This is the accessible text file for GAO report number GAO-05-588R 
entitled 'Financial Audit: The Department of Health and Human 
Services's Fiscal Year 2004 Management Representation Letter on Its 
Financial Statements' which was released on June 24, 2005. 

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June 23, 2005: 

Mr. Kerry Weems Acting: 
Chief Financial Officer: 
Department of Health and Human Services: 

Mr. Daniel R. Levinson Acting: 
Inspector General: 
Department of Health and Human Services: 

Subject: Financial Audit: The Department of Health and Human Services's 
Fiscal Year 2004 Management Representation Letter on Its Financial 
Statements: 

As you know, the Secretary of the Treasury, in coordination with the 
Director of the Office of Management and Budget (OMB), is required to 
annually prepare and submit audited financial statements of the U.S. 
government to the President and the Congress. We are required to audit 
these consolidated financial statements (CFS) and report on the results 
of our work.[Footnote 1] In connection with fulfilling our requirement 
to audit the fiscal year 2004 CFS, we evaluated the Department of the 
Treasury's (Treasury) financial reporting procedures and related 
internal control over the process for compiling the CFS, including the 
management representation letter provided us by Treasury and OMB. 
Written representation letters from management, required by U.S. 
generally accepted government auditing standards, ordinarily confirm 
oral representations given to the auditor, indicate and document the 
continuing appropriateness of those representations, and reduce the 
possibility of a misunderstanding between management and the auditor. 

In our report, which is included in the fiscal year 2004 Financial 
Report of the United States Government,[Footnote 2] we reported a 
limitation on the scope of our work due to identified concerns with the 
adequacy of certain federal agencies' management representations on 
which Treasury and OMB depend to provide their representations to us 
regarding the CFS. Specifically, Treasury and OMB stated that their 
representation letter to us on the CFS was based primarily on the 
individual federal agency representation letters. Consequently, our 
audit considered the content of the individual federal agency letters, 
and the incompleteness of certain of these letters impaired our ability 
to obtain sufficient evidence in support of our audit of the CFS. This 
limitation contributed to our disclaimer of opinion on the CFS. We 
performed sufficient audit work to provide the disclaimer of opinion 
and issued our audit report, dated December 6, 2004, in accordance with 
U.S. generally accepted government auditing standards. 

As part of our audit of the fiscal year 2004 CFS, we received and 
reviewed selected federal agencies' management representation letters 
to assess their adequacy in support of our audit of the CFS. As the 
federal government gets closer to an opinion on its financial 
statements, it becomes more important that the federal agencies' 
management representation letters be complete and reliably prepared. 

The purpose of this report is to communicate our observations on the 
Department of Health and Human Services's (HHS) fiscal year 2004 
management representation letter. Our objective is to help ensure that 
future management representation letters submitted by HHS are 
sufficient to help support Treasury and OMB's preparation of the CFS 
management representation letter and our ability to rely on the 
representations in that letter in combination with individual federal 
agency representation letters. We reviewed five key areas in each 
management representation letter: (1) signatures, (2) materiality 
thresholds, (3) representations, (4) summary of unadjusted 
misstatements, and (5) reliability of representations. In reviewing the 
management representation letters, we applied the American Institute of 
Certified Public Accountants' (AICPA) Codification of Auditing 
Standards, AU Section 333, Management Representations; OMB Bulletin 01- 
02, Audit Requirements for Federal Financial Statements; and the 
GAO/President's Council on Integrity and Efficiency (PCIE) Financial 
Audit Manual (FAM) section 1001, entitled "Management 
Representations."[Footnote 3]

Results in Brief: 

HHS's fiscal year 2004 management representation letter did not provide 
all the information necessary to support Treasury and OMB's preparation 
of the CFS management representation letter. This in turn impacted our 
ability to rely on the representations in the CFS management 
representation letter in combination with individual federal agency 
representation letters. 

We identified some needed improvements in three of the five key areas 
we reviewed. First, HHS did not provide the materiality thresholds used 
to determine, for representation purposes, any matters that were 
individually or collectively material to its financial statements. Such 
individual federal agency thresholds are considered by Treasury and OMB 
in providing a materiality threshold for the CFS representation letter. 
Second, the letter included 27 of the 29 representations[Footnote 4] 
from the FAM that were applicable to HHS. The other 2 representations 
were not fully included. Finally, HHS did not include a complete 
summary of unadjusted misstatements with its management representation 
letter and also did not distinguish between misstatements affecting 
intragovernmental accounts and misstatements affecting accounts with 
the public. 

We believe that these matters can be easily addressed. We are making 
three recommendations to HHS's Acting Chief Financial Officer targeted 
to specific changes needed. Also, we are recommending that the HHS 
Acting Inspector General, with the contracted independent public 
accountant, work with the department to help ensure that future 
management representation letters meet the key conditions noted as 
needing improvements in this report. 

In commenting on a draft of this report, HHS's Deputy Assistant 
Secretary Finance and Deputy Inspector General for Audit Services 
raised some points regarding the three areas that we noted in our 
report as needing improvement, but stated that they will (1) work to 
ensure the fiscal year 2005 materiality thresholds are communicated to 
Treasury, OMB, and GAO; (2) ensure that their fiscal year 2005 
management representation letter includes the FAM language for one of 
the representations not fully included; and (3) use the FAM language 
related to "known" and "likely" misstatements and carry-forward effect 
in their fiscal year 2005 summary of unadjusted misstatements. For the 
other representation not fully included, they noted that reference to 
stewardship property, plant, and equipment would not be included in the 
management representation letter. However, in order for there to be no 
misunderstandings, HHS's future management representation letters 
should provide additional detail on its stewardship responsibilities. 
In addition, the HHS Deputy Assistant Secretary Finance's and Deputy 
Inspector General for Audit Services's comments did not address 
distinguishing between misstatements affecting intragovernmental 
accounts and misstatements affecting accounts with the public on HHS's 
summary of unadjusted misstatements. As stated in the report, this 
information is needed by us to prepare the governmentwide summary of 
unadjusted misstatements. 

Background: 

In conducting agency financial statement audits, U.S. generally 
accepted government auditing standards incorporate financial auditing 
fieldwork and reporting standards issued by the AICPA. Such auditing 
standards (AU Section 333) require auditors to obtain certain 
representations from agency management. These representations are part 
of the evidential matter to be considered by the auditor in its audit 
of the agency's financial statements. The representations obtained will 
depend on the circumstances of the engagement and the nature and basis 
of presentation of the financial statements. AU Section 333 discusses 
specific representations that should be obtained from management, 
including a requirement to attach a schedule of unadjusted financial 
statement misstatements for entities with uncorrected misstatements. 

In addition, OMB Bulletin 01-02 and FAM section 1001 contain guidance 
on preparing federal agencies' management representation letters. 
According to the FAM, in addition to the representations included in AU 
Section 333, the auditor generally should consider the need to obtain 
representations on other matters based on the circumstances of the 
audited entity. FAM section 1001A lists 35 specific representations 
ordinarily included in the management representation letter and also 
includes a requirement to attach a schedule of unadjusted financial 
statement misstatements for entities with uncorrected misstatements. 
(See enc. I for these representations.) Representations listed in FAM 
section 1001A should be customized to the situation of the entity being 
audited or excluded if inapplicable. We perform our audit of the CFS in 
accordance with the FAM and related auditing standards. 

Treasury and OMB are to receive management representation letters from 
certain federal agencies. This is important because U.S. generally 
accepted government auditing standards require that Treasury and OMB 
provide us, as principal auditor of the CFS, a management 
representation letter, and their letter depends on the information in 
such agencies' management representation letters. In their 
representation letter to us for the audit of the fiscal year 2004 CFS, 
Treasury and OMB stated that their representations are based primarily 
on the representations of those agencies covered by the Chief Financial 
Officers (CFO) Act and other selected agencies that were made in 
connection with the preparation of these entities' respective financial 
statements and provided to OMB and Treasury. For this reason, it is 
important that all federal agency representation letters be complete 
and reliable. 

Objectives, Scope, and Methodology: 

In connection with our audit of the fiscal year 2004 CFS, we evaluated 
Treasury's financial reporting procedures and related internal control, 
including the CFS management representation letter. For the fiscal year 
2004 CFS, 33 of the 35 "verifying agencies" submitted audited financial 
statements along with their management representation letters to 
Treasury.[Footnote 5] In our review of these 33 management 
representation letters, our overall objective was to assess their 
adequacy as it relates to our audit of the CFS. Specifically, we 
reviewed each agency management representation letter to determine 
whether the following five key conditions were met: 

* the management representation letter was signed by appropriate agency 
officials;

* the management representation letter included designation as to the 
amounts above which matters were considered material (materiality 
thresholds);

* the management representation letter included applicable 
representations from the FAM;

* the management representation letter included a properly prepared 
summary of unadjusted misstatements for agencies with uncorrected 
misstatements; and: 

* the representations in the management representation letter were 
reliable based on a review of findings in the auditor's report. 

This report is based on the audit work we performed for the audit of 
the fiscal year 2004 CFS, which was performed in accordance with U.S. 
generally accepted government auditing standards. 

We requested comments on a draft of this report from HHS's Chief 
Financial Officer and Inspector General or their designees. Written 
comments from HHS's Deputy Assistant Secretary Finance and Deputy 
Inspector General for Audit Services are reprinted in enclosures II and 
III, respectively, and are also discussed in the Agency Comments and 
Our Evaluation section. 

Identified Issues with HHS's Fiscal Year 2004 Management Representation 
Letter: 

With respect to HHS's fiscal year 2004 management representation 
letter, we identified the following three areas that need some 
improvement: (1) providing the materiality thresholds used, (2) fully 
including applicable representations from the FAM, and (3) including a 
summary of unadjusted misstatements. Details regarding these issues are 
as follows. 

Providing the Materiality Thresholds Used: 

Management representations may be limited to matters that are 
considered individually or collectively material to the entity's 
financial statements, provided that management and the auditor have 
reached an understanding on the materiality thresholds to be used. 
Likewise, in preparing the overall management representation letter for 
the CFS, which is provided to us, Treasury and OMB limit the letter's 
representations to matters that are considered to be material. While an 
understanding between management and the auditor of materiality 
thresholds used is not explicitly required by auditing standards to be 
included in the management representation letter, Treasury and OMB use 
agency thresholds in providing a materiality threshold for the 
governmentwide management representation letter. 

For fiscal year 2004, because the materiality thresholds used were not 
included in HHS's and a number of other federal agencies' management 
representation letters, or otherwise provided to Treasury and OMB, 
Treasury and OMB's ability to represent that all matters material to 
the CFS were properly considered and included in the overall management 
representation letter for the CFS was impaired. 

Fully Including Applicable Representations from the FAM: 

Written representations from management ordinarily confirm oral 
representations made to the auditor during the audit, document the 
continuing appropriateness of those representations, and reduce the 
possibility of a misunderstanding. To meet auditing standards and OMB 
requirements, federal agencies' management and auditors need to ensure 
that management representation letters are complete and accurate. 

We found that HHS's fiscal year 2004 management representation letter 
included 27 of the 29 representations from the FAM that were applicable 
to HHS. The 2 other representations were not fully included. For one of 
the incomplete representations, the HHS management representation 
letter included the following representation intended to cover the 
satisfactory title to all owned assets, including stewardship property, 
plant, and equipment representation called for by FAM 6. (See enc. I 
for this representation.)

"Except for properties capitalized under capital leases, HHS has 
satisfactory title to all assets appearing in the balance sheet as of 
September 30, 2004, including assigned and unassigned loans; and there 
are no liens or encumbrances, nor have any assets been pledged. All 
assets to which the HHS has satisfactory title appear in the balance 
sheet."

While this representation addresses owned assets, it should also 
address stewardship property, plant, and equipment as called for by FAM 
6. 

For the other incomplete representation, the management representation 
letter included the following representation intended to cover the 
subsequent events representation called for by FAM 13. (See enc. I for 
this representation.)

"No events or transactions have occurred since September 30, 2004 or 
are pending that would have a material effect on the financial 
statements at that date or for the period then ended, or that are of 
such significance in relation to the HHS's affairs to require mention 
in a note to the financial statements in order to make them not 
misleading regarding the financial position, net cost, changes in net 
position, budgetary resources, and the reconciliation of net costs to 
budgetary obligations of the HHS."

While this representation addresses the financial statements and notes, 
it should also address stewardship information as called for by FAM 13. 

When agencies include incomplete representations in their management 
representation letters, it impairs our ability to audit the CFS and 
Treasury and OMB's ability to make these types of representations in 
the CFS management representation letter. 

Including a Complete Summary of Unadjusted Misstatements: 

U.S. generally accepted government auditing standards require that for 
each federal agency with uncorrected misstatements, a summary of 
unadjusted misstatements be attached to the agency's management 
representation letter. Treasury and OMB use the summaries of unadjusted 
misstatements to assess the impact of federal agencies' unadjusted 
misstatements on the CFS and make appropriate management 
representations to us at the governmentwide level. The summaries are 
also used by us, as principal auditor of the CFS, to develop an overall 
governmentwide summary of unadjusted misstatements, which is then 
attached to the CFS management representation letter prepared by 
Treasury and OMB. 

Also, in a matter related to the compilation process for the CFS, in 
fiscal year 2004, Treasury required agencies to submit a summary of 
unadjusted misstatements as part of the closing package using the 
standardized format provided for in the Treasury Financial Manual 
(TFM). The TFM, however, required additional details to be added to 
this summary of unadjusted misstatements than those called for by the 
FAM. Specifically, agencies were to also (1) include a description of 
the misstatements and (2) distinguish between misstatements affecting 
intragovernmental accounts and misstatements affecting accounts with 
the public. We need this additional information to develop the overall 
governmentwide summary of unadjusted misstatements. In order to avoid 
duplication of effort by the agencies in preparing two summaries of 
unadjusted misstatements, the additional information should also be 
included in the summary of unadjusted misstatements attached to the 
management representation letter. As such, we plan to work with PCIE to 
modify the FAM to call for these two additional disclosures to be 
included in the summary of unadjusted misstatements attached to the 
management representation letter. 

HHS included a summary of unadjusted misstatements with its management 
representation letter, but the summary as called for by the FAM was 
incomplete. Specifically, HHS did not (1) separate "known" and "likely" 
misstatements and (2) separately identify the carry-forward effect of 
the prior year's unadjusted misstatements. In addition, HHS did not 
submit a summary of unadjusted misstatements as part of its closing 
package to Treasury as required by the TFM. As such, HHS also did not 
distinguish between misstatements affecting intragovernmental accounts 
and misstatements affecting accounts with the public. 

Without a complete summary of unadjusted misstatements from each of the 
verifying agencies with uncorrected misstatements, it is not possible 
for us, as principal auditor of the CFS, to reasonably determine the 
audit risk exposure for each of the line items in the CFS or to prepare 
an adequate summary of unadjusted misstatements at the governmentwide 
level. 

Conclusions: 

In three of the five key areas we reviewed, HHS's fiscal year 2004 
management representation letter did not provide all the information 
necessary to support Treasury and OMB's preparation of the CFS 
management representation letter and our ability to rely on the 
representations in that letter in combination with individual federal 
agency representation letters, including that of HHS. The additional 
information needed from HHS is straightforward and should be easy to 
address. 

Recommendations for Executive Action: 

We recommend to HHS's Acting Chief Financial Officer that in the future 
the management representation letter: 

* include materiality thresholds or such thresholds be provided 
separately to Treasury and OMB;

* fully include all representations from the FAM that are applicable to 
HHS; and: 

* include a complete summary of unadjusted misstatements, if there are 
any uncorrected misstatements, that also distinguishes between 
misstatements affecting intragovernmental accounts and misstatements 
affecting accounts with the public. 

We recommend that the HHS Acting Inspector General, with the contracted 
independent public accountant, work with the department to help ensure 
that future management representation letters meet the key conditions 
noted as needing improvements in this report. 

Agency Comments and Our Evaluation: 

HHS's Deputy Assistant Secretary Finance and Deputy Inspector General 
for Audit Services, in separate letters that are reprinted in 
enclosures II and III, respectively, provided written comments on our 
draft report. Their specific comments and our evaluation of their 
comments for each of the issues in the report are discussed below. 

HHS's Deputy Assistant Secretary Finance and Deputy Inspector General 
for Audit Services stated that their offices believe that the points 
raised by us did not affect HHS's audit or our audit of the CFS. With 
respect to affecting HHS's audit, the purpose of our review was to 
assess the adequacy of selected agencies' management representation 
letters in supporting our audit of the CFS. We did not conclude on or 
report as to the specific effect of the issues we identified on the 
audit of any of the respective agencies' financial statements, as this 
was not a focus of our review. In regards to affecting our audit of the 
CFS, we disagree. As stated in our report, we reported a limitation on 
the scope of our work on the fiscal year 2004 CFS due to identified 
concerns with the adequacy of certain federal agencies' management 
representations on which Treasury and OMB depend to provide their 
representations to us regarding the CFS. Specifically, the 
incompleteness of certain of these federal agencies' letters, including 
HHS's letter, impaired our ability to obtain sufficient evidence in 
support of our audit of the CFS and contributed to our disclaimer of 
opinion on the CFS. 

Providing the Materiality Thresholds Used: 

HHS's Deputy Assistant Secretary Finance and Deputy Inspector General 
for Audit Services stated that they did not consider it proper to 
include a consolidated materiality threshold in HHS's management 
representation letter that is signed by all of the operating divisions. 
We are unclear as to why the signing of the letter by the operating 
divisions would impact the disclosure of materiality thresholds in the 
departmentwide management representation letter. However, we are 
pleased that, consistent with our recommendation, HHS stated it will 
ensure that the fiscal year 2005 materiality thresholds are 
communicated to Treasury, OMB, and GAO. 

Fully Including Applicable Representations from the FAM: 

As it relates to FAM representation #6, HHS's Deputy Inspector General 
for Audit Services stated that reference to stewardship property, 
plant, and equipment would not be included in the management 
representation letter. He stated that given the nature of the heritage 
assets and Indian trust lands, pursuant to Public Law 86-121, the 
assets will be returned to the Department of the Interior's Bureau of 
Indian Affairs when no longer needed by HHS's Indian Health Service. He 
also noted that a separate paragraph regarding the stewardship 
reporting was included in HHS's fiscal year 2004 management 
representation letter. In addition, HHS's Deputy Assistant Secretary 
Finance noted that his office believes that HHS fully recognized its 
Indian Health Service's stewardship property, plant, and equipment in 
this separate paragraph. 

The required supplementary stewardship information section of HHS's 
fiscal year 2004 Performance and Accountability Report discusses 
stewardship property, plant, and equipment. As such, HHS's management 
representation letter should include a representation related to these 
assets. The representation should clearly communicate HHS's 
responsibilities for the stewardship property, plant, and equipment, 
including whether or not HHS has title and if there are any 
encumbrances. Although HHS's management representation letter stated 
that the required supplementary stewardship information has been 
prepared and presented in conformity with the guidelines established by 
the Statements on Federal Financial Accounting Standards, it did not 
specifically discuss stewardship property, plant, and equipment. As a 
result, HHS's future management representation letters should provide 
additional detail on its stewardship responsibilities. 

As it relates to FAM representation #13, HHS's Deputy Assistant 
Secretary Finance and Deputy Inspector General for Audit Services 
stated that there were no significant subsequent events related to 
stewardship information. The Deputy Inspector General for Audit 
Services also stated that his office believes that the representations 
provided by management covered the significant portion of the required 
supplementary stewardship information by reference to the Centers for 
Medicare and Medicaid Services's representation letter. Nevertheless, 
the Deputy Assistant Secretary Finance and Deputy Inspector General for 
Audit Services stated that their offices will ensure that HHS's fiscal 
year 2005 management representation letter includes the FAM language 
for this representation. Since (1) the FAM calls for a representation 
that there are no material subsequent events or transactions that have 
not been properly recorded in the stewardship information and (2) HHS 
reports stewardship information at the department level, FAM 
representation #13 in the HHS consolidated financial statements 
management representation letter should incorporate language related to 
stewardship information. We are pleased that HHS has agreed to 
incorporate the FAM language into this representation for fiscal year 
2005. 

Including a Complete Summary of Unadjusted Misstatements: 

HHS's Deputy Assistant Secretary Finance and Deputy Inspector General 
for Audit Services stated that information contained in the summary of 
unadjusted misstatements would allow a reader to classify adjustments 
as "known" or "likely". Specifically, they stated that misstatements 
labeled "exposure" were classified as likely and all other adjustments 
were classified as known. In HHS's summary of unadjusted misstatements, 
the word "exposure" was noted for some of the misstatements. However, 
the term "known" was not noted on any of the misstatements. It was not 
clear during our review as to how this presentation provided the 
information called for by the FAM. In addition, HHS's Deputy Assistant 
Secretary Finance and Deputy Inspector General for Audit Services 
stated that information contained in the summary of unadjusted 
misstatements would allow a reader to determine the carry-forward 
effect of the prior year's unadjusted misstatements. Specifically, they 
indicated that the carry-forward effect was included on the summary 
under the "turnaround effect" line. However, the turnaround effect on 
the summary only included one amount as to the effect on net income and 
did not show any effect on the related balance sheet line item(s). As a 
result, it was unclear that the "turnaround effect" was the carry- 
forward effect. Therefore, in order for there to be no 
misunderstandings, in future management representation letters, the 
language and presentation called for by the FAM should be used to 
prepare the summary of unadjusted misstatements. We are pleased that 
HHS's Deputy Assistant Secretary Finance and Deputy Inspector General 
for Audit Services stated that they will use the FAM language in their 
fiscal year 2005 management representation letter. 

HHS's summary of unadjusted misstatements also did not distinguish 
between misstatements affecting intragovernmental accounts and 
misstatements affecting accounts with the public. HHS's Deputy 
Assistant Secretary Finance and Deputy Inspector General for Audit 
Services comments did not address this issue. As stated in the report, 
this information is also needed by us to prepare the governmentwide 
summary of unadjusted misstatements. 

Within 60 days of the date of this report, we would appreciate 
receiving a written statement on actions taken to address these 
recommendations. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Homeland Security and 
Governmental Affairs; the Subcommittee on Federal Financial Management, 
Government Information, and International Security, Senate Committee on 
Homeland Security and Governmental Affairs; the House Committee on 
Government Reform; and the Subcommittee on Government Management, 
Finance, and Accountability, House Committee on Government Reform. In 
addition, we are sending copies to the Fiscal Assistant Secretary of 
the Treasury and the Controller of OMB. Copies will be made available 
to others upon request. This report is also available at no charge on 
GAO's Web site at [Hyperlink, http://www.gao.gov]. 

We appreciate the courtesy and cooperation extended to us by your staff 
throughout our work. We look forward to continuing to work with your 
offices to help improve financial management in the federal government. 
If you have any questions about the contents of this report, please 
contact me at (202) 512-3406. 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

Enclosures --3: 

[End of section]

Enclosure I: Representations in FAM 1001A: 

Guidance contained in FAM 1001 and FAM 1001A deals with the management 
representations that the auditor should obtain from current management 
as part of the audit. This guidance also acknowledges that judgment 
needs to be exercised to obtain representations that depend on the 
circumstances of the engagement and the nature and basis of 
presentation of the financial statements. Representations given in FAM 
section 1001A should be customized to the situation of the entity being 
audited, and additional representations may need to be obtained. 

FAM 1001A lists 27 representations that are ordinarily included, if 
applicable, in the management representation letter that an agency 
provides to the auditor. For representations 3, 11, 16, and 18, the 
agency should address three separate components. As such, each agency 
is ordinarily expected to make a total of 35 representations. 
Representations 18, 19, 20, and 21 are not applicable unless the agency 
received an opinion on its internal control. In addition, 
representations 22, 23, and 24 address the three requirements of the 
Federal Financial Management Improvement Act of 1996 and are only 
applicable to the 24 CFO Act agencies. The 35 representations in FAM 
1001A are as follows. 

1. We are responsible for the fair presentation of the financial 
statements and stewardship information in conformity with U.S. 
generally accepted accounting principles. 

2. The financial statements are fairly presented in conformity with 
U.S. generally accepted accounting principles. 

3. We have made available to you all: 

* financial records and related data;

* where applicable, minutes of meetings of the Board of Directors [or 
other similar bodies, such as congressional oversight committees] or 
summaries of actions of recent meetings for which minutes have not been 
prepared; and: 

* communications from the Office of Management and Budget (OMB) 
concerning noncompliance with or deficiencies in financial reporting 
practices. 

4. There are no material transactions that have not been properly 
recorded in the accounting records underlying the financial statements 
or disclosed in the notes to the financial statements. 

5. We believe that the effects of the uncorrected financial statement 
misstatements summarized in the accompanying schedule are immaterial, 
both individually and in the aggregate, to the financial statements 
taken as a whole. [If management believes that certain of the 
identified items are not misstatements, management's belief may be 
acknowledged by adding to the representation, for example, "We believe 
that items XX and XX do not constitute misstatements because 
[description of reason]."]

6. The [entity] has satisfactory title to all owned assets, including 
stewardship property, plant, and equipment; such assets have no liens 
or encumbrances; and no assets have been pledged. 

7. We have no plans or intentions that may materially affect the 
carrying value or classification of assets and liabilities. 

8. Guarantees under which the [entity] is contingently liable have been 
properly reported or disclosed. 

9. Related party transactions and related accounts receivable or 
payable, including assessments, loans, and guarantees, have been 
properly recorded and disclosed. 

10. All intraentity transactions and balances have been appropriately 
identified and eliminated for financial reporting purposes, unless 
otherwise noted. All intragovernmental transactions and balances have 
been appropriately recorded, reported, and disclosed. We have 
reconciled intragovernmental transactions and balances with the 
appropriate trading partners for the four fiduciary transactions 
identified in Treasury's Intra-governmental Fiduciary Transactions 
Accounting Guide, and other intragovernmental asset, liability, and 
revenue amounts as required by the applicable OMB Bulletin. 

11. There are no: 

* possible violations of laws or regulations whose effects should be 
considered for disclosure in the financial statements or as a basis for 
recording a loss contingency,

* material liabilities or gain or loss contingencies that are required 
to be accrued or disclosed that have not been accrued or disclosed, or: 

* unasserted claims or assessments that are probable of assertion and 
must be disclosed that have not been disclosed. 

12. We have complied with all aspects of contractual agreements that 
would have a material effect on the financial statements in the event 
of noncompliance. 

13. No material events or transactions have occurred subsequent to 
September 30, 20X2 [or date of latest audited financial statements], 
that have not been properly recorded in the financial statements and 
stewardship information or disclosed in the notes. 

14. We are responsible for establishing and maintaining internal 
control. 

15. We acknowledge our responsibility for the design and implementation 
of programs and controls to prevent and detect fraud (intentional 
misstatements or omissions of amounts or disclosures in financial 
statements and misappropriation of assets that could have a material 
effect on the financial statements). 

16. We have no knowledge of any fraud or suspected fraud affecting the 
[entity] involving: 

* management,

* employees who have significant roles in internal control, or: 

* others where the fraud could have a material effect on the financial 
statements. 

[If there is knowledge of any such instances, they should be described.]

17. We have no knowledge of any allegations of fraud or suspected fraud 
affecting the [entity] received in communications from employees, 
former employees, or others. [If there is knowledge of any such 
allegations, they should be described.]

18. Pursuant to 31 U.S.C. 3512(c), (d) (commonly known as the Federal 
Managers' Financial Integrity Act), we have assessed the effectiveness 
of the [entity's] internal control in achieving the following 
objectives: 

* reliability of financial reporting--transactions are properly 
recorded, processed, and summarized to permit the preparation of 
financial statements and stewardship information in accordance with 
U.S. generally accepted accounting principles, and assets are 
safeguarded against loss from unauthorized acquisition, use or 
disposition;

* compliance with applicable laws and regulations--transactions are 
executed in accordance with (i) laws governing the use of budget 
authority and with other laws and regulations that could have a direct 
and material effect on the financial statements and (ii) any other 
laws, regulations, and governmentwide policies identified by OMB in its 
audit guidance; and: 

* reliability of performance reporting--transactions and other data 
that support reported performance measures are properly recorded, 
processed, and summarized to permit the preparation of performance 
information in accordance with criteria stated by management. 

[If the entity bases its internal control assessment on suitable 
criteria other than 31 U.S.C. 3512(c), (d), this item should cite the 
criteria used (for example, Internal Control--Integrated Framework 
issued by the Committee of Sponsoring Organizations (COSO) of the 
Treadway Commission).]

19. Those controls in place on September 30, 20X2 [or date of latest 
audited financial statements], and during the years ended 20X2 and 
20X1, provided reasonable assurance that the foregoing objectives are 
met. [If there are material weaknesses, the foregoing representation 
should be modified to read: 

* Those controls in place on September 30, 20X2, and during the years 
ended 20X2 and 20X1, provided reasonable assurance that the foregoing 
objectives are met except for the effects of the material weaknesses 
discussed below or in the attachment. 

* or: Internal controls are not effective. 

* or: Internal controls do not meet the foregoing objectives.]

20. We have disclosed to you all significant deficiencies in the design 
or operation of internal control that could adversely affect the 
entity's ability to meet the internal control objectives and identified 
those we believe to be material weaknesses. 

21. There have been no changes to internal control subsequent to 
September 30, 20X2 [or date of latest audited financial statements], or 
other factors that might significantly affect it. [If there were 
changes, describe them, including any corrective actions taken with 
regard to any significant deficiencies or material weaknesses.]

22. We are responsible for implementing and maintaining financial 
management systems that substantially comply with federal financial 
management systems requirements, federal accounting standards (U.S. 
generally accepted accounting principles), and the U.S. Government 
Standard General Ledger at the transaction level. 

23. We have assessed the financial management systems to determine 
whether they substantially comply with these federal financial 
management systems requirements. Our assessment was based on guidance 
issued by OMB. 

24. The financial management systems substantially complied with 
federal financial management systems requirements, federal accounting 
standards, and the U.S. Government Standard General Ledger at the 
transaction level as of [date of the latest financial statements]. 

[If the financial management systems substantially comply with only one 
or two of the above elements, this representation should be modified as 
follows: 

* As of [date of financial statements], the [entity's] financial 
management systems substantially comply with [specify which of the 
three elements for which there is substantial compliance (e.g., federal 
accounting standards and the SGL at the transaction level)], but did 
not substantially comply with [specify which of the elements for which 
there was a lack of substantial compliance (e.g., federal financial 
management systems requirements)], as described below (or in an 
attachment).]

[If the financial management systems do not substantially comply with 
any of the three elements, the following paragraph should be used 
instead: 

* As of [date of financial statements], the [entity's] financial 
management systems do not substantially comply with the federal 
financial management systems requirements.]

[If there is a lack of substantial compliance with one or more of the 
three requirements, identify herein or in an attachment all the facts 
pertaining to the noncompliance, including the nature and extent of the 
noncompliance and the primary reason or cause of the noncompliance.]

25. We are responsible for the [entity's] compliance with applicable 
laws and regulations. 

26. We have identified and disclosed to you all laws and regulations 
that have a direct and material effect on the determination of 
financial statement amounts. 

27. We have disclosed to you all known instances of noncompliance with 
laws and regulations. 

[End of section]

Enclosure II: Comments From the Office of the Chief Financial Officer 
at the Department of Health and Human Services: 

DEPARTMENT OF HEALTH & HUMAN SERVICES: 

Office of the Secretary: 

JUN 10 2005: 

TO: Gary T. Engel: 
Director, Financial Management and Assurance: 
Government Accountability Office Washington,

Washington, D.C. 20201: 

FROM: George Strader: 
Deputy Assistant Secretary Finance: 

SUBJECT: Department of Health and Human Services, Office of Inspector 
General Comments on GAO-05-588R HHS' Management Representation Letter 
Draft Report: 

Thank you for the opportunity to comment on your draft report entitled 
Financial Audit: The Department ofHealth and Human Services' Fiscal 
Year 2004 Management Representation Letter on Its Financial Statements. 
I am responding on behalf of Kerry Weems, Acting Chief Financial 
Officer. 

We agree that it is important to have a complete and accurately 
prepared Management Representation Letter that supports both the HHS 
and the Governmentwide consolidated financial statements. We have 
worked consistently with our OIG and our auditors Ernst and Young to 
produce such a letter. We believe our Management Representation Letter 
served that purpose and that the points raised by the GAO in no way 
affected our HHS audit or that of the CFS. 

We know that our OIG has already commented in detail on your report. We 
totally agree with their comments and wish to make these additional 
remarks. 

Providing the Materiality Thresholds. Our office and that of the OIG 
did not consider it proper to include a consolidated threshold that 
would be signed by all OPDIV managers. What might be of significant 
materiality at the HHS level would not be applicable at all OPDIVs, 
particularly the smaller organizations. We shall work with the OIG and 
E&Y to ensure materiality thresholds are separately conveyed to GAO, 
OMB and Treasury in FY 2005. 

Fully Including Applicable Representations From the FAM. We believe we 
fully recognized the Indian Health Service's stewardship PP&E in the 
separate paragraph regarding stewardship reporting in the FY 2004 
management representation letter. With reference to events or 
transactions occurring since September 30, 2004, there were none with 
respect to stewardship property. We shall, however, ensure that our FY 
2005 management representation follows closely your recommendation for 
this disclosure. 

Including Complete Summary of Unadjusted Misstatements. GAO has noted 
that our Management Representation Letter did not separately identify 
the unadjusted misstatements as "known" and "likely" misstatements as 
well as identity of the carry-forward effect of prior year's unadjusted 
misstatements. Our use of the term "exposure" meant the adjustments 
were "likely" and all others were classified as "known." Summarily, the 
use of the term "turnaround effect" for prior year's unadjusted 
misstatements is the same as GAO's term "carry-forward-effect." We 
shall use the preferred language in our FY 2005 management 
representation letter. 

Again, we thank you for the opportunity to provide comments. We request 
that our comments be considered in the revision of the draft report or 
be incorporated in the final report. Should you wish to discuss the 
comments, please contact Paul Weinberger, at (202) 260-6572, or through 
e-mail at Paul.Weinberger@hhs.gov. 

[End of section]

Enclosure III: Comments From the Office of the Inspector General at the 
Department of Health and Human Services: 

DEPARTMENT OF HEALTH & HUMAN SERVICES: 
Office of Inspector General: 

Washington, D.C. 20201: 

JUNE 6 2005: 

TO: Gary T. Engel: 
Director, Financial Management and Assurance: 
Government Accountability Office: 
Washington, DC 20548: 

FROM: Joseph E. Vengrin: 
Deputy Inspector General for Audit Services: 

SUBJECT: Department of Health and Human Services, Office of Inspector 
General Comments on GAO-05-588R HHS' Management Representation Letter 
Draft Report: 

Thank you for the opportunity to comment on your draft report entitled 
Financial Audit The Department of Health and Human Services' Fiscal 
Year 2004 Management Representation Letter on Its Financial Statements. 

We agree with the Government Accountability Office (GAO) that it is 
important that Federal agencies' management representation letters be 
complete and reliably prepared and that the letters should help support 
Treasury and Office of Management and Budget (OMB) preparation of the 
Governmentwide consolidated financial statement (CFS) management 
representation letter. However, we do not believe that the lack of 
information in the fiscal year (FY) 2004 Department of Health and Human 
Services (HHS) management representation letter affected GAO's ability 
to rely on the representations in the CFS management representation 
letter and individual Federal agency representation letters. 

Furthermore, we believe that the areas that GAO identified as 
incomplete were not significant and would not limit the scope of audit 
work or impair GAO's ability to obtain sufficient evidence in support 
of its audit of the CFS. Our comments on the three areas that GAO cited 
as needing improvement follow. 

Providing the Materiality Thresholds: 

On page 8 of the draft report, GAO stated, "While an understanding 
between management and the auditor of materiality thresholds used is 
not explicitly required by auditing standards to be included in the 
management representation letter, Treasury and OMB use agency 
thresholds in providing a materiality threshold for the government-wide 
management representation letter."

We concur that auditing standards do not require that materiality 
thresholds be included in the management representation letter. Because 
of the nature and complexity of the HHS organization of operating 
divisions (OPDIV) and timing of the management representation letter, 
the Office of Inspector General (OIG) and the principal auditor 
determined that it was not appropriate to include a consolidated 
threshold in the HHS representation letter that is signed by all of the 
OPDIVs. Including a consolidated materiality threshold, as GAO 
suggests, would have little applicability over our smaller OPDIVs, such 
as the Food and Drug Administration. The FY 2004 HHS representation 
letter did, however, refer to the Center for Medicare & Medicaid 
Services (CMS) representation letter, which contained a threshold 
amount. 

Thus, although we agree that materiality thresholds should be provided 
to GAO, we do not believe that the consolidated HHS threshold or the 
separate OPDIV thresholds should be, or are required to be, contained 
in the HHS management representation letter. OIG will work with 
auditors and management to ensure that the FY 2005 representation 
threshold(s) is properly communicated to GAO, OMB, and Treasury. 

Fully Including Applicable Representations From the FAM: 

GAO indicated that the representation made below should also address 
stewardship property, plant, and equipment: 

Except for properties capitalized under capital leases, HHS has 
satisfactory title to all assets appearing in the balance sheet as of 
September 30, 2004, including assigned and unassigned loans; and there 
are no liens or encumbrances, nor have any assets been pledged. All 
assets to which the HHS has satisfactory title appear in the balance 
sheet. 

Given the nature of the heritage assets and Indian trust land described 
in the HHS stewardship schedule (both types relate to the Indian Health 
Service OPDIV), pursuant to Public Law 86-121 the assets will be 
returned to the Department of the Interior's Bureau of Indian Affairs 
when no longer needed by the Indian Health Service in connection with 
its general PP&E. Therefore, HHS would not include reference to the 
stewardship information in this paragraph of the management 
representation letter. A separate paragraph regarding the stewardship 
reporting was included in the FY 2004 HHS management representation 
letter: "The required supplementary information, required supplementary 
stewardship information, and supplementary information included with 
the financial statements has been prepared and presented in conformity 
with the guidelines established by the SFFAS."

In addition, GAO indicated that the representation below should also 
address stewardship information: 

No events or transactions have occurred since September 30, 2004 or are 
pending that would have a material effect on the financial statements 
at that date or for the period then ended, or that are of such 
significance in relation to the HHS's affairs to require mention in a 
note to the financial statements in order to make them not misleading 
regarding the financial position, net cost, changes in net position, 
budgetary resources, and the reconciliation of net costs to budgetary 
obligations of the HHS. 

Although this paragraph does not reference stewardship information, we 
believe that the representations provided by management covered the 
significant portion of the required supplementary stewardship 
information by reference to the CMS management representation letter. 
The FY 2004 CMS representation letter included the following statement: 
"No material events or transactions have occurred subsequent to 
September 30, 2004, that have not been properly recorded in the 
consolidated financial statements and required supplementary 
stewardship information or disclosed in the notes thereto."

In addition, discussions with management have indicated that no 
significant subsequent events occurred as related to the HHS 
stewardship information. However, OIG will work with the auditors and 
management to ensure that the "required supplementary stewardship 
information" is referred to in the subsequent events paragraph to be 
included in the FY 2005 HHS management representation letter. 

Including a Complete Summary of Unadjusted Misstatements: 

GAO noted that the summary of unadjusted misstatements submitted with 
the management representation letter was incomplete. Specifically, HHS 
did not (1) separate "known" and likely" misstatements or (2) 
separately identify the carry-forward effect of the prior year's 
unadjusted misstatements. 

The summary of unadjusted misstatements attached to the FY 2004 
management representation letter included a detailed description of the 
proposed transactions that would allow a reader to classify the 
adjustments as "known" and "likely." In summary, those items labeled 
"exposure" were classified as likely and all other adjustments were 
classified as known. However, OIG will work with the auditors and 
management to ensure that the summary of unadjusted misstatements 
attached to the FY 2005 management representation letter explicitly 
states whether the adjustments were known or likely. 

The carry-forward effect of the prior year's unadjusted misstatements 
was included in the schedule of unadjusted misstatements attached to 
the FY 2004 management representation letter. The amount was reported 
on the "turnaround effect" line on page 2 of the schedule. OIG will 
work with the auditors and management to ensure that the schedule 
refers to the "turnaround effect" as the "carry-forward effect" on the 
summary of unadjusted misstatements attached to the FY 2005 management 
letter. 

Again, we thank you for the opportunity to provide comments. We request 
that our comments be considered in the revision of the draft report or 
be incorporated in the final report. Should you wish to discuss the 
comments, please contact David Long, Assistant Inspector General for 
ROIT Audits, at (202) 619-1157, or through e-mail at 
david.long@oig.hhs.gov. 

[End of section]

(198367): 

FOOTNOTES

[1] The Government Management Reform Act of 1994 has required such 
reporting, covering the executive branch of government, beginning with 
financial statements prepared for fiscal year 1997. 31 U.S.C.  331 
(e). The federal government has elected to include certain financial 
information on the legislative and judicial branches in the CFS as 
well. 

[2] The fiscal year 2004 Financial Report of the United States 
Government was completed by the Department of the Treasury on December 
15, 2004, and is available through both GAO's Web site at www.gao.gov 
and Treasury's Web site at www.fms.treas.gov/fr/index.html. 

[3] GAO, GAO/PCIE: Financial Audit Manual: Update, GAO-04-1015G 
(Washington, D.C.: July 30, 2004), an update to Financial Audit Manual: 
Volumes 1 and 2, GAO-01-765G (Washington, D.C.: Aug. 1, 2001). 

[4] The FAM lists 27 representations that are ordinarily included, if 
applicable, in the management representation letter that an agency 
provides to the auditor. For 4 of the representations, the agency is 
required to address three separate components. As such, each agency is 
ordinarily expected to make a total of 35 representations. Six of the 
35 representations are not applicable unless the agency received an 
opinion on its internal control. Since HHS did not receive an opinion 
on its internal control for fiscal year 2004, only 29 of the 35 
representations were applicable to HHS's fiscal year 2004 management 
representation letter. 

[5] See Treasury Financial Manual, vol. I, part 2, ch. 4700, for a list 
of the 35 agencies. These agencies, for fiscal year 2004, consisted of 
23 CFO Act agencies and 12 material other agencies. The 33 agencies we 
reviewed did not include the U.S. Securities and Exchange Commission 
and the Smithsonian Institution because these audits were not complete 
before the fiscal year 2004 Financial Report of the United States 
Government was issued. The Department of Homeland Security (DHS) 
Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 
16, 2004), added DHS to the list of CFO Act agencies, increasing the 
number of CFO Act agencies again to 24 for fiscal year 2005.