U.S. Department of State Fiscal Year 2019 Agency Financial Report

4 • Accounting for Software – Federal agencies use various types of software applications, called internal use software, to conduct business. Applications in the development phase are considered software in development (SID). Agencies are required to report software as property in their consolidated financial statements. We identified numerous instances in which the data recorded for SID were inaccurate or unsupported. Although the Department performs a quarterly data call to obtain software costs from bureau project managers, this process was not sufficient because it relied on the responsiveness and understanding of individual project managers, not all of whom understood the accounting requirements for reporting SID. Additionally, the Department did not have an effective process to confirm that information provided by project managers was complete or accurate. The errors resulted in misstatements to the Department’s consolidated financial statements. Without an effective process to obtain complete and accurate information pertaining to software applications, the Department may continue to misstate its consolidated financial statements. II. Budgetary Accounting The Department lacked sufficient reliable funds control over its accounting and business processes to ensure budgetary transactions were properly recorded, monitored, and reported. Beginning in our report on the Department’s FY 2010 consolidated financial statements, we identified budgetary accounting as a significant deficiency. During FY 2019, the audit continued to identify control limitations, and we concluded that the combination of control deficiencies remained a significant deficiency. The individual deficiencies we identified are summarized as follows: • Support of Obligations – Obligations are definite commitments that create a legal liability of the Government for payment. The Department should record only legitimate obligations, which include a reasonable estimate of potential future outlays. We identified a large number of low-value obligations (i.e., obligations that are $5 or less) for which the Department could not provide evidence of a binding agreement. The Department’s financial system was designed to reject payments for invoices without established obligations. Because allotment holders did not always record valid and accurate obligations prior to the receipt of goods and services, the Department established low- value obligations, which allowed invoices to be paid in compliance with the Prompt Payment Act; 2 however, this process effectively bypassed the controls in the financial system. The continued use of this practice could lead to a violation of the Antideficiency Act 3 and increases the risk of fraud, misuse, and waste. • Timeliness of Obligations – The Department should record an obligation in its financial management system when it enters into an agreement, such as a contract or a purchase order, to purchase goods and services. During our testing, we identified numerous 2 31 U.S.C. § 39, “Prompt Payment.” 3 Antideficiency Act, Pub. L. No. 97-258, 96 STAT. 923 (September 13, 1982). 52 | U nited S tates D epartment of S tate 2019 A gency F inancial R eport FINANCIAL SECTION | INDEPENDENT AUDITOR’S REPORT