Working Capital Fund Annual Financial Statement
Fiscal Year 2004

Report No. 05-05
January 2005
Office of the Inspector General

Commentary and Summary

The Working Capital Fund (WCF) is a revolving fund created primarily to provide certain administrative services to the Department on a centralized basis. The WCF is reimbursed by the Department’s participating components for the cost of these services, which includes an amount for operating expenses of the fund. The WCF also serves as the custodian for amounts collected through civil debt litigation and has the authority to retain up to three percent of these collections. The WCF does not receive appropriated monies from Congress, but is allowed to receive unobligated prior year appropriations from other Department of Justice components. Amounts transferred to the WCF may be used by the Department for the acquisition or improvement of automated systems and capital equipment.

This audit report contains the financial statements of the WCF for the fiscal years ended September 30, 2004 and 2003. Under the direction of the Office of the Inspector General (OIG), the audit was performed by KMPG, LLP. The audit resulted in an unqualified opinion on the FY 2004 financial statements. An unqualified opinion means that the financial statements present fairly, in all material respects, the financial position and results of operations of the entity. For FY 2003, the WCF also received an unqualified opinion on its financial statements (OIG Report 04-26).

The Independent Auditors’ Report on Internal Control over Financial Reporting identified two reportable conditions. The first reportable condition identified weaknesses in the WCF’s accrual processes for certain accounts included in the June 30, 2004 interim financial statements. Specifically, the auditors noted the following problems in the WCF’s accrual processes, which resulted in a reportable condition:

  • a $5 million difference in the amount reported as “Earned Revenue with the Public” on the Statement of Net Cost and the amount reported as “Collections – Retained by WCF” on the Statement of Custodial Activity, and
  • a high error rate over the status of obligations recorded by Debt Collection Management (DCM) in the June 30, 2004 trial balance.

The second reportable condition concerns the WCF’s Financial Management Information System (FMIS2) accounting system, which is maintained by the Offices, Boards and Divisions (OBDs). The OBDs’ auditors identified weaknesses in the information system controls environment, which also impacts the WCF. The specific control improvements needed in the FMIS2 accounting system are described below:

  • the OBDs’ management must implement effective entity-wide security program planning for FMIS2,
  • the OBDs’ management of logical access control for FMIS2 lacks effective controls,
  • the OBDs’ management of change control for FMIS2 lacks effective controls, and
  • segregation of duties monitoring for FMIS2 needs to be strengthened.

As a result of these reportable conditions, timely and accurate information is not available to management throughout the year, and the auditors were required to perform additional substantive testing in order to ensure the balances were materially correct at year-end. This significantly increased the risk that the WCF would not meet the accelerated financial statement reporting deadline. Although the WCF was able to meet the challenge by performing extensive labor intensive manual reviews of its records and made the necessary adjustments, this may not be possible in future years.

In their Report on Compliance with Laws and Regulations, the auditors concluded that the WCF’s financial management systems did not substantially comply with federal financial management systems requirements and applicable federal accounting standards as required by the FFMIA. The same compliance issue had been reported for FY 2003.

The OIG reviewed KMPG’s report and related documentation and made necessary inquiries of its representatives. Our review, as differentiated from an audit in accordance with U.S. generally accepted government auditing standards, was not intended to enable us to express, and we do not express, an opinion on the WCF’s financial statements, conclusions about the effectiveness of internal control, conclusions on whether the WCF’s financial management systems substantially complied with FFMIA, or conclusions on compliance with laws and regulations. KPMG is responsible for the attached auditors’ report dated October 27, 2004, and the conclusions expressed in the report. However, our review disclosed no instances where KPMG did not comply, in all material respects, with generally accepted government auditing standards.