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Management and Auditor Disclosures of Causes and Effects and Timely 
Communication to Users' which was released on October 5, 2006.

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Report to the Director, Office of Management and Budget:

United States Government Accountability Office:

GAO:

October 2006:

FINANCIAL AUDIT:

Restated Financial Statements: Agencies' Management and Auditor 
Disclosures of Causes and Effects and Timely Communication to Users:

GAO-07-91:

GAO Highlights:

Highlights of GAO-07-91, a report to the Director of the Office of 
Management and Budget

Why GAO Did This Study:

GAO continues to have concerns about restatements to federal agencies’ 
previously issued financial statements. During fiscal year 2005, at 
least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated 
certain of their fiscal year 2004 financial statements to correct 
misstatements. To study this trend, GAO reviewed the nature and causes 
of the restatements made by certain CFO Act agencies in fiscal year 
2004 to their fiscal year 2003 financial statements. Eleven CFO Act 
agencies had restatements for fiscal year 2003. Nine of those 11 
received unqualified opinions on their originally issued fiscal year 
2003 financial statements. GAO’s view is that users of federal 
agencies’ financial statements and the related audit reports need to be 
provided at least a basic understanding of why a restatement was 
necessary and its effect on the agencies’ previously issued financial 
statements and related audit reports. This report communicates GAO’s 
observations on the transparency and timeliness of the 9 federal 
agencies’ and their auditors’ restatement disclosures.

What GAO Found:

The nine agencies GAO reviewed did not consistently communicate 
financial statement restatements. GAO found that all nine agencies 
could have greatly enhanced the adequacy, effectiveness, and timeliness 
of their restatement disclosures to users. Similar transparency issues 
existed with the associated audit reports regarding disclosure of all 
the essential information that would clearly explain the restatements. 
GAO highlighted the following issues as among the more prevalent issues 
to be addressed: 

* columns of the agencies’ restated financial statements were not 
labeled as “Restated,” 
* agencies’ restatement footnote disclosures lacked clarity or 
sufficient detail regarding the nature of the restatements and the 
effect on balances reported in previously issued financial statements,
* restatement information was not sufficiently disclosed in the 
agencies’ Management Discussion and Analysis,
* audit reports did not disclose that the respective agencies had 
restated certain of their fiscal year 2003 financial statements, 
* audit reports did not provide a statement that the previously issued 
audit report was withdrawn and replaced by the opinion on the restated 
financial statements, and
* material misstatements and potential material misstatements were not 
timely communicated by agencies to either their auditors or to the 
users of the financial statements.

The primary contributing factor for the restatement disclosure issues 
that GAO identified was insufficient guidance available at the time to 
both the agencies’ management and their respective auditors for 
disclosure of the restatements and the timeliness of such disclosures. 
GAO believes that information regarding restatements should be 
disclosed in a transparent and timely manner consistent with the 
qualitative characteristics of information in financial reports 
described in Statement of Federal Financial Accounting Concepts (SFFAC) 
No. 1. In GAO’s view, more detailed accounting and auditing guidance on 
how to satisfy the financial reporting characteristics as outlined in 
SFFAC No. 1 as it relates to the disclosure of restatements would have 
been helpful. OMB revised Circular No. A-136, Financial Reporting 
Requirements, which provides additional guidance to federal agencies’ 
management regarding disclosure of restatements to previously issued 
financial statements. Revisions made to OMB Circular No. A-136 address 
many of GAO’s concerns regarding the agencies’ disclosure of 
restatements. In addition, the proposed 2006 revision of generally 
accepted government auditing standards now includes a section on 
reporting on restatement of previously issued financial statements. In 
addition, on August 23, 2006, OMB issued Bulletin No. 06-03, which also 
provides some information regarding reporting on restatements. However, 
GAO believes that OMB needs to timely provide additional, though 
complementary, restatement guidance to both the agencies’ management 
and their respective auditors. 

What GAO Recommends:

GAO is making 11 recommendations to the Office of Management and Budget 
(OMB) to further improve the restatement guidance available to 
agencies’ management and the agencies’ respective auditors. OMB stated 
that it would take GAO’s recommendations under advisement. GAO 
reiterates its concern that it is critical for OMB to timely provide 
additional restatement guidance.

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-91].

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gary T. Engel at (202) 512-3406 or 
engelg@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Objectives, Scope, and Methodology:

Insufficient and Inconsistent Disclosure of Financial Statement 
Restatements by Certain Federal Agencies and Their Auditors:

Timely Communication of Material Misstatements to Users of Previously 
Issued Financial Statements:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Recommendations to OMB:

Recommendations Regarding OMB Circular No. A-136:

Recommendations Regarding OMB Bulletin No. 06-03:

Appendix II: GAO Contact and Staff Acknowledgments:

Related GAO Products:

United States Government Accountability Office:

Washington, DC 20548:

October 5, 2006:

The Honorable Rob Portman: 
Director: 
Office of Management and Budget:

Dear Mr. Portman:

We continue to have concerns about restatements to federal agencies' 
previously issued financial statements. During fiscal year 2005, at 
least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated 
certain of their fiscal year 2004 financial statements to correct 
misstatements. To study this trend, we reviewed the nature and causes 
of the restatements made by certain CFO Act agencies in fiscal year 
2004 to their fiscal year 2003 financial statements.[Footnote 1] Our 
audit of the consolidated financial statements of the U.S. government 
(CFS) for fiscal years 2004 and 2003 showed that 11 CFO Act agencies 
had restated one or more of their fiscal year 2003 financial statements 
to correct misstatements.[Footnote 2] Nine of the 11 agencies had 
received an unqualified audit opinion on their originally issued 
financial statements. Because of the significant increase in the number 
of restatements identified during our fiscal year 2004 audit, we 
initiated a review of the nature and causes of these 9 federal 
agencies' restatements.

Accounting principles attribute errors in recognition, measurement, 
presentation, or disclosure in previously issued financial statements 
to (1) mathematical mistakes, (2) mistakes in the application of 
generally accepted accounting principles (GAAP), or (3) oversight or 
misuse of facts when the financial statements were prepared. 
Restatements occur when an entity, either voluntarily or prompted by 
its auditors or regulators, revises previously issued financial 
statements. Accounting standards state that financial statements should 
only be restated for the correction of errors that would have caused 
any statements to be materially misstated. Therefore, restatements 
should not occur if misstatements in previously issued financial 
statements are not material. Such standards further state that the 
restated financial statements should disclose the nature of the 
misstatement and effect of its correction on relevant balances. The 
Office of Management and Budget (OMB) has issued guidance to federal 
agencies' management regarding disclosure of restatements to previously 
issued financial statements. Generally accepted government auditing 
standards (GAGAS)[Footnote 3] discuss the auditors' responsibilities 
when they become aware of information affecting previously issued 
financial statements, including corrections of material misstatements. 
GAGAS stress the importance of timely communication of restatements to 
users relying or likely to rely on the previously issued financial 
statements. The proposed 2006 revision of GAGAS includes an additional 
section on reporting on restatement of previously issued financial 
statements. In addition, on August 23, 2006, OMB issued Bulletin No. 06-
03,[Footnote 4] which also provides some information regarding 
reporting on restatements.

We believe that federal agencies' financial statements and the related 
audit reports should provide users with at least a basic understanding 
of why a restatement was necessary and the effect of the restatement on 
the agencies' previously issued financial statements and related audit 
reports. In keeping with full transparency,[Footnote 5] when 
restatements occur, restated financial statements should clearly 
communicate that the financial statements previously issued by 
management and the opinion thereon should no longer be relied on and 
instead the restated financial statements and the related auditor's 
opinion should be used. In addition, timely communication of 
restatements is critical to prevent users of federal agencies' 
financial statements and the related audit reports from inadvertently 
relying on inaccurate information.

Restatements are not unique to the federal government. Over the past 
several years, we have seen a number of corporate scandals as well as 
restatements by public companies.[Footnote 6] In response, the Congress 
enacted the Sarbanes-Oxley Act[Footnote 7] in 2002 to strengthen 
corporate governance and improve transparency and accountability to 
help ensure the accuracy and integrity of the financial reporting 
system in the private sector to protect investors. In addition, in May 
2005, the Financial Accounting Standards Board's (FASB) Statement of 
Financial Accounting Standards (FAS) No. 154, Accounting Changes and 
Error Corrections,[Footnote 8] was issued. FAS No. 154 requires 
nongovernmental entities to disclose that their previously issued 
financial statements have been restated, a description of the nature of 
the error, the effect of the correction on each financial statement 
line item, and the cumulative effect of change in the statement of 
financial position. Further, the Securities and Exchange Commission 
(SEC) now requires companies to disclose restatements in the Form 8- 
K.[Footnote 9] Specifically, under the Form 8-K requirements, if a 
company is advised by its auditor that disclosure should be made to 
prevent future reliance on a previously issued audit report or 
completed interim review related to previously issued financial 
statements, the company should disclose (1) the date on which it was so 
advised or notified, (2) the financial statements that should no longer 
be relied upon, (3) a brief description of the information provided by 
the auditor, and (4) a statement of whether the audit committee or the 
board of directors discussed with the auditor the matters disclosed in 
the filing.

America's taxpayers deserve no less in terms of transparency, 
accountability, disclosure, and notification from federal agencies. 
Between September 2005 and January 2006, we issued reports covering 
five of the nine CFO Act agencies that had received unqualified audit 
opinions on, but subsequently restated, their originally issued fiscal 
year 2003 financial statements.[Footnote 10] We reported that these 
restatements generally resulted from (1) lack of effective internal 
controls over the processing and reporting of certain transactions and 
(2) failure of the auditors to design and/or perform adequate audit 
procedures to detect such misstatements. During our fieldwork, December 
2004 through October 2005, our review of these nine agencies also 
focused on the following two key areas: (1) the extent of transparency 
exhibited in disclosing the nature and cause of the misstatement and 
its impact on the financial statements and the reissued or updated 
audit report and (2) the timing of communicating the material 
misstatement to users of the financial statements. This capping report, 
which summarizes the results of our review of the nine agencies, 
provides our overall observations on their transparency and timeliness, 
and includes governmentwide recommendations based on our work at these 
agencies.

Results in Brief:

The nine agencies we reviewed did not consistently communicate 
financial statement restatements. Further, we believe that all nine 
agencies could greatly enhance the adequacy, effectiveness, and 
timeliness of their restatement disclosures to users. Specifically, we 
found that:

* two agencies did not label their financial statements as "Restated";

* of the six agencies that restated their Statements of Changes in Net 
Position, two of the agencies' restatement presentations could be 
misinterpreted because the agencies' fiscal year 2004 beginning 
financial statement balances did not agree with the restated fiscal 
year 2003 ending balances;

* all nine agencies' restatement footnotes[Footnote 11] lacked 
sufficient clarity or sufficient detail regarding the nature of the 
restatements and the effect on balances reported in previously issued 
financial statements; and:

* seven of the nine agencies asserted in their fiscal year 2004 
Management Discussion and Analysis (MD&A) that they had achieved a 
consecutive number of unqualified opinions on their respective 
financial statements. Of these, six did not acknowledge restatements to 
certain of these financial statements in the intervening years, which 
we believe is misleading to users.

We also found transparency issues with all nine agencies' audit reports 
related to the disclosure of all the essential information that would 
clearly explain the restatement. Specifically, we found that:

* seven of the nine audit reports did not provide a statement that the 
previously issued audit report was withdrawn[Footnote 12] and replaced 
by the opinion on the restated financial statements and:

* three of the nine audit reports either did not disclose the 
restatement or refer to the restatement footnote in the financial 
statements.

With regard to the timely communication of material misstatements 
affecting previously issued financial statements and restatement of 
such financial statements, we found that:

* three of the nine agencies identified potential material 
misstatements prior to the fourth quarter of fiscal year 2004 and did 
not timely communicate that a potential material misstatement had been 
identified to either their auditor or to the users of the financial 
statements,

* six of the nine agencies identified potential material misstatements 
in their fiscal year 2003 financial statements after the third quarter 
of fiscal year 2004 but before that year's comparative financial 
statements were issued and did not timely communicate that a potential 
material misstatement had been identified to the users of the financial 
statements, and:

* at least one agency's auditor did not advise the agency's management 
to timely notify users of the financial statements as to the potential 
material misstatements affecting the agency's previously issued 
financial statements.

The primary contributing factor for these issues was insufficient 
guidance available at the time to both the agencies' management and 
their respective auditors for disclosure of the restatements and the 
timeliness of such disclosures.

Although the guidance available did not provide explicit details for 
disclosing restatements, we believe that information regarding 
restatements should be disclosed in a transparent and timely manner 
consistent with the qualitative characteristics of information in 
financial reports described in Statement of Federal Financial 
Accounting Concepts (SFFAC) No. 1.[Footnote 13] In our view, more 
detailed accounting and auditing guidance on how to satisfy the 
financial reporting characteristics outlined in SFFAC No. 1 as it 
relates to the disclosure of restatements would have been helpful. 
Nevertheless, a number of federal agencies included information in 
their restatement disclosures that improved the transparency of the 
restatement. For example, during fiscal year 2004, seven of the nine 
agencies labeled their restated financial statements as "Restated," 
although not expressly required by accounting standards at that time. 
In addition, during fiscal year 2005, we found that one agency, the 
Department of State (State), went far beyond guidance available for 
agency management and timely notified its users not to rely on its 
fiscal year 2004 comparative financial statements and the related audit 
report because of a potential material misstatement in the financial 
statements. State's action serves as a model for what we believe is 
appropriate for fully and timely notifying users of potential material 
misstatements.

During our review, OMB revised Circular No. A-136, Financial Reporting 
Requirements,[Footnote 14] which provides additional guidance to 
federal agencies' management regarding disclosure of restatements to 
previously issued financial statements. The revised OMB Circular No. A- 
136, issued August 23, 2005,[Footnote 15] addresses many of our 
concerns regarding the agencies' disclosure of restatements. In 
addition, OMB issued OMB Bulletin No. 06-03, dated August 23, 2006, 
which provided additional guidance concerning (1) audit report language 
when the financial statements are restated, (2) actions the auditor 
should take when previously issued audit reports are not reliable due 
to material misstatements, and (3) the timing of the restated financial 
statements and audit reports. However, we believe that additional 
restatement guidance is needed for both the agencies' management and 
their respective auditors. As such, this report contains 11 
recommendations to assist OMB in updating OMB Circular No. A-136 as 
well as OMB Bulletin No. 06-03 to further improve guidance to agencies' 
management and the agencies' respective auditors regarding the timely 
disclosure of material misstatements in previously issued financial 
statements and the presentation and disclosure of restatements.

In oral comments on a draft of this report, OMB stated that it would 
take our recommendations under advisement, but that there were no 
current plans to update guidance that has been recently 
issued.[Footnote 16] OMB also noted that any future plans to update 
guidance would carefully consider issues already currently being 
addressed by the American Institute of Certified Public Accountants' 
(AICPA) Codification of Auditing Standards. In addition, OMB provided 
some technical comments, which we have incorporated as appropriate.

As noted in this report, we found inconsistent communications and 
insufficient disclosures of financial statement restatements by agency 
management and their auditors. As such, we reiterate our concern that 
it is critical for OMB to timely offer separate, though complementary, 
guidance to agency management and to agency auditors that provides more 
explicit and detailed guidance concerning their respective roles and 
responsibilities when an actual or potential material misstatement is 
identified in previously issued financial statements. Separate guidance 
is important because agency management and agency auditors have 
different roles and responsibilities. For example, management is 
responsible for preparing the financial statements and adjusting them 
to correct any material misstatements. The auditor is responsible for 
expressing or disclaiming an opinion on the financial statements 
prepared by management. The auditor has certain additional 
responsibilities should management not properly respond to actual or 
potential material misstatements.

Background:

Federal agencies' management responsibilities for their financial 
statements include, among other things, preparing the financial 
statements in conformity with GAAP and establishing and maintaining 
internal controls over financial reporting. Auditors of these financial 
statements are required to plan and perform their audits to obtain 
reasonable assurance about whether the financial statements are free of 
material misstatement. While restatements to previously issued 
financial statements can happen and may not be surprising given 
weaknesses in the financial reporting environment at many federal 
agencies, inherently, restatements raise questions about the 
reliability of other information in previously issued financial 
statements. In addition, frequent restatements to correct misstatements 
can undermine public trust and confidence in both the entity and all 
responsible parties. Adequate transparency and timely notification of 
restatements are essential to help preclude users of agencies' 
financial statements and the related audit reports from inadvertently 
relying on inaccurate information and allow them to make more informed 
and relevant decisions.

According to SFFAC No. 1, the primary intended users of federal 
agencies' financial reports are citizens, the Congress, federal 
executives, and federal program managers. Each of these groups may use 
federal agencies' financial statements to satisfy their specific needs. 
Citizens are interested in many aspects of the federal government, 
especially those federal programs that affect their well-being. The 
Congress uses the agencies' financial statements to monitor and 
evaluate the efficiency and effectiveness of federal programs. Federal 
executives, such as central agency officials at OMB and the Department 
of the Treasury (Treasury), use the federal agencies' financial 
statements to oversee government spending. Specifically, OMB assists 
the President in overseeing the preparation of the federal budget by 
formulating the President's spending plans, evaluating the 
effectiveness of agency programs, assessing competing funding demands 
among agencies, and setting funding priorities. Treasury assists the 
President in managing the finances of the federal government and 
prepares the CFS, which is based on audited financial statements 
prepared by federal agencies. GAO uses the agencies' financial 
statements and the work of their respective auditors during its annual 
audit of the CFS. Federal program managers also use agencies' financial 
statements as a tool for managing their respective agencies' operations 
within the limits of the spending authority granted by the Congress.

Objectives, Scope, and Methodology:

The objectives of our review were to determine the transparency and 
timeliness of the restatement disclosures by the nine CFO Act agencies' 
management and their respective auditors. For the nine agencies we 
reviewed, we interviewed the preparers and auditors of the agencies' 
fiscal year 2003 financial statements, including staff from the 
agencies' Offices of Inspector General (OIG), and we obtained and 
reviewed relevant audit documentation. Because the OIGs typically 
contracted with various independent public accountants (IPA) to audit 
the agencies' financial statements, we expanded our contacts to include 
such IPAs. Our work was not designed to and we did not test the 
accuracy or appropriateness of the restatements. In addition, our 
review did not include restatements[Footnote 17] reported in fiscal 
year 2005 financial statements since such financial statements were 
issued during November 2005, one month after the completion of our 
fieldwork. With respect to the two key areas, we reviewed the nine 
agencies' fiscal years 2004 and 2003 comparative financial statements 
and the related audit reports to determine, among other things, whether 
the:

* appropriate columns of the agencies' restated financial statements 
were labeled "Restated";

* fiscal year 2003 ending balance agreed with the fiscal year 2004 
beginning balance on the agencies' Statement of Changes in Net 
Position, if restated;

* agencies' restatement footnotes were properly labeled;

* agencies asserted in their MD&A that they had received a consecutive 
number of clean audit opinions, and if so, whether they disclosed that 
certain of their previously issued financial statements were 
subsequently restated to correct for a material misstatement;

* audit reports referred the reader to the agencies' restatement 
footnote;

* agencies timely notified their auditors and users of their financial 
statements of the material misstatement and plans for correcting the 
misstatement in the financial statements; and:

* auditors were aware of a material misstatement to previously issued 
financial statements prior to the beginning of the fourth quarter of 
the following fiscal year and whether the amount and effect were known, 
and if so, did the auditors advise the agencies' management to reissue 
the financial statements.

For this capping report, which is based on our review of the nine 
federal agencies that reported restatements in fiscal year 2004 
financial statements, we considered certain accounting and auditing 
standards that were applicable to fiscal year 2004 federal financial 
reporting as well as accounting standards that were issued subsequent 
to fiscal year 2004. These standards consist of the Federal Accounting 
Standards Advisory Board's (FASAB) Statement of Federal Financial 
Accounting Standards (SFFAS) No. 15, Management's Discussions and 
Analysis; SFFAS No. 21, Reporting Corrections of Errors and Changes in 
Accounting Principles; FAS No. 16, Prior Period Adjustments; FAS No. 
154, Accounting Changes and Error Corrections; and the AICPA's 
Codification of Auditing Standards, AU section 110, Responsibilities 
and Functions of the Independent Auditor, AU section 420, Consistency 
of Application of Generally Accepted Accounting Principles, AU section 
508, Reports on Audited Financial Statements, and AU section 561, 
Subsequent Discovery of Facts Existing at the Date of the Auditor's 
Report. We also considered the following OMB guidance: OMB Bulletins 
No. 06-03 and No. 01-02, Audit Requirements for Federal Financial 
Statements; OMB Bulletin No. 01-09, Form and Content of Agency 
Financial Statements; and OMB Circular No. A-136, Financial Reporting 
Requirements.[Footnote 18]

We performed our detailed review and analysis of the fiscal year 2003 
restatements reported in agencies' fiscal year 2004 financial 
statements from December 2004 to October 2005. Between September 2005 
and January 2006, we issued reports to five of the nine CFO Act 
agencies that had received unqualified audit opinions on, but 
subsequently restated in fiscal year 2004, their originally issued 
fiscal year 2003 financial statements. In conjunction with our fiscal 
year 2005 CFS audit, we identified continued restatements of previously 
issued agency financial statements and the need for additional guidance 
to agencies and their auditors governmentwide. Our work was performed 
in accordance with GAGAS.

We requested comments on a draft of this report from the Director of 
OMB or his designee. OMB provided oral comments, which are discussed in 
the Agency Comments and Our Evaluation section of this report.

Insufficient and Inconsistent Disclosure of Financial Statement 
Restatements by Certain Federal Agencies and Their Auditors:

During our review of the nine CFO Act agencies' restatements reported 
in fiscal year 2004, we identified issues with the disclosures made by 
those agencies and their respective auditors regarding the 
restatements. The primary contributing factor for these disclosure 
issues was insufficient guidance available at the time to both the 
agencies' management and their auditors for disclosing the restatements.

Although the available guidance did not provide explicit details for 
disclosing restatements, we believe that information regarding 
restatements should be disclosed in a transparent and timely manner 
consistent with the qualitative characteristics of information in 
financial reports described in SFFAC No. 1. In our view, more detailed 
accounting and auditing guidance on how to satisfy the financial 
reporting characteristics in SFFAC No. 1 as it relates to the 
disclosure of restatements would have been helpful. Regardless, as 
discussed later in the report, several agencies included information in 
their restatement disclosures that improved the transparency of the 
restatement.

Given the issues we identified in our review of restatements reported 
in fiscal year 2004 financial statements, we believe it would be 
appropriate to offer more explicit or detailed guidance for how agency 
management and their respective auditors should disclose restatements. 
Specifically, although SFFAS No. 21 required that the nature of an 
error in previously issued financial statements and the effect of its 
correction on relevant balances be disclosed, the standard did not 
provide a detailed explanation of the type of information that should 
be disclosed or what the nature of an error means. OMB Bulletin No. 01- 
09, which specifies the form and content for federal financial 
statements, also did not provide specific guidance on how an agency's 
management should disclose restatement information in its financial 
statements. As for the auditor's disclosure of the agency's 
restatements in its audit report, AU section 561 only stated that the 
audit report usually should refer to the note to the financial 
statements that describes the restatement. Thus, if for no other reason 
than avoiding interpretation issues as to how much disclosure and in 
what form is appropriate, we believe that guidance to agency auditors 
should be enhanced to attain some added level of uniform treatment 
regarding the disclosure of restatements.

Issues Regarding Agencies' Restatement Disclosures:

We identified the following four issues related to the agencies' 
reporting of the restatements.

Labeling of Restated Financial Statements:

While guidance available during fiscal year 2004 did not expressly 
require agencies to label the columns of restated financial statements 
as "Restated," seven of the nine agencies labeled their financial 
statements as such. Such labeling is a common practice in reporting 
restated financial statements. Two of the nine agencies did not label 
their financial statements as "Restated," and as a result, users of 
such statements may be unaware that a restatement occurred.

OMB Circular No. A-136 was revised during fiscal year 2005 to provide 
additional guidance for disclosing restatements; however, it does not 
require agencies to label their financial statements as "Restated." In 
our view, revising OMB Circular No. A-136 to require agencies to label 
the columns of the restated financial statements as "Restated" would 
make the existence of restated financial statements more evident to the 
readers of the financial statements.

Restatements to Certain Agencies' Statement of Changes in Net Position:

We also found issues regarding certain agencies' restated Statement of 
Changes in Net Position. Of the six agencies that restated their 
originally issued fiscal year 2003 Statements of Changes in Net 
Position to correct for material misstatements, two of the restatement 
presentations could be misinterpreted because the fiscal year 2004 
beginning balances did not agree with the restated fiscal year 2003 
ending balances. Instead of carrying forward the restated fiscal year 
2003 ending balance to the fiscal year 2004 beginning balance, these 
two agencies made prior period adjustments to the fiscal year 2004 
beginning balances to reflect the restated fiscal year 2003 ending 
balances. We believe that a clearer presentation on the agencies' 
fiscal years 2004 and 2003 comparative Statement of Changes in Net 
Position would have been to carry forward the restated fiscal year 2003 
ending balances and present them as the fiscal year 2004 beginning 
balances instead of presenting prior period adjustments in the fiscal 
year 2004 column.

Although authoritative guidance available during fiscal year 2004 did 
not expressly prohibit agencies from reflecting prior year restatements 
as adjustments to the current year's beginning balances on the 
Statement of Changes in Net Position, we found that the other four 
agencies' restated fiscal year 2003 ending balances agreed with the 
fiscal year 2004 beginning balances on their Statement of Changes in 
Net Position. The current version of OMB Circular No. A-136 includes 
guidance from SFFAS No. 21, which states that the adjustment should be 
made to the beginning balance of cumulative results of operations, in 
the Statement of Changes in Net Position for the earliest period 
presented. In our view, OMB Circular No. A-136 would be enhanced if it 
explicitly stated that the current year unadjusted beginning balances 
on the Statement of Changes in Net Position are to agree with the 
restated ending balances on the prior year's statement (i.e., that 
adjustments are to be made only to the prior year and carried forward 
as restated).

Agencies' Restatement Footnotes:

In our view, all nine of the agencies' restatement footnotes lacked 
sufficient clarity or sufficient detail regarding the restatements in 
at least one of the following two areas: (1) the title of the footnote 
or (2) the content of the footnote.

For five agencies, the title of the restatement footnote did not 
reflect the existence of a restatement. Specifically, three agencies 
titled their restatement footnotes as either "Prior Period Adjustments" 
or "Prior Period Reclassification," which could be misinterpreted since 
the changes to the financial statements represented restatements 
because of material misstatements rather than prior period 
adjustments[Footnote 19] or prior period reclassifications.[Footnote 
20] The other two agencies did not include separate footnotes 
disclosing the restatement information. Instead, one agency provided 
the restatement information under its "Significant Accounting Policies" 
and the other included it under its "Statement of Changes in Net 
Position" and its "Statement of Budgetary Resources" notes. The 
remaining four agencies appropriately titled their restatement 
disclosures by entitling their footnote "Restatement."

With respect to restatement footnote content, five clearly explained 
the misstatement and reason for the restatement while the other four 
agencies did not. Accordingly, it was not clear if these four agencies' 
misstatements were attributed to errors in recognition, measurement, 
presentation, or disclosure in financial statements resulting from 
mathematical mistakes, mistakes in the application of GAAP, or 
oversight or misuse of facts that existed at the time the financial 
statements were prepared. In addition, one of the nine agencies did not 
disclose the specific year(s) being restated, while two other agencies 
did not disclose all of the financial statements impacted by the 
restatements.

Further, we also believe some additional language should be included in 
related footnotes. Specifically, in our view, a sufficient restatement 
footnote would also include (1) the specific amount(s) of the material 
misstatement(s) and the related effect(s) on the previously issued 
financial statement(s) (e.g., year(s) being restated and the specific 
financial statement(s) affected and line items restated); (2) the 
overall impact the restatement has on the current year financial 
statements (e.g., the change in overall net position, change in the 
audit opinion); and (3) a discussion of the corrective actions taken by 
the agency's management. Although six agencies appropriately disclosed 
the amounts being restated, the remaining three did not disclose the 
specific line items restated and the related amounts. In addition, five 
agencies did not disclose the effect of the restatement on the 
financial statements as a whole. Further, none of the nine agencies' 
restatement footnotes discussed the actions taken by the agency's 
management after discovering the misstatement, such as measures taken 
to better prevent similar misstatements from occurring in the future 
(e.g., improvements in internal controls).

Authoritative guidance available during fiscal year 2004 did not 
provide explicit guidance to the agencies as to what information should 
be included in the agencies' footnotes or how the restatement note 
should be titled. Revisions made to OMB Circular No. A-136 address a 
number of these areas. Specifically, OMB Circular No. A-136 now 
requires agencies to provide restatement information in a separate note 
entitled "Restatements." In addition, regarding content of the note, 
the revised circular calls for the following information to be included 
in the note: the nature of the error and the reason for the 
restatement, the year(s) being restated, which financial statements are 
impacted, the amounts being restated, and the effect of the restatement 
on the financial statements as a whole (i.e., change in overall net 
position, change in audit opinion, etc.) Further, per the revised OMB 
Circular No. A-136, agencies should discuss the actions management took 
after discovering the error.

The additional requirements in OMB Circular No. A-136 address many of 
our concerns with the transparency of the restatement footnote. We did, 
though, identify three areas where OMB Circular No. A-136 could further 
enhance transparency. The first is to clarify that when agencies 
disclose the amounts being restated, it is important that they also 
disclose the specific line items restated and the related amounts. In 
our view, this additional information will allow the readers of the 
restated financial statements to more clearly see how the restatement 
affected such statements. The second is to define the meaning of the 
"nature" of an error. The third is to explicitly state what type of 
information should be provided when discussing the actions management 
took after discovering the error.

Disclosure of Restatements in Agencies' Management's Discussion and 
Analysis:

We also found that certain agencies' presentation of restatements in 
their MD&A could be misleading. Seven of the nine agencies we reviewed 
stated in their fiscal year 2004 MD&A that they had achieved a 
consecutive number of unqualified opinions on their respective 
financial statements. However, six did not acknowledge that one or more 
of these financial statements had been restated in the intervening 
years to correct for material misstatements. We believe stating that 
there have been consecutive years of unqualified audit opinions without 
the appropriate context could be misleading to the reader of the 
financial statements. It erroneously conveys an impression of 
consistent, accurate financial reporting over a period of time, when in 
fact this was not the case because subsequently, the financial 
statements and the opinion were found to be incorrect.

According to SFFAS No. 15, Management's Discussions and Analysis, 
management should have great discretion regarding what to say in its 
MD&A. At the same time, the standard also states that the pervasive 
requirement is that the MD&A not be misleading. In our view, it is 
misleading for an agency to state in its MD&A that it has received a 
consecutive number of unqualified opinions on its financial statements 
when one or more of its financial statements within that time frame 
were subsequently restated. In our view, agencies having restated their 
financial statements should either refrain from such claims or clearly 
disclose in their MD&A which of the agency's prior year financial 
statements, as originally issued, were materially misstated and 
subsequently restated. Although standards do not specifically state 
that agencies shall disclose restatement information in their MD&A, we 
found that one of the seven agencies did state that it had received a 
clean audit opinion for 7 consecutive years but appropriately disclosed 
that its fiscal year 2003 financial statements were restated to correct 
misstatements.

Issues Regarding Auditors' Restatement Disclosures:

During our review, we found issues regarding how agency auditors 
disclosed the agencies' restatements in their audit reports. According 
to AU section 561, the restatement footnote in the agency's financial 
statements "usually should" be referred to in the audit report, but 
given the latitude, such disclosure is not an across-the-board 
requirement. In any report on financial statements, the auditor has the 
discretion to add a separate paragraph to the audit report to emphasize 
a matter regarding the financial statements. In our view, such matters 
include the effect of the material misstatements on previously audited 
financial statements and the accompanying audit report. Also, we 
believe that if the agency's restatement footnote does not provide a 
clear and adequate description of the restatement, then the auditor 
should go beyond merely referencing the restatement footnote and add a 
separate paragraph to the audit report that provides additional details 
regarding the effects of the restatement and should consider whether it 
is necessary to modify the audit opinion.

In our view, none of the nine agencies' audit reports we reviewed 
sufficiently disclosed all the essential information that would clearly 
explain the restatement. Specifically, we found that:

* seven of the nine audit reports did not provide a statement that the 
previously issued audit report was withdrawn and replaced by the 
opinion on the restated financial statements,

* three of the nine audit reports either did not disclose the 
restatement or include a reference to the agency restatement footnote 
in the financial statements,[Footnote 21] and:

* none of the nine agencies provided a sufficient description of the 
restatement (i.e., the nature and cause of the misstatement, year(s) 
being restated, financial statements and line items impacted, specific 
amount(s) of the material misstatement(s) and the related effects on 
the previously issued financial statements, and actions management took 
after discovering the misstatement) in the notes to their financial 
statements and none of these agencies' auditors compensated for this by 
providing such information in their audit reports.

In our view, the auditor plays an important role in ensuring proper 
disclosure of restatements. Accordingly, if any of the prior year 
financial statements are restated and management did not already 
provide a sufficient description of the restatement in the note(s) to 
the financial statements, the audit report should include such 
information. In addition, although none of the nine agencies' auditors 
disclosed misstatements of unknown amounts, we believe that if at the 
time of issuance of the audit report, a material misstatement or 
potential material misstatement has been identified in any of the prior 
years' financial statements but the specific amount of the misstatement 
and the related effects of such are not yet known, it is important for 
the auditor to disclose the situation in its audit report and modify 
its opinion or disclaim an opinion on the prior year financial 
statements as appropriate.

Timely Communication of Material Misstatements to Users of Previously 
Issued Financial Statements:

We also identified issues with the timeliness of management and auditor 
communication regarding material misstatements affecting certain 
agencies' previously issued financial statements. We attributed these 
issues to a combination of the lack of specific guidance at that time 
for both agencies management and their respective auditors and the lack 
of compliance with the related accounting and auditing standards that 
were in effect during fiscal year 2004.

During fiscal year 2004, neither OMB Bulletin No. 01-09 nor SFFAS No. 
21, which apply primarily to agency management, provided specific 
guidance on the timely investigation and reporting of a material 
misstatement or potential material misstatement in a previously issued 
financial statement following its discovery. The guidance available to 
auditors at that time was AU section 561 and OMB Bulletin No. 01-02, 
which provided guidance to the agencies' auditors regarding the timely 
communication of restatements for corrections of misstatements. While 
this audit guidance conveyed the intent of timely communication, it did 
not provide much guidance for how the agencies' management or their 
respective auditors should timely communicate such restatements.

OMB Bulletin No. 01-02 stated that there shall be open and timely 
communication throughout the audit process between the agencies' 
management and their auditors, which includes potential audit findings, 
materially misstated or unsupported amounts in the financial 
statements, and material weaknesses in internal control. The bulletin 
did not provide guidance for what the auditor should communicate to 
management for when and how an actual or potential restatement should 
be disclosed to the users of the agency's financial statements. With 
respect to the auditor's responsibilities for timely communication, AU 
section 561 states that consideration should be given to, among other 
things, the "time elapsed" since the erroneous financial statements 
were issued. According to AU section 561, when the auditor has 
concluded that action should be taken to prevent future reliance on the 
audit report, the auditor should advise the auditee to make appropriate 
disclosure of the newly discovered facts and their impact on the 
financial statements to persons who are known to be currently relying 
or who are likely to rely on the financial statements and the related 
auditor's report. AU section 561 also states that if an auditor 
determines that issuance of financial statements accompanied by the 
audit report for a subsequent period is "imminent," appropriate 
disclosures can be made in such statements rather than by separately 
issuing the restated financial statements. However, guidance available 
during fiscal year 2004, AU section 561 and OMB Bulletin No. 01- 
02,[Footnote 22] did not define "time elapsed" or "imminent." In 
addition, existing standards and guidance do not provide sufficient 
explicit or detailed guidance to management and auditors regarding 
ensuring the timely disclosure of material misstatements affecting 
previously issued financial statements.

Issues Regarding Timeliness of Management's Communication of 
Misstatements to Auditors and Users:

In our view, none of the agencies timely communicated that a potential 
material misstatement had been identified to either their auditor or to 
the users of the financial statements. Agency management is responsible 
for reporting key information in a timely manner, including timely 
notification of known material or potential material misstatements in 
previously issued financial statements.

During fiscal year 2004, OMB Bulletin No. 01-02 called for 
communication between the agencies' management and their auditors, but 
it did not provide details for disclosing restatements to users of 
agency financial statements. In addition, as noted above, neither OMB 
Bulletin No. 01-09 nor SFFAS No. 21 provided specific guidance on the 
timely investigation and reporting of a material misstatement or 
potential material misstatement in a previously issued financial 
statement following its discovery. Our review of the nine CFO Act 
agencies that restated certain of their fiscal year 2003 financial 
statements found that three of these agencies identified potential 
material misstatements prior to the beginning of the fourth quarter of 
fiscal year 2004, and in our view, did not timely communicate that a 
potential misstatement had been identified either to their auditors or 
to the users of their financial statements. The remaining six agencies 
identified potential material misstatements after the third quarter of 
fiscal year 2004 but before that year's comparative financial 
statements were issued. These six agencies, in our view, also did not 
timely communicate the potential material misstatements to the users of 
their financial statements since they did not notify the users of the 
potential material misstatement prior to the issuance of the restated 
fiscal year 2003 financial statements during fiscal year 2004.

We believe that the current version of OMB Circular No. A-136, if 
properly implemented, should address many of our concerns regarding 
agencies' timely communication of restatements. For example, according 
to this version of OMB Circular No. A-136, "management shall assume 
responsibility for any false or misleading information in the financial 
statements, or omissions that render information made in the financial 
statements misleading. As such, as soon as possible after errors are 
detected, management shall notify their auditors and inform their 
primary users of their financial statements of the error and plans for 
correcting it in the financial statements … it is imperative that 
management work with their auditor as soon as the error is detected to 
assist the auditor in any actions that need to be taken."

These are important advances. We do, though, have some remaining 
concerns regarding the adequacy of guidance to agencies relating to the 
timely communication of material misstatements in previously issued 
financial statements. Specifically, we believe it is important for 
subsequently discovered material misstatements and potential material 
misstatements be disclosed to OMB in the agencies' quarterly financial 
statements for the reporting period in which the misstatements were 
discovered. In our view, agencies need to report on the misstatement 
within a reasonable time period following the discovery of the 
misstatement. In particular, if the specific amount of a material 
misstatement and the related effect of such on the previously issued 
financial statements are known and the issuance of the subsequent 
period audited financial statements is not imminent, then we believe it 
is important that the agencies promptly (1) reissue the most recently 
issued fiscal year financial statements before issuing the current 
year's financial statements and (2) communicate the reissuance (a) in 
writing to the Congress, OMB, Treasury, and GAO; and (b) to the public 
on the Internet pages where the agencies' audited financial statements 
that were affected by the material misstatements were published. If a 
material misstatement is identified when issuance of the subsequent 
period audited financial statements is imminent, we believe it is 
important that the agencies (1) issue restated financial statements as 
part of the current year's comparative financial statements and (2) 
communicate the restatement (a) in writing to the Congress, OMB, 
Treasury, and GAO; and (b) to the public on the same Internet page 
where the agencies' audited financial statements that were affected by 
the material misstatements were published.

Further, in our view, if at any time an agency identifies a material 
misstatement or potential material misstatement and the effects of it 
on the financial statements are not known or cannot be determined 
without a prolonged investigation, the agencies should timely notify 
persons that are known to be relying or who are likely to rely on the 
previously issued financial statements and the related audit report 
that the (1) previously issued financial statements will or may be 
restated and therefore, (2) the related audit report is no longer 
reliable. It is important that the agencies include the Congress, OMB, 
Treasury, and GAO in any such notification and notify the public by 
posting such notification on the same Internet pages where the 
agencies' previously issued financial statements that were affected by 
the material or potential material misstatement were published.

An example of how to appropriately convey this type of information is 
State's communication and disclosure of a potential material 
misstatement in its fiscal year 2004 financial statements. 
Specifically, State identified a potential material misstatement during 
the fourth quarter of fiscal year 2005 and, in our view, went beyond 
the then existing guidance and appropriately disclosed the problem. 
Guidance available to agency management at that time, SFFAS No. 21 and 
OMB Bulletin No. 01-09, did not provide explicit guidance for timely 
communication of a restatement to users of financial statements. State 
also complied with the revised OMB Circular No. A-136, issued August 
23, 2005, even though it was not effective until the end of fiscal year 
2005. Specifically, during September 2005, State's CFO timely notified 
external parties, including GAO, to which State's fiscal year 2004 
comparative financial statements were directly distributed, not to rely 
on its fiscal year 2004 comparative financial statements and the 
related audit report. The notification also stated that State was 
committed to resolving this issue as quickly as possible. State also 
notified the public of this issue in the form of a cautionary note on 
the same Internet pages where the agency's audited financial statements 
that were affected by the material misstatement were published. State's 
cautionary note included a statement that such actions were necessary 
because State recently became aware of a potential material 
misstatement affecting the previously issued financial statements and 
the related audit report. State noted that due to the need for a 
complete and thorough analysis, the complexity of the matters involved, 
and the accelerated financial reporting requirements, State was unable 
to satisfy the independent auditors by November 15 as to the amount of 
the potential material misstatement. As a result, the independent 
auditors issued a qualified opinion on the fiscal year 2005 and 2004 
financial statements. State's CFO also sent a subsequent letter to GAO 
on December 23, 2005, to inform us that the independent auditors had 
satisfied themselves about the amounts presented and the auditor 
updated its opinion on the fiscal year 2005 and 2004 financial 
statements from a qualified to an unqualified opinion. State was fully 
transparent in its reports of the restatement in all respects and 
showed how disclosing the restatement should be done. As such, in our 
view, State's actions serve as a model for full and timely notification 
of a potential material misstatement found in a previously issued 
financial statement when identified after the third quarter of the 
current fiscal year and before the current year's comparative financial 
statements are issued.

Issues Regarding Timeliness of Certain Auditors' Restatement 
Disclosures:

Auditors play a critical role in helping to ensure that users of 
financial statements are timely notified of material misstatements 
affecting previously issued financial statements and restatement of 
such financial statements.

AU section 561, guidance available during fiscal year 2004, requires 
that auditors consider the "time elapsed" since the financial 
statements were issued when a material misstatement is discovered. 
According to AU section 561, if an auditor determines that issuance of 
financial statements accompanied by the audit report for a subsequent 
period is "imminent," appropriate disclosures can be made in such 
statements rather than in reissued statements. However, neither "time 
elapsed" nor "imminent" is defined in AU section 561. We found that at 
least one of the auditors of the three agencies that had discovered 
misstatements prior to the fourth quarter of the current fiscal year 
did not advise its respective agency to make such a disclosure because 
(1) in May 2004 the auditor did not think that there were any users who 
would still be relying on the fiscal year 2003 financial statements and 
the related audit report and (2) the auditor considered issuance of the 
fiscal years 2004 and 2003 comparative financial statements to be 
imminent.[Footnote 23] We have concerns that, without notification, 
anyone who may have been relying on the fiscal year 2003 financial 
statements would not have known for more than 5 months that the 
agency's originally issued financial statements, which received an 
unqualified opinion, were materially misstated and should not be relied 
on.

In our view, existing auditing standards and guidance, including OMB 
Bulletin No. 06-03, while conveying the need for appropriate 
notifications, do not provide sufficient explicit or detailed guidance 
to auditors regarding ensuring the timely disclosure of material 
misstatements affecting previously issued financial statements. Our 
position is that when a material misstatement or potential material 
misstatement affecting previously issued financial statements and the 
related audit report is identified, the auditor has a responsibility to 
advise the agency's management to timely notify users such as the 
Congress, OMB, Treasury, and GAO in writing as well as the public and 
clearly disclose the situation to them. If the agency's management does 
not timely provide adequate disclosure to the relevant users, the 
auditor has the responsibility to do so.

We believe that it is also important that the auditor advise the 
agency's management of its responsibility to determine the specific 
amount of the material misstatement or potential material misstatement 
and the related effects of such on the previously issued financial 
statements as soon as reasonably possible. In those cases where the 
specific amount of the material misstatement and the related effects of 
such on a previously issued financial statement are known and issuance 
of the subsequent period audited financial statements is not imminent, 
we believe that the auditor would need to also advise the agency's 
management to promptly reissue the most recently issued fiscal year 
financial statements before issuing the current fiscal year financial 
statements and to communicate the reissuance to relevant users in 
writing as well as the public to clearly disclose the situation to 
them. If the agency's management does not reissue the financial 
statements or communicate the reissuance as required, our position is 
that the auditor has the responsibility to notify the Congress, OMB, 
Treasury, and GAO in writing as well as any other users known to be 
relying on the previously issued financial statements. If the specific 
amount of the material misstatement and the related effects of such on 
a previously issued financial statement are known and issuance of the 
subsequent period audited financial statements is imminent, it is 
important that the auditor advise the agency's management to issue 
restated financial statements as part of the current year comparative 
financial statements and disclose restatements in the audit report. If 
the specific amount of the misstatement and the related effect of such 
on a previously issued financial statement remain unknown when the 
current year financial statements are issued, it is necessary that the 
auditor disclose such information when issuing the audit report and 
modify or disclaim the opinion on the previously issued financial 
statements as appropriate.

Conclusions:

The issues we identified regarding the transparency and timeliness of 
restatement disclosures primarily resulted from insufficient guidance 
available during fiscal year 2004 to both the agencies' management and 
their respective auditors for disclosure of the restatements and the 
timeliness of such disclosures. It will be important that those 
agencies needing, in the future, to restate their prior year financial 
statements ensure the adequacy of the disclosure and presentation of 
such restatements as well as timely notifying users known to be relying 
on the previously issued financial statements. It will also be 
important that the agencies' financial statements and the related audit 
reports provide sufficient detail so that the reader will be able to 
gain at least a basic understanding of why the agencies needed to 
restate their previously issued financial statements and the effects of 
such on the agencies' previously issued financial statements. The 
revision of OMB Circular No. A-136 during fiscal year 2005 addressed 
many of our concerns regarding the agencies' disclosure of 
restatements; however, additional guidance is still needed. In this 
regard, we are making recommendations for further revisions to OMB 
Circular No. A-136 as well as OMB Bulletin No. 06-03. We have provided 
our views, as outlined in appendix I, on how OMB guidance could be 
further enhanced to ensure that future restatement disclosures are 
uniform and more transparent.

Recommendations for Executive Action:

We recommend that the Director of OMB direct the Controller of OMB's 
Office of Federal Financial Management to incorporate the restatement 
guidance and requirements, as detailed in appendix I, into Circular No. 
A-136 to assist OMB in addressing the issues we found with the 
agencies' restatement disclosures and the timeliness of such 
disclosures. Appendix I incorporates seven recommendations as specific 
changes to Circular No. A-136 that focus on the:

* timely disclosure by agency management of material misstatement(s) or 
potential material misstatement(s) and the related effect(s) of such in 
the previously issued financial statements and:

* presentation and disclosure of restatements in the agencies' MD&A and 
financial statements and related footnotes.

We also recommend that the Director of OMB direct the Controller of 
OMB's Office of Federal Financial Management to incorporate the 
restatement guidance and requirements, as detailed in appendix I, into 
Bulletin No. 06-03 to assist OMB in addressing the issues we found with 
auditors' restatement disclosures and the timeliness of such 
disclosures. Appendix I incorporates four recommendations as specific 
changes to Bulletin No. 06-03 that focus on the:

* auditor's timely disclosure of material misstatement(s) or potential 
material misstatement(s) and the related effect(s) of such in the 
previously issued financial statements and:

* presentation and disclosure of restatements in the audit report.

Agency Comments and Our Evaluation:

In oral comments on a draft of this report, OMB stated that it would 
take our recommendations under advisement, but that there were no 
current plans to update guidance that has been recently 
issued.[Footnote 24] OMB also noted that any future plans to update 
guidance would carefully consider issues already currently being 
addressed by the AICPA's Codification of Auditing Standards. In 
addition, OMB provided some technical comments, which we have 
incorporated as appropriate.

As noted in this report, we found inconsistent communications and 
insufficient disclosures of financial statement restatements by agency 
management and their auditors. As such, we reiterate our concern that 
it is critical for OMB to timely offer separate, though complementary, 
guidance to agency management and to agency auditors that provides more 
explicit and detailed guidance concerning their respective roles and 
responsibilities when an actual or potential material misstatement is 
identified in previously issued financial statements. Separate guidance 
is important because agency management and agency auditors have 
different roles and responsibilities. For example, management is 
responsible for preparing the financial statements and adjusting them 
to correct any material misstatements. The auditor is responsible for 
expressing or disclaiming an opinion on the financial statements 
prepared by management. The auditor has certain additional 
responsibilities should management not properly respond to actual or 
potential material misstatements.

This report contains recommendations to the Director of OMB. The head 
of a federal agency is required by 31 U.S.C. § 720 to submit a written 
statement on actions taken on these recommendations. You should submit 
your statement to the Senate Committee on Homeland Security and 
Governmental Affairs and the House Committee on Government Reform 
within 60 days of the date of this report. A written statement also 
must be sent to the House and Senate Committees on Appropriations with 
the agency's first request for appropriations made more than 60 days 
after the date of the report.

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

We acknowledge and appreciate the cooperation and assistance provided 
by OMB and the nine CFO Act agencies' management and their respective 
auditors throughout our work. We look forward to continuing to work 
with your office to help improve financial management in the federal 
government. If you or your staff have any questions about the contents 
of this report, please contact Gary T. Engel, Director, Financial 
Management and Assurance, at (202) 512-3406 or by e-mail at 
engelg@gao.gov. Staff acknowledgments are provided in appendix II.

Sincerely yours,

[Signed by]

David M. Walker: 
Comptroller General: 
of the United States:

[End of section]

Appendix I: Recommendations to OMB:

As noted throughout this report, we believe that additional restatement 
guidance is needed for both the agencies' management and their 
respective auditors. To facilitate in this process, we are providing 
the following 11 requirements that, in our view, should be incorporated 
into Office of Management and Budget (OMB) Circular No. A-136 and OMB 
Bulletin No. 06-03.

Recommendations Regarding OMB Circular No. A-136:

GAO recommends that the following requirement be added to sections 
II.4.3.1, II.4.4.1, II.4.5.1, II.4.6.1, and II.4.7.1 of OMB Circular 
No. A-136, Financial Reporting Requirements:

Agencies shall label restated financial statements as "Restated."

GAO recommends that the "Management Actions Related to Corrections of 
Errors" subsection of section II.4.5.5 of OMB Circular No. A-136, 
Financial Reporting Requirements, be modified to read as follows:

If the agency's management becomes aware of a material misstatement(s) 
or potential material misstatement(s) affecting a previously issued 
financial statement(s), then the agency's management, in coordination 
with their respective auditor, shall do the following:

1.  Communicate the following information to those charged with 
governance, oversight bodies, funding agencies, and others who are 
relying or are likely to rely on the financial statement(s). This 
includes communication (1) in writing to the Congress, OMB, Treasury, 
and GAO; (2) to the public on the Internet pages where the agency's 
previously issued financial statements that were affected by the 
material misstatement(s) or potential material misstatement(s) are 
published; and (3) to OMB in the agency's next quarterly financial 
statements and in subsequent quarterly financial statements until the 
specific amount(s) of the material misstatement(s) and the related 
effect(s) of such on the previously issued financial statement(s) are 
known and reported:

(a) the nature and cause(s) of the known or likely material 
misstatement(s),

(b) the amount(s) of known or likely material misstatement(s) and the 
related effect(s) on the previously issued financial statement(s) 
(e.g., disclosure of the specific financial statement(s) and line 
item(s) affected). If this information is not known, then the 
disclosure includes information that is known and a statement that 
management cannot determine the amount(s) and the related effect(s) on 
the previously issued financial statement(s) without further 
investigation, and:

(c) a notice that (1) a previously issued financial statement(s) will 
or may be restated[Footnote 25] and, therefore, (2) the related 
auditor's report is no longer reliable.

2.  Promptly determine the financial statement effects of the known or 
potential material misstatement(s) on the previously issued financial 
statement(s).

(a) If the specific amount(s) of the material misstatement(s) and the 
related effect(s) of such on a previously issued financial statement(s) 
are known and issuance of the subsequent period audited financial 
statements is not imminent,[Footnote 26] then the agency's management 
shall promptly:

i. reissue the most recently issued fiscal year financial statements 
before issuing the current fiscal year's financial statements;

ii. communicate the reissuance to those charged with governance, 
oversight bodies, funding agencies, and others who are relying or are 
likely to rely on the financial statement(s). This includes 
communication (a) in writing to the Congress, OMB, Treasury, and GAO 
and (b) to the public on the Internet pages where the agency's 
previously issued financial statements that were affected by the 
material misstatement(s) are published; and:

iii. disclose the following information, at a minimum, in the agency's 
restatement footnotes:

1. the nature and cause(s) of the misstatement(s) that led to the need 
for restatement, and:

2. the specific amount(s) of the material misstatement(s) and the 
related effect(s) on the previously issued financial statement(s) 
(e.g., year(s) being restated, specific financial statement(s) affected 
and line items restated, actions the agency's management took after 
discovering the misstatement), and the impact on the financial 
statements as a whole (e.g., change in overall net position, change in 
the audit opinion).

(b) If the specific amount(s) of the material misstatement(s) and the 
related effect(s) of such on a previously issued financial statement(s) 
are known and issuance of the subsequent period audited financial 
statements is imminent, then the agency's management shall:

i.issue restated financial statement(s) as part of the current year's 
comparative financial statements;

ii.communicate the restatement to those charged with governance, 
oversight bodies, funding agencies, and others who are relying or are 
likely to rely on the financial statement(s). This includes 
communication (a) in writing to the Congress, OMB, Treasury, and GAO 
and (b) to the public on the Internet pages where the agency's 
previously issued financial statements that were affected by the 
material misstatement(s) are published; and:

iii. disclose the following information, at a minimum, in the agency's 
restatement footnote:

1. the nature and cause(s) of the misstatement(s) that led to the need 
for restatement, and:

2. the specific amount(s) of the material misstatement(s) and the 
related effect(s) on the previously issued financial statement(s) 
(e.g., year(s) being restated, specific financial statement(s) affected 
and line items restated, actions the agency's management took after 
discovering the misstatement), and the impact on the financial 
statements as a whole (e.g., change in overall net position, change in 
the audit opinion).

(c) If the specific amount(s) of the misstatement(s) and the related 
effect(s) of such on a previously issued financial statement(s) remain 
unknown when the current year's financial statements are issued, then 
the agency's management shall follow section II.4.5.5 (1) above and 
include the following, at a minimum, in its restatement footnote:

i. a statement disclosing that a material misstatement(s) or potential 
material misstatement(s) affects a previously issued financial 
statement(s), but the specific amount(s) of the misstatement(s) and the 
related effect(s) of such are not known,

ii. the nature and cause(s) of the misstatement(s) or potential 
misstatement(s),

iii. an estimate of the magnitude of the misstatement(s) or potential 
misstatement(s) and the related effect(s) of such on a previously 
issued financial statement(s) (e.g., disclosure of the specific 
financial statement(s) and line items affected) that are known and a 
statement that the specific amount(s) and the related effect(s) of such 
cannot be determined without further investigation, and:

iv. a statement disclosing that a restatement(s) to a previously issued 
financial statement(s) will or may occur.

GAO also recommends that the following requirement be added to the 
"Corrections of Errors" subsection of section II.4.5.5 of OMB Circular 
No. A-136, Financial Reporting Requirements:

The Statement of Changes in Net Position's current year's unadjusted 
beginning balances shall agree with the restated ending balances on the 
agency's prior year's Statement of Changes in Net Position.

GAO recommends that section II.4.10.43, of OMB Circular No. A-136, 
Financial Reporting Requirements, be revised to:

* clarify the definition of the "nature" of an error,

* include an explanation that the disclosure of the "amounts being 
restated" specifically refers to the disclosure of the specific line 
items restated and the related amounts, and:

* clarify how an agency should specifically further discuss the actions 
management took after discovering the error.

GAO recommends that the following requirement be added to section 
II.2.7 of OMB Circular No. A-136, Financial Reporting Requirements, 
which discusses guidance for information included in the Management 
Discussion and Analysis (MD&A):

Agency's management shall disclose the existence of restatements in its 
MD&A if the agency asserts in its MD&A that it received an unqualified 
opinion on any previously issued financial statement and that 
respective financial statement was subsequently restated.

Recommendations Regarding OMB Bulletin No. 06-03:

GAO recommends that section 5.2 of OMB Bulletin No. 06-03, Audit 
Requirements for Federal Financial Statements, be modified to read as 
follows:

5.2: The nature or amount of known or likely misstatement(s) in 
previously issued audited financial statement(s) may lead the auditor 
to believe that the auditor's report would or could reasonably have 
been affected if the auditor had known of the misstatement(s) when the 
auditor issued the auditor's report. When this condition exists, the 
auditor shall advise management to communicate the following 
information to those charged with governance, oversight bodies, funding 
agencies, and others who are relying or are likely to rely on the 
financial statement(s):

* the nature and cause(s) of the known or likely material 
misstatement(s),

* the amount(s) of known or likely material misstatement(s) and the 
related effect(s) on the previously issued financial statement(s) 
(e.g., disclosure of the specific financial statement(s) and line 
item(s) affected). If this information is not known, then the 
disclosure includes information that is known and a statement that 
management cannot determine the amount(s) and the related effect(s) on 
the previously issued financial statement(s) without further 
investigation, and:

* a notice that (1) a previously issued financial statement(s) will or 
may be restated and, therefore, (2) the related auditor's report is no 
longer reliable.

This includes communication (1) in writing to the Congress, OMB, 
Treasury, and GAO; (2) to the public on the Internet pages where the 
agency's previously issued financial statements that were affected by 
the material misstatement(s) or potential material misstatement(s) are 
published; and (3) to OMB in the agency's next quarterly financial 
statements and in subsequent quarterly financial statements until the 
specific amount(s) of the material misstatement(s) and the related 
effect(s) of such on the previously issued financial statement(s) are 
known and reported.

GAO also recommends that the following requirements be added to section 
5 of OMB Bulletin No. 06-03, Audit Requirements for Federal Financial 
Statements, as follows:

5.3: The auditor shall review the adequacy of management's 
communication information about the known or potential material 
misstatement(s) to report users, including those charged with 
governance, oversight bodies, and funding agencies. When performing 
this review, the auditor shall consider whether (1) management acted 
timely to determine the financial statement effects of the potential 
material misstatement(s), (2) management acted timely to communicate 
with appropriate parties, and (3) management disclosed the nature and 
extent of the known or likely material misstatement(s) on Internet 
pages where the agency's previously issued financial statements are 
published.

5.4: The auditor shall notify those charged with governance if the 
auditor believes that management is unduly delaying its determination 
of the effect(s) of the misstatement(s) on a previously issued 
financial statement(s).

5.5: The auditor shall evaluate the timeliness and appropriateness of 
management's decision whether to issue restated financial statement(s). 
Management may separately issue the restated financial statement(s) or 
may present the restated financial statement(s) on a comparative basis 
with those of a subsequent period. Ordinarily, the auditor would expect 
management to issue restated financial statement(s) as soon as 
practicable. However, it may not be necessary for management to 
separately issue the restated financial statement(s) and the auditor's 
report when issuance of the subsequent period audited financial 
statements is imminent.[Footnote 27]

5.6: If the auditor becomes aware of a material misstatement(s) or 
potential misstatement(s) affecting a previously issued financial 
statement(s), then the auditor shall advise the agency's management to 
determine the specific amount(s) of the material misstatement(s) or 
potential material misstatement(s) and the related effect(s) of such on 
the previously issued financial statement(s) as soon as reasonably 
possible.

5.7: If the specific amount(s) of the material misstatement(s) and the 
related effect(s) of such on a previously issued financial statement(s) 
are known and the issuance of the subsequent period audited financial 
statements is not imminent, then the auditor shall advise the agency's 
management to promptly:

* reissue the most recently issued fiscal year financial statements 
before issuing the current fiscal year's financial statements;

* communicate the reissuance to those charged with governance, 
oversight bodies, funding agencies, and others who are relying or are 
likely to rely on the financial statement(s). This includes 
communication (1) in writing to the Congress, OMB, Treasury, and GAO 
and (2) to the public on the Internet pages where the agency's 
previously issued financial statements that were affected by the 
material misstatement(s) are published; and:

* disclose the following information, at a minimum, in the agency's 
restatement footnotes: (1) the nature and cause(s) of the 
misstatement(s) that led to the need for restatement, and (2) the 
specific amount(s) of the material misstatement(s) and the related 
effect(s) on the previously issued financial statement(s) (e.g., 
year(s) being restated, specific financial statement(s) affected and 
line items restated, actions the agency's management took after 
discovering the misstatement), and the impact on the financial 
statements as a whole (e.g., change in overall net position, change in 
the audit opinion).

5.8: If the specific amount(s) of the material misstatement(s) and the 
related effect(s) of such on a previously issued financial statement(s) 
are known and issuance of the subsequent period audited financial 
statements is imminent, then the auditor shall disclose restatements in 
the auditor's report as listed in 7.7 and advise agency's management to:

* issue restated financial statement(s) as part of the current year's 
comparative financial statements;

* communicate the restatement to those charged with governance, 
oversight bodies, funding agencies, and others who are relying or are 
likely to rely on the financial statement(s). This includes 
communication (a) in writing to the Congress, OMB, Treasury, and GAO 
and (b) to the public on the Internet pages where the agency's 
previously issued financial statements that were affected by the 
material misstatement(s) are published; and:

* disclose the following information, at a minimum, in the agency's 
restatement footnote: (1) the nature and cause(s) of the 
misstatement(s) that led to the need for restatement and (2) the 
specific amount(s) of the material misstatement(s) and the related 
effect(s) on the previously issued financial statement(s) (e.g., 
year(s) being restated, specific financial statement(s) affected and 
line items restated, actions the agency's management took after 
discovering the misstatement), and the impact on the financial 
statements as a whole (e.g., change in overall net position, change in 
the audit opinion).

5.9: If the specific amount(s) of the misstatement(s) and the related 
effect(s) of such on a previously issued financial statement(s) remain 
unknown when the current year's financial statements are issued, then 
the auditor shall follow 7.8 when issuing the auditor's report and 
advise the agency's management as required in 5.2.

5.10: The auditor shall notify those charged with governance, oversight 
bodies, and funding agencies when management (1) does not take the 
necessary steps to promptly inform report users of the situation or (2) 
does not restate with appropriate timeliness the financial statements 
in circumstances when the auditor believes they need to be restated. 
The auditor shall inform these parties that the auditor will take steps 
to prevent future reliance on the auditor's report. The steps taken 
will depend on the facts and circumstances, including legal 
considerations. This includes communication in writing to the Congress, 
OMB, Treasury, and GAO as well as any other users known to be relying 
on the previously issued financial statement(s).

GAO recommends that section 7.7 of OMB Bulletin No. 06-03, Audit 
Requirements for Federal Financial Statements, be modified to read as 
follows:

7.7: When management restates a previously issued financial 
statement(s), the auditor shall perform audit procedures sufficient to 
reissue or update the auditor's report on the restated financial 
statement(s). The auditor shall fulfill these responsibilities whether 
the restated financial statement(s) are separately issued or presented 
on a comparative basis with those of a subsequent period. The auditor 
shall include the following information in an explanatory paragraph in 
the reissued or updated auditor's report on the restated financial 
statement(s):

* a statement disclosing that a previously issued financial 
statement(s) has been restated,

* a statement that the previously issued financial statement(s) was 
materially misstated and that the previously issued auditor's report 
(including report date) is withdrawn and replaced by the auditor's 
report on the restated financial statement(s),

* a reference to the note(s) to the restated financial statement(s) 
that discusses the restatement,

* a description of the following if not already provided in the note(s) 
to the financial statement(s): (1) the nature and cause(s) of the 
misstatement(s) that led to the need for restatement and (2) the 
specific amount(s) of the material misstatement(s) and the related 
effect(s) on the previously issued financial statement(s) (e.g., 
year(s) being restated and the specific financial statement(s) affected 
and line items restated) and the impact on the financial statements as 
a whole (e.g., change in overall net position, change in the audit 
opinion), and:

* a discussion of any significant internal control deficiency that 
failed to prevent or detect the misstatement and what action management 
has taken about the deficiency.

GAO also recommends that the following requirements be added to section 
7 of OMB Bulletin No. 06-03, Audit Requirements for Federal Financial 
Statements, as follows:

7.8: If at the time of issuance of the auditor's report a material 
misstatement(s) or potential material misstatement(s) has been 
identified in any of the previously issued financial statements and the 
specific amount(s) of the misstatement(s) and the related effect(s) of 
such are not known, then the auditor shall update the auditor's report 
on the previously issued financial statement(s) as appropriate. 
Furthermore, the auditor's report shall disclose, at a minimum, the 
following:

* a statement disclosing that a material misstatement(s) or potential 
material misstatement(s) affects a previously issued financial 
statement(s) but the specific amount(s) of the misstatement(s) and the 
related effect(s) of such are not known;

* a reference to note(s) to the financial statements that discusses the 
restatement or potential restatement;

* a description of the following, if not already provided in the 
agency's note(s) to the financial statements: (1) the nature and 
cause(s) of the misstatement(s) or potential misstatement(s), and (2) 
an estimate of the magnitude of the misstatement(s) or potential 
misstatement(s) and the related effect(s) of such on a previously 
issued financial statement(s) (e.g., disclosure of the specific 
financial statement(s) and line items affected) that are known and a 
statement that the specific amount(s) and the related effect(s) of such 
cannot be determined without further investigation; and:

* a statement disclosing that a restatement(s) to a previously issued 
financial statement(s) will or may occur.

[End of section]

Appendix II GAO Contact and Staff Acknowledgments:

GAO Contact:

Gary T. Engel, (202) 512-3406.

Acknowledgments:

Arthur W. Brouk, Alberto Garza, Michael D. Hansen, Malissa Livingston, 
and Michelle Philpott made key contributions to this report.

[End of section]

Related GAO Products:

Fiscal Year 2004 U.S. Government Financial Statements: Sustained 
Improvement in Federal Financial Management Is Crucial to Addressing 
Our Nation's Future Fiscal Challenges. GAO-05-284T. Washington, D.C.: 
February 9, 2005.

Financial Audit: Restatements to the Department of State's Fiscal Year 
2003 Financial Statements. GAO-05-814R. Washington, D.C.: September 20, 
2005.

Financial Audit: Restatements to the Nuclear Regulatory Commission's 
Fiscal Year 2003 Financial Statements. GAO-06-30R. Washington, D.C.: 
October 27, 2005.

Financial Audit: Restatement to the General Services Administration's 
Fiscal Year 2003 Financial Statements. GAO-06-70R. Washington, D.C.: 
December 6, 2005.

Financial Audit: Restatements to the National Science Foundation's 
Fiscal Year 2003 Financial Statements. GAO-06-229R. Washington, D.C.: 
December 22, 2005.

Financial Audit: Restatements to the Department of Agriculture's Fiscal 
Year 2003 Consolidated Financial Statements. GAO-06-254R. Washington, 
D.C.: January 26, 2006.

Fiscal Year 2005 U.S. Government Financial Statements: Sustained 
Improvement in Federal Financial Management is Crucial to Addressing 
Our Nation's Financial Condition and Long-term Fiscal Imbalance. GAO- 
06-406T. Washington, D.C.: March 1, 2006.

[End of section]

FOOTNOTES

[1] This report focuses only on those corrections of errors that 
resulted in restatements to agencies' fiscal year 2003 financial 
statements. Changes to prior period financial statements may also occur 
as a result of changes in accounting principles, where specifically 
required by Federal Accounting Standards Advisory Board (FASAB) 
standards, and changes in reporting entity.

[2] According to American Institute of Certified Public Accountants, 
Codification of Auditing Standards, AU section 110, Responsibilities 
and Functions of the Independent Auditor (1972), misstatements can be 
caused by error (unintentional) or fraud (intentional). The meaning of 
the term "error," as used in accounting principles, is consistent with 
the meaning of the term "misstatement." 

[3] GAGAS, promulgated by the Comptroller General of the United States, 
are to be followed by federal auditors and audit organizations and by 
other auditors auditing federal organizations, programs, or activities 
when required by law, contract, or policy. These standards pertain to 
auditors' professional qualifications, the quality of audit effort, and 
the characteristics of professional and meaningful audit reports. GAGAS 
incorporate American Institute of Certified Public Accountants' field 
work and reporting standards and the related Statements on Auditing 
Standards for financial audits unless the Comptroller General of the 
United States excludes them by formal announcement.

[4] OMB Bulletin No. 06-03, Audit Requirements for Federal Financial 
Statements, August 23, 2006, supersedes OMB Bulletin No. 01-02, Audit 
Requirements for Federal Financial Statements, October 16, 2000.

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

[6] GAO, Financial Statement Restatements: Trends, Market Impacts, 
Regulatory Responses, and Remaining Challenges, GAO-03-138 (Washington, 
D.C.: Oct. 4, 2002).

[7] Pub. L. No. 107-204, 116 Stat. 745 (July 30, 2002).

[8] Financial Accounting Standards Board, Statement of Financial 
Accounting Standards No. 154, Accounting Changes and Error Corrections.

[9] Form 8-K is the "current report" companies must file with the SEC 
to announce major events that shareholders should know about.

[10] Our review did not include 2 of the 11 agencies that had 
restatements for fiscal year 2003 because these agencies did not 
receive unqualified opinions on their originally issued fiscal year 
2003 financial statements. Reports were issued to the Department of 
Agriculture, Department of State, General Services Administration, 
National Science Foundation, and Nuclear Regulatory Commission. We did 
not issue separate reports dealing with the other 4 agencies 
(Departments of Justice, Transportation, and Health and Human Services, 
and the Office of Personnel Management) since those agencies' 
restatements primarily dealt with material misstatements affecting the 
Statement of Budgetary Resources, which we have already reported on in 
our February 2005 and March 2006 testimonies. See our Related GAO 
Products page for a list of these reports as well as other related GAO 
products.

[11] According to Federal Accounting Standards Advisory Board, 
Statement of Federal Financial Accounting Concepts No. 2, Entity and 
Display, financial information is also conveyed with accompanying 
footnotes, which are an integral part of the financial statements. 
Footnotes typically provide additional disclosures that are necessary 
to make the financial statements more informative and not misleading.

[12] According to American Institute of Certified Public Accountants, 
Codification of Auditing Standards, AU section 561, Subsequent 
Discovery of Facts Existing at the Date of the Auditor's Report (1972), 
when the auditor has concluded that subsequently discovered information 
would have affected the previously issued audit report and believes 
there are persons relying or likely to rely on the previously issued 
financial statements, the auditor should take action to prevent future 
reliance on the previously issued audit report. To appropriately 
withdraw the previously issued audit report, the auditor may reissue 
the audit report separately from the audit report on the current-period 
financial statements or issue an updated report in conjunction with the 
audit report on the current-period financial statements as discussed in 
American Institute of Certified Public Accountants, Codification of 
Auditing Standards, AU section 508, Reports on Audited Financial 
Statements (1989). 

[13] According to Federal Accounting Standards Advisory Board, 
Statement of Federal Financial Accounting Concepts No. 1, Objectives of 
Federal Financial Reporting, financial reports must be understandable, 
reliable, relevant, timely, consistent, and comparable.

[14] Office of Management and Budget, Circular No. A-136 Revised, 
Financial Reporting Requirements, August 23, 2005. 

[15] OMB revised Circular No. A-136 again on July 24, 2006; however, 
there were minimal changes to guidance related to restatements. 

[16] As noted previously, OMB issued guidance to agency management and 
agency auditors on July 24, 2006 and August 23, 2006, respectively.

[17] At least 7 of the 24 CFO Act agencies restated certain of their 
fiscal year 2004 financial statements to correct misstatements. Three 
of these agencies had received an unqualified opinion on their 
originally issued fiscal year 2004 financial statements while the 
remaining 4 had received a disclaimer of opinion on their financial 
statements. The auditor for one of the agencies withdrew the 
unqualified opinion that had been previously rendered on the agency's 
fiscal year 2004 financial statements and issued a qualified opinion on 
the restated financial statements.

[18] OMB Circular No. A-136 was revised during fiscal years 2005 and 
2006 and supersedes OMB Bulletin No. 01-09. 

[19] According to Federal Accounting Standards Advisory Board, 
Statement of Federal Financial Accounting Standards No. 21, Reporting 
Corrections of Errors and Changes in Accounting Principles, a prior 
period adjustment is defined as a correction for an error that occurred 
in and whose cumulative effect is attributable to periods not presented 
in the current financial statements.

[20] According to American Institute of Certified Public Accountants, 
Codification of Auditing Standards, AU section 420, Consistency of 
Application of Generally Accepted Accounting Principles (1972), 
classifications in the current financial statements may be different 
from classifications in the prior year's financial statements. Although 
changes in classification are usually not of sufficient importance to 
necessitate disclosure, material changes in classification should be 
indicated and explained in the financial statements or notes. 

[21] Specifically, two audit reports neither disclosed the restatement 
nor referred to the restatement footnote and another audit report 
disclosed the restatement, but did not refer to the restatement 
footnote.

[22] Subsequent to our initial review, OMB issued OMB Bulletin No. 06- 
03, Audit Requirements for Federal Financial Statements on August 23, 
2006, which now supersedes OMB Bulletin No. 01-02. OMB Bulletin No. 06- 
03 provides a definition for what is considered "imminent." 
Specifically, OMB defines imminent as being "within 90 calendar days of 
the subsequent period financial statements planned issue date."

[23] The auditor did not provide us with documentation of the basis for 
its conclusion that users were not likely to still be relying on fiscal 
year 2003 financial statements and would not attach importance to the 
correction of the material error.

[24] As noted previously, OMB issued guidance to agency management and 
agency auditors on July 24, 2006 and August 23, 2006, respectively.

[25] Financial statements are restated to correct an error(s) in 
previously issued financial statement(s).

[26] For purposes of this guidance, imminent means within 90 days of 
determining the effect of the misstatement(s) on the previously issued 
financial statements.

[27] For purposes of this guidance, imminent means within 90 days of 
determining the effect of the misstatement(s) on the previously issued 
financial statements.

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