,268 18-F-0039 40 ------- In FY 2017, the EPA received an appropriation of $1.1 billion for Superfund. Treasury's Bureau of Fiscal Service (BFS), the manager of the Superfund Trust Fund assets, records a liability to the EPA for the amount of the appropriation. BFS 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, 2017, and September 30, 2016, the Treasury Trust Fund has a liability to the EPA for previously appropriated funds and special accounts of $4.8 for both fiscal years. EPA Treasury Combined SUPERFUND FY 2016 Undistributed Balances Un-invested Fund Balance $ 439 439 Total Undisbursed Balance - 439 439 Interest Receivable - 3,282 3,282 Investments, Net 4,740,927 63,693 4,804,620 Total Assets $ 4,740,927 67,414 4,808,341 Liabilities & Equity Equity $ 4,740,927 67,414 4,808,341 Total Liabilities and Equity $ 4,740,927 67,414 4,808,341 Receipts Corporate Environmental $ Cost Recoveries - 30,833 30,833 Fines & Penalties - 7,277 7,277 Total Revenue - 38,110 38,110 Appropriations Received - 811,684 811,684 Interest Income - 37,311 37,311 Total Receipts $ 887,105 887,105 Outlays Transfers to/from EPA, Net $ 1,120,585 (1,120,585) Total Outlays 1,120,585 (1,120,585) - Net Income $ 1,120,585 (233,480) 887,105 18-F-0039 41 ------- B. LUST LUST is supported primarily by a sales tax on motor fuels to clean up LUST waste sites. In FY 2017 and 2016, there were no fund receipts from cost recoveries. The amounts contained in these notes are provided by Treasury. Outlays represent appropriations received by the EPA's LUST Trust Fund; such funds are eliminated on consolidation with the LUST Trust Fund maintained by Treasury. EPA Treasury Combined LUST FY 2017 Undistributed Balances Un-invested Fund Balance $ 13,690 13,690 Total Undisbursed Balance Interest Receivable Investments, Net 37,647 13,690 14 491,821 13,690 14 529,468 Total Assets $ 37,647 505,525 543,172 Liabilities & Equity Equity 37,647 505,525 543,172 Receipts Highway TF Tax Airport TF Tax Inland TF Tax $ 213,392 11,752 49 213,392 11,752 49 Total Revenue Interest Income - 225,193 3,048 225,193 3,048 Total Receipts $ 228,241 228,241 Outlays Transfers to/from EPA, Net $ 107,000 (107,000) Total Outlays $ 107,000 (107,000) - Net Income $ 107,000 121,241 228,241 EPA Treasury Combined LUST FY 2016 Undistributed Balances Un-invested Fund Balance $ 13,830 13,830 Total Undisbursed Balance Interest Receivable Investments, Net 52,806 448,025 500,831 Total Assets $ 52,806 461,855 514,661 Liabilities & Equity Equity 52,806 461,855 514,661 Receipts Highway TF Tax Airport TF Tax Inland TF Tax $ 191,562 11,013 106 191,562 11,013 106 Total Revenue Interest Income - 202,681 961 202,681 961 Total Receipts $ 203,642 203,642 Outlays Transfers to/from EPA, Net $ 191,941 (191,941) Total Outlays $ 191,941 (191,941) - Net Income $ $ 191,941 11,701 203,642 18-F-0039 42 ------- Note 37. Miscellaneous Receipts Violation, Anti-Deficiency Act Violations and Potential Anti- Deficiency Act Violations A. Miscellaneous Receipt Act Violation In 2007 and 2014 The Office of Pesticide Programs established the per-product maintenance fee to purposefully collect fees above the FIFRA § 4 statutory target with the understanding that the EPA could "make up" for shortfalls in prior years' collections. The FIFRA § 4 does not authorize the EPA to purposefully over-collect fees where the statutory target was not met in prior years to reach the target "on average" over a given number of years. As of 2016, the Agency had collected $1,072 in fees in excess of its statutory authority. In compliance with the Miscellaneous Receipts Act, in May 2016, the EPA deposited the excess fees collected into the General Fund of the Treasury. B. Anti-Deficiency Act Violations On February 10, 2017, the EPA reported violations of the Anti-deficiency Act (ADA), as required by 31 U.S.C. § 1351, which occurred in the Hazardous Substance Superfund account in Fiscal Years 1986, 1989, and 1995 in connection with the use of funds from state partners in the Superfund Remedial and Superfund Emergency Response and Removal programs in the total amount of $463 as required, by OMB circular A- 11, Section 145, in writing 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. C. Potential Anti-Deficiency Act Violations In FY 2016 the EPA determined that the Agency had experienced two separate Anti-Deficiency Act Voluntary Services Prohibition violations. 31 U.S.C. § 1342 prohibits the EPA from accepting voluntary services for the United States, or employing personal services not authorized by law, except in the cases of emergency involving the safety of human life or the protection of property. The first violation occurred from January through April 2014 when the EPA accepted unpaid peer reviews for environmental education grants. At least one of the peer reviewers did not sign a written agreement in advance that states that the services are offered without the expectation of payment, and expressly waives any future pay claims against the government which constitutes a violation of the Voluntary Services Prohibition. The Agency was also unable to determine if there were any more peer reviewers who only had oral agreements. The second violations occurred in the Honors Law Clerk Program where at least seven post-graduates provided services to the Agency at varying points between 2011 and 2015. Written and signed waivers were unable to be located but are ineffective under 5 U.S.C. §§ 5331-5338 which the principle of equal pay for substantially equal work applies. In FY 2017, the Agency reviewed whether other voluntary and intern programs might also have had similar issues and included language in its budgetary and supervisory guidance reminding Agency managers to pay close attention to all Federal requirements when accepting voluntary services on behalf of the Agency. As of the date of the audit report, the EPA is reviewing the proposed transmission of, as required by OMB circular A-l 1, 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 for Anti-Deficiency Act violation related to the Voluntary Services Provision. 18-F-0039 ------- Note 38. Other Information The EPA received a disclaimer of opinion on audits of the FIFRA and PRIA financial statements for fiscal years 2014 through 2016 issued by the Office of Inspector General (report numbers 16-F-0322, 17-F-0364 and 16-F-0322, 17-F-0365 respectively). A disclaimer of opinion means that OIG was unable to obtain sufficient evidence to determine if the statements were fairly presented and free of material misstatement. The EPA had previously received unmodified, or clean, opinion on these financial statements for FY 2013. OIG noted a material weakness in that the EPA could not adequately support $34 million of its FY 2014 FIFRA Fund costs and $28 million of its FY 2014 PRIA Fund costs. The EPA receives its funding for these programs both from fees paid by pesticide manufacturers and from amounts appropriated by the Congress. In FY 2014, the EPA allocated its pesticide funding to use appropriated amounts, which would expire, and retained funding received from fees. Therefore, significant payroll amounts paid from appropriations were not charged directly to the FIFRA and PRIA Funds or other pesticide programs. This resulted in the loss of the audit trail for reporting separate costs and liabilities for the FIFRA and PRIA Funds and other pesticide programs. The OIG noted the same material weaknesses in FY 2015 and FY 2016 for FIFRA and PRIA fund costs. 18-F-0039 44 ------- Required Supplementary Information (Unaudited) Environmental Protection Agency As of September 30, 2017, and September 30, 2016 (Dollars in Thousands) 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. Deferred Maintenance is described as the act of keeping fixed assets in acceptable condition. Such activities include: Preventive maintenance, replacement of parts, systems, or components, and other activities needed to preserve or maintain the asset. The deferred maintenance as of Fiscal Year 2017: FY2017 FY2016 Asset Category Buildings $ 143,583 $ 132,449 EPA Held Equipment 620 370 Vehicles 9 9 Total Deferred Maintenance $ 144,212 $ 132,828 In Fiscal Year 2017, in accordance with SFFAS No. 42, Deferred Maintenance and Repairs: Amending Statements of Federal Financial Accounting Standards 6, 14, 29 and 32, agencies are required to: a) Describe their maintenance and repairs policies and how they are applied. b) Discuss how they rank and prioritize maintenance and repair activities among other activities. c) Identify factors considered in determining acceptable condition standards. d) State whether deferred maintenance and repairs relate solely to capitalized or fully depreciated general PP&E. e) Identify PP&E for which management does not measure and/or report deferred maintenance and repairs and the rational for the exclusion of other than non-capitalized or fully depreciated general PP&E. f) Provide beginning and ending deferred maintenance and repairs balances by g) Explain significant changes from the prior year. 18-F-0039 ------- The EPA presents the above Deferred Maintenance and Repairs (DM&R) information by asset category as follows: Buildings: Policy Explanation Maintenance and repairs policies and how they are applied. The maintenance and repair policy is to maintain facilities and real property installed equipment to fully meet mission needs at each site. Systems are maintained to function efficiently at full capacity and to meet or exceed life expectancy of buildings and building systems. How we rank and prioritize maintenance and repair activities among other activities. Building and facility program projects are scored and ranked individually based on seven weighted factors to determine priority needs. High scoring projects are prioritized above lower scoring projects. The seven factors considered are: health and safety, energy conservation, environmental compliance, program requirements, repair and upkeep, space alteration, and operational urgency. Repair and Improvement (R&I) projects are identified and prioritized on a local basis. Factors considered in determining acceptable condition standards. The nine building systems must function at a level that fully meet mission needs. The nine building systems are: structure, roof, exterior components and finish, interior finish, HVAC, electrical, plumbing, conveyance, and specialized program support equipment. Each system is rated from 0 to 5 during facility assessments. Ratings are used to determine facility condition index and estimated deferred maintenance. State whether DM&R relate solely to capitalized general PP&E and stewardship PP&E or also to non-capitalized or fully depreciated general PP&E. Facilities assessments and the resulting DM&R estimates are applied to capitalize PP&E only. Full facility assessments using the NASA parametric model are used to determine facilities and systems indices and deferred maintenance estimates. PP&E for which management does not measure and/or report DM&R and the rationale for the exclusion of other than non-capitalized or fully depreciated general PP&E. Buildings are not excluded from DM&R estimates. Explain significant changes from the prior year. No significant changes. 18-F-0039 46 ------- EPA held Equipment Policy Explanation Maintenance and repairs policies and how they are applied. Managers of the equipment consider manufacturers recommendations in determining maintenance requirements. How we rank and prioritize maintenance and repair activities among other activities. Equipment is maintained based on manufacture's recommendations. Factors considered in determining acceptable condition standards. Manufacturer recommendations. State whether DM&R relate solely to capitalized general PP&E and stewardship PP&E or also to non-capitalized or fully depreciated general PP&E. DM&R relates to all EPA Held Equipment as determined by individual site managers. PP&E for which management does not measure and/or report DM&R and the rationale for the exclusion of other than non-capitalized or fully depreciated general PP&E. Individual site managers determine the need to measure and/or report DM&R based on mission needs. Explain significant changes from the prior year. Individual site equipment managers decide on a case-by- case basis the need to maintain equipment. 18-F-0039 ------- Vehicles Policy Explanation Maintenance and repairs policies and how they are applied. Vehicle managers maintain vehicles owned by the EPA in accordance with the recommendations of the manufacturer. How we rank and prioritize maintenance and repair activities among other activities. The goal is to maintain the vehicle as built and as recommended by the manufacturer. Repairs and maintenance are also described as system critical or minor. System critical repairs and maintenance are high priority and are immediately taken care of. Minor repairs are lower priority and may be taken care of at a later date (time/scheduling permitting). These are not critical to in-field functionality, but the repairs are needed to maintain the vehicle as built. Factors considered in determining acceptable condition standards. The vehicle is inspected to insure that it (the vehicle) and related specialized equipment are in good working order. The criteria being that the vehicle is being maintained as built and as recommended by the manufacturer. State whether DM&R relate solely to capitalized general PP&E and stewardship PP&E or also to non-capitalized or fully depreciated general PP&E. All vehicles are capitalized. PP&E for which management does not measure and/or report DM&R and the rationale for the exclusion of other than non- capitalized or fully depreciated general PP&E. None. Explain significant changes from the prior year. No significant changes. 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. 18-F-0039 48 ------- Supplemental Combined Statement of Budgetary Resources Environmental Protection Agency For the Period Ending September 30, 2017 (Dollars in Thousands) Env. Prog. & Mgmt. Leaking Underground Storage Tank Science & Tech Superfund State & Tribal Ass. Grants Other Total BUDGETARY RESOURCES Unobligated Balance, Brought Forward, October 1: Adjustment to Unobligated Balance $ 307,949 947 3,619 2 118,502 85 3,406,772 18,933 187,775 975 217,434 208 4,242,051 21,150 Unobligated balance brought forward, October 1, as adjusted 308,896 3,621 118,587 3,425,705 188,750 217,642 4,263,201 Recoveries of Prior Year Unpaid Obligations 80,569 475 35,967 112,978 62,851 37,646 330,486 Other changes in unobligated balance (5,722) . (3,211) (233) . (33,095) (42,261) Unobligated balance from prior year budget authority, net 383,743 4,096 151,343 3,538,450 251,601 222,193 4,551,426 Appropriations (discretionary and mandatory) 2,600,999 185,041 706,473 1,126,420 3,565,963 1,185,370 9,370,266 Spending authority from offsetting collections 78,873 . 20,991 306,306 . 273,982 680,152 Total Budgetary Resources $ 3,063,615 189,137 878,807 4,971,176 3,817,564 1,681,545 14,601,844 STATUS OF BUDGETARY RESOURCES Obligations incurred 2,761,123 185,494 781,819 1,581,191 3,589,195 1,455,796 10,354,618 Unobligated balance, end of year: Apportioned 234,514 3,642 77,358 3,389,986 228,369 218,716 4,152,585 Un-apportioned . . . . . 1,992 1,992 Total unobligated balance, end of period Expired unobligated balance, end of year 234,514 67,977 3,642 77,358 19,361 3,389,986 228,369 220,708 5,041 4,154,577 92,649 Total Status of Budgetary Resources $ 3,063,614 189,136 878,808 4,971,177 3,817,564 1,681,545 14,601,844 CHANGE IN OBLIGATED BALANCE Unpaid Obligations Unpaid Obligations, Brought Forward, October 1 (gross) $ 1,232,532 87,242 346,646 1,446,122 5,355,895 226,532 8,694,969 Obligations incurred 2,761,123 185,494 781,819 1,581,191 3,589,195 1,455,796 10,354,618 Outlays (gross) (2,671,914 (183,681) (781,295) (1,430,019) (3,453,280) (1,396,647) (9,916,836) Recoveries of prior year unpaid obligations (80,569) (475) (35,967) (112,978) (62,851) (37,646) (330,486) Unpaid obligations, end of year (gross) $ 1,241,172 88,580 311,203 1,484,316 5,428,959 248,035 8,802,265 Uncollected Payments Uncollected customer payments from Federal Sources, brought forward, Oct. 1 Change in uncollected customer payments from Federal sources $ (73,077) (37,746) - (16,550) 4,456 (10,057) 1,004 - (148,956) (24,443) (248,640) (56,729) Uncollected customer payments from Federal sources, end of year $ (110,823) . (12,094) (9,053) . (173,399) (305,369) 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 $ 2,679,872 (42,074) (37,746) 185,041 (2) 727,464 (25,532) 4,456 1,432,726 (326,243) 1,004 3,565,963 (975) 1,459,352 (249,747) (24,443) 10,050,418 (644,573) (56,729) Budget authority, net (discretionary and mandatory) $ 2,600,052 185,039 706,388 1,107,487 3,564,988 1,185,162 9,349,116 Outlays, gross (discretionary and mandatory) Actual offsetting collections (discretionary and mandatory) $ 2,671,914 (42,074) 183,681 (2) 781,295 (25,532) 1,430,019 (326,243) 3,453,280 (975) 1,396,647 (249,747) 9,916,836 (644,573) Outlays, net (discretionary and mandatory) 2,629,840 183,679 755,763 1,103,776 3,452,305 1,146,900 9,272,263 Distributed offsetting receipts . . . (1,086,148) . (23,305) (1,109,453) Agency outlays, net (discretionary and mandatory) $ 2,629,840 183,679 755,763 17,628 3,452,305 1,123,595 8,162,810 18-F-0039 49 ------- Required Supplemental Stewardshiplnformation (Unaudited) Environmental Protection Agency Required Supplemental Stewardship Information (Unaudited) For the Year Ended September 30, 2017 (Dollars in Thousands) Investment in The Nation's Research and Development: The EPA's Office of Research and Development provides the crucial underpinnings for the EPA decision- making. Through conducting cutting-edge science and technical analysis, ORD develops 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. The 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 and application of alternative techniques for prioritizing chemicals for further testing through computational toxicology; the environmental effects of pollutants 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. The EPA also supports regulatory decision-making with chemical risk assessments. For FY 2017, the full cost of the Agency's Research and Development activities totaled over $635 million. Below is a breakout of the expenses (dollars in thousands):1 FY2013 FY2014 FY2015 FY2016 FY2017 Programmatic Expenses $ 531,901 $ 510,911 $ 535,352 $ 54U90 $ 532,153 Allocated Expenses $ 78,189 $ 73,622 $ 78,028 $ 82,646 $ 103,451 See Section II of the PAR for more detailed information on the results of the Agency's investment in research and development. 1 Allocated Expenses calculated specifically for the Required Supplemental Stewardship Information report and do not represent the overall Agency indirect cost rates. 18-F-0039 50 ------- Investment in The Nation's Infrastructure: The Agency makes significant investments in the nation's drinking water and clean water infrastructure, primarily through the two SRF programs and the WIFIA program. WIFIA: The EPA provides through the WIFIA program long-term, low cost supplemental credit assistance under customized terms to creditworthy water and wastewater projects. The WIFIA program directly supports the Agency's goal to ensure waters are clean through improved water infrastructure. The program requires a small appropriation compared to its potential loan volume. For example, the FY17 WIFIA appropriation of $30 million could spur up to $5 billion in total infrastructure investment. The WIFIA program is designed to attract private participation, encourage new revenue streams for infrastructure investment, and allow public agencies to get more projects done. State Revolving Funds: The 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. Construction Grants Program: During the 1970s and 1980s, the Construction Grants Program provided 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. 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, the EPA shifted the focus of municipal financial assistance from grants to loans that are provided by State Revolving Funds. The Agency also is appropriated funds to finance the construction of infrastructure outside the Revolving Funds programs. These are reported below as Other Infrastructure Grants. The Agency's appropriated investments in the nation's Water Infrastructure are outlined below (dollars in thousands): See the Goal 2 - Clean and Safe Water portion in Section II of the AFR for more detailed information on the results of the Agency's investment in infrastructure. WIFIA Drinking Water SRF Other Infrastructure Grants Allocated Expenses Construction Grants Clean Water SRF FY2013 FY2014 FY2015 FY2016 FY2017 $ 6,944 $ 1,447 $ 17,462 $ 11,344 $ 8,686 $ 1,976,537 $ 1,534,453 $ 1,715,630 $ 1,459,820 $ 1,247,919 $ 1,027,613 $ 1,187,212 $ 1,268,360 $ 1,213,201 $ 994,297 $ 166,050 $ 118,706 $ 96,439 $ 62,011 $ 44,916 $ 524,326 $ 516,102 $ 590,595 $ 529,815 $ 480,415 $ 0$ 0$ 0$ 0$ 30,000 18-F-0039 51 ------- 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): FY2013 FY2014 FY2015 FY2016 FY2017 Training and Awareness Grants $ 20,769 $ 23,255 $ 27,047 $ 29,116 $ 22,090 Fellowships 11,157 8,082 6,579 4,630 2,077 Allocated Expenses 4,118 4,226 5,146 5,336 4,073 Total $ 36,044 $ 35,563 $ 38,772 $ 39,082 $ 28,240 18-F-0039 52 ------- Appendix II Agency Response to Draft Report 18-F-0039 ------- #^osr% km. \- t/ *L PROlfc % UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D.C, 20460 NOV 1 3 2017 OFFICE OF THE CHIEF FINANCIAL OFFICER MEMORANDUM SUBJECT: Response to Office of Inspector General Draft Audit Report No. OA-FY 17-0206. "Audit /y^qfEPA<&M^I Year 2017 Financial Statements, " dated November 13, 2017 FROM: V Davit}-? Iri^OTOtlJflngTKirTSancial Officer ^~~©ffice of the Chief Financial Officer TO: Paul C. Curtis, Director Financial Statements Audits Thank you for the opportunity to respond to the issues and recommendation in the subject draft audit report. The following is a summary of the agency's overall position, along with its position on the report recommendation. We have provided a corrective action and estimated completion date. AGENCY'S OVERALL POSITION The agency concurs with the following recommendation. No. Recommendation High-Level Intended Corrective Action(s) Estimated Completion by Quarter and FY 1 Require the Compass Financials Project Manager to obtain the Federal Acquisition Certification for Program and Project Managers with the information Technology specialization within the 1-year deadline, as required by the Office of Management and Budget, and take corrective actions if the Project Manager is not able to complete the certification requirements by the deadline. The Compass Financials Project Manager will obtain the required FAC-P/PM certification within the one-year window. 10/01/2018 18-F-0039 Internet Address (URL) • http://www.epa.gov Recycled/Recyclable • Printed with Vegetable Oil Based Inks on Recycled Paper (Minimum 30% Posteortsumer) ------- To address specific findings in the report, please see the Technical Comments below. • EPA's Accounting for Software Continues to Be a Material Weakness We appreciate the OIG acknowledging the progress we continue to make in resolving the material weakness in the accounting for software. A key part of this remediation effort has been improving procedures for validating expenditures that require capitalization and the communications between agency program offices and the accounting office. In FY 2017, we met with program officials from all EPA offices with software investments requiring capitalization. As a result, all costs for software expenditures requiring capitalization were validated. We also continued to make expanded use of the fixed asset subsystem within Compass, the EPA's accounting system. By using the fixed asset subsystem, we have improved our documentation of software costs and the accuracy of asset values including depreciation. We plan to close the material weakness in FY 2018. • Additional Efforts Needed to Resolve EPA's Cash Differences With Treasury The audit report noted major improvements in the agency's efforts to resolve the long-standing cash differences. Of the $2.2 M cash difference in the Washington Finance Center, the offset of $.9M difference is in a cancelled treasury account symbol. The agency could not immediately clear the difference; but will work with the Department of Treasury on options for clearing differences in cancelled account symbols. The agency will continue research efforts to resolve the remaining differences. CONTACT INFORMATION If you have any questions regarding this response, please contact OCFO's Audit Follow-up Coordinator, Bob Trent, at 202-566-0983. cc: Charles Sheehan Kevin Christensen Richard Eyermann Howard Osborne Jeanne Conklin John O'Connor Meshell Jones-Peeler Carol Terris Kathy O'Brien Quentin Jones Robert Hill Ruth-Alene Soward Bill Samuel Rudy Brevard Wanda Arrington Margaret Hiatt Robert L Smith Gary Sternberg Bettye Belle-Daniel 18-F-0039 2 ------- Appendix III Distribution The Administrator Chief of Staff Chief of Staff for Operations Deputy Chief of Staff for Operations Chief Financial Officer Assistant Administrator for Administration and Resources Management Assistant Administrator and Chief Information Officer, Office of Environmental Information Assistant Administrator for Land and Emergency Management Agency Follow-Up Coordinator General Counsel Associate Administrator for Congressional and Intergovernmental Relations Associate Administrator for Public Affairs Associate Chief Financial Officer Controller, Office of the Chief Financial Officer Deputy Controller, Office of the Chief Financial Officer Director, Office of Budget, Office of the Chief Financial Officer Director, Office of Planning, Analysis and Accountability, Office of the Chief Financial Officer Director, Office of Technology Solutions, 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 Resource and Information Management, Office of the Chief Financial Officer Deputy Assistant Administrator, Office of Administration and Resources Management Director, Office of Grants and Debarment, Office of Administration and Resources Management Director, Office of Acquisition Management, Office of Administration and Resources Management Director, Office of Administration, Office of Administration and Resources Management Director, Office of Resources, Operations and Management, Office of Administration and Resources Management Deputy Director, Office of Resources, Operations and Management, Office of Administration and Resources Management Director, Office of Superfund Remediation and Technology Innovation, Office of Land and Emergency Management Principal Deputy Assistant Administrator and Deputy Chief Information Officer, Office of Environmental Information Director, Office of Information Technology Operations, Office of Environmental Information Director, Office of Information Security and Privacy, Office of Environmental Information Audit Follow-Up Coordinator, Office of the Administrator Audit Follow-Up Coordinator, Office of the Chief Financial Officer Audit Follow-Up Coordinator, Office of Administration and Resources Management Audit Follow-Up Coordinator, Office of Environmental Information Audit Follow-Up Coordinator, Office of Land and Emergency Management Audit Follow-Up Coordinator, Office of Grants and Debarment, Office of Administration and Resources Management 18-F-0039 ------- |