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entitled 'Financial Audit: Restatements to the Department of 
Agriculture's Fiscal Year 2003 Consolidated Financial Statements' which 
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January 26, 2006: 

Mr. Charles R. Christopherson, Jr. 
Chief Financial Officer: 
Department of Agriculture: 

The Honorable Phyllis K. Fong: 
Inspector General: 

Department of Agriculture: 

Subject: Financial Audit: Restatements to the Department of 
Agriculture's Fiscal Year 2003 Consolidated Financial Statements: 

As you know, the Secretary of the Treasury, in coordination with the 
Director of the Office of Management and Budget (OMB), is required to 
annually prepare and submit audited financial statements of the U.S. 
government to the President and Congress. We are required to audit 
these consolidated financial statements (CFS) and report on the results 
of our work.[Footnote 1] An issue meriting concern and close scrutiny 
that emerged during our fiscal year 2004 CFS audit was the growing 
number of Chief Financial Officers (CFO) Act agencies that 
restated[Footnote 2] certain of their financial statements for fiscal 
year 2003 to correct errors.[Footnote 3] Errors in financial statements 
can result from mathematical mistakes, mistakes in the application of 
accounting principles, or oversight or misuse of facts that existed at 
the time the financial statements were prepared. Frequent restatements 
to correct errors can undermine public trust and confidence in both the 
entity and all responsible parties. Further, when restatements do 
occur, it is important that financial statements clearly communicate, 
and readers of the restated financial statements understand, that the 
financial statements originally issued by management in the previous 
year and the opinion thereon should no longer be relied on and instead 
the restated financial statements and related auditor's opinion should 
be used. 

Eleven of the 23 CFO Act agencies[Footnote 4] restated certain of their 
financial statements for fiscal year 2003. Five CFO Act agencies had 
restatements in fiscal year 2003 covering their fiscal year 2002 
financial statements. Three CFO Act agencies had restatements covering 
both years. We noted that the extent of the restatements to CFO Act 
agencies' fiscal year 2003 financial statements varied from agency to 
agency, ranging from correcting two line items on one agency's balance 
sheet to correcting numerous line items on several of another agency's 
financial statements. In some cases, the net operating results of an 
agency were affected by the restatement. The amounts of the agencies' 
restatements ranged from several million dollars to more than $91 
billion. 

Nine of the 11 agencies that had restatements for fiscal year 2003 
received unqualified opinions on their originally issued fiscal year 
2003 financial statements. The auditors for 6 of these 9 agencies 
issued unqualified opinions on the restated financial statements, 
replacing the previous unqualified opinions on the respective agencies' 
original fiscal year 2003 financial statements. The auditors for 2 of 
these 9 withdrew their unqualified opinions on the fiscal year 2003 
financial statements and issued other than unqualified opinions on the 
respective agencies' restated fiscal year 2003 financial statements 
because they could not determine whether there were any additional 
misstatements and the effect of any such misstatements on the restated 
fiscal year 2003 financial statements. For the remaining agency, the 
principal auditor of the agency's fiscal year 2004 financial statements 
was not the principal auditor of the agency's fiscal year 2003 
financial statements, and an audit opinion on the agency's restated 
fiscal year 2003 financial statements was not issued. 

Our review focused on the nine agencies with restatements for fiscal 
year 2003 that received unqualified opinions on their originally issued 
fiscal year 2003 financial statements.[Footnote 5] These were the 
Department of Agriculture (USDA), Department of State, Department of 
Justice, Department of Transportation, Department of Health and Human 
Services, General Services Administration, National Science Foundation, 
Nuclear Regulatory Commission, and Office of Personnel Management. 

Because of the varying nature and circumstances surrounding the 
restatements, we are issuing a number of separate reports on the 
matter. This report communicates our observations regarding USDA's 
fiscal year 2003 restatements. Going forward, we hope that the lessons 
learned from the fiscal year 2003 restatements, together with our 
recommendations, will help (1) USDA avoid the need for restatements to 
its future financial statements and ensure the adequacy of the 
disclosure and presentation of audit results and any restatements and 
(2) ensure that USDA's Office of Inspector General (OIG) and other 
auditors apply appropriate audit procedures in future audits so that 
similar errors, which caused the original fiscal year 2003 financial 
statements to be misstated, as noted in this report, are identified 
before the financial statements are issued. 

We reviewed four key areas with respect to the restatements of USDA's 
fiscal year 2003 financial statements: (1) the nature and cause of the 
errors that necessitated the restatements, including planned corrective 
actions by the agency and its auditors; (2) the timing of communicating 
the material misstatement to users of the financial statements; (3) the 
extent of transparency[Footnote 6] exhibited in disclosing the nature 
and impact of the material misstatement in the financial statements and 
the reissued auditor's report; and (4) audit issues that contributed to 
the failure to detect the errors that necessitated the restatements 
during the audit of the agency's fiscal year 2003 financial statements. 

Results in Brief: 

Material errors identified at three of USDA's component agencies led to 
the restatement of four of the five statements in USDA's originally 
issued fiscal year 2003 consolidated financial statements.[Footnote 7] 
The material errors resulted from the lack of or ineffective 
implementation of several key internal control procedures related to 
(1) recording appropriations, (2) the proper reporting of material 
items on the Statement of Financing, and (3) processing nonroutine 
journal vouchers. We believe that more effective audit procedures 
applied by USDA's auditors could have detected the material errors 
noted in this report. 

In addition, certain aspects of the footnote disclosure and financial 
statement presentation relating to the restatements could be 
misinterpreted. Specifically, the footnote disclosure related to the 
restatements was titled Prior Period Adjustments, which could be 
misinterpreted since most of the corrections discussed in the note were 
not prior period adjustments.[Footnote 8] USDA's presentation of its 
fiscal year 2004 Consolidated Statement of Changes in Net Position may 
also be misinterpreted because the fiscal year 2004 beginning balances 
did not agree with the restated fiscal year 2003 ending balances. 
Further, USDA asserted in its fiscal year 2004 Management Discussion 
and Analysis (MD&A) that the agency has sustained: 

unqualified or "clean" opinions on its financial statements since 
fiscal year 2002 but did not specifically acknowledge in its MD&A that 
it restated both originally issued fiscal years 2003 and 2002 financial 
statements for material errors. In addition, USDA did not completely 
disclose in the MD&A the nature and extent of the restatements to its 
originally issued fiscal year 2003 financial statements. We believe 
that not including this information in the MD&A could be misleading. 
Although the OIG told us that it believed disclosure of such 
information in its audit report was not necessary, in our view, such 
disclosure could have reduced the potential for a reader to be misled. 

We are making three recommendations on this matter, including two 
recommendations to USDA's CFO. We recommend that USDA's CFO ensure (1) 
that procedures to prevent any similar errors from occurring and going 
undetected in future years are effectively implemented and (2) for 
future years, the adequacy of the disclosure and presentation of audit 
results and any restatements. We are also making a recommendation to 
USDA's Inspector General to ensure, in conjunction with the contracted 
independent public accountant (IPA) if one is used, that audit 
procedures are effectively implemented to test for any (1) improperly 
recorded appropriations transactions in the general ledger, (2) 
improperly reported material items on the Statement of Financing, and 
(3) incorrect nonroutine journal vouchers. 

In commenting on a draft of this report, USDA's CFO expressed 
confidence that his office's current plans and efforts would ensure 
that its consolidated financial statements are accurate and timely and 
contain adequate disclosure. In a separate letter, the Inspector 
General concurred with our recommendations. 

Background: 

In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23 
CFO Act agencies' performance and accountability reports for possible 
restatements and identified 11 agencies that had restated certain of 
their audited fiscal year 2003 financial statements. 

The primary intended users of federal agencies' financial reports are 
citizens, Congress, federal executives, and federal program 
managers.[Footnote 9] Each of these groups may use federal agencies' 
financial statements to satisfy their specific needs. Citizens are 
interested in many aspects of the federal government, particularly 
federal programs that affect their financial well-being. Congress is 
interested in monitoring and assessing the efficiency and effectiveness 
of federal programs. Federal executives, such as central agency 
officials at OMB and the Department of the Treasury (Treasury), are 
interested in federal financial statements to assist the President of 
the United States. OMB assists the President in overseeing the 
preparation of the federal budget by formulating the President's 
spending plans, evaluating the effectiveness of agency programs, 
assessing competing funding demands among agencies, and setting funding 
priorities. Treasury assists the President in managing the finances of 
the federal government and prepares the CFS, which are based on audited 
financial statements prepared by federal agencies. We audit the CFS and 
report on the results of our audit. Finally, federal program managers 
use agency financial statements as tools for managing their operations 
within the limits of the spending authority granted by Congress. 

The primary accounting and auditing standards that apply to restatement 
disclosures by federal entities are Federal Accounting Standards 
Advisory Board's Statement of Federal Financial Accounting Standards 
(SFFAS) No. 21, and the American Institute of Certified Public 
Accountants' (AICPA) Codification of Auditing Standards, AU section 
561, Subsequent Discovery of Facts Existing at the Date of the 
Auditor's Report.[Footnote 10] 

Objective, Scope, and Methodology: 

The objective of our review of restatements of USDA's fiscal year 2003 
consolidated financial statements was to determine the nature and cause 
of the errors, the transparency and timing of communicating the 
material misstatements, any audit issues relating to such 
misstatements, and any actions being taken to help preclude similar 
errors from occurring in the future. 

We reviewed the nature and causes of the restatements, and we also 
examined corrective actions taken by USDA to help preclude similar 
errors from occurring in the future. We interviewed the preparers and 
auditors of USDA's fiscal year 2003 consolidated and certain component 
agencies' financial statements, including staff from the agency's OIG, 
and we obtained and reviewed relevant audit documentation. Because 
USDA's OIG contracted with various IPAs for the audits of certain USDA 
component agencies' financial statements, such as the Forest Service 
and Risk Management Agency's Federal Crop Insurance Corporation, we 
also had to expand our contacts to include such IPAs. Our work was not 
designed to and we did not test the accuracy or appropriateness of the 
restatements. 

In our review, we considered certain accounting and auditing standards, 
including SFFAS No. 21; OMB Bulletin 01-09, Form and Content of Agency 
Financial Statements;[Footnote 11] the Financial Accounting Standards 
Board's Statement of Financial Accounting Standards No. 16, Prior 
Period Adjustments; and the AICPA Codification of Auditing Standards, 
AU section 329, Analytical Procedures, AU section 420, Consistency of 
Application of Generally Accepted Accounting Principles, AU section 
508, Reports on Audited Financial Statements, and AU section 561. 

We performed our review of the restatements of USDA's fiscal year 2003 
consolidated financial statements from December 2004 to October 2005 in 
accordance with U.S. generally accepted government auditing standards. 

We requested comments on a draft of this report from USDA's CFO and 
Inspector General or their designees. Written comments from USDA's CFO 
and Inspector General are reprinted in enclosures I and II, 
respectively, and are discussed in the Agency Comments section. 

Issues Related to Restatements of USDA's Fiscal Year 2003 Consolidated 
Financial Statements: 

USDA restated four of the five statements in its originally issued 
fiscal year 2003 consolidated financial statements to reflect material 
errors detected at three of its component agencies. These errors 
affected USDA's originally issued fiscal year 2003 Consolidated 
Statement of Changes in Net Position, Consolidated Balance Sheet, 
Combined Statement of Budgetary Resources, and Consolidated Statement 
of Financing. 

During our review of the restatements, we identified the following 
areas that need improvement: 

* internal control procedures over recording appropriations, 

* internal control procedures related to the proper reporting of 
material items on the Statement of Financing, 

* internal control procedures over processing nonroutine journal 
vouchers, 

* audit procedures for detecting errors similar to those discussed 
throughout this report, and: 

* disclosure and presentation of the restatements. 

These issues are discussed in detail below. 

Material Error in Recording Certain Appropriations General Ledger 
Accounts: 

USDA restated its originally issued fiscal year 2003 Consolidated 
Statement of Changes in Net Position and its Consolidated Balance Sheet 
for an incorrect recording of Appropriations Used in fiscal year 2003 
by its Food and Nutrition Service (FNS). In our view, the approximately 
$4.7 billion error was not detected by FNS due to a lack of key 
internal control procedures over recording appropriations. 

USDA and USDA's OIG officials provided us the following perspectives on 
the events that led to the needed restatements. FNS incorrectly 
recorded a transfer of intragovernmental funds as Unexpended 
Appropriations - Transfers - In during fiscal year 2003, expended those 
moneys during the fiscal year, and incorrectly recorded the 
expenditures as Unexpended Appropriations - Used in its general ledger. 
FNS recorded the transfer of intragovernmental funds in such a manner 
because FNS's general ledger at that time did not have the standard 
general ledger account Nonexpenditure Financing Sources - Transfers - 
In. Later in fiscal year 2003, the Office of the Chief Financial 
Officer (OCFO) implemented this standard general ledger account to 
account for transfers of intragovernmental funds. In late October 2003, 
FNS discovered and corrected the transfer recording error by 
reclassifying the transfer of intragovernmental funds from Unexpended 
Appropriations - Transfers - In to Nonexpenditure Financing Sources - 
Transfers - In.[Footnote 12] However, FNS did not correct the 
accounting entries related to expending those funds, which led to the 
need to restate USDA's originally issued fiscal year 2003 Consolidated 
Statement of Changes in Net Position and Consolidated Balance Sheet. It 
was not until October 2004, during FNS's year-end analysis of its 
fiscal year 2004 financial statements that FNS determined that the 
fiscal year 2003 recording errors were not fully corrected. 

A USDA OIG official told us that it was first notified of the material 
error by FNS at the end of fiscal year 2004 and subsequently informed 
USDA's OCFO that USDA would need to restate its originally issued 
fiscal year 2003 Consolidated Statement of Changes in Net Position and 
Consolidated Balance Sheet for the material error detected at 
FNS.[Footnote 13] The error caused the ending balances for Cumulative 
Results of Operations and Unexpended Appropriations on the fiscal year 
2003 Consolidated Statement of Changes in Net Position and Consolidated 
Balance Sheet to be materially overstated and understated by 
approximately $4.7 billion, respectively.[Footnote 14] Although Total 
Net Position was unchanged, these two accounts represent distinct 
components of net position. Specifically, according to Statements of 
Federal Financial Accounting Concepts No. 2, Cumulative Results of 
Operations generally includes the amounts accumulated over the years by 
an entity from its financing sources less its expenses and losses, 
while Unexpended Appropriations represents appropriations not yet 
obligated or expended, including undelivered orders. 

Material Error Was Not Detected Due to a Lack of Key Internal Control 
Procedures over Recording Appropriations: 

USDA officials told us that the FNS error was not detected during 
fiscal year 2003 because the department did not have internal control 
procedures requiring (1) a reconciliation of current year 
appropriations reported in USDA's general ledger with Treasury's record 
of USDA's appropriations accounts and (2) that any exceptions 
identified during the reconciliation be adequately researched and 
resolved. According to the Treasury Financial Manual (TFM),[Footnote 
15] agencies (1) must compare their Fund Balance with Treasury 
account[Footnote 16] in their internal ledgers with reports furnished 
by Treasury[Footnote 17] and (2) should use guidelines in the TFM 
supplement, Fund Balance with Treasury Reconciliation 
Procedures,[Footnote 18] as a basis for tailoring procedures for their 
own operations. Specifically, this supplement outlines generic 
operating procedures for reconciling the Fund Balance with Treasury 
account, including performing a reconciliation that involves comparing 
an agency's current year appropriations reported in the agency's 
general ledger to Treasury's record of the agency's appropriations 
accounts. Such a reconciliation and effective research would have 
identified Nonexpenditure Financing Sources - Transfers - In that were 
inappropriately classified as Unexpended Appropriations - Transfers - 
In, which in turn, could have led to the identification of the 
recording error in Unexpended Appropriations - Used. According to the 
TFM, failure to implement effective and timely reconciliation 
procedures could (1) increase the risks of fraud, waste, and 
mismanagement of funds; (2) affect the federal government's ability to 
effectively monitor budget execution; and (3) affect the federal 
government's ability to accurately measure the full cost of its 
programs. 

According to USDA officials, USDA formally established procedures in 
June 2005 requiring monthly reconciliations of certain[Footnote 19] 
current year appropriations reported in USDA's general ledger with 
Treasury's record of USDA's appropriations accounts and resolution of 
any identified differences. This procedure is intended to provide 
reasonable assurance, on a timely basis, that USDA's appropriations 
transactions are properly recorded in its general ledger, by detecting 
and correcting errors similar to those that led to the fiscal year 2003 
restatement. 

Audit Procedures Were Not Adequately Designed to Detect the Material 
Error in Certain Recorded Appropriations: 

USDA's OIG officials stated that the OIG's fiscal year 2003 audit 
procedures did not detect the material error in Appropriations Used. In 
addition, according to an OIG official, FNS did not timely notify the 
OIG that the OCFO had implemented the above-noted standard general 
ledger account. The OIG official stated that FNS informed the OIG that 
no changes in accounting operations were made and that the OIG's 
various audit procedures did not identify any information that 
contradicted what FNS had told the OIG. 

According to the Financial Audit Manual (FAM),[Footnote 20] the auditor 
should perform audit procedures to test for all significant 
assertions[Footnote 21] in significant financial statement line items 
and accounts. An OIG official stated that the OIG performed audit 
procedures on funds FNS received during its fiscal year 2003 audit, 
which included tracing funds to source documents, but its procedures 
did not detect the material error. 

The official stated that if an appropriate analytical procedure had 
been performed during fiscal year 2003, then the material error would 
have been detected. The FAM states that as required by AU 329, 
Analytical Procedures, auditors must perform overall analytical 
procedures in order to determine if the auditor has obtained an 
adequate understanding of all fluctuations and relationships in the 
financial statements. According to AU 329, analytical procedures 
involve comparisons of recorded amounts, or ratios developed from 
recorded amounts, to expectations developed by the auditor. The OIG 
official stated that the analytical procedure that could have detected 
this material error was not performed during fiscal year 2003, but that 
the OIG included such an analytical procedure during its fiscal year 
2004 and fiscal year 2005 audits. Specifically, according to an OIG 
official, the OIG performed an analytical procedure to calculate the 
cumulative results of operations independently and then compared the 
expected results with amounts reported in the financial statements. 

Material Error Due to Improperly Reported Material Items on the 
Statement of Financing: 

In fiscal year 2004, USDA restated its originally issued fiscal year 
2003 Combined Statement of Budgetary Resources and Consolidated 
Statement of Financing to address a material error that occurred at 
USDA's Risk Management Agency's Federal Crop Insurance Corporation 
(FCIC) when FCIC tried to correct, per OMB's advisement, the way it 
recorded Obligations Incurred. 

According to an FCIC official, FCIC received a letter from OMB, dated 
December 19, 2002, requesting that FCIC properly record insurance fund 
program obligations incurred during the fiscal year when individual 
claims are approved to be paid for insured events. According to OMB's 
letter, FCIC instead was recording estimated obligations during the 
fiscal year in which the insured event occurred, which potentially 
placed FCIC in the untenable position of violating the Anti-Deficiency 
Act[Footnote 22] should actual claims exceed estimates. The FCIC 
official stated that as a result of OMB's letter, FCIC modified the way 
it recorded Obligations Incurred before the fiscal year 2002 financial 
statements were issued; however, FCIC failed to remove all of its 
estimated accrued obligations (i.e., claims not yet approved to be paid 
for insured events) from the fiscal year 2002 beginning obligated 
balance. The FCIC official told us that as a result, an incorrect 
fiscal year 2002 ending obligated balance was carried forward to become 
the fiscal year 2003 beginning balance. This material error caused the 
Beginning of Period Obligated Balance, Net and Beginning of Period 
Unobligated Balance on FCIC's originally issued fiscal year 2003 
Statement of Budgetary Resources to be materially overstated and 
understated by approximately $1.2 billion, respectively. In addition, 
due to the same error, Obligations Incurred on FCIC's originally issued 
fiscal year 2003 Statement of Budgetary Resources and Statement of 
Financing were materially understated by approximately $1.2 
billion.[Footnote 23] 

According to OMB Bulletin 01-09, the Statement of Financing (1) is the 
bridge between an entity's budgetary and proprietary[Footnote 24] 
accounting[Footnote 25] and (2) articulates the relationships between 
net obligations derived from an entity's budgetary accounts and net 
cost of operations derived from the entity's proprietary accounts by 
identifying and explaining key differences between the two numbers. As 
stated in SFFAS No. 7, the Statement of Financing reconciles the 
budgetary resources obligated for a federal entity's programs and 
operations (i.e., Obligations Incurred) to the net cost of operating 
that entity (i.e., Net Cost of Operations). As a result, because 
Obligations Incurred was materially understated, the Net Cost of 
Operations reported on FCIC's draft of its fiscal year 2003 Statement 
of Financing did not match the Net Cost of Operations reported on 
FCIC's draft of its fiscal year 2003 Statement of Net Cost. According 
to an FCIC official, in fiscal year 2003, FCIC was aware that the Net 
Cost of Operations as reported on both draft statements did not match 
but did not research the issue to determine the exact accounting 
entries necessary to correct the error. The official stated that 
instead of researching the issue, FCIC made an unsupported adjustment 
to Other Components Requiring or Generating Resources in Future Periods 
on the Statement of Financing in order to force the Net Cost of 
Operations reported on FCIC's draft of its fiscal year 2003 Statement 
of Financing to match Net Cost of Operations reported on FCIC's draft 
of its fiscal year 2003 Statement of Net Cost. While this adjustment 
eliminated the imbalance between Net Cost of Operations reported on the 
two statements, it also caused Other Components Requiring or Generating 
Resources in Future Periods to be overstated by approximately $1.2 
billion. 

The material error at FCIC also affected USDA's consolidated financial 
statements. Specifically, the material error caused the same line 
items, as noted above, to be materially misstated on USDA's originally 
issued fiscal year 2003 Combined Statement of Budgetary Resources and 
Consolidated Statement of Financing. This material error resulted in 
USDA's originally issued fiscal year 2003 Combined Statement of 
Budgetary Resources showing that USDA had fewer budgetary resources 
than it actually did. 

Material Error Resulted from a Lack of Key Internal Control Procedures 
Related to the Proper Reporting of Material Items on FCIC's Statement 
of Financing: 

FCIC's IPA's audit report, dated November 4, 2004, found that FCIC's 
preparation of its Statement of Financing needed improvements. 
Specifically, the IPA found that FCIC made unsupported adjustments to 
its originally issued fiscal year 2003 Statement of Financing instead 
of performing research and taking corrective action. In this case, the 
fiscal year 2003 year-end unsupported adjustment, which was made in 
order to force the Net Cost of Operations reported on FCIC's draft of 
its fiscal year 2003 Statement of Financing to match Net Cost of 
Operations reported on FCIC's draft of its fiscal year 2003 Statement 
of Net Cost, was incorrect. 

FCIC's IPA noted in its independent auditor's report that this material 
error resulted from FCIC's lack of key internal control procedures 
related to the proper reporting of material items on the Statement of 
Financing. Specifically, the IPA noted that FCIC did not have 
procedures requiring its accounting staff to research and identify why 
Net Cost of Operations as reported on FCIC's draft of its fiscal year 
2003 Statement of Financing did not match Net Cost of Operations as 
reported on FCIC's draft of its fiscal year 2003 Statement of Net Cost. 
As a result, FCIC made the unsupported manual adjustment to force the 
Net Cost of Operations reported on the two draft statements to match. 
If such above-noted research procedures had been performed, we believe 
that FCIC could have identified and corrected the error in Beginning of 
Period Obligated Balance, Net and Beginning of Period Unobligated 
Balances, which caused Obligations Incurred to be materially 
understated and, in turn, could have prevented the need to make an 
unsupported adjustment to Other Components Requiring or Generating 
Resources in Future Periods on the Statement of Financing, which 
created an additional error. 

According to our Internal Control Management and Evaluation 
Tool,[Footnote 26] when assessing whether necessary control activities 
are in place and being applied, agencies should consider if timely 
action is taken on exceptions, implementation problems, or information 
that requires follow-up. Such consideration may have identified that 
FCIC lacked key internal control procedures requiring timely action be 
taken to investigate and resolve identified exceptions, such as the 
above-noted exception that led to FCIC's fiscal year 2003 material 
error. Failure to timely investigate and resolve exceptions, 
implementation problems, or information that requires follow-up could, 
among other things, (1) increase the risks of fraud, waste, and 
mismanagement of funds and (2) result in materially inaccurate 
reporting of financial information. 

In April 2005, FCIC established internal control procedures related to 
reporting of material items on FCIC's Statement of Financing. These 
procedures require FCIC's financial management staff to (1) prepare 
supporting documentation for manual adjustments to FCIC's Statement of 
Financing; (2) increase their review of the financial statements, 
including incorporating analytical analyses of the relationships among 
balances into the review process; and (3) attend additional training on 
budgetary accounting and the related statements. In addition, the newly 
established procedures require an accountant to review FCIC's Statement 
of Financing for consistency and accuracy with other financial 
statements, such as FCIC's Statement of Net Cost and Statement of 
Budgetary Resources. These procedures are intended to support the 
proper reporting of material line items on FCIC's Statement of 
Financing so that errors, similar to those noted above, are identified 
and corrected before the financial statements are issued. 

Audit Procedures Did Not Detect the Material Error on FCIC's Statement 
of Financing: 

FCIC's IPA for fiscal year 2003 stated that its audit procedures did 
not detect the material error in FCIC's fiscal year 2003 reported 
unobligated and obligated beginning account balances. FCIC's IPA for 
fiscal year 2003 stated that it was not the IPA for fiscal year 2002. 
Accordingly, FCIC's IPA for fiscal year 2003 told us that it reviewed 
the predecessor auditor's working papers to determine the nature, 
timing, and extent of the fiscal year 2003 audit procedures that the 
IPA would perform over opening balances. FCIC's IPA for fiscal year 
2003 told us that it relied upon the work of the previous auditor with 
respect to the fiscal year 2002 ending obligated and unobligated 
balances that were, in turn, the beginning balances for fiscal year 
2003, which were subsequently determined to be materially overstated 
and understated, respectively. 

In addition, FCIC's IPA for fiscal year 2003 stated that it had 
designed and applied audit procedures in fiscal year 2003 to analyze 
differences between budgetary and proprietary accounts. However, FCIC's 
IPA for fiscal year 2003 stated that such audit procedures did not 
identify the material error in Obligations Incurred, which resulted 
from improperly recorded obligations in fiscal year 2002. Although we 
requested FCIC's IPA's audit documentation related to its review of 
FCIC's fiscal year 2003 Statement of Financing, we were not provided 
with such information. Without documentation of the IPA's audit 
procedures in this area, we are unable to determine whether the lack of 
detection of the material error was a result of inadequate design or 
implementation of audit procedures. 

We believe that analytical procedures could also have detected the 
error. Specifically, as previously mentioned, the FAM states that as 
required by AU 329, the auditor must perform overall analytical 
procedures in order to determine if the auditor has obtained an 
adequate understanding of all fluctuations and relationships in the 
financial statements. The FAM states that the auditor should understand 
the causes of fluctuations and determine if its understanding is 
consistent with other audit evidence; if the auditor is unable to do 
so, the auditor should perform appropriate procedures to obtain an 
understanding or to resolve any inconsistencies. According to the FAM, 
one such analytical procedure involves comparing current year amounts 
in the financial statements with comparative financial information 
(i.e., amounts reported in prior years). We believe that this type of 
analytical procedure could have identified the significant increase in 
Other Components Requiring or Generating Resources in Future Periods, 
which resulted from the above-noted unsupported adjustment. 
Specifically, the reported balance for Other Components Requiring or 
Generating Resources in Future Periods on the Statement of Financing 
increased from $148 million for fiscal year 2002 to $1,520 million for 
fiscal year 2003. In our view, an investigation of the cause of this 
increase could have detected the above-noted material error. 

Both FCIC's IPA and USDA's OIG stated that they plan to dedicate more 
resources to ensure the proper reporting of material items on the 
Statement of Financing. However, it is going to be important that in 
future years, audit procedures are performed to identify and 
investigate any material unsupported adjustments made to FCIC's as well 
as USDA's consolidated financial statements. 

USDA Restated Its Combined Statement of Budgetary Resources Due to an 
Incorrect Nonroutine Journal Voucher: 

In fiscal year 2004, USDA restated its originally issued fiscal year 
2003 Combined Statement of Budgetary Resources to correct for a 
material accounting error made by USDA's Forest Service (FS).[Footnote 
27] According to an FS official, the restatement to USDA's fiscal year 
2003 Combined Statement of Budgetary Resources corrected an 
approximately $178 million overstatement of the ending unobligated 
balance, an approximately $16 million overstatement of Net Transfers, 
and an approximately $193 million understatement of Total Obligated 
Balance, Net, End of Period. The FS official stated that the error was 
caused by an incorrect, nonroutine journal vouche[Footnote 28]r 
processed by FS in October 2003 and recorded in the general ledger 
activity for fiscal year 2003. 

Material Error Resulted from Ineffective Internal Control Procedures 
over Processing Nonroutine Journal Vouchers: 

FS's IPA stated that as a result of FS's fiscal year-end 2003 account 
analyses, FS processed several nonroutine journal vouchers, including 
one that incorrectly adjusted three budgetary accounts and led to the 
restatement of USDA's originally issued fiscal year 2003 Combined 
Statement of Budgetary Resources. According to an FS official, 
inexperienced FS personnel used a nonroutine journal voucher to adjust 
an out-of-balance condition between FS's budgetary accounts and the 
corresponding financial information submitted to Treasury without 
identifying the underlying cause of the out-of-balance condition and 
without sufficient approval. In an FS memo to its IPA dated November 
12, 2004, FS noted that it did not have properly designed and/or 
effective internal control procedures to prevent and/or detect errors 
in the processing of its financial transactions, primarily related to 
the processing and approval of nonroutine transactions through the use 
of journal vouchers. 

According to our Standards for Internal Control in the Federal 
Government,[Footnote 29] control activities, such as internal control 
procedures, help to ensure that transactions are completely and 
accurately recorded. Properly designed and effectively implemented 
internal control procedures over processing nonroutine journal 
vouchers, which according to FS's IPA is an inherently high-risk area, 
could have prevented or detected the material error that led to the 
restatement of USDA's originally issued fiscal year 2003 Combined 
Statement of Budgetary Resources. Failure to have properly designed and 
effective internal control procedures over processing nonroutine 
journal vouchers could, among other things, (1) increase the risks of 
fraud, waste, and mismanagement of funds and (2) result in materially 
inaccurate reporting of financial information. 

An FS official stated that during fiscal year 2004, FS established new 
internal control procedures requiring multiple supervisory reviews of 
nonroutine journal vouchers with final approval by FS's CFO. These 
procedures, if effectively implemented, should help ensure that 
nonroutine journal vouchers are appropriate. According to FS's IPA, as 
of October 30, 2005, FS had not processed any nonroutine journal 
vouchers during fiscal year 2005. 

Audit Procedures Were Not Effectively Implemented to Detect FS's 
Material Error: 

According to FS's IPA, its staff selected and reviewed the nonroutine 
journal voucher that resulted in the material error, but did not 
identify the above-noted problems related to the material error. 
According to the FAM, there are many aspects of an audit that require 
technical judgments, and the auditor should ensure that persons with 
adequate technical expertise are available to make such decisions. FS's 
IPA stated that starting in fiscal year 2004, it has staffed the audit 
with personnel more experienced in budgetary accounting and reporting 
and plans to continue staffing the FS audit with similarly experienced 
personnel. 

In addition, FS's IPA noted in its fiscal year 2004 audit documentation 
that throughout fiscal year 2004, it tested FS's new internal control 
procedures for processing nonroutine journal vouchers by sampling 
nonroutine journal vouchers to determine whether they were accurately 
prepared, properly supported, correctly posted, and properly reviewed 
and approved. As a result of its internal control testing, FS's IPA 
found that (1) some journal vouchers were not accurately prepared, 
properly supported, and correctly posted and (2) in some instances, FS 
personnel had already identified the errors and made corrections. FS's 
IPA also noted that it discussed all errors disclosed by its test work 
with FS, and FS made appropriate corrections. 

Disclosure and Presentation of USDA's Restatements Could Be 
Misinterpreted: 

Certain aspects of the footnote disclosure and financial statement 
presentation relating to the restatements could be misinterpreted. 
Specifically, the notes to USDA's comparative fiscal years 2004 and 
2003 consolidated financial statements included a note disclosure 
titled Prior Period Adjustments, which could be misinterpreted since 
most of the corrections discussed in the note were not prior period 
adjustments as defined by SFFAS No. 21. In addition, we found that 
USDA's presentation of the restatements in its comparative fiscal years 
2004 and 2003 consolidated financial statements could also be 
misinterpreted. Specifically, on USDA's fiscal years 2004 and 2003 
comparative Consolidated Statement of Changes in Net Position, the 
fiscal year 2004 beginning balances did not agree with the restated 
fiscal year 2003 ending balances, and amounts were reported in the 
fiscal year 2004 column as prior period adjustments to the fiscal year 
2004 beginning balances to reflect the restated fiscal year 2003 ending 
balances. We believe that a clearer presentation on USDA's fiscal years 
2004 and 2003 comparative Consolidated Statement of Changes in Net 
Position would have been to carry forward the restated fiscal year 2003 
ending balances and present them as the fiscal year 2004 beginning 
balances instead of presenting prior period adjustments in the fiscal 
year 2004 column. 

Other Matters Related to the Disclosure of the Restatements: 

According to SFFAS No. 15, Management's Discussions and Analysis, 
management should have great discretion regarding what to say in its 
MD&A, but the pervasive requirement is that the MD&A not be misleading. 
USDA asserted in its fiscal year 2004 MD&A that an unqualified 
financial statement audit opinion indicates that a department's 
financial statements are free of significant errors or misstatements. 
USDA also stated in its MD&A that "in fiscal year 2002, USDA--and all 
its agencies--achieved their first unqualified consolidated financial 
audit opinion in the Department's 140-year history  USDA's clean audit 
opinion was sustained in fiscal years 2003 and 2004." However, USDA did 
not specifically acknowledge in the MD&A that its fiscal year 2003 and 
its fiscal year 2002 consolidated financial statements, as originally 
issued, were both materially misstated and subsequently restated. 
Furthermore, in its MD&A, USDA did not completely disclose the nature 
and extent of the restatements to its originally issued fiscal year 
2003 financial statements. Specifically, USDA disclosed in the MD&A 
only one of the three restatements discussed in this report. We believe 
not including the above-noted information in the MD&A could be 
misleading. Although the OIG told us that it believed disclosure of 
such information in its audit report was not necessary, in our view, 
such disclosure could have reduced the potential for a reader to be 
misled. 

Conclusions: 

The material errors in USDA's originally issued fiscal year 2003 
consolidated financial statements could have been detected by more 
effective internal controls and audit procedures. USDA corrected the 
errors and issued restated financial statements. Going forward, it will 
be important for USDA to ensure that corrective actions are taken to 
prevent any similar errors from going undetected. In addition, for 
future years, USDA should ensure the adequacy of the disclosure and 
presentation of audit results and any restatements. Further, it will be 
important that USDA's OIG and other auditors effectively implement 
audit procedures to detect any similar errors in the future. 

Recommendations for Executive Action: 

We are making three recommendations on this matter, including two 
recommendations to USDA's CFO. We recommend that USDA's CFO ensure (1) 
that procedures to prevent any errors similar to those that resulted in 
the need to restate USDA's originally issued fiscal year 2003 financial 
statements are effectively implemented and (2) for future years, the 
adequacy of the disclosure and presentation of audit results and any 
restatements. 

We also recommend that USDA's Inspector General, in conjunction with 
the IPA if one is used, ensure that audit procedures are effectively 
implemented to test for any (1) improperly recorded appropriations 
transactions in the general ledger, (2) improperly reported material 
items on the Statement of Financing, and (3) incorrect nonroutine 
journal vouchers. 

Agency Comments: 

USDA's CFO and Inspector General provided written comments on a draft 
of this report. (See encs. I and II.) The CFO expressed confidence that 
his office's current plans and efforts would ensure that the financial 
statements are accurate and timely and contain adequate disclosures. 
The Inspector General agreed with our recommendations and stated that 
her office has instituted, in conjunction with the IPAs, strengthened 
quality control measures over its audit procedures. 

Within 60 days of the date of this report, we would appreciate 
receiving a written statement on actions taken to address these 
recommendations. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Homeland Security and 
Governmental Affairs; the Subcommittee on Federal Financial Management, 
Government Information, and International Security, Senate Committee on 
Homeland Security and Governmental Affairs; the House Committee on 
Government Reform; and the Subcommittee on Government Management, 
Finance and Accountability, House Committee on Government Reform. In 
addition, we are sending copies to the Fiscal Assistant Secretary of 
the Treasury and the Controller of OMB. This report is also available 
at no charge on GAO's Web site at www.gao.gov. 

We appreciate the courtesy and cooperation extended to us by your staff 
throughout our work. We look forward to continuing to work with your 
offices to help improve financial management in the federal government. 
If you have any questions about the contents of this report, please 
contact me at (202) 512-3406 or engelg@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

[End of section] 

Enclosure I: Comments from the Chief Financial Officer, Department of 
Agriculture: 

United States Department of Agriculture: 
Office of the Chief Financial Officer: 
1400 Independence Avenue, SW: 
Washington, DC 20250: 

JAN 18 2006: 

Mr. Gary T. Engel: 
Director: 
Financial Management and Assurance: 
Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Engel: 

The Department of Agriculture's Office of the Chief Financial Officer 
(OCFO) appreciates the opportunity to comment on the draft audit report 
no. GAO-06-254R, dated December 15, 2005, relating to your Financial 
Audit: Restatements to the Department of Agriculture's Fiscal Year 2003 
Consolidated Financial Statements. We have no comments regarding your 
report except to thank you for your efforts. 

OCFO is confident that our current plans and efforts will assure that 
our consolidated financial statements are accurate and timely and will 
contain clear and full disclosures in accordance with requirements. 

Sincerely, 

Signed by: 

Charles R. Christopherson, Jr.: 
Chief Financial Officer: 

[End of section] 

Enclosure II: Comments from the Inspector General, Department of 
Agriculture: 

UNITED STATES DEPARTMENT OF AGRICULTURE: 
OFFICE OF INSPECTOR GENERAL: 
Washington, D.C. 20250: 

JAN 9 2006: 

Mr. Gary T. Engel: 
Director: 
Financial Management and Assurance: 
Government Accountability Office: 
441 G Street NW. 
Washington, D.C. 20548: 

Dear Mr. Engel: 

The following is the Department of Agriculture's (USDA) Office of 
Inspector General (OIG) response to the U.S. Government Accountability 
Office (GAO) draft audit report GAO-05-595R, dated December 15, 2005, 
relating to your review of the fiscal year (FY) 2003 restatements to 
USDA's financial statements. We generally agree with the facts as 
presented. 

Recommendations to OIG for Executive Action: 

GAO recommended that the USDA Inspector General, in conjunction with 
the independent public accountants (IPA), ensure that audit procedures 
are effectively implemented to test for any (1) improperly recorded 
appropriation transactions in the general ledger, (2) improperly 
reported material items on the Statement of Financing, and (3) 
incorrect non-routine journal vouchers. 

OIG Response: 

We agree with the recommendations addressed to OIG. Our office has 
instituted, in conjunction with the IPAs, strengthened quality control 
measures over our audit procedures. Specifically, analytical procedures 
detecting fluctuations in general ledger account balances and 
relationships between financial statements are being employed 
extensively in all of the financial statement audits performed by OIG 
and in conjunction with the IPAs. 

Thank you for the opportunity to provide our comments to GAO's report 
of USDA's restatements to USDA's FY 2003 consolidated financial 
statements. If you have any questions, please contact me at (202) 720- 
8001, or Mr. Robert W. Young, Assistant Inspector General for Audit, at 
(202) 720-6945. 

Sincerely, 

Signed for: 

Phyllis K. Fong: 
Inspector General: 

[End of section] 

(198397): 

FOOTNOTES 

[1] The Government Management Reform Act of 1994 has required such 
reporting, covering the executive branch of government, beginning with 
financial statements prepared for fiscal year 1997. 31 U.S.C.  331 
(e). The federal government has elected to include certain financial 
information on the legislative and judicial branches in the CFS as 
well. 

[2] A financial statement restatement occurs when an entity either 
voluntarily or prompted by its auditors or regulators revises public 
financial information that has previously been reported. 

[3] According to Federal Accounting Standards Advisory Board, Statement 
of Federal Financial Accounting Standards (SFFAS) No. 21, Reporting 
Corrections of Errors and Changes in Accounting Principles, prior 
period financial statements presented should be restated only to 
correct errors that caused such statements to be materially misstated. 

[4] The Federal Emergency Management Agency (FEMA) was transferred to 
the Department of Homeland Security (DHS) effective March 1, 2003. With 
this transfer, FEMA was no longer required to prepare and have audited 
stand-alone financial statements under the CFO Act, leaving 23 CFO Act 
agencies for the remainder of fiscal year 2003 and for fiscal year 
2004. The DHS Financial Accountability Act, Pub. L. No. 108-330, 118 
Stat. 1275 (Oct. 16, 2004), added DHS to the list of CFO Act agencies, 
increasing the number of CFO Act agencies again to 24 beginning in 
fiscal year 2005. 

[5] The two agencies that had restatements for fiscal year 2003 but did 
not receive unqualified opinions on their originally issued fiscal year 
2003 financial statements were the Department of Defense and the Small 
Business Administration. 

[6] Transparency is the full, accurate, and timely disclosure of 
information. 

[7] USDA restated certain of its originally issued fiscal year 2003 
consolidated financial statements to correct for material errors 
identified at its Food and Nutrition Service, Forest Service, and Risk 
Management Agency's Federal Crop Insurance Corporation. According to 
USDA officials, since USDA was already restating the fiscal year 2003 
financial statements for material errors, it also decided to correct 
for less significant errors that had been identified. Specifically, 
certain less significant errors identified at Animal and Plant Health 
Inspection Service, Credit Commodity Corporation, Forest Service, 
Natural Resources Conservation Service, and the departmentwide level 
were also included in the restatement note disclosure. 

[8] SFFAS No. 21 defines a prior period adjustment as a correction for 
an error that occurred in and whose cumulative effect is attributable 
to periods not presented in the current financial statements. 

[9] Federal Accounting Standards Advisory Board, Statement of Federal 
Financial Accounting Concepts No. 1, Objectives of Federal Financial 
Reporting. 

[10] Generally accepted government auditing standards incorporate AICPA 
reporting standards and Statements on Auditing Standards unless the 
Comptroller General of the United States excludes them by formal 
announcement. 

[11] Office of Management and Budget, Bulletin 01-09, Form and Content 
of Agency Financial Statements (Washington, D.C.: Sept. 25, 2001). 

[12] According to Treasury's U.S. Standard General Ledger (USSGL) 
Supplement No. S2 Treasury Financial Manual (Hyattsville, Md.: 
September 2002), the Unexpended Appropriations - Transfers - In 
represents the amount of unexpended appropriations from current or 
prior years that were transferred in during the fiscal year, while 
Nonexpenditure Financing Sources - Transfers - In represents funds 
transferred in, or to be transferred in, that occur as a result of a 
nonexchange nonexpenditure transaction. According to Federal Accounting 
Standards Advisory Board, Original Pronouncements, a nonexchange 
transaction occurs when one party involved in a transaction (1) 
receives value without giving or promising value in return or (2) gives 
or promises value without receiving value in return. GAO's Glossary of 
Terms Used in the Federal Budget Process, GAO-05-734SP, states that for 
accounting and reporting purposes, a nonexpenditure transfer includes 
transactions between appropriation and fund accounts that do not 
represent payments for goods and services received or to be received 
but rather serves only to adjust the amounts available in the accounts 
for making payments. 

[13] USDA officials stated that once notified of the error, they 
researched whether other USDA component agencies had similar errors. 
According to the officials, their research identified that USDA's 
Animal and Plant Health Inspection Service and Natural Resources 
Conservation Service had similar situations where they had improperly 
recognized Appropriations Used in the approximate amounts of $311 
million and $478 million, respectively. 

[14] This is because the material error caused the Appropriations Used 
component of Cumulative Results of Operations and the Appropriations 
Used component of Unexpended Appropriations on USDA's originally issued 
fiscal year 2003 Consolidated Statement of Changes in Net Position to 
be materially overstated and understated by approximately $4.7 billion, 
respectively. 

[15] Department of the Treasury, Treasury Financial Manual, vol. 1, pt. 
2, ch. 5100, I TFM 2-5100 (Hyattsville, Md.: Oct. 18, 1999). 

[16] The Fund Balance with Treasury account is an asset account 
representing the future economic benefits of moneys that agencies can 
spend for future authorized transactions. Transactions, such as 
nonexpenditure transfers, affect the Fund Balance with Treasury 
account. 

[17] Treasury's Financial Management Service maintains a summary 
account for each appropriation and fund showing transactions relating 
to appropriations. For example, at the close of each month, agencies 
are furnished FMS 6653, a ledger for each appropriation and fund 
account. The ledger shows the opening balance, classified transactions 
for the month, and the resultant closing balance as well as 
appropriation warrants issued. 

[18] Department of the Treasury, Fund Balance with Treasury 
Reconciliation Procedures A Supplement to the Treasury Financial 
Manual, I TFM 2-5100 (November 1999). 

[19] According to a USDA official, USDA's Controller Operations 
Division Financial Reporting Branch performs the reconciliation for all 
of the USDA component agencies it services. 

[20] GAO/President's Council on Integrity and Efficiency, Financial 
Audit Manual, GAO-01-765G (Washington, D.C.: July 2001), updated by GAO-
04-1015G and GAO-04-942G (July 2004). 

[21] Financial statement assertions are management representations that 
are embodied in financial statement components. The assertions can be 
either explicit or implicit and can be classified into the following 
categories: (1) existence or occurrence, (2) completeness, (3) rights 
and obligations, (4) valuation or allocation, and (5) presentation and 
disclosure. 

[22] 31 U.S.C.  1341. 

[23] This is because there is a relationship between Beginning of 
Period Obligated Balance, Net and Obligations Incurred such that if 
there is an overstatement of the Beginning of Period Obligated Balance, 
Net, then, provided no other errors have occurred on the Statement of 
Budgetary Resources, Obligations Incurred would be understated. 

[24] Proprietary accounts provide the information for the financial 
statements based on Federal Accounting Standards Advisory Board 
standards and are intended to provide an economic, rather than a 
budgetary, measure of operations and resources. 

[25] Certain transactions affect both proprietary and budgetary 
accounts. Although budgetary and proprietary accounting information are 
complementary, both the types of information and the timing of their 
recognition are different, which is caused by differences in the basis 
of accounting. For example, under budgetary accounting, a federal 
entity records an obligation when it places a purchase order or signs a 
contract. Under proprietary accounting, liabilities are recognized when 
goods and services are received or are recognized based on an estimate 
of work completed under a contract or agreement. 

[26] GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G 
(Washington, D.C.: August 2001). 

[27] USDA's consolidated financial statements were also corrected for 
less significant errors identified at FS. According to the OIG's audit 
report, FS corrected errors for alignment of budgetary and proprietary 
account relationships and posting errors, unsupported balances in 
various suspense and deposit clearing funds, Fund Balance with Treasury 
and associated custodial liability, and certain revenue transactions. 
According to FS, the IPA, and the OIG, of the errors that were 
corrected, only the nonroutine journal voucher, noted above, was 
material. 

[28] According to an FS official, FS's nonroutine journal vouchers do 
not follow the USSGL posting model logic, since nonroutine journal 
vouchers allow for posting increases and decreases to any account in 
the general ledger. The USSGL provides basic standard posting logic for 
financial events across the federal government and illustrates both 
proprietary and budgetary entries for each accounting event. 

[29] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).