METROPOLITAN EDISON COMPANY - Pennsylvania Public Utility ...

Committee citing the internal controls over the accounting for capital projects as a“material weakness”. Further study was performed during 2004, with ED&CS focusedon evaluating the root cause for each identified cost misclassification issue. Financialreclassifications identified through December 2004 totaled an additional $17.1 million.Ultimately, in 2005, a mechanized tool was developed to identify impropercharges to O&M and transfer the amounts to appropriate capital accounts. KPMG, LLPwas engaged in March 2006 to identify opportunities to automate manual controls andmigrate from a manual detective to an automated preventive orientation. In April 2006,FirstEnergy engaged Ernst & Young, LLP to test certain key controls. In June 2006,FirstEnergy’s IAD completed its Second Quarter Assessment of Internal Controls OverFinancial Reporting. Part of this assessment was a review of the accounting issuesrelated to the accounting for capital projects. IAD reported the controls over financialreporting to be effective. IAD was performing its Third Quarter Assessment of InternalControls Over Financial Reporting at the time of BWG’s field work, so the Consultantrecommended that FirstEnergy provide a copy of the Third Quarter Assessment ofInternal Controls Over Financial Reporting, as well as the PricewaterhouseCoopers,LLP (PwC) management letter for the 2006 financial audit, to PUC Audit Staff when itbecame available.Follow-up Finding and Conclusion No. V-2 – FirstEnergy has correcteddeficiencies identified in its assessment of internal controls over financialreporting.Copies of the IAD’s Third Quarter Assessment of Internal Controls Over FinancialReporting as of September 30, 2006, the Internal Audit Department’s Fourth QuarterAssessment of Internal Controls Over Financial Reporting as of December 31, 2006,and the PwC report regarding internal control over financial reporting for the 2006financial audit were included in FirstEnergy’s Implementation Plan submitted to the PUCon June 29, 2007.The Third Quarter Assessment of Internal Controls Over Financial Reporting asof September 30, 2006, found that, overall, the internal controls over financial reportingwere effective as of September 30, 2006. More specifically:• 22 deficiencies were closed (remediated and tested) in the third quarter.• 39 deficiencies were open at final certification:‣ 36 control deficiencies, of which 23 had been resolved (i.e.,the remediation plan had been implemented and the new orresolved control(s) were pending operational effectivenesstesting by Internal Auditing).‣ One deficiency had not yet been classified (i.e., furtheranalysis was necessary before it could be determined if thisissue was limited to a deficiency).‣ Two significant deficiencies, of which one had beenresolved, with the new or resolved control(s) pendingoperational effectiveness training by Internal Auditing, and- 32 -