This audit report contains the Annual Financial Statement of the United States Marshals Service (USMS) for the fiscal years (FY) ended September 30, 2006, and September 30, 2005. 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 2006 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 generally accepted accounting principles in the United States. The USMS also received an unqualified opinion on its FY 2005 financial statements (OIG Report No. 06-09).

For FY 2006, the auditors reported two reportable conditions, both of which were material weaknesses. The auditors reported a material weakness related to financial statement quality control. Specifically, the USMS’s process for preparing and reviewing the financial statements lacks the necessary quality review checks for errors, omissions, and inconsistencies with generally accepted accounting principles and federal accounting requirements. This condition has been reported for the past six years as either a reportable condition or a material weakness. The auditors also reported a second material weakness regarding improvements needed in the information system general and application control environments. Significant weaknesses were identified in the areas of segregation of duties, system software, and access controls.

In the Independent Auditor’s Report on Compliance and Other Matters, the auditors reported that the USMS’s financial management systems did not substantially comply with the requirements of the Federal Financial Management Improvement Act (FFMIA) of 1996. The auditors also reported non-compliances with regard to the Prompt Payment Act and funding of capital leases in accordance with Office of Management and Budget Circular A-11.

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 generally accepted government auditing standards in the United States, 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 auditor’s reports dated October 26, 2006, 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.