Summary of Report 03-555

April 2003

Report Number 03-555 and KPMG's report

The State's basic financial statements for the year ended August 31, 2002, are materially correct in accordance with accounting principles generally accepted in the United States of America.

While the State's basic financial statements are materially correct, our audit identified specific issues that a number of agencies need to address to ensure the accuracy of their financial information. For example, two agencies did not reconcile their internal accounting systems with the Uniform Statewide Accounting System (USAS), and other agencies had weaknesses in their reconciliation processes. Reconciling the information in various accounting systems and subsystems is critical in providing accurate financial information.

At certain agencies, we also identified weaknesses in information technology security that could compromise the integrity of financial information. Inadequate documentation in areas such as policies and procedures and information technology at several agencies also could make it difficult to ensure the accuracy of financial information.

• A financial material weakness continues to exist at the Department of Health.

The Department of Health (Department) has a material weakness that significantly reduces the reliability of its financial information. This material weakness did not have a material impact on the accuracy of the State's financial statements. However, if that material weakness is not corrected or other material weaknesses are identified, the accuracy of the State's financial statements in the future could be affected. The Department has not fully corrected issues from prior years, and we identified additional issues in fiscal year 2002. These issues include the Department's lack of policies and procedures for reconciling financial systems, failure to reconcile the internal accounting system with USAS for fiscal year 2002, $137 million understatement of accounts payable and corresponding expenditures in its fiscal year 2002 Annual Financial Report, and inadequate implementation and security controls for its internal accounting system.

• Certain agencies had weaknesses in reconciling their internal accounting systems.

Two agencies that use the Health and Human Services Administrative System (HHSAS) as their internal accounting systems—the Department of Health and the Health and Human Services Commission—did not reconcile HHSAS with USAS from September 2001 through November 2002. Both agencies implemented HHSAS at the beginning of fiscal year 2002.

As more health and human services agencies implement HHSAS as their internal accounting systems, it is important that they develop processes for reconciling HHSAS with USAS. Agencies that expect to implement HHSAS for fiscal year 2004 include the Department of Human Services and the Department of Mental Health and Mental Retardation.

The General Land Office and Veterans' Land Board was unable to successfully reconcile information in its Veterans' Land Board Land Loan Servicing/Lockbox System with its general ledger.

• Weaknesses in the security of information technology could compromise the integrity of financial data.

KPMG LLP and the Department of Health's (Department) internal auditor have both identified information technology security weaknesses surrounding the Department's implementation of HHSAS. Examples of these weaknesses include inadequate system auditing, improper user function restrictions, and inadequate user account and maintenance controls.

Although the Comptroller of Public Accounts generally has adequate controls to ensure the reliability of information in TEXNET (the system that receives electronic funds transfer payments from taxpayers), we identified specific areas that should be strengthened to prevent potential abuse, theft, or misuse of this system.

• Inadequate documentation could make it difficult to ensure the accuracy of financial information.

The Department of Health, Health and Human Service Commission, and General Land Office and Veterans' Land Board lack documented policies and/or procedures for reconciling information in their accounting systems. This increases the risk that these agencies could provide erroneous and inconsistent financial information.

• The State implemented a new financial reporting model.

The State implemented Governmental Accounting Standards Board (GASB) Statements 34, 35, and 37, as well as all required paragraphs of GASB Statement 38, for fiscal year 2002. The previous financial reporting model governed by prior GASB statements emphasized fund types (the total of all funds of a particular type). The new financial reporting model governed by current GASB statements focuses on the State as a whole in the government-wide financial statements and on major individual funds in the fund financial statements.

Federal portion - The State Auditor's Office contracted KPMG, LLP, to perform the federal portion of the 2002 Statewide Single Audit. The federal portion included a review of compliance and controls over the State's federal awards and an audit of the Schedule of Expenditures of Federal Awards. See KPMG's report including findings, recommendations, and management responses.

Financial portion - The State Auditor's Office performed the financial portion of the 2001 Statewide Single Audit. The financial portion includes an audit of the State's financial statements and a review of significant financial and compliance controls. See SAO Report No. 03-555 and its findings, recommendations, and management responses.

The two reports are submitted to the Federal Government to fulfill Single Audit reporting requirements.

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