Financial Audits:

The Vast Majority of Executive Branch Entities Included in the Federal Budget Are Statutorily Required to Have Their Financial Statements Audited

GAO-05-1024R: Published: Sep 30, 2005. Publicly Released: Sep 30, 2005.

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The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government Management Reform Act of 1994, requires 24 major executive branch departments and agencies to prepare annual financial statements and have them audited. The Accountability of Tax Dollars Act of 2002 (ATD Act) extended this requirement to most executive agencies not explicitly subject to the CFO Act, unless they received a waiver or exemption from the Director of the Office of Management and Budget (the Director). Further, chapter 91 of title 31 of the United States Code, commonly referred to as the Government Corporation Control Act, and certain federal agencies' enabling legislation also require annual financial statement audits. Given the importance of timely, reliable, and useful financial information in assessing the overall financial management of the government, Congress asked us to identify executive branch entities that are not subject to the requirements of preparing annual financial statements and having them audited. In addition, Congress was interested in knowing certain budget information related to executive branch entities covered by the ATD Act that had received an exemption or waiver from the Director for fiscal years 2003 and 2004. This report summarizes the information provided during our June 27, 2005, briefing to congressional staff. Based on request letters and subsequent discussions with congressional staff, our objectives were to determine (1) which executive branch entities had received an exemption or waiver from the Director for preparing fiscal years 2003 and 2004 financial statements and having them audited in accordance with the ATD Act, (2) the amount of net budget authority and net outlays for these entities, and (3) which executive branch entities other than those subject to the CFO Act, ATD Act, Government Corporation Control Act, and enabling legislation do not annually prepare financial statements and have them audited.

We determined that almost 94 percent of the executive branch entities included in the federal budget are statutorily required to have their financial statements audited. Looking at the federal government as a whole, we determined that about 83 percent of federal entities (including the legislative and judicial branches) included in the federal budget are statutorily required to have their financial statements audited. To put this in perspective to federal spending, in fiscal year 2004, federal entities' reported net outlays totaled about $2.797 trillion, of which approximately $2.784 trillion, or about 99.5 percent, was related to federal entities whose fiscal year 2004 financial statements were subjected to audit. The ATD Act provided the Director with the authority to waive entities from having to prepare financial statements and having them audited for fiscal years 2002 and 2003, the initial phase in period of the act. In addition, beginning with fiscal year 2002, the Director could exempt an ATD Act agency if the total budget authority of the agency for the fiscal year does not exceed $25 million and if the Director determines that requiring annual audited financial statements for the agency with respect to the fiscal year is not warranted due to the absence of risks associated with the agency's operations, the agency's demonstrated performance, or other factors that the Director considers relevant. As a result, we found that primarily due to the expiration of the Director's authority to waive the requirements of the ATD Act, for fiscal year 2004, the Director granted exemptions to 12 ATD Act agencies with net outlays totaling approximately $30 million. By comparison, 21 ATD Act agencies were granted exemptions or waivers for fiscal year 2003 with net outlays totaling about $1.669 billion. Enclosure II documents which federal executive branch entities were granted waivers or exemptions from the Director and the amount of net budget authority and net outlays for these entities. Aside from these 12, another 9 agencies with net outlays totaling about $521 million did not prepare and have audited financial statements for fiscal year 2004. Their reasons varied. However, officials for 5 of the 9 agencies stated that they will prepare and have audited financial statements for fiscal year 2005. Of the remaining 4, one official expressed the view that his agency is exempt from the ATD Act, one stated that it is not cost effective for it to prepare financial statements and have them audited, one has already requested an exemption from the Director for fiscal year 2005, and one stated that it plans to request an exemption for fiscal year 2005. Based on inquiries to OMB and others, we are not aware of any comprehensive list or database of other executive branch entities that receive federal funding. Such other entities include temporary commissions, task forces, and advisory boards. However, based on the limited information available, we were able to determine that the costs related to these types of entities are primarily administrative, such as travel, payroll, rent, and procurements, and may or may not be covered by separate appropriations.

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