U.S. Government Financial Statements: Results of GAO's Fiscal Year 1997
Audit (Testimony, 04/01/98, GAO/T-AIMD-98-128).

Pursuant to a legislative requirement, GAO discussed the results of its
audit of the United States government's consolidated financial
statements.

GAO noted that: (1) significant financial systems weaknesses, problems
with fundamental recordkeeping, incomplete documentation, and weak
internal controls, including computer controls, prevented the government
from accurately reporting a large portion of assets, liabilities, and
costs; (2) these deficiencies affect the reliability of the consolidated
financial statements and much of the underlying financial information;
(3) they also affect the government's ability to accurately measure the
full cost and financial performance of programs and effectively and
efficiently manage its operations; (4) such deficiencies prevented GAO
from being able to form an opinion on the reliability of the
consolidated financial statements; (5) they are the result of widespread
material internal control and financial systems weaknesses that
significantly impair the federal government's ability to adequately
safeguard assets, ensure proper recording of transactions, and ensure
compliance with laws and regulations; (6) GAO's audit of the federal
government's consolidated financial statements and the Inspectors
General audits of agencies' financial statements have resulted in an
identification and analysis of deficiencies in the government's
recordkeeping and control systems and recommendations to correct them;
(7) fixing these problems represents a significant challenge because of
the size and complexity of the federal government and the discipline
needed to comply with new accounting and reporting requirements; (8)
several individual agencies that have been audited for a number of years
faced serious deficiencies in their initial audits and made good
progress in resolving them; (9) with a concerted effort, the federal
government, as a whole, can continue to make progress toward ensuring
full accountability and generating reliable information on a regular
basis; (10) annual financial statement audits are essential to ensuring
the effectiveness of the improvements now underway, and ultimately, to
producing the reliable and complete information needed by decisionmakers
and the public to evaluate the government's financial performance; and
(11) they are also central to helping the government implement broader
management reforms called for by the Government Performance and Results
Act.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD-98-128
     TITLE:  U.S. Government Financial Statements: Results of GAO's 
             Fiscal Year 1997 Audit
      DATE:  04/01/98
   SUBJECT:  Financial management systems
             Financial statement audits
             Data integrity
             Government liability (legal)
             Materiality
             Computer security
             Internal controls
             Accounting errors
             Federal agency accounting systems
             Accounting procedures

             
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Cover
================================================================ COVER


Before the Subcommittee on Government Management, Information and
Technology, Committee on Government Reform and Oversight, House of
Representatives

For Release on Delivery
Expected at
9:30 a.m.
Wednesday,
April 1, 1998

U.  S.  GOVERNMENT FINANCIAL
STATEMENTS - RESULTS OF GAO'S
FISCAL
YEAR 1997 AUDIT

Statement of Gene L.  Dodaro
Assistant Comptroller General
Accounting and Information Management Division

GAO/T-AIMD-98-128

GAO/AIMD-98-128T


(919202)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to discuss the results of our audit of the United
States government's consolidated financial statements.  The Chief
Financial Officers (CFO) Act, as expanded by the Government
Management Reform Act, requires the Secretary of the Treasury, in
cooperation with the Director of the Office of Management and Budget
(OMB), to annually prepare these statements, beginning with those for
fiscal year 1997, and GAO is required to audit them.  Yesterday, the
first consolidated financial statements for the U.S.  government,
along with our report, were submitted to the Congress and the
President by the statutory deadline. 

The preparation of this historic document is the latest product of a
series of reforms with the goal of producing much needed improvements
in the federal government's financial management.  These efforts have
included the development and issuance of a new set of generally
accepted accounting standards for the federal government.\1

In 1990, the CFO Act established a pilot program under which a few
agencies began preparing and auditing financial statements. 
Following the successful pilot program, each of the government's 24
largest departments and agencies was statutorily required to annually
produce audited financial statements using the new accounting
standards, beginning with fiscal year 1996. 

These reforms now subject the federal government to the same fiscal
discipline imposed for years on the private sector and state and
local governments.  This discipline is needed to correct
long-standing serious weaknesses in financial management systems,
controls, and reporting practices.  Considerable effort is underway
across government to make needed improvements and progress is being
made, but it will take concerted, sustained attention to rectify
years of inattention. 

The most serious challenges are framed by the results of our audit of
the consolidated financial statements of the U.S.  government for
fiscal year 1997.  In summary, significant financial systems
weaknesses, problems with fundamental recordkeeping, incomplete
documentation, and weak internal controls, including computer
controls, prevented the government from accurately reporting a large
portion of its assets, liabilities, and costs.  These deficiencies
affect the reliability of the consolidated financial statements and
much of the underlying financial information.  They also affect the
government's ability to accurately measure the full cost and
financial performance of programs and effectively and efficiently
manage its operations.  Major problems included the federal
government's inability to

  -- properly account for and report billions of dollars of property,
     equipment, materials, and supplies;

  -- properly estimate the cost of most federal credit programs and
     the related loans receivable and loan guarantee liabilities;

  -- estimate and report material amounts of environmental and
     disposal liabilities and related costs;

  -- determine the proper amount of various reported liabilities,
     including postretirement health benefits for military and
     federal civilian employees, veterans compensation benefits,
     accounts payable, and other liabilities;

  -- accurately report major portions of the net costs of government
     operations;

  -- determine the full extent of improper payments that occur in
     major programs and that are estimated to involve billions of
     dollars annually;

  -- properly account for billions of dollars of basic transactions,
     especially those between governmental entities;

  -- ensure that the information in the consolidated financial
     statements is consistent with agencies' financial statements;

  -- ensure that all disbursements are properly recorded; and

  -- effectively reconcile the change in net position reported in the
     financial statements with budget results. 

Such deficiencies prevented us from being able to form an opinion on
the reliability of the consolidated financial statements.  They are
the result of widespread material internal control and financial
systems weaknesses that significantly impair the federal government's
ability to adequately safeguard assets, ensure proper recording of
transactions, and ensure compliance with laws and regulations. 
Additionally, (1) serious computer control weaknesses expose the
government's financial information to inappropriate disclosure,
destruction, modification, or fraud and (2) material control
weaknesses affect the government's tax collection activities. 

Our audit of the federal government's consolidated financial
statements and the Inspectors General (IG) audits of agencies'
financial statements have resulted in an identification and analysis
of deficiencies in the government's recordkeeping and control systems
and recommendations to correct them.  Fixing these problems
represents a significant challenge because of the size and complexity
of the federal government and the discipline needed to comply with
new accounting and reporting requirements.  Several individual
agencies that have been audited for a number of years faced serious
deficiencies in their initial audits and made good progress in
resolving them. 

With a concerted effort, the federal government, as a whole, can
continue to make progress toward ensuring full accountability and
generating reliable information on a regular basis.  Annual financial
statement audits are essential to ensuring the effectiveness of the
improvements now underway, and ultimately, to producing the reliable
and complete information needed by decisionmakers and the public to
evaluate the government's financial performance.  They are also
central to helping the government implement broader management
reforms called for by the Government Performance and Results Act. 

The following sections outline (1) our disclaimer of opinion on the
government's fiscal year 1997 consolidated financial statements, (2)
internal controls weaknesses, and (3) serious difficulties complying
with financial systems requirements.  They also present information
on (1) the Year 2000 computing problem, (2) issues affecting the
government's long-term financial condition, and (3) actions underway
to improve financial reporting across the government. 


--------------------
\1 Federal accounting standards are developed and recommended by the
Federal Accounting Standards Advisory Board, which was established in
October 1990 by the Secretary of the Treasury, the Director of the
Office of Management and Budget, and the Comptroller General. 


   DISCLAIMER OF OPINION
---------------------------------------------------------- Chapter 0:1

Overall, because we were unable to determine the reliability of
significant portions of the government's fiscal year 1997
consolidated financial statements, we were unable to express an
opinion on them.  However, we were able to determine that amounts
reported for environmental and disposal liabilities and liabilities
for veterans compensation benefits are understated by material
amounts. 

Because of the government's serious systems, recordkeeping,
documentation, and control deficiencies, amounts reported in the
consolidated financial statements and related notes do not provide a
reliable source of information for decision-making by the government
or the public.  These deficiencies also diminish the reliability of
any information contained in any other financial management
information--including budget information and information used to
manage the government day-to-day--which is taken from the same data
sources as the consolidated financial statements. 

The following sections describe material deficiencies we identified
and discuss their effect on the financial statements and the
management of government operations. 


      PROPERTY, PLANT AND
      EQUIPMENT AND INVENTORIES
      AND RELATED PROPERTY
-------------------------------------------------------- Chapter 0:1.1

The federal government--one of the world's largest holders of
physical assets--does not have accurate information about the amount
of assets held to support its domestic and global operations. 
Hundreds of billions of dollars of the more than $1.2 trillion of
these reported assets are not adequately supported by financial
and/or logistical records.  These include (1) operating materials and
supplies comprised largely of ammunition, defense repairable items
(such as navigational computers, landing gear, and transmissions),
and other military supplies and (2) buildings, military equipment,
and various government-owned assets in the hands of private sector
contractors. 

Because the government does not have complete and reliable
information to support its asset holdings, it could not
satisfactorily verify the existence of all reported assets,
substantiate the amounts at which they were valued, or determine
whether all of its assets were included in its financial statements. 
For example, certain recorded military property had, in fact, been
sold or disposed of in prior years--or could not be located--and an
estimated $9 billion of known military operating materials and
supplies were not reported.  These problems impair the government's
ability to (1) know the location and condition of all its assets,
including those used for military deployment, (2) safeguard them from
physical deterioration, theft, or loss, (3) prevent unnecessary
storage and maintenance costs or purchase of assets already on hand,
and (4) determine the full costs of government programs that use the
assets. 


      LOANS RECEIVABLE AND LOAN
      GUARANTEE LIABILITIES
-------------------------------------------------------- Chapter 0:1.2

Most federal credit agencies responsible for federal lending programs
were unable to properly report the cost of these programs.  Federal
credit programs include direct loans and loan guarantees for farms,
rural utilities, low and moderate income housing, veterans'
mortgages, and student loans.  As of the end of fiscal year 1997, the
government reported $156 billion of loans receivable and $37 billion
of liabilities for estimated losses on defaulted guaranteed loans. 
However, the net loan amounts expected to be collected and guarantee
amounts expected to be paid could not be reasonably estimated because
of a lack of historical data or other evidence.  In addition, some
agencies did not have adequate information to support the validity of
their outstanding direct loans or to track the specific loans that
they have an obligation to guarantee. 

Until federal credit agencies correct these serious data
deficiencies, information supplied by them about the cost of their
credit programs, including information to support annual budget
requests for these programs, should be used with caution in making
future budgetary decisions, managing program costs, and measuring the
performance of credit activities. 


      ENVIRONMENTAL LIABILITIES
-------------------------------------------------------- Chapter 0:1.3

Liabilities for disposal of hazardous waste and remediation of
environmental contamination, reported at $212 billion, were
materially understated primarily because an estimate has not been
developed for major weapons systems, such as aircraft, missiles,
ships and submarines, and for ammunition.  Properly stating these
liabilities could assist in determining priorities for cleanup
activities and allow for appropriate consideration of future
budgetary resources needed to carry out these activities. 


      LIABILITIES
-------------------------------------------------------- Chapter 0:1.4

The systems and data were not available to accurately estimate
significant portions of the more than $2.2 trillion reported as
federal employee and veterans benefits liabilities.  For example, to
estimate the $218 billion reported as military postretirement health
benefit liabilities, the government used unaudited budget information
because the necessary cost data were not available.  Also, the
federal government cannot provide adequate assurance about the
reliability of historical claim information at the insurance
carrier-level used to estimate the $159 billion reported for civilian
postretirement health benefit liabilities. 

Additionally, the estimated liability for veterans compensation
benefits is materially understated because it does not include
estimates for anticipated changes in disability ratings and for
incurred claims not yet reported.  In addition, some agencies do not
maintain adequate records and controls or have systems to ensure the
accuracy and completeness of data used to calculate estimates of a
reported $98 billion of accounts payable and a reported $169 billion
of other liabilities such as those for litigation. 

These problems significantly affect the determination of the full
cost of the government's current operations, as well as the extent of
actual liabilities.  Further, commitments and contingencies were not
properly reported because many amounts represent the maximum risk
exposure rather than the amount of loss that is reasonably possible
and certain commitments are not reported. 


      COSTS OF GOVERNMENT
      OPERATIONS
-------------------------------------------------------- Chapter 0:1.5

The government was unable to support significant portions of the more
than $1.6 trillion reported as the total net costs of government
operations.  The previously discussed material deficiencies in
reporting assets and liabilities and the lack of effective
reconciliations, as discussed below, also affect reported net costs. 
Further, we were unable to determine whether the amounts reported in
the individual net cost categories reported in the Statement of Net
Cost and in the subfunction detail following the statement were
properly classified.  Without accurate cost information, the federal
government is limited in its ability to control and reduce costs,
assess performance, evaluate programs, and set fees to recover costs
where required. 

The government is also unable to determine the full extent of
improper payments--that is, payments made for other than valid,
authorized purposes.  In this regard, estimates of improper payments
in major federal programs, such as Medicare, total in the billions of
dollars annually.  The full extent of such payments, however, is
unknown because many agencies have not estimated the magnitude of
improper payments in their programs.  The reasons for improper
payments range from mistakes to fraud and abuse.  Such payments are
likely to continue until agencies implement better systems and
controls. 


      UNRECONCILED TRANSACTIONS
-------------------------------------------------------- Chapter 0:1.6

To make the consolidated financial statements balance, Treasury
recorded a net $12 billion item on the Statement of Changes in Net
Position, which it labeled unreconciled transactions.  This
out-of-balance amount is the net of more than $100 billion of
unreconciled transactions--both positive and negative amounts--which
Treasury attributes to the government's inability to properly
identify and eliminate transactions between federal government
entities and to agency adjustments that affected net position. 

Agencies' accounts can be out of balance with each other, for
example, when one or the other of the affected agencies does not
properly record a transaction with another agency or the agencies
record the transactions in different time periods.  These
out-of-balance conditions can be detected and corrected by
instituting procedures for reconciling transactions between agencies. 
Generally, such reconciliations are not performed.  These
unreconciled transactions result in material misstatements of assets,
liabilities, revenues, and/or costs. 


      PREPARATION OF CONSOLIDATED
      FINANCIAL STATEMENTS
-------------------------------------------------------- Chapter 0:1.7

The federal government cannot ensure that the information in the
consolidated financial statements is consistent with agency financial
statements.  Treasury relies on agencies to submit data needed to
prepare the federal government's consolidated financial statements. 
Such data consists of approximately 2,000 individual reporting
components, each having many account balances.  However, several
agencies were unable to provide assurance that amounts submitted to
Treasury agreed with their agency financial statements.  In addition,
many agencies needed to make significant subsequent adjustments to
their submissions in an effort to properly classify amounts in the
consolidated financial statements. 

We found further misstatements, which Treasury corrected, totalling
several hundred billion dollars in agency-submitted information
primarily because (1) agencies submitted incorrectly coded financial
data that contributed to the unreconciled transactions described
above, (2) agencies recorded similar transactions in different
general ledger accounts, and (3) certain amounts were materially
misallocated to net cost categories. 

These problems are compounded by the substantial volume of
information submitted, limitations in the federal government's
current general ledger account structure, and the significant amount
of other information that Treasury must gather to prepare the
consolidated financial statements.  As a result, additional
misstatements in the government's consolidated financial statements
could exist. 


      CASH DISBURSEMENT ACTIVITY
-------------------------------------------------------- Chapter 0:1.8

Several major agencies are not effectively reconciling disbursements. 
These reconciliations are a key control--similar in concept to
individuals reconciling personal checkbooks with a bank's records
each month.  However, there were (1) billions of dollars of
unresolved gross differences between agencies' and Treasury records
of cash disbursements as of the end of fiscal year 1997 and (2) large
amounts of unresolved differences arbitrarily written off by some
agencies without adequately determining whether their records may, in
fact, have been correct.  As a result, the government is unable to
ensure that all disbursements are properly recorded. 


      RECONCILING THE CHANGE IN
      NET POSITION WITH BUDGET
      RESULTS
-------------------------------------------------------- Chapter 0:1.9

The government did not have a process to obtain information to
effectively reconcile the reported change in net position of $3
billion and the reported budget deficit of $22 billion.  The
reconciling items comprising the difference are typically the result
of timing differences in the recognition and measurement of revenue
and costs.  Under budgetary accounting, the budget deficit reflects
outlays and receipts that generally are measured on a cash basis. 
For financial statement reporting purposes, costs are reported when
incurred rather than when paid.  Federal decisionmakers use budgetary
accounting to control the use of funds and for fiscal planning.  Once
the federal government produces reliable consolidated financial
statements, an effective reconciliation would provide additional
assurance of the reliability of budget results. 


   MATERIAL CONTROL WEAKNESSES
---------------------------------------------------------- Chapter 0:2

We found pervasive material weaknesses\2 in internal controls across
government that contribute to these deficiencies.  These weaknesses,
such as the lack of effective reconciliations and poorly designed
systems, result in ineffective controls over (1) safeguarding the
federal government's assets from unauthorized acquisition, use, or
disposition, (2) ensuring that transactions are executed in
accordance with laws governing the use of budget authority and with
other relevant laws and regulations, and (3) ensuring the reliability
of financial statements. 

We also found that widespread and serious computer control weaknesses
affect virtually all federal agencies and significantly contribute to
many material deficiencies discussed above.  Material control
weaknesses also affect the government's tax collection activities. 


--------------------
\2 A material weakness is a condition in which the design or
operation of one or more of the internal control components does not
reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material to the financial
statements may occur and not be detected promptly by employees in the
normal course of performing their duties. 


      COMPUTER CONTROL WEAKNESSES
-------------------------------------------------------- Chapter 0:2.1

Widespread computer control weaknesses are placing enormous amounts
of federal assets at risk of fraud and misuse, financial information
at risk of unauthorized modification or destruction, sensitive
information at risk of inappropriate disclosure, and critical
operations at risk of disruption.  Significant information security
weaknesses in systems that handle the government's unclassified
information have been reported in each of the major federal agencies. 
The most serious reported problem is inadequately restricted access
to sensitive data.  In today's highly computerized and interconnected
environment, such weaknesses are vulnerable to exploitation by
outside intruders as well as authorized users with malicious intent. 

The consequences of computer control weaknesses could be devastating
and costly--for instance, placing billions of dollars of payments and
collections at risk of fraud and impairing military operations.  In
addition to these potential consequences at Treasury and Defense,
identified weaknesses at agencies such as the Department of Health
and Human Service's Health Care Financing Administration and the
Social Security Administration place sensitive medical and other
personal records at risk of disclosure. 

Because computer control weaknesses are pervasive across government,
in February 1997, we added information security to our list of
federal high-risk areas.\3 The problem persists, in large part,
because agency managers have not fully instituted a framework for
assessing risk and ensuring that necessary policies and controls are
in place and remain effective on an ongoing basis.  Over the past 2
years, we and the IGs have issued more than 70 reports that identify
computer control weaknesses in the federal government and made
recommendations to address them. 


--------------------
\3 High-Risk Series:  An Overview (GAO/HR-97-1, February 1997) and
High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, February 1997). 


      TAX COLLECTION ACTIVITIES
-------------------------------------------------------- Chapter 0:2.2

The federal government has material weaknesses in controls related to
its tax collection activities, which affect its ability to
efficiently and effectively account for and collect the government's
revenue.\4 This situation requires extensive reliance on ad hoc
programming and analysis and material audit adjustments to prepare
basic financial information.  For example, the government currently
does not obtain information necessary to identify tax collections by
every type of tax at the time of collection.  As a result, the
government cannot separately report revenue for three of the four
largest revenue sources--Social Security, Hospital Insurance, and
individual income taxes.  Because of this, the government had to
report these three tax types in the same line item on the
Consolidated Statement of Changes in Net Position.  Additionally,
excise tax revenues are distributed to the relevant trust funds based
on assessments rather than, as required by the Internal Revenue Code,
on collections. 

Serious weaknesses also affect the federal government's ability to
effectively manage its taxes receivable and other unpaid
assessments.\5 The lack of appropriate subsidiary systems to track
the status of taxpayer accounts affects the government's ability to
make informed decisions about collection efforts.  This weakness, for
example, has resulted in the government pursuing and collecting, from
individual taxpayers, taxes that had already been paid. 
Additionally, the federal government is vulnerable to loss of tax
revenue due to weaknesses in controls over disbursements for tax
refunds.  The government does not perform fundamental verification
procedures to ensure the validity of amounts claimed by taxpayers as
overpayments prior to making disbursements for refunds. 
Consequently, it does not have effective controls to prevent the
inappropriate payment of refunds, increasing its exposure to lost
revenue. 


--------------------
\4 Financial Audit:  Examination of IRS' Fiscal Year 1997 Custodial
Financial Statements (GAO/AIMD-98-77, February 26, 1998). 

\5 Other unpaid assessments consist of amounts for which (1) neither
the taxpayer nor a court has affirmed that the amounts are owed and
(2) the government does not expect further collections due to factors
such as the taxpayer's death, bankruptcy, or insolvency. 


   FINANCIAL SYSTEMS REQUIREMENTS
   GENERALLY NOT MET
---------------------------------------------------------- Chapter 0:3

The Federal Financial Management Improvement Act of 1996 requires
auditors performing financial audits under the expanded CFO Act to
report whether agencies' financial management systems comply
substantially with federal accounting standards, financial systems
requirements, and the government's standard general ledger at the
transaction level.  We reported in October 1997\6 that prior audit
results and agency self-reporting all point to significant challenges
that agencies must meet to fully implement these requirements.  The
significant financial management deficiencies discussed throughout
this report underscore the challenge. 

The majority of federal agencies' financial management systems are
not designed to meet current accounting standards and systems
requirements and cannot provide reliable financial information for
managing government operations and holding managers accountable. 
Auditors' reports for fiscal year 1997 agency financial audits are
disclosing the continuing poor shape in which agencies find their
financial systems.  As of the date of our audit report, only four
agency auditors have reported that their agency's financial systems
comply with the act's requirements. 


--------------------
\6 Financial Management:  Implementation of the Federal Financial
Management Improvement Act of 1996 (GAO/AIMD-98-1, October 1, 1997). 


      YEAR 2000 COMPUTING CRISIS
-------------------------------------------------------- Chapter 0:3.1

The Year 2000 computing crisis is the most sweeping and urgent
information technology challenge facing pubic and private section
organizations.\7 In recent testimony\8 before the Subcommittee, we
discussed the need for strong leadership and effective public/private
cooperation to avoid major disruptions due to the Year 2000 computing
crisis.  The federal government is extremely vulnerable due to its
widespread dependence on computer systems to deliver vital public
services and to carry out financial operations, such as processing
financial transactions, reporting financial information, controlling
property, and collecting revenue.  While some progress has occurred
in addressing the Year 2000 problem, a great deal of additional
effort is required to prevent serious disruptions in government
operations and in financial transactions and reporting. 

This challenge is made more difficult by the age and poor
documentation of the government's existing systems and its lackluster
track record in modernizing systems to deliver expected improvements
and meet promised deadlines.  Consequently, we surfaced the Year 2000
computing crisis as a high-risk area across government in February
1997. 

In the past year, we have issued over 20 reports outlining actions
underway in a wide range of federal activities to address this
challenge and providing numerous recommendations for additional
improvements needed.  The President recently created a Council on
Year 2000 Conversion, led by an Assistant to the President, to
oversee federal agencies' Year 2000 efforts, speak for the United
States in national and international forums, and coordinate with
governments at all levels, as well as with the private sector.  We
will continue to monitor this situation and make needed
recommendations. 


--------------------
\7 For the past several decades, information systems have typically
used two digits to represent the year, such as "98" for 1998, in
order to conserve electronic data storage and reduce operating costs. 
In this format, however, 2000 is indistinguishable from 1900 because
both are represented as "00." As a result, if not modified, computer
systems or applications that use dates or perform date- or
time-sensitive calculations may generate incorrect results beyond
1999. 

\8 Year 2000 Computing Crisis:  Strong Leadership and Effective
Public/Private Cooperation Needed to Avoid Major Disruptions
(GAO/T-AIMD-98-101, March 18, 1998). 


   FINANCIAL STATEMENT AND BUDGET
   DECISIONS:  ADDING THE
   LONG-TERM PERSPECTIVE
---------------------------------------------------------- Chapter 0:4

When the government is able to produce them, reliable consolidated
financial statements will be a valuable tool for analyzing the
government's financial condition.  They will also help inform budget
deliberations by providing additional information beyond that
provided in the budget on the long-term cost implications for a wide
range of government programs.  The largely cash-based budget and the
financial statements offer different perspectives which, when
combined, can provide a fuller view of the costs of agency programs
and of the government's commitments. 

A view of the long-term sustainability of fiscal policies can also be
helpful to decisionmakers considering the government's financial
position and making decisions about resource allocation.  Such a
picture requires projections of spending and revenues into the
future.  In this context, the sovereign power to tax and the implied
commitments of social insurance programs--such as Social Security and
Medicare--must be considered in addition to those items that are
quantified in the financial statements.  For example, if the combined
Social Security trust funds' disbursements exceed receipts, as
currently estimated to occur in 2012, the government's financing
needs will increase.  Since 1992, in a series of long-term
simulations, we have analyzed various fiscal policy alternatives and
their long-term sustainability.\9


--------------------
\9 The most recent of these reports are Budget Issues:  Long-Term
Fiscal Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998) and Budget
Issues:  Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19,
October 22, 1997). 


   FINANCIAL MANAGEMENT
   IMPROVEMENTS UNDERWAY
---------------------------------------------------------- Chapter 0:5

Several individual agencies that have been audited for a number of
years faced serious deficiencies in their initial audits and made
good progress in resolving them.  For example, we conducted audits of
IRS' financial statements since fiscal year 1992.  During our first
audits, we identified serious problems and were unable to give an
opinion on IRS' financial statements.  IRS was committed to resolving
the problems, and we were able to express an unqualified opinion on
its custodial financial statements for fiscal year 1997.  These
financial statements reported over $l.6 trillion of tax revenue, $142
billion of tax refunds, and $28 billion of net federal taxes
receivable.\10

In another case at Treasury, we audited and expressed an unqualified
opinion on the Schedule of Federal Debt Managed by Treasury's Bureau
of the Public Debt.\11 This schedule reported (1) $3.8 trillion of
federal debt held by the public comprising individuals, corporations,
state or local governments, the Federal Reserve System, and foreign
governments and central banks, (2) $1.6 trillion of federal debt held
by federal entities, such as the Social Security trust funds, and (3)
$246 billion of interest on federal debt held by the public. 

At the completion of our field work, several agencies have received
unqualified opinions on fiscal year 1997 financial statements.  These
agencies are the: 

  -- Social Security Administration. 

  -- National Aeronautics and Space Administration. 

  -- Nuclear Regulatory Commission. 

  -- Department of Energy. 

  -- General Services Administration. 

  -- Department of Labor. 

  -- Small Business Administration. 

  -- Environmental Protection Agency. 

The executive branch recognizes the extent and severity of the
financial management deficiencies discussed in this report and that
addressing them will require concerted improvement efforts across
government.  Financial management has been designated one of the
President's priority management objectives, with the goal of having
performance and cost information in a timely, informative, and
accurate way, consistent with federal accounting standards.  Also,
the administration has made a commitment to complete audits and gain
unqualified opinions for all CFO Act agencies and the government as a
whole. 

To help achieve this goal, strategies are being established involving
specific agencies.  For example, plans at the Department of Defense
include completing a new accounting systems architecture, reviewing
inventory accounting processes, and developing a departmentwide
property accountability system.  Treasury and OMB are developing
plans to improve the accuracy and timeliness of governmentwide
accounting and reporting. 

OMB is also working with individual agencies to address problems
precluding unqualified audit opinions, which will require the active
involvement of individual agency IGs as well.  We will continue to
focus on financial systems and internal control deficiencies at
particular agencies.  For example, we have issued a series of
reports\12 on the factors to be considered and the data that must be
available to meet accounting standards for Defense's environmental
and disposal liabilities.  Also, we plan to further evaluate
Defense's property and logistical systems to recommend additional
corrective actions to address weaknesses in accounting for major
asset categories on the financial statements.  We are also working
with the major credit agencies to improve reporting of loans and loan
guarantees. 

In addition, the coordinated efforts of Treasury and OMB will be
required to identify and provide solutions for certain governmentwide
deficiencies, such as the inability to properly identify and
eliminate transactions between federal entities.  We will continue to
provide suggestions for resolving governmentwide problems and to
monitor progress in overcoming them. 


--------------------
\10 Financial Audit:  Examination of IRS' Fiscal Year 1997 Custodial
Financial Statements (GAO/AIMD-98-77, February 26, 1998). 

\11 Financial Audit:  Examination of the Bureau of the Public Debt's
Fiscal Year 1997 Schedule of Federal Debt (GAO/AIMD-98-65, February
27, 1998). 

\12 Financial Management:  Factors to Consider in Estimating
Environmental Liabilities for Removing Hazardous Materials in Nuclear
Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997), Financial
Management:  DOD's Liability for Aircraft Disposal Can Be Estimated
(GAO/AIMD-98-9, November 20, 1997), Financial Management:  DOD's
Liability for the Disposal of Conventional Ammunition Can Be
Estimated (GAO/AIMD-98-32, December 19, 1997), and Financial
Management:  DOD's Liability for Missile Disposal Can Be Estimated
(GAO/AIMD-98-50R, January 7, 1998). 


-------------------------------------------------------- Chapter 0:5.1

We appreciate the cooperation and assistance we received from the
Chief Financial Officers and Inspectors General throughout
government, as well as Department of the Treasury and Office of
Management and Budget officials, in carrying out our responsibility
to audit the government's consolidated financial statements.  We look
forward to continuing to work with these officials to achieve the CFO
Act's financial management reform goals. 

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


*** End of document. ***