Auditing and Financial Management:

Responses to Posthearing Questions Related to GAO's Testimony on the U.S. Government's Consolidated Financial Statements for Fiscal Year 2003

GAO-04-624R: Published: Apr 30, 2004. Publicly Released: Apr 30, 2004.

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On March 3, 2004, the Subcommittee on Government Efficiency and Financial Management, House Committee on Government Reform, heard testimony on the U.S. government's consolidated financial statements for fiscal year 2003. This letter responds to questions related to the testimony and to subsequent questions from the Vice Chairman.

During his March 10, 2004, testimony, the Department of Homeland Security's (DHS) chief financial officer (CFO) expressed satisfaction with the current level of accounting staff in his office and in the department's bureaus but indicated that additional staff may be needed in the future. In DHS's fiscal year 2003 Performance and Accountability Report, however, DHS's independent financial statement auditor reported that one of the agency's seven material weaknesses was related to financial management and personnel. We believe that requiring opinions on internal control over financial reporting (including safeguarding of assets) and compliance with relevant laws and regulations for CFO Act agencies and DHS is a reasonable and necessary step to evaluate and to inform the public as to whether agencies have sufficient financial reporting systems and controls in place. The Federal Financial Management Improvement Act of 1996 (FFMIA) requires that the departments and agencies covered by the CFO Act implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S. government Standard General Ledger at the transaction level. Being substantially compliant with FFMIA means that a federal agency's financial management systems as a whole substantially comply with the three requirements mentioned earlier. Internal control is embodied in these three requirements. At the same time, internal control comprises much more than substantial compliance with FFMIA. Internal control is an integral component of an organization's management that provides reasonable assurance that the following objectives are being achieved: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations. Internal control should be an integral part of each system that management uses to regulate and guide operations, including, but not limited to, financial management systems. To compel agency auditors to report in accordance with the law and to address issues concerning the definition of substantial compliance, we have recommended that OMB enhance its audit guidance related to FFMIA assessments. Specifically, we recommended that OMB (1) require agency auditors to provide a statement of positive assurance as to an agency's financial management systems' substantial compliance with FFMIA and (2) clarify the definition of substantial compliance. Presently, there are three major impediments to producing financial statements that accurately reflect the federal government's assets and liabilities that should be addressed. These major impediments are (1) serious financial management problems at the Department of Defense (DOD), (2) the federal government's inability to fully account for and reconcile transactions between federal government entities, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition, improved clarity and transparency are needed in federal financial reporting.

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