Financial Audit:

Process for Preparing the Consolidated Financial Statements of the U.S. Government Continues to Need Improvement

GAO-05-407: Published: May 4, 2005. Publicly Released: May 4, 2005.

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For the past 8 years, since the first audit of the consolidated financial statements of the U.S. government (CFS), certain material weaknesses in internal control and in selected accounting and financial reporting practices have resulted in conditions that prevented GAO from expressing an opinion on the CFS. Specifically, GAO has reported that the U.S. government did not have adequate systems, controls, and procedures to properly prepare the CFS. In December 2004, GAO reported on weaknesses identified during its fiscal year 2004 audit of the CFS, including weaknesses relating to the Department of the Treasury's (Treasury) preparation of the CFS. The purpose of this report is to (1) discuss the details of the weaknesses relating to Treasury's preparation of the CFS, (2) recommend improvements to address those weaknesses, and (3) provide the status of corrective actions to address the 142 open recommendations GAO previously reported.

GAO identified weaknesses during its tests of Treasury's process for preparing the fiscal year 2004 CFS. Such weaknesses in the CFS preparation process impair the U.S. 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. The weaknesses GAO identified during the fiscal year 2004 CFS audit involved directly linking audited federal agency financial statements to the CFS, controls over the compilation process, consolidated reporting guidance to agencies, intragovernmental activity and balances--explanations for material unreconciled transactions, consistency of the Department of Justice's and agencies' opinions on legal cases, and conformity with U.S. generally accepted accounting principles. During fiscal year 2004, Treasury made progress in laying the foundation to address certain long-standing material deficiencies in preparing the CFS. Foremost is the ongoing development of a new system, which is intended to directly link information from federal agencies' audited financial statements to amounts reported in the CFS. Additional actions are under way and planned. Of the 142 open recommendations that GAO reported in September 2004 regarding the process for preparing the CFS, 135 remained open as of December 6, 2004, the end of GAO's fieldwork for the fiscal year 2004 CFS audit. However, 86 of these 135 recommendations relate to specific disclosures required under U.S. generally accepted accounting principles. Treasury has taken action to begin addressing the conformity with U.S. generally accepted accounting principles issue. GAO plans to determine the status of corrective actions to address its open recommendations during its fiscal year 2005 audit of the CFS.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As of December 1, 2006, this recommendation has been implemented and the status is closed. Treasury further revised and documented its procedures in fiscal year 2006 related to the CFS compilation process to address segregation of duties.

    Recommendation: In connection with Treasury's development of its new compilation system and process, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to segregate the duties of individuals performing key functions in Treasury's processes for preparing governmentwide adjustments to the financial statements, making changes to Excel spreadsheets that contain audited agency financial information, and accessing federal agencies' closing package data in Treasury's new system.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: During the fiscal year 2009 CFS audit, we found that Treasury had written procedures requiring supporting documentation be maintained for journal vouchers recorded in the CFS. In addition, our review of journal vouchers found that Treasury had maintained adequate supporting documentation for fiscal year 2009, in all material respects. As a result of maintaining adequate supporting documentation with each journal voucher, Treasury's controls over the journal voucher process was improved, and the risk of inaccurate changes being made to amounts in the CFS was decreased. This action should help to improve the reliability of information presented in the CFS.

    Recommendation: In connection with Treasury's development of its new compilation system and process, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to require and maintain appropriate supporting documentation for all journal vouchers recorded in the CFS.

    Agency Affected: Department of the Treasury

  3. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury attempted to contact agencies before recording journal vouchers and made management decisions on making journal vouchers that affect agency audited closing package data. In fiscal year 2014, Treasury will ensure that this agency communication along with the Treasury decision making process is fully documented in the support for the journal vouchers. We will follow-up on progress made by Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: In connection with Treasury's development of its new compilation system and process, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to require that Treasury employees contact and document communications with agencies before recording journal vouchers to change agency audited closing package data.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: During fiscal year 2009, we found that Treasury had written procedures requiring review and approval of data changes to the CFS and evidence that such reviews were documented. As a result of these actions, the risk that unauthorized transactions or inaccurate data were being used to compile the CFS was decreased. This action should help to improve the reliability of information presented in the CFS.

    Recommendation: In connection with Treasury's development of its new compilation system and process, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to require and document management reviews of all procedures that result in data changes to the CFS.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: Treasury further revised its automated processes in fiscal year 2006 to prevent unauthorized changes to agency submitted data.

    Recommendation: In connection with Treasury's development of its new compilation system and process, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to configure the Governmentwide Financial Reporting System (GFRS) database to prevent Treasury from altering data submitted by federal agencies and to use separate GFRS databases for testing and production.

    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 continues to make improvements to its internal control infrastructure, by updating and revising its standard operating procedures (SOP) to ensure key controls are in place at all critical areas of the CFS preparation process. Treasury will continue to monitor and assess its internal control during fiscal year 2014 toward achieving a sound internal control environment. We will follow-up on progress made by Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: In connection with Treasury's development of its new compilation system and process, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to assess the infrastructure associated with the compilation process and modify it as necessary to achieve a sound internal control environment.

    Agency Affected: Department of the Treasury

  7. Status: Closed - Implemented

    Comments: Our audit work found that Treasury updated its Treasury Financial Manual to provide clear guidance for reporting accurate data in the area of loans receivable and loan guarantees.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to review the Treasury Financial Manual (TFM) and any other guidance to federal agencies to ensure that they provide clear instructions for reporting accurate data to Treasury in the specific area of loans receivable and loan guarantees.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: Our audit work found that Treasury updated the Treasury Financial Manual instructions requiring agencies to submit a complete closing package to GAO.

    Recommendation: The Director of the Office of Management and Budget (OMB) should direct the Controller of the Office of Federal Financial Management, in coordination with the Fiscal Assistant Secretary, to ensure that federal agencies submit to the GAO a complete closing package, as required by the TFM as part of the consolidation process, consisting of the special purpose audit opinion, management representation letter for the closing package, audit trail report (reclassification journal voucher report), closing package financial statement reports, trading partner summary reports, notes reports, and other data reports.

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

  9. Status: Closed - Implemented

    Comments: Our audit work found that Treasury updated its instructions to agencies to require agencies to provide detailed explanations for all material differences identified in the intragovernmental reconciliation.

    Recommendation: As Treasury continues to make strides to address issues related to intragovernmental transactions, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to require that federal agencies provide detailed explanations for all material differences identified in the intragovernmental reconciliations.

    Agency Affected: Department of the Treasury

  10. Status: Closed - Implemented

    Comments: As of December 1, 2006, this recommendation is closed. OMB and Treasury developed policies and procedures related to legal letter representations and legal contingency disclosures to address inconsistencies between the Department of Justice and agency assessments and to determine the proper disclosure for the CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB's Office of Federal Financial Management, to develop policies and procedures to determine the proper resolution and the appropriate legal representations to GAO at the governmentwide level when Justice's legal counsel and agencies' legal counsel provide inconsistent opinions.

    Agency Affected: Department of the Treasury

  11. Status: Closed - Implemented

    Comments: Our audit work found that Treasury updated its Treasury Financial Manual to provide clear guidance for reporting accurate data in the area of property, plant, and equipment.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to review the TFM and any other guidance to federal agencies to ensure that they provide clear instructions for reporting accurate data to Treasury in the specific area of property, plant, and equipment.

    Agency Affected: Department of the Treasury

  12. Status: Closed - Implemented

    Comments: As of December 1, 2006, this recommendation is closed. Treasury updated the TFM in fiscal year 2006 related to the required GAAP disclosures to ensure accurate financial data reporting by federal agencies in the area of federal employee and veteran benefits payable.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to review the TFM and any other guidance to federal agencies to ensure that they provide clear instructions for reporting accurate data to Treasury in the specific area of federal employee and veteran benefits payable.

    Agency Affected: Department of the Treasury

  13. Status: Closed - Implemented

    Comments: Our audit work found that Treasury updated its Treasury Financial Manual to provide clear guidance for reporting accurate data in the area of contingencies.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to review the TFM and any other guidance to federal agencies to ensure that they provide clear instructions for reporting accurate data to Treasury in the specific area of contingencies.

    Agency Affected: Department of the Treasury

  14. Status: Closed - Implemented

    Comments: Our audit work found that Treasury updated its Treasury Financial Manual to provide clear guidance for reporting accurate debit and credit amounts.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to review the TFM and any other guidance to federal agencies to ensure that they provide clear instructions for reporting accurate data to Treasury in the specific area of reporting debit and credit amounts.

    Agency Affected: Department of the Treasury

  15. Status: Closed - Implemented

    Comments: In fiscal year 2007, Treasury improved its FEVBP disclosures by revising its Treasury Financial Manual to specifically call for VA to provide the rates of interest and inflation used in determining the compensation and burial benefits valuation. Further, the fiscal year 2005 FEVBP disclosure included these significant economic assumptions for estimating the VA compensation and burial benefits liability.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the note disclosure for federal employee and veteran benefits payable meets the requirements of SFFAS No. 5, Accounting for Liabilities of the Federal Government, paragraph 110, table 9, which states that all components of the liability for future policy benefits should be separately disclosed in a footnote with a description of each amount and an explanation of its projected use and any other potential uses.

    Agency Affected: Department of the Treasury

  16. 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 (SFFAS) 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. As part of our audit of the fiscal year 2006 CFS, we found that Treasury disclosed the required information relating to Federal Employee and Veteran Benefits Payable, in accordance with SFFAS No. 32.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the note disclosure for federal employee and veteran benefits payable meets the requirements of SFFAS No. 5, Accounting for Liabilities of the Federal Government, paragraphs 117 and 118, all federal reporting entities with whole life insurance programs should follow the standards as prescribed in the private sector standards when reporting the liability for future policy benefits, in addition to the following required disclosures: liability for future policy benefits relating to participating life insurance contracts should be equal to the sum of (1) the net level premium reserve for death and endowment policy benefits, (2) the liability for terminal dividends, and (3) any premium deficiency.

    Agency Affected: Department of the Treasury

  17. 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 (SFFAS) 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. As part of our audit of the fiscal year 2006 CFS, we found that Treasury disclosed the required information relating to Federal Employee and Veteran Benefits Payable, in accordance with SFFAS No. 32.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the note disclosure for federal employee and veteran benefits payable meets the requirements of SFFAS No. 5, Accounting for Liabilities of the Federal Government, paragraph 121, states that all components of the liability for future policy benefits (i.e., the net-level premium reserve for death and endowment policy and the liability for terminal dividends) should be separately disclosed in a footnote with a description of each amount and an explanation of its projected use and any other potential uses (e.g., reducing premiums, determining and declaring dividends available, or reducing federal support in the form of appropriations related to administrative cost or subsidies).

    Agency Affected: Department of the Treasury

  18. Status: Closed - Implemented

    Comments: Our audit work found that the required information regarding the reasons for and nature of restricted cash was disclosed in the fiscal year 2005 CFS, Note 2, Cash and Other Monetary Assets.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the note disclosure for cash and other monetary assets meets the requirements of SFFAS No. 1, Accounting for Selected Assets and Liabilities, paragraph 30, which requires that financial reports disclose the reasons for and nature of restricted cash. SFFAS No. 1 defines restricted cash as restrictions usually imposed on cash deposits (in escrow or other special accounts) by law, regulation, or agreement.

    Agency Affected: Department of the Treasury

  19. Status: Closed - Implemented

    Comments: Our audit work found that the amounts reported for the "other cash" line items that are restricted with respect to the federal government taken as a whole was disclosed in the fiscal year 2008 CFS, Note 2, Cash and Other Monetary Assets.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that agencies designate any amounts reported for the "other cash" line items that are restricted with respect to the federal government taken as a whole in the note disclosure for cash and other monetary assets.

    Agency Affected: Department of the Treasury

  20. Status: Closed - Not Implemented

    Comments: The required information related to life insurance in the other liabilities note disclosure was not deemed material to the fiscal year 2008 CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the note disclosure for other liabilities meets the requirements of SFFAS No. 5, paragraph 114, which requires that indicators of the range of uncertainty around insurance-related estimates and the sensitivity of the estimates to changes in major assumptions be reported.

    Agency Affected: Department of the Treasury

 

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