Financial Audit: Restated Financial Statements: Agencies'
Management and Auditor Disclosures of Causes and Effects and
Timely Communication to Users (05-OCT-06, GAO-07-91).
GAO continues to have concerns about restatements to federal
agencies' previously issued financial statements. During fiscal
year 2005, at least 7 of the 24 Chief Financial Officers (CFO)
Act agencies restated certain of their fiscal year 2004 financial
statements to correct misstatements. To study this trend, GAO
reviewed the nature and causes of the restatements made by
certain CFO Act agencies in fiscal year 2004 to their fiscal year
2003 financial statements. Eleven CFO Act agencies had
restatements for fiscal year 2003. Nine of those 11 received
unqualified opinions on their originally issued fiscal year 2003
financial statements. GAO's view is that users of federal
agencies' financial statements and the related audit reports need
to be provided at least a basic understanding of why a
restatement was necessary and its effect on the agencies'
previously issued financial statements and related audit reports.
This report communicates GAO's observations on the transparency
and timeliness of the 9 federal agencies' and their auditors'
restatement disclosures.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-91
ACCNO: A61866
TITLE: Financial Audit: Restated Financial Statements: Agencies'
Management and Auditor Disclosures of Causes and Effects and
Timely Communication to Users
DATE: 10/05/2006
SUBJECT: Accounting errors
Accounting standards
Audit reports
Financial analysis
Financial disclosure
Financial records
Financial statement audits
Financial statements
Timeliness
Transparency
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-07-91
* Results in Brief
* Background
* Objectives, Scope, and Methodology
* Insufficient and Inconsistent Disclosure of Financial Statem
* Issues Regarding Agencies' Restatement Disclosures
* Labeling of Restated Financial Statements
* Restatements to Certain Agencies' Statement of Changes in Ne
* Agencies' Restatement Footnotes
* Disclosure of Restatements in Agencies' Management's Discuss
* Issues Regarding Auditors' Restatement Disclosures
* Timely Communication of Material Misstatements to Users of P
* Issues Regarding Timeliness of Management's Communication of
* Issues Regarding Timeliness of Certain Auditors' Restatement
* Conclusions
* Recommendations for Executive Action
* Agency Comments and Our Evaluation
* Recommendations Regarding OMB Circular No. A-136
* Recommendations Regarding OMB Bulletin No. 06-03
* GAO Contact
* Acknowledgments
* GAO's Mission
* Obtaining Copies of GAO Reports and Testimony
* Order by Mail or Phone
* To Report Fraud, Waste, and Abuse in Federal Programs
* Congressional Relations
* Public Affairs
Report to theDirector, Office of Management and Budget
United States Government Accountability Office
GAO
October 2006
FINANCIAL AUDIT
Restated Financial Statements: Agencies' Management and Auditor
Disclosures of Causes and Effects and Timely Communication to Users
GAO-07-91
Contents
Letter 1
Results in Brief 4
Background 8
Objectives, Scope, and Methodology 9
Insufficient and Inconsistent Disclosure of Financial Statement
Restatements by Certain Federal Agencies and Their Auditors 11
Timely Communication of Material Misstatements to Users of Previously
Issued Financial Statements 18
Conclusions 24
Recommendations for Executive Action 24
Agency Comments and Our Evaluation 25
Appendix I Recommendations to OMB 27
Recommendations Regarding OMB Circular No. A-136 27
Recommendations Regarding OMB Bulletin No. 06-03 31
Appendix II GAO Contact and Staff Acknowledgments 37
Related GAO Products 38
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
United States Government Accountability Office
Washington, DC 20548
Comptroller General
of the United States
October 5, 2006
The Honorable Rob Portman Director Office of Management and Budget
Dear Mr. Portman:
We continue to have concerns about restatements to federal agencies'
previously issued financial statements. During fiscal year 2005, at least
7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain
of their fiscal year 2004 financial statements to correct misstatements.
To study this trend, we reviewed the nature and causes of the restatements
made by certain CFO Act agencies in fiscal year 2004 to their fiscal year
2003 financial statements.1 Our audit of the consolidated financial
statements of the U.S. government (CFS) for fiscal years 2004 and 2003
showed that 11 CFO Act agencies had restated one or more of their fiscal
year 2003 financial statements to correct misstatements.2 Nine of the 11
agencies had received an unqualified audit opinion on their originally
issued financial statements. Because of the significant increase in the
number of restatements identified during our fiscal year 2004 audit, we
initiated a review of the nature and causes of these 9 federal agencies'
restatements.
Accounting principles attribute errors in recognition, measurement,
presentation, or disclosure in previously issued financial statements to
(1) mathematical mistakes, (2) mistakes in the application of generally
accepted accounting principles (GAAP), or (3) oversight or misuse of facts
when the financial statements were prepared. Restatements occur when an
entity, either voluntarily or prompted by its auditors or regulators,
revises previously issued financial statements. Accounting standards state
that financial statements should only be restated for the correction of
errors that would have caused any statements to be materially misstated.
Therefore, restatements should not occur if misstatements in previously
issued financial statements are not material. Such standards further state
that the restated financial statements should disclose the nature of the
misstatement and effect of its correction on relevant balances. The Office
of Management and Budget (OMB) has issued guidance to federal agencies'
management regarding disclosure of restatements to previously issued
financial statements. Generally accepted government auditing standards
(GAGAS)3 discuss the auditors' responsibilities when they become aware of
information affecting previously issued financial statements, including
corrections of material misstatements. GAGAS stress the importance of
timely communication of restatements to users relying or likely to rely on
the previously issued financial statements. The proposed 2006 revision of
GAGAS includes an additional section on reporting on restatement of
previously issued financial statements. In addition, on August 23, 2006,
OMB issued Bulletin No. 06-03,4 which also provides some information
regarding reporting on restatements.
1This report focuses only on those corrections of errors that resulted in
restatements to agencies' fiscal year 2003 financial statements. Changes
to prior period financial statements may also occur as a result of changes
in accounting principles, where specifically required by Federal
Accounting Standards Advisory Board (FASAB) standards, and changes in
reporting entity.
2According to American Institute of Certified Public Accountants,
Codification of Auditing Standards, AU section 110, Responsibilities and
Functions of the Independent Auditor (1972), misstatements can be caused
by error (unintentional) or fraud (intentional). The meaning of the term
"error," as used in accounting principles, is consistent with the meaning
of the term "misstatement."
We believe that federal agencies' financial statements and the related
audit reports should provide users with at least a basic understanding of
why a restatement was necessary and the effect of the restatement on the
agencies' previously issued financial statements and related audit
reports. In keeping with full transparency,5 when restatements occur,
restated financial statements should clearly communicate that the
financial statements previously issued by management and the opinion
thereon should no longer be relied on and instead the restated financial
statements and the related auditor's opinion should be used. In addition,
timely communication of restatements is critical to prevent users of
federal agencies' financial statements and the related audit reports from
inadvertently relying on inaccurate information.
3GAGAS, promulgated by the Comptroller General of the United States, are
to be followed by federal auditors and audit organizations and by other
auditors auditing federal organizations, programs, or activities when
required by law, contract, or policy. These standards pertain to auditors'
professional qualifications, the quality of audit effort, and the
characteristics of professional and meaningful audit reports. GAGAS
incorporate American Institute of Certified Public Accountants' field work
and reporting standards and the related Statements on Auditing Standards
for financial audits unless the Comptroller General of the United States
excludes them by formal announcement.
4OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
Statements, August 23, 2006, supersedes OMB Bulletin No. 01-02, Audit
Requirements for Federal Financial Statements, October 16, 2000.
5Transparency is the full, accurate, and timely disclosure of information.
Restatements are not unique to the federal government. Over the past
several years, we have seen a number of corporate scandals as well as
restatements by public companies.6 In response, the Congress enacted the
Sarbanes-Oxley Act7 in 2002 to strengthen corporate governance and improve
transparency and accountability to help ensure the accuracy and integrity
of the financial reporting system in the private sector to protect
investors. In addition, in May 2005, the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (FAS) No. 154,
Accounting Changes and Error Corrections,8 was issued. FAS No. 154
requires nongovernmental entities to disclose that their previously issued
financial statements have been restated, a description of the nature of
the error, the effect of the correction on each financial statement line
item, and the cumulative effect of change in the statement of financial
position. Further, the Securities and Exchange Commission (SEC) now
requires companies to disclose restatements in the Form 8-K.9
Specifically, under the Form 8-K requirements, if a company is advised by
its auditor that disclosure should be made to prevent future reliance on a
previously issued audit report or completed interim review related to
previously issued financial statements, the company should disclose (1)
the date on which it was so advised or notified, (2) the financial
statements that should no longer be relied upon, (3) a brief description
of the information provided by the auditor, and (4) a statement of whether
the audit committee or the board of directors discussed with the auditor
the matters disclosed in the filing.
America's taxpayers deserve no less in terms of transparency,
accountability, disclosure, and notification from federal agencies.
Between September 2005 and January 2006, we issued reports covering five
of the nine CFO Act agencies that had received unqualified audit opinions
on, but subsequently restated, their originally issued fiscal year 2003
financial statements.10 We reported that these restatements generally
resulted from (1) lack of effective internal controls over the processing
and reporting of certain transactions and (2) failure of the auditors to
design and/or perform adequate audit procedures to detect such
misstatements. During our fieldwork, December 2004 through October 2005,
our review of these nine agencies also focused on the following two key
areas: (1) the extent of transparency exhibited in disclosing the nature
and cause of the misstatement and its impact on the financial statements
and the reissued or updated audit report and (2) the timing of
communicating the material misstatement to users of the financial
statements. This capping report, which summarizes the results of our
review of the nine agencies, provides our overall observations on their
transparency and timeliness, and includes governmentwide recommendations
based on our work at these agencies.
6GAO, Financial Statement Restatements: Trends, Market Impacts, Regulatory
Responses, and Remaining Challenges, GAO-03-138 (Washington, D.C.: Oct. 4,
2002).
7Pub. L. No. 107-204, 116 Stat. 745 (July 30, 2002).
8Financial Accounting Standards Board, Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections.
9Form 8-K is the "current report" companies must file with the SEC to
announce major events that shareholders should know about.
Results in Brief
The nine agencies we reviewed did not consistently communicate financial
statement restatements. Further, we believe that all nine agencies could
greatly enhance the adequacy, effectiveness, and timeliness of their
restatement disclosures to users. Specifically, we found that
o two agencies did not label their financial statements as
"Restated";
o of the six agencies that restated their Statements of Changes
in Net Position, two of the agencies' restatement presentations
could be misinterpreted because the agencies' fiscal year 2004
beginning financial statement balances did not agree with the
restated fiscal year 2003 ending balances;
o all nine agencies' restatement footnotes11 lacked sufficient
clarity or sufficient detail regarding the nature of the
restatements and the effect on balances reported in previously
issued financial statements; and
o seven of the nine agencies asserted in their fiscal year 2004
Management Discussion and Analysis (MD&A) that they had achieved a
consecutive number of unqualified opinions on their respective
financial statements. Of these, six did not acknowledge
restatements to certain of these financial statements in the
intervening years, which we believe is misleading to users.
We also found transparency issues with all nine agencies' audit
reports related to the disclosure of all the essential information
that would clearly explain the restatement. Specifically, we found
that
o seven of the nine audit reports did not provide a
statement that the previously issued audit report was
withdrawn12 and replaced by the opinion on the
restated financial statements and
o three of the nine audit reports either did not
disclose the restatement or refer to the restatement
footnote in the financial statements.
With regard to the timely communication of material misstatements
affecting previously issued financial statements and restatement
of such financial statements, we found that
o three of the nine agencies identified potential
material misstatements prior to the fourth quarter of
fiscal year 2004 and did not timely communicate that
a potential material misstatement had been identified
to either their auditor or to the users of the
financial statements,
o six of the nine agencies identified potential
material misstatements in their fiscal year 2003
financial statements after the third quarter of
fiscal year 2004 but before that year's comparative
financial statements were issued and did not timely
communicate that a potential material misstatement
had been identified to the users of the financial
statements, and
o at least one agency's auditor did not advise the
agency's management to timely notify users of the
financial statements as to the potential material
misstatements affecting the agency's previously
issued financial statements.
The primary contributing factor for these issues was insufficient
guidance available at the time to both the agencies' management
and their respective auditors for disclosure of the restatements
and the timeliness of such disclosures.
Although the guidance available did not provide explicit details
for disclosing restatements, we believe that information regarding
restatements should be disclosed in a transparent and timely
manner consistent with the qualitative characteristics of
information in financial reports described in Statement of Federal
Financial Accounting Concepts (SFFAC) No. 1.13 In our view, more
detailed accounting and auditing guidance on how to satisfy the
financial reporting characteristics outlined in SFFAC No. 1 as it
relates to the disclosure of restatements would have been helpful.
Nevertheless, a number of federal agencies included information in
their restatement disclosures that improved the transparency of
the restatement. For example, during fiscal year 2004, seven of
the nine agencies labeled their restated financial statements as
"Restated," although not expressly required by accounting
standards at that time. In addition, during fiscal year 2005, we
found that one agency, the Department of State (State), went far
beyond guidance available for agency management and timely
notified its users not to rely on its fiscal year 2004 comparative
financial statements and the related audit report because of a
potential material misstatement in the financial statements.
State's action serves as a model for what we believe is
appropriate for fully and timely notifying users of potential
material misstatements.
During our review, OMB revised Circular No. A-136, Financial
Reporting Requirements,14 which provides additional guidance to
federal agencies' management regarding disclosure of restatements
to previously issued financial statements. The revised OMB
Circular No. A-136, issued August 23, 2005,15 addresses many of
our concerns regarding the agencies' disclosure of restatements.
In addition, OMB issued OMB Bulletin No. 06-03, dated August 23,
2006, which provided additional guidance concerning (1) audit
report language when the financial statements are restated, (2)
actions the auditor should take when previously issued audit
reports are not reliable due to material misstatements, and (3)
the timing of the restated financial statements and audit reports.
However, we believe that additional restatement guidance is needed
for both the agencies' management and their respective auditors.
As such, this report contains 11 recommendations to assist OMB in
updating OMB Circular No. A-136 as well as OMB Bulletin No. 06-03
to further improve guidance to agencies' management and the
agencies' respective auditors regarding the timely disclosure of
material misstatements in previously issued financial statements
and the presentation and disclosure of restatements.
In oral comments on a draft of this report, OMB stated that it
would take our recommendations under advisement, but that there
were no current plans to update guidance that has been recently
issued.16 OMB also noted that any future plans to update guidance
would carefully consider issues already currently being addressed
by the American Institute of Certified Public Accountants' (AICPA)
Codification of Auditing Standards. In addition, OMB provided some
technical comments, which we have incorporated as appropriate.
As noted in this report, we found inconsistent communications and
insufficient disclosures of financial statement restatements by
agency management and their auditors. As such, we reiterate our
concern that it is critical for OMB to timely offer separate,
though complementary, guidance to agency management and to agency
auditors that provides more explicit and detailed guidance
concerning their respective roles and responsibilities when an
actual or potential material misstatement is identified in
previously issued financial statements. Separate guidance is
important because agency management and agency auditors have
different roles and responsibilities. For example, management is
responsible for preparing the financial statements and adjusting
them to correct any material misstatements. The auditor is
responsible for expressing or disclaiming an opinion on the
financial statements prepared by management. The auditor has
certain additional responsibilities should management not properly
respond to actual or potential material misstatements.
Background
Federal agencies' management responsibilities for their financial
statements include, among other things, preparing the financial
statements in conformity with GAAP and establishing and
maintaining internal controls over financial reporting. Auditors
of these financial statements are required to plan and perform
their audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. While
restatements to previously issued financial statements can happen
and may not be surprising given weaknesses in the financial
reporting environment at many federal agencies, inherently,
restatements raise questions about the reliability of other
information in previously issued financial statements. In
addition, frequent restatements to correct misstatements can
undermine public trust and confidence in both the entity and all
responsible parties. Adequate transparency and timely notification
of restatements are essential to help preclude users of agencies'
financial statements and the related audit reports from
inadvertently relying on inaccurate information and allow them to
make more informed and relevant decisions.
According to SFFAC No. 1, the primary intended users of federal
agencies' financial reports are citizens, the Congress, federal
executives, and federal program managers. Each of these groups may
use federal agencies' financial statements to satisfy their
specific needs. Citizens are interested in many aspects of the
federal government, especially those federal programs that affect
their well-being. The Congress uses the agencies' financial
statements to monitor and evaluate the efficiency and
effectiveness of federal programs. Federal executives, such as
central agency officials at OMB and the Department of the Treasury
(Treasury), use the federal agencies' financial statements to
oversee government spending. Specifically, OMB assists the
President in overseeing the preparation of the federal budget by
formulating the President's spending plans, evaluating the
effectiveness of agency programs, assessing competing funding
demands among agencies, and setting funding priorities. Treasury
assists the President in managing the finances of the federal
government and prepares the CFS, which is based on audited
financial statements prepared by federal agencies. GAO uses the
agencies' financial statements and the work of their respective
auditors during its annual audit of the CFS. Federal program
managers also use agencies' financial statements as a tool for
managing their respective agencies' operations within the limits
of the spending authority granted by the Congress.
Objectives, Scope, and Methodology
The objectives of our review were to determine the transparency
and timeliness of the restatement disclosures by the nine CFO Act
agencies' management and their respective auditors. For the nine
agencies we reviewed, we interviewed the preparers and auditors of
the agencies' fiscal year 2003 financial statements, including
staff from the agencies' Offices of Inspector General (OIG), and
we obtained and reviewed relevant audit documentation. Because the
OIGs typically contracted with various independent public
accountants (IPA) to audit the agencies' financial statements, we
expanded our contacts to include such IPAs. Our work was not
designed to and we did not test the accuracy or appropriateness of
the restatements. In addition, our review did not include
restatements17 reported in fiscal year 2005 financial statements
since such financial statements were issued during November 2005,
one month after the completion of our fieldwork. With respect to
the two key areas, we reviewed the nine agencies' fiscal years
2004 and 2003 comparative financial statements and the related
audit reports to determine, among other things, whether the
o appropriate columns of the agencies' restated
financial statements were labeled "Restated";
o fiscal year 2003 ending balance agreed with the
fiscal year 2004 beginning balance on the agencies'
Statement of Changes in Net Position, if restated;
o agencies' restatement footnotes were properly
labeled;
o agencies asserted in their MD&A that they had
received a consecutive number of clean audit
opinions, and if so, whether they disclosed that
certain of their previously issued financial
statements were subsequently restated to correct for
a material misstatement;
o audit reports referred the reader to the agencies'
restatement footnote;
o agencies timely notified their auditors and users
of their financial statements of the material
misstatement and plans for correcting the
misstatement in the financial statements; and
o auditors were aware of a material misstatement to
previously issued financial statements prior to the
beginning of the fourth quarter of the following
fiscal year and whether the amount and effect were
known, and if so, did the auditors advise the
agencies' management to reissue the financial
statements.
For this capping report, which is based on our review of the nine
federal agencies that reported restatements in fiscal year 2004
financial statements, we considered certain accounting and
auditing standards that were applicable to fiscal year 2004
federal financial reporting as well as accounting standards that
were issued subsequent to fiscal year 2004. These standards
consist of the Federal Accounting Standards Advisory Board's
(FASAB) Statement of Federal Financial Accounting Standards
(SFFAS) No. 15, Management's Discussions and Analysis; SFFAS No.
21, Reporting Corrections of Errors and Changes in Accounting
Principles; FAS No. 16, Prior Period Adjustments; FAS No. 154,
Accounting Changes and Error Corrections; and the AICPA's
Codification of Auditing Standards, AU section 110,
Responsibilities and Functions of the Independent Auditor, AU
section 420, Consistency of Application of Generally Accepted
Accounting Principles, AU section 508, Reports on Audited
Financial Statements, and AU section 561, Subsequent Discovery of
Facts Existing at the Date of the Auditor's Report. We also
considered the following OMB guidance: OMB Bulletins No. 06-03 and
No. 01-02, Audit Requirements for Federal Financial Statements;
OMB Bulletin No. 01-09, Form and Content of Agency Financial
Statements; and OMB Circular No. A-136, Financial Reporting
Requirements.18
We performed our detailed review and analysis of the fiscal year
2003 restatements reported in agencies' fiscal year 2004 financial
statements from December 2004 to October 2005. Between September
2005 and January 2006, we issued reports to five of the nine CFO
Act agencies that had received unqualified audit opinions on, but
subsequently restated in fiscal year 2004, their originally issued
fiscal year 2003 financial statements. In conjunction with our
fiscal year 2005 CFS audit, we identified continued restatements
of previously issued agency financial statements and the need for
additional guidance to agencies and their auditors governmentwide.
Our work was performed in accordance with GAGAS.
We requested comments on a draft of this report from the Director
of OMB or his designee. OMB provided oral comments, which are
discussed in the Agency Comments and Our Evaluation section of
this report.
Insufficient and Inconsistent Disclosure of Financial Statement
Restatements by Certain Federal Agencies and Their Auditors
During our review of the nine CFO Act agencies' restatements
reported in fiscal year 2004, we identified issues with the
disclosures made by those agencies and their respective auditors
regarding the restatements. The primary contributing factor for
these disclosure issues was insufficient guidance available at the
time to both the agencies' management and their auditors for
disclosing the restatements.
Although the available guidance did not provide explicit details
for disclosing restatements, we believe that information regarding
restatements should be disclosed in a transparent and timely
manner consistent with the qualitative characteristics of
information in financial reports described in SFFAC No. 1. In our
view, more detailed accounting and auditing guidance on how to
satisfy the financial reporting characteristics in SFFAC No. 1 as
it relates to the disclosure of restatements would have been
helpful. Regardless, as discussed later in the report, several
agencies included information in their restatement disclosures
that improved the transparency of the restatement.
Given the issues we identified in our review of restatements
reported in fiscal year 2004 financial statements, we believe it
would be appropriate to offer more explicit or detailed guidance
for how agency management and their respective auditors should
disclose restatements. Specifically, although SFFAS No. 21
required that the nature of an error in previously issued
financial statements and the effect of its correction on relevant
balances be disclosed, the standard did not provide a detailed
explanation of the type of information that should be disclosed or
what the nature of an error means. OMB Bulletin No. 01-09, which
specifies the form and content for federal financial statements,
also did not provide specific guidance on how an agency's
management should disclose restatement information in its
financial statements. As for the auditor's disclosure of the
agency's restatements in its audit report, AU section 561 only
stated that the audit report usually should refer to the note to
the financial statements that describes the restatement. Thus, if
for no other reason than avoiding interpretation issues as to how
much disclosure and in what form is appropriate, we believe that
guidance to agency auditors should be enhanced to attain some
added level of uniform treatment regarding the disclosure of
restatements.
Issues Regarding Agencies� Restatement Disclosures
We identified the following four issues related to the agencies'
reporting of the restatements.
Labeling of Restated Financial Statements
While guidance available during fiscal year 2004 did not expressly
require agencies to label the columns of restated financial
statements as "Restated," seven of the nine agencies labeled their
financial statements as such. Such labeling is a common practice
in reporting restated financial statements. Two of the nine
agencies did not label their financial statements as "Restated,"
and as a result, users of such statements may be unaware that a
restatement occurred.
OMB Circular No. A-136 was revised during fiscal year 2005 to
provide additional guidance for disclosing restatements; however,
it does not require agencies to label their financial statements
as "Restated." In our view, revising OMB Circular No. A-136 to
require agencies to label the columns of the restated financial
statements as "Restated" would make the existence of restated
financial statements more evident to the readers of the financial
statements.
Restatements to Certain Agencies� Statement of Changes in Net Position
We also found issues regarding certain agencies' restated
Statement of Changes in Net Position. Of the six agencies that
restated their originally issued fiscal year 2003 Statements of
Changes in Net Position to correct for material misstatements, two
of the restatement presentations could be misinterpreted because
the fiscal year 2004 beginning balances did not agree with the
restated fiscal year 2003 ending balances. Instead of carrying
forward the restated fiscal year 2003 ending balance to the fiscal
year 2004 beginning balance, these two agencies made prior period
adjustments to the fiscal year 2004 beginning balances to reflect
the restated fiscal year 2003 ending balances. We believe that a
clearer presentation on the agencies' fiscal years 2004 and 2003
comparative Statement of Changes in Net Position would have been
to carry forward the restated fiscal year 2003 ending balances and
present them as the fiscal year 2004 beginning balances instead of
presenting prior period adjustments in the fiscal year 2004
column.
Although authoritative guidance available during fiscal year 2004
did not expressly prohibit agencies from reflecting prior year
restatements as adjustments to the current year's beginning
balances on the Statement of Changes in Net Position, we found
that the other four agencies' restated fiscal year 2003 ending
balances agreed with the fiscal year 2004 beginning balances on
their Statement of Changes in Net Position. The current version of
OMB Circular No. A-136 includes guidance from SFFAS No. 21, which
states that the adjustment should be made to the beginning balance
of cumulative results of operations, in the Statement of Changes
in Net Position for the earliest period presented. In our view,
OMB Circular No. A-136 would be enhanced if it explicitly stated
that the current year unadjusted beginning balances on the
Statement of Changes in Net Position are to agree with the
restated ending balances on the prior year's statement (i.e., that
adjustments are to be made only to the prior year and carried
forward as restated).
Agencies� Restatement Footnotes
In our view, all nine of the agencies' restatement footnotes
lacked sufficient clarity or sufficient detail regarding the
restatements in at least one of the following two areas: (1) the
title of the footnote or (2) the content of the footnote.
For five agencies, the title of the restatement footnote did not
reflect the existence of a restatement. Specifically, three
agencies titled their restatement footnotes as either "Prior
Period Adjustments" or "Prior Period Reclassification," which
could be misinterpreted since the changes to the financial
statements represented restatements because of material
misstatements rather than prior period adjustments19 or prior
period reclassifications.20 The other two agencies did not include
separate footnotes disclosing the restatement information.
Instead, one agency provided the restatement information under its
"Significant Accounting Policies" and the other included it under
its "Statement of Changes in Net Position" and its "Statement of
Budgetary Resources" notes. The remaining four agencies
appropriately titled their restatement disclosures by entitling
their footnote "Restatement."
With respect to restatement footnote content, five clearly
explained the misstatement and reason for the restatement while
the other four agencies did not. Accordingly, it was not clear if
these four agencies' misstatements were attributed to errors in
recognition, measurement, presentation, or disclosure in financial
statements resulting from mathematical mistakes, mistakes in the
application of GAAP, or oversight or misuse of facts that existed
at the time the financial statements were prepared. In addition,
one of the nine agencies did not disclose the specific year(s)
being restated, while two other agencies did not disclose all of
the financial statements impacted by the restatements.
Further, we also believe some additional language should be
included in related footnotes. Specifically, in our view, a
sufficient restatement footnote would also include (1) the
specific amount(s) of the material misstatement(s) and the related
effect(s) on the previously issued financial statement(s) (e.g.,
year(s) being restated and the specific financial statement(s)
affected and line items restated); (2) the overall impact the
restatement has on the current year financial statements (e.g.,
the change in overall net position, change in the audit opinion);
and (3) a discussion of the corrective actions taken by the
agency's management. Although six agencies appropriately disclosed
the amounts being restated, the remaining three did not disclose
the specific line items restated and the related amounts. In
addition, five agencies did not disclose the effect of the
restatement on the financial statements as a whole. Further, none
of the nine agencies' restatement footnotes discussed the actions
taken by the agency's management after discovering the
misstatement, such as measures taken to better prevent similar
misstatements from occurring in the future (e.g., improvements in
internal controls).
Authoritative guidance available during fiscal year 2004 did not
provide explicit guidance to the agencies as to what information
should be included in the agencies' footnotes or how the
restatement note should be titled. Revisions made to OMB Circular
No. A-136 address a number of these areas. Specifically, OMB
Circular No. A-136 now requires agencies to provide restatement
information in a separate note entitled "Restatements." In
addition, regarding content of the note, the revised circular
calls for the following information to be included in the note:
the nature of the error and the reason for the restatement, the
year(s) being restated, which financial statements are impacted,
the amounts being restated, and the effect of the restatement on
the financial statements as a whole (i.e., change in overall net
position, change in audit opinion, etc.). Further, per the revised
OMB Circular No. A-136, agencies should discuss the actions
management took after discovering the error.
The additional requirements in OMB Circular No. A-136 address many
of our concerns with the transparency of the restatement footnote.
We did, though, identify three areas where OMB Circular No. A-136
could further enhance transparency. The first is to clarify that
when agencies disclose the amounts being restated, it is important
that they also disclose the specific line items restated and the
related amounts. In our view, this additional information will
allow the readers of the restated financial statements to more
clearly see how the restatement affected such statements. The
second is to define the meaning of the "nature" of an error. The
third is to explicitly state what type of information should be
provided when discussing the actions management took after
discovering the error.
Disclosure of Restatements in Agencies� Management�s Discussion
and Analysis
We also found that certain agencies' presentation of restatements
in their MD&A could be misleading. Seven of the nine agencies we
reviewed stated in their fiscal year 2004 MD&A that they had
achieved a consecutive number of unqualified opinions on their
respective financial statements. However, six did not acknowledge
that one or more of these financial statements had been restated
in the intervening years to correct for material misstatements. We
believe stating that there have been consecutive years of
unqualified audit opinions without the appropriate context could
be misleading to the reader of the financial statements. It
erroneously conveys an impression of consistent, accurate
financial reporting over a period of time, when in fact this was
not the case because subsequently, the financial statements and
the opinion were found to be incorrect.
According to SFFAS No. 15, Management's Discussions and Analysis,
management should have great discretion regarding what to say in
its MD&A. At the same time, the standard also states that the
pervasive requirement is that the MD&A not be misleading. In our
view, it is misleading for an agency to state in its MD&A that it
has received a consecutive number of unqualified opinions on its
financial statements when one or more of its financial statements
within that time frame were subsequently restated. In our view,
agencies having restated their financial statements should either
refrain from such claims or clearly disclose in their MD&A which
of the agency's prior year financial statements, as originally
issued, were materially misstated and subsequently restated.
Although standards do not specifically state that agencies shall
disclose restatement information in their MD&A, we found that one
of the seven agencies did state that it had received a clean audit
opinion for 7 consecutive years but appropriately disclosed that
its fiscal year 2003 financial statements were restated to correct
misstatements.
Issues Regarding Auditors� Restatement Disclosures
During our review, we found issues regarding how agency auditors
disclosed the agencies' restatements in their audit reports.
According to AU section 561, the restatement footnote in the
agency's financial statements "usually should" be referred to in
the audit report, but given the latitude, such disclosure is not
an across-the-board requirement. In any report on financial
statements, the auditor has the discretion to add a separate
paragraph to the audit report to emphasize a matter regarding the
financial statements. In our view, such matters include the effect
of the material misstatements on previously audited financial
statements and the accompanying audit report. Also, we believe
that if the agency's restatement footnote does not provide a clear
and adequate description of the restatement, then the auditor
should go beyond merely referencing the restatement footnote and
add a separate paragraph to the audit report that provides
additional details regarding the effects of the restatement and
should consider whether it is necessary to modify the audit
opinion.
In our view, none of the nine agencies' audit reports we reviewed
sufficiently disclosed all the essential information that would
clearly explain the restatement. Specifically, we found that
o seven of the nine audit reports did not provide a
statement that the previously issued audit report was
withdrawn and replaced by the opinion on the restated
financial statements,
o three of the nine audit reports either did not
disclose the restatement or include a reference to
the agency restatement footnote in the financial
statements,21 and
o none of the nine agencies provided a sufficient
description of the restatement (i.e., the nature and
cause of the misstatement, year(s) being restated,
financial statements and line items impacted,
specific amount(s) of the material misstatement(s)
and the related effects on the previously issued
financial statements, and actions management took
after discovering the misstatement) in the notes to
their financial statements and none of these
agencies' auditors compensated for this by providing
such information in their audit reports.
In our view, the auditor plays an important role in ensuring
proper disclosure of restatements. Accordingly, if any of the
prior year financial statements are restated and management did
not already provide a sufficient description of the restatement in
the note(s) to the financial statements, the audit report should
include such information. In addition, although none of the nine
agencies' auditors disclosed misstatements of unknown amounts, we
believe that if at the time of issuance of the audit report, a
material misstatement or potential material misstatement has been
identified in any of the prior years' financial statements but the
specific amount of the misstatement and the related effects of
such are not yet known, it is important for the auditor to
disclose the situation in its audit report and modify its opinion
or disclaim an opinion on the prior year financial statements as
appropriate.
Timely Communication of Material Misstatements to Users of
Previously Issued Financial Statements
We also identified issues with the timeliness of management and
auditor communication regarding material misstatements affecting
certain agencies' previously issued financial statements. We
attributed these issues to a combination of the lack of specific
guidance at that time for both agencies management and their
respective auditors and the lack of compliance with the related
accounting and auditing standards that were in effect during
fiscal year 2004.
During fiscal year 2004, neither OMB Bulletin No. 01-09 nor SFFAS
No. 21, which apply primarily to agency management, provided
specific guidance on the timely investigation and reporting of a
material misstatement or potential material misstatement in a
previously issued financial statement following its discovery. The
guidance available to auditors at that time was AU section 561 and
OMB Bulletin No. 01-02, which provided guidance to the agencies'
auditors regarding the timely communication of restatements for
corrections of misstatements. While this audit guidance conveyed
the intent of timely communication, it did not provide much
guidance for how the agencies' management or their respective
auditors should timely communicate such restatements.
OMB Bulletin No. 01-02 stated that there shall be open and timely
communication throughout the audit process between the agencies'
management and their auditors, which includes potential audit
findings, materially misstated or unsupported amounts in the
financial statements, and material weaknesses in internal control.
The bulletin did not provide guidance for what the auditor should
communicate to management for when and how an actual or potential
restatement should be disclosed to the users of the agency's
financial statements. With respect to the auditor's
responsibilities for timely communication, AU section 561 states
that consideration should be given to, among other things, the
"time elapsed" since the erroneous financial statements were
issued. According to AU section 561, when the auditor has
concluded that action should be taken to prevent future reliance
on the audit report, the auditor should advise the auditee to make
appropriate disclosure of the newly discovered facts and their
impact on the financial statements to persons who are known to be
currently relying or who are likely to rely on the financial
statements and the related auditor's report. AU section 561 also
states that if an auditor determines that issuance of financial
statements accompanied by the audit report for a subsequent period
is "imminent," appropriate disclosures can be made in such
statements rather than by separately issuing the restated
financial statements. However, guidance available during fiscal
year 2004, AU section 561 and OMB Bulletin No. 01-02,22 did not
define "time elapsed" or "imminent." In addition, existing
standards and guidance do not provide sufficient explicit or
detailed guidance to management and auditors regarding ensuring
the timely disclosure of material misstatements affecting
previously issued financial statements.
Issues Regarding Timeliness of Management�s Communication of
Misstatements to Auditors and Users
In our view, none of the agencies timely communicated that a
potential material misstatement had been identified to either
their auditor or to the users of the financial statements. Agency
management is responsible for reporting key information in a
timely manner, including timely notification of known material or
potential material misstatements in previously issued financial
statements.
During fiscal year 2004, OMB Bulletin No. 01-02 called for
communication between the agencies' management and their auditors,
but it did not provide details for disclosing restatements to
users of agency financial statements. In addition, as noted above,
neither OMB Bulletin No. 01-09 nor SFFAS No. 21 provided specific
guidance on the timely investigation and reporting of a material
misstatement or potential material misstatement in a previously
issued financial statement following its discovery. Our review of
the nine CFO Act agencies that restated certain of their fiscal
year 2003 financial statements found that three of these agencies
identified potential material misstatements prior to the beginning
of the fourth quarter of fiscal year 2004, and in our view, did
not timely communicate that a potential misstatement had been
identified either to their auditors or to the users of their
financial statements. The remaining six agencies identified
potential material misstatements after the third quarter of fiscal
year 2004 but before that year's comparative financial statements
were issued. These six agencies, in our view, also did not timely
communicate the potential material misstatements to the users of
their financial statements since they did not notify the users of
the potential material misstatement prior to the issuance of the
restated fiscal year 2003 financial statements during fiscal year
2004.
We believe that the current version of OMB Circular No. A-136, if
properly implemented, should address many of our concerns
regarding agencies' timely communication of restatements. For
example, according to this version of OMB Circular No. A-136,
"management shall assume responsibility for any false or
misleading information in the financial statements, or omissions
that render information made in the financial statements
misleading. As such, as soon as possible after errors are
detected, management shall notify their auditors and inform their
primary users of their financial statements of the error and plans
for correcting it in the financial statements ... it is imperative
that management work with their auditor as soon as the error is
detected to assist the auditor in any actions that need to be
taken."
These are important advances. We do, though, have some remaining
concerns regarding the adequacy of guidance to agencies relating
to the timely communication of material misstatements in
previously issued financial statements. Specifically, we believe
it is important for subsequently discovered material misstatements
and potential material misstatements be disclosed to OMB in the
agencies' quarterly financial statements for the reporting period
in which the misstatements were discovered. In our view, agencies
need to report on the misstatement within a reasonable time period
following the discovery of the misstatement. In particular, if the
specific amount of a material misstatement and the related effect
of such on the previously issued financial statements are known
and the issuance of the subsequent period audited financial
statements is not imminent, then we believe it is important that
the agencies promptly (1) reissue the most recently issued fiscal
year financial statements before issuing the current year's
financial statements and (2) communicate the reissuance (a) in
writing to the Congress, OMB, Treasury, and GAO; and (b) to the
public on the Internet pages where the agencies' audited financial
statements that were affected by the material misstatements were
published. If a material misstatement is identified when issuance
of the subsequent period audited financial statements is imminent,
we believe it is important that the agencies (1) issue restated
financial statements as part of the current year's comparative
financial statements and (2) communicate the restatement (a) in
writing to the Congress, OMB, Treasury, and GAO; and (b) to the
public on the same Internet page where the agencies' audited
financial statements that were affected by the material
misstatements were published.
Further, in our view, if at any time an agency identifies a
material misstatement or potential material misstatement and the
effects of it on the financial statements are not known or cannot
be determined without a prolonged investigation, the agencies
should timely notify persons that are known to be relying or who
are likely to rely on the previously issued financial statements
and the related audit report that the (1) previously issued
financial statements will or may be restated and therefore, (2)
the related audit report is no longer reliable. It is important
that the agencies include the Congress, OMB, Treasury, and GAO in
any such notification and notify the public by posting such
notification on the same Internet pages where the agencies'
previously issued financial statements that were affected by the
material or potential material misstatement were published.
An example of how to appropriately convey this type of information
is State's communication and disclosure of a potential material
misstatement in its fiscal year 2004 financial statements.
Specifically, State identified a potential material misstatement
during the fourth quarter of fiscal year 2005 and, in our view,
went beyond the then existing guidance and appropriately disclosed
the problem. Guidance available to agency management at that time,
SFFAS No. 21 and OMB Bulletin No. 01-09, did not provide explicit
guidance for timely communication of a restatement to users of
financial statements. State also complied with the revised OMB
Circular No. A-136, issued August 23, 2005, even though it was not
effective until the end of fiscal year 2005. Specifically, during
September 2005, State's CFO timely notified external parties,
including GAO, to which State's fiscal year 2004 comparative
financial statements were directly distributed, not to rely on its
fiscal year 2004 comparative financial statements and the related
audit report. The notification also stated that State was
committed to resolving this issue as quickly as possible. State
also notified the public of this issue in the form of a cautionary
note on the same Internet pages where the agency's audited
financial statements that were affected by the material
misstatement were published. State's cautionary note included a
statement that such actions were necessary because State recently
became aware of a potential material misstatement affecting the
previously issued financial statements and the related audit
report. State noted that due to the need for a complete and
thorough analysis, the complexity of the matters involved, and the
accelerated financial reporting requirements, State was unable to
satisfy the independent auditors by November 15 as to the amount
of the potential material misstatement. As a result, the
independent auditors issued a qualified opinion on the fiscal year
2005 and 2004 financial statements. State's CFO also sent a
subsequent letter to GAO on December 23, 2005, to inform us that
the independent auditors had satisfied themselves about the
amounts presented and the auditor updated its opinion on the
fiscal year 2005 and 2004 financial statements from a qualified to
an unqualified opinion. State was fully transparent in its reports
of the restatement in all respects and showed how disclosing the
restatement should be done. As such, in our view, State's actions
serve as a model for full and timely notification of a potential
material misstatement found in a previously issued financial
statement when identified after the third quarter of the current
fiscal year and before the current year's comparative financial
statements are issued.
Issues Regarding Timeliness of Certain Auditors� Restatement
Disclosures
Auditors play a critical role in helping to ensure that users of
financial statements are timely notified of material misstatements
affecting previously issued financial statements and restatement
of such financial statements.
AU section 561, guidance available during fiscal year 2004,
requires that auditors consider the "time elapsed" since the
financial statements were issued when a material misstatement is
discovered. According to AU section 561, if an auditor determines
that issuance of financial statements accompanied by the audit
report for a subsequent period is "imminent," appropriate
disclosures can be made in such statements rather than in reissued
statements. However, neither "time elapsed" nor "imminent" is
defined in AU section 561. We found that at least one of the
auditors of the three agencies that had discovered misstatements
prior to the fourth quarter of the current fiscal year did not
advise its respective agency to make such a disclosure because (1)
in May 2004 the auditor did not think that there were any users
who would still be relying on the fiscal year 2003 financial
statements and the related audit report and (2) the auditor
considered issuance of the fiscal years 2004 and 2003 comparative
financial statements to be imminent.23 We have concerns that,
without notification, anyone who may have been relying on the
fiscal year 2003 financial statements would not have known for
more than 5 months that the agency's originally issued financial
statements, which received an unqualified opinion, were materially
misstated and should not be relied on.
In our view, existing auditing standards and guidance, including
OMB Bulletin No. 06-03, while conveying the need for appropriate
notifications, do not provide sufficient explicit or detailed
guidance to auditors regarding ensuring the timely disclosure of
material misstatements affecting previously issued financial
statements. Our position is that when a material misstatement or
potential material misstatement affecting previously issued
financial statements and the related audit report is identified,
the auditor has a responsibility to advise the agency's management
to timely notify users such as the Congress, OMB, Treasury, and
GAO in writing as well as the public and clearly disclose the
situation to them. If the agency's management does not timely
provide adequate disclosure to the relevant users, the auditor has
the responsibility to do so.
We believe that it is also important that the auditor advise the
agency's management of its responsibility to determine the
specific amount of the material misstatement or potential material
misstatement and the related effects of such on the previously
issued financial statements as soon as reasonably possible. In
those cases where the specific amount of the material misstatement
and the related effects of such on a previously issued financial
statement are known and issuance of the subsequent period audited
financial statements is not imminent, we believe that the auditor
would need to also advise the agency's management to promptly
reissue the most recently issued fiscal year financial statements
before issuing the current fiscal year financial statements and to
communicate the reissuance to relevant users in writing as well as
the public to clearly disclose the situation to them. If the
agency's management does not reissue the financial statements or
communicate the reissuance as required, our position is that the
auditor has the responsibility to notify the Congress, OMB,
Treasury, and GAO in writing as well as any other users known to
be relying on the previously issued financial statements. If the
specific amount of the material misstatement and the related
effects of such on a previously issued financial statement are
known and issuance of the subsequent period audited financial
statements is imminent, it is important that the auditor advise
the agency's management to issue restated financial statements as
part of the current year comparative financial statements and
disclose restatements in the audit report. If the specific amount
of the misstatement and the related effect of such on a previously
issued financial statement remain unknown when the current year
financial statements are issued, it is necessary that the auditor
disclose such information when issuing the audit report and modify
or disclaim the opinion on the previously issued financial
statements as appropriate.
Conclusions
The issues we identified regarding the transparency and timeliness
of restatement disclosures primarily resulted from insufficient
guidance available during fiscal year 2004 to both the agencies'
management and their respective auditors for disclosure of the
restatements and the timeliness of such disclosures. It will be
important that those agencies needing, in the future, to restate
their prior year financial statements ensure the adequacy of the
disclosure and presentation of such restatements as well as timely
notifying users known to be relying on the previously issued
financial statements. It will also be important that the agencies'
financial statements and the related audit reports provide
sufficient detail so that the reader will be able to gain at least
a basic understanding of why the agencies needed to restate their
previously issued financial statements and the effects of such on
the agencies' previously issued financial statements. The revision
of OMB Circular No. A-136 during fiscal year 2005 addressed many
of our concerns regarding the agencies' disclosure of
restatements; however, additional guidance is still needed. In
this regard, we are making recommendations for further revisions
to OMB Circular No. A-136 as well as OMB Bulletin No. 06-03. We
have provided our views, as outlined in appendix I, on how OMB
guidance could be further enhanced to ensure that future
restatement disclosures are uniform and more transparent.
Recommendations for Executive Action
We recommend that the Director of OMB direct the Controller of
OMB's Office of Federal Financial Management to incorporate the
restatement guidance and requirements, as detailed in appendix I,
into Circular No. A-136 to assist OMB in addressing the issues we
found with the agencies' restatement disclosures and the
timeliness of such disclosures. Appendix I incorporates seven
recommendations as specific changes to Circular No. A-136 that
focus on the
o timely disclosure by agency management of material
misstatement(s) or potential material misstatement(s)
and the related effect(s) of such in the previously
issued financial statements and
o presentation and disclosure of restatements in the
agencies' MD&A and financial statements and related
footnotes.
We also recommend that the Director of OMB direct the Controller
of OMB's Office of Federal Financial Management to incorporate the
restatement guidance and requirements, as detailed in appendix I,
into Bulletin No. 06-03 to assist OMB in addressing the issues we
found with auditors' restatement disclosures and the timeliness of
such disclosures. Appendix I incorporates four recommendations as
specific changes to Bulletin No. 06-03 that focus on the
Agency Comments and Our Evaluation
In oral comments on a draft of this report, OMB stated that it
would take our recommendations under advisement, but that there
were no current plans to update guidance that has been recently
issued.24 OMB also noted that any future plans to update guidance
would carefully consider issues already currently being addressed
by the AICPA's Codification of Auditing Standards. In addition,
OMB provided some technical comments, which we have incorporated
as appropriate.
As noted in this report, we found inconsistent communications and
insufficient disclosures of financial statement restatements by
agency management and their auditors. As such, we reiterate our
concern that it is critical for OMB to timely offer separate,
though complementary, guidance to agency management and to agency
auditors that provides more explicit and detailed guidance
concerning their respective roles and responsibilities when an
actual or potential material misstatement is identified in
previously issued financial statements. Separate guidance is
important because agency management and agency auditors have
different roles and responsibilities. For example, management is
responsible for preparing the financial statements and adjusting
them to correct any material misstatements. The auditor is
responsible for expressing or disclaiming an opinion on the
financial statements prepared by management. The auditor has
certain additional responsibilities should management not properly
respond to actual or potential material misstatements.
This report contains recommendations to the Director of OMB. The
head of a federal agency is required by 31 U.S.C. S: 720 to submit
a written statement on actions taken on these recommendations. You
should submit your statement to the Senate Committee on Homeland
Security and Governmental Affairs and the House Committee on
Government Reform within 60 days of the date of this report. A
written statement also must be sent to the House and Senate
Committees on Appropriations with the agency's first request for
appropriations made more than 60 days after the date of the
report.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Federal Financial
Management, Government Information, and International Security,
Senate Committee on Homeland Security and Governmental Affairs;
the House Committee on Government Reform; and the Subcommittee on
Government Management, Finance, and Accountability, House
Committee on Government Reform. In addition, we are sending copies
to the Secretary of the Treasury and the Fiscal Assistant
Secretary of the Treasury. Copies will be made available to others
upon request. This report is also available at no charge on GAO's
Web site at http://www.gao.gov.
We acknowledge and appreciate the cooperation and assistance
provided by OMB and the nine CFO Act agencies' management and
their respective auditors throughout our work. We look forward to
continuing to work with your office to help improve financial
management in the federal government. If you or your staff have
any questions about the contents of this report, please contact
Gary T. Engel, Director, Financial Management and Assurance, at
(202) 512-3406 or by e-mail at [email protected]. Staff
acknowledgments are provided in appendix II.
Sincerely yours,
David M. Walker
Comptroller General of the United States
Appendix I: Recommendations to OMB
As noted throughout this report, we believe that additional
restatement guidance is needed for both the agencies' management
and their respective auditors. To facilitate in this process, we
are providing the following 11 requirements that, in our view,
should be incorporated into Office of Management and Budget (OMB)
Circular No. A-136 and OMB Bulletin No. 06-03.
Recommendations Regarding OMB Circular No. A-136
GAO recommends that the following requirement be added to sections
II.4.3.1, II.4.4.1, II.4.5.1, II.4.6.1, and II.4.7.1 of OMB
Circular No. A-136, Financial Reporting Requirements:
Agencies shall label restated financial statements as "Restated."
GAO recommends that the "Management Actions Related to Corrections
of Errors" subsection of section II.4.5.5 of OMB Circular No.
A-136, Financial Reporting Requirements, be modified to read as
follows:
If the agency's management becomes aware of a material
misstatement(s) or potential material misstatement(s) affecting a
previously issued financial statement(s), then the agency's
management, in coordination with their respective auditor, shall
do the following:
o auditor's timely disclosure of material
misstatement(s) or potential material misstatement(s)
and the related effect(s) of such in the previously
issued financial statements and
o presentation and disclosure of restatements in the
audit report.
1. Communicate the following information to those
charged with governance, oversight bodies, funding
agencies, and others who are relying or are likely to
rely on the financial statement(s). This includes
communication (1) in writing to the Congress, OMB,
Treasury, and GAO; (2) to the public on the Internet
pages where the agency's previously issued financial
statements that were affected by the material
misstatement(s) or potential material misstatement(s)
are published; and (3) to OMB in the agency's next
quarterly financial statements and in subsequent
quarterly financial statements until the specific
amount(s) of the material misstatement(s) and the
related effect(s) of such on the previously issued
financial statement(s) are known and reported:
(a) the nature and cause(s) of the known or likely
material misstatement(s),
(b) the amount(s) of known or likely material
misstatement(s) and the related effect(s) on the
previously issued financial statement(s) (e.g.,
disclosure of the specific financial statement(s) and
line item(s) affected). If this information is not
known, then the disclosure includes information that
is known and a statement that management cannot
determine the amount(s) and the related effect(s) on
the previously issued financial statement(s) without
further investigation, and
(c) a notice that (1) a previously issued financial
statement(s) will or may be restated1 and, therefore,
(2) the related auditor's report is no longer
reliable.
2. Promptly determine the financial statement effects
of the known or potential material misstatement(s) on
the previously issued financial statement(s).
(a) If the specific amount(s) of the material
misstatement(s) and the related effect(s) of such on
a previously issued financial statement(s) are known
and issuance of the subsequent period audited
financial statements is not imminent,2 then the
agency's management shall promptly:
i. reissue the most recently issued fiscal year
financial statements before issuing the current
fiscal year's financial statements;
ii. communicate the reissuance to those charged with
governance, oversight bodies, funding agencies, and
others who are relying or are likely to rely on the
financial statement(s). This includes communication
(a) in writing to the Congress, OMB, Treasury, and
GAO and (b) to the public on the Internet pages where
the agency's previously issued financial statements
that were affected by the material misstatement(s)
are published; and
iii. disclose the following information, at a
minimum, in the agency's restatement footnotes:
1. the nature and cause(s) of the misstatement(s)
that led to the need for restatement, and
2. the specific amount(s) of the material
misstatement(s) and the related effect(s) on the
previously issued financial statement(s) (e.g.,
year(s) being restated, specific financial
statement(s) affected and line items restated,
actions the agency's management took after
discovering the misstatement), and the impact on the
financial statements as a whole (e.g., change in
overall net position, change in the audit opinion).
(b) If the specific amount(s) of the material
misstatement(s) and the related effect(s) of such on
a previously issued financial statement(s) are known
and issuance of the subsequent period audited
financial statements is imminent, then the agency's
management shall:
i. issue restated financial statement(s) as part of
the current year's comparative financial statements;
ii. communicate the restatement to those charged with
governance, oversight bodies, funding agencies, and
others who are relying or are likely to rely on the
financial statement(s). This includes communication
(a) in writing to the Congress, OMB, Treasury, and
GAO and (b) to the public on the Internet pages where
the agency's previously issued financial statements
that were affected by the material misstatement(s)
are published; and
iii. disclose the following information, at a
minimum, in the agency's restatement footnote:
1. the nature and cause(s) of the misstatement(s)
that led to the need for restatement, and
2. the specific amount(s) of the material
misstatement(s) and the related effect(s) on the
previously issued financial statement(s) (e.g.,
year(s) being restated, specific financial
statement(s) affected and line items restated,
actions the agency's management took after
discovering the misstatement), and the impact on the
financial statements as a whole (e.g., change in
overall net position, change in the audit opinion).
(c) If the specific amount(s) of the misstatement(s)
and the related effect(s) of such on a previously
issued financial statement(s) remain unknown when the
current year's financial statements are issued, then
the agency's management shall follow section II.4.5.5
(1) above and include the following, at a minimum, in
its restatement footnote:
i. a statement disclosing that a material
misstatement(s) or potential material misstatement(s)
affects a previously issued financial statement(s),
but the specific amount(s) of the misstatement(s) and
the related effect(s) of such are not known,
ii. the nature and cause(s) of the misstatement(s) or
potential misstatement(s),
iii. an estimate of the magnitude of the
misstatement(s) or potential misstatement(s) and the
related effect(s) of such on a previously issued
financial statement(s) (e.g., disclosure of the
specific financial statement(s) and line items
affected) that are known and a statement that the
specific amount(s) and the related effect(s) of such
cannot be determined without further investigation,
and
iv. a statement disclosing that a restatement(s) to a
previously issued financial statement(s) will or may
occur.
GAO also recommends that the following requirement be added to the
"Corrections of Errors" subsection of section II.4.5.5 of OMB
Circular No. A-136, Financial Reporting Requirements:
The Statement of Changes in Net Position's current year's
unadjusted beginning balances shall agree with the restated ending
balances on the agency's prior year's Statement of Changes in Net
Position.
GAO recommends that section II.4.10.43, of OMB Circular No. A-136,
Financial Reporting Requirements, be revised to:
o clarify the definition of the "nature" of an
error,
o include an explanation that the disclosure of the
"amounts being restated" specifically refers to the
disclosure of the specific line items restated and
the related amounts, and
o clarify how an agency should specifically further
discuss the actions management took after discovering
the error.
GAO recommends that the following requirement be added to section
II.2.7 of OMB Circular No. A-136, Financial Reporting
Requirements, which discusses guidance for information included in
the Management Discussion and Analysis (MD&A):
Agency's management shall disclose the existence of restatements
in its MD&A if the agency asserts in its MD&A that it received an
unqualified opinion on any previously issued financial statement
and that respective financial statement was subsequently restated.
Recommendations Regarding OMB Bulletin No. 06-03
GAO recommends that section 5.2 of OMB Bulletin No. 06-03, Audit
Requirements for Federal Financial Statements, be modified to read
as follows:
5.2 The nature or amount of known or likely misstatement(s) in
previously issued audited financial statement(s) may lead the
auditor to believe that the auditor's report would or could
reasonably have been affected if the auditor had known of the
misstatement(s) when the auditor issued the auditor's report. When
this condition exists, the auditor shall advise management to
communicate the following information to those charged with
governance, oversight bodies, funding agencies, and others who are
relying or are likely to rely on the financial statement(s):
o the nature and cause(s) of the known or likely
material misstatement(s),
o the amount(s) of known or likely material
misstatement(s) and the related effect(s) on the
previously issued financial statement(s) (e.g.,
disclosure of the specific financial statement(s) and
line item(s) affected). If this information is not
known, then the disclosure includes information that
is known and a statement that management cannot
determine the amount(s) and the related effect(s) on
the previously issued financial statement(s) without
further investigation, and
o a notice that (1) a previously issued financial
statement(s) will or may be restated and, therefore,
(2) the related auditor's report is no longer
reliable.
This includes communication (1) in writing to the Congress, OMB,
Treasury, and GAO; (2) to the public on the Internet pages where
the agency's previously issued financial statements that were
affected by the material misstatement(s) or potential material
misstatement(s) are published; and (3) to OMB in the agency's next
quarterly financial statements and in subsequent quarterly
financial statements until the specific amount(s) of the material
misstatement(s) and the related effect(s) of such on the
previously issued financial statement(s) are known and reported.
GAO also recommends that the following requirements be added to
section 5 of OMB Bulletin No. 06-03, Audit Requirements for
Federal Financial Statements, as follows:
5.3 The auditor shall review the adequacy of management's
communication information about the known or potential material
misstatement(s) to report users, including those charged with
governance, oversight bodies, and funding agencies. When
performing this review, the auditor shall consider whether (1)
management acted timely to determine the financial statement
effects of the potential material misstatement(s), (2) management
acted timely to communicate with appropriate parties, and (3)
management disclosed the nature and extent of the known or likely
material misstatement(s) on Internet pages where the agency's
previously issued financial statements are published.
5.4 The auditor shall notify those charged with governance if the
auditor believes that management is unduly delaying its
determination of the effect(s) of the misstatement(s) on a
previously issued financial statement(s).
5.5 The auditor shall evaluate the timeliness and appropriateness
of management's decision whether to issue restated financial
statement(s). Management may separately issue the restated
financial statement(s) or may present the restated financial
statement(s) on a comparative basis with those of a subsequent
period. Ordinarily, the auditor would expect management to issue
restated financial statement(s) as soon as practicable. However,
it may not be necessary for management to separately issue the
restated financial statement(s) and the auditor's report when
issuance of the subsequent period audited financial statements is
imminent.3
5.6 If the auditor becomes aware of a material misstatement(s) or
potential misstatement(s) affecting a previously issued financial
statement(s), then the auditor shall advise the agency's
management to determine the specific amount(s) of the material
misstatement(s) or potential material misstatement(s) and the
related effect(s) of such on the previously issued financial
statement(s) as soon as reasonably possible.
5.7 If the specific amount(s) of the material misstatement(s) and
the related effect(s) of such on a previously issued financial
statement(s) are known and the issuance of the subsequent period
audited financial statements is not imminent, then the auditor
shall advise the agency's management to promptly:
o reissue the most recently issued fiscal year
financial statements before issuing the current
fiscal year's financial statements;
o communicate the reissuance to those charged with
governance, oversight bodies, funding agencies, and
others who are relying or are likely to rely on the
financial statement(s). This includes communication
(1) in writing to the Congress, OMB, Treasury, and
GAO and (2) to the public on the Internet pages where
the agency's previously issued financial statements
that were affected by the material misstatement(s)
are published; and
o disclose the following information, at a minimum,
in the agency's restatement footnotes: (1) the nature
and cause(s) of the misstatement(s) that led to the
need for restatement, and (2) the specific amount(s)
of the material misstatement(s) and the related
effect(s) on the previously issued financial
statement(s) (e.g., year(s) being restated, specific
financial statement(s) affected and line items
restated, actions the agency's management took after
discovering the misstatement), and the impact on the
financial statements as a whole (e.g., change in
overall net position, change in the audit opinion).
5.8 If the specific amount(s) of the material misstatement(s) and
the related effect(s) of such on a previously issued financial
statement(s) are known and issuance of the subsequent period
audited financial statements is imminent, then the auditor shall
disclose restatements in the auditor's report as listed in 7.7 and
advise agency's management to:
o issue restated financial statement(s) as part of
the current year's comparative financial statements;
o communicate the restatement to those charged with
governance, oversight bodies, funding agencies, and
others who are relying or are likely to rely on the
financial statement(s). This includes communication
(a) in writing to the Congress, OMB, Treasury, and
GAO and (b) to the public on the Internet pages where
the agency's previously issued financial statements
that were affected by the material misstatement(s)
are published; and
o disclose the following information, at a minimum,
in the agency's restatement footnote: (1) the nature
and cause(s) of the misstatement(s) that led to the
need for restatement and (2) the specific amount(s)
of the material misstatement(s) and the related
effect(s) on the previously issued financial
statement(s) (e.g., year(s) being restated, specific
financial statement(s) affected and line items
restated, actions the agency's management took after
discovering the misstatement), and the impact on the
financial statements as a whole (e.g., change in
overall net position, change in the audit opinion).
5.9 If the specific amount(s) of the misstatement(s) and the
related effect(s) of such on a previously issued financial
statement(s) remain unknown when the current year's financial
statements are issued, then the auditor shall follow 7.8 when
issuing the auditor's report and advise the agency's management as
required in 5.2.
5.10 The auditor shall notify those charged with governance,
oversight bodies, and funding agencies when management (1) does
not take the necessary steps to promptly inform report users of
the situation or (2) does not restate with appropriate timeliness
the financial statements in circumstances when the auditor
believes they need to be restated. The auditor shall inform these
parties that the auditor will take steps to prevent future
reliance on the auditor's report. The steps taken will depend on
the facts and circumstances, including legal considerations. This
includes communication in writing to the Congress, OMB, Treasury,
and GAO as well as any other users known to be relying on the
previously issued financial statement(s).
GAO recommends that section 7.7 of OMB Bulletin No. 06-03, Audit
Requirements for Federal Financial Statements, be modified to read
as follows:
7.7 When management restates a previously issued financial
statement(s), the auditor shall perform audit procedures
sufficient to reissue or update the auditor's report on the
restated financial statement(s). The auditor shall fulfill these
responsibilities whether the restated financial statement(s) are
separately issued or presented on a comparative basis with those
of a subsequent period. The auditor shall include the following
information in an explanatory paragraph in the reissued or updated
auditor's report on the restated financial statement(s):
o a statement disclosing that a previously issued
financial statement(s) has been restated,
o a statement that the previously issued financial
statement(s) was materially misstated and that the
previously issued auditor's report (including report
date) is withdrawn and replaced by the auditor's
report on the restated financial statement(s),
o a reference to the note(s) to the restated
financial statement(s) that discusses the
restatement,
o a description of the following if not already
provided in the note(s) to the financial
statement(s): (1) the nature and cause(s) of the
misstatement(s) that led to the need for restatement
and (2) the specific amount(s) of the material
misstatement(s) and the related effect(s) on the
previously issued financial statement(s) (e.g.,
year(s) being restated and the specific financial
statement(s) affected and line items restated) and
the impact on the financial statements as a whole
(e.g., change in overall net position, change in the
audit opinion), and
o a discussion of any significant internal control
deficiency that failed to prevent or detect the
misstatement and what action management has taken
about the deficiency.
GAO also recommends that the following requirements be added to
section 7 of OMB Bulletin No. 06-03, Audit Requirements for
Federal Financial Statements, as follows:
7.8 If at the time of issuance of the auditor's report a material
misstatement(s) or potential material misstatement(s) has been
identified in any of the previously issued financial statements
and the specific amount(s) of the misstatement(s) and the related
effect(s) of such are not known, then the auditor shall update the
auditor's report on the previously issued financial statement(s)
as appropriate. Furthermore, the auditor's report shall disclose,
at a minimum, the following:
o a statement disclosing that a material
misstatement(s) or potential material misstatement(s)
affects a previously issued financial statement(s)
but the specific amount(s) of the misstatement(s) and
the related effect(s) of such are not known;
o a reference to note(s) to the financial statements
that discusses the restatement or potential
restatement;
o a description of the following, if not already
provided in the agency's note(s) to the financial
statements: (1) the nature and cause(s) of the
misstatement(s) or potential misstatement(s), and (2)
an estimate of the magnitude of the misstatement(s)
or potential misstatement(s) and the related
effect(s) of such on a previously issued financial
statement(s) (e.g., disclosure of the specific
financial statement(s) and line items affected) that
are known and a statement that the specific amount(s)
and the related effect(s) of such cannot be
determined without further investigation; and
o a statement disclosing that a restatement(s) to a
previously issued financial statement(s) will or may
occur.
Appendix II: GAO Contact and Staff Acknowledgments
GAO Contact
Gary T. Engel, (202) 512-3406.
Acknowledgments
Arthur W. Brouk, Alberto Garza, Michael D. Hansen, Malissa
Livingston, and Michelle Philpott made key contributions to this
report.
Related GAO Products
Fiscal Year 2004 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to
Addressing Our Nation's Future Fiscal Challenges. GAO-05-284T .
Washington, D.C.: February 9, 2005.
Financial Audit: Restatements to the Department of State's Fiscal
Year 2003 Financial Statements. GAO-05-814R . Washington, D.C.:
September 20, 2005.
Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements. GAO-06-30R .
Washington, D.C.: October 27, 2005.
Financial Audit: Restatement to the General Services
Administration's Fiscal Year 2003 Financial Statements. GAO-06-70R
. Washington, D.C.: December 6, 2005.
Financial Audit: Restatements to the National Science Foundation's
Fiscal Year 2003 Financial Statements. GAO-06-229R . Washington,
D.C.: December 22, 2005.
Financial Audit: Restatements to the Department of Agriculture's
Fiscal Year 2003 Consolidated Financial Statements. GAO-06-254R .
Washington, D.C.: January 26, 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-06-406T . Washington, D.C.: March 1, 2006.
Related GAO Products
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in
meeting its constitutional responsibilities and to help improve
the performance and accountability of the federal government for
the American people. GAO examines the use of public funds;
evaluates federal programs and policies; and provides analyses,
recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at
no cost is through GAO's Web site ( www.gao.gov ). Each weekday,
GAO posts newly released reports, testimony, and correspondence on
its Web site. To have GAO e-mail you a list of newly posted
products every afternoon, go to www.gao.gov and select "Subscribe
to Updates."
Order by Mail or Phone
The first copy of each printed report is free. Additional copies
are $2 each. A check or money order should be made out to the
Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are
discounted 25 percent. Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax:
(202) 512-6061
To Report Fraud, Waste, and Abuse in Federal Programs
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
[email protected] Automated answering system: (800) 424-5454 or
(202) 512-7470
Congressional Relations
Gloria Jarmon, Managing Director, [email protected] (202) 512-4400
U.S. Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548
Public Affairs
Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW,
Room 7149 Washington, D.C. 20548
10Our review did not include 2 of the 11 agencies that had restatements
for fiscal year 2003 because these agencies did not receive unqualified
opinions on their originally issued fiscal year 2003 financial statements.
Reports were issued to the Department of Agriculture, Department of State,
General Services Administration, National Science Foundation, and Nuclear
Regulatory Commission. We did not issue separate reports dealing with the
other 4 agencies (Departments of Justice, Transportation, and Health and
Human Services, and the Office of Personnel Management) since those
agencies' restatements primarily dealt with material misstatements
affecting the Statement of Budgetary Resources, which we have already
reported on in our February 2005 and March 2006 testimonies. See our
Related GAO Products page for a list of these reports as well as other
related GAO products.
11According to Federal Accounting Standards Advisory Board, Statement of
Federal Financial Accounting Concepts No. 2, Entity and Display, financial
information is also conveyed with accompanying footnotes, which are an
integral part of the financial statements. Footnotes typically provide
additional disclosures that are necessary to make the financial statements
more informative and not misleading.
12According to American Institute of Certified Public Accountants,
Codification of Auditing Standards, AU section 561, Subsequent Discovery
of Facts Existing at the Date of the Auditor's Report (1972), when the
auditor has concluded that subsequently discovered information would have
affected the previously issued audit report and believes there are persons
relying or likely to rely on the previously issued financial statements,
the auditor should take action to prevent future reliance on the
previously issued audit report. To appropriately withdraw the previously
issued audit report, the auditor may reissue the audit report separately
from the audit report on the current-period financial statements or issue
an updated report in conjunction with the audit report on the
current-period financial statements as discussed in American Institute of
Certified Public Accountants, Codification of Auditing Standards, AU
section 508, Reports on Audited Financial Statements (1989).
13According to Federal Accounting Standards Advisory Board, Statement of
Federal Financial Accounting Concepts No. 1, Objectives of Federal
Financial Reporting, financial reports must be understandable, reliable,
relevant, timely, consistent, and comparable.
14Office of Management and Budget, Circular No. A-136 Revised, Financial
Reporting Requirements, August 23, 2005.
15OMB revised Circular No. A-136 again on July 24, 2006; however, there
were minimal changes to guidance related to restatements.
16As noted previously, OMB issued guidance to agency management and agency
auditors on July 24, 2006 and August 23, 2006, respectively.
17At least 7 of the 24 CFO Act agencies restated certain of their fiscal
year 2004 financial statements to correct misstatements. Three of these
agencies had received an unqualified opinion on their originally issued
fiscal year 2004 financial statements while the remaining 4 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.
18OMB Circular No. A-136 was revised during fiscal years 2005 and 2006 and
supersedes OMB Bulletin No. 01-09.
19According to Federal Accounting Standards Advisory Board, Statement of
Federal Financial Accounting Standards No. 21, Reporting Corrections of
Errors and Changes in Accounting Principles, a prior period adjustment is
defined as a correction for an error that occurred in and whose cumulative
effect is attributable to periods not presented in the current financial
statements.
20According to American Institute of Certified Public Accountants,
Codification of Auditing Standards, AU section 420, Consistency of
Application of Generally Accepted Accounting Principles (1972),
classifications in the current financial statements may be different from
classifications in the prior year's financial statements. Although changes
in classification are usually not of sufficient importance to necessitate
disclosure, material changes in classification should be indicated and
explained in the financial statements or notes.
21Specifically, two audit reports neither disclosed the restatement nor
referred to the restatement footnote and another audit report disclosed
22Subsequent to our initial review, OMB issued OMB Bulletin No. 06-03,
Audit Requirements for Federal Financial Statements on August 23, 2006,
which now supersedes OMB Bulletin No. 01-02. OMB Bulletin No. 06-03
provides a definition for what is considered "imminent." Specifically, OMB
defines imminent as being "within 90 calendar days of the subsequent
period financial statements planned issue date."
23The auditor did not provide us with documentation of the basis for its
conclusion that users were not likely to still be relying on fiscal year
2003 financial statements and would not attach importance to the
correction of the material error.
24As noted previously, OMB issued guidance to agency management and agency
auditors on July 24, 2006 and August 23, 2006, respectively.
1Financial statements are restated to correct an error(s) in previously
issued financial statement(s).
2For purposes of this guidance, imminent means within 90 days of
determining the effect of the misstatement(s) on the previously issued
financial statements.
3For purposes of this guidance, imminent means within 90 days of
determining the effect of the misstatement(s) on the previously issued
financial statements.
(198416)
www.gao.gov/cgi-bin/getrpt? GAO-07-91 .
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gary T. Engel at (202) 512-3406 or
[email protected].
Highlights of GAO-07-91 , a report to the Director of the Office of
Management and Budget
October 2006
FINANCIAL AUDIT
Restated Financial Statements: Agencies' Management and Auditor
Disclosures of Causes and Effects and Timely Communication to Users
GAO continues to have concerns about restatements to federal agencies'
previously issued financial statements. During fiscal year 2005, at least
7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain
of their fiscal year 2004 financial statements to correct misstatements.
To study this trend, GAO reviewed the nature and causes of the
restatements made by certain CFO Act agencies in fiscal year 2004 to their
fiscal year 2003 financial statements. Eleven CFO Act agencies had
restatements for fiscal year 2003. Nine of those 11 received unqualified
opinions on their originally issued fiscal year 2003 financial statements.
GAO's view is that users of federal agencies' financial statements and the
related audit reports need to be provided at least a basic understanding
of why a restatement was necessary and its effect on the agencies'
previously issued financial statements and related audit reports. This
report communicates GAO's observations on the transparency and timeliness
of the 9 federal agencies' and their auditors' restatement disclosures.
What GAO Recommends
GAO is making 11 recommendations to the Office of Management and Budget
(OMB) to further improve the restatement guidance available to agencies'
management and the agencies' respective auditors. OMB stated that it would
take GAO's recommendations under advisement. GAO reiterates its concern
that it is critical for OMB to timely provide additional restatement
guidance.
The nine agencies GAO reviewed did not consistently communicate financial
statement restatements. GAO found that all nine agencies could have
greatly enhanced the adequacy, effectiveness, and timeliness of their
restatement disclosures to users. Similar transparency issues existed with
the associated audit reports regarding disclosure of all the essential
information that would clearly explain the restatements. GAO highlighted
the following issues as among the more prevalent issues to be addressed:
o columns of the agencies' restated financial statements were not
labeled as "Restated,"
o agencies' restatement footnote disclosures lacked clarity or
sufficient detail regarding the nature of the restatements and the
effect on balances reported in previously issued financial
statements,
o restatement information was not sufficiently disclosed in the
agencies' Management Discussion and Analysis,
o audit reports did not disclose that the respective agencies had
restated certain of their fiscal year 2003 financial statements,
o audit reports did not provide a statement that the previously
issued audit report was withdrawn and replaced by the opinion on
the restated financial statements, and
o material misstatements and potential material misstatements
were not timely communicated by agencies to either their auditors
or to the users of the financial statements.
The primary contributing factor for the restatement disclosure issues that
GAO identified was insufficient guidance available at the time to both the
agencies' management and their respective auditors for disclosure of the
restatements and the timeliness of such disclosures. GAO believes that
information regarding restatements should be disclosed in a transparent
and timely manner consistent with the qualitative characteristics of
information in financial reports described in Statement of Federal
Financial Accounting Concepts (SFFAC) No. 1. In GAO's view, more detailed
accounting and auditing guidance on how to satisfy the financial reporting
characteristics as outlined in SFFAC No. 1 as it relates to the disclosure
of restatements would have been helpful. OMB revised Circular No. A-136,
Financial Reporting Requirements, which provides additional guidance to
federal agencies' management regarding disclosure of restatements to
previously issued financial statements. Revisions made to OMB Circular No.
A-136 address many of GAO's concerns regarding the agencies' disclosure of
restatements. In addition, the proposed 2006 revision of generally
accepted government auditing standards now includes a section on reporting
on restatement of previously issued financial statements. In addition, on
August 23, 2006, OMB issued Bulletin No. 06-03, which also provides some
information regarding reporting on restatements. However, GAO believes
that OMB needs to timely provide additional, though complementary,
restatement guidance to both the agencies' management and their respective
auditors.
*** End of document. ***