This letter is in response to the Secretary of Education's May 2, 2003, letter requesting that we make a commitment to reconsider by early this summer our high-risk designation of the Department of Education's Student Financial Aid (SFA) programs. In that letter, the Secretary of Education outlined how the department has addressed many of the concerns we have identified and the plans it has underway for continued improvements, as well as its plans to update Federal Student Aid's (FSA) Five-Year Performance Plan. In order to help ensure that planned and completed actions address the issues raised in our recent High-Risk and Performance and Accountability reports, Education offered to provide a series of briefings to our key managers on: plans and progress for sustaining the clean opinion on the department's financial statements; FSA progress on its modernization efforts and FSA Data Strategies Framework; FSA program integrity initiatives, including FSA default prevention and collection strategies; and progress on One-ED (the department's human capital planning initiative).

The department has taken actions over the last several years to improve its financial management and the weaknesses identified. Significant progress was made recently when the department received an unqualified--or "clean"--opinion on its financial statements for fiscal year 2002. While this is an important milestone, significant management weaknesses remain that must be addressed in the other two key measurements we identified, which are discussed in more detail below. In addition, it is important that the department demonstrate that it can sustain the clean opinion, as well as other improvements that are made. The department first received an unqualified audit opinion on its fiscal year 1997 financial statements, but was not able to sustain that result, nor repeat it until this year. The first key measure that remains a weakness is compliance with the Federal Financial Management Improvement Act of 1996 (FFMIA). FFMIA requires agencies to institute financial management systems that substantially comply with federal financial management systems requirements, applicable accounting standards, and the federal government's Standard General Ledger. Every year since FFMIA was enacted, the department's auditors have reported that the department's systems did not substantially comply with the act's requirements. This continued for fiscal year 2002. According to the auditors, although the department implemented a new financial management system during fiscal year 2002, issues associated with the transition to the new system contributed to difficulties in providing reliable, timely information for managing current operations and timely reporting of financial information to central agencies. The auditors also reported that the department needs to address identified computer security weaknesses in its financial management and other information systems. The second key measure that remains uncorrected is material internal control weaknesses identified in the financial statement audits. The department's auditors have consistently reported major internal control weaknesses related to financial management systems and financial reporting. In fiscal year 2002, the auditor again reported that significant financial management issues continued to impair the department's ability to accumulate, analyze, and present reliable financial information. While the auditor reported improvements in the latter part of the fiscal year, they reported that they continue to believe that the department needs to place additional focus on reconciliation procedures, account analysis, and financial reporting. Until these issues are fully resolved, the department's ability to produce timely, accurate, and useful financial information for its managers and stakeholders will be greatly impeded. Although we decline to commit to reconsider our January 2003 decision to classify the SFA program as high risk at this time, we will continue to work with the department to ensure that we are informed about and have validated the progress made in resolving these issues and sustaining improvement in all three areas. This proactive approach, which includes consideration of our ongoing work as well as that of the department's outside auditors and the Inspector General, will enable us to promptly assess progress made and challenges that remain in preparation for the next high-risk cycle. In this regard, our next high-risk list is scheduled for publication in January 2005.

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