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

5 obligations that were not recorded within the requisite 15 days of execution of the obligating document and obligations that were recorded in the financial management system prior to the formal execution of a contract. The Department did not have processes to ensure the accurate and timely creation and recording of obligations. Without an effective obligation process, controls to monitor funds and make timely payments may be compromised, which may lead to violations of the Antideficiency Act 4 and the Prompt Payment Act. 5 • Capital Lease Obligations – The Department must obligate funds to cover the net present value of the Government’s total estimated legal obligation over the life of a capital lease contract. However, the Department annually obligates funds equal to 1 year of the capital lease cost rather than the entire amount of the lease agreement. The Department obligates leases on an annual basis rather than for the entire lease agreement period because that is the manner in which funds are budgeted and appropriated. Because of the unrecorded obligation, the Department’s consolidated financial statements were misstated. • Effectiveness of Allotment Controls – Federal agencies use allotments to allocate funds in accordance with statutory authority. Allotments provide authority to agency officials to incur obligations as long as those obligations are within the scope and terms of the allotment authority. We identified systemic issues in the Department’s use of overrides that allowed officials to exceed allotments. The Department did not have an automated control to prevent users from recording obligations that exceeded allotment amounts. Department management stated that such an automated control is not reasonable because of instances in which an allotment may need to be exceeded; however, the Department has not formally identified, documented, and communicated the circumstances under which an allotment override is acceptable. Overriding allotment controls could lead to a violation of the Antideficiency Act 6 and increases the risk of fraud, misuse, and waste. III. Validity and Accuracy of Unliquidated Obligations Unliquidated obligations (ULO) represent the cumulative amount of orders, contracts, and other binding agreements for which the goods and services that were ordered have not been received or the goods and services have been received but for which payment has not yet been made. The Department’s policies and procedures provide guidance that requires allotment holders to perform at least monthly reviews, analyses, and validation of ULOs. Weaknesses in controls over ULOs were initially reported in the audit of the Department’s FY 1997 consolidated financial statements. During FY 2019, we found that the Department took steps to improve its ULO validation and reporting efforts. For example, the Department focused its reviews on programs and ULOs with a greater risk of invalidity and required allotment holders to certify and support that ULOs were valid. The Department also recorded an adjustment to its consolidated financial statements based on its review of targeted ULOs. 4 Ibid. 5 31 U.S.C. § 39. 6 Pub. L. No. 97-258 (1982). 2019 A gency F inancial R eport U nited S tates D epartment of S tate | 53 INDEPENDENT AUDITOR’S REPORT | FINANCIAL SECTION