Independent Auditors' Report — KPMG LLP, Financial Section

Summary

The Financial Section of a U.S. Department of Labor report, containing an Independent Auditors' Report by KPMG LLP to the Secretary and Acting Inspector General on DOL's consolidated and sustainability financial statements as of September 30, 2021 and 2020. The report states that DOL included obligations of $47.3 billion related to unemployment insurance programs enacted during the COVID-19 pandemic in the combined statement of budgetary resources for the year ended September 30, 2021. It states that the auditors were unable to obtain sufficient appropriate audit evidence about the methodology and certain underlying data. It gives an opinion on the consolidated financial statements that is qualified for the possible effects of that matter.

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 Financial Section




                             KPMG LLP
                             Suite 12000
                             1801 K Street, NW
                             Washington, DC 20006




                                        Independent Auditors’ Report


Secretary and Acting Inspector General
United States Department of Labor

Report on the Financial Statements
The accompanying financial statements of the United States (U.S.) Department of Labor (DOL)
comprise the consolidated financial statements and the sustainability financial statements.
We have audited the consolidated financial statements, which comprise the consolidated balance
sheets as of September 30, 2021 and 2020, and the related consolidated statements of net cost and
changes in net position, and combined statements of budgetary resources for the years then ended,
and the related notes to the consolidated financial statements.

We have audited the sustainability financial statements, which comprise the statements of social
insurance as of September 30, 2021, 2020, 2019, 2018, and 2017; the statements of changes in social
insurance amounts for the years ended September 30, 2021 and 2020; and the related notes to the
sustainability financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in
accordance with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud
or error.

Auditors’ Responsibility

Our responsibility is to express opinions on these financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States
of America, in accordance with the standards applicable to financial audits contained in Government
Auditing Standards issued by the Comptroller General of the United States, and in accordance with
Office of Management and Budget (OMB) Bulletin No. 21-04, Audit Requirements for Federal
Financial Statements. Those standards and OMB Bulletin No. 21-04 require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free from
material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s


30 United States Department of Labor
                             KPMG LLP, a Delaware limited liability partnership and a member firm of
                             the KPMG global organization of independent member firms affiliated with
                             KPMG International Limited, a private English company limited by guarantee.
                                                                             Independent Auditors’ Report




preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our modified and unmodified audit opinions.

Basis for Qualified Opinion on the Consolidated Financial Statements

DOL included obligations of $47.3 billion related to unemployment insurance programs enacted
during the COVID-19 pandemic in the new obligations and upward adjustments caption in the
combined statement of budgetary resources for the year ended September 30, 2021. These
obligations were comprised of $3.3 billion in undelivered orders- paid (public) and $44.0 billion in
undelivered orders – unpaid (public), which were disclosed in notes 18.E and 25. We were unable to
obtain sufficient appropriate audit evidence about the methodology and certain underlying
assumptions used to estimate the balances. Consequently, we were unable to determine whether
any adjustments to these amounts were necessary.

In addition, DOL included COVID-19 related unemployment insurance benefit overpayments of $4.4
billion, net of allowance, in the accounts receivable, net (with the public) caption in the consolidated
balance sheet as of September 30, 2021, and in notes 4, 21 and 25. We were unable to obtain
sufficient appropriate audit evidence about the completeness of the benefit overpayment receivable.
Consequently, we were unable to determine whether any adjustments to these amounts were
necessary.

Qualified Opinion on the Consolidated Financial Statements
In our opinion, except for the possible effects on the 2021 consolidated financial statement of the
matter described in the Basis for Qualified Opinion on the Consolidated Financial Statements
paragraph, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the U.S. Department of Labor as of September 30, 2021 and 2020,
and its net costs, changes in net position, and budgetary resources for the years then ended in
accordance with U.S. generally accepted accounting principles.

Opinion on the Sustainability Financial Statements

In our opinion, the sustainability financial statements referred to above present fairly, in all material
respects, the U.S. Department of Labor’s social insurance information as of September 30, 2021,
2020, 2019, 2018, and 2017; and its changes in social insurance amounts for the years ended
September 30, 2021 and 2020, in accordance with U.S. generally accepted accounting principles.




                                                                     FY 2021 Agency Financial Report 31
Financial Section




 Emphasis of a Matter

 As discussed in Notes 1-W and 1-Y to the financial statements, the sustainability financial statements
 are based on management’s assumptions. These sustainability financial statements present the
 actuarial present value of DOL’s future expenditures to be paid to or on behalf of participants, the
 present value of estimated future income to be received from excise taxes, and the present value of
 estimated future expenditures for administrative costs during a projection period sufficient to
 illustrate long-term sustainability. The sustainability financial statements are intended to aid users in
 assessing whether future resources will likely be sufficient to sustain public services and to meet
 obligations as they come due. The statements of social insurance and changes in social insurance
 amounts are based on income and benefit formulas in current law and assume that scheduled
 benefits will continue after the related trust fund is exhausted. The sustainability financial statements
 are not forecasts or predictions. The sustainability financial statements are not intended to imply that
 current policy or law is sustainable. In preparing the sustainability financial statements, management
 considers and selects assumptions and data that it believes provide a reasonable basis to illustrate
 whether current law or policy is sustainable. Assumptions underlying such sustainability information
 do not consider changes in policy or all potential future events that could affect future income, future
 expenditures, and sustainability. Because of the large number of factors that affect the sustainability
 financial statements and the fact that future events and circumstances cannot be estimated with
 certainty, even if current policy is continued, there will be differences between the estimates in the
 sustainability financial statements and the actual results, and those differences may be material. Our
 opinion on the sustainability financial statements is not modified with respect to this matter.

 Other Matters

 Interactive Data
 Management has elected to reference to information on websites or other forms of interactive data
 outside the Agency Financial Report to provide additional information for the users of its financial
 statements. Such information is not a required part of the basic financial statements or
 supplementary information required by the Federal Accounting Standards Advisory Board. The
 information on these websites or the other interactive data has not been subjected to any of our
 auditing procedures, and accordingly, we do not express an opinion or provide any assurance on it.

Required Supplementary Information
 U.S. generally accepted accounting principles require that the information in the Management’s
 Discussion and Analysis and Required Supplementary Information sections be presented to
 supplement the basic financial statements. Such information, although not a part of the basic
 financial statements, is required by the Federal Accounting Standards Advisory Board who considers
 it to be an essential part of financial reporting for placing the basic financial statements in an
 appropriate operational, economic, or historical context. We have applied certain limited procedures
 to the required supplementary information in accordance with auditing standards generally accepted
 in the United States of America, which consisted of inquiries of management about the methods of
 preparing the information and comparing the information for consistency with management’s
 responses to our inquiries, the basic financial statements, and other knowledge we obtained during
 our audits of the basic financial statements. We do not express an opinion or provide any assurance


32 United States Department of Labor
                                                                             Independent Auditors’ Report




on the information because the limited procedures do not provide us with sufficient evidence to
express an opinion or provide any assurance.

Other Information
Our audits were conducted for the purpose of forming an opinion on the basic financial statements
as a whole. The information in the Message from the Secretary of Labor, Message from the Chief
Financial Officer, and Other Information sections is presented for purposes of additional analysis and
is not a required part of the basic financial statements. Such information has not been subjected to
the auditing procedures applied in the audits of the basic financial statements, and accordingly, we
do not express an opinion or provide any assurance on it.

Other Reporting Required by Government Auditing Standards

Internal Control over Financial Reporting

In planning and performing our audit of the financial statements as of and for the year ended
September 30, 2021, we considered DOL’s internal control over financial reporting (internal control)
as a basis for designing procedures that are appropriate in the circumstances for the purpose of
expressing our opinions on the financial statements, but not for the purpose of expressing an opinion
on the effectiveness of DOL’s internal control. Accordingly, we do not express an opinion on the
effectiveness of DOL’s internal control. We did not test all internal controls relevant to operating
objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982.

Our consideration of internal control was for the limited purpose described in the preceding
paragraph and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies
may exist that have not been identified. However, as described in Exhibit I, we did identify certain
deficiencies in internal control that we consider to be a material weakness.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent,
or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control, such that there is a reasonable possibility that a
material misstatement of the entity’s financial statements will not be prevented, or detected and
corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies,
in internal control that is less severe than a material weakness, yet important enough to merit
attention by those charged with governance. We consider the deficiency described in Exhibit I, to be
a material weakness.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether DOL’s financial statements as of and for the
year ended September 30, 2021 are free from material misstatement, we performed tests of its
compliance with certain provisions of laws, regulations, contracts, and grant agreements,
noncompliance with which could have a direct and material effect on the financial statements.
However, providing an opinion on compliance with those provisions was not an objective of our
audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no


                                                                    FY 2021 Agency Financial Report 33
Financial Section




 instances of noncompliance or other matters that are required to be reported under Government
 Auditing Standards or OMB Bulletin No. 21-04.

 We also performed tests of its compliance with certain provisions referred to in Section 803(a) of the
 Federal Financial Management Improvement Act of 1996 (FFMIA). Providing an opinion on
 compliance with FFMIA was not an objective of our audit, and accordingly, we do not express such an
 opinion. The results of our tests disclosed no instances in which DOL’s financial management systems
 did not substantially comply with the (1) Federal financial management systems requirements, (2)
 applicable Federal accounting standards, and (3) the United States Government Standard General
 Ledger at the transaction level.

 DOL’s Response to the Finding

 DOL’s response to the finding identified in our audit is described in Exhibit II. DOL’s response was not
 subjected to the auditing procedures applied in the audit of the financial statements and, accordingly,
 we express no opinion on the response.

 Purpose of the Other Reporting Required by Government Auditing Standards

 The purpose of the communication described in the Other Reporting Required by Government
 Auditing Standards section is solely to describe the scope of our testing of internal control and
 compliance and the results of that testing, and not to provide an opinion on the effectiveness of
 DOL’s internal control or compliance. Accordingly, this communication is not suitable for any other
 purpose.




 November 19, 2021




34 United States Department of Labor
                                                                        Independent Auditors’ Report

                                                                                   Material Weakness
                                                                                             Exhibit I


1. Improvements Needed in Controls over Financial Reporting Related to Unemployment Trust
   Fund Balances and Activity


   Certain unemployment insurance (UI) pandemic programs were established in response to the
   COVID-19 pandemic to provide enhanced UI benefits to eligible individuals. Two of the largest
   pandemic programs were the Federal Pandemic Unemployment Compensation (FPUC) and the
   Pandemic Unemployment Assistance (PUA) programs. The new UI pandemic programs
   resulted in a significant increase in UI benefit disbursement and related activity in the
   Unemployment Trust Fund, which is included in the United States Department of Labor’s (DOL)
   financial statements and related notes as of September 30, 2021. We noted certain
   management controls were not sufficiently designed and documented to support the specific
   items reviewed, analyses performed, and conclusions reached for certain UTF balances and
   related transactions. These deficiencies resulted in material corrections to the FY 2021 DOL
   financial statements and notes, and increased the risk that other misstatements could occur
   and not be prevented or detected and corrected in a timely manner. We have included below
   a summary of the specific issues noted.

   Obligation of COVID-19 funding

   The UI pandemic programs expired on September 6, 2021; however, DOL management
   determined that certain UI claims for unemployed weeks that occurred prior to the expiration
   of the UI pandemic programs were still in appeal or had not yet been processed as of
   September 30, 2021. As a result, management determined the need to establish an obligation
   for the future outlays to states for those UI claims that are ultimately determined eligible by
   the State Workforce Agencies (SWA).

   Management developed a methodology and related assumptions to estimate the obligation;
   however, we noted that management did not have sufficient processes and controls in place
   to properly validate the reasonableness of the methodology and assumptions used. In
   addition, management did not have access to certain UI claim data that was critical to
   developing certain assumptions because all UI claims are processed by the state.

   This occurred because management did not have an existing methodology in place that was
   suitable to perform such an estimate given the short time available due to federal reporting
   deadlines. Furthermore, management was not able to complete the analyses and back testing
   necessary to verify certain assumptions were valid. Management also did not have a sufficient
   process in place to coordinate and obtain the necessary data from the SWAs within the
   required reporting timeline. As a result, certain assumptions were not fully supported by
   relevant data.

   These deficiencies resulted in management’s inability to properly support the accuracy of
   $47.3 billion in undelivered orders included in the new obligations and upward adjustments
   reported in the combined statement of budgetary resources as of September 30, 2021, and




                                                                FY 2021 Agency Financial Report 35
Financial Section

Material Weakness
Exhibit I




     the related $44.0 billion in undelivered orders – unpaid (public) and $3.3 billion in undelivered
     orders- paid (public), which were disclosed in note 18.E.

     We also noted that management did not have a sufficient process in place to research the
     proper accounting treatment in accordance with U.S. GAAP for the obligation noted above.
     Specifically, we noted that while management researched and documented the justification
     for recording the obligation noted above, documentation to support the related accounting
     treatment could not be provided. As a result, management incorrectly recorded the obligation
     as a delivered order instead of an undelivered order and also incorrectly recorded a related
     liability. Although this entry had no impact on the new obligations and upward adjustments, it
     did cause benefits due and payable and gross costs to be overstated by $44.0 billion and $47.3
     billion, respectively and advances and prepayments to be understated by $3.3 billion. In
     addition, undelivered orders – unpaid and undelivered orders – paid were both understated by
     $44.0 billion and $3.3 billion, respectively. Management did correct these errors in its financial
     statements as of September 30, 2021.

     UTF COVID-19 Overpayment Accounts Receivables and related allowances

     DOL management’s financial reporting controls were not operating at the level of precision
     necessary to ensure that UTF benefit overpayments related to the FPUC and PUA programs
     were complete. This occurred because ETA did not consider or document the impact of certain
     SWAs not submitting PUA and FPUC benefit overpayment data to DOL during FY 2021. As a
     result, ETA was not able to timely recognize that the benefit overpayment data for these
     programs was not complete.

     We also noted that management’s review controls over the benefit payment allowances for
     FPUC and PUA were not operating effectively. Specifically, we noted the uncollectible
     percentage management used to estimate the allowance for PUA and FPUC did not reflect the
     actual collection rate for those programs to date. Management relied on historical collection
     data from other UI programs because the programs were still fairly new and did not fully
     consider the FPUC and PUA data received to date. We estimated that the allowance for the
     FPUC and PUA benefit overpayments were collectively understated by approximately $2.5
     billion.

     Financial Statement Disclosure of UTF Activity

     The Office of Chief Financial Officer (OCFO) financial statement review control was not
     operating effectively to prevent certain misstatements in UTF information presented in the
     notes. As a result, we identified the following three material misstatements related to UTF
     COVID-19 activity:

     •   Note 2, Fund Balance with Treasury: Obligated Balance Not Yet Disbursed totaling $20.2
         billion in the Trust Funds column was misclassified as Non-Budgetary Fund Balance with
         Treasury




36 United States Department of Labor
                                                                        Independent Auditors’ Report

                                                                                   Material Weakness
                                                                                             Exhibit I


•   Note 24, Reclassification of Financial Statement Line Items for Financial Report
    Compilation Process: DOL incorrectly reported $204.6 billion in both Transfers in without
    reimbursement and Transfers out without reimbursement in the Dedicated Collections
    Combined column and corresponding amounts in the Dedicated Collection Eliminations.
    However, the $204.6 billion were intra-fund transfers related to the same UTF dedicated
    collections fund and therefore should have been eliminated and not reported in the note

•   Note 25, COVID-19 Activity: An unobligated balance remaining of $112.2 billion was
    incorrectly presented in the note although the related indefinite authority was returned as
    of September 30, 2021

Management subsequently made corrections to the note disclosures once we notified them of
the misstatements.

The following criteria are relevant to the conditions noted above:

• The Government and Accountability Office Standards for Internal Control in the Federal
  Government (the Standards), Section 10.02 states:

         Management designs control activities in response to the entity’s objectives
         and risks to achieve an effective internal control system. Control activities are
         the policies, procedures, techniques, and mechanisms that enforce
         management’s directives to achieve the entity’s objectives and address related
         risks.

    Section 10.03 of the Standards states:

         Management clearly documents internal control and all transactions and other
         significant events in a manner that allows the documentation to be readily
         available for examination. The documentation may appear in management
         directives, administrative policies, or operating manuals, in either paper or
         electronic form. Documentation and records are properly managed and
         maintained.

    Section 13.04 of the Standards states:

         Management obtains relevant data from reliable internal and external sources
         in a timely manner based on the identified information requirements.
         Relevant data have a logical connection with, or bearing upon, the identified
         information requirements. Reliable internal and external sources provide data
         that are reasonably free from error and bias and faithfully represent what they
         purport to represent. Management evaluates both internal and external
         sources of data for reliability. Sources of data can be operational, financial, or
         compliance related. Management obtains data on a timely basis so that they
         can be used for effective monitoring.



                                                                FY 2021 Agency Financial Report 37
Financial Section

Material Weakness
Exhibit I



     To address the deficiencies noted above, we recommend that the Assistant Secretary for
     Employment and Training:

         1. Develop policies and procedures to coordinate with SWAs to obtain the necessary
            information needed to support related balances and assumptions, and to perform
            benchmarking and/or other analyses to validate new assumptions;

         2. Amend policies and procedures to provide specific steps to be performed during the
            reviews and the documentation requirements, which should include the specific items
            reviewed, analyses performed, and conclusions reached; and

         3. Maintain documentation of the reviews performed to assess the reasonableness of the
            underlying data, assumptions, and formulas used in the models that is sufficiently
            detailed to evidence the specific items reviewed, analysis performed, and conclusions
            reached.

     Additionally, we recommend the Acting Chief Financial Officer:

         4. Develop policies and procedures to ensure that the accounting treatment for
            significant transactions are appropriately researched and documented prior to
            recording the transaction to the general ledger; and

         5. Enhance management review controls over the amounts that are presented in the
            notes to the financial statements.

     Management’s Response:

     See Exhibit II for management’s response.

     Auditors’ Response:

     We will conduct follow-up procedures in FY 2022 to determine whether corrective actions
     have been developed and implemented.




38 United States Department of Labor
       Independent Auditors’ Report

           Management’s Response
                        Exhibit II




FY 2021 Agency Financial Report 39
Financial Section

Management’s Response
Exhibit II




40 United States Department of Labor
       Independent Auditors’ Report

           Management’s Response
                        Exhibit II




FY 2021 Agency Financial Report 41


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