The definition of a deficiency is also set forth in the attached Appendix I.

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1 May 5, 2010 Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU USA Tel: (671) Fax: (671) Mr. Jared C. Morris Chief Executive Officer Federated States of Micronesia Petroleum Corporation P.O. Box 1762 Kolonia, Pohnpei FM Dear Mr. Morris: In planning and performing our audit of the financial statements of the Federated States of Micronesia Petroleum Corporation (the Company), a component unit of the FSM National Government, as of December 31, 2009 and 2008, for the year ended December 31, 2009, and for the period from inception (May 19, 2008) through December 31, 2008 (on which we have issued our report dated May 5, 2010), in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, we considered the Company s internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Company s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting. However, in connection with our audit, we identified, and included in the attached Appendix I, deficiencies related to the Company s internal control over financial reporting and other matters as of December 31, 2009 that we wish to bring to your attention. We have also issued a separate report to the Board of Directors, also dated May 5, 2010, on our consideration of the Company s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The definition of a deficiency is also set forth in the attached Appendix I. A description of the responsibility of management for establishing and maintaining internal control over financial reporting and of the objectives of and inherent limitations of internal control over financial reporting, is set forth in the attached Appendix II and should be read in conjunction with this report. This report is intended solely for the information and use of the Board of Directors, management, others within the organization, and the Office of the FSM National Public Auditor and is not intended to be and should not be used by anyone other than these specified parties. Member of Deloitte Touche Tohmatsu

2 We will be pleased to discuss the attached comments with you and, if desired, to assist you in implementing any of the suggestions. We wish to thank the staff and management of the Company for their cooperation and assistance during the course of this engagement. Very truly yours,

3 APPENDIX I SECTION I CONTROL DEFICIENCIES We identified, and have included below, control deficiencies involving the Company s internal control over financial reporting as of December 31, 2009 that we wish to bring to your attention: Fuel Tanks in Yap Bulk Plant Comment: Tanks 2 & 5 have rusted out staircases that are no longer safe to ascend/descend. A hydraulic lift is now used to access the top of the tanks for gauge readings. Tank 4 however, is out of range for the hydraulic lift to reach and appears to have possibly less than 2 years before the stairs reach a similarly unsafe condition. These conditions may be relevant to deferred maintenance issues resulting from the deterioration of the tanks. Recommendation: It is difficult to speculate a recommendation due to the range of investment and safety issues that exist. Ultimately, tanks 2 & 5 (and eventually 4) may need to be repaired for leaks and faulty staircases. Inventory and Fixed Assets Loans Payable Comment: Inventory and fixed asset loans from Bank of Guam were not always paid on time in The Company incurred additional bank charges as a result. Recommendation: The Company should revisit its cash flow plan and endeavor to pay its loans to avoid bank charges. The Company should monitor interest and bank charges incurred and record them separately in the general ledger. Additions to Fixed Assets-Hardware and Software Comment: The Company has a contract for research, development and implementation of information systems. Billings include professional fees, cost of hardware and software acquired to set-up the information system and supplies used in the conduct of research, development and implementation. The Company records these professional fees as expense while it capitalizes hardware and software costs and supplies. The fixed asset register of the Company listed the specific billings as one line item. Recommendation: Capitalized costs may not have the same useful lives. The Company should further identify costs of hardware, software and other intangibles. The different nature of capitalized costs should be depreciated over the respective estimated useful lives. Fixed Assets (1) Comment: The Company s policy on fixed assets is to capitalize individual items with estimated useful lives of more than one year without regard to a capitalization threshold. We noted that costs to renovate an office were included as repairs and maintenance expense. Per inquiry, the Company opts to expense out costs that are not tangible. Recommendation: Certain costs incurred may extend the lives of assets to more than one year or cause the asset to be more productive. These costs, though not tangible, may be capitalizable. The Company should reassess and concretize its policy on fixed assets capitalization. (2) Comment: The Company s fixed assets are not tagged. Recommendation: To enable proper identification and monitor completeness and existence of fixed assets, we suggest they be tagged.

4 APPENDIX I, Continued Fixed Assets, Continued (3) Comment: The Company purchased its fixed assets at the start of its operations on a lump-sum basis. Costs that are depreciated are the costs passed on to FSMPC at that time. Some items have zero costs in the fixed asset register. Some assets are listed as one large component. Recommendation: The Company should review completeness and existence of fixed assets acquired. The Company should verify if the zero cost assets still exist. The fixed asset register should be reviewed to break down costs of assets based on components with different useful lives. Accounts Payable, Accruals and Other Liabilities Comment: The financial statement close process does not specify steps to ensure complete capture of liabilities. During the 2009 audit, we noted that liabilities are understated by $53,000 and 2008 expenses amounting to $69,000 were recorded in Recommendation: We recommend that the Company strictly review the completeness of its liabilities as of year-end. The Company should ensure that expenses are recorded in the correct period that they relate to. Revenue Comments: (1) We noted one sample in our test of 75 sales transaction during the year 2009 that one customer was given a price not appropriate for its customer category. (2) Prices used in the sales invoices are rounded to the nearest tenths instead of the nearest thousandths. (3) Manual sales invoice number does not match the sales invoice number in the general ledger. (4) One manual sales invoice cannot be located in the file. Per inquiry, these conditions occurred when the Company was still using a manual processing of revenue. The implementation of the new system has addressed the risk. Recommendation: We recommend continued monitoring of the process to prevent recurrence of the conditions. Inventory Comment: The Company s ending inventory did not include the quantities located in Chuuk Aviation, which understated inventory by $45,000. Recommendation: We recommend that the Company capture all readings and calibrations and adjust the records completely. We also recommend that the Company update ending inventory to match the count regularly. This will help them identify understatement or overstatement and investigate the causes timely.

5 APPENDIX I, Continued Leases (1) Comment: The Company does not have a signed copy of its facility lease with the Pohnpei State Government for its Pohnpei bulk plant. Recommendation: We recommend that the Company obtain a copy of the said lease for its file. (2) Comment: One of the Company s lease agreements require additional lease payments contingent on the level of gallons sold by the Company from that leased facility. Recommendation: We recommend that the Company monitor the gallons sold and pay required contingent rentals, if warranted. Personnel Records Comment: Most of the Company s employees contract of employment ended in June The Company has not yet issued a renewal for the contracts. Recommendation: We recommend that the Company review the status of the employment contracts and issue renewal documents, if warranted. SECTION II OTHER MATTERS We noted no other matters related to operations and best practices involving internal control over financial reporting that we wish to bring to your attention. SECTION III DEFINITION The definition of a control deficiency that is established in AU 325, Communicating Internal Control Related Matters Identified in an Audit, is as follows: A control deficiency 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 misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective is not always met. A deficiency in operation exists when a properly designed control does not operate as designed, or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively.

6 APPENDIX II MANAGEMENT S RESPONSIBILITY FOR, AND THE OBJECTIVES AND LIMITATIONS OF, INTERNAL CONTROL OVER FINANCIAL REPORTING The following comments concerning management s responsibility for internal control over financial reporting and the objectives and inherent limitations of internal control over financial reporting are adapted from auditing standards generally accepted in the United States of America. Management s Responsibility The Company s management is responsible for the overall accuracy of the financial statements and their conformity with generally accepted accounting principles. In this regard, management is also responsible for establishing and maintaining effective internal control over financial reporting. Objectives of Internal Control over Financial Reporting Internal control over financial reporting is a process affected by those charged with governance, management, and other personnel and designed to provide reasonable assurance about the achievement of the entity s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Internal control over the safeguarding of assets against unauthorized acquisition, use, or disposition may include controls related to financial reporting and operations objectives. Generally, controls that are relevant to an audit of financial statements are those that pertain to the entity s objective of reliable financial reporting (i.e., the preparation of reliable financial statements that are fairly presented in conformity with generally accepted accounting principles). Inherent Limitations of Internal Control over Financial Reporting Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.