This audit report contains the Annual Financial Statement of the United States Marshals Service (USMS) for the fiscal years (FY) ended September 30, 2007, and September 30, 2006. Under the direction of the Office of the Inspector General (OIG), Cotton & Company LLP (Cotton & Company) performed the USMS audit.

The USMS received an unqualified opinion on its FY 2007 financial statements. An unqualified opinion means that the financial statements present fairly, in all material respects, the financial position and results of the entity’s operations in conformity with accounting principles generally accepted in the United States. The USMS also received an unqualified opinion on its FY 2006 financial statements (OIG Report No. 07-14).

For FY 2007, the auditors reported three significant deficiencies, two of which were material weaknesses. Effective for FY 2007, the term “reportable condition” was changed to the term “significant deficiency”, and new definitions of material weakness and significant deficiency were introduced in auditing standards generally accepted in the United States. See Government Auditing Standards and Office of Management and Budget Bulletin No. O7-04, Audit Requirements for Federal Financial Statements. The first material weakness relates to financial accounting and reporting quality control and assurance deficiencies. The USMS’s review controls over underlying accounting transactions, data, and account balances do not ensure that all transactions are recorded, processed, summarized and reported in accordance with the United States Standard General Ledger (USSGL), OMB Circular A-136, Financial Reporting Requirements, and federal accounting standards. This condition has been reported for the past 7 years as either a reportable condition or a material weakness. The second material weakness relates to inadequate funds management controls. Financial and compliance controls are not adequate to ensure obligations are properly recorded and that the related account balances are valid, accurate, and complete. A significant deficiency was also reported for the USMS’s information system controls. The auditors reported that improvements are needed in the areas of change controls, system software, and access controls.

The Independent Auditors’ Report on Compliance and Other Matters reported that the USMS’s financial management systems did not substantially comply with the federal financial management system requirements, applicable federal accounting standards, and use of the USSGL at the transaction level as required by the Federal Financial Management Improvement Act (FFMIA) of 1996. The auditors also reported non-compliance with the Prompt Payment Act and unauthorized financial commitments that were not in accordance with the Federal Acquisition Regulation.

The OIG reviewed Cotton & Company’s reports 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 USMS’s financial statements, conclusions about the effectiveness of internal control, conclusions on whether the USMS’s financial management systems substantially complied with FFMIA, or conclusions on compliance with laws and regulations. Cotton & Company is responsible for the attached auditors’ reports dated November 1, 2007, and the conclusions expressed in the reports. However, our review disclosed no instances where Cotton & Company did not comply, in all material respects, with generally accepted government auditing standards.