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

7 without an effective process to accurately identify deferred revenue, there is a risk of errors in the Department’s future consolidated financial statements. V. Financial Reporting In FY 2019, the Department’s internal control structure was not sufficient to ensure that financial statement balances were consolidated and classified accurately. We concluded that the combination of financial reporting-related control deficiencies was a significant deficiency. The individual deficiencies we identified are summarized as follows: • Classification of Funds from Dedicated Collections – One component of the consolidated financial statements, the Statement of Changes in Net Position, presents the total financing sources available to, or used by, a Federal agency to support its net cost of operations and the net change in its financial position. Agencies are required to disclose “Funds from Dedicated Collections” separately from “All Other Funds” in the Statement of Changes in Net Position. We identified a new fund that should have been reported as Funds from Dedicated Collections but was instead classified as All Other Funds. Department officials stated that they were generally aware of the new fund and indicated that they had performed a review of all new funding sources to determine the most appropriate accounting classification. However, this review did not correctly identify the new fund as Funds from Dedicated Collections due to an incomplete understanding of the requirements of the law 8 that established the fund. Although the Department reclassified the fund in the consolidated financial statements, ineffective reviews of new funding sources may lead to future misclassifications. • Monitoring Allocation Transfers – In some cases, appropriated funds are required to be transferred to another agency for programmatic execution (referred to as “child funds”). Despite transferring these funds to another agency, the Department is required to report on the use and status of child funds in its consolidated financial statements. During FY 2019, the Department made significant child fund transfers to three other agencies. To obtain audit coverage of the Department’s most significant child funds, we requested that the financial statements auditors of two of the three agencies perform certain audit steps. Those auditors identified several invalid ULOs. We also requested detailed financial information from the third agency, which received a less significant amount of child funds from the Department. The third agency provided only partial responses to our requests, and we were unable to fully validate the information provided. The Department did not have an effective routine process to ensure that amounts reported by agencies receiving child funds were accurate. For example, the Department did not communicate effectively with child fund agencies to ensure that the validity of ULOs was reviewed periodically. In addition, the Department did not have a routine process to ensure that transaction-level details were readily available from the other agencies and were auditable. The Department adjusted its consolidated financial statements to correct the errors identified with the 8 8 U.S.C. § 1715, “Consular and Border Security Programs.” 2019 A gency F inancial R eport U nited S tates D epartment of S tate | 55 INDEPENDENT AUDITOR’S REPORT | FINANCIAL SECTION