Fiscal Year 2007 U.S. Government Financial Statements: Sustained 
Improvement in Financial Management Is Crucial to Improving	 
Accountability and Addressing the Long-Term Fiscal Challenges	 
(05-JUN-08, GAO-08-847T).					 
                                                                 
The Congress and the President need to have reliable, useful and 
timely financial and performance information to make sound	 
decisions on the current and future direction of vital federal	 
government programs and policies. Unfortunately, except for the  
2007 Statement of Social Insurance, GAO was again unable to	 
provide assurance on the reliability of the consolidated	 
financial statements of the U.S. government (CFS) due primarily  
to certain material weaknesses in the federal government's	 
internal control. GAO has reported that unless these weaknesses  
are adequately addressed, they will, among other things, (1)	 
hamper the federal government's ability to reliably report a	 
significant portion of its assets, liabilities, costs, and other 
related information; and (2) affect the federal government's	 
ability to reliably measure the full cost as well as the	 
financial and nonfinancial performance of certain programs and	 
activities. This testimony presents the results of GAO's audit of
the CFS for fiscal year 2007 and discusses the federal		 
government's long-term fiscal outlook.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-847T					        
    ACCNO:   A82266						        
  TITLE:     Fiscal Year 2007 U.S. Government Financial Statements:   
Sustained Improvement in Financial Management Is Crucial to	 
Improving Accountability and Addressing the Long-Term Fiscal	 
Challenges							 
     DATE:   06/05/2008 
  SUBJECT:   Accountability					 
	     Accounting 					 
	     Auditing procedures				 
	     Budget deficit					 
	     Cost analysis					 
	     Data collection					 
	     Data integrity					 
	     Financial management				 
	     Financial management systems			 
	     Financial records					 
	     Financial statement audits 			 
	     Financial statements				 
	     Fiscal policies					 
	     Future budget projections				 
	     Interagency relations				 
	     Internal controls					 
	     Projections					 
	     Reporting requirements				 
	     Reports management 				 
	     Financial reporting				 
	     GAO High Risk Series				 

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GAO-08-847T

This is the accessible text file for GAO report number GAO-08-847T 
entitled 'Fiscal Year 2007 U.S. Government Financial Statements: 
Sustained Improvement in Financial Management Is Crucial to Improving 
Accountability and Addressing the Long-Term Fiscal Challenge' which was 
released on June 5, 2008.

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Testimony: 

Before the Subcommittee on Government Management, Organization, and 
Procurement, Committee on Oversight and Government Reform, House of 
Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Thursday, June 5, 2008: 

Fiscal Year 2007 U.S. Government Financial Statements: 

Sustained Improvement in Financial Management Is Crucial to Improving 
Accountability and Addressing the Long-Term Fiscal Challenge: 

Statement of Gene L. Dodaro: 
Acting Comptroller General of the United States: 

GAO-08-847T: 

GAO Highlights: 

Highlights of GAO-08-847T, a testimony before the Subcommittee on 
Government Management, Organization, and Procurement, Committee on 
Oversight and Government Reform, House of Representatives. 

Why GAO Did This Study: 

The Congress and the President need to have reliable, useful and timely 
financial and performance information to make sound decisions on the 
current and future direction of vital federal government programs and 
policies. 

Unfortunately, except for the 2007 Statement of Social Insurance, GAO 
was again unable to provide assurance on the reliability of the 
consolidated financial statements of the U.S. government (CFS) due 
primarily to certain material weaknesses in the federal government's 
internal control. GAO has reported that unless these weaknesses are 
adequately addressed, they will, among other things, (1) hamper the 
federal government's ability to reliably report a significant portion 
of its assets, liabilities, costs, and other related information; and 
(2) affect the federal government's ability to reliably measure the 
full cost as well as the financial and nonfinancial performance of 
certain programs and activities. 

This testimony presents the results of GAOï¿½s audit of the CFS for 
fiscal year 2007 and discusses the federal government's long-term 
fiscal outlook. 

What GAO Found: 

For the 11th consecutive year, three major impediments prevented GAO 
from rendering an opinion on the federal government's accrual basis 
consolidated financial statements: (1) serious financial management 
problems at the Department of Defense, (2) the federal government's 
inability to adequately account for and reconcile intragovernmental 
activity and balances between federal agencies, and (3) the federal 
government's ineffective process for preparing the consolidated 
financial statements. In addition, financial management system problems 
continue to hinder federal agency accountability. Although the federal 
government still has a long way to go, significant progress has been 
made in improving federal financial management. For example, audit 
results for many federal agencies have improved and federal financial 
system requirements have been developed. In addition, GAO was able to 
render an unqualified opinion on the 2007 Statement of Social 
Insurance. Further, for the first time, the federal government issued a 
summary financial report which is intended to make the information in 
the Financial Report of the U.S. Government (Financial Report) more 
understandable and accessible to a broader audience. 

It is important that this progress be sustained by the current 
administration as well as the new administration that will be taking 
office next year and that the Congress continues its oversight to bring 
about needed improvements to federal financial management. Given the 
federal government's current financial condition and the nation's long-
term fiscal challenge, the need for the Congress and federal 
policymakers and management to have reliable, useful, and timely 
financial and performance information is greater than ever. Information 
included in the Financial Report, such as the Statement of Social 
Insurance along with long-term fiscal simulations and fiscal 
sustainability reporting, can help increase understanding of the 
nation's long-term fiscal outlook. 

The nation's long-term fiscal challenge is a matter of utmost concern. 
The federal government faces large and growing structural deficits due 
primarily to rising health care costs and known demographic trends. 
Simply put, the federal government is on an imprudent and unsustainable 
long-term fiscal path. Addressing this challenge will require a 
multipronged approach. Moreover, the longer that action is delayed, the 
greater the risk that the eventual changes will be disruptive and 
destabilizing. 

Finally, the federal government should consider the need for further 
revisions to the current federal financial reporting model to recognize 
the unique needs of the federal government. A broad reconsideration of 
issues, such as the kind of information that may be relevant and useful 
for a sovereign nation, could lead to reporting enhancements that might 
help provide the Congress and the President with more useful financial 
information to deliberate strategies to address the nation's long-term 
fiscal challenge. 

What GAO Recommends: 

Over the years, GAO has made numerous recommendations directed at 
improving federal financial management, including ones regarding issues 
addressed in this testimony. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-847T]. For more 
information, contact McCoy Williams or Gary T. Engel at (202) 512-2600 
or Susan Irving at (202) 512-9142. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am most pleased to be here today to discuss our report on the U.S. 
government's consolidated financial statements for fiscal years 2007 
and 2006. I would like to thank you for continuing the annual tradition 
of oversight hearings on this important subject. The involvement of 
your subcommittee remains critical to ultimately assuring the continued 
progress in improving federal financial management while enhancing 
public confidence in the government as a steward that is accountable 
for its finances. Such hearings play a vital role in ensuring that the 
federal government is held accountable to the American people. 

In this testimony, I will discuss (1) the major issues relating to the 
consolidated financial statements for fiscal years 2007 and 2006, 
including progress that has been made toward addressing major 
impediments to an opinion on the consolidated financial statements; (2) 
financial management systems problems that continue to hinder federal 
agency accountability; (3) the challenges posed by the federal 
government's long-term fiscal condition and GAO's views on a possible 
way forward; and (4) the need for an improved federal financial 
reporting model. Until these issues are adequately addressed, they will 
continue to have adverse implications for the federal government and 
the taxpayers. 

Both the consolidated financial statements and our related audit report 
are included in the fiscal year 2007 Financial Report of the United 
States Government (Financial Report).[Footnote 1] The Financial Report 
was issued by the Department of the Treasury (Treasury) on December 17, 
2007.[Footnote 2] In addition, for the first time, Treasury and the 
Office of Management and Budget (OMB) in coordination with GAO issued 
on February 14, 2008, a summary financial report entitled, The Federal 
Government's Financial Health: A Citizens Guide to the 2007 Financial 
Report of the United States Government. This guide is intended to make 
the information in the Financial Report more understandable and more 
accessible to a broader audience. The Director of OMB, the Secretary of 
the Treasury, and I believe that the information discussed in this 
guide is important to all Americans. This is a good first step, and I 
am confident that the guide will evolve over time. Both of these 
reports are available through GAO's Internet site, at [hyperlink, 
http://www.gao.gov/financial/fy2007financialreport.html] and Treasury's 
Internet site, at [hyperlink, http://www.fms.treas.gov/fr/index.html]. 

Summary: 

Certain material weaknesses[Footnote 3] in financial reporting and 
other limitations on the scope of our work resulted in conditions that 
for the 11th consecutive year prevented us from providing the Congress 
and the American people an opinion on the federal government's 
financial statements, other than the Statement of Social Insurance, 
which are referred to as the federal government's accrual basis 
consolidated financial statements.[Footnote 4] However, since the 
enactment of key financial management reforms in the 1990's, the 
federal government has made significant progress in improving financial 
management activities and practices. As shown in appendix III, for 
fiscal year 2007, 19 of 24 Chief Financial Officers (CFO) Act agencies 
were able to attain unqualified audit opinions on their financial 
statements. In contrast, only 6 CFO Act agencies received unqualified 
audit opinions for fiscal year 1996. In addition, federal financial 
systems requirements have been developed. Also, accounting and 
financial reporting standards have continued to evolve to provide 
greater transparency and accountability over the federal government's 
operations, financial condition, and fiscal outlook. Further, fiscal 
year 2007 marked the second year in which the Statement of Social 
Insurance has been provided as a basic financial statement.[Footnote 5] 
The Statement of Social Insurance displays the present value[Footnote 
6] of projected revenues and expenditures for scheduled benefits of 
certain benefit programs that are referred to as social insurance 
(e.g., Social Security, Medicare). Importantly, we were able to render 
an unqualified opinion on the 2007 Statement of Social Insurance--a 
significant accomplishment for the federal government. 

The federal government, however, still has a long way to go to address 
several principal challenges to fully realizing strong federal 
financial management.[Footnote 7] For example, three major impediments 
continue to prevent GAO from rendering an opinion on the federal 
government's accrual basis consolidated financial statements: (1) 
serious financial management problems at the Department of Defense, (2) 
the federal government's inability to adequately account for and 
reconcile intragovernmental activity and balances between federal 
agencies, and (3) the federal government's ineffective process for 
preparing the consolidated financial statements. Further, in our 
opinion, the federal government did not maintain effective internal 
controls over financial reporting and compliance with significant laws 
and regulations as of September 30, 2007, due to numerous material 
weaknesses. Moreover, financial management system problems continue to 
hinder federal agency accountability. 

In our audit report, we also emphasized that the federal government's 
current fiscal path is unsustainable and that tough choices by the 
Congress and the President are necessary to address the nation's long- 
term fiscal challenge. The fiscal and cash flow implications of the 
federal government's large and growing Social Security and Medicare 
commitments will be felt as the large baby boom generation leaves the 
work force and collects benefits. In fact, the oldest members of the 
baby boom generation are now eligible for Social Security retirement 
benefits. The budget and economic implications of the baby boom 
generation's retirement will only intensify as the baby boomers age. 
Given these and other factors, it seems clear that the nation is on an 
imprudent and unsustainable long-term fiscal path that is getting worse 
with the passage of time. The issues raised by this long-term fiscal 
challenge are issues of significance that affect every American. 
Committed leadership and sustained efforts by the Congress, the 
President, and other key individuals throughout the federal financial 
management community will be needed to put our nation on a more prudent 
and sustainable long-term fiscal path. Given the government's current 
financial condition and the nation's long-term fiscal challenge, the 
need for the Congress and federal policymakers and management to have 
reliable, useful, and timely financial and performance information is 
greater than ever. Sound decisions on the current results and future 
direction of vital federal government programs and policies are more 
difficult without such information. Information included in the 
Financial Report, such as the Statement of Social Insurance along with 
long-term fiscal simulations and fiscal sustainability reporting can 
help increase understanding of the federal government's long-term 
fiscal outlook. 

Finally, we believe the federal government should consider the need for 
further revisions to the current federal financial reporting model to 
recognize the unique needs of the federal government. The current 
reporting model recognizes some of these needs; however, a broad 
reconsideration of issues, such as the kind of information that may be 
relevant and useful for a sovereign nation, could lead to reporting 
enhancements that might help provide the Congress and the President 
with more useful financial information to deliberate strategies to 
address the nation's long-term fiscal challenge. 

Highlights of Major Issues Related to the U.S. Government's 
Consolidated Financial Statements for Fiscal Years 2007 and 2006: 

As has been the case for the previous 10 fiscal years, the federal 
government did not maintain adequate systems or have sufficient, 
reliable evidence to support certain material information reported in 
the U.S. government's accrual basis consolidated financial statements. 
The underlying material weaknesses in internal control, which generally 
have existed for years, contributed to our disclaimer of opinion on the 
U.S. government's accrual basis consolidated financial statements for 
the fiscal years ended 2007 and 2006.[Footnote 8] Appendix I describes 
the material weaknesses that contributed to our disclaimer of opinion 
in more detail and highlights the primary effects of these material 
weaknesses on the accrual basis consolidated financial statements and 
on the management of federal government operations. 

The material weaknesses that contributed to our disclaimer of opinion 
were the federal government's inability to: 

* satisfactorily determine that property, plant, and equipment and 
inventories and related property, primarily held by the Department of 
Defense (DOD), were properly reported in the consolidated financial 
statements; 

* implement effective credit reform estimation and related financial 
reporting processes at certain federal credit agencies; 

* reasonably estimate or adequately support amounts reported for 
certain liabilities, such as environmental and disposal liabilities, or 
determine whether commitments and contingencies were complete and 
properly reported; 

* support significant portions of the total net cost of operations, 
most notably related to DOD, and adequately reconcile disbursement 
activity at certain agencies; 

* adequately account for and reconcile intragovernmental activity and 
balances between federal agencies; 

* ensure that the federal government's consolidated financial 
statements were (1) consistent with the underlying audited agency 
financial statements, (2) properly balanced, and (3) in conformity with 
Generally Accepted Accounting Principles; and; 

* identify and either resolve or explain material differences that 
exist between certain components of the budget deficit reported in 
Treasury's records, used to prepare the Reconciliation of Net Operating 
Cost and Unified Budget Deficit and Statement of Changes in Cash 
Balance from Unified Budget and Other Activities, and related amounts 
reported in federal agencies' financial statements and underlying 
financial information and records. 

Due to the material weaknesses and the additional limitations on the 
scope of our work, as discussed in our audit report, there may also be 
additional issues that could affect the accrual basis consolidated 
financial statements that have not been identified. 

In addition to the material weaknesses that contributed to our 
disclaimer of opinion, which were discussed above, we found three other 
material weaknesses in internal control as of September 30, 2007. These 
weaknesses are discussed in more detail in appendix II, including the 
primary effects of the material weaknesses on the accrual basis 
consolidated financial statements and on the management of federal 
government operations. These other material weaknesses were the federal 
government's inability to: 

* determine the full extent to which improper payments occur; 

* identify and resolve information security control weaknesses and 
manage information security risks on an ongoing basis, and; 

* effectively manage its tax collection activities. 

Further, our audit report discusses certain significant deficiencies in 
internal control at the governmentwide level.[Footnote 9] These 
significant deficiencies involve the following areas: 

* preparing the Statement of Social Insurance for certain programs, 
and; 

* monitoring and oversight regarding certain federal grants and 
entities that offer Medicare health plan options. 

Individual federal agency financial statement audit reports identify 
additional control deficiencies which were reported by agency auditors 
as material weaknesses or significant deficiencies at the individual 
agency level. We do not deem these additional control deficiencies to 
be material weaknesses at the governmentwide level. 

Regarding agencies' internal controls, in December 2004, OMB revised 
OMB Circular No. A-123, Management's Responsibility for Internal 
Control, which became effective for fiscal year 2006. In fiscal year 
2006, agencies began to implement the more rigorous requirements of the 
revised OMB Circular No. A-123, which include management 
identification, assessment, testing, correction, and documentation of 
internal controls over financial reporting for each account or group of 
accounts, as well as an annual assurance statement from the agency head 
as to whether internal control over financial reporting is effective. 

OMB recognized that due to the complexity of some agencies, 
implementation of these new requirements may span more than 1 year. 
Accordingly, certain agencies have adopted multiyear implementation 
plans. According to OMB's Federal Financial Management Report for 2007, 
16 of the 24 CFO Act agencies have performed assessments required by 
OMB Circular No. A-123 for all key processes, while the remaining 8 CFO 
Act agencies are phasing in implementation of the requirements by 
testing a portion of the key processes and providing plans for testing 
the remaining processes within 3 years. Also, according to that report, 
to achieve its strategic goal of improving effectiveness of internal 
control over financial reporting, OMB has developed priority actions 
that include updating guidance, as necessary, based on lessons learned 
from agencies' implementation of the circular. It will be important 
that OMB continue to monitor and oversee federal agencies' 
implementation of these new requirements. 

Addressing Major Impediments to an Opinion on the Accrual Basis 
Consolidated Financial Statements: 

Three major impediments to our ability to render an opinion on the U.S. 
government's accrual basis consolidated financial statements continued 
to be: (1) serious financial management problems at DOD, (2) the 
federal government's inability to adequately account for and reconcile 
intragovernmental activity and balances between federal agencies, and 
(3) the federal government's ineffective process for preparing the 
consolidated financial statements. Extensive efforts by DOD officials 
and cooperative efforts between agency chief financial officers, 
Treasury officials, and OMB officials will be needed to resolve these 
serious obstacles to achieving an opinion on the U.S. government's 
accrual basis consolidated financial statements. 

Financial Management at DOD: 

Essential to further improving financial management governmentwide and 
ultimately to achieving an opinion on the U.S. government's 
consolidated financial statements is the resolution of serious 
weaknesses in DOD's business operations. DOD is one of the largest and 
most complex organizations in the world. Since the first financial 
statement audit of a major DOD component was attempted almost 20 years 
ago, we have reported that weaknesses in DOD's business operations, 
including financial management, not only adversely affect the 
reliability of reported financial data, but also the economy, 
efficiency, and effectiveness of its operations. 

DOD continues to dominate GAO's list of high-risk programs designated 
as vulnerable to waste, fraud, abuse, and mismanagement, bearing 
responsibility, in whole or in part, for 15 of 27 high-risk areas. 
[Footnote 10] Eight of these areas are specific to DOD and include 
DOD's overall approach to business transformation, as well as business 
systems modernization and financial management. Collectively, these 
high-risk areas relate to DOD's major business operations, including 
financial management, which directly support the warfighters, including 
their pay, the benefits provided to their families, and the 
availability and condition of equipment and supplies they use both on 
and off the battlefield. 

Successful transformation of DOD's financial management operations will 
require a multifaceted, cross-organizational approach that addresses 
the contribution and alignment of key elements, including sustained 
leadership, strategic plans, people, processes, and technology. 
Congress clearly recognized, in the National Defense Authorization Act 
for Fiscal Year 2008,[Footnote 11] the need for executive-level 
attention in ensuring that DOD was on a sustainable path toward 
achieving business transformation. This legislation codifies Chief 
Management Officer (CMO) responsibilities at a high level in the 
department--assigning them to the Deputy Secretary of Defense--and 
establishing a full-time Deputy CMO and designating CMO 
responsibilities within the military services. However, in less than a 
year, our government will undergo a change in administrations, which 
raises questions about the continuity of effort and the sustainability 
of the progress that DOD has made to date. As such, we believe the CMO 
position should be codified as a separate position from the Deputy 
Secretary of Defense in order to provide full-time attention to 
business transformation over the long term, subject to an extended term 
appointment. Because business transformation is a long-term and complex 
process, we have recommended a term of at least 5 to 7 years to provide 
sustained leadership and accountability. 

Importantly, DOD has taken steps toward developing and implementing a 
framework for addressing the department's long-standing financial 
management weaknesses and improving its capability to provide timely, 
reliable, and relevant financial information for analysis, decision 
making, and reporting, a key defense transformation priority. 
Specifically, this framework, which is discussed in both the 
department's Enterprise Transition Plan (ETP)[Footnote 12] and the 
Financial Improvement and Audit Readiness (FIAR) Plan,[Footnote 13] 
includes the department's Standard Financial Information Structure 
(SFIS) and Business Enterprise Information System (BEIS). DOD intends 
this framework to define and put into practice a standard DOD-wide 
financial management data structure as well as enterprise-level 
capabilities to facilitate reporting and comparison of financial data 
across the department. 

DOD's efforts to develop and implement SFIS and BEIS should help to 
improve the consistency and comparability of the department's financial 
information and reporting; however, a great deal of work remains before 
the financial management capabilities of DOD and its components' 
transformation efforts achieve financial visibility.[Footnote 14] 
Examples of work remaining include data cleansing; improvements to 
current policies, processes, procedures, and controls; and 
implementation of fully integrated systems. 

In 2007, DOD introduced refinements to its approach for achieving 
financial statement auditability. These refinements include the 
following: 

* Requesting audits of entire financial statements rather than 
attempting to build upon audits of individual financial statement line 
items. 

* Focusing on improvements in end-to-end business processes, or 
segments[Footnote 15] that underlie the amounts reported on the 
financial statements. 

* Using audit readiness validations and annual verification reviews of 
segment improvements to help ensure sustainability of corrective 
actions and improvements. 

* Forming a working group to begin auditability risk assessments of 
financial systems at key decision points in their development and 
deployment life cycle to help ensure that the processes and internal 
controls support repeatable production of auditable financial 
statements. 

We are encouraged by DOD's efforts and emphasize the necessity for 
consistent management oversight toward achieving financial management 
capabilities and reporting of meaningful and measurable transformation 
effort benchmarks and accomplishments. We will continue to monitor 
DOD's efforts to transform its business operations and address its 
financial management challenges as part of our continuing DOD business 
enterprise architecture and financial audit readiness oversight. 

Intragovernmental Activity and Balances: 

Federal agencies are unable to adequately account for and reconcile 
intragovernmental activity and balances. OMB and Treasury require the 
chief financial officers (CFO) of 35 executive departments and agencies 
to reconcile, on a quarterly basis, selected intragovernmental activity 
and balances with their trading partners. In addition, these agencies 
are required to report to Treasury, the agency's inspector general, and 
GAO on the extent and results of intragovernmental activity and 
balances reconciliation efforts as of the end of the fiscal year. 

A substantial number of the agencies did not adequately perform the 
required reconciliations for fiscal years 2007 and 2006. For these 
fiscal years, based on trading partner information provided to Treasury 
via agencies' closing packages, Treasury produced a "Material 
Difference Report" for each agency showing amounts for certain 
intragovernmental activity and balances that significantly differed 
from those of its corresponding trading partners as of the end of the 
fiscal year. Based on our analysis of the "Material Difference Reports" 
for fiscal year 2007, we noted that a significant number of CFOs were 
unable to adequately explain the differences with their trading 
partners or did not provide adequate documentation to support 
responses. For both fiscal years 2007 and 2006, amounts reported by 
federal agency trading partners for certain intragovernmental accounts 
were not in agreement by significant amounts. In addition, a 
significant number of CFOs cited differing accounting methodologies, 
accounting errors, and timing differences for their material 
differences with their trading partners. Some CFOs simply indicated 
that they were unable to explain the differences with their trading 
partners with no indication when the differences will be resolved. As a 
result of the above, the federal government's ability to determine the 
impact of these differences on the amounts reported in the accrual 
basis consolidated financial statements is significantly impaired. 

In 2006, OMB issued Memorandum No. M-07-03, Business Rules for 
Intragovernmental Transactions (Nov. 13, 2006), and Treasury issued the 
Treasury Financial Manual Bulletin No. 2007-03, Intragovernmental 
Business Rules (Nov. 15, 2006). This guidance added criteria for 
resolving intragovernmental disputes and major differences between 
trading partners for certain intragovernmental transactions and called 
for the establishment of an Intragovernmental Dispute Resolution 
Committee. OMB is currently working with the Chief Financial Officers 
Council to create the Intragovernmental Dispute Resolution Committee. 
[Footnote 16] Treasury is also taking steps to help resolve material 
differences in intragovernmental activity and balances. For example, 
Treasury is requiring federal agencies to provide a plan of action on 
how the agency is addressing certain of its unresolved material 
differences. Resolving the intragovernmental transactions problem 
remains a difficult challenge and will require a strong commitment by 
federal agencies to fully implement the recently issued business rules 
and continued strong leadership by OMB and Treasury. 

Preparing the Consolidated Financial Statements: 

Although further progress was demonstrated in fiscal year 2007, the 
federal government continued to have inadequate systems, controls, and 
procedures to ensure that the consolidated financial statements are 
consistent with the underlying audited agency financial statements, 
properly balanced, and in conformity with U.S. generally accepted 
accounting principles (GAAP).[Footnote 17] Treasury has showed progress 
by demonstrating that amounts in the Statement of Social Insurance were 
consistent with the underlying federal agencies' audited financial 
statements and that the Balance Sheet and the Statement of Net Cost 
were consistent with federal agencies' financial statements prior to 
eliminating intragovernmental activity and balances. However, 
Treasury's process for compiling the consolidated financial statements 
did not ensure that the information in the remaining three principal 
financial statements and notes were fully consistent with the 
underlying information in federal agencies' audited financial 
statements and other financial data. During fiscal year 2007, Treasury, 
in coordination with OMB, continued to develop and implement corrective 
action plans and milestones for short-term and long-range solutions for 
certain internal control weaknesses we have reported regarding the 
process for preparing the consolidated financial statements. Resolving 
some of these internal control weaknesses will be a difficult challenge 
and will require a strong commitment from Treasury and OMB as they 
execute and implement their corrective action plans. 

Federal Agencies' Financial Management Systems: 

Under the Federal Financial Management Improvement Act of 1996 (FFMIA), 
as a part of the CFO Act agencies' financial statement audits, auditors 
are required to report whether agencies' financial management systems 
comply substantially with (1) federal financial management systems 
requirements, (2) applicable federal accounting standards, and (3) the 
U.S. Government Standard General Ledger (SGL) at the transaction level. 
These factors, if implemented successfully, help provide a solid 
foundation for improving accountability over government operations and 
routinely producing sound cost and operating performance information. 

As shown in figure 1, 19 out of the 24 CFO Act agencies received an 
unqualified opinion on their financial statements in fiscal year 2007; 
however, 8 of these 19 agencies' systems did not substantially comply 
with one or more of the three FFMIA requirements. This shows that 
irrespective of these unqualified "clean" opinions on the financial 
statements, many agencies still do not have reliable, useful and timely 
financial information with which to make informed decisions and ensure 
accountability on an ongoing basis. 

Figure 1: Comparison of 2007 Financial Statement Audit Results to FFMIA 
Assessments: 

[See PDF for image] 

This figure contains a pie-chart and a sub-chart, depicting the 
following information: 

CFO Act agenciesï¿½ financial statement audit results: 
Unqualified opinion: 19 agencies; 
Disclaimer or qualified opinion: 5 agencies. 

CFO Act agenciesï¿½ systems notsubstantially compliant with FFMIA: 
Unqualified opinion: 8 agencies; 
Disclaimer or qualified opinion: 5 agencies. 

Source: CFO Act agencies. 

Note: Data are compiled from CFO Act agencies' Performance and 
Accountability Reports for fiscal year 2007. 

[End of figure] 

The modernization of federal financial management systems has been a 
long-standing challenge at many federal agencies. As shown in figure 1, 
auditors reported that 13 of the 24 CFO Act agencies' systems did not 
substantially comply with one or more of the three FFMIA requirements 
for fiscal year 2007. This compares with 17 agencies for fiscal year 
2006. Although the number of agencies reported as not substantially 
compliant has declined, the federal government's capacity to manage 
with timely and useful data remains limited, thereby hampering its 
ability to effectively administer and oversee its major programs. 

For fiscal year 2007, noncompliance with federal financial management 
systems requirements was the most frequently cited deficiency of the 
three FFMIA requirements. One of the federal financial management 
systems requirements is for agencies to have integrated financial 
management systems. Based on our review of the fiscal year 2007 audit 
reports, we identified the lack of integrated financial management 
systems to be one of the six problem areas for the 13 agency systems 
that are reported as not being substantially compliant with FFMIA. 
Figure 2 summarizes these six areas and the number of agencies with 
problems reported in each area.[Footnote 18] 

Figure 2: Number of CFO Act Agencies with Reported FFMIA Compliance 
Problems for Fiscal Year 2007: 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Problem area: Nonintegrated financial management systems; 
CFO Act agencies: 8. 

Problem area: Inadequate reconciliation procedures; 
CFO Act agencies: 10. 

Problem area: Lack of accurate and timely recording; 
CFO Act agencies: 11. 

Problem area: Noncompliance with the SGL; 
CFO Act agencies: 5. 

Problem area: Lack of adherence to federal accounting standards; 
CFO Act agencies: 7. 

Problem area: Weak security over information systems; 11. 
CFO Act agencies: 

Source: GAO analysis based on independent auditorsï¿½ financial statement 
audit reports prepared by agency inspectors general and contract 
auditors for fiscal year 2007. 

[End of figure] 

The lack of integrated financial management systems typically results 
in agencies expending major time, effort, and resources, including in 
some cases, hiring external consultants to develop information that 
their systems should be able to provide on a daily or recurring basis. 
In addition, nonintegrated systems are more prone to error which could 
result in information that is not reliable, useful, or timely. Figure 2 
also shows that auditors for 11 CFO Act agencies had reported the lack 
of accurate and timely recording of financial information as a problem 
in fiscal year 2007. Accurate and timely recording of financial 
information is essential for effective financial management. 
Furthermore, the majority of participants at a recent Comptroller 
General's forum[Footnote 19] on improving financial management systems 
agreed that financial management systems are not able to provide, or 
provide little, information that is reliable, useful, and timely to 
assist management in their day-to-day decision making, which is the 
ultimate goal of FFMIA. 

Participants at the forum also discussed current financial management 
initiatives and the strategies for transformation of federal financial 
management. To reduce the cost and improve the outcome of federal 
financial management systems implementations, OMB continues to move 
forward on a key initiative--the financial management line of business 
(line of business), by leveraging common standards and shared 
solutions. OMB anticipates that the line of business initiative will 
help achieve the goals of improving the cost, quality, and performance 
of financial management operations. OMB and the Financial Systems 
Integration Office have demonstrated continued progress toward 
implementation of the line of business initiative by issuing a common 
governmentwide accounting classification structure, financial services 
assessment guide, and exposure drafts of certain standard business 
processes. However, as we previously recommended,[Footnote 20] OMB 
needs to continue defining standard business processes. A critical 
factor for success will be ensuring that agencies cannot continue 
developing and implementing their own stovepiped systems. Failure to do 
so may require additional work, increase costs to adopt these standard 
business processes, and further delay the transformation of federal 
financial management systems. 

In a January 2008 memo, OMB recognized the risks associated with 
nonstandardized processes and updated its guidance on the line of 
business. Current plans are for the Financial Systems Integration 
Office to continue developing business standards and incorporate them 
into software requirements and permit agencies and shared service 
providers to utilize only the certified products as configured. Along 
with these changes, continued high-priority and sustained top-level 
commitment by OMB and leaders throughout the federal government will be 
necessary to fully and effectively achieve the common goals of the line 
of business and FFMIA. 

The Nation's Long-Term Fiscal Challenge: 

The nation's long-term fiscal challenge is a matter of utmost concern. 
The federal government faces large and growing structural deficits due 
primarily to rising health care costs and known demographic trends. 
There is a need to engage in a fundamental review of what the federal 
government does, how it does it, and how it is financed. Understanding 
and addressing the federal government's financial condition and the 
nation's long-term fiscal challenge are critical to maintain fiscal 
flexibility so that policymakers can respond to current and emerging 
social, economic, and security challenges. 

While some progress has been made in recent years in addressing the 
federal government's short-term fiscal condition, the nation has not 
made progress on its long-term fiscal challenge. However, even this 
short-term deficit is understated: It masks the fact that the federal 
government has been using the Social Security surplus to offset 
spending in the rest of government for many years. If the Social 
Security surplus is excluded, the on-budget deficit[Footnote 21] in 
fiscal year 2007 was more than double the size of the unified deficit. 
For example, Treasury reported a unified deficit of $163 billion and an 
on-budget deficit of $344 billion in fiscal year 2007. 

While the federal government's unified budget deficit has declined in 
recent years, its liabilities, contingencies and commitments, and 
social insurance responsibilities have increased. As of September 30, 
2007, the U.S. government reported in the 2007 Financial Report that it 
owed (i.e., liabilities) more than it owned (i.e., assets) by more than 
$9 trillion. Further, the Statement of Social Insurance in the 
Financial Report disclosed $41 trillion in social insurance 
responsibilities, including Medicare and Social Security, up more than 
$2 trillion from September 30, 2006. 

Information included in the Financial Report, such as the Statement of 
Social Insurance along with long-term fiscal simulations and fiscal 
sustainability reporting can help increase understanding of the federal 
government's long-term fiscal outlook. Over the next few decades, the 
nation's fiscal challenge will be shaped largely by rising health care 
costs and known demographic trends. As the baby boom generation 
retires, federal spending on retirement and health care programs-- 
Social Security and Medicare, and Medicaid--will grow dramatically. 

The future costs of Social Security and Medicare commitments are 
reported in the Statement of Social Insurance in the Financial Report. 
We were able to render an unqualified opinion on the 2007 Statement of 
Social Insurance--a significant accomplishment for the federal 
government. The statement displays the present value of projected 
revenues and expenditures for scheduled benefits of social insurance 
programs. For Social Security and Medicare alone, projected 
expenditures for scheduled benefits exceed earmarked revenues (i.e., 
dedicated payroll taxes and premiums) by approximately $41 trillion 
over the next 75 years in present value terms. Stated differently, one 
would need approximately $41 trillion invested today to deliver on the 
currently promised benefits not covered by earmarked revenues for the 
next 75 years. 

Table 1 shows a simplified version of the Statement of Social Insurance 
by its primary components. 

Table 1: Simplified Statement of Social Insurance as of January 1, 2007 
(Dollars in trillions): 

Present value of future revenue (earmarked contributions, taxes, and 
premiums): 
Social Security: $34 trillion; 
Medicare Hospital Insurance (Part A): $11 trillion; 
Medicare Supplementary Medical Insurance (Part B): $5 trillion; 
Medicare Supplementary Medical Insurance (Part D): $2 trillion; 
Total: $52 trillion. 

Present value of expenditures for scheduled future benefits[A]: 
Social Security: $41 trillion; 
Medicare Hospital Insurance (Part A): $23 trillion; 
Medicare Supplementary Medical Insurance (Part B): $18 trillion; 
Medicare Supplementary Medical Insurance (Part D): $11 trillion; 
Total: $93 trillion. 

Present value of future expenditures in excess of future revenue[B]: 
Social Security: ($7 trillion); 
Medicare Hospital Insurance (Part A): ($12 trillion); 
Medicare Supplementary Medical Insurance (Part B): ($13 trillion); 
Medicare Supplementary Medical Insurance (Part D): ($8 trillion); 
Total: ($41 trillion). 

Source: The Department of the Treasury. 

Notes: Data are from the fiscal year 2007 Financial Report. Totals do 
not necessarily equal the sum of the components due to rounding. 

[A] These amounts include administrative expenses for the programs. 

[B] Under current law, Social Security and Federal Hospital Insurance 
(Medicare Part A) payments are limited to amounts available to the 
respective trust funds. 

[End of table] 

Although these social insurance commitments dominate the long-term 
outlook, they are not the only federal programs or activities that bind 
the future. GAO developed the concept of "fiscal exposures" to provide 
a framework for considering the wide range of responsibilities, 
programs, and activities that may explicitly or implicitly expose the 
federal government to future spending.[Footnote 22] In addition to the 
social insurance commitments, the federal government's fiscal exposures 
include about $11 trillion in liabilities reported on the Balance 
Sheet, $1 trillion of other commitments and contingencies, as well as 
other potential exposures that cannot be quantified. So beyond dealing 
with Medicare and Social Security, policymakers need to look at other 
policies that limit the federal government's flexibility--not 
necessarily to eliminate all of them but to at least be aware of them 
and make a conscious decision to reform them in a manner that will be 
responsible, equitable, and sustainable. 

Long-term fiscal simulations of future revenues and costs for all 
federal programs offer a comprehensive assessment of the federal 
government's long-term fiscal outlook. Since 1992, GAO has published 
long-term fiscal simulations of what might happen to federal deficits 
and debt levels under varying policy assumptions. GAO's simulations-- 
which are neither forecasts nor predictions--continue to show ever- 
increasing long-term deficits resulting in a federal debt level that 
ultimately spirals out of control. The timing of deficits and the 
resulting debt buildup varies depending on the assumptions used. For 
example, figure 3 shows GAO's simulation of the deficit path based on 
recent trends and policy preferences. In this simulation, we start with 
the Congressional Budget Office's (CBO) baseline and then assume that 
(1) all expiring tax provisions are extended through 2018--and then 
revenues are brought to their historical level as a share of gross 
domestic product (GDP) plus expected revenue from deferred taxes--(2) 
discretionary spending grows with the economy, and (3) no structural 
changes are made to Social Security, Medicare, or Medicaid. [Footnote 
23] 

Figure 3: Unified Surpluses and Deficits under GAO's Alternative 
Simulation: 

[See PDF for image] 

This figure is a line graph depicting the following data: 

This figure is a graph illustrating the unified surpluses and deficits 
as a share of GDP under Alternative Fiscal Policy Simulations. The 
vertical axis of the graph represents percent of GDP from -20 to 5. The 
horizontal axis of the graph represents years from 2000 to 2050. The 
following data is depicted: 

[See PDF for image] 

Year: 2000; 
Alternative Simulation: 2.433. 

Year: 2001; 
Alternative Simulation: 1.274. 

Year: 2002; 
Alternative Simulation: -1.52. 

Year: 2003; 
Alternative Simulation: -3.495. 

Year: 2004; 
Alternative Simulation: -3.588. 

Year: 2005; 
Alternative Simulation: -2.599. 

Year: 2006; 
Alternative Simulation: -1.906. 

Year: 2007; 
Alternative Simulation: -1.192. 

Year: 2008; 
Alternative Simulation: -1.79. 

Year: 2009; 
Alternative Simulation: -2.127. 

Year: 2010; 
Alternative Simulation: -2.783. 

Year: 2011; 
Alternative Simulation: -3.142. 

Year: 2012; 
Alternative Simulation: -3.025. 

Year: 2013; 
Alternative Simulation: -3.626. 

Year: 2014; 
Alternative Simulation: -3.691. 

Year: 2015; 
Alternative Simulation: -4.051. 

Year: 2016; 
Alternative Simulation: -4.477. 

Year: 2017; 
Alternative Simulation: -4.623. 

Year: 2018; 
Alternative Simulation: -4.95. 

Year: 2019; 
Alternative Simulation: -5.048. 

Year: 2020; 
Alternative Simulation: -5.151. 

Year: 2021; 
Alternative Simulation: -5.603. 

Year: 2022; 
Alternative Simulation: -5.986. 

Year: 2023; 
Alternative Simulation: -6.494. 

Year: 2024; 
Alternative Simulation: -6.935. 

Year: 2025; 
Alternative Simulation: -7.507. 

Year: 2026; 
Alternative Simulation: -7.961. 

Year: 2027; 
Alternative Simulation: -8.527. 

Year: 2028; 
Alternative Simulation: -9.01. 

Year: 2029; 
Alternative Simulation: -9.6. 

Year: 2030; 
Alternative Simulation: -10.093. 

Year: 2031; 
Alternative Simulation: -10.693. 

Year: 2032; 
Alternative Simulation: -11.294. 

Year: 2033; 
Alternative Simulation: -11.801. 

Year: 2034; 
Alternative Simulation: -12.409. 

Year: 2035; 
Alternative Simulation: -12.863. 

Year: 2036; 
Alternative Simulation: -13.471. 

Year: 2037; 
Alternative Simulation: -14.083. 

Year: 2038; 
Alternative Simulation: -14.589. 

Year: 2039; 
Alternative Simulation: -15.19. 

Year: 2040; 
Alternative Simulation: -15.696. 

Year: 2041; 
Alternative Simulation: -16.298. 

Year: 2042; 
Alternative Simulation: -16.807. 

Year: 2043; 
Alternative Simulation: -17.414. 

Year: 2044; 
Alternative Simulation: -18.03. 

Year: 2045; 
Alternative Simulation: -18.555. 

Year: 2046; 
Alternative Simulation: -19.188. 

Year: 2047; 
Alternative Simulation: -19.727. 

Year: 2048; 
Alternative Simulation: -20.378. 

Year: 2049; 
Alternative Simulation: -20.938. 

Year: 2050; 
Alternative Simulation: -21.605. 

Source: GAOï¿½s April 2008 analysis. 

Note: Assume currently scheduled Social Security benefits are paid in 
full throughout the simulation period. 

[End of figure] 

Over the long term, the nation's fiscal challenge stems primarily from 
rising health care costs and, to a lesser extent, the aging of the 
population. Absent significant changes on the spending or revenue sides 
of the budget or both, these long-term deficits will encumber a growing 
share of federal resources and test the capacity of current and future 
generations to afford both today's and tomorrow's commitments. 

Figure 4 looks behind the deficit path to the composition of federal 
spending. It shows that the estimated growth in the major entitlement 
programs leads to an unsustainable fiscal future. In this figure, the 
category "all other spending" includes much of what many think of as 
"government"--discretionary spending on such activities as national 
defense, homeland security, veterans health benefits, national parks, 
highways and mass transit, and foreign aid, plus mandatory spending on 
the smaller entitlement programs such as Supplemental Security Income, 
Temporary Assistance for Needy Families, and farm price 
supports.[Footnote 24] The growth in Social Security, Medicare, 
Medicaid, and interest on debt held by the public dwarfs the growth in 
all other types of spending. A government that in one generation does 
nothing more than pay interest on its debt and mail checks to retirees 
and some of their health providers is unacceptable. 

Figure 4: Potential Fiscal Outcomes under GAO's Alternative Simulation: 
Revenues and Composition of Spending as Shares of GDP: 

[See PDF for image] 

This is a line/stacked bar graph with one line (revenue) and four 
stacked bars containing four spending items (Net interest, Social 
Security, Medicare and Medicaid, and All other spending). The vertical 
axis represents Percent of GDP and the horizontal axis represents 
fiscal years 2008, 2018, 2030, and 2040. 

The following data is depicted: 

Fiscal year 2008: 
Net interest: 1.6%; 
Social Security: 4.3%; 
Medicare & Medicaid: 4.3%; 
All other spending: 10.1%; 
Revenue: 18.6%. 

Fiscal year 2018: 
Net interest: 2.5%; 
Social Security: 4.9%; 
Medicare & Medicaid: 5.7%; 
All other spending: 9.7%; 
Revenue: 17.9%. 

Fiscal year 2030: 
Net interest: 4.9%; 
Social Security: 6.1%; 
Medicare & Medicaid: 8.1%; 
All other spending: 9.7%; 
Revenue: 18.6%. 

Fiscal year 2040: 
Net interest: 8.5%; 
Social Security: 6.3%; 
Medicare & Medicaid: 9.9%; 
All other spending: 9.7%; 
Revenue: 18.6%. 

Source: GAOï¿½s April 2008 analysis. 

Note: Discretionary spending grows with GDP after 2008. AMT exemption 
amount is retained at the 2007 level through 2018 and expiring tax 
provisions are extended. After 2018, revenue as a share of GDP returns 
to its historical level of 18.3 percent of GDP plus expected revenues 
from deferred taxes, i.e. taxes on withdrawals from retirement 
accounts. Medicare spending is based on the Trustees April 2007 
projections adjusted for the Centers for Medicare and Medicaid Services 
alternative assumption that physician payments are not reduced as 
specified under current law. 

[End of figure] 

The federal government's increased spending and rising deficits will 
drive a rising debt burden. At the end of fiscal year 2007, debt held 
by the public exceeded $5 trillion. Figure 5 shows that this growth in 
the federal government's debt cannot continue unabated without causing 
serious harm to the economy. In the last 200 years, only during and 
after World War II has debt held by the public exceeded 50 percent of 
GDP. But this is only part of the story. The federal government for 
years has been borrowing the surpluses in the Social Security trust 
funds and other similar funds and using them to finance federal 
government costs. When such borrowings occur, Treasury issues federal 
securities to these government funds that are backed by the full faith 
and credit of the U.S. government. Although borrowing by one part of 
the federal government from another may not have the same economic and 
financial implications as borrowing from the public, it represents a 
claim on future resources and hence a burden on future taxpayers and 
the future economy. If federal securities held by those funds are 
included, the federal government's total debt is much higher--about $9 
trillion as of the end of fiscal year 2007. 

Figure 5: Debt Held by the Public under GAO's Alternative Simulation: 

[See PDF for image] 

This figure is a line graph. The vertical axis of the graph represents 
percent of GDP from 0 to 200. The horizontal axis of the graph 
represents fiscal years from 2000 through 2050. The following data is 
depicted: 

Fiscal year: 2000; 
Percent of GDP: 35.122; 

Fiscal year: 2001; 
Percent of GDP: 32.999. 

Fiscal year: 2002; 
Percent of GDP: 34.113. 

Fiscal year: 2003; 
Percent of GDP: 36.223. 

Fiscal year: 2004; 
Percent of GDP: 37.34. 

Fiscal year: 2005; 
Percent of GDP: 37.504. 

Fiscal year: 2006; 
Percent of GDP: 37.082. 

Fiscal year: 2007; 
Percent of GDP: 36.832. 

Fiscal year: 2008; 
Percent of GDP: 37.093. 

Fiscal year: 2009; 
Percent of GDP: 37.776. 

Fiscal year: 2010; 
Percent of GDP: 38.743. 

Fiscal year: 2011; 
Percent of GDP: 39.966. 

Fiscal year: 2012; 
Percent of GDP: 41.176. 

Fiscal year: 2013; 
Percent of GDP: 43.067. 

Fiscal year: 2014; 
Percent of GDP: 44.944. 

Fiscal year: 2015; 
Percent of GDP: 47.138. 

Fiscal year: 2016; 
Percent of GDP: 49.682. 

Fiscal year: 2017; 
Percent of GDP: 52.278. 

Fiscal year: 2018; 
Percent of GDP: 55.074. 

Fiscal year: 2019; 
Percent of GDP: 57.935. 

Fiscal year: 2020; 
Percent of GDP: 60.837. 

Fiscal year: 2021; 
Percent of GDP: 64.107. 

Fiscal year: 2022; 
Percent of GDP: 67.696. 

Fiscal year: 2023; 
Percent of GDP: 71.698. 

Fiscal year: 2024; 
Percent of GDP: 76.017. 

Fiscal year: 2025; 
Percent of GDP: 80.738. 

Fiscal year: 2026; 
Percent of GDP: 85.747. 

Fiscal year: 2027; 
Percent of GDP: 91.144. 

Fiscal year: 2028; 
Percent of GDP: 96.83. 

Fiscal year: 2029; 
Percent of GDP: 102.902. 

Fiscal year: 2030; 
Percent of GDP: 109.248. 
	
Fiscal year: 2031; 
Percent of GDP: 115.964. 

Fiscal year: 2032; 
Percent of GDP: 123.037. 

Fiscal year: 2033; 
Percent of GDP: 130.3. 

Fiscal year: 2034; 
Percent of GDP: 137.88. 

Fiscal year: 2035; 
Percent of GDP: 145.627. 

Fiscal year: 2036; 
Percent of GDP: 153.689. 

Fiscal year: 2037; 
Percent of GDP: 162.056. 

Fiscal year: 2038; 
Percent of GDP: 170.61. 

Fiscal year: 2039; 
Percent of GDP: 179.437. 

Fiscal year: 2040; 
Percent of GDP: 188.43. 

Fiscal year: 2041; 
Percent of GDP: 197.678. 

Fiscal year: 2042; 
Percent of GDP: 207.076. 

Fiscal year: 2043; 
Percent of GDP: 216.715. 

Fiscal year: 2044; 
Percent of GDP: 226.594.
	
Fiscal year: 2045; 
Percent of GDP: 236.61. 

Fiscal year: 2046; 
Percent of GDP: 246.864. 

Fiscal year: 2047; 
Percent of GDP: 257.253. 

Fiscal year: 2048; 
Percent of GDP: 268.001. 

Fiscal year: 2049; 
Percent of GDP: 278.932. 

Fiscal year: 2050; 
Percent of GDP: 290.105. 

Source: GAO's April 2008 analysis. 

Note: Assumes currently scheduled Social Security and Medicare Part A 
benefits are paid in full throughout the simulation period. 

[End of figure] 

As shown in figure 6, total federal debt increased over each of the 
last four fiscal years. 

Figure 6: Total Federal Debt Outstanding: 

[See PDF for image] 

This figure is a combination stacked vertical bar and line graph 
depicting the following data: 

Total Federal Debt Outstanding (Dollars in billions): 

As of September 30, 2003: 
Held by the public: $3,913; 
Intragovernmental holdings: $2,859; 
Total: $6,772. 

As of September 30, 2004: 
Held by the public: $4,297; 
Intragovernmental holdings: $3,071; 
Total: $7,368. 

As of September 30, 2005: 
Held by the public: $4,589; 
Intragovernmental holdings: $3,346; 
Total: $7,935. 

As of September 30, 2006: 
Held by the public: $4,826; 
Intragovernmental holdings: $3,663; 
Total: $8,489. 

As of September 30, 2007: 
Held by the public: $5,033; 
Intragovernmental holdings: $3,962; 
Total: $8,995. 

Source: The Department of the Treasury. 

[End of figure] 

On September 29, 2007, the statutory debt limit had to be raised for 
the third time in 4 years in order to avoid being breached; between the 
end of fiscal year 2003 and the end of fiscal year 2007, the debt limit 
had to be increased by about one-third. It is anticipated that actions 
will need to be taken in fiscal year 2009 to avoid breaching the 
current statutory debt limit of $9,815 billion. 

A quantitative measure of the long-term fiscal challenge measure is 
called "the fiscal gap." The fiscal gap is the amount of spending 
reduction or tax increases that would be needed today to keep debt as a 
share of GDP at or below today's ratio. The fiscal gap is an estimate 
of the action needed to achieve fiscal balance over a certain time 
period such as 75 years. Another way to say this is that the fiscal gap 
is the amount of change needed to prevent the kind of debt explosion 
implicit in figure 5. The fiscal gap can be expressed as a share of the 
economy or in present value dollars. 

Under GAO's alternative simulation, closing the fiscal gap would 
require spending cuts or tax increases equal to 6.7 percent of the 
entire economy over the next 75 years, or about $54 trillion in present 
value terms. To put this in perspective, closing the gap would require 
an increase in today's federal tax revenues of about 36 percent or an 
equivalent reduction in today's federal program spending (i.e., in all 
spending except for interest on the debt held by the public, which 
cannot be directly controlled) to be maintained over the entire period. 

Policymakers could phase in the policy changes so that the tax 
increases or spending cuts would grow over time and allow people to 
adjust. The size of these annual tax increases and spending cuts would 
be more than five times the fiscal year 2007 deficit of 1.2 percent of 
GDP. Delaying action would make future adjustments even larger. Under 
our alternative simulation, waiting even 10 years would require a 
revenue increase of about 45 percent or noninterest spending cuts of 
about 40 percent. This gap is too large for the federal government to 
grow its way out of the problem. To be sure, additional economic growth 
would certainly help the federal government's financial condition and 
ability to address this fiscal gap, but it will not eliminate the need 
for action. 

Understanding and addressing the federal government's financial 
condition and the nation's long-term fiscal challenge are critical to 
the nation's future. As we reported in December 2007,[Footnote 25] 
several countries have begun preparing fiscal sustainability reports to 
help assess the implications of their public pension and health care 
programs and other challenges in the context of overall sustainability 
of government finances. European Union members also annually report on 
longer-term fiscal sustainability. The goal of these reports is to 
increase public awareness and understanding of the long-term fiscal 
outlook in light of escalating health care cost growth and population 
aging, to stimulate public and policy debates, and to help policymakers 
make more informed decisions. These countries used a variety of 
measures, including projections of future revenue and spending and 
summary measures of fiscal imbalance and fiscal gaps, to assess fiscal 
sustainability. Last year, we recommended that the United States should 
prepare and publish a long-range fiscal sustainability report.[Footnote 
26] I am pleased to note that the Federal Accounting Standards Advisory 
Board (FASAB) will soon issue a draft of a proposed standard on fiscal 
sustainability reporting. 

Here in the first half of 2008, the long-term fiscal challenge is not 
in the distant future. In fact, the oldest members of the baby boom 
generation are now eligible for Social Security retirement benefits and 
will be eligible for Medicare benefits in less than 3 years. The budget 
and economic implications of the baby boom generation's retirement have 
already become a factor in CBO's 10-year budget projections and that 
impact will only intensify as the baby boomers age. 

The financial markets also are noticing. Earlier this year, Moody's 
Investors Service issued its annual report on the United States. In 
that report, it noted that absent Medicare and Social Security reforms, 
the long-term fiscal health of the United States and the federal 
government's current Aaa sovereign credit rating were at risk. 
Likewise, Standard and Poor's noted in a recent report that Medicare 
and Social Security reform is necessary to prevent a much worse long- 
term fiscal deterioration. These comments serve to note the significant 
longer-term interest rate risk that the federal government faces absent 
meaningful action to address these long-range challenges. Higher longer-
term interest costs would only serve to complicate the nation's fiscal, 
economic, and other challenges in future years. 

At some point, action will need to be taken to change the nation's 
fiscal course. The sooner appropriate actions are taken, the sooner the 
miracle of compounding will begin to work for the federal budget rather 
than against it. Conversely, the longer that action to deal with the 
nation's long-term fiscal outlook is delayed, the greater the risk that 
the eventual changes will be disruptive and destabilizing and future 
generations will have to bear a greater burden of the cost. Simply put, 
the federal government is on an imprudent and unsustainable long-term 
fiscal path that is getting worse with the passage of time. 

A Possible Way Forward: 

Meeting this long-term fiscal challenge overarches everything. It is 
the nation's largest sustainability challenge, but it is not the only 
one. Aligning the federal government to meet the challenges and 
capitalize on the opportunities of the 21st century will require a 
fundamental review of what the federal government does, how it does it, 
and how it is financed. 

In addressing the growing costs of the major entitlement programs and 
reexamining other major programs, policies, and activities, attention 
should be paid to both the spending and the revenue sides of the 
budget. Programs that run through the tax code--sometimes referred to 
as tax expenditures[Footnote 27]--must be reexamined along with those 
that run through the spending side. Moving forward, the federal 
government needs to start making tough choices in setting priorities 
and linking resources and activities to results. 

Meeting the nation's long-term fiscal challenge will require a 
multipronged approach bringing people together to tackle health care, 
Social Security, and the tax system as well as: 

* strengthening oversight of programs and activities, including 
creating approaches to better facilitate the discussion of integrated 
solutions to crosscutting issues; and; 

* reengineering and reprioritizing the federal government's existing 
programs, policies, and activities to address 21st century challenges 
and capitalize on related opportunities. 

There are also some process changes that might help the discussion by 
increasing the transparency and relevancy of key financial, 
performance, and budget reporting and estimates that highlight the 
fiscal challenge. Stronger budget controls for both spending and tax 
policies to deal with both near-term and longer-term deficits may also 
be helpful. 

In summary, to effectively address the nation's long-term fiscal 
challenge, tackling health care cost growth and other existing 
entitlement programs will be essential. However, this entitlement 
reform alone will not get the job done. The federal government also 
needs to reprioritize and constrain other spending and consider whether 
revenues at the historical average of 18.3 percent of GDP will be 
sufficient--that may involve discussion of the tax system. I am pleased 
that GAO has been able to offer you specific analysis and tools to 
assist you in this important work. However, only elected officials can 
and should decide which issues to address as well as how and when to 
address them. Addressing these problems will require tough choices, and 
the fiscal clock is ticking. 

The Federal Financial Reporting Model: 

The Financial Report provides useful information on the government's 
financial position at the end of the fiscal year and changes that have 
occurred over the course of the year. However, in evaluating the 
nation's fiscal condition, it is critical to look beyond the short-term 
results and consider the overall long-term financial condition and long-
term fiscal challenge of the government--that is, the sustainability of 
the federal government's programs, commitments, and responsibilities in 
relation to the resources expected to be available. 

The current federal financial reporting model does not clearly, 
comprehensively and transparently show the wide range of 
responsibilities, programs, and activities that may either obligate the 
federal government to future spending or create an expectation for such 
spending. Thus, it does not provide the best possible picture of the 
federal government's overall performance, financial condition, and 
future fiscal outlook. 

Accounting and financial reporting standards have continued to evolve 
to provide adequate transparency and accountability over the federal 
government's operations, financial condition and fiscal outlook. 
However, after 11 years of reporting at the governmentwide level, it is 
appropriate to consider the need for further revisions to the current 
federal financial reporting model, which could affect both consolidated 
and agency reporting. While the current reporting model recognizes some 
of the unique needs of the federal government, a broad reconsideration 
of the federal financial reporting model could address the following 
types of questions: 

* What kind of information is most relevant and useful for a sovereign 
nation? 

* Do traditional financial statements convey information in a 
transparent manner? 

* What is the role of the balance sheet in the federal government 
reporting model? 

* How should items that are unique to the federal government, such as 
social insurance commitments and the power to tax, be reported? 

In addition, further enhancements to accounting and financial reporting 
standards are needed to effectively convey the long-term financial 
condition of the U.S. government and annual changes therein. For 
example, the federal government's financial reporting should be 
expanded to disclose the reasons for significant changes during the 
year in scheduled social insurance benefits and funding. It should also 
include (1) a Statement of Fiscal Sustainability[Footnote 28] that 
provides a long-term look at the sustainability of social insurance 
programs in the context of all federal programs, and (2) other 
sustainability information, including intergenerational equity. 
[Footnote 29] The Federal Accounting Standards Advisory Board is 
currently considering possible changes to social insurance reporting 
and has initiated a project on fiscal sustainability reporting. 

Engaging in a reevaluation of the federal financial reporting model 
could stimulate discussion that would bring about a new way of thinking 
about the federal government's financial and performance reporting 
needs. To understand various perceptions and needs of the stakeholders 
for federal financial reporting, a wide variety of stakeholders from 
the public and private sector should be consulted. Ultimately, the goal 
of such a reevaluation would be reporting enhancements that can help 
the Congress deliberate on strategies to address the federal 
government's challenges, including its long-term fiscal challenge. 

Closing Comments: 

In closing, it is important that the progress that has been made in 
improving federal financial management activities and practices be 
sustained by the current administration as well as the new 
administration that will be taking office next year. Across government, 
financial management improvement initiatives are underway, and if 
effectively implemented, they have the potential to greatly improve the 
quality of financial management information as well as the efficiency 
and effectiveness of agency operations. However, the federal government 
still has a long way to go before realizing strong federal financial 
management. For DOD, the challenges are many. We are encouraged by 
DOD's efforts toward addressing its long-standing financial management 
weaknesses, but consistent and diligent management oversight toward 
achieving financial management capabilities, including audit readiness 
is needed. Federal agencies need to improve the government's financial 
management systems. The civilian CFO Act agencies must continue to 
strive toward routinely producing not only annual financial statements 
that can pass the scrutiny of a financial audit, but also quarterly 
financial statements and other meaningful financial and performance 
data to help guide decision makers on a day-to-day basis. 

Addressing the nation's long-term fiscal challenge constitutes a major 
transformational challenge that may take a generation or more to 
resolve. GAO is committed to sustained attention to this fiscal 
challenge to help ensure that this is not the first generation to leave 
its children and grandchildren a legacy of failed fiscal stewardship 
and the hardships that would bring. Given the size of the projected 
deficit, the leadership and efforts of many people will be needed to 
put the nation on a more prudent and sustainable longer-term fiscal 
path. 

Given the federal government's current financial condition and the 
nation's long-term fiscal challenge, the need for the Congress and 
federal policymakers and management to have reliable, useful, and 
timely financial and performance information is greater than ever. 
Sound decisions on the current and future direction of vital federal 
government programs and policies are more difficult without such 
information. We will continue to stress the need for development of 
more meaningful financial and performance reporting on the federal 
government. Until the problems discussed in this testimony are 
effectively addressed, they will continue to have adverse implications 
for the federal government and the taxpayers. 

Finally, I want to emphasize the value of sustained congressional 
interest in these issues, as demonstrated by this subcommittee's 
leadership. It will be key that, going forward, the appropriations, 
budget, authorizing, and oversight committees hold agency top 
leadership accountable for resolving the remaining problems and that 
they support improvement efforts. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other members of the 
subcommittee may have at this time. 

GAO Contacts and Acknowledgments: 

For further information regarding this testimony, please contact McCoy 
Williams, Managing Director; and Gary Engel, Director; Financial 
Management and Assurance at (202) 512-2600, as well as Susan Irving, 
Director; Federal Budget Analysis, Strategic Issues at (202) 512-9142. 
Key contributions to this testimony were also made by staff on the 
Consolidated Financial Statement audit team. 

[End of section] 

Appendix I: Material Weaknesses Contributing to Our Disclaimer of 
Opinion on the Accrual Basis Consolidated Financial Statements: 

The continuing material weaknesses discussed below contributed to our 
disclaimer of opinion on the federal government's accrual basis 
consolidated financial statements. The federal government did not 
maintain adequate systems or have sufficient reliable evidence to 
support information reported in the accrual basis consolidated 
financial statements, as described below. 

Property, Plant, and Equipment and Inventories and Related Property: 

The federal government could not satisfactorily determine that 
property, plant, and equipment (PP&E) and inventories and related 
property were properly reported in the consolidated financial 
statements. Most of the PP&E and inventories and related property are 
the responsibility of the Department of Defense (DOD). As in past 
years, DOD did not maintain adequate systems or have sufficient records 
to provide reliable information on these assets. Other agencies, most 
notably the National Aeronautics and Space Administration, reported 
continued weaknesses in internal control procedures and processes 
related to PP&E. 

Without reliable asset information, the federal government does not 
fully know the assets it owns and their location and condition and 
cannot effectively (1) safeguard assets from physical deterioration, 
theft, or loss; (2) account for acquisitions and disposals of such 
assets; (3) ensure that the assets are available for use when needed; 
(4) prevent unnecessary storage and maintenance costs or purchase of 
assets already on hand; and (5) determine the full costs of programs 
that use these assets. 

Loans Receivable and Loan Guarantee Liabilities: 

Federal agencies that account for the majority of the reported balances 
for direct loans and loan guarantee liabilities continue to have 
internal control weaknesses related to their credit reform estimation 
and related financial reporting processes. While progress in addressing 
these long-standing weaknesses was reported by certain federal credit 
agencies, certain deficiencies in the Department of Agriculture's 
credit reform processes contributed to its auditor being unable to 
obtain sufficient, appropriate evidence to support related accounts. As 
such, for fiscal year 2007, we have added this area to the list of 
material weaknesses contributing to our disclaimer of opinion on the 
accrual basis consolidated financial statements. 

These issues and the complexities associated with estimating the costs 
of lending activities significantly increase the risk that material 
misstatements in agency and governmentwide financial statements could 
occur and go undetected. Moreover, these weaknesses continue to 
adversely affect the federal government's ability to support annual 
budget requests for federal lending programs, make future budgetary 
decisions, manage program costs, and measure the performance of lending 
activities. 

Liabilities and Commitments and Contingencies: 

The federal government could not reasonably estimate or adequately 
support amounts reported for certain liabilities. For example, DOD was 
not able to estimate with assurance key components of its environmental 
and disposal liabilities. In the past, DOD could not support a 
significant amount of its estimated military postretirement health 
benefits liabilities included in federal employee and veteran benefits 
payable. These unsupported amounts related to the cost of direct health 
care provided by DOD-managed military treatment facilities. This year, 
the auditor's report on the financial statements that include the 
estimated military postretirement health benefits liabilities had not 
been issued as of the date of our audit report.[Footnote 30] Further, 
the federal government could not determine whether commitments and 
contingencies, including those related to treaties and other 
international agreements entered into to further the U.S. government's 
interests, were complete and properly reported. 

Problems in accounting for liabilities affect the determination of the 
full cost of the federal government's current operations and the extent 
of its liabilities. Also, weaknesses in internal control supporting the 
process for estimating environmental and disposal liabilities could 
result in improperly stated liabilities as well as affect the federal 
government's ability to determine priorities for cleanup and disposal 
activities and to appropriately consider future budgetary resources 
needed to carry out these activities. In addition, if disclosures of 
commitments and contingencies are incomplete or incorrect, reliable 
information is not available about the extent of the federal 
government's obligations. 

Cost of Government Operations and Disbursement Activity: 

The previously discussed material weaknesses in reporting assets and 
liabilities, material weaknesses in financial statement preparation, as 
discussed below, and the lack of adequate disbursement reconciliations 
at certain federal agencies affect reported net costs. As a result, the 
federal government was unable to support significant portions of the 
total net cost of operations, most notably related to DOD. 

With respect to disbursements, DOD and certain other federal agencies 
reported continued weaknesses in reconciling disbursement activity. For 
fiscal years 2007 and 2006, there was unreconciled disbursement 
activity, including unreconciled differences between federal agencies' 
and Treasury's records of disbursements and unsupported federal agency 
adjustments, totaling billions of dollars, which could also affect the 
balance sheet. 

Unreliable cost information affects the federal government's ability to 
control and reduce costs, assess performance, evaluate programs, and 
set fees to recover costs where required. If disbursements are 
improperly recorded, this could result in misstatements in the 
financial statements and in certain data provided by federal agencies 
for inclusion in The Budget of the United States Government (hereafter 
referred to as "the President's Budget") concerning obligations and 
outlays. 

Accounting for and Reconciliation of Intragovernmental Activity and 
Balances: 

Federal agencies are unable to adequately account for and reconcile 
intragovernmental activity and balances. OMB and Treasury require the 
chief financial officers (CFO) of 35 executive departments and agencies 
to reconcile, on a quarterly basis, selected intragovernmental activity 
and balances with their trading partners. In addition, these agencies 
are required to report to Treasury, the agency's inspector general, and 
GAO on the extent and results of intragovernmental activity and 
balances reconciliation efforts as of the end of the fiscal year. 

A substantial number of the agencies did not adequately perform the 
required reconciliations for fiscal years 2007 and 2006. For these 
fiscal years, based on trading partner information provided to Treasury 
via agencies' closing packages, Treasury produced a "Material 
Difference Report" for each agency showing amounts for certain 
intragovernmental activity and balances that significantly differed 
from those of its corresponding trading partners as of the end of the 
fiscal year. Based on our analysis of the "Material Difference Reports" 
for fiscal year 2007, we noted that a significant number of CFOs were 
unable to adequately explain the differences with their trading 
partners or did not provide adequate documentation to support 
responses. For both fiscal years 2007 and 2006, amounts reported by 
federal agency trading partners for certain intragovernmental accounts 
were not in agreement by significant amounts. In addition, a 
significant number of CFOs cited differing accounting methodologies, 
accounting errors, and timing differences for their material 
differences with their trading partners. Some CFOs simply indicated 
that they were unable to explain the differences with their trading 
partners with no indication when the differences will be resolved. As a 
result of the above, the federal government's ability to determine the 
impact of these differences on the amounts reported in the accrual 
basis consolidated financial statements is significantly impaired. 

Preparation of Consolidated Financial Statements: 

While further progress was demonstrated in fiscal year 2007, the 
federal government continued to have inadequate systems, controls, and 
procedures to ensure that the consolidated financial statements are 
consistent with the underlying audited agency financial statements, 
properly balanced, and in conformity with U.S. generally accepted 
accounting principles (GAAP). In addition, as discussed in our scope 
limitation section of our audit report, Treasury could not provide the 
final fiscal year 2007 accrual basis consolidated financial statements 
and adequate supporting documentation in time for us to complete all of 
our planned auditing procedures. During our fiscal year 2007 audit, we 
found the following: 

* Treasury has showed progress by demonstrating that amounts in the 
Statement of Social Insurance were consistent with the underlying 
federal agencies' audited financial statements and that the Balance 
Sheet and the Statement of Net Cost were consistent with federal 
agencies' financial statements prior to eliminating intragovernmental 
activity and balances. However, Treasury's process for compiling the 
consolidated financial statements did not ensure that the information 
in the remaining three principal financial statements and notes were 
fully consistent with the underlying information in federal agencies' 
audited financial statements and other financial data. 

* At the federal agency level, for fiscal year 2007, auditors for many 
of the CFO Act agencies reported material weaknesses or other 
significant deficiencies regarding agencies' financial reporting 
processes which, in turn, could affect the preparation of the 
consolidated financial statements. For example, auditors for several 
agencies reported that a significant number of adjustments were 
required to prepare the agencies' financial statements. These and other 
auditors are also required to separately audit financial information 
sent by the federal agencies to Treasury via a closing package. In 
connection with preparing the consolidated financial statements, 
Treasury had to create adjustments to correct significant errors found 
in agencies' audited closing package information. 

* To make the fiscal years 2007 and 2006 consolidated financial 
statements balance, Treasury recorded net decreases of $6.7 billion and 
$11 billion, respectively, to net operating cost on the Statement of 
Operations and Changes in Net Position, which it labeled "Other - 
Unmatched transactions and balances."[Footnote 31] An additional net 
$2.5 billion and $10.4 billion of unmatched transactions were recorded 
in the Statement of Net Cost for fiscal years 2007 and 2006, 
respectively. Treasury is unable to fully identify and quantify all 
components of these unreconciled activities. 

* The federal government could not demonstrate that it had fully 
identified and reported all items needed to reconcile the operating 
results, which for fiscal year 2007 showed a net operating cost of 
$275.5 billion, to the budget results, which for the same period showed 
a unified budget deficit of $162.8 billion. 

* Treasury's elimination of certain intragovernmental activity and 
balances continues to be impaired by the federal agencies' problems in 
handling their intragovernmental transactions. As previously discussed, 
amounts reported for federal agency trading partners for certain 
intragovernmental accounts were not in agreement by significant 
amounts. This resulted in the need for intragovernmental elimination 
entries by Treasury that recorded the net differences between trading 
partners as "Other - Unmatched transactions and balances," in order to 
force the Statements of Operations and Changes in Net Position into 
balance. In addition, differences in other intragovernmental accounts, 
primarily related to transactions with the General Fund, have not been 
reconciled, still remain unresolved, and total hundreds of billions of 
dollars. Therefore, the federal government continues to be unable to 
determine the impact of unreconciled intragovernmental activity and 
balances on the accrual basis consolidated financial statements. 

* We have consistently reported that certain financial information 
required by GAAP was not disclosed in the consolidated financial 
statements. In 2006, the Federal Accounting Standards Advisory Board 
issued a new standard that eliminated or lessened the disclosure 
requirements for the consolidated financial statements related to 
certain information that Treasury had not been reporting.[Footnote 32] 
While Treasury made progress in addressing some of the remaining 
omitted information, there continue to be disclosures required by GAAP 
that are excluded from the consolidated financial statements. Also, 
certain material weaknesses noted in this report, for example, 
commitments and contingencies related to treaties and other 
international agreements, preclude Treasury from determining if a 
disclosure is required by GAAP in the consolidated financial statements 
and us from determining if the omitted information is material. 
Further, Treasury's ability to report information in accordance with 
GAAP will also remain impaired until federal agencies, such as DOD, can 
provide Treasury with complete and reliable information required to be 
reported in the consolidated financial statements. 

* Other internal control weaknesses existed in Treasury's process for 
preparing the consolidated financial statements, involving inadequate 
or ineffective (1) documentation of certain policies and procedures; 
(2) management reviews of adjustments and key iterations of the 
financial statements, notes, and management discussion and analysis 
provided to GAO for audit; (3) supporting documentation for certain 
adjustments made to the consolidated financial statements; (4) 
processes for monitoring the preparation of the consolidated financial 
statements; and (5) spreadsheet controls. 

* The consolidated financial statements include financial information 
for the executive, legislative, and judicial branches, to the extent 
that federal agencies within those branches have provided Treasury such 
information. However, as we have reported in past years, there continue 
to be undetermined amounts of assets, liabilities, costs, and revenues 
that are not included, and the federal government did not provide 
evidence or disclose in the consolidated financial statements that the 
excluded financial information was immaterial. 

* As in previous years, Treasury did not have adequate systems and 
personnel to address the magnitude of the fiscal year 2007 financial 
reporting challenges it faced, such as weaknesses in Treasury's process 
for preparing the consolidated financial statements noted above. We 
found that personnel at Treasury's Financial Management Service had 
excessive workloads that required an extraordinary amount of effort and 
dedication to compile the consolidated financial statements; however, 
there were not enough personnel with specialized financial reporting 
experience to help ensure reliable financial reporting by the reporting 
date. In addition, the federal government does not perform quarterly 
compilations at the governmentwide level, which leads to almost all of 
the compilation effort being performed during a condensed time period 
at the end of the year. 

Components of the Budget Deficit: 

Both the Reconciliation of Net Operating Cost and Unified Budget 
Deficit and Statement of Changes in Cash Balance from Unified Budget 
and Other Activities report a budget deficit for fiscal years 2007 and 
2006 of $162.8 billion and $247.7 billion, respectively.[Footnote 33] 
The budget deficit is calculated by subtracting actual budget outlays 
(outlays) from actual budget receipts (receipts). 

For several years, we have been reporting material unreconciled 
differences between the total net outlays reported in selected federal 
agencies' Statement of Budgetary Resources (SBR) and Treasury's central 
accounting records used to compute the budget deficit[Footnote 34] 
reported in the consolidated financial statements. OMB and Treasury 
have continued to work with federal agencies to reduce these material 
unreconciled differences. However, billions of dollars of differences 
still exist in this and other components of the deficit because the 
federal government does not have effective processes and procedures for 
identifying, resolving, and explaining material differences in the 
components of the deficit between Treasury's central accounting records 
and information reported in agency financial statements and underlying 
agency financial information and records. Until these differences are 
timely reconciled by the federal government, their effect on the U.S. 
government's consolidated financial statements will be unknown. 

In fiscal year 2007, we again noted that several agencies' auditors 
reported internal control weaknesses (1) affecting the agencies' SBRs, 
and (2) relating to monitoring, accounting, and reporting of budgetary 
transactions. These weaknesses could affect the reporting and 
calculation of the net outlay amounts in the agencies' SBRs. In 
addition, such weaknesses also affect the agencies' ability to report 
reliable budgetary information to Treasury and OMB and may affect the 
unified budget outlays reported by Treasury in its Combined Statement 
of Receipts, Outlays, and Balances,[Footnote 35] and certain amounts 
reported in the President's Budget. 

[End of section] 

Appendix II: Other Material Weaknesses: 

The federal government did not maintain effective internal control over 
financial reporting (including safeguarding assets) and compliance with 
significant laws and regulations as of September 30, 2007. In addition 
to the material weaknesses discussed in appendix I that contributed to 
our disclaimer of opinion on the accrual basis consolidated financial 
statements, we found the following three other material weaknesses in 
internal control. 

Improper Payments: 

Although showing progress under OMB's continuing leadership, agencies' 
fiscal year 2007 reporting under the Improper Payments Information Act 
of 2002 (IPIA)[Footnote 36] does not reflect the full scope of improper 
payments. For fiscal year 2007, federal agencies' estimates of improper 
payments, based on available information, totaled about $55 billion. 
[Footnote 37] The increase from the prior year estimate of $41 billion 
[Footnote 38] was primarily attributable to a component of the Medicaid 
program reporting improper payments for the first time totaling about 
$13 billion for fiscal year 2007, which we view as a positive step to 
improve transparency over the full magnitude of improper payments. 

Major challenges remain in meeting the goals of the act and ultimately 
better ensuring the integrity of payments.[Footnote 39] For fiscal year 
2007, four agency auditors reported noncompliance issues with IPIA 
related to agencies' risk assessments, sampling methodologies, 
implementing corrective action plans, and recovering improper payments. 
We also identified issues with agencies' risk assessments such as not 
completing risk assessments of all programs and activities or not 
conducting annual reviews of any programs and activities. OMB's current 
guidance allows for annual risk assessments to be conducted less often 
than annually (generally every 3 years) for programs where baselines 
are already established, are in the process of being measured, or are 
scheduled to be measured by an established date. For fiscal year 2007, 
we noted that 4 agencies were implementing a 3-year cycle for 
conducting risk assessments. Furthermore, select agencies have not 
reported improper payment estimates for 14 risk-susceptible federal 
programs with total program outlays of about $170 billion for fiscal 
year 2007. Lastly, we found that major management challenges and 
internal control weaknesses continue to plague agency operations and 
programs susceptible to significant improper payments. For example, in 
the Department of Education's fiscal year 2007 Performance and 
Accountability Report, the Office of Inspector General reported that 
its recent investigations continue to uncover problems, including 
inadequate attention to improper payments and failure to identify and 
take corrective action to detect and prevent fraudulent activities by 
grantees. 

Information Security: 

Although progress has been made, serious and widespread information 
security control weaknesses continue to place federal assets at risk of 
inadvertent or deliberate misuse, financial information at risk of 
unauthorized modification or destruction, sensitive information at risk 
of inappropriate disclosure, and critical operations at risk of 
disruption. GAO has reported information security as a high-risk area 
across government since February 1997. During fiscal year 2007, federal 
agencies did not consistently implement effective controls to prevent, 
limit, or detect unauthorized access to computing resources. 
Specifically, agencies did not always (1) identify and authenticate 
users to prevent unauthorized access; (2) enforce the principle of 
least privilege to ensure that authorized access was necessary and 
appropriate; (3) apply encryption to protect sensitive data on networks 
and portable devices; (4) log, audit, and monitor security-relevant 
events; and (5) restrict physical access to information assets. In 
addition, agencies did not consistently configure network devices and 
services to prevent unauthorized access and ensure system integrity, 
such as patching key servers and workstations in a timely manner; 
assign incompatible duties to different individuals or groups so that 
one individual does not control all aspects of a process or 
transaction; and maintain or test continuity of operations plans for 
key information systems. Such information security control weaknesses 
unnecessarily increase the risk that the reliability and availability 
of data that are recorded in or transmitted by federal financial 
management systems could be compromised. A primary reason for these 
weaknesses is that federal agencies have not yet fully 
institutionalized comprehensive security management programs, which are 
critical to identifying information security control weaknesses, 
resolving information security problems, and managing information 
security risks on an ongoing basis. The administration has taken 
important actions to improve information security, such as issuing 
extensive guidance on information security and requiring agencies to 
perform specific actions to protect certain personally identifiable 
information. However, until agencies effectively and fully implement 
agencywide information security programs, federal data and systems, 
including financial information, will remain at risk. 

Tax Collection Activities: 

During fiscal year 2007, material internal control weaknesses and 
systems deficiencies continued to affect the federal government's 
ability to effectively manage its tax collection activities, an issue 
that has been reported in our financial statement audit reports for the 
past 10 years. Due to errors and delays in recording taxpayer 
information, payments, and other activities, taxpayers were not always 
credited for payments made on their taxes owed, which could result in 
undue taxpayer burden. In addition, the federal government did not 
always follow up on potential unreported or underreported taxes and did 
not always pursue collection efforts against taxpayers owing taxes to 
the federal government. Moreover, the federal government did not have 
cost benefit information, related cost-based performance measures, or a 
systematic process for ensuring it is using its resources to maximize 
its ability to collect what is owed and minimize the disbursements of 
improper tax refunds. As a result, the federal government is vulnerable 
to loss of tax revenue and exposed to potentially billions of dollars 
in losses due to inappropriate refund disbursements. 

[End of section] 

Appendix III: Fiscal Year 2007 Audit Results: 

Table 2: CFO Act Agencies: Fiscal Year 2007 Audit Results and Principal 
Auditors: 

CFO Act agencies: Agency for International Development; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: OIG. 

CFO Act agencies: Agriculture; 
Opinion rendered by agency auditor: Qualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: OIG. 

CFO Act agencies: Commerce; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: KPMG LLP. 

CFO Act agencies: Defense; 
Opinion rendered by agency auditor: Disclaimer; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: OIG. 

CFO Act agencies: Education; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: Ernst & Young, LLP. 

CFO Act agencies: Energy; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agencies: Environmental Protection Agency; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: OIG. 

CFO Act agencies: General Services Administration; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: Pricewaterhouse Coopers LLP. 

CFO Act agencies: Health and Human Services; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: Pricewaterhouse Coopers LLP. 

CFO Act agencies: Homeland Security; 
Opinion rendered by agency auditor: [B]; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agencies: Housing and Urban Development; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: OIG. 

CFO Act agencies: Interior; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agencies: Justice; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agencies: Labor; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: KPMG LLP. 

CFO Act agencies: National Aeronautics and Space Administration; 
Opinion rendered by agency auditor: Disclaimer; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: Ernst & Young, LLP. 

CFO Act agencies: National Science Foundation; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: Clifton Gunderson LLP. 

CFO Act agencies: Nuclear Regulatory Commission; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: R. Navarro & Associates, Inc. 

CFO Act agencies: Office of Personnel Management; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agencies: Small Business Administration; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: KPMG LLP. 

CFO Act agencies: Social Security Administration; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: Pricewaterhouse Coopers LLP. 

CFO Act agencies: State; 
Opinion rendered by agency auditor: Disclaimer; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: Leonard G. Birnbaum and Company, LLP. 

CFO Act agencies: Transportation; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: OIG. 

CFO Act agencies: Treasury; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: KPMG LLP. 

CFO Act agencies: Veterans Affairs; 
Opinion rendered by agency auditor: Unqualified; 
Agencies' auditors reported material weaknesses or noncompliance[A]: 
[Check];
Principal auditor: Deloitte & Touche LLP. 

Source: GAO. 

[A] Reported noncompliance with applicable laws and regulations and/or 
substantial noncompliance with one or more of the Federal Financial 
Management Improvement Act requirements. 

[B] For fiscal year 2007, only the Consolidated Balance Sheet and the 
related Statement of Custodial Activity of the Department of Homeland 
Security were subject to audit; the auditor was unable to express an 
opinion on these two financial statements. 

[End of table] 

[End of section] 

Footnotes: 

[1] Our audit work regarding the U.S. government's consolidated 
financial statements was conducted in accordance with U.S. generally 
accepted government auditing standards. 

[2] Also, see GAO, Understanding the Primary Components of the Annual 
Financial Report of the United States Government, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-958SP] (Washington, D.C.: 
September 2005), which was prepared to help those who seek to obtain a 
better understanding of the Financial Report. 

[3] A material weakness is a significant deficiency, or combination of 
significant deficiencies, that results in more than a remote likelihood 
that a material misstatement of the financial statements will not be 
prevented or detected. A significant deficiency is a control 
deficiency, or combination of control deficiencies, that adversely 
affects the entity's ability to initiate, authorize, record, process, 
or report financial data reliably in accordance with generally accepted 
accounting principles such that there is more than a remote likelihood 
that a misstatement of the entity's financial statements that is more 
than inconsequential will not be prevented or detected. A control 
deficiency exists when the design or operation of a control does not 
allow management or employees, in the normal course of performing their 
assigned functions, to prevent or detect misstatements on a timely 
basis. 

[4] Most revenues reported in the accrual basis consolidated financial 
statements are recorded on a modified cash basis. 

[5] We disclaimed an opinion on the fiscal year 2006 consolidated 
financial statements, including the Statement of Social Insurance. 
Social insurance programs included in the Statement of Social Insurance 
are Social Security, Medicare, Railroad Retirement, and Black Lung. 

[6] Present value is the discounted value of a payment or stream of 
payments to be received or paid in the future, taking into 
consideration a specific interest or discount rate. 

[7] GAO, Critical Accountability and Fiscal Stewardship Challenges 
Facing Our Nation, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-
542T] (Washington, D.C.: Mar. 1, 2007). 

[8] We previously reported that certain material weaknesses prevented 
us from expressing an opinion on the consolidated financial statements 
of the U.S. government for fiscal years 1997 through 2006. 

[9] See page 182 of the Financial Report for more details regarding 
these significant deficiencies. 

[10] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-310] (Washington, D.C.: 
January 2007). 

[11] Pub. L. No. 110-181, ï¿½ 904 (2008). 

[12] The Enterprise Transition Plan is intended to describe how DOD 
will transition from its current or "as is" operational environment to 
its intended or "to be" operational capabilities. The Business 
Transformation Agency is the DOD agency responsible for DOD's business 
transformation and the development and implementation of the ETP. 

[13] DOD's FIAR Plan, initially issued in December 2005 and updated 
each June and September, is intended to provide DOD components with a 
framework for resolving problems affecting the accuracy, reliability, 
and timeliness of financial information and obtaining clean financial 
statement audit opinions. 

[14] DOD defines financial visibility as providing immediate access to 
accurate and reliable financial information (planning, programming, 
budgeting, accounting, and cost information) in support of financial 
accountability and efficient and effective decision making through the 
department in support of the missions of the warfighter. 

[15] DOD defines a segment as a component of an entity's business and 
financial environment. A segment can include (1) complete or partial 
business processes; (2) financial systems, business systems, or both; 
or (3) commands or installations. According to DOD, the environment's 
complexity, materiality, and timing of corrective actions are all 
factors that are taken into consideration when defining a segment. 

[16] The U.S. Chief Financial Officers Council is an organization of 
the CFOs and Deputy CFOs of the largest federal agencies and senior 
officials of OMB and Treasury who work collaboratively to improve 
financial management in the U.S. government. 

[17] Most of the issues regarding the preparation of the consolidated 
financial statements that we identified in fiscal year 2007 existed in 
fiscal year 2006, and many have existed for a number of years. In July 
2007, we reported the issues we identified to Treasury and OMB and 
provided new recommendations for corrective action and discussed the 
status of certain previously issued recommendations in GAO, Financial 
Audit: Significant Internal Control Weaknesses Remain in the 
Preparation of the Consolidated Financial Statements of the U.S. 
Government, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-805] 
(Washington, D.C.: July 23, 2007). 

[18] The same six types of problems have been cited by auditors 
although the auditors may not have reported these problems as specific 
reasons for the agency systems not being substantially compliant with 
the FFMIA requirements. 

[19] On December 11, 2007, the Comptroller General of the United States 
hosted a forum in Washington, D.C., attended by Chief Financial 
Officers, Chief Information Officers, Inspectors General (IG) from 
several of the 24 CFO Act agencies, and other knowledgeable officials 
in the public and private sector, to discuss issues related to 
effective financial management system implementation across the federal 
government and to address long-standing federal financial management 
issues. See GAO, Highlights of a Forum: Improving the Federal 
Government's Financial Management Systems, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-447SP] (Washington, D.C.: Apr. 
16, 2008). 

[20] GAO, Financial Management Systems: Additional Efforts Needed to 
Address Key Causes of Modernization Failures, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-06-184] (Washington, D.C.: Mar. 
15, 2006). 

[21] The on-budget deficit includes all budgetary accounts other than 
those designated by law as off-budget. The off-budget accounts are the 
Postal Service and Social Security trust funds. The unified budget is a 
comprehensive measure of all federal activities, including those that 
are on-budget and off-budget. 

[22] GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term 
Costs and Uncertainties, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-03-213] (Washington, D.C.: Jan. 24, 2003). 

[23] Social Security and Medicare spending are based on the 2008 
Trustees' intermediate projections. Medicare spending is adjusted using 
the Centers for Medicare and Medicaid Services' estimates assuming that 
physician payments are not reduced as required under current law. 
Medicaid spending is based on CBO's December 2007 long-term projections 
adjusted to reflect excess cost growth consistent with the Trustees' 
intermediate projections. Additional information about GAO's simulation 
model, assumptions, data, and results can be found at [hyperlink, 
http://www.gao.gov/special.pubs/longterm/]. 

[24] Discretionary spending refers to spending based on authority 
provided in annual appropriations acts. Mandatory spending refers to 
spending that the Congress has authorized in legislation other than 
appropriations acts that entitles beneficiaries to receive payment or 
that otherwise obligates the federal government to make payment. 

[25] GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but 
Does Not Provide Sufficient Information for Reporting on Our Nation's 
Longer-Term Fiscal Challenge, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-206] (Washington, D.C.: Dec. 20, 2007). 

[26] GAO, Long-Term Fiscal Challenge: Additional Transparency and 
Controls Are Needed, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
07-1144T] (Washington, D.C.: July 25, 2007), and Long-Term Budget 
Outlook: Deficits Matter--Saving Our Future Requires Tough Choices 
Today, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-389T] 
(Washington, D.C.: Jan. 23, 2007). 

[27] In addition to the reported net cost, the federal government 
foregoes tax revenues as a result of preferential provisions, such as 
tax exclusions, credits, and deductions. These revenue losses are 
referred to as tax expenditures. 

[28] The Statement of Fiscal Sustainability would show the relationship 
between the present value of projected revenues and outlays for social 
insurance and for all other federal programs. 

[29] Intergenerational equity assesses the extent to which different 
age groups may be required to assume financial burdens to sustain 
federal responsibilities. 

[30] The auditor's report on these financial statements was issued 
subsequent to the date of our audit report. The auditor continued to 
report issues related to the cost of direct health care provided by DOD-
managed military treatment facilities. 

[31] Although Treasury was unable to determine how much of the 
unmatched transactions and balances, if any, relate to net operating 
cost, it reported this amount as a component of net operating cost in 
the consolidated financial statements. 

[32] SFFAS No. 32, Consolidated Financial Report of the United States 
Government Requirements: Implementing Statement of Federal Financial 
Accounting Concepts 4 "Intended Audience and Qualitative 
Characteristics for the Consolidated Financial Report of the United 
States Government" (Washington, D.C.: Sept. 28, 2006). 

[33] The budget deficit, receipts, and outlays amounts are reported in 
Treasury's Monthly Treasury Statement and the President's Budget. 

[34] See GAO's audit report on its audit of the federal government's 
fiscal year 2006 financial statements that was incorporated in the 2006 
Financial Report of the U.S. Government published by Treasury. Also, 
see GAO, Financial Audit: Process for Preparing the Consolidated 
Financial Statements of the U.S. Government Needs Improvement, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-45] (Washington, 
D.C.: Oct. 30, 2003). 

[35] Treasury's Combined Statement of Receipts, Outlays, and Balances 
presents budget results and cash related assets and liabilities of the 
federal government with supporting details. Treasury represents this 
report as the recognized official publication of receipts and outlays 
of the federal government based on agency reporting. 

[36] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). The IPIA 
requires federal agencies to review all programs and activities, 
identify those that may be susceptible to significant improper 
payments, estimate and report the annual amount of improper payments 
for those programs, and implement actions to cost-effectively reduce 
improper payments. 

[37] The $55 billion includes 19 newly reported programs with improper 
payment estimates totaling about $16 billion. Of the 19 programs, 5 
reported zero improper payment estimates for fiscal year 2007. 

[38] In their fiscal year 2007 Performance and Accountability Reports 
(PAR), selected federal agencies updated their fiscal year 2006 
improper payment estimates to reflect changes since issuance of their 
fiscal year 2006 PARs. These updates decreased the governmentwide 
improper payment estimate for fiscal year 2006 from $42 billion to $41 
billion. 

[39] GAO, Improper Payments: Agencies' Efforts to Address Improper 
Payment and Recovery Auditing Requirements Continue, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-635T] (Washington, D.C.: Mar. 
29, 2007). 

[End of section] 

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