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

4 • Contractor-Held Property – The Department uses contractors to provide support in overseas locations, which may include acquiring personal property on behalf of the Department. This type of property is generally referred to as contractor-held property (CHP). The Department has title to the CHP and reports all CHP with an acquisition cost over $25,000 as an asset in its financial statements. In some cases, the property can be transferred to host-country governments for their use. Depending on the type of agreement, the Department may retain ownership of the property after it is transferred. Once an asset is provided to its intended user (e.g., a host-country government), it should be put “in service,” which means that the asset begins to depreciate over its useful life. The Department found that it had been incorrectly accounting for certain CHP. Specifically, the Department acquired assets in FY 2014 that it planned to transfer to a host-country government. That property was placed into service prior to FY 2020 but was not recorded correctly in the financial system. Although the Department implemented a quarterly CHP data call, the process did not ensure that all CHP assets were properly accounted for in the Department’s financial statements. As a result, the Department’s prior year financial statements were misstated. The Department recorded an adjustment to correct the impact on its FY 2020 financial statements. • 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 financial statements. We identified numerous instances in which the data recorded for SID were unsupported. We also identified some instances where completed projects were not transferred from SID to the internal use software account. 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 financial statements. Without an effective process to obtain complete and accurate information pertaining to software applications, the Department may continue to misstate its 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 financial statements, we identified budgetary accounting as a significant deficiency. During FY 2020, 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 52 | U ni ted S tates D epartment of S tate 2020 A gency F inanci al R eport FINANCIAL SECTION | INDEPENDENT AUDITOR’S REPORT