Fiscal Year 2005 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to
Addressing Our Nation's Financial Condition and Long-term Fiscal
Imbalance (01-MAR-06, GAO-06-406T).
GAO is required by law to annually audit the consolidated
financial statements of the U.S. government. The Congress and the
President need to have timely, reliable, and useful financial and
performance information. Sound decisions on the current results
and future direction of vital federal government programs and
policies are made more difficult without such information. Until
the problems discussed in GAO's audit report on the U.S.
government's consolidated financial statements are adequately
addressed, they will continue to (1) hamper the federal
government's ability to reliably report a significant portion of
its assets, liabilities, costs, and other information; (2) affect
the federal government's ability to reliably measure the full
cost as well as the financial and nonfinancial performance of
certain programs and activities; (3) impair the federal
government's ability to adequately safeguard significant assets
and properly record various transactions; and (4) hinder the
federal government from having reliable financial information to
operate in an economical, efficient, and effective manner.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-406T
ACCNO: A48021
TITLE: Fiscal Year 2005 U.S. Government Financial Statements:
Sustained Improvement in Federal Financial Management Is Crucial
to Addressing Our Nation's Financial Condition and Long-term
Fiscal Imbalance
DATE: 03/01/2006
SUBJECT: Accountability
Accounting procedures
Accounting standards
Audit reports
Federal agency accounting systems
Financial management
Financial management systems
Financial statement audits
Financial statements
Internal controls
Performance measures
Reporting requirements
Projections
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GAO-06-406T
* Appendix I: Material Deficiencies
* Appendix II: Other Material Weaknesses
* Appendix III: Fiscal Year 2005 Audit Results
Testimony
Before the Subcommittee on Government Management, Finance, and
Accountability, Committee on Government Reform, House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:00 p.m. EST
Wednesday, March 1, 2006
FISCAL YEAR 2005 U.S. GOVERNMENT FINANCIAL STATEMENTS
Sustained Improvement in Federal Financial Management Is Crucial to
Addressing Our Nation's Financial Condition and Long-term Fiscal Imbalance
Statement of David M. Walker Comptroller General of the United States
GAO-06-406T
Mr. Chairman and Members of the Subcommittee:
I am most pleased to be here today and commend your subcommittee's
tradition of oversight hearings on this and other financial management
issues throughout the year. Such hearings continue to play a vital role in
ensuring that the federal government is held accountable to the American
people. Today I will discuss our report on the U.S. government's
consolidated financial statements for fiscal years 2005 and 2004. Our work
was conducted in accordance with U.S. generally accepted government
auditing standards.
Both the consolidated financial statements and our report on them are
included in the fiscal year 2005 Financial Report of the United States
Government. This most recent report was issued by the Department of the
Treasury (Treasury) on December 15, 2005, and is available through GAO's
Internet site, at www.gao.gov/financial/fy2005financialreport.html , and
Treasury's Internet site, at www.fms.treas.gov/fr/index.html . I also
would like to highlight a guide we issued in September 2005 titled
Understanding the Primary Components of the Annual Financial Report of the
United States Government,1 which was prepared to help those who seek to
obtain a better understanding of the Financial Report. This guide can also
be found on GAO's Internet site at
www.gao.gov/financial/fy2005/guidetofrofusg.pdf.
For the ninth consecutive year, certain material weaknesses2 in internal
control and in selected accounting and financial reporting practices
resulted in conditions that continued to prevent us from being able to
provide the Congress and American people an opinion as to whether the
consolidated financial statements of the U.S. government were fairly
stated in conformity with U.S. generally accepted accounting principles
(GAAP). Further, we also reported that the federal government did not
maintain effective internal control over financial reporting (including
safeguarding assets) and compliance with significant laws and regulations
as of September 30, 2005. Until the problems that I will discuss today and
that are discussed in our audit report are adequately addressed, they will
continue to have adverse implications for the federal government and the
taxpayers.
1GAO, Understanding the Primary Components of the Annual Financial Report
of the United States Government, GAO-05-958SP (Washington, D.C.: September
2005).
2A material weakness is a condition that precludes the entity's internal
control from providing reasonable assurance that misstatements, losses, or
noncompliance material in relation to the financial statements or to
stewardship information would be prevented or detected on a timely basis.
More troubling still is the federal government's overall financial
condition and long-term fiscal imbalance. While the fiscal year 2005
budget deficit was lower than 2004, it was still very high, especially
given the impending retirement of the "baby boom" generation and rising
health care costs. Importantly, as reported in the fiscal year 2005
Financial Report of the United States Government, the federal government's
accrual-based net operating cost-that is, the cost to operate the federal
government-increased to $760 billion in fiscal year 2005 from $616 billion
in fiscal year 2004. This represents an increase of about $144 billion or
23 percent. To make matters worse, the federal government's liabilities
and unfunded commitments, which include military and civilian retirement
benefits and promised Social Security and Medicare payments, are growing
rapidly. Simply put, our nation's financial condition and long-term fiscal
imbalance is on an imprudent and unsustainable course.
In this testimony, I will discuss (1) the federal government's long-term
fiscal imbalance, (2) our continued concerns about the identification of
misstatements in federal agencies' prior year financial statements, and
(3) the major issues relating to the consolidated financial statements for
fiscal years 2005 and 2004. I will also discuss systems problems that
continue to hinder federal agency accountability, and describe progress
that has been made toward addressing major impediments to an opinion on
the consolidated financial statements.
The Nation's Fiscal Imbalance
The Financial Report of the United States Government provides useful
information on the government's financial position at the end of the
fiscal year and changes that have occurred over the course of the year.
However, in evaluating the nation's fiscal condition, it is critical to
look beyond the short-term results and consider the overall long-term
financial condition and long-term fiscal imbalance of the government-that
is, the sustainability of the federal government's programs, commitments,
and responsibilities in relation to the resources expected to be
available. More important than the large increase in the government's net
operating cost in fiscal year 2005 and persistent short-term budget
deficits, fiscal simulations by GAO and others show that over the long
term, we face large and growing structural deficits due primarily to known
demographic trends, rising health care costs, and lower federal revenues
relative to the economy.
As I have testified before, the current financial reporting model does not
clearly, comprehensively, and transparently show the wide range of
responsibilities, programs, and activities that may either obligate the
federal government to future spending or create an expectation for such
spending. Thus, it provides a potentially unrealistic and misleading
picture of the federal government's overall performance, financial
condition, and future fiscal outlook. The federal government's gross debt3
in the U.S. government's consolidated financial statements was about $8
trillion as of September 30, 2005.4 This number excludes such items as the
current gap between the present value of future promised and funded Social
Security and Medicare benefits, veterans' health care, and a range of
other liabilities (e.g., federal employee and veteran benefits payable),
commitments, and contingencies that the federal government has pledged to
support.5 Including these items, the federal government's fiscal exposures
now total more than $46 trillion, representing close to four times gross
domestic product (GDP) in fiscal year 2005 and up from about $20 trillion
or two times GDP in 2000. About one third of the approximately $26
trillion increase resulted from enactment of the Medicare prescription
drug benefit in fiscal year 2004. (See table 1.) The federal government's
current fiscal exposures translate into a burden of about $156,000 per
American or approximately $375,000 per full-time worker, up from $72,000
and $165,000 respectively, in 2000. Furthermore, these amounts do not
include future costs resulting from Hurricane Katrina or the conflicts in
Iraq and Afghanistan.
3The federal government's gross debt consists of debt held by the public
and intragovernmental debt holdings.
4On December 29, 2005, the Secretary of the Treasury (Secretary) notified
the Congress that the statutory debt limit will be reached in mid-February
2006. On February 16, 2006, to avoid exceeding the debt limit, the
Secretary began suspending investments in the Government Securities
Investment Fund of the Federal Employees' Retirement System (G-Fund) and
also suspended the sales of State and Local Government Series securities
(SLGS).
5A broader discussion of fiscal exposures can be found in GAO, Fiscal
Exposures: Improving the Budgetary Focus on Long-Term Costs and
Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).
Table 1: Estimated Fiscal Exposures
Dollars in trillions
2000 2005
Explicit liabilities $6.9 $9.9
o Publicly held debt
o Military & civilian pensions & retiree health
o Other
Commitments & contingencies 0.5 0.9
o E.g., Pension Benefit Guarantee Corporation, undelivered
orders
Implicit exposures 13.0 35.6
o Future Social Security benefits 3.8 5.7
o Future Medicare Part A benefits 2.7 8.8
o Future Medicare Part B benefits 6.5 12.4
o Future Medicare Part D benefits -- 8.7
Total $20.4 $46.4
Source: U.S. government's consolidated financial statements (CFS).
Note: Estimates for Social Security and Medicare are at present value as
of January 1 of each year as reported in the CFS and all other data are as
of September 30.
In addition to the approximately $46 trillion of estimated fiscal
exposures discussed above, there are exposures that are not included in
those figures because the amounts of the exposures are not currently
estimable. For example, the Department of Energy, in the footnotes to its
fiscal year 2005 financial statements, disclosed that its environmental
liability estimates do not include cleanup costs at sites for which there
is no current feasible remediation approach, such as the nuclear explosion
test area at the Nevada Test Site. It is important to understand the
nature and extent of these types of additional exposures in the long-term
fiscal planning for the federal government.6
6For information on how agencies could better recognize, in the budget,
the full costs of environmental cleanup and disposal associated with asset
acquisitions, see GAO, Long-Term Commitments: Improving the Budgetary
Focus on Environmental Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24,
2003). Also, at the request of this subcommittee and the House
Subcommittee on Energy and Resources, Committee on Government Reform, GAO
has ongoing work assessing the adequacy of agency processes and controls
for estimating environmental liabilities and the nature and type of
uncertainties that could impact the ultimate cost of cleanup. Our report
on this study is expected to be issued by the end of this month.
Additionally, tax expenditure amounts are not required to be disclosed,
nor are they disclosed, in agency or the U.S. government's consolidated
financial statements. Tax expenditures are reductions in tax revenues that
result from preferential provisions, such as tax exclusions, credits, and
deductions. These revenue losses reduce the resources available to fund
other programs or they require higher tax rates to raise a given amount of
revenue. As we reported in September 2005, the number of tax expenditures
more than doubled since 1974, and the sum of tax expenditure revenue loss
estimates tripled in real terms to nearly $730 billion in 2004.7 Under the
most recent estimates, this has risen to more than $775 billion in 2005.
Enhanced reporting on tax expenditures would ensure greater transparency
and accountability for revenue forgone by the federal government and
provide a more comprehensive picture of the federal government's policies
and fiscal position.
Further, additional changes are needed to communicate important
information to users about current operating results and the long-term
financial condition of the U.S. government and annual changes therein. In
particular, the government's financial statements should clearly
communicate to the user:
o the on-budget or operating results versus unified budget
results for the year;
o the long-term sustainability of federal government
programs-areas to consider include
o the relationship of the federal government's
existing commitments/responsibilities, including
social insurance, to appropriate measures, such as
GDP and per capita amounts,
o the government's long-term fiscal imbalance in
relation to appropriate measures, such as GDP, and
o the magnitude of the potential alternatives for
resolving the long term deficits, such as the rate of
tax increases or spending reductions necessary to
balance the government's long-term finances;
o inter-generational equity issues, e.g., assessing the extent to
which different age groups may be required to assume financial
burdens for commitments already made; and
o a liability at the governmentwide level for funds held by
Social Insurance trust funds.
Another tool that would serve to more effectively communicate the
federal government's finances to the public would be a Summary
Annual Report. Such a report would summarize, in a clear, concise,
and transparent manner, key financial and performance information
included in the Financial Report of the United States Government.
The federal government's financial condition and long-term fiscal
imbalance present enormous challenges to the nation's ability to
respond to emerging forces reshaping American society, the United
States' place in the world, and the future role of the federal
government. GAO's long-term simulations illustrate the magnitude
of the fiscal challenges associated with an aging society and the
significance of the related challenges the government will be
called upon to address. Figures 1 and 2 present these simulations
under two different sets of assumptions. In figure 1, we start
with the Congressional Budget Office's (CBO) 10-year
baseline-constructed according to the statutory requirements for
that baseline.8 Consistent with these requirements, discretionary
spending is assumed to grow with inflation for the first 10 years
and all tax cuts currently scheduled to expire are assumed to
expire. After 2016, discretionary spending is assumed to grow at
the same rate as the economy, and revenue is held constant as a
share of GDP at the 2016 level. In figure 2, two assumptions are
changed: (1) discretionary spending is assumed to grow at the same
rate as the economy after 2006 rather than merely with inflation,
and (2) all expiring tax provisions are extended. For both
simulations, Social Security and Medicare spending is based on the
2005 Trustees' intermediate cost projections, and we assume that
benefits continue to be paid in full after the trust funds are
exhausted. Medicaid spending is based on CBO's December 2005
long-term projections under midrange assumptions.
Figure 1: Composition of Spending as a Share of GDP under Baseline
Extended
Note: In addition to the expiration of tax cuts, revenue as a
share of GDP increases through 2016 due to (1) real bracket creep,
(2) more taxpayers becoming subject to the alternative minimum tax
(AMT), and (3) increased revenue from tax-deferred retirement
accounts. After 2016, revenue as a share of GDP is held constant.
Figure 2: Composition of Spending as a Share of GDP Assuming
Discretionary Spending Grows with GDP after 2006 and All Expiring
Tax Provisions Are Extended
Note: This includes certain tax provisions that expired at the end
of 2005, such as the increased AMT exemption amount.
As these simulations illustrate, absent policy changes on the
spending or revenue side of the budget, the growth in spending on
federal retirement and health entitlements will encumber an
escalating share of the government's resources. Indeed, when we
assume that all the temporary tax reductions are made permanent
and discretionary spending keeps pace with the economy, our
long-term simulations suggest that by 2040 federal revenues would
be adequate to pay only some Social Security benefits and interest
on the federal debt. Neither slowing the growth in discretionary
spending nor allowing the tax provisions to expire-nor both
together-would eliminate the imbalance.
Although revenues will be part of the debate about our fiscal
future, assuming no changes to Social Security, Medicare,
Medicaid, and other drivers of the long-term fiscal gap would
require at least a doubling of taxes-and that seems to be highly
implausible. Accordingly, substantive reform of Social Security
and our major health programs is critical to recapturing our
future fiscal flexibility. Ultimately, the nation will have to
decide what level of federal benefits and spending it wants and
how it will pay for these benefits. Our current path also will
increasingly constrain our ability to address emerging and
unexpected budgetary needs and increase the burdens that will be
faced by future generations. Continuing on this fiscal path will
mean escalating and ultimately unsustainable federal deficits and
debt that will serve to threaten the standard of living for the
American people and ultimately our national security.
As these simulations illustrate, regardless of the assumptions
used, the problem is too big to be solved by economic growth alone
or by making modest changes to existing spending and tax policies.
Rather, a fundamental reexamination, reprioritization, and
reengineering of major spending programs, tax policies, and
government priorities will be important to recapture our fiscal
flexibility and update our programs and priorities to respond to
emerging social, economic, and security changes. Ultimately, this
will likely require a national discussion about what Americans
want from their government and how much they are willing to pay
for those things.
According to Statement of Federal Financial Accounting Standards
(SFFAS) No. 21, Reporting Corrections of Errors and Changes in
Accounting Principles, prior period financial statements presented
should only be restated for corrections of errors, when such
errors caused the financial statements to be materially misstated.
Errors in financial statements can result from mathematical
mistakes, mistakes in the application of accounting principles, or
oversight or misuse of facts that existed at the time the
financial statements were prepared.
We continue to have concerns about the identification of
misstatements in federal agencies' prior year financial
statements. At least 79 of the 24 CFO Act agencies restated
certain of their fiscal year 2004 financial statements to correct
errors. During fiscal year 2005, we reviewed the causes and nature
of the restatements made by several Chief Financial Officers (CFO)
Act agencies in fiscal year 2004 to their fiscal year 2003
financial statements and recommended improvements in internal
controls and audit procedures to prevent or detect future similar
errors.10 Generally, the reasons for the restatements we reviewed
were agencies' lack of effective internal controls over the
processing and reporting of certain transactions and the failure
of the auditors to design and/or perform adequate audit procedures
to detect such errors. During our review, we noted that the extent
of the restatements to the agencies' fiscal year 2003 financial
statements varied from agency to agency, ranging from correcting
two line items on an agency's balance sheet to correcting numerous
line items on several of another agency's financial statements. In
some cases, the net operating results of the agency were affected
by the restatement. The amounts of the agencies' restatements
ranged from several million dollars to more than $91 billion.
Frequent restatements to correct errors can undermine public trust
and confidence in both the entity and all responsible parties.
Material internal control weaknesses discussed in our fiscal year
2005 audit report serve to increase the risk that additional
errors may occur and not be identified on a timely basis by agency
management or their auditors, resulting in further restatements.
As has been the case for the previous eight fiscal years, the
federal government did not maintain adequate systems or have
sufficient reliable evidence to support certain material
information reported in the U.S. government's consolidated
financial statements. These material deficiencies, which generally
have existed for years, contributed to our disclaimer of opinion
on the U.S. government's consolidated financial statements for the
fiscal years ended September 30, 2005, and 2004 and also
constitute material weaknesses in internal control.11 Appendix I
describes the material deficiencies in more detail and highlights
the primary effects of these material weaknesses on the
consolidated financial statements and on the management of federal
government operations. These material deficiencies were the
federal government's inability to
o satisfactorily determine that property, plant, and equipment
and inventories and related property, primarily held by the
Department of Defense (DOD), were properly reported in the
consolidated financial statements;
o reasonably estimate or adequately support amounts reported for
certain liabilities, such as environmental and disposal
liabilities, or determine whether commitments and contingencies
were complete and properly reported;
o support significant portions of the total net cost of
operations, most notably related to DOD, and adequately reconcile
disbursement activity at certain federal agencies;
o adequately account for and reconcile intragovernmental activity
and balances between federal agencies;
o ensure that the federal government's consolidated financial
statements were consistent with the underlying audited agency
financial statements, balanced, and in conformity with GAAP; and
o resolve material differences that exist between the total net
outlays reported in federal agencies' Statements of Budgetary
Resources and the records used by Treasury to prepare the
Statements of Changes in Cash Balance from Unified Budget and
Other Activities.
Due to the material deficiencies and additional limitations on the
scope of our work, as discussed in our audit report, there may
also be additional issues that could affect the consolidated
financial statements that have not been identified.
In addition to the material weaknesses that represented material
deficiencies, which were discussed above, we found the following
four other material weaknesses in internal control as of September
30, 2005. These weaknesses are discussed in more detail in
appendix II, including the primary effects of the material
weaknesses on the consolidated financial statements and on the
management of federal government operations. These material
weaknesses were the federal government's inability to
o implement effective processes and procedures for properly
estimating the cost of certain lending programs, related loan
guarantee liabilities, and value of direct loans;
o determine the extent to which improper payments exist;
o identify and resolve information security control weaknesses
and manage information security risks on an ongoing basis; and
o effectively manage its tax collection activities.
For fiscal year 2005, 18 of 24 CFO Act agencies were able to
attain unqualified opinions on their financial statements by the
November 15, 2005, reporting deadline established by the Office of
Management and Budget (OMB) (see app. III). The independent
auditor of the Department of State subsequently withdrew its
qualified opinion on the department's fiscal year 2005 financial
statements and reissued an unqualified opinion on such financial
statements dated December 14, 2005. As a result, 19 CFO Act
agencies received unqualified opinions on their fiscal year 2005
financial statements. However, irrespective of these unqualified
opinions, many agencies do not have timely, reliable, and useful
financial information and effective controls with which to make
informed decisions and ensure accountability on an ongoing basis.
The ability to produce the data needed for efficient and effective
management of day-to-day operations in the federal government and
provide the necessary accountability to taxpayers and the Congress
has been a long-standing challenge at most federal agencies.
The results of the fiscal year 2005 Federal Financial Managers
Integrity Act of 1996 (FFMIA) assessments performed by agency
inspectors general or their contract auditors show that certain
problems continue to affect financial management systems at most
CFO Act agencies. These problems include nonintegrated financial
systems, lack of accurate and timely recording of data, inadequate
reconciliation procedures, and noncompliance with accounting
standards and the U.S. Government Standard General Ledger (SGL).12
While the problems are much more severe at some agencies than at
others, the nature and severity of the problems indicate that
overall, management at most CFO Act agencies lack the complete
range of information needed for accountability, performance
reporting, and decision making.
FFMIA requires auditors, as part of the CFO Act agencies'
financial statement audits, to report whether agencies' financial
management systems substantially comply with (1) federal financial
management systems requirements, (2) applicable federal accounting
standards, and (3) the SGL at the transaction level. The major
barrier to achieving compliance with FFMIA continues to be the
inability of agencies to meet federal financial management systems
requirements, which involve not only core financial systems, but
also administrative and programmatic systems.
For fiscal year 2005, auditors for 18 of the 24 CFO Act agencies
reported that the agencies' financial management systems did not
substantially comply with one or more of the FFMIA requirements
noted above. For 5 of the remaining 6 CFO Act agencies, auditors
provided negative assurance, meaning that nothing came to their
attention indicating that the agencies' financial management
systems did not substantially meet FFMIA requirements. The
auditors for these 5 agencies did not definitively state whether
the agencies' systems substantially complied with FFMIA
requirements, as is required under the statute. In contrast,
auditors for the Department of Labor provided positive assurance
by stating that, in their opinion, the department's financial
management systems substantially complied with the requirements of
FFMIA. Further, auditors for the Department of Energy and the
General Services Administration reported that those agencies'
financial management systems did not substantially comply with
FFMIA requirements in fiscal year 2005 due to recently identified
internal control weaknesses over financial reporting. The auditors
had not reported any FFMIA compliance issues at those 2 federal
agencies in fiscal year 2004.
As individual agencies move forward with various initiatives to
address FFMIA-related problems, it is important that consideration
be given to the numerous governmentwide initiatives under way to
address long-standing financial management weaknesses. OMB
continues to move forward on new initiatives to enhance financial
management and provide results-oriented information in the federal
government. Two ongoing developments in this area in fiscal year
2005 were the realignment of responsibilities formerly performed
by the Joint Financial Management Improvement Program and its
Program Management Office and the development of financial
management lines of business. The overall vision of these
initiatives is to eliminate duplicative roles, streamline
financial management improvement efforts, and improve the cost,
quality, and performance of financial management systems by
leveraging shared services13 solutions.
Three major impediments to our ability to render an opinion on the
U.S. government's consolidated financial statements continued to
be: (1) serious financial management problems at DOD, (2) the
federal government's inability to adequately account for and
reconcile intragovernmental activity and balances between federal
agencies, and (3) the federal government's ineffective process for
preparing the consolidated financial statements. Extensive
cooperative efforts between agency chief financial officers,
inspectors general, Treasury officials, and OMB officials will be
needed to resolve these serious obstacles to achieving an opinion
on the U.S. government's consolidated financial statements.
Essential to improving financial management governmentwide and
ultimately to achieving an opinion on the U.S. government's
consolidated financial statements is the resolution of serious
weaknesses in DOD's business operations. DOD's financial
management weaknesses are pervasive, complex, long standing, and
deeply rooted in virtually all business operations throughout the
department. To date, none of the military services or major DOD
components has passed the test of an independent financial audit14
because of pervasive weaknesses in business management systems,
processes, and internal control. Of the 25 areas on GAO's
governmentwide high-risk list, 8 are DOD programs or operations,
and the department shares responsibility for 6 other high-risk
areas that are governmentwide in scope.15 These weaknesses
adversely affect the department's (and the federal government's)
ability to control costs; ensure basic accountability; anticipate
future costs and claims on the budget; measure performance;
maintain funds control; prevent fraud, waste, and abuse; and
address pressing management issues.
Effective management, reporting, and decision making depend upon
information that is timely, reliable, and useful. Recent actions
taken by the department to develop an integrated strategy to
better understand and initiate efforts to systematically transform
and address weaknesses in its business operations are encouraging.
On September 28, 2005, DOD approved two key components of its
transformation strategy: the Business Enterprise Architecture and
the Business Transition Plan.16 An enterprise architecture should
provide a clear and comprehensive picture of an entity, whether it
is an organization (e.g., a federal department) or a functional or
mission area that cuts across more than one organization (e.g.,
financial management). This picture consists of snapshots of both
the enterprise's current "As Is" operational and technological
environment and its target or "To Be" environment. A transition
plan should provide the capital investment roadmap for
transitioning from the current to the target environment by
describing how and when new business systems will be developed and
implemented. In November 2005, we reported17 that while DOD had
made important progress toward building a foundation upon which to
improve its business operations, it did not fully satisfy the
requirements of the Ronald W. Reagan National Defense
Authorization Act for 2005.18 For example, we reported that the
architecture did not address how DOD would comply with federal
accounting, financial, and reporting requirements, such as the
United States Government Standard General Ledger.
In late December 2005, DOD issued its Financial Improvement and
Audit Readiness (FIAR) Plan, a third major component of its
business transformation strategy. According to DOD briefings, the
"purpose of the FIAR Plan is to provide a roadmap to guide the
department in improving financial management and achieving a clean
audit opinion." Similar to an earlier DOD improvement effort, the
Financial Improvement Initiative, the FIAR Plan utilizes an
incremental approach to structure its process for examining its
operations, diagnosing problems, planning corrective actions, and
preparing for audit. However, unlike the previous plan, the FIAR
Plan does not establish an overall goal of achieving a clean audit
opinion on its departmentwide financial statements by a specific
date. Rather, the FIAR Plan appears to recognize that it will take
several years before DOD is able to implement the systems,
processes, and other changes necessary to fully address its
financial management weaknesses. In the interim, DOD plans to
focus its initial efforts on four areas: (1) military equipment,
(2) real property, (3) military retiree eligible health care fund
liabilities, and (4) environmental liabilities. The FIAR Plan also
focuses on the U.S. Marine Corps and the U.S. Army Corps of
Engineers, Civil Works because these organizations intend to be
ready for audit in fiscal years 2007 and 2008, respectively. As
the FIAR Plan evolves, DOD intends to refine or include additional
goals to improve processes and systems related to other balance
sheet line items and financial statements.
There will need to be ongoing and sustained top management
attention to business transformation at DOD to address what are
some of the most difficult financial management challenges in the
federal government. As we noted in our November 2005 testimony,19
we continue to believe that the implementation of a new Chief
Management Officer position at DOD will be needed in order for the
department to succeed in its overall business transformation
strategy. We will continue to monitor DOD's efforts to transform
its business operations and address its financial management
deficiencies as part of our continuing DOD business enterprise
architecture work and our oversight of DOD's financial statement
audit.
Federal agencies are unable to adequately account for and
reconcile intragovernmental activity and balances. OMB and
Treasury require the CFOs of 35 executive departments and agencies
to reconcile, on a quarterly basis, selected intragovernmental
activity and balances with their trading partners.20 In addition,
these agencies are required to report to Treasury, the agency's
inspector general, and GAO on the extent and results of
intragovernmental activity and balances reconciliation efforts as
of the end of the fiscal year.
A substantial number of the agencies did not fully perform the
required reconciliations for fiscal years 2005 and 2004. For
fiscal year 2005, based on trading partner information provided in
the Governmentwide Financial Reporting System discussed below,
Treasury produced a "Material Difference Report" for each agency
showing amounts for certain intragovernmental activity and
balances that significantly differed from those of its
corresponding trading partners. After analysis of the fiscal year
2005 "Material Difference Reports", we noted a significant number
of CFOs were still unable to explain their material differences
with their trading partners. For both fiscal years 2005 and 2004,
amounts reported by federal agency trading partners for certain
intragovernmental accounts were significantly out of balance. As a
result, the federal government's ability to determine the impact
of these differences on the amounts reported in the consolidated
financial statements is impaired. Resolving the intragovernmental
transactions problem remains a difficult challenge and will
require a commitment by federal agencies and strong leadership and
oversight by OMB.
The federal government continued to have inadequate systems,
controls, and procedures to ensure that the consolidated financial
statements are consistent with the underlying audited agency
financial statements, balanced, and in conformity with GAAP.
During fiscal year 2005, Treasury continued the ongoing
development of a new system, the Governmentwide Financial
Reporting System (GFRS), to collect agency financial statement
information directly from federal agencies' audited financial
statements. The goal of GFRS is to be able to directly link
information from federal agencies' audited financial statements to
amounts reported in the consolidated financial statements, a
concept that we strongly support, and to resolve many of the
weaknesses we have identified in the process for preparing the
consolidated financial statements. For the fiscal year 2005
reporting process, Treasury's GFRS was able to capture certain
agency financial information from agencies' audited financial
statements, but GFRS was still not at the stage that it could be
used to fully compile the consolidated financial statements from
the information captured. Treasury did, however, make progress in
demonstrating that amounts in the consolidated Balance Sheet and
Statement of Net Cost were consistent with federal agencies'
audited financial statements prior to eliminating
intragovernmental activity and balances.
In closing, given the federal government's overall financial
condition and long-term fiscal imbalance, the need for the
Congress and the President to have timely, reliable, and useful
financial and performance information is greater than ever. Sound
decisions on the current results and future direction of vital
federal government programs and policies are made more difficult
without such information. Until the problems discussed in our
audit report are adequately addressed, they will continue to have
adverse implications for the federal government and the taxpayers.
It will also be key that the appropriations, budget, authorizing,
and oversight committees hold agency top leadership accountable
for resolving these problems and that they support improvement
efforts.
Addressing the nation's long-term fiscal imbalance constitutes a
major transformational challenge that may take a generation or
more to resolve. Given the size of the projected deficit, the U.S.
government will not be able to grow its way out of this
problem-tough choices will be required.
Traditional incremental approaches to budgeting will need to give
way to more fundamental and periodic reexaminations of the base of
government. Our report, 21st Century Challenges: Reexamining the
Base of the Federal Government,21 is intended to support the
Congress in identifying issues and options that could help address
these fiscal pressures.
Further, the Congress needs to have access to the long-term cost
of selected spending and tax proposals before they enact related
laws. The fiscal risks previously mentioned can be managed only if
they are properly accounted for and publicly disclosed, including
the many existing commitments facing the federal government. New
reporting approaches, as well as enhanced budget processes and
control mechanisms, are needed to better understand, monitor, and
manage the impact of spending and tax policies over the long term.
In addition, a set of key national, outcome-based performance
metrics would inform strategic planning, enhance performance and
accountability reporting, and help to assess the impact of various
spending programs and tax policies.
Mr. Chairman, this concludes my prepared statement. I would be
pleased to respond to any questions that you or other members of
the subcommittee may have at this time.
For further information regarding this testimony, please contact
Jeffrey C. Steinhoff, Managing Director, and Gary T. Engel,
Director, Financial Management and Assurance, at (202) 512-2600.
The continuing material deficiencies discussed below contributed
to our disclaimer of opinion on the federal government's
consolidated financial statements for fiscal years 2005 and 2004.
The federal government did not maintain adequate systems or have
sufficient, reliable evidence to support information reported in
the consolidated financial statements, as described below.
The federal government could not satisfactorily determine that
property, plant, and equipment (PP&E) and inventories and related
property were properly reported in the consolidated financial
statements. Most of the PP&E and inventories and related property
are the responsibility of the Department of Defense (DOD). As in
past years, DOD did not maintain adequate systems or have
sufficient records to provide reliable information on these
assets. Other agencies, most notably the National Aeronautics and
Space Administration, reported continued weaknesses in internal
control procedures and processes related to PP&E.
Without reliable asset information, the federal government does
not fully know the assets it owns and their location and condition
and cannot effectively (1) safeguard assets from physical
deterioration, theft, or loss; (2) account for acquisitions and
disposals of such assets; (3) ensure that the assets are available
for use when needed; (4) prevent unnecessary storage and
maintenance costs or purchase of assets already on hand; and (5)
determine the full costs of programs that use these assets.
The federal government could not reasonably estimate or adequately
support amounts reported for certain liabilities. For example, DOD
was not able to estimate with assurance key components of its
environmental and disposal liabilities. In addition, DOD could not
support a significant amount of its estimated military
postretirement health benefits liabilities included in federal
employee and veteran benefits payable. These unsupported amounts
related to the cost of direct health care provided by DOD-managed
military treatment facilities. Further, the federal government
could not determine whether commitments and contingencies,
including those related to treaties and other international
agreements entered into to further the U.S. government's
interests, were complete and properly reported.
Problems in accounting for liabilities affect the determination of
the full cost of the federal government's current operations and
the extent of its liabilities. Also, improperly stated
environmental and disposal liabilities and weak internal control
supporting the process for their estimation affect the federal
government's ability to determine priorities for cleanup and
disposal activities and to appropriately consider future budgetary
resources needed to carry out these activities. In addition, when
disclosures of commitments and contingencies are incomplete or
incorrect, reliable information is not available about the extent
of the federal government's obligations.
The previously discussed material deficiencies in reporting assets
and liabilities, material deficiencies in financial statement
preparation, as discussed below, and the lack of adequate
disbursement reconciliations at certain federal agencies affect
reported net costs. As a result, the federal government was unable
to support significant portions of the total net cost of
operations, most notably related to DOD.
With respect to disbursements, DOD and certain other federal
agencies reported continued weaknesses in reconciling disbursement
activity. For fiscal years 2005 and 2004, there was unreconciled
disbursement activity, including unreconciled differences between
federal agencies' and the Department of the Treasury's records of
disbursements and unsupported federal agency adjustments, totaling
billions of dollars, which could also affect the balance sheet.
Unreliable cost information affects the federal government's
ability to control and reduce costs, assess performance, evaluate
programs, and set fees to recover costs where required. Improperly
recorded disbursements could result in misstatements in the
financial statements and in certain data provided by federal
agencies for inclusion in the President's budget concerning
obligations and outlays.
Federal agencies are unable to adequately account for and
reconcile intragovernmental activity and balances. The Office of
Management and Budget (OMB) and Treasury require the Chief
Financial Officers (CFO) of 35 executive departments and agencies
to reconcile, on a quarterly basis, selected intragovernmental
activity and balances with their trading partners.1 In addition,
these agencies are required to report to Treasury, the agency's
inspector general, and GAO on the extent and results of
intragovernmental activity and balances reconciliation efforts as
of the end of the fiscal year.
A substantial number of the agencies did not fully perform the
required reconciliations for fiscal years 2005 and 2004. For these
fiscal years, based on trading partner information provided in the
Governmentwide Financial Reporting System (GFRS), Treasury
produced a "Material Difference Report" for each agency showing
amounts for certain intragovernmental activity and balances that
significantly differed from those of its corresponding trading
partners. After analysis of the "Material Difference Reports" for
fiscal year 2005, we noted a significant number of CFOs were still
unable to explain the differences with their trading partners. For
both fiscal years 2005 and 2004, amounts reported by federal
agency trading partners for certain intragovernmental accounts
were significantly out of balance. In addition, about 25 percent
of the significant federal agencies reported internal control
weaknesses regarding reconciliations of intragovernmental activity
and balances. As a result, the federal government's ability to
determine the impact of these differences on the amounts reported
in the consolidated financial statements is impaired.
Fiscal year 2005 was the second year that Treasury used its GFRS
to collect agency financial statement information taken directly
from federal agencies' audited financial statements. The goal of
GFRS is to be able to directly link information from federal
agencies' audited financial statements to amounts reported in the
U.S. government's consolidated financial statements and resolve
many of the weaknesses we previously identified in the process for
preparing the consolidated financial statements. For both the
fiscal year 2005 and 2004 reporting processes, GFRS was able to
capture agency financial information, but GFRS was still not at
the stage that it could be used to fully compile the consolidated
financial statements from the information captured. Therefore, for
fiscal year 2005 Treasury continued to primarily use manual
procedures to prepare the consolidated financial statements. As
discussed in the scope limitations section of our audit report,
Treasury could not produce the fiscal year 2005 consolidated
financial statements and supporting documentation in time for us
to complete all of our planned auditing procedures. In addition,
the federal government continued to have inadequate systems,
controls, and procedures to ensure that the consolidated financial
statements are consistent with the underlying audited agency
financial statements, balanced, and in conformity with U.S.
generally accepted accounting principles (GAAP). Specifically,
during our fiscal year 2005 audit, we found the following2
o Treasury's process for compiling the consolidated financial
statements did not ensure that the information in all of the five
principal financial statements and notes was fully consistent with
the underlying information in federal agencies' audited financial
statements and other financial data. Treasury made progress in
demonstrating amounts in the Balance Sheet and the Statement of
Net Cost were consistent with federal agencies' audited financial
statements prior to eliminating intragovernmental activity and
balances. However, about 25 percent of the significant federal
agencies' auditors reported internal control weaknesses related to
the processes the agencies perform to provide financial statement
information to Treasury for preparing the consolidated financial
statements.
o To make the fiscal years 2005 and 2004 consolidated financial
statements balance, Treasury recorded a net $4.3 billion decrease
and a net $3.4 billion increase, respectively, to net operating
cost on the Statements of Operations and Changes in Net Position,
which it labeled "Unreconciled Transactions Affecting the Change
in Net Position."3 An additional net $3.2 billion and $1.2 billion
of unreconciled transactions were recorded in the Statement of Net
Cost for fiscal years 2005 and 2004, respectively. Treasury is
unable to fully identify and quantify all components of these
unreconciled activities.
o The federal government did not have an adequate process to
identify and report items needed to reconcile the operating
results, which for fiscal year 2005 showed a net operating cost of
$760 billion, to the budget results, which for the same period
showed a unified budget deficit of $318.5 billion. In addition, a
net $13.2 billion "net amount of all other differences" was needed
to force this statement into balance.
o Treasury's ability to eliminate certain intragovernmental
activity and balances continues to be impaired by the federal
agencies' problems in handling their intragovernmental
transactions. As discussed above, amounts reported for federal
agency trading partners for certain intragovernmental accounts
were significantly out of balance, resulting in the need for
unsupported intragovernmental elimination entries in order to
force the Statement of Operations and Changes in Net Position into
balance. In addition, significant differences in other
intragovernmental accounts, primarily related to transactions with
the General Fund, have not been reconciled and still remain
unresolved. Therefore, the federal government continues to be
unable to determine the impact of unreconciled intragovernmental
activity and balances on the consolidated financial statements.
o Treasury lacked a process to ensure that fiscal years 2005 and
2004 consolidated financial statements and notes were comparable.
Certain information reported for fiscal 2004 may require
reclassification to be comparable to the fiscal year 2005 amounts.
However, Treasury did not analyze this information or reclassify
amounts within various financial statement line items and notes to
enhance comparability. For example, the Reconciliations of Net
Operating Cost and Unified Budget Deficit showed $47.8 billion and
$.2 billion for property, plant, and equipment disposals and
revaluations for fiscal years 2005 and 2004, respectively.
However, based on the financial information provided by agencies
to Treasury in GFRS, the fiscal year 2004 amount would be $25.4
billion. The difference would be reclassified from the net amount
of all other differences line item on the Reconciliations of Net
Operating Cost and Unified Budget Deficit.
o Treasury did not have an adequate process to ensure that the
financial statements, related notes, Stewardship Information, and
Supplemental Information are presented in conformity with GAAP.
For example, we found that certain financial information required
by GAAP was not disclosed in the consolidated financial
statements. Treasury submitted a proposal to the Federal
Accounting Standards Advisory Board (FASAB) seeking to amend
previously issued standards and eliminate or lessen the disclosure
requirements for the consolidated financial statements so that
GAAP would no longer require certain of the information that
Treasury has not been reporting. Comments are due to the FASAB
today, on an exposure draft of a proposed FASAB standard, based on
the Treasury proposal. Treasury stated that it is waiting for
FASAB approval and issuance of this proposed standard to determine
the disclosures that will be required in future consolidated
financial statements. As a result of Treasury not providing us
with adequate documentation of its rationale for excluding the
currently required information and certain of the material
deficiencies noted above, we were unable again to determine if the
missing information was material to the consolidated financial
statements.
o Information system weaknesses existed within the segments of
GFRS that were used during the fiscal years 2005 and 2004
reporting processes. We found that the GFRS database (1) was not
configured to prevent the alteration of data submitted by federal
agencies and (2) was used for both production and testing during
the reporting processes. Therefore, information submitted by
federal agencies within GFRS is not adequately protected against
unauthorized modification or loss. In addition, Treasury was
unable to explain why numerous GFRS users appeared to have
inappropriate access to GFRS agency information or demonstrate the
appropriate segregation of duties exist.
o Although Treasury made progress in addressing them, certain
other internal control weaknesses in its process for preparing the
consolidated financial statements continued to exist and involved
a lack of (1) appropriate documentation of certain policies and
procedures for preparing the consolidated financial statements,
(2) adequate supporting documentation for certain adjustments made
to the consolidated financial statements, and (3) necessary
management reviews.
o The consolidated financial statements include financial
information for the executive, legislative, and judicial branches,
to the extent that federal agencies within those branches have
provided Treasury such information. However, there are
undetermined amounts of assets, liabilities, costs, and revenues
that are not included, and the federal government did not provide
evidence or disclose in the consolidated financial statements that
the excluded financial information was immaterial.
o Treasury did not have the infrastructure to address the
magnitude of the fiscal year 2005 financial reporting challenges
it was faced with, such as an incomplete financial reporting
system, compressed time frames for compiling the financial
information, and lack of adequate internal control over the
financial statement preparation process. We found that personnel
at Treasury's Financial Management Service had excessive workloads
that required an extraordinary amount of effort and dedication to
compile the consolidated financial statements; however, there were
not enough personnel with specialized financial reporting
experience to ensure reliable financial reporting by the reporting
date.
o Treasury, in coordination with OMB, had not provided us with
adequate documentation evidencing an executable plan of action and
milestones for short-term and long-range solutions for certain
internal control weaknesses we have previously reported regarding
the process for preparing the consolidated financial statements.
OMB Circular A-136, Financial Reporting Requirements, which
incorporated and updated OMB Bulletin No. 01-09, Form and Content
of Agency Financial Statements, states that outlays in federal
agencies' Statement of Budgetary Resources (SBR) should agree with
the net outlays reported in the Budget of the United States
Government. In addition, Statement of Federal Financial Accounting
Standards No. 7, Accounting for Revenue and Other Financing
Sources and Concepts for Reconciling Budgetary and Financial
Accounting, requires explanation of any material differences
between the information required to be disclosed (including net
outlays) in the financial statements and the amounts described as
"actual" in the Budget of the United States Government.
The federal government reported in the Statement of Changes in
Cash Balance from Unified Budget and Other Activities (Statement
of Changes in Cash Balance) and the Reconciliations of Net
Operating Cost and Unified Budget Deficit (Reconciliation
Statement) budget deficits for fiscal years 2005 and 2004 of
$318.5 billion and $412.3 billion, respectively. The budget
deficit is calculated by subtracting actual budget outlays from
actual budget receipts.4 As we have reported since fiscal year
2003, we found material unreconciled differences between the total
net outlays reported in selected federal agencies' SBRs and
Treasury's central accounting records, which it uses to prepare
the Statement of Changes in Cash Balance. Treasury's processes for
preparing the Statement of Changes in Cash Balance do not include
procedures for identifying and resolving differences between its
central accounting records and net outlay amounts reported in
agencies' SBRs.
In fiscal year 2004, we noted reported internal control weaknesses
regarding certain agencies' SBRs. In fiscal year 2005, several
agencies' auditors reported internal control weaknesses (1)
affecting the agencies' SBRs, and (2) relating to monitoring,
accounting, and reporting of budgetary transactions. These
weaknesses could affect the reporting and calculation of the net
outlay amounts in the agencies' SBRs. In addition, such weaknesses
transcend to agencies' ability to also report reliable budgetary
information to Treasury and OMB and may affect the unified budget
outlays reported by Treasury in its Combined Statement of
Receipts, Outlays, and Balances,5 and certain amounts reported in
the Budget of the United States Government.
OMB has been working with agencies to reduce the differences
between the total net outlays reported in the federal agencies'
SBRs and the Statement of Changes in Cash Balance. In June 2005,
OMB issued its Differences Between FY 2004 Budget Execution
Reports and Financial Statements for CFO Act Agencies report which
discusses various types of differences in federal agency financial
statements and budget execution reports, including net outlays,
and makes recommendations for OMB and federal agencies to consider
in improving both sets of reports in the future.
Until the material differences between the total net outlays
reported in the federal agencies' SBRs and the records used to
prepare the Statement of Changes in Cash Balance are timely
reconciled, the effect of these differences on the U.S.
government's consolidated financial statements will be unknown.
The federal government did not maintain effective internal control
over financial reporting (including safeguarding assets) and
compliance with significant laws and regulations as of September
30, 2005. In addition to the material deficiencies discussed in
appendix I, we found the following four other material weaknesses
in internal control.
Federal agencies continue to have material weaknesses and
reportable conditions related to their lending activities. The
Department of Housing and Urban Development lacked adequate
management reviews of underlying data and cost estimation
methodologies that resulted in material errors being undetected,
and significant adjustments were needed. In addition, the
Department of Education's processes do not provide for a robust
budget-to-actual cost comparison or facilitate assessments of the
validity of its lending program cost estimates. While the Small
Business Administration made substantial progress to improve its
cost-estimation processes, additional improvements are still
needed to ensure that year-end reporting is accurate. These
deficiencies plus others at the Department of Agriculture relating
to the processes and procedures for estimating program costs
continue to adversely affect the federal government's ability to
support annual budget requests for these programs, make future
budgetary decisions, manage program costs, and measure the
performance of lending activities. Further, these weaknesses and
the complexities associated with estimating the costs of lending
activities greatly increase the risk that significant errors in
agency and governmentwide financial statements could occur and go
undetected.
While agencies have made progress in implementing processes and
controls to identify, estimate, and reduce improper payments,1
such improper payments are a long-standing, widespread, and
significant problem in the federal government. The Congress
acknowledged this problem by passing the Improper Payment
Information Act of 2002 (IPIA).2 The IPIA requires agencies to
review all programs and activities, identify those that may be
susceptible to significant improper payments,3 estimate and report
the annual amount of improper payments for those programs, and
implement actions to cost-effectively reduce improper payments.
Further, in fiscal year 2005, the Office of Management and Budget
(OMB) began to separately track the elimination of improper
payments under the President's Management Agenda.
Significant challenges remain to effectively achieve the goals of
the IPIA. From our review of agencies' fiscal year 2005
Performance and Accountability Reports (PARs), we noted that some
agencies still have not instituted a systematic method of
reviewing all programs and activities, have not identified all
programs susceptible to significant improper payments, and/or have
not annually estimated improper payments for their high-risk
programs. For example, seven major agency programs with outlays
totaling about $280 billion, including Medicaid and the Temporary
Assistance For Needy Families programs, still cannot annually
estimate improper payments, even though they were required by OMB
to report such information beginning with their fiscal year 2003
budget submissions. In addition, two agency auditors that tested
compliance with IPIA cited agency noncompliance with the act in
their annual audit reports.
Federal agencies' estimates of improper payments, based on
available information, for fiscal year 2005 exceeded $38 billion,
a net decrease of about $7 billion, or 16 percent, from the prior
year improper payment estimate of $45 billion.4 This decrease was
attributable to the following factors. In fiscal year 2005, the
Department of Health and Human Services reported a $9.6 billion
decrease in its Medicare program improper payment estimate,
principally due to improvements in its due diligence with
providers to ensure the necessary documentation is in place to
support payment claims. However, in fiscal year 2005, this
decrease was partially offset as a result of more programs
reporting estimates of improper payments.
Although progress has been made, serious and widespread
information security control weaknesses continue to place federal
assets at risk of inadvertent or deliberate misuse, financial
information at risk of unauthorized modification or destruction,
sensitive information at risk of inappropriate disclosure, and
critical operations at risk of disruption. GAO has reported
information security as a high-risk area across government since
February 1997. Such information security control weaknesses could
result in compromising the reliability and availability of data
that are recorded in or transmitted by federal financial
management systems. A primary reason for these weaknesses is that
federal agencies have not yet fully institutionalized
comprehensive security management programs, which are critical to
identifying information security control weaknesses, resolving
information security problems, and managing information security
risks on an ongoing basis. The Congress has shown continuing
interest in addressing these risks, as evidenced with hearings on
Federal Information Security Management Act of 20025
implementation and information security. In addition, the
administration has taken important actions to improve information
security, such as revising agency internal control requirements in
OMB Circular A-1236 and issuing extensive guidance on information
security.
Material internal control weaknesses and systems deficiencies
continue to affect the federal government's ability to effectively
manage its tax collection activities,7 an issue that has been
reported in our financial statement audit reports for the past 8
years. Due to errors and delays in recording taxpayer information,
payments, and other activities, taxpayers were not always credited
for payments made on their taxes owed, which could result in undue
taxpayer burden. In addition, the federal government did not
always follow up on potential unreported or underreported taxes
and did not always pursue collection efforts against taxpayers
owing taxes to the federal government.
Weaknesses in controls over tax collection activities continue to
affect the federal government's ability to efficiently and
effectively account for and collect revenue. Additionally,
weaknesses in financial reporting of revenues affect the federal
government's ability to make informed decisions about collection
efforts. As a result, the federal government is vulnerable to loss
of tax revenue and exposed to potentially billions of dollars in
losses due to inappropriate refund disbursements.
7The sum of individual tax expenditure estimates is useful for gauging the
general magnitude of the revenue involved, but does not take into account
possible interactions between individual provisions. For additional
information, see GAO, Government Performance and Accountability: Tax
Expenditures Represent a Substantial Federal Commitment and Need to Be
Reexamined, GAO-05-690 (Washington, D.C.: September 2005).
8The Congressional Budget Office, The Budget and Economic Outlook: Fiscal
Years 2007 to 2016 (Washington, D.C.: January 2006).
Restatements of Agencies' Financial Statements
9Three of these agencies had received an unqualified opinion on their
originally issued fiscal year 2004 financial statements while the
remaining four had received a disclaimer of opinion on their financial
statements. The auditor for one of the agencies withdrew the unqualified
opinion that had been previously rendered on the agency's fiscal year 2004
financial statements and issued a qualified opinion on the restated
financial statements.
10GAO, Financial Audit: Restatements to the Department of State's Fiscal
Year 2003 Financial Statements, GAO-05-814R (Washington, D.C.: Sep. 20,
2005); GAO, Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements, GAO-06-30R
(Washington, D.C.: Oct. 27, 2005); GAO, Financial Audit: Restatements to
the General Services Administration's Fiscal Year 2003 Financial
Statements, GAO-06-70R (Washington, D.C.: Dec. 6, 2005); GAO Financial
Audit: Restatements to the National Science Foundation's Fiscal Year 2003
Financial Statements, GAO-06-229R (Washington, D.C.: Dec. 22, 2005); and
GAO, Financial Audit: Restatements to the Department of Agriculture's
Fiscal Year 2003 Financial Statements, GAO-06-254R (Washington, D.C.: Jan.
26, 2006).
Highlights of Major Issues Related to the U.S. Government's Consolidated
Financial Statements for Fiscal Years 2005 and 2004
11We previously reported that material deficiencies prevented us from
expressing an opinion on the consolidated financial statements of the U.S.
government for fiscal years 1997 through 2004.
Systems Problems at Agencies Continue to Hinder Accountability
12The United States Standard General Ledger provides a uniform Chart of
Accounts and technical guidance to be used in standardizing federal agency
accounting.
Addressing Major Impediments to an Opinion on Consolidated Financial Statements
Financial Management at DOD
13As defined by the Association of Government Accountants (AGA), shared
services represent "financial and administrative services provided by a
single organization established to provide such services efficiently and
effectively for the benefit of multiple organizations or entities". See
AGA Corporate Partner Advisory Group Research, Financial Management Shared
Services: A Guide for Federal Users, AGA CPAG Research Series: Report No.
2, July 2005.
14Although not major DOD components, the Military Retirement Fund received
an unqualified audit opinion on its fiscal year 2005 financial statements,
and the DOD Medicare Eligible Retiree Health Care Fund received a
qualified audit opinion on its fiscal year 2005 financial statements.
15 GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005). The eight specific DOD high-risk areas are: (1) approach to
business transformation, (2) business systems modernization, (3) contract
management, (4) financial management, (5) personnel security clearance
program, (6) supply chain management, (7) support infrastructure
management, and (8) weapon systems acquisition. The six governmentwide
high-risk areas are (1) disability programs, (2) interagency contracting,
(3) information systems and critical infrastructure, (4) information
sharing for homeland security, (5) human capital, and (6) real property.
16The Ronald W. Reagan National Defense Authorization Act for Fiscal Year
2005, Pub. L. No. 108-375, S:332, 118 Stat. 1811, 1851-1856 (Oct. 28,
2004) (codified, in part, at 10 U.S.C. S:2222) required DOD to develop a
Business Enterprise Architecture and Transition Plan.
17GAO, DOD Business Systems Modernization: Important Progress Made in
Establishing Foundational Architecture Products and Investment Management
Practices, but Much Work Remains, GAO-06-219 (Washington, D.C.: Nov. 23,
2005).
18Pub. L. No. 108-375, S:332, 118 Stat. 1811, 1851 (Oct. 28, 2004).
Intragovernmental Activity and Balances
19GAO, Defense Management: Foundational Steps Being Taken to Manage DOD
Business Systems Modernization, but Much Remains to be Accomplished to
Effect True Business Transformation, GAO-06-234T (Washington, D.C.: Nov.
9, 2005).
20Trading partners are U.S. government agencies, departments, or other
components included in the consolidated financial statements that do
business with each other.
Preparing the Consolidated Financial Statements
Closing Comments
GAO Contacts
21GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
Appendix I: Material Deficiencies
Material Deficiencies
Property, Plant, and Equipment and Inventories and Related Property
Liabilities and Commitments and Contingencies
Cost of Government Operations and Disbursement Activity
Accounting for and Reconciliation of Intragovernmental Activity and Balances
1Trading partners are U.S. government agencies, departments, or other
components included in the consolidated financial statements that do
business with each other.
Preparation of Consolidated Financial Statements
2Most of the issues we identified in fiscal year 2005 existed in fiscal
year 2004, and many have existed for a number of years. In May 2005, we
reported in greater detail on the issues we identified in GAO, Financial
Audit: Process for Preparing the Consolidated Financial Statements of the
U.S. Government Continues to Need Improvement, GAO-05-407 (Washington,
D.C.: May 4, 2005). This report includes numerous recommendations to
Treasury and OMB.
3Although Treasury was unable to determine how much of the unreconciled
transactions, if any, relate to operations, it reported unreconciled
transactions as a component of net operating cost in the consolidated
financial statements.
Net Outlays-A Component of the Budget Deficit
4In previous years, the Statement of Changes in Cash Balance reported
actual budget outlays and actual budget receipts; however, beginning in
fiscal year 2004, the federal government chose not to disclose budget
outlays and budget receipts in this financial statement and only included
the budget deficit. Receipts and net outlays (unified budget amounts) are
also reported in governmentwide reports--specifically, in the President's
Budget (annually); Treasury's Final Monthly Treasury Statement, as part of
leading economic indicators on federal finances (quarterly); and
Treasury's annual Combined Statement of Receipts, Outlays, and Balances of
the United States Government.
5Treasury's Combined Statement of Receipts, Outlays, and Balances presents
budget results and cash-related assets and liabilities of the federal
government with supporting details. Treasury represents this report as the
recognized official publication of receipts and outlays of the federal
government based on agency reporting.
Appendix II: Other Material Weaknesses
Other Material Weaknesses
Loans Receivable and Loan Guarantee Liabilities
Improper Payments
1Improper payments include inadvertent errors, such as duplicate payments
and miscalculations, payments for unsupported or inadequately supported
claims, payments for services not rendered, payments to ineligible
beneficiaries, and payments resulting from fraud and abuse by program
participants and/or federal employees.
2Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
3OMB defines the term "significant improper payments" as "annual erroneous
payments in the program exceeding both 2.5 percent of program payments and
$10 million."
4In their fiscal year 2005 PARs, selected agencies updated their fiscal
year 2004 improper payment estimates to reflect changes since issuance of
their fiscal year 2004 PARs. These updates increased the governmentwide
improper payment estimate for fiscal year 2004 from $45 billion to $46
billion.
Information Security
Tax Collection Activities
5Title III of the E-Government Act of 2002, Pub. L. No. 107-347, 116 Stat.
2899, 2946 (Dec. 17, 2002).
6OMB Circular No. A-123, Management's Responsibility for Internal Control
(Revised December 21, 2004).
7GAO, Financial Audit: IRS's Fiscal Years 2005 and 2004 Financial
Statements, GAO-06-137 (Washington, D.C.: Nov. 10, 2005).
Appendix III: Fiscal Year 2005 Audit Results
Table 2: CFO Act Agencies: Fiscal Year 2005 Audit Results, Principal
Auditors, and Number of Other Audit Contractors
Agencies'
auditors
Opinion reported Agency for Unqualified SQRT OIG 2
rendered by material Number of International
CFO Act agency weaknesses or other audit Development
agencies auditor noncompliance Principal auditor contractors
Agriculture Unqualified SQRT OIG 3
Commerce Unqualified SQRT KPMG LLP 0
Defense Disclaimer SQRT OIG 1
Education Unqualified SQRT Ernst & Young, LLP 0
Energy Disclaimer SQRT KPMG LLP 0
Environmental Unqualified SQRT OIG 0
Protection
Agency
General (a) SQRT PricewaterhouseCoopers 0
Services LLP
Administration
Health and Unqualified SQRT Ernst & Young, LLP 2
Human Services
Homeland Disclaimer SQRT KPMG LLP 0
Security
Housing and Unqualified SQRT OIG 1
Urban
Development
Interior Unqualified SQRT KPMG LLP 0
Justice Unqualified SQRT KPMG LLP 2
Labor Unqualified R. Navarro & 1
Associates, Inc.
National Disclaimer SQRT Ernst & Young, LLP 0
Aeronautics
and Space
Administration
National Unqualified KPMG LLP 0
Science
Foundation
Nuclear Unqualified SQRT R. Navarro & 0
Regulatory Associates, Inc.
Commission
Office of Unqualified SQRT KPMG LLP 0
Personnel
Management
Small Business Unqualified SQRT Cotton and Company LLP 0
Administration
Social Unqualified PricewaterhouseCoopers 2
Security LLP
Administration
State (b) SQRT Leonard G. Birnbaum 4
and Company, LLP
Transportation Unqualified SQRT OIG 3
Treasury Unqualified SQRT KPMG LLP 5
Veterans Unqualified SQRT Deloitte & Touche LLP 0
Affairs
Source: GAO.
aIn 2005, GSA received an unqualified opinion on its Balance Sheet,
Statement of Changes in Net Position, and Statement of Net Cost, and a
disclaimer of opinion on its Statement of Budgetary Resources and
Statement of Financing.
bThe independent auditors of the Department of State's fiscal year 2005
financial statements issued a qualified opinion because they were not able
to examine evidence regarding personal property in time to meet the
November 15, 2005, reporting deadline. In late December, GAO was informed
by the Acting Chief Financial Officer for the Department of State that
subsequent to the issuance of the qualified opinion, the independent
auditors satisfied themselves about the amounts presented as personal
property. As a result, the auditors issued an unqualified opinion on the
Department of State's fiscal year 2005 financial statements dated December
14, 2005.
(198413)
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Highlights of GAO-06-406T , testimony before the Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives
March 1, 2006
FISCAL YEAR 2005 U.S. GOVERNMENT FINANCIAL STATEMENTS
Sustained Improvement in Federal Financial Management Is Crucial to
Addressing Our Nation's Financial Condition and Long-term Fiscal Imbalance
GAO is required by law to annually audit the consolidated financial
statements of the U.S. government.
The Congress and the President need to have timely, reliable, and useful
financial and performance information. Sound decisions on the current
results and future direction of vital federal government programs and
policies are made more difficult without such information.
Until the problems discussed in GAO's audit report on the U.S.
government's consolidated financial statements are adequately addressed,
they will continue to (1) hamper the federal government's ability to
reliably report a significant portion of its assets, liabilities, costs,
and other information; (2) affect the federal government's ability to
reliably measure the full cost as well as the financial and nonfinancial
performance of certain programs and activities; (3) impair the federal
government's ability to adequately safeguard significant assets and
properly record various transactions; and (4) hinder the federal
government from having reliable financial information to operate in an
economical, efficient, and effective manner.
For the ninth consecutive year, certain material weaknesses in internal
control and in selected accounting and financial reporting practices
resulted in conditions that continued to prevent GAO from being able to
provide the Congress and American people an opinion as to whether the
consolidated financial statements of the U.S. government are fairly stated
in conformity with U.S. generally accepted accounting principles. Three
major impediments to an opinion on the consolidated financial statements
continued to be (1) serious financial management problems at the
Department of Defense, (2) the federal government's inability to
adequately account for and reconcile intragovernmental activity and
balances between federal agencies, and (3) the federal government's
ineffective process for preparing the consolidated financial statements.
Further, in our opinion, as of September 30, 2005, the federal government
did not maintain effective internal control over financial reporting and
compliance with significant laws and regulations due to numerous material
weaknesses.
More troubling still is the federal government's overall financial
condition and long-term fiscal imbalance. While the fiscal year 2005
budget deficit was lower than 2004, it was still very high, especially
given the impending retirement of the "baby boom" generation and rising
health care costs. Importantly, as reported in the fiscal year 2005
Financial Report of the United States Government, the federal government's
accrual-based net operating cost-the cost to operate the federal
government-increased to $760 billion in fiscal year 2005 from $616 billion
in fiscal year 2004. This represents an increase of about $144 billion or
23 percent. The federal government's gross debt was about $8 trillion as
of September 30, 2005. This number excludes such items as the gap between
the present value of future promised and funded Social Security and
Medicare benefits, veterans' health care, and a range of other
liabilities, commitments, and contingencies that the federal government
has pledged to support. Including these items, the federal government's
fiscal exposures now total more than $46 trillion, representing close to
four times gross domestic product (GDP) in fiscal year 2005 and up from
about $20 trillion or two times GDP in 2000. Given these and other
factors, a fundamental reexamination of major spending programs, tax
policies, and government priorities will be important and necessary to put
us on a prudent and sustainable fiscal path. This will likely require a
national discussion about what Americans want from their government and
how much they are willing to pay for those things.
We continue to have concerns about the identification of misstatements in
federal agencies' prior year financial statements. Frequent restatements
to correct errors can undermine public trust and confidence in both the
entity and all responsible parties. The material internal control
weaknesses discussed in this testimony serve to increase the risk that
additional errors may occur and not be identified on a timely basis by
agency management or their auditors, resulting in further restatements.
*** End of document. ***