As required by Government Auditing Standards and OMB Bulletin No. 01-02, Audit Requirements for Federal Financial Statements, we have reviewed the status of the Agencies' corrective actions with respect to the findings and recommendations included in the prior year's report on Agencies' internal control dated January 13, 2004. The following analysis provides our assessment of the progress Agencies have made through September 30, 2004 in correcting the conditions identified in the FY 2003 Internal Control and Laws and Regulations Compliance reports.

Internal Control Report:

The FY 2003 Internal Control Report identified the following Material Weaknesses:

• Financial Statement Preparation and Analysis;
• Reconciliation Procedures;
• Conversion To New Accounting System; and
• Computer Security Weaknesses.

The accounting and reporting concepts identified in these matters continue to exist in FY 2004 and, accordingly, have contributed to Material Weaknesses number 1, 2 and 4.

The “Conversion To New Accounting System” finding last year included a recommendation to quickly “cleanup” accounting processes and procedures prior to the end of FY 2004 to avoid problems in preparing financial statements. Management did implement several improvements in policies and procedures; however, such improvements were not sufficient to overcome the enormity of the problems that existed nine months ago. As a result of the “cleanup” of the accounting records in FY 2004, described in Material Weakness No. 1, several adjustments were needed to the accounting records prior to preparing the financial statements at September 30, 2004.

With respect to Reportable Conditions, the “Grants Financial Management Oversight” finding last year was upgraded to a Material Weakness this year (number 3). FHWA had not implemented new procedures recommended to improve controls to ensure funds are safeguarded against fraud, waste and abuse. In addition, new matters described in Material Weakness No. 3, substantially increased the risk of improper payments.

Laws and Regulations Compliance:

1. Condition – Single Audit Act of 1984 (SAA): Even though improvements have been noted, the matters identified in our prior year report continued to exist in FY 2004. These matters are addressed in our Report on Compliance with Laws and Regulations.
2. Condition – The Federal Managers Financial Integrity Act of 1982 (FMFIA): Even though improvements have been noted, the matters identified in our prior year report continued to exist in FY 2004. These matters are addressed in our Report on Compliance with Laws and Regulations.
3. Condition – Anti-Deficiency Act: The conditions identified in the prior year report continued to exist in FY 2004. These matters are addressed in our Report on Compliance with Laws and Regulations.
4. Condition – Managerial Cost Accounting and Performance Measurement: Even though improvements have been noted, the matters identified in our prior year report continued to exist in FY 2004. These matters are addressed in our Report on Compliance with Laws and Regulations.