U.S. Department of State Fiscal Year 2020 Agency Financial Report

3 projects should be tracked in the CIP account until the project reaches substantial completion. We identified domestic construction projects that were substantially complete prior to FY 2020 but that continued to be tracked in the CIP account. The Department does not have clear policies regarding the accounting treatment of domestic construction projects or processes to monitor the status of domestic construction projects. The untimely transfer of completed domestic construction projects resulted in misstatements in the Department’s asset and expense balances. In addition to construction projects for property that the Department owns, under some circumstances the Department pays for the renovation or improvement of facilities that are occupied by the Department but that are owned or leased by the General Services Administration (GSA). The Department’s policies require the capitalization of major real property renovations or leasehold improvements of $1 million or more. We obtained a list of ongoing domestic construction projects and found that the costs for each project was being recorded as operating expenses by the Department, rather than CIP. However, we determined that several of the projects had estimated costs that met the capitalization threshold. The Department does not have a policy specific to the accounting treatment for improvements to domestic real property under occupancy agreements, such as with GSA. Without a policy, the Department may not appropriately and consistently account for domestic real property transactions, thus understating assets and overstating operating expenses in the Department’s financial statements. • Leases – The Department manages approximately 17,800 real property leases throughout the world. The majority of the Department’s leases are short-term operating leases. The Department must disclose the future minimum lease payments (FMLP) related to the Department’s operating lease obligations in the notes related to the financial statements. We found numerous recorded lease terms that did not agree with supporting documentation and errors in the Department’s FMLP calculations. The Department’s processes to record lease information and to ensure the accuracy of FMLP calculations were not always effective. The errors resulted in misstatements in the Department’s notes related to the financial statements. • Personal Property – The Department uses several non-integrated systems to track, manage, and record personal property transactions, which are periodically merged or reconciled with the financial management system to centrally account for the acquisition, disposal, and transfer of personal property. We identified a significant number of personal property transactions from prior years that were not recorded in the correct fiscal year. In addition, we found that the acquisition value for numerous tested items could not be supported or was incorrect. Furthermore, we found that the gain or loss recorded for some personal property disposals was not recorded properly. The Department’s internal control structure did not ensure that personal property acquisitions and disposals were recorded in a complete, timely, and accurate manner. In addition, the Department’s monitoring activities were not effective to ensure proper financial reporting for personal property. The errors resulted in misstatements to the Department’s financial statements. The lack of effective control may result in the loss of accountability for asset custodianship, which could lead to undetected theft or waste. 2020 A gency F inanci al R eport U ni ted S tates D epartment of S tate | 51 INDEPENDENT AUDITOR’S REPORT | FINANCIAL SECTION