PODCAST: Independent Audit of the EPA’s Fiscal Years 2024 and 2023 (Restated) Consolidated Financial Statements 


KellyJune: Hello and thank you for joining us today for another podcast by the U.S. Environmental Protection Agency Office of Inspector General. I’m KellyJune, spokesperson for the EPA OIG and with me is Damon Jackson, a certified public accounting, or CPA, with 30 years of financial management, internal controls, and process improvement experience in the private sector and federal government. He is a Director in the financial directorate here at the EPA OIG and today he will dive into the key terms that played a role in the unmodified opinion in the Audit of the EPA’s fiscal year 2024 and 2023 (restated) consolidated financial statements. 

Damon: Well, I will do my best, thank you for having me.

KellyJune: Before we begin, I want to confirm that this audit was conducted by a team of EPA OIG auditors not external contractors. Is that correct?
Damon: Yes, that is correct. It is unique that we preform the audit in-house. But I think it really shows our oversight capabilities are far-reaching. The EPA OIG has CPAs and experienced financial auditors that are trained to recognize fraud, waste, and abuse or mismanagement in the Agency operations and financial management of their funds. Which is important because the risk of not detecting a material misstatement resulting from fraud is higher than a misstatement resulting from error. Fraud can be more difficult to detect because it may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. By keeping the audit internal we timely assess the Agency’s financial health and can quickly address concerns with the EPA. It also affords us the ability to pass information along to other auditors, evaluators, and investigators, for other engagements or criminal investigations, using our existing resources, if we find something in the course of our financial audit.  This is a term I call, ‘value added’ auditing…greater or more return on existing investment. We provide an opinion on the financial statements, but we also make recommendations to improve agencies’ financial management practices, systems, and controls. We recognize that our opinion could affect public trust in EPA’s stewardship of taxpayer dollars therefore we are meticulous in reporting our audit findings and recommendations and focused on improving Agency operations.
KellyJune: The fiscal year 2024 financial statements, which covers October 1, 2023 through September 30, 2024, received an unmodified opinion, which means the OIG found the financial statements to be free from material misstatements. However, your team did find material weaknesses and significant deficiencies.  If an unmodified opinion is sometimes called a “clean opinion”, how did your team come to a clean opinion given the issues addressed in this report?

Damon: Well, it comes down to definitions of terms and a materiality threshold with both quantitative and qualitative factors. 

An unmodified opinion, or clean opinion, means that we found the financial statements were fairly presented and free of material misstatement. The key term in that sentence is the qualifier of “material” before misstatement. Materiality is an interesting term because it is more of a threshold which is used to determine significance. A material misstatement indicates that an error, whether by mishap or fraud, could be indicative of a more serious issue or several issues that have a substantial impact on the financial statements. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user of the financial statements. A clean opinion, yes, means the financial statements were free of material misstatements.

However, it does not mean the financial statement were free of any issues. We did find material weaknesses and significant deficiencies. A material weakness indicates a reasonable possibility that that errors in the financial statements will not be prevented or detected and corrected on a timely basis. And a significant deficiency, while less severe than a material weakness, is important enough to suggest corrective action be taken. 

KellyJune: Why didn’t the material weaknesses and significant deficiencies that you found rise to the level of a material misstatement?

Damon: Materiality is taken in aggregate and compared to a total. The EPA has about $105 billion in assets in fiscal year 24 thanks to increased funding from IIJA and IRA programs. This also increases the materiality benchmark. Individually our findings are concerning. We preformed tests and conducted interviews with program offices to rank and file our findings as either significant deficiency or material weakness. However, taken in aggregate against the total assets the findings are still concerning because in layman’s terms, ‘a person walking down the street might drop a penny, which is not concerning if you have a dollar, but, you still want to stop to see if you have a hole in the pocket or not, and if the other 99 cents is still there.’

KellyJune: Well, that makes sense! Can you talk a little bit about the significant deficiencies and material weaknesses that you found?

Damon: Sure -  We found a significant deficiency in the Agency’s reconciliation and management of elements of its property, plant, and equipment that was below our materiality threshold but needed to be corrected.

In this audit, there were a few material weaknesses; the largest in terms of dollars relates to the IIJA Clean School Bus program reporting of rebates. What stood out to the auditors was that the Agency chose to use a different type of rebate, one in which the applicant only needed to show a purchase order for the school bus, it didn’t need to actually be purchased, in order to receive federal funds.  From a financial management standpoint, those funds should continue to be followed to ensure that those federal dollars are being used to buy the appropriate school buses.

KellyJune:  You mention a material weakness in the Clean School Bus funding, which comes from a 5-billion-dollar program and spans over five years. These financial statements are only a snapshot that covers fiscal year 2024. Is there concern with the future financial reporting for this or other Infrastructure, Investment, and Jobs Act, or IJA or Inflation Reduction Act, or IRA, programs?

Damon: A great thing about financial statement audits is that we can gain a lot of information by just following the numbers. The numbers told a story about the clean school bus program but it was only one part of the story. Soon the EPA OIG will be releasing a report that covers oversight of that first rebate program. That report should add color to the one-dimensional story we see in the numbers. 

But as for IIJA and IRA programs, we have an overall concern with the disconnect between the Office of the Chief Financial Officer and the Agency Program Offices.  The core issues we report as material weaknesses related to the Clean School Bus program could become issues with other programs if left unaddressed.  As such, we recommend for OCFO and Agency Program Offices to develop guidance to evaluate program business processes and determine internal controls and financial management that needs to be implemented for these new and/or modified programs.  
Inspector General O’Donnell has expressed concern over the EPA’s ability to manage the Greenhouse Gas Reduction Fund, a $20-plus billion program. There is concern that if the EPA does not address these recommendations and continues the pattern of lax controls then the Greenhouse Gas Reduction Fund reporting going on now could crest the materiality threshold in FY 2025 financial statements. But we will not know for sure until we look at the numbers next year. 


KellyJune: Would you say then that these recommendations would be a good guidepost for the EPA as they look to report more IIJA and IRA funds?

Damon: These recommendations are good guideposts for programs happening now and in the future. It is hard to guess what the future holds. But good financial management is timeless.


KellyJune: One last thing, can you talk about the restatement. Why is there a restatement for fiscal year 2023? 

Damon: It’s all driven by the issues we noted earlier in the accounting of the Clean School Bus program.

KellyJune: Damon, thank you for being with us today.

Damon : Thank you for having me.

KellyJune: And to our listeners, thanks for joining us. The full report from today’s podcast, as well as other OIG reports and project notifications, are on our website at www dot epaoig dot gov.  

We urge anyone with information about fraud, waste, abuse, or mismanagement involving an EPA or Chemical Safety Board operation or program to contact the EPA OIG Hotline by calling 888-546-8740, emailing OIG-DOT-hotline-AT-epa-DOT-gov, or to submit a complaint form via our website.