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
(26-JUN-08, GAO-08-926T).
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-08-926T
ACCNO: A82555
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
Challenge
DATE: 06/26/2008
SUBJECT: Accountability
Accounting
Accrual basis accounting
Auditing procedures
Budget deficit
Federal debt
Federal social security programs
Financial management
Financial management systems
Financial records
Financial statement audits
Financial statements
Fiscal policies
Future budget projections
Health care costs
Intergovernmental fiscal relations
Internal controls
Reporting requirements
Strategic planning
Cost analysis
Performance appraisal
Interagency relations
Government information dissemination
GAO High Risk Series
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GAO-08-926T
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Testimony Before the Subcommittee on Federal Financial Management,
Government Information, Federal Services, and International Security,
Committee on Homeland Security and Governmental Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:30 p.m. EDT:
Thursday, June 26, 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-08-926T:
GAO Highlights:
Highlights of GAO-08-926T, a testimony before the Subcommittee on
Federal Financial Management, Government Information, Federal Services,
and International Security, Committee on Homeland Security and
Governmental Affairs, U.S. Senate.
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 GAO�s 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
accessible and understandable 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, click on [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-926T. 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 holding an oversight hearing on
this important subject. Your subcommittee' s active involvement is
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 each 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 partial pie-chart depicting the
following data:
CFO Act agencies� financial statement audit results:
Unqualified opinion: 19 agencies;
Disclaimer or qualified opinion: 5 agencies.
CFO Act agencies� systems not substantially 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:
CFO Act agencies: 11.
Source: GAO analysis based on independent auditors� 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:
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 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:
Year: 2000;
Baseline extended: 2.433%;
Alternative Simulation: 2.433%.
Year: 2001;
Baseline extended: 1.274%;
Alternative Simulation: 1.274%.
Year: 2002;
Baseline extended: -1.52%;
Alternative Simulation: -1.52%.
Year: 2003;
Baseline extended: -3.495%;
Alternative Simulation: -3.495%.
Year: 2004;
Baseline extended: -3.588%;
Alternative Simulation: -3.588%.
Year: 2005;
Baseline extended: -2.599%;
Alternative Simulation: -2.599%.
Year: 2006;
Baseline extended: -1.906%;
Alternative Simulation: -1.906%.
Year: 2007;
Baseline extended: -1.192%;
Alternative Simulation: -1.192%.
Year: 2008;
Baseline extended: -1.542%;
Alternative Simulation: -1.79%.
Year: 2009;
Baseline extended: -1.337%;
Alternative Simulation: -2.127%.
Year: 2010;
Baseline extended: -1.545%;
Alternative Simulation: -2.783%.
Year: 2011;
Baseline extended: -0.711%;
Alternative Simulation: -3.142%.
Year: 2012;
Baseline extended: 0.504%;
Alternative Simulation: -3.025%.
Year: 2013;
Baseline extended: 0.338%;
Alternative Simulation: -3.626%.
Year: 2014;
Baseline extended: 0.509%;
Alternative Simulation: -3.691%.
Year: 2015;
Baseline extended: 0.594%;
Alternative Simulation: -4.051%.
Year: 2016;
Baseline extended: 0.463;
Alternative Simulation: -4.447.
Year: 2017;
Baseline extended: 0.705;
Alternative Simulation: -4.481.
Year: 2018;
Baseline extended: 0.174;
Alternative Simulation: -4.623.
Year: 2019;
Baseline extended: 0.774;
Alternative Simulation: -5.048.
Year: 2020;
Baseline extended: 0.556;
Alternative Simulation: -5.151.
Year: 2021;
Baseline extended: 0.224;
Alternative Simulation: -5.603.
Year: 2022;
Baseline extended: -0.028;
Alternative Simulation: -5.986.
Year: 2023;
Baseline extended: -0.393;
Alternative Simulation: -6.494.
Year: 2024;
Baseline extended: -0.677%;
Alternative Simulation: -6.953%.
Year: 2025;
Baseline extended: -1.074%;
Alternative Simulation: -7.507%.
Year: 2026;
Baseline extended: -1.343%;
Alternative Simulation: -7.961%.
Year: 2027;
Baseline extended: -1.72%;
Alternative Simulation: -8.527%.
Year: 2028;
Baseline extended: -2.01%;
Alternative Simulation: -9.01%.
Year: 2029;
Baseline extended: -2.402%;
Alternative Simulation: -9.6%.
Year: 2030;
Baseline extended: -2.69%;
Alternative Simulation: -10.093%.
Year: 2031;
Baseline extended: -3.078%;
Alternative Simulation: -10.693%.
Year: 2032;
Baseline extended: -3.463%;
Alternative Simulation: -11.294%.
Year: 2033;
Baseline extended: -3.75%;
Alternative Simulation: -11.801%.
Year: 2034;
Baseline extended: -4.134%;
Alternative Simulation: -12.409%.
Year: 2035;
Baseline extended: -7.163%;
Alternative Simulation: -12.863%.
Year: 2036;
Baseline extended: -4.806%;
Alternative Simulation: -13.471%.
Year: 2037;
Baseline extended: -5.187%.
Alternative Simulation: -14.083%.
Year: 2038;
Baseline extended: -5.462%;
Alternative Simulation: -14.589%.
Year: 2039;
Baseline extended: -9.17%;
Alternative Simulation: -15.19%.
Year: 2040;
Baseline extended: -6.099%;
Alternative Simulation: -15.696%.
Year: 2041;
Baseline extended: -6.465;
Alternative Simulation: -16.298.
Year: 2042;
Baseline extended: -6.735;
Alternative Simulation: -16.807.
Year: 2043;
Baseline extended: -7.105;
Alternative Simulation: -17.414.
Year: 2044;
Baseline extended: -7.483;
Alternative Simulation: -18.03.
Year: 2045;
Baseline extended: -7.769;
Alternative Simulation: -18.555.
Year: 2046;
Baseline extended: -8.159;
Alternative Simulation: -19.188.
Year: 2047;
Baseline extended: -8.457;
Alternative Simulation: -19.727.
Year: 2048;
Baseline extended: -8.86;
Alternative Simulation: -20.378.
Year: 2049;
Baseline extended: -9.172%;
Alternative Simulation: -20.938%.
Year: 2050;
Baseline extended: -9.591%;
Alternative Simulation: -21.605%.
Source: GAO�s August 2008 analysis.
Note: Assumes currently scheduled Social Security and Medicare Part A
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: GAO�s April 2008 analysis.
Note: Discretionary spending grows with GDP after 2008. Alternative
minimum tax 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'
2008 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:
[Historical high: 109 percent in 1946]
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.[Footnote 25]
Figure 6: Total Federal Debt Outstanding:
[See PDF for image]
This figure is a combined stacked vertical bar and line graph depicting
the following data:
Total Federal Debt Outstanding (dollars in billions):
Date: As of September 30, 2003;
Intragovernmental holdings: $2,859;
Held by the public: $3,913;
Total: $6,772.
Date: As of September 30, 2004;
Intragovernmental holdings: $3,071;
Held by the public: $4,297;
Total: $7,368.
Date: As of September 30, 2005;
Intragovernmental holdings: $3,346;
Held by the public: $4,589;
Total: $7,935.
Date: As of September 30, 2006;
Intragovernmental holdings: $3,663;
Held by the public: $4,826;
Total: $8,489.
Date: As of September 30, 2007;
Intragovernmental holdings: $3,962;
Held by the public: $5,033;
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 26]
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
27] 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 28]--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.
Regarding the tax system, although tax reform may need to play a role
in meeting our challenges, any system will need to include design
features and reasonable service and enforcement efforts to maximize
compliance. Under the current system, the tax gap--the difference
between the tax amounts taxpayers pay voluntarily on time and what they
should pay under the laws--contributes to the nation's long-term fiscal
challenges and can undermine compliance if those who comply see their
friends, neighbors, and business competitors avoiding their tax
obligations. According to the latest Internal Revenue Service (IRS)
estimates for tax year 2001, the federal government falls $345 billion
short of collecting all of the taxes owed before voluntary late
payments and IRS enforcement actions and $290 billion afterwards.
Although the extent to which we can reduce the tax gap is unknown,
meaningful reductions can contribute resources to dealing with our long-
term challenges.
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 29] 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 30] 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. 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 31] 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 32] 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 33]
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 34]
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 35]
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 36] 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 37] 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 38] The increase from the prior year estimate of $41 billion
[Footnote 39] 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 40] 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]:
[Empty];
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, � 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] The Schedule of Federal Debt managed by Treasury's Bureau of the
Public Debt reports essentially all of the total debt of the federal
government. Beginning with fiscal year 1997, the Schedule of Federal
Debt has annually been audited and received an unqualified opinion.
[26] 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).
[27] 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).
[28] 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.
[29] 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.
[30] Intergenerational equity assesses the extent to which different
age groups may be required to assume financial burdens to sustain
federal responsibilities.
[31] 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.
[32] 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.
[33] 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).
[34] The budget deficit, receipts, and outlays amounts are reported in
Treasury's Monthly Treasury Statement and the President's Budget.
[35] 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).
[36] 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.
[37] 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.
[38] 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.
[39] 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.
[40] 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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