Financial Management: Extending the Financial Statements Audit	 
Requirement of the CFO Act to Additional Federal Agencies	 
(14-MAY-02, GAO-02-740T).					 
                                                                 
Congress is considering expanding the number of federal agencies 
required to prepare audited financial statements to include all  
executive branch agencies that have budget authority of $25	 
million or more. The Federal Financial Management Improvement Act
of 1996 builds on the Chief Financial Officers (CFO) Act by	 
encouraging agencies to have systems that generate timely,	 
accurate, and useful information with which to make informed	 
decisions on an ongoing basis. The 26 non-CFO Act agencies that  
GAO surveyed reported that they anticipate significant benefits  
from audited financial statements.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-740T					        
    ACCNO:   A03331						        
  TITLE:     Financial Management: Extending the Financial Statements 
Audit Requirement of the CFO Act to Additional Federal Agencies  
     DATE:   05/14/2002 
  SUBJECT:   Auditing procedures				 
	     Auditing standards 				 
	     Financial statement audits 			 
	     Proposed legislation				 
	     Reporting requirements				 

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GAO-02-740T
     
A

Test i mony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives

For Release on Delivery Expected at 2: 00 p. m. FINANCIAL Tuesday, May 14,
2002 MANAGEMENT

Extending the Financial Statements Audit Requirement of the CFO Act to
Additional Federal Agencies

Statement of Gary T. Engel Director, Financial Management and Assurance

GAO- 02- 740T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today
to assist the Subcommittee in its consideration of H. R. 4685, a bill to
amend title 31 of the United States Code to expand the number of federal
agencies that are required to prepare audited financial statements. As
currently proposed, the Chief Financial Officers (CFO) Act audit requirement
1 would be expanded to executive branch agencies that have budget authority
of $25 million or more and are not already required to have financial
statements audits. 2 Agencies subject to CFO Act audit requirements are also
subject to the requirements of the Federal Financial Management Improvement
Act of 1996 (FFMIA). 3 FFMIA builds on the CFO Act by emphasizing the need
for agencies to have systems that can generate timely, accurate, and useful
information with which to make informed decisions on an ongoing basis.

Our remarks today are based on work we did at the request of Representative
Patrick J. Toomey, who has introduced H. R. 4685, on the views of 26
surveyed executive branch agencies not covered by the CFO Act on having
audited financial statements 4 and on our past and ongoing audit work at
various CFO Act agencies.

We agree with the thrust of the proposed amendment in H. R. 4685 to expand
the number of federal agencies that are required to prepare audited
financial statements. Our longstanding position has been that the
preparation and audit of financial statements increase accountability and
transparency and are an important tool in the development of reliable,
timely, and useful financial information for day- to- day management and
oversight. Preparing audited financial statements also leads to improvements
in internal control and financial management systems. The views expressed by
the 26 selected agencies in our survey are generally

1 The CFO Act of 1990, as expanded by the Government Management Reform Act
of 1994, requires 24 major executive branch departments and agencies to
prepare annual financial statements and have them audited (31 U. S. C.
3515).

2 The requirement would not apply to executive agencies already required by
statute to have audited financial statements or to corporations, agencies,
or instrumentalities subject to chapter 91 of title 31 of the United States
Code.

3 31 U. S. C. 3512 note (2000). 4 U. S. General Accounting Office, Survey
Results of Selected Non- CFO Act Agencies? Views on Having Audited Financial
Statements, GAO- 02- 281R (Washington, D. C.: Dec. 14, 2001).

consistent with our views on the bill and generally support the position
that agencies should have audited financial statements. For the existing CFO
Act agencies, the preparation and audit of financial statements have been
the primary catalyst for increasing the reliability of financial data,
improving financial operations, and enhancing accountability.

Summary of Survey The 26 non- CFO Act agencies we surveyed are generally
independent

agencies that have commissions or boards appointed by the President. 5
Results The objectives of the survey were to determine the

 benefits achieved or anticipated by the surveyed agencies from preparing
financial statements and having them audited;  degree of effort or
anticipated effort for the surveyed agencies to

prepare financial statements and have them audited;  factors, including
budget authority, that should be considered in

determining whether agencies should prepare financial statements and have
them audited; and

 surveyed agencies? views about whether, in general, agencies should have
their financial statements audited.

As shown in table 1, 12 of the 26 surveyed agencies have had financial
statements audits within the past 5 years, and 14 have not. (See app. I for
information about the 26 surveyed agencies, including baseline and financial
information.)

5 We selected the 26 agencies by identifying 28 executive branch entities
that (1) were not subject to the CFO Act, as amended, (2) had budget
authority for fiscal year 1999 of at least $10 million, and (3) with one
exception, were not required by law to have their financial statements
audited. As agreed with the study?s requester, we did not include two of the
entities- the Central Intelligence Agency Retirement Fund and the Executive
Office of the President- in the scope of our survey, leaving 26 agencies for
our survey.

Table 1: Surveyed Agencies Have had financial statements audits

Have not had financial statements audits

Defense Nuclear Facilities Safety Board a Commodity Futures Trading
Commission Farm Credit System Insurance Corporation

Consumer Product Safety Commission Federal Communications Commission

Equal Employment Opportunity Commission d Federal Housing Finance Board

Federal Election Commission Federal Mediation and Conciliation Service

Federal Labor Relati ons Authority Federal Trade Commission

Institute of Museum and Library Services International Trade Commission b

Merit Systems Protection Board Office of Navajo and Hopi Indian Relocati on

National Archives and Records Administration e Railroad Ret irement Board

National Endowment for the Arts U. S. Court of Appeals f or Veterans Cl aims
c

National Endowment for the Humanities U. S. Hol ocaust Memori al Museum

National Labor Relations Board U. S. Institute of Peace

National Transportat ion Safety Board d Securities and Exchange Commission
Selective Service System a The Defense Nuclear Facilities Safety Board has
balance- sheet- only audits every 3 to 5 years, most recently for fiscal
year 1997. It did not prepare fiscal year 2000 financial statements. b The
International Trade Commission discontinued audits of its financial
statements, effective for fiscal

year 1999. It did not prepare fiscal year 2000 financial statements. c The
U. S. Court of Appeals for Veterans Claims? first audit was of its fiscal
year 2000 financial

statements. d The Equal Employment Opportunity Commission and the National
Transportation Safety Board have indicated that they plan to have financial
statements audits within the next 5 years.

e The National Archives and Records Administration has annual financial
statements audits of three trust and revolving funds.

Overall, the surveyed agencies reported that they either achieved
significant benefits or would anticipate achieving such benefits from having
audited financial statements. The level of effort to prepare financial

statements and prepare for an audit of the statements varied significantly
with the size and other characteristics of the agencies. In determining
whether agencies should prepare financial statements and have them audited,
respondents identified a number of factors that should be considered,
including budget authority, key financial statement amounts,

and the type of agency operations. For example, the surveyed agencies
reported that the fiduciary responsibilities of the agency and the risks
associated with the agency?s operations were the most important factors to

consider. Twenty- one of the 26 surveyed agencies responded that federal
agencies, in general, should have audited financial statements.

Achieved or Anticipated The 12 surveyed agencies that have had their
financial statements audited

Benefits of Having Audited generally reported significant benefits from
those audits. As shown in

Financial Statements figure 1, the most significant benefits cited were
enhancing accountability

and identifying inefficiencies and weaknesses. Other significant benefits
included improving internal control, enhancing the public?s perception of
the agency, meeting statutory requirements, and monitoring assets and
liabilities. The 14 surveyed agencies that have not had audited financial
statements reported that they would anticipate benefits from such audits,
but to a much lesser extent than the achieved benefits reported by the 12
surveyed agencies that have had their financial statements audited.

Figure 1: Average Ranking by Surveyed Agencies of Extent of Benefits
Achieved or Anticipated from Financial Statements Audits Achieved or
anticipated benefits

Enhance accountability Identify inefficiencies and weaknesses

Improve internal control Enhance perception of the agency

Meet statutory requirements Monitor assets, liabilities, and net position
Improve reliability of financial management information

Monitor budget status Improve financial management systems Identify costs of
providing government services

Identify actual costs or savings Facilitate external funding

Increase grant funding Little or no

Some Moderate

Great Very great

extent extent extent extent

extent Average ranking

Agencies that have had financial statements audits Agencies that have not
had financial statements audits

We asked the 12 audited agencies whether the benefits of their first audit
and subsequent audits outweighed the costs and whether their audits were
more or less beneficial than expected. As shown in figures 2 and 3, half of

the 12 agencies responded that the benefits achieved outweighed the costs of
the first audit, and about three- fourths of the agencies responded that the
benefits achieved outweighed the costs of subsequent audits.

Figure 2: Benefits Achieved Versus Costs for First Audit for Surveyed
Agencies That Have Had Financial Statements Audits

8% Benefits somewhat outweigh the costs 8%

Not able to judge 42% 17%

Costs substantially outweigh the benefits 25% Benefits about equal to the
costs Benefits substantially outweigh the costs Note: None of the surveyed
agencies that have had financial statements audits responded that the costs
somewhat outweigh the benefits.

Figure 3: Benefits Achieved Versus Costs for Subsequent Audits for Surveyed
Agencies That Have Had Financial Statements Audits

9% Benefits about equal to the costs 18% Costs substantially outweigh the
benefits

55% 18%

Benefits somewhat outweigh the costs

Benefits substantially outweigh the costs Note: None of the surveyed
agencies that have had financial statements audits responded that the costs
somewhat outweigh the benefits or that they were not able to judge. One of
these 12 surveyed agencies is not included in this chart because fiscal year
2000 was the agency?s first financial

statements audit.

Ten of the 12 agencies (83 percent) responded that their audits were more
beneficial than or about as beneficial as they had expected.

Degree of Effort or For the 12 surveyed agencies that have had their
financial statements

Anticipated Effort to audited, the reported level of effort to prepare
financial statements and to

Prepare Financial prepare for an audit varied significantly with the size
and other

Statements and Have Them characteristics of the agencies. For example, the
reported number of staff

days to prepare for the first audit ranged from 50 to 750 days, and, as
shown Audited

in table 2, the estimated fiscal year 2000 audit costs ranged from $11, 000
to $350, 000.

Table 2: Reported Audit and Related Costs for Surveyed Agencies That Had
Fiscal Year 2000 Financial Statements Audits Number

of Estimated costs of financial statements

Other estimated costs related to Range of budget agencies

audits performed by contractor or financial statements audits authority a
that had

Office of Inspector General fiscal year

2000 financial

Low High Average Low High Average statements

audits b

Less than $25 million 4 $11,000 $54,512 $29,525 $0 $9,300 $2,325 $25 million
to $150

4 $26,000 $100,000 $54,000 $0 $15,000 $5,750 million

Greater than $6 billion 2 $220,000 $350,000 c $285,000 $2,000 $1,218,000 c
$610,000 a Budget authority data were obtained from the Fiscal Year 2002
President?s Budget. None of the surveyed agencies that have had financial
statements audits had fiscal year 2000 budget authority between $150 million
and $6 billion. b Two of the 12 surveyed agencies that have had financial
statements audits, the International Trade

Commission and the Defense Nuclear Facilities Safety Board, did not have
financial statements audits for fiscal year 2000. c The surveyed agency that
reported financial statements audit costs of $350,000 also reported related

costs of $1,218, 000 for consultants to assist the agency in preparing for
the financial statements audit.

Frequently reported steps that these agencies had taken to prepare for their
first and subsequent audits are (1) improving or replacing financial
management systems, (2) hiring additional financial management personnel,
(3) training financial management personnel, and (4) performing significant
manual procedures (for first audits).

Factors to Consider in As figure 4 shows, the 26 surveyed agencies responded
that the most Determining Whether

important factors that should be considered in determining whether Agencies
Should Have

agencies should have audited financial statements are (1) whether the
Financial Statements Audits

agency has fiduciary responsibilities and (2) risks associated with the
agency?s operations. The surveyed agencies said that the amounts of an
agency?s assets and liabilities are of equal importance to the amount of
budget authority an agency has. Other important factors include whether

the agency receives nongovernmental funding and the amounts of an agency?s
revenues and expenses.

Figure 4: Ranking of Importance by Surveyed Agencies of Factors to Consider
in Determining Need for Financial Statements Audits

Factors to consider Risks associated with the agency's operations

Fiduciary responsibilities Receipt of nongovernmental funding

Amount of liabilities Amount of assets Amount of budget authority

Amount of revenue Amount of expenses If an agency has a CFO If an agency has
an Office of Inspector General

Little or no Some Moderate

Great Very great

extent extent extent extent extent

Average ranking

Agencies that have had financial statements audits Agencies that have not
had financial statements audits

Of the 14 surveyed agencies that have not had their financial statements
audited, 13 reported that the absence of a statutory requirement to do so
was a reason they have not had such audits. Other reasons cited by 6 of the
14 agencies include an insufficient number of financial management personnel
and insufficient funding.

Surveyed Agencies? General Twenty- one of the 26 surveyed agencies,
including all 12 that have had their

Views about Whether financial statements audited, reported that, in general,
agencies should

Agencies Should Have have their financial statements audited. The remaining
5 surveyed

Financial Statements Audits agencies, whose budget authority ranged from
about $250, 000 to about

$325 million, expressed the opposite view. Other Considerations Using a
fixed- dollar threshold to determine which agencies should be

subject to the audit requirement has the benefit of simplicity. Over time,
however, entities could move above and below the threshold depending on
annual changes in their budget authority. Also, through inflation, the
number of entities that meet the dollar threshold would likely increase. One
way to deal with this issue and still incorporate a dollar threshold is to
provide the Office of Management and Budget (OMB), through the proposed
legislation, the authority to add agencies that fall below or exclude
agencies that meet the threshold based in part on the other factors
identified in our survey. OMB could then be required to report to the
Congress on the reasons for a change to any agency?s status with respect to
the financial statements audit requirement.

The proposed legislation does not specifically provide for a phase- in
period for an agency to implement the audit requirement, but it does provide
that OMB may waive this requirement for the first 2 fiscal years beginning
after the date of enactment. We support this waiver provision and would
support making a similar waiver available to OMB for agencies that do not
initially meet, but at a subsequent date do meet, the dollar audit
threshold.

Conclusions In closing, I would like to reiterate our support for the thrust
of H. R. 4685 to expand financial statements audit requirements beyond the
current 24 CFO

Act agencies. The importance of having financial statements audits goes far
beyond obtaining an unqualified opinion. The preparation and audit of
financial statements contribute to reliable, timely, and useful financial
information, and such information is important in helping management ensure
accountability, measure and control costs, and make timely and fully
informed decisions. Preparing audited financial statements also leads to
improvements in internal control and financial management systems. Hence, we
view much of the effort involved in preparing financial statements and
having them audited as an integral part of effective financial management.

Mr. Chairman, this concludes my statement. We welcome any questions that you
or other members of the Subcommittee may have.

Contact If you have any questions about this testimony, please contact me at
(202) 512- 3406. I can be reached by e- mail at engelg@ gao. gov. Other key

contributors to this testimony were Kent Bowden, Casey Keplinger, LaShawnda
Wilson, and Esther Tepper.

Appendi x I

Information on the 26 Surveyed Agencies The following tables provide
financial and other baseline information about the 26 surveyed agencies. The
tables generally contain information provided by the agencies, which we did
not independently verify.

Table 3: Fiscal Year 2000 Financial Data as Reported to Treasury by Surveyed
Agencies That Have Had Financial Statements Audits

Budget Total

Total Total

Agency Authority a Percent Total Assets Percent

Liabilities Percent Revenue Percent

Expenses Percent

Railroad Retirement Board $9,183 56 $22,703.1 57 $3,977.6 29 $9,330.2 54
$8,678.5 47 Federal Communications Commission 6,795 42 15,360.8 38 9,306.0
68 7,580.9 44 9,408.3 51 Federal Trade Commission 126 1 227.3 1 218.4 2
126.8 1 143.7 1 Farm Credit System Insurance Corporation 83 1 1,601.7 4
167.9 1 101.4 1 12.7 0 International Trade Commission 44 0 6.7 0 5.4 0 46.0
0 46.3 0 Federal Mediation and Conciliation Service 39 0 10.2 0 6.9 0 41.2 0
40.6 0 U. S. Holocaust Memorial Museum 33 0 0.9 0 0.2 0 2.6 0 2.7 0 Federal
Housing Finance Board b 19 0 6.6 0 3.8 0 19.1 0 18.9 0 Defense Nuclear
Facilities Safety Board 17 0 10.2 0 2.8 0 0.0 0 17.4 0 U. S. Institute of
Peace 13 0 0.8 0 0.7 0 0.0 0 12.9 0 U. S. Court of Appeals for Veterans
Claims 11 0 10.4 0 2.5 0 11.5 0 11.4 0 Office of Navajo and Hopi Indian
Relocation 8 0 11.0 0 2.0 0 14.1 0 14.1 0

Total $16,371 100 $39,949.7 100 $13,694.2 100 $17,273.8 100 $18,407.5 100

a Fiscal year 2000 budget authority data were obtained from the Fiscal Year
2002 President?s Budget. b The amounts reported for Federal Housing Finance
Board are from their audited financial statments and not from data reported
to Treasury. Note: All dollar amounts are in millions. The individual
percentages do not total to 100 percent due to rounding. The percentages
less than one are portrayed as zero in this chart.

Table 4: Fiscal Year 2000 Financial Data as Reported to Treasury by Surveyed
Agencies That Have Not Had Financial Statements Audits

Budget Total

Total Total

Agency Authority a Percent Total Assets Percent

Liabilities Percent Revenue Percent

Expenses Percent

Securities and Exchange Commission $382 20 $2,790.0 71 $123.3 15 $3,638.7 74
$363.9 20 National Archives and Records Administration 323 17 252.8 6 345.4
42 280.6 6 311.5 17 Equal Employment Opportunity Commission 282 15 42.1 1
17.7 2 65.9 1 67.6 4 National Labor Relations Board 205 11 47.7 1 49.8 6 8.8
0 213.4 11 Institute of Museum and Library Services 190 10 225.5 6 0.3 0
187.0 4 187.2 10 National Endowment for the Humanities 118 6 99.8 3 1.7 0
116.3 2 116.0 6 National Endowment for the Arts 102 5 106.4 3 2.8 0 111.1 2
108.5 6 National Transportation Safety Board 82 4 34.0 1 4.7 1 b bb b
Commodity Futures Trading Commission 63 3 261.2 7 251.6 30 312.6 6 310.9 17
Consumer Product Safety Commission 52 3 19.1 0 14.9 2 57.0 1 58.1 3 Federal
Election Commission 38 2 11.5 0 3.4 0 41.1 1 41.5 2 Merit System Protection
Board 29 2 7.3 0 4.2 1 31.1 1 31.1 2 Federal Labor Relations Authority 24 1
4.0 0 4.2 1 23.9 0 24.2 1 Selective Service System 24 1 15.5 0 3.8 0 21.2 0
22.5 1

Total $1,914 100 $3,916.9 100 $827.8 100 $4,895.3 100 $1,856.4 100

a Fiscal year 2000 budget authority data were obtained from the Fiscal Year
2002 President?s Budget. b National Transportation Safety Board did not
report data for revenue and expenses to Treasury. Note: All dollar amounts
are in millions. The individual percentages do not total to 100 percent due
to rounding. The percentages less than one are portrayed as zero in this
chart.

Table 5: Baseline Information as Reported by Surveyed Agencies That Have Had
Financial Statements Audits

Agency Functions

(in General? or

authority full time GAGAS fee

functions budget total Inspector with guarantees

penalties for a millions)

of GAAS? estate

loan and operations custodial 2000 2000 equivalents

offices Office real or retail of year year equivalent?

in accordance insurance loans grants

fines services fiduciary/ or lease Agency Other Fiscal Fiscal Number CFO
Statutory Audit Buy/ Provide Make Make Assess Provide Maintain Railroad
Retirement Board $9,183 1,154 60 Yes Yes GAGAS X XXX

Federal Communications Commission 6,795 1,950 4 Yes Yes GAGAS X X XXX
Federal Trade Commission 126 1,007 9 Yes Yes GAGAS X X X Farm Credit System
Insurance Corporation 83 10 1 Yes No GAGAS X X International Trade
Commission 44 354 1 Yes Yes GAGAS a X XX Federal Mediation and Conciliation
Service 39 288 71 Yes No GAGAS X X U. S. Holocaust Memorial Museum 33 458 5
Yes No GAAS X X Federal Housing Finance Board 19 107 1 Yes Yes GAGAS X
Defense Nuclear Facilities Safety Board 17 96 7 Yes No GAAS b U. S.
Institute of Peace 13 65 1 No No GAAS X U. S. Court of Appeals for Veterans
Claims 11 88 1 Yes No GAGAS X XX Office of Navajo and Hopi Indian Relocation
8 60 3 Yes No GAAS

Total $16,371 5,637 164 Average $1,364 470 14

a International Trade Commission discontinued audits of its financial
statements, effective for fiscal year 1999. It did not prepare fiscal year
2000 financial statements. b Defense Nuclear Facilities Safety Board has
balance sheet only audits every 3 to 5 years, most

recently for fiscal year 1997. It did not prepare fiscal year 2000 financial
statements. Notes: Fiscal year 2000 budget authority data were obtained from
the Fiscal Year 2002 President?s Budget.

GAGAS (generally accepted government auditing standards) are public sector
auditing standards; GAAS (generally accepted auditing standards) are private
sector auditing standards.

Table 6: Baseline Information as Reported by Surveyed Agencies That Have Not
Had Financial Statements Audits

Agency Functions

(in General? statements authority full time

fee functions

budget total Inspector financial guarantees penalties

for a millions) of prepared?

estate loan and operations

custodial 2000 2000 equivalents offices

Office 2000 real or retail year year of equivalent? year insurance

loans grants fines services fiduciary/ or lease Agency

Fiscal Fiscal Number CFO Statutory Fiscal Buy/ Provide Make Make Assess
Provide Maintain Other Securities and Exchange Commission $382 3,037 14 No
Yes No X XX National Archives and Records Administration 323 2,362 28 Yes
Yes No X XXX Equal Employment Opportunity Commission 282 2,924 52 Yes Yes No
X X National Labor Relations Board 205 1,976 52 Yes Yes No X Institute of
Museum and Library Services 190 45 1 Yes No a No X National Endowment for
the Humanities 118 170 1 Yes Yes No X X National Endowment for the Arts 102
155 1 Yes Yes No X X National Transportation Safety Board 82 425 11 Yes No a
No X Commodity Futures Trading Commission 63 546 6 Yes Yes No X XX Consumer
Product Safety Commission 52 480 43 Yes Yes No X X Federal Election
Commission 38 357 2 Yes Yes No X Merit Systems Protection Board 29 234 11
Yes No b No Federal Labor Relations Authority 24 198 8 Yes Yes No X
Selective Service System 24 165 5 Yes No a No

Total $1,914 13,074 235 Average $137 934 17

a Institute of Museum and Library Services, National Transportation Safety
Board, and Selective Service System use the services of another agency?s
Office of Inspector General. b Merit Systems Protection Board's General
Counsel acts as its Inspector General for investigating

fraud, waste, and abuse. The agency also uses the services of another
agency's Office of Inspector General.

Note: Fiscal year 2000 budget authority data were obtained from the Fiscal
Year 2002 President?s Budget.

(198115)

GAO United States General Accounting Office

a

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Appendix I

Appendix I Information on the 26 Surveyed Agencies

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Appendix I Information on the 26 Surveyed Agencies

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Appendix I Information on the 26 Surveyed Agencies

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