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January 19, 2007: 

The Honorable Byron L. Dorgan: 
Chairman: 
Committee on Indian Affairs: 
United States Senate: 

The Honorable Daniel K. Inouye: 
United States Senate: 

The Honorable Tim Johnson: 
United States Senate: 

Subject: Office of Special Trustee for American Indians: Financial 
Statement Audit Recommendations and the Audit Follow-up Process: 

In 1994, Congress enacted the American Indian Trust Fund Management 
Reform Act, Pub. L. No. 103-412, recognizing the federal government's 
fiduciary responsibilities toward American Indians. The act called for 
more effective management of the Department of the Interior's 
(Interior) fiduciary responsibilities, required an annual audit of 
Indian trust funds, and created the Office of Special Trustee for 
American Indians (OST) in Interior. In 1996, the Secretary of the 
Interior ordered the transfer of responsibility for trust fund 
management, including preparation of the financial statements of the 
Tribal and Other Trust Funds and Individual Indian Monies Trust Funds 
(Indian trust funds), from the Bureau of Indian Affairs (BIA) to OST. 
Since then, OST has prepared and independent public accountants have 
audited the financial statements[Footnote 1] of the Indian trust funds. 
The auditors have issued qualified audit opinions each year since 1996 
because of inadequacies in Interior's trust-related systems, controls, 
and processes, disagreements between Interior and the trust funds' 
beneficiaries on amounts owed, and potential claims against the 
government. 

You expressed concern about deficiencies identified and reported in the 
Indian trust funds' annual financial statement audits for fiscal years 
1996 through 2005. You asked us to determine (1) the reported status of 
OST management's responses to financial statement audit recommendations 
from fiscal years 1996 through 2005 and (2) whether financial statement 
audit follow-up procedures and controls for OST are designed to meet 
the requirements of applicable guidance and whether controls are in 
place to reasonably assure that audit follow-up objectives are 
achieved. This letter transmits our slides we used to brief your staff 
on October 5, 2006.[Footnote 2] The slides from that briefing are 
presented in their entirety in enclosure I. 

The independent auditors of the Indian trust funds' financial 
statements issued numerous recommendations from fiscal years 1996 
through 2005 to address identified financial audit weaknesses. In 
performing their annual audits for 1996 through 2000, independent 
auditors Griffin and Associates, P.C. (Griffin) determined that a 
majority of the recommendations could be closed based on OST management 
actions. The successor auditors, KPMG, LLP (KPMG), reassessed the 
outstanding recommendations in 2001, closed or downgraded some 
recommendations based on additional audit work, and consolidated the 
remaining 12 recommendations into 2 overall recommendations addressing 
issues considered to be material weaknesses. KPMG also added a third 
recommendation in 2001 to address a reportable condition which was 
subsequently downgraded in severity to advisory comments based on OST 
management actions. Consequently, 2 broad recommendations addressing 
material weaknesses[Footnote 3] remain open as of September 30, 2005. 
The first material weakness, concerning unresolved financial reporting 
matters from prior audit periods, encompasses five deficiencies, all 
outstanding since before 1996. The second material weakness, concerning 
OST reliance on processing of Indian trust transactions at BIA 
encompasses seven deficiencies and was first reported as an overall 
weakness in 2001, although related deficiencies had been noted earlier. 

Financial statement audit follow-up procedures and controls for OST are 
designed to meet the requirements of the Office of Management and 
Budget's (OMB) Circular No. A-50, Audit Follow-up, and internal 
controls are in place to reasonably assure that audit follow-up 
objectives are achieved. OMB Circular No. A-50 prescribes standards for 
audit follow-up. We identified Interior policies addressing each of the 
standards. We also found that OST, Interior, and Interior's Office of 
Inspector General (OIG) have implemented specific control procedures 
directed at assuring effective audit follow-up. At the same time, we 
did not see evidence that Interior is conducting a periodic evaluation 
of its entire audit follow-up system. Such an evaluation is required by 
OMB Circular No. A-50 to assure efficient, prompt, and proper 
resolution of audit recommendations. However, the independent auditors 
of the Indian trust funds may mitigate any associated risks for 
financial statement audits because they annually validate whether OST's 
previously identified underlying deficiencies, which were the basis for 
the recommendations, have been corrected. 

Agency Comments and Our Evaluation: 

The Department of the Interior provided written comments on a draft of 
this briefing. In responding to our observation that we did not see 
evidence of a periodic evaluation of Interior's entire audit follow-up 
system, as required by OMB Circular No. A-50, Interior stated that it 
has policies and procedures in place and carries out periodic audit 
follow-up evaluations to meet OMB requirements. To support its 
position, Interior cited its semiannual status meetings and lessons 
learned meetings held at year-end with its bureaus, procedures directed 
at analyzing bureau progress reporting, and its use of annual goals for 
resolving corrective actions to measure effectiveness. Interior also 
cited its financial statement audit results, updated internal control 
handbook, executive performance agreements, and comparisons of 
recommendation tracking information with similar OIG information. As we 
recognized in our briefing, for financial statement audit 
recommendations, the independent public accountants provide an 
independent assessment of whether OST's underlying deficiencies have 
been corrected. 

However, we do not agree that the specific audit follow-up evaluative 
activities cited by Interior constitute the comprehensive assessment of 
audit recommendation resolution and corrective action called for in OMB 
Circular No. A-50. Specifically, Interior's cited policies, procedures, 
and practices do not provide a department-level evaluation of the 
overall effectiveness of Interior's audit follow-up activities. 
Instead, the department relies on indirect measures, such as the number 
of corrective actions reported as resolved by its bureaus, as a 
surrogate measure of its effectiveness. In addition, we found no 
evidence that Interior verifies the veracity of bureau-reported 
corrective actions. Also, as discussed in our briefing, Interior 
provided us a study completed in 1993 as evidence of its most recent 
assessment of its compliance with requirements of OMB Circular No. A-
50. 

Along with its comments, Interior provided an updated summary of the 
latest corrective action plans for OST's 12 open financial statement 
audit deficiencies as of September 30, 2005. Interior also provided 
some technical corrections, which we have incorporated as appropriate. 
Interior's comments are reprinted in enclosure II. 

Scope and Methodology: 

To determine the reported status of OST management's responses to 
financial statement audit recommendations from fiscal years 1996 
through 2005, we obtained and reviewed the Indian trust funds' 
financial audit reports and management letters for fiscal years 1996 
through 2005 and identified and summarized the status of 
recommendations from the auditors' reports. We also reviewed 
information from OST's corrective action plans and Interior 
recommendation status reports related to the financial statement audits 
of the Indian trust funds. We interviewed officials from the 
independent financial statement auditors--Griffin & Associates, P.C., 
the auditors of the Indian trust funds' financial statements for fiscal 
years 1996 through 2000, and KPMG, LLP, the auditors for fiscal years 
2001 through 2005. 

To determine whether financial statement audit follow-up procedures and 
controls for OST are designed to meet the requirements of applicable 
guidance and whether controls are in place to reasonably assure that 
audit follow-up objectives are achieved, we interviewed officials from 
OST, Interior, OIG, Griffin and Associates, P.C., and KPMG to 
understand their respective roles in the process. We obtained and 
reviewed all OIG follow-up audit reports and verification and status 
reports issued from fiscal years 2000 through 2005 to identify any 
systemic audit follow-up issues related to financial statement audits. 
We reviewed Interior's departmental policy manual, audit follow-up 
policies in Interior's Management Control and Audit Follow-up handbook, 
and Guidelines for Fiscal Year 2005 Internal Control and Audit Follow- 
up Program relative to OMB Circular No. A-50, Audit Follow-up, in the 
context of financial statement audits. We assessed aspects of 
Interior's and OST's internal control related to audit follow-up in the 
context of financial statement audits. 

OST's ability to prepare and report on Indian trust funds' financial 
statements that are fairly stated depends on correcting material 
weaknesses identified in the financial statement audits and 
establishing historical beginning trust fund balances. Our work focused 
on the recommendations arising from the annual financial statement 
audits for fiscal years 1996 through 2005. While several of these 
recommendations are affected by Interior's efforts to establish 
historical beginning trust fund balances, the status of those efforts 
was beyond the scope of this review. 

We performed our work at the Department of the Interior's headquarters, 
in Washington, D.C., including interviewing key OST management 
officials who were visiting from their offices in Albuquerque, New 
Mexico. We performed our work from August 2005 though July 2006 in 
accordance with U.S. generally accepted government auditing standards. 

As arranged with your offices, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
14 days from the report date. At that time, we will send copies of this 
report to interested congressional committees, the Secretary of the 
Interior, the Special Trustee for American Indians, and other 
interested parties. We will also make copies available to others upon 
request. In addition, this report will be available at no charge on 
GAO's Web site at www.gao.gov. Should you or your staff have any 
questions about this report, please contact me at (202) 512-9508 or 
martinr@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs can be found on the last page of this 
report. Robert E. Martin, Mary Arnold Mohiyuddin, and Paul Caban made 
key contributions to this report. 

Signed by: 

Robert E. Martin: 
Director, Financial Management and Assurance: 

Enclosures: 

Enclosure I: October 5, 2006 Briefing: 

A Briefing for Senator Byron L. Dorgan, Senator Daniel K. Inouye, and 
Senator Tim Johnson: 

Office of Special Trustee for American Indians Financial Statement 
Audit Recommendations and the Audit Follow-up Process: 

October 5, 2006: 

Briefing Agenda: 

Introduction: 
Objectives: 
Scope and Methodology: 
Results in Brief: 
Background: 
Status of Financial Statement Audit Recommendations: 
Audit Follow-up Process: 
Conclusions: 
Agency Comments and Our Evaluation: 

Introduction: 

In 1994, Congress enacted the American Indian Trust Fund Management 
Reform Act, Pub. L. No. 103-412, recognizing the federal government's 
trust responsibilities toward American Indians. 

The act called for more effective management of the Department of the 
Interior's (Interior) trust responsibilities, required an annual audit 
of Indian trust funds, and created the Office of Special Trustee for 
American Indians (OST) in Interior. 

The Secretary of the Interior implemented the transfer of the Office of 
Trust Funds Management from the Bureau of Indian Affairs (BIA) to OST 
by secretarial order in 1996. 

Beginning with its first financial statement audit of Indian trust 
funds for fiscal year 1996, OST has received a qualified audit opinion 
each year because of inadequacies in Interior's trust-related systems 
and processes, disagreements between Interior and beneficiaries on 
amounts owed, and potential claims against the government. 

Objectives: 

You asked us to determine: 

the reported status of OST management's responses to financial 
statement audit recommendations from fiscal years 1996 through 2005 
and: 

whether financial statement audit follow-up procedures and controls for 
OST are designed to meet the requirements of applicable guidance and 
whether controls are in place to reasonably ensure that audit follow-up 
objectives are achieved. 

Scope and Methodology: 

To fulfill our first objective on the status of reported financial 
statement audit recommendations, we: 

obtained and reviewed the Indian trust funds financial statement audit 
reports and auditor management letters for fiscal years 1996 through 
2005; 

identified and summarized the status of recommendations from the 
auditors' reports; 

reviewed information from OST's corrective action plans and Interior 
recommendation status reports related to the financial statement audits 
of the Indian trust funds; and: 

interviewed officials from independent financial statement auditors 
Griffin & Associates, P.C. (fiscal years 1996-2000) and KPMG, LLP 
(fiscal years 2001-2005). 

To fulfill our second objective on audit follow-up for financial 
statement audits, we: 

interviewed officials from OST, Interior, the Office of the Inspector 
General (OIG), Griffin & Associates, P.C., and KPMG to understand their 
respective roles in the process; 

obtained and reviewed OIG follow-up audit reports and verification and 
status reports to identify any systemic audit follow-up issues related 
to financial statement audits; 

reviewed Interior's policy manual and other guidance relative to Office 
of Management and Budget (OMB) Circular No. A-50, Audit Followup, in 
the context of financial statement audits; and: 

assessed aspects of Interior's and OST's internal control in the 
context of financial statement audit follow-up. 

We performed our work at Interior headquarters, in Washington, D.C., 
including interviewing key OST management officials who were visiting 
from their offices in Albuquerque, New Mexico. 

We performed our work from August 2005 through July 2006 in accordance 
with U.S. generally accepted government auditing standards. 

Results in Brief: 

The independent auditors of the Indian trust funds financial statements 
made numerous recommendations to address the financial statement audit 
weaknesses they identified. 

In performing their annual testing, independent auditors determined 
that a majority of the recommendations could be closed based on OST 
management actions. 

Two broad recommendations addressing material weaknesses remain open as 
of and for the year ending September 30, 2005. 

1. Unresolved financial reporting matters from prior audit periods 
2. OST reliance on processing of Indian trust funds transactions at 
BIA: 

Unresolved Financial Reporting Matters from Prior Audit Periods 

This material weakness relates to five deficiencies, all outstanding 
since before 1996. 

1. Lack of reliable Individual Indian Money (IIM) balance: 

2. Trust fund balances tribal: 

3. Cash tribal: 

4. Special deposit accounts (SDA) inconsistent practices: 

5. Trust fund balances -IIM: 

OST Reliance on Processing of Indian Trust Funds Transactions at BIA: 

This material weakness relates to seven deficiencies, which were first 
reported comprehensively in 2001, but related deficiencies existed 
earlier. 

1. Trust systems: 

2. Segregation of duties: 

3. Accounts receivable: 

4. Probate backlog: 

5. Untimely deposits: 

6. Supervised and restricted accounts: 

7. Appraisal review: 

Financial statement audit follow-up procedures and controls for OST are 
designed to meet the requirements of OMB Circular No. A-50, and 
controls are in place to reasonably ensure that audit follow-up 
objectives are achieved. 

OMB Circular No. A-50 prescribes standards for audit follow-up, and 
Interior policy addresses each of the standards. 

We noted control activities were in place at OST, Interior, and OIG to 
support audit follow-up. 

We did not see evidence of periodic evaluation of the audit follow-up 
system, as required by OMB Circular No. A-50 and Interior's own policy; 
however, the role of the independent auditors may mitigate any 
associated risk for financial statement audits. 

In its response to our observation that we did not see evidence of a 
periodic evaluation of the audit follow-up process as required by OMB 
Circular No. A-50 and in its own policy, Interior stated that it 
carries out periodic evaluations as required by OMB. Interior listed 
various policies and procedures to support its position. 

Interior does not evaluate the effectiveness of its audit follow-up 
activities directly. Instead, it relies on the number of corrective 
actions reported as resolved by its bureaus to measure its own 
effectiveness. In addition, we found no evidence that Interior verifies 
this bureau-reported information. 

As a result, we do not believe the activities cited by Interior 
constitute the comprehensive assessment of the audit follow-up system 
for efficiency, promptness, and proper resolution and corrective action 
called for in OMB Circular No. A-50. 

Background: 

Weaknesses in the management and accounting practices of the Indian 
trust funds have been a long-standing issue. 

As early as 1928, and in numerous subsequent reports, GAO, 
congressional committees, and others have highlighted weak accounting 
practices and other problems in trust fund management. 

In Interior's fiscal year 1987 supplemental appropriations act, 
Congress directed BIA to provide an accounting to the account holders 
and Congress. 

In 1994, Congress enacted the American Indian Trust Fund Management 
Reform Act of 1994, requiring a full accounting for Indian trust funds. 

In 1996, Interior became a defendant in a class action lawsuit, Cobell 
v. Babbitt, associated with the department's historical management of 
funds held in trust for individual Indians, the IIM. 

In January 2003, Interior filed with the U.S. District Court for the 
District of Columbia its Historical Accounting Plan for Individual 
Indian Money Accounts to reconstruct historical balances in the IN 
statements. 

OST's ability to prepare and report on Indian trust funds financial 
statements that are fairly stated depends on correcting material 
weaknesses identified in the financial statement audits and 
establishing historical beginning trust fund balances. 

This work focuses on the recommendations arising from the annual 
financial statement audits beginning with those in fiscal year 1996. 
Efforts to establish historical beginning trust fund balances are 
beyond the scope of this review. 

OST reports directly to the Secretary of the Interior and oversees and 
coordinates Indian trust asset reform efforts across Interior. 

OST also performs financial trust services on behalf of individual 
Indian and tribal account holders. 

OST depends on receiving timely and accurate information from financial 
and other transaction records maintained by BIA, the Minerals 
Management Service, and other Interior offices to allocate receipts and 
disbursements to trust beneficiaries. 

As of September 30, 2005, OST maintained approximately 1,450 accounts 
with reported assets exceeding $2.8 billion, and over 277,000 IN 
accounts with reported assets of about $420 million. 

Income is generated from the leasing of Indian-owned land, the sales of 
natural resources, royalties from oil and gas exploration and 
production, judgment awards and settlements of claims, and interest 
earned on invested funds. 

Since 1996, OST has prepared annual financial statements for the Indian 
trust funds, and independent public accountants have audited the 
financial statements. 

The financial statements are prepared on cash (tribal) and modified 
cash (IIM) bases, which are comprehensive bases of accounting other 
than U.S. generally accepted accounting principles. 

Griffin & Associates, P.C., performed the financial statement audits 
for fiscal years 1996 through 2000. 

KPMG, LLP, performed the financial statement audits for fiscal years 
2001 through 2005 and continues to be the auditor for the Indian trust 
funds financial statements. 

Status of Financial Statement Audit Recommendations: 

Griffin & Associates, P.C., made approximately 60 recommendations to 
OST based on its audits of the Indian trust funds financial statements 
from fiscal years 1996 through 2000. 

OST's corrective action plans and other internal documents indicate 
that OST management's actions corrected 37 of the 60 internal control 
and compliance recommendations. 

Accordingly, Griffin closed these 37 recommendations. 

In 2001, KPMG: 

reassessed the outstanding recommendations made by Griffin; 

closed or downgraded some based on additional audit testing; 

consolidated 12 others into two broad areas, each of which it 
considered to be a material weakness, and issued two recommendations 
thereon; and: 

added a third recommendation for a reportable condition on information 
technology (IT) controls. 

KPMG concluded that OST management actions from fiscal years 2001 
through 2005 had corrected most deficiencies making up the IT 
reportable condition; hence, KPMG downgraded it to an advisory comment 
in 2005. 

During the audit period: 

A material weakness resulted when internal control did not reduce to a 
relatively low level the risk that material errors, fraud, or 
noncompliance could occur and not be promptly detected by the audited 
entity. 

A reportable condition resulted when significant deficiencies in the 
design or operation of internal control could adversely affect 
information presented in the financial statements. 

An advisory comment resulted when other deficiencies existed that were 
not reportable conditions and were not clearly inconsequential. 

The first outstanding recommendation is for a material weakness labeled 
as unresolved financial reporting matters from prior audit periods. 

This material weakness consists of five deficiencies which, based on 
our analysis, have been outstanding in one form or another since before 
1996. 

1. Lack of reliable IIM balance: 

2. Trust fund balances tribal: 

3. Cash tribal: 

4. SDAs inconsistent practices: 

5. Trust fund balances-IIM: 

Unresolved Financial Reporting Matters from Prior Audit Periods: 

1. Lack of reliable IN balance: Control account balance for IN account 
holders did not agree with the subsidiary ledger. 

2. Trust fund balances tribal: Proper recipients of interest for tribal 
accounts have not been determined. 

3. Cash tribal: Overdrafted payments and improper accounting left 12 
tribal trust fund accounts with negative cash balances. 

4. SDAs: SDA moneys have not been distributed to recipients. 

5. Trust fund balances IIM: Proper recipients of interest for IN 
accounts have not been determined. 

The second outstanding recommendation is for a material weakness 
labeled as OST reliance on processing of Indian trust funds 
transactions at BIA. 

This weakness was first reported comprehensively in 2001 and presently 
consists of seven financial statement reporting deficiencies. 

1. Trust systems: 

2. Segregation of duties: 

3. Accounts receivable: 

4. Probate backlog: 

5. Untimely deposits: 

6. Supervised and restricted accounts: 

7. Appraisal review: 

OST Reliance on Processing of Indian Trust Funds Transactions at BIA: 

1. Trust systems: BIA did not consistently implement automated systems 
for Indian trust assets. 

2. Segregation of duties: Indian trust processing responsibilities at 
BIA were not properly separated to prevent or detect errors. 

3. Accounts receivable: BIA did not fully develop and communicate 
standardized policies and procedures for accounts receivable. 

4. Probate backlog: BIA did not always enter probate orders for land 
title into the trust management systems in a timely way. 

5. Untimely deposits: BIA did not consistently forward trust receipts 
in a timely manner to OST for deposit. 

6. Supervised and restricted accounts: BIA did not consistently 
maintain documentation for supervised accounts or consistently perform 
annual reviews of active accounts. 

7. Appraisal review: Approval controls over tribally performed 
appraisals conducted through self-determination or self-governance 
contracts/compacts were not in place. 

Several outstanding issues are complex and will not be fixed by OST 
alone. 

Both Griffin and KPMG have noted the historical nature of issues, 
arising primarily from lack of adequate financial reporting systems and 
inadequate controls. 

Some balances that are part of OST's unresolved matters from prior 
periods are affected by years of accumulated errors. 

OST has stated that some corrective actions would require legislative 
fixes because OST is not authorized to use current appropriations to 
fund differences arising from prior years. 

Factors affecting ownership records are complex. 

System and data fixes depend on joint efforts with BIA. 

Audit Follow-up Process: 

Interior policy for follow-up on financial statement audit 
recommendations addresses each of the required standards under OMB 
Circular No. A-50. 

We saw evidence of control activities to support audit follow-up by 
OST, Interior, and the Interior OIG. 

We did not see evidence of periodic evaluation of the audit follow-up 
system, as required by OMB Circular No. A-50 and Interior's own policy. 

However, for financial statement audits, the independent auditors 
annually validate whether OST's underlying deficiencies previously 
identified, and which were the basis for the recommendations, have been 
corrected. 

OST control activities related to financial statement audit follow-up 
include: 

issuing quarterly and monthly corrective action plans and status 
reports to Interior, 

designating a senior OST official to review and approve status reports, 

designating an OST audit liaison officer as the focal point for OST 
status reporting to Interior headquarters, 

participating in semiannual issue resolution meetings with Interior and 
its OIG, 

submitting closure documents to Interior headquarters and retaining 
supporting documentation on actions taken, and: 

drafting policy on OST audit follow-up activities. 

Interior's audit follow-up control activities include: 

a policy clearly defining audit follow-up roles and responsibilities 
for OST, Interior, and the Interior OIG; 

an official designated with overall responsibility for audit follow-up 
and resolving differences with the auditors; 

a management council of senior executives to resolve audit issues that 
may not otherwise be resolved routinely; 

monthly and quarterly reporting by OST to Interior and semiannual 
status meetings between Interior and OST staff; and: 

a tracking database used to monitor and report OST's progress on 
implementation and resolution of audit deficiencies. 

OIG control activities related to financial statement audit follow-up 
include: 

referring findings and recommendations identified by the independent 
auditor as part of the annual financial statement audit to Interior; 

performing quality reviews of the work of the independent pendent 
auditors, who determine if actions reported by OST management have 
corrected the underlying deficiency; 

maintaining a database for tracking and reporting on the status of 
referred recommendations and reconciling it with Interior's database; 
and: 

reporting semiannually on the status of outstanding financial and other 
recommendations to Congress. 

Conclusions: 

The majority of the recommendations on financial statement reporting 
deficiencies issued from fiscal years 1996 through 2005 related to the 
independent audit of the Indian trust funds financial statements are 
closed. The two remaining recommendations relate to 12 deficiencies 
that have been outstanding for some time. 

Effective corrective actions and audit follow-up processes are key to 
resolution of identified audit deficiencies. OST's and Interior's 
procedures and controls are designed to meet the requirements of 
applicable guidance, and controls are in place to reasonably ensure 
that audit follow-up objectives are achieved for financial statement 
audits. 

Timely and effective responses to correct the remaining deficiencies 
will depend on OST's sustained efforts to implement its corrective 
actions over time and on Interior's and the OIG's oversight efforts as 
part of the audit follow-up process. 

Agency Comments and Our Evaluation: 

The Department of the Interior provided written comments on a draft of 
this briefing. 

In responding to our observation that we did not see evidence of a 
periodic evaluation of the audit follow-up system, as required by OMB 
Circular No. A-50 and Interior's own policy, Interior stated that it 
carries out periodic evaluations as required by OMB. 

Interior listed several policies and procedures to support its 
position, some of which we have cited previously as audit follow-up 
control activities. Interior also made reference to its audit follow-up 
performance measures, financial statement audits, updated internal 
control handbook, and its executive performance agreements. 

Interior stated it analyzed bureau progress reports, identified lessons 
learned, and used annual goals for resolved corrective actions to 
measure effectiveness. 

Interior does not evaluate the effectiveness of its audit follow-up 
activities directly. Instead, it relies on the number of corrective 
actions reported as resolved by its bureaus to measure its own 
effectiveness. In addition, we found no evidence that Interior verifies 
this bureau-reported information. 

As a result, we do not believe the activities cited by Interior 
constitute the comprehensive assessment to determine if the audit 
follow-up system results in efficient, prompt, and proper resolution 
and corrective action on audit recommendations called for in OMB 
Circular No. A-50. Instead, the activities cited are part of the audit 
follow-up system and not a comprehensive assessment of it. 

However, as we state in this briefing, for financial statement audit 
recommendations, the independent public accountants annually determine 
whether OST's underlying deficiencies have been corrected. 

Also, as part of our review, we requested the results of the most 
recent OMB Circular No. A-50 evaluation. Interior provided a May 1993 
report assessing compliance by three Interior bureaus with the Federal 
Managers' Financial Integrity Act of 1982. The report did not include 
an assessment of the audit follow-up system with respect to Indian 
Trust Fund audit recommendations. 

Along with its comments, Interior provided an updated summary of the 
latest corrective action plans for OST's 12 open financial statement 
audit recommendations as of September 30, 2005. Interior also provided 
some technical corrections, which we have incorporated as appropriate. 

Interior's comments are reprinted in enclosure I. 

[End of section] 

Enclosure II: Comments from the Department of the Interior: 

United States Department Of The Interior: 
Office Of The Assistant Secretary: 
Policy, Management And Budget: 
Washington, DC 20240: 

Take Pride In America: 

Sep 13 2006: 

Robert E. Martin: 
Director, Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Martin: 

Thank you for providing the Department of the Interior the opportunity 
to review and comment on the draft U.S. Government Accountability 
Office report entitled, "Office of the Special Trustee for American 
Indians: Financial Statement Audit Recommendations and the Audit 
Followup Process" dated August 4, 2006. 

The Department and the Office of the Special Trustee for American 
Indians have thoroughly reviewed the Draft Report and provide the 
following comments on GAO's observations: 

Audit Follow-up Process: 

GAO Statement: We did not see evidence of periodic evaluation of the 
audit follow-up process, as required by OMB Circular A-50 and 
Interior's own policy. 

Response: The Department of the Interior and its bureaus and offices 
carry out periodic evaluations throughout the year as required by OMB 
Circular A-50. In fact, in the scorecard status for December 2005, OMB 
noted: 

"DOI received a clean audit opinion for FY 2005 and reduced the most 
auditor-reported material weaknesses compared to all other CFO Act 
agencies without reporting any new auditor weaknesses." 

The Department established policy and procedures and carries out 
specific activities to ensure the effectiveness of audit follow-up 
throughout the year. First, the Department has a GPRA goal to measure 
the effectiveness of the audit follow-up program. DOI's established 
GPRA management excellence performance goal each year requires 
correction of 100 percent of the audit recommendations scheduled for 
implementation that fiscal year. This goal includes GAO, OIG, and 
financial audit recommendations. This goal is reported annually in the 
Department's Performance Accountability Report which is audited each 
year by KPMG as part of the annual financial audit. There have been no 
notices of findings or deficiencies in that process or other aspects of 
the program reported by KPMG. 

The SES performance agreements of all bureau and office responsible 
program _ executives and CFO's annually evaluate the individual 
executive's effectiveness in this area. 

Each quarter the OIG and the Office of Financial Management (PFM) 
review and compare their separate tracking systems on audits referred 
to PFM by the OIG for monitoring and resolution. In instances where 
there were discrepancies between the two systems, we worked with the 
OIG to resolve them. 

In addition, bureau and office directors are required to send monthly 
and quarterly reports to their Assistant Secretaries and PFM on their 
progress in correcting audit recommendations. Reports are analyzed and 
follow-up guidance is provided to ensure the effectiveness of bureau 
programs to implement audit recommendations by established deadlines. 
PFM provides monthly and quarterly summaries of these reports to the 
Department's Management Control and Audit Follow-up Council (MCAF 
Council) noting areas for additional action at that level. 

Each year, PFM holds Mid-Year and Year-End Internal Control and Audit 
Follow-up meetings with all bureaus and offices. Results from those 
meetings are reported to the Assistant Secretary for Policy, Management 
and Budget and to the MCAF Council who directly communicates best 
practices or areas of concern with Assistant Secretaries and bureau and 
office directors. At the end of the year, a Department-wide lessons- 
learned meeting is held and the next year's departmental guidance 
reflects the lessons learned and discussions held during the meeting. 

At the beginning of FY 2005, the Department's "Internal Control and 
Audit Follow-up Handbook" was substantially revised to comply with the 
new requirements of OMB's revised Circular A-123 and Appendix A, and to 
reflect lessons learned in 2005. This draft guidance is currently being 
edited based on lessons learned from implementing the revised Circular 
in FY 2006. 

We hope these comments and the enclosed technical comments prepared by 
the Office of the Special Trustee will assist you in preparing the 
final report. 

Sincerely, 

Signed by: 

R Thomas Weimer: 
Assistant Secretary: 

Enclosure: 

Office of the Special Trustee for American Indians: 
General Comments On U.S. Government Accountability Draft Report 
Entitled, "Office of the Special Trustee for American Indians: 
Financial Statements Audit Recommendations And the Audit Followup 
Process" 

Financial Statement Audit Recommendations: 

B. Financial Reporting - Unresolved Matters from Prior Periods - 
(Subpart I) Lack of Reliable IIM Balance: 

This problem requires approximately $6 million to resolve this 
discrepancy. OST is currently in discussions with congressional 
staffers to reconcile the issue. After the issue is resolved OST will 
post all correcting entries, which will bring the HM assets in balance 
with the IIM liabilities. The target date for completion is September 
2007, dependent on enactment of legislation. 

(Subpart 2) Trust Fund Balances - Tribal: 

OST contracted to research, identify, and proposed corrective entries 
to clean up this account and to provide management with recommendations 
for distribution of the remaining funds. The report has been delivered 
and distributions are targeted to be completed by September 30, 2006. 

(Subpart 3) Cash -Tribal: 

OST has verified the details associated with each account. Recoupment 
letters have been sent to the affected Tribes. OST has received funds 
and cleared one account to date. Additional options will be pursued in 
FY 2007. The target date for completion is September 2007. 

(Subpart 4) Special Deposit Accounts - Inconsistent Practices - Tribal 
and IIM: 

Timely distribution of funds deposited in Special Deposit Accounts 
(SDA) is dependent on two primary factors: (1) identify deposits to 
trust land leases and allotments, (2) having current and accurate trust 
allotment ownership recorded in the BIA automated realty systems. These 
factors are controlled by BIA. 

By continuing to work in partnership with the BIA and by implementing 
the initiatives - listed in the Fiduciary Trust Model (FTM), most 
notably conversion to the leasing module of the Trust Asset and 
Accounting Management System (TAAMS), we will eliminate the use of 
SDAs. 

Target date for distribution of SDA activity post 1/1/2003 is 12/21/ 
2007. This date is the target date for BIA to be completely migrated to 
the TAAMS - Leasing module. The December 31, 2007 target date is the 
date when no further receipts will be deposited into SDA. By December 
31, 2007 it is envisioned that due to the BIA-wide implementation of 
TAAMS-Leasing, along with the TAAMS-Trust Funds Accounting System 
(TFAS) interface, trust funds will be automatically posted to 
beneficiary accounts. In coordination with BIA pre-1/1/2003 activity is 
targeted to be completed by the Office of Historical Trust Accounting 
(OHTA) in 2009. 

(Subpart 5) Trust Fund Balances - IIM: 

OST will seek legislation to set these funds aside permanently to earn 
additional interest for monthly distribution to current IIM account 
holders. One potential option would be to permanently set aside the 
balances to earn additional interest distributions to IIM account 
holders. The target date for completion is September 2007, dependent on 
legislation. 

A. Reliance on Processing of Trust Transactions at the Bureau of Indian 
Affairs: 

a) Trust Systems: OST's participation in this predominately BIA issue 
is in the form of supplying contract assistance in validating data 
prior to conversion of BIA Agencies to a model Agency based on the FTM. 

b) Segregation of Duties: OST has implemented new procedures, whereby 
Indian trust remittances are received directly at a commercial lockbox 
facility and deposited directly into the U.S. Department of Treasury 
rather than being received at field locations. 

Checks received through the mail at field locations are forwarded to 
the lockbox for deposit. 

c) Accounts Receivable: With each conversion to TAAMS - Leasing module 
which interfaces to the TFAS, (BIA Pilot Agencies converted in June 
2005) an automated Trust Funds Receivable (TFR) module is established. 

d) Probate Backlog: With the conversion to TAAMS, all probate orders 
related to land title will be brought up to date and maintained in a 
timely fashion. 

e) Untimely Deposits: With the implementation of the automated lockbox, 
the conversion to TAAMS (which will alleviate the need for Special 
Deposit Accounts) and use of the TFR, there should no longer be 
untimely deposits. 

f) Supervised and Restricted Accounts: The BIA has developed a 
Corrective Action Plan addressing this issue with a completion date of 
09/30/2006. 

g) Appraisal Review: A policy memorandum dated October 6, 2005, was 
issued by the Director of the BIA. This memorandum directed the BIA 
Approving Official to ensure that the appropriate OST appraisal review 
had been completed prior to approval of a trust land or resource 
transaction. 

In addition, the following technical corrections to the report content 
should be addressed: 

Page 3; Bullet 3: 

GAO Statement: The Secretary of the Interior implemented the OST 
requirement of the Act by Secretarial Order in 1996. 

Correction: The Secretary of the Interior implemented the transfer of 
OTFM from the BIA to OST by Secretarial Order in 1996. 

Page 23; Nos. 2 and 7: 

GAO Statement #2: Segregation of Duties: Indian trust processing 
responsibilities are not properly separated to prevent or detect 
errors. 

Correction: Segregation. of Duties: Indian trust processing 
responsibilities at the BIA are not properly separated to prevent or 
detect errors. 

GAO Statement #7: Appraisal Review: Approval controls over Indian 
performed appraisals were not in place. 

Correction: Appraisal Review: Approval controls over Tribally performed 
appraisals conducted through Self-determination or Self Governance 
contracts/compacts were not in place. 

[End of section] 

(197007): 

FOOTNOTES 

[1] The Indian trust funds' financial statements contain the tribal 
accounts, which are reported on a cash basis and Individual Indian 
Monies accounts, which are reported on a modified cash basis. These are 
comprehensive bases of accounting other than U.S. generally accepted 
accounting principles. 

[2] On December 8, 2006, we briefed a staff member who was not able to 
attend our October 5, 2006, briefing. 

[3] For the financial reporting periods covered by the audits in our 
review, Statement on Auditing Standard (SAS) No. 60, Communicating 
Internal Control Related Matters Noted in an Audit, defined a material 
weakness as resulting when internal control did not reduce to a 
relatively low level the risk that material errors, fraud, or 
noncompliance could occur and not be promptly detected by the audited 
entity. It further defined a reportable condition as resulting when 
significant deficiencies in the design or operation of internal control 
could adversely affect information presented in the financial 
statements. Finally, it defined an advisory comment as resulting when 
other deficiencies existed that were not reportable conditions and were 
not clearly inconsequential. For subsequent financial reporting 
periods, SAS No. 112, Communicating Internal Control Related Matters 
Identified in an Audit, changed the terminology and definitions used by 
auditors in communicating internal control matters. 

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