Financial Audit:

Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Further Improvement

GAO-04-866: Published: Sep 10, 2004. Publicly Released: Sep 10, 2004.

Additional Materials:

Contact:

Gary T. Engel
(202) 512-8815
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

For the past 7 years, since the first audit of the consolidated financial statements of the U.S. government (CFS), certain material weaknesses in internal control and financial reporting have resulted in conditions that have prevented GAO from expressing an opinion on the CFS. Specifically, GAO has reported that the federal government did not have adequate systems, controls, and procedures to properly prepare the CFS. In October 2003, GAO reported on weaknesses identified during the fiscal year 2002 audit regarding financial reporting procedures and internal control over the process for preparing the CFS. The purpose of this report is to (1) discuss additional weaknesses identified during the fiscal year 2003 audit, (2) recommend improvements to address those weaknesses, and (3) provide the status of corrective actions to address the 129 open recommendations contained in the October 2003 report.

Many of the weaknesses in internal control that have contributed to GAO's continuing disclaimers of opinion on the CFS were identified by agency financial statement auditors during their audits of federal agencies' financial statements and have been reported in detail with recommendations to agencies in separate reports. However, some of the weaknesses GAO reported were identified during GAO's tests of the Department of the Treasury's process for preparing the CFS. Such weaknesses impair the federal government's ability to ensure that the CFS is consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles. In addition to the compilation and reporting weaknesses that GAO reported in October 2003, GAO found additional weaknesses in the compilation and reporting process in the following seven areas during the fiscal year 2003 CFS audit: (1) allocation methodology for certain costs in the statement of net cost, (2) statement of changes in cash balance from unified budget and other activities, (3) reporting of criminal debt, (4) recording and disclosing contingencies, (5) directly linking audited federal agency financial statements to the CFS, (6) prior period adjustments, and (7) conformity with U.S. generally accepted accounting principles. GAO found that with respect to four required disclosure areas, information was either not included in the CFS or was not presented in conformity with U.S. generally accepted accounting principles. As a result of this and certain other weaknesses GAO identified, GAO was unable to determine if the missing information was material to the CFS. The four disclosure areas were (1) federal employee and veteran benefits payable, (2) environmental and disposal liabilities, (3) research and development, and (4) deferred maintenance. GAO's October 2003 report contained 129 recommendations. Of those recommendations, 118 remained open as of February 20, 2004, the end of GAO's fieldwork for the fiscal year 2003 CFS audit.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: During its audit of the fiscal year 2004 CFS, GAO found that the Department of the Treasury revised its methodology for allocating OPM costs to other federal agencies. The revised methodology used FTEs provided by OPM in the Governmentwide Financial Report System.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that, if full-time equivalents (FTEs) are used as part of Treasury's methodology for allocating Office of Personnel Management (OPM) costs, the FTEs used for the agencies listed on the Statement of Net Cost agree with the FTEs listed in the Analytical Perspectives, Budget of the United States Government as currently stated in Treasury's methodology.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: During its audit of the fiscal year 2004 CFS, GAO found that the Department of the Treasury revised its methodology for allocating OPM costs to other federal agencies. The revised methodology used FTEs provided by OPM in the Governmentwide Financial Report System.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to document any changes to the stated methodology for allocating OPM costs and the rationale for these changes.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: During its audit of the fiscal year 2004 CFS, GAO found that Treasury required management reviews of the accuracy of the allocated OPM costs to help ensure that the information contained in the CFS is accurate.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to require reviews by Treasury management of the accuracy of the allocated OPM costs.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Not Implemented

    Comments: Over the past few years, Treasury has taken certain actions to address recommendations related to the two CFS budget statements. To provide recommendations that are better aligned with the remaining control deficiencies in this area, we have (1) closed this recommendation and (2) included new recommendations for corrective action in GAO-13-540, under the section "Preparation of the Budget Statements Included in the CFS".

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to develop a process that will allow full reporting of the changes in cash balance of the U.S. government. Specifically, the process should provide for reporting on the change in cash reported on the consolidated Balance Sheet, which should be linked to cash balances reported in federal agencies' audited financial statements.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: Beginning in fiscal year 2006, Treasury implemented related reporting disclosures applicable to the CFS under SFFAS No. 32, paragraph 15.b.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to report gross amounts for receipts and disbursements of cash related to direct loans and loan guarantees.

    Agency Affected: Department of the Treasury

  6. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury and OMB, will assess options as to what methodologies or approaches to use for obtaining the additional information needed from the agencies. We will follow-up on progress made by Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: In the interim, until the joint task force is established and a strategic plan is developed, the Director of OMB should direct the Controller of OMB, in coordination with the Fiscal Assistant Secretary of the Treasury, to work with Justice and certain other executive branch agencies to ensure that these agencies report or disclose relevant criminal debt information in conformity with GAAP in their financial statements and have such information subjected to audit.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  7. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury stated that Treasury, along with OMB, will assess options as to what methodologies or approaches to use for obtaining the additional information needed from the agencies. We will follow-up on progress made by Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to include relevant criminal debt information in the CFS or document the specific rationale for excluding such information.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: During our fiscal year 2007 CFS audit, we found that OMB had made significant progress in explaining and resolving significant differences between net outlay amounts reported in federal agencies' Statement of Budgetary Resources and the budget of the U.S. government. As such, OMB has substantially addressed this recommendation.

    Recommendation: The Director of OMB should direct the Controller of OMB, in coordination with Treasury's Fiscal Assistant Secretary, to work with the federal agencies so that the differences between net outlays the agencies report in their Statements of Budgetary Resources (SBRs) and the net outlay records Treasury uses to prepare the Statement of Changes in Cash Balance are reconciled.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  9. Status: Closed - Implemented

    Comments: During our fiscal year 2007 CFS audit, we found that OMB had made significant progress in explaining and resolving significant differences between net outlay amounts reported in federal agencies' Statement of Budgetary Resources and the budget of the U.S. government. As such, OMB has substantially addressed this recommendation.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to determine and address the effects that any of the differences between net outlays the agencies report in their SBRs and Treasury's net outlay records may have on the CFS.

    Agency Affected: Department of the Treasury

  10. Status: Closed - Implemented

    Comments: Our audit work found that contingency loss information we had recommended to be disclosed was disclosed in the fiscal year 2005 CFS, Note 19, Contingencies.

    Recommendation: Because the limited information requested through Treasury's FACTS does not capture all the disclosure requirements under the accounting standards, the contingency note disclosure for the CFS may have been inaccurate and unreliable. For fiscal year 2004, Treasury is completing the design of and will be implementing a new system for compiling the CFS. The Secretary of the Treasury should direct the Fiscal Assistant Secretary to include in the new system a request for federal agencies to provide the following contingency loss informtion to assist Treasury in disclosing contingencies in the CFS in accordance with GAAP: (1) contingency losses assessed as probable and for which possible losses and estimated loss ranges are measurable, (2) contingency losses assessed as probable and for which possible losses cannot be estimated, (3) contingency losses assessed as reasonably possible and for which losses and estimated loss ranges are measurable, (4) contingency losses assessed as reasonably possible and for which possible losses are not measurable, and (5) the nature and extent of significant contingency losses for which the agency is unable to provide an assessment on the likelihood of an unfavorable outcome.

    Agency Affected: Department of the Treasury

  11. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2013 audit, this recommendation was closed. Treasury's process for compiling the CFS requires federal entities to directly link their audited financial statement notes to the CFS notes. During our fiscal year 2013, we found that the Balance Sheet, Statement of Net Cost, and Statement of Operations and Changes in Net Position, including the associated notes, were consistent with the significant federal entities' financial statements prior to eliminating intragovernmental activity and balances. We also found the the social insurance statements, including the associated note, were consistent with the underlying federal entities' financial statements.

    Recommendation: As Treasury is still designing its new compilation process, which it expects to implement beginning with the fiscal year 2004 CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB, to modify Treasury's plans for the new closing package to require federal agencies to directly link their audited financial statement notes to the CFS notes.

    Agency Affected: Department of the Treasury

  12. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2013 audit, this recommendation was closed. Treasury's process for compiling the CFS generally demonstrated that amounts in the Statement of Social Insurance and the Statement of Changes in Social Insurance Amounts were consistent with the underlying federal entities' audited financial statements and that the Balance Sheet, Statement of Net Cost, and Statement of Operations and Changes in Net Position were also consistent with the significant federal entities' financial statements prior to eliminating intragovernmental activity and balances. With regard to directly linking the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities to federal entities' audited financial statements and other financial data, we incorporated this issue along with other control deficiencies related to the two CFS budget statements into recommendations issued as a result of our fiscal year 2012 CFS audit (12-04 and 12-05).

    Recommendation: As Treasury is still designing its new compilation process, which it expects to implement beginning with the fiscal year 2004 CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB, to modify Treasury's plans for the new closing package to provide the necessary information to demonstrate that all of the five principal consolidated financial statements are consistent with the underlying information in federal agencies' audited financial statements and other financial data.

    Agency Affected: Department of the Treasury

  13. Status: Closed - Implemented

    Comments: During its audit of the fiscal year 2004 CFS, GAO found that the Department of the Treasury correctly reported prior period adjustments in accordance with SFFAS No. 21.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to report prior period adjustments in accordance with SFFAS No. 21 by (1) restating the prior year for corrections of material errors and adjusting the beginning balance of cumulative results of operations and disclosing the nature of the errors in the notes to the CFS and (2) including corrections of immaterial errors in the current year and not citing them as prior period adjustments on the Statement of Changes in Net Position and not disclosing them in the notes to the CFS.

    Agency Affected: Department of the Treasury

  14. Status: Closed - Implemented

    Comments: During its audit of the fiscal year 2004 CFS, GAO found that the Department of the Treasury's new closing package allowed federal agencies to clearly distinguish between prior period adjustments and changes in accounting principles in accordance with SFFAS No. 21.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to modify Treasury's plans for the new closing package to include in Treasury's new closing package a process that will allow federal agencies to clearly distinguish between prior period adjustments and changes in accounting principles in accordance with SFFAS No. 21.

    Agency Affected: Department of the Treasury

  15. Status: Closed - Implemented

    Comments: During its audit of the fiscal year 2004 CFS, GAO found that the Department of the Treasury included in the CFS the required disclosure for federal employee and veterans' benefits payable in accordance with SFFAS No 5, paragraph 65.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure that SFFAS No. 5, paragraph 65, states that actuarial assumptions should be on the basis of the actual experience of the covered group, to the extent that credible experience data are available, but should emphasize expected long-term future trends rather than give undue weight to recent experience. However, the fiscal year 2003 military rates of inflation and projected salary increases included in the CFS were the actual fiscal year 2003 rates disclosed in the Department of Defense's audited financial statements rather than the long-term rates. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  16. Status: Closed - Implemented

    Comments: Our audit work found that the information required to be disclosed in accordance with SFFAS No. 5, paragraph 83 was disclosed in the fiscal year 2005 CFS, Note 11, Federal Employee and Veteran Benefits Payable.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure for other retirement benefits that meets the requirements of SFFAS No. 5, paragraph 83, which states that the entity should disclose the assumptions used. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  17. Status: Closed - Implemented

    Comments: Our audit work found that the information required to be disclosed in accordance with SFFAS No. 5, paragraph 72 was disclosed in the fiscal year 2005 CFS, Note 11, Federal Employee and Veteran Benefits Payable.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure for federal employee and veteran benefits payable that meets the requirements of SFFAS No. 5, paragraph 72, which states that the entity should report a pension expense for the net of the following components: normal costs; interest on the pension liability during the period; prior (and past) service cost from plan amendments (or the initiation of a new plan) during the period, if any; and actuarial gains and losses during the period, if any. The individual components should be disclosed. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  18. Status: Closed - Implemented

    Comments: Our audit work found that the information required to be disclosed in accordance with SFFAS No. 5, paragraph 88 was disclosed in the fiscal year 2005 CFS, Note 11, Federal Employee and Veteran Benefits Payable.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure that meets the requirements of SFFAS No. 5, paragraph 88, which states that the entity should report an other retirement benefits expense for the net of the following components: normal cost; interest on the other retirement benefits liability during the period; prior (and past) service costs from plan amendments (or the initiation of a new plan) during the period, if any; any gains or losses due to a change in the medical inflation rate assumption; and other actuarial gains or losses during the period, if any. The individual components should be disclosed. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  19. Status: Closed - Implemented

    Comments: On October 4, 2004, Treasury submitted a proposal to the Federal Accounting Standards Advisory Board (FASAB) seeking to amend certain previously issued standards and eliminate or lessen the disclosure requirements for the CFS so that GAAP would no longer require certain of the information Treasury was not reporting. On September 28, 2006, FASAB issued Statement of Federal Financial Accounting Standard No. 32, Consolidated Financial Report of the United States Government Requirements: Implementing Statement of Federal Financial Accounting Concepts 4 "Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government", effective for periods after September 30, 2005. Based on the new GAAP requirements for the CFS and additional disclosures made by Treasury, we found as part of our audit of the fiscal year 2006 CFS that Treasury disclosed the required information relating to Environmental and Disposal Liabilities, in accordance with SFFAS No.32.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure of the method for assigning estimated total cleanup costs to current operating periods (i.e., physical capacity versus passage of time). If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  20. Status: Closed - Implemented

    Comments: During our audit of the fiscal year 2006 Consolidated Financial Statements (CFS) of the U.S. Government, we determined that (1) Treasury disclosed, for cleanup costs associated with general property, plant, and equipment, the unrecognized portion of estimated total cleanup costs, in accordance with U.S. Generally Accepted Accounting Principles and (2) Treasury disclosed the method for assigning estimated total cleanup costs to current operating periods, in accordance with SFFAS No.6.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure for environmental and disposal liabilities that meets the requirements of SFFAS No. 6, which requires the reporting entity to disclose the unrecognized portion of estimated total cleanup costs associated with general property, plant, and equipment. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  21. Status: Closed - Implemented

    Comments: On October 4, 2004, Treasury submitted a proposal to the Federal Accounting Standards Advisory Board (FASAB) seeking to amend certain previously issued standards and eliminate or lessen the disclosure requirements for the CFS so that GAAP would no longer require certain of the information Treasury was not reporting. On September 28, 2006, FASAB issued Statement of Federal Financial Accounting Standard No. 32, Consolidated Financial Report of the United States Government Requirements: Implementing Statement of Federal Financial Accounting Concepts 4 "Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government", with an effective date for periods after September 30, 2005. Based on the new GAAP requirements for the CFS and additional disclosures made by Treasury, as part of our audit of the fiscal year 2006 CFS, we found that Treasury disclosed the required information relating to Environmental and Disposal Liabilities, in accordance with SFFAS No.32.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure for environmental and disposal liabilities that meets the requirements of SFFAS No. 6 which requires the reporting entity to disclose the nature of estimates and the disclosure of information regarding possible changes to the estimates resulting from inflation, deflation, technology, or applicable laws and regulations. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  22. Status: Closed - Implemented

    Comments: As of December 1, 2006, this recommendation is closed. The Management, Discussion, and Analysis section of the 2006 CFS included a discussion of the reasons for and the amount of certain significant changes relating to environmental and disposal liabilities.

    Recommendation: The Secretary of the Treasury should consider whether the reader would be interested in understanding why the environmental and disposal liabilities amount significantly changed during the year and include the explanation for the change in the note disclosure.

    Agency Affected: Department of the Treasury

  23. Status: Closed - Implemented

    Comments: In the fiscal year 2007 CFS, the Department of the Treasury requested applicable federal agencies to provide information regarding results achieved for their agencies' research and development programs. During GAO's audit of the fiscal year 2007 CFS and our review of the research and development supplementary stewardship information, we found the Department of the Treasury reported major program results by basic research, applied research and development program.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure of program outcomes (i.e., program outcome data or output data) for the investments in research and development. Outcome data are expected to consist typically of a narrative discussion of the major results achieved by the program along the lines of basic research, applied research, and development--as defined in the standard. If outcome data are not available (for example, the agency has not agreed on outcome measures for the program, the agency is unable to collect reliable outcome data, or the outcomes will not occur for several years), the outputs that best provide indications of the intended program outcomes shall be used to justify continued treatment of expenses as investments until outcome data are available. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  24. Status: Closed - Implemented

    Comments: In May 2006, the Department of the Treasury's Financial Management Service (FMS) developed written guidelines for reporting stewardship investments in the fiscal year 2006 CFS which included a high-level summary description of the major research and development programs. The research and development information in the Supplemental Information section of the FY 2006 CFS presented such summary information.

    Recommendation: The Secretary of the Treasury should include in the CFS a disclosure for research and development that includes a narrative description of the major results achieved through the investments in basic research, applied research, and development. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

  25. Status: Closed - Implemented

    Comments: Our audit work found that the disclosure requirements under SFFAS No. 6, paragraph 83 were included in the fiscal year 2005 CFS in the required supplementary information section.

    Recommendation: The Secretary of the Treasury should include in the CFS required supplemental information for deferred maintenance that meets the requirements of SFFAS No. 6, Accounting for Property, Plant, and Equipment, paragraph 83, which requires the reporting entity to disclose the identification of each major class of asset (i.e., building and structures, furniture and fixtures, equipment, vehicles, and land) for which maintenance has been deferred. If this is excluded, the specific rationale for its exclusion should be documented.

    Agency Affected: Department of the Treasury

 

Explore the full database of GAO's Open Recommendations »

Sep 22, 2014

Jul 9, 2014

Jun 19, 2014

May 30, 2014

May 15, 2014

May 13, 2014

May 12, 2014

May 2, 2014

Mar 27, 2014

Looking for more? Browse all our products here