Financial Management: Briefing on the Results of the Financial Audit of the National Institutes of Health

Published by the Government Accountability Office on 1999-05-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division


      May 14,1999

      The Honorable Tom Bliley
      Chairman, Committee on Commerce
      House of Representatives

      Subject:    Financial Management: Brieiing on the Results of the Financial Audit of the
                  National Institutes of Health

      Dear Mr. Chairman

      This letter responds to your request that we review the National Institutes of Health’s (NIH)
      fiscal year 1998 financial audit report and brief your staff on the signiscant issues raised in
      that report. To meet a requirement for an audited departmental financial statement, ’the
      Department of Health and Human Services (HHS) decided to have most of its component’s
      financial statements audited. In our April 26,1999, briefing to your staff, we discussed the
      key financial management issues highlighted in the auditor’s report on NIH, which are
      summarized below. The briefing slides are enclosed.

      ‘ftesults in Brief

      The independent public &counting firm’s” (IPA) audit opinion went from qualified on all NIH
      principal statements for fiscal year 1997 to unqualified on all principal statements except the
      Statement of Financing for fiscal year 1998. The IPA quabfied its opinion on the fiscal year
      1997 principal statements because (1) NIH had not performed a complete physical inventory
      in the past 4 years and (2) the amount reported as the grant accrual could not be
      substantiated. For fiscal year 1998, the IPA issued a disclaimer of opinion on the Statement of
      Financing because NIH could not reconcile differences between its
      net costand budgetary obligations.

      ‘31 U.S.C. 0 3515 (a)(1994).
      ?I’he HHS Office of the Inspector General contracted with Ernst and Young, L.L.P., an IPA, to
      perform the fiscal year 1997 and 1998 financial statement audits.

                                                          GAO/Al&ID-99-181R NM F’ina.ncial Audit

In its internal control report for fiscal year 1997,the IPA cited material weaknesses3in
financial reporting, property management, and grant management. For fiscal year 1998,the
IPA continued to report these three areas as weaknesses, but considered only financial
reporting to be a material weakness, particularly in the area of the development and analysis
of financial statements.

The IPA stated that while NIH implemented many improvements in fiscal year 1998,
significant financial management issues were still affecting NIHs ability to analyze its
financial activity and prepare auditable and timely fhancial information. For example, NIEi
did not have an integrated financial system to assist in the preparation of its financial
statements. NlH’s decentralized structure resulted in a labor intensive and time-consuming
process in which trial balances from its 22 institutes and centers had to be consolidated. The
IPA noted that having an integrated Gnancial system and a sufficient number of properly
trained personnel is essential for performing periodic analyses and reconciliations to detect
errors and irregularities promptly.

The IPA reported that in fiscal year 1998, NIH performed its first wall-to-wall physical
inventory of personal property in 5 years and a complete physical inventory of its real
property. The IPA stated that these are important initial steps, but emphasized that NET’s
efforts could be wasted if not followed up with the development of formal procedures to
ensure proper accountability of assets and the reconciliation of property records to the
general ledger. The IPA also noted that while NIH has initiated procedures to reconcile its
property records to its general ledger, further improvements are necessary to ensure that
differences are researched and adjustments are recorded to the general ledger and related
subsidiary records with adequate supporting documentation.

In its report for fiscal year 1998, the IPA noted improvements in grant management.
Specifically, NM improved its documentation supporting the amount of grant accrual
reported on the financial statements. Also, through the development of a methodology, it
improved its calculation of the liability for expenditures that had been incurred but not

In NIH’s response to the IPA’s report, management concurred with the findings and stated
that they would develop a corrective action plan to address the weaknesses.

 We are sending copies of this letter to Representative John D. Dingell, Ranking Minority
 Member of your Committee, Dr. Harold I& Varmus, Director of NIH, and other interested
 parties. Copies wiIl also be made available to others upon request.

 3A material wealmess is a condition in which the design or operation of one or more of the
 internal control components does not reduce to a relatively low level the risk that errors or
 irregularities in amounts that would be material to the financial statements may occur and
 not be detected promptly by employees in the normal course of performing their duties.

 Page 2                                             GAO/AI&ID-99-181R NIH Financial Audit

If you have any questions about this letter or the earlier briefing, please contact me at (202)
512476. Chinero Thomas and Rosa Ricks Harris were major contributors to this letter.

Sincerely yours,

Gloria L. Jarmon
Director, Health, Education, and Human Services
  Accounting and Financial Management


Page 3                                              GAO/AIMD-99-181R        NIH Financial Audit
I-   n n

a     L

2    a
GAo Financial Statement Audits

         l   Opinions on financial statements
             -unq.ualified, qualified, adverse, disclaimer.

         l   Report on Internal Control
             -material weaknesses and reportable

     l       Compliance with Laws and Regulations

     l       Management letter

GAo Audit History

     l   FY 1997
         -Qualified opinion on financial statements
         because amounts for fixed assets and
         grant advances payable could not be

GAo Audit History (cont.)

     l   Report on Internal Control identified
         weaknesses in
           , -fixed assets
             -grant accrual
             -grant advances
             -financial reporting
             -grant monitoring

O,o .-

GAo Audit History (cont.)

     l   FY 1998
         -Unqualified opinion on the balance
         statements of net costs, custodial activities,
         budgetary resources, and changes

         -Disclaimer on the Statement of Financing
         due to unreconciliable differences between
         net costs and budgetary obligations

GAo Audit History (cont.)

     l   Report on Internal Control identified
         weaknesses in
             -financial reporting
             -fixed assets
             -Fund Balance with Treasury

GAO Audit History (cont.)

     0 Report on Compliance with Laws and
       Regulations identified
          -instances of noncompliance with

     l   Management letter identified weaknesses
            -grant accrual
            -grant monitoring

GAo Scope and’Methodology

     l   Reviewed the audit reports on NIH’s
         FY 1997 and FY 1998 financial
         statement audits

GAo Significant FY 1998 Audit Issues

     l   Financial Reporting

     l   Fixed Assets

     l   Fund Balance with Treasury

     l   Grant Accrual

     l   Grant Monitoring

GAo IPA Audit Results

     FY 1998 Audit Report

     l   Financial Reporting
         -no integrated financial reporting
         system to facilitate preparation of
         reliable financial statements

         -lack of timely reconciliation between the I IS
         general ledger and subsidiary

GAo IPA Audit Results

       l   Financial Reporting (cont.)
           -lack of periodic analysis of revenue,
           expenses, and other account balances to
           ensure that balances reported in the
           general ledger are accurate and

           - inadequate documentation of
           accounting and internal control
           procedures and processes

GAo IPA Audit Results

     l   Fixed Assets-PP&E
         -physical inventory of personal
         property identified $27 million in.
         capitalized assets which could not be

         -no subsidiary system to account for real
         property activity prior to FY 1999   .    4 tI

GAo IPA Audit Results

     l   Fixed Assets (cont.)
         -no up-to-date formalized policies and
         procedures to ensure that building-related
         expenditures which meet criteria for
         capitalization are recorded appropriately

GAo IPA Audit Results

     l   Fund Balance With Treasury
         -lack of timely posting of adjustments to the
         general ledger

         -lack of periodic reconciliation to Treasury

         -lack of supporting documentation for     I’
         unreconciled suspense account differences

GAo IPA Audit Results

     l     Grant Accrual
         . -information in the Payment Management
           System not sufficient to calculate an
           estimate of incurred but not reported grant

     l   Grant Monitoring
         -inadequate system to ensure all single I II
         audit reports are received
         -lack of timely notification for the receipt of
         single audit reports at the Census Bureau
GAo IPA Recommendations

     l   Strengthen controls to improve the
         reliability and documentation of financia
              -perform and oversee monthly
             reconciliation of all major financial

GAo IPA Recommendations

     l   Update current policies and procedures to
         ensure that capitalized asset activity is
         properly recorded in the property
         management information system and the
         general ledger; and property records are
         reconciled to the general ledger

GAo IPA >Recommendations

     l   Develop standardized inventory
         procedures, assign inventory dates, attend
         selected inventory counts, and monitor
         inventory results

     l   Develop formalized policies and
         procedures for real property and train
         personnel to ensure proper accounting for v
         real property

GAo IPA Recommendations

     l   Improve current procedures to ensure
         timely reconciliations and adjustments for

     l   Consider whether changes should be
         made to current grant recipient reporting
         requirements in order to refine the grant
         accrual estimate

GAo IPA Recommendations

     l   Develop a system to track the submission
         of Single Audit reports by grantees and
         identify those that are delinquent

     l   Coordinate with the Census Bureau to
         ensure that notification of the receipt of
         Single Audit reports are received promptly
         and information is accurate                  ,I

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