FOR OFFICIAL USE ONLY

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Independent Auditors’ Report on DHS’ FY 2007 Financial Statements

OIG-08-12 November 2007

DEPARTMENT OF HOMELAND SECURITY

Office of Inspector General

Office of Inspector General U.S. Department of Homeland Security Washington, DC 20528

November 15, 2007

Preface The Department of Homeland Security (DHS) Office of Inspector General (OIG) was established by the Homeland Security Act of 2002 (Public Law 107-296) by amendment to the Inspector General Act of 1978. This is one of a series of audit, inspection, and special reports prepared as part of our oversight responsibilities to promote economy, efficiency, and effectiveness within the department. The attached report presents financial information excerpted from DHS’ Annual Financial Report (AFR) and the results of the DHS financial statement audits for fiscal year (FY) 2007 and FY 2006. We contracted with the independent public accounting firm KPMG LLP (KPMG) to perform the audits. The contract required that KPMG perform its audits according to generally accepted government auditing standards and guidance from the Office of Management and Budget and the Government Accountability Office. KPMG was unable to provide an opinion on DHS’ balance sheet as of September 30, 2007 and 2006. The FY 2007 auditor’s report discusses eight significant deficiencies, seven of which are considered material weaknesses in internal control, and eight instances of noncompliance with laws and regulations. KPMG is responsible for the attached auditor’s report dated November 15, 2007, and the conclusions expressed in the report. We do not express opinions on DHS’ financial statements or internal control or conclusions on compliance with laws and regulations. The recommendations herein have been discussed in draft with those responsible for implementation. It is our hope that this report will result in more effective, efficient, and economical operations. We express our appreciation to all of those who contributed to the preparation of this report.

Richard L. Skinner Inspector General

Independent Auditor’s Report on

DHS’ FY 2007 Financial Statements

Table of Contents

Description Page Number

Department of Homeland Security, Office of Inspector General Transmittal Letter.…………………………………………………..………..……… …1-4 Independent Auditor’s Report…………………………………………………………….…1-7 Introduction to Exhibits on Internal Control and Compliance and Other Matters…….i.1-2 Exhibit I - Material Weaknesses in Internal Control – U.S. Coast Guard……….…...I.1-16 Exhibit II – Material Weaknesses – DHS Civilian Components……..……………….II.1-20 Exhibit III – Significant Deficiency – DHS Civilian Components………………………III.1-2 Exhibit IV – Compliance and Other Matters…………………………………………....IV.1-5 Exhibit V – Status of Prior Year Findings…………….………………………………....V.1-10 Management Response……………………………………………………..……Unnumbered

Report Distribution

Department of Homeland Security

Secretary Deputy Secretary Chief of Staff Deputy Chief of Staff General Counsel Executive Secretariat Director, GAO/OIG Liaison Office Assistant Secretary for Policy Assistant Secretary for Public Affairs Assistant Secretary for Legislative Affairs Under Secretary, Management Chief Financial Officer Chief Information Officer Chief Security Officer Chief Privacy Officer

Office of Management and Budget Chief, Homeland Security Branch DHS OIG Program Examiner

Congress Congressional Oversight and Appropriations Committees, as appropriate

Additional Information and Copies To obtain additional copies of this report, call the Office of Inspector General (OIG) at (202) 254-4199, fax your request to (202) 254-4305, or visit the OIG web site at www.dhs.gov/oig. OIG Hotline To report alleged fraud, waste, abuse or mismanagement, or any other kind of criminal or noncriminal misconduct relative to department programs or operations:

• Call our Hotline at 1-800-323-8603; • Fax the complaint directly to us at (202) 254-4292; • Email us at DHSOIGHOTLINE@dhs.gov; or • Write to us at:

DHS Office of Inspector General/MAIL STOP 2600, Attention: Office of Investigations - Hotline, 245 Murray Drive, SW, Building 410, Washington, DC 20528.

The OIG seeks to protect the identity of each writer and caller.