Except as noted below, our tests for compliance with selected provisions of laws and regulations disclosed no other instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or OMB audit guidance. The objective of our audit was not to provide an opinion on the Agencies' overall compliance with laws and regulations. Accordingly, we do not express such an opinion.

1. Single Audit Act of 1984 (SAA) - Agencies collectively have awarded over $40 billion in Federal Financial Assistance in the form of grants in FY 2004, many of which are over $300,000, and therefore, must comply with the SAA. For FY 2004, OMB increased the threshold for Single Audit coverage to $500,000.

   During our review of each Agency's policies and procedures for grants, we noted the provisions of the SAA, and the related OMB Circular No. A-133 had not been effectively implemented. Even though certain Agencies have started to establish procedures to monitor activity of their Federal Financial Assistance recipients and to comply with the provisions of the Circular, those procedures were not fully implemented in FY 2004. In addition, some Agencies have no procedures to specifically address the Single Audit issues.

   In connection with our review of the files of forty-five recipients of Federal Financial Assistance, we noted the following specific examples that support our conclusion that DOT and the Agencies did not have an effective program in place to ensure compliance with the provisions of the SAA:

   • Audit Reports for fourteen recipients were submitted late; and 100
   • Agency management's decision on audit findings for one recipient was not made within six months after receipt of the audit report by DOT from the Federal Clearing House.

   Similar matters were reported in our FY 2003 report, and the volume of exceptions in our testing has declined. Compliance with OMB Circular No. A-133 should be reemphasized to appropriate Agency staff, with special emphasis on ensuring that management decisions are issued to the recipient for all Single Audit reports received within the sixmonth timeframe required by the Act.

2. Federal Managers Financial Integrity Act of 1982 (FMFIA) - FMFIA, and the related OMB Circular No. A-123, requires agencies to issue an Annual Statement to OMB on whether the Agency's financial management systems and automated information security programs conform with government-wide requirements, as defined by OMB Circular No. A-127. OMB Circular No. A-130, Appendix III, requires agencies to report security deficiencies and material weaknesses within their FMFIA reporting mechanisms as defined by OMB Circular No. A-123, and take corrective actions in accordance with that directive.

   In general, the Agencies except for FMCSA, do not have complete formalized procedures in place to identify, assess, and monitor management controls over various financial areas, including their financial information systems. FMCSA has formally conducted risk assessment on its assessable units and developed a comprehensive FMFIA program. However, FMCSA did not go through the process of monitoring and validating whether management controls worked effectively as designed in fiscal 2004. It plans to document its validation in fiscal 2005. Accordingly, in varying degrees, Agencies did not adequately document and/or validate their support for DOT's compliance with FMFIA.

   DOT's FMFIA report has made reference to the weaknesses in its internal control and its non-compliance with financial management systems and processes that are detailed in this audit report.

3. Anti-Deficiency Act - The following matters were identified as matters of noncompliance with the Anti-deficiency Act:
   1. FHWA continues to encounter difficulties in processing its normal business transactions and in performing reconciliations due to the lack of fund status report from Delphi during FY 2004. We noted four funds with obligations in excess of its budgetary authority by approximately $600 thousand through September 30, 2004. Since FHWA is still researching certain fund status issues, it is uncertain if an anti-deficiency matter does exist. Accordingly, FHWA has not reported this matter to OMB and Congress.
   2. The prior year Audit Report identified an anti-deficiency matter whereby DOT improperly expended the Treasury miscellaneous receipts in the amount of $49 million. DOT returned $44 million to the Treasury through September 30, 2003. The remaining $5 million is mostly attributed to FHWA's Federal-Aid Highway activities. DOT reported this violation to OMB and Congress in FY 2003.
   3. The prior year Audit Report identified an anti-deficiency matter for FTA relating to a one-time over obligations in 1984 of approximately $562 million. At September 30, 2004, the remaining over obligated amount was approximately $77 million. FTA has requested a deficiency appropriation from Congress to fund this amount; however, Congress had not appropriated the amount as of September 30, 2004. DOT reported this violation to OMB and Congress in FY 2003.
4. Government Performance and Results Act of 1993 - GPRA requires agencies to adequately manage programs efficiently and effectively. To comply with this law Agencies must have a cost accounting system to capture costs of specific programs. As reported in FY 2003, HTF Agencies have not fully implemented the managerial cost accounting in FY 2004 and, accordingly, did not present the full cost of each program in its Statement of Net Cost for FY 2004.
   

   In response to the President's Management Agenda, HTF Agencies must devise an accounting methodology to allocate resource use by program objectives and link resource use to actual program results. HTF Agencies' strategic plans typically link management goals with program goals and objectives, but the full cost to accomplish the desired program result is not readily available to management. The Agencies do not allocate internal resources such as salaries, equipment, and program resources such as formula and discretionary grants to specific activities or program delivery outcomes. Cost accounting is intended to enhance this linkage by identifying the cost of Federal resources used by a program in relation to specific goals and objectives, and to support the process of resource allocation to program allocation in the budget process. Management did not adequately identify programs for disclosure in its financial statements. The line items detailed in Note 10 (“Net Program Cost”) to the financial statements were not consistent with OMB's definition of a program, “a specific activity or project as listed in the program and financing schedules of the annual budget of the U.S. Government.” The implementation of a managerial cost accounting system will allow Agency management to analyze program costs in relation to achieving program objectives. This will enable management to improve the performance of program cost effectiveness.