Financial Audit:

Significant Internal Control Weaknesses Remain in Preparing the Consolidated Financial Statements of the U.S. Government

GAO-06-415: Published: Apr 21, 2006. Publicly Released: Apr 21, 2006.

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For the past 9 years, since our 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. Included with GAO's December 2005 disclaimer of opinion on the fiscal year 2005 CFS was its discussion of continuing weaknesses relating to the Department of the Treasury's (Treasury) preparation of the CFS. The purpose of this report is to (1) provide details of those additional weaknesses, (2) recommend improvements, and (3) describe the status of corrective actions on GAO's previous 154 recommendations.

GAO identified weaknesses during its tests of Treasury's process for preparing the fiscal year 2005 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 2005 CFS audit involved the following areas: (1) directly linking audited federal agency financial statements to the CFS, (2) comparability of financial statements, (3) audit assurance over certain federal agencies' closing packages, (4) internal control monitoring, (5) consolidated reporting guidance to federal agencies, (6) reconciling of intragovernmental activity and balances, and (7) various other internal control weaknesses that were identified in previous years' audits but remained in fiscal year 2005. Of the 154 recommendations GAO reported in May 2005 regarding the process for preparing the CFS, 131 remained open as of December 2, 2005, when GAO completed its fieldwork for the audit of the fiscal year 2005 CFS. However, 76 of these 131 recommendations relate to specific disclosures required under U.S. generally accepted accounting principles. Treasury has submitted a proposal to the Federal Accounting Standards Advisory Board (FASAB) seeking to amend previously issued standards and eliminate or lessen the disclosure requirements for the consolidated financial statements so that U.S. generally accepted accounting principles would no longer require certain of the information Treasury has not been reporting. Comments on the exposure draft of a proposed FASAB standard, based on the Treasury proposal, were due March 1, 2006. GAO will continue to monitor the status of corrective actions to address open recommendations during its fiscal year 2006 audit of the CFS.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to develop a process to help ensure that, for each reporting year, the 2 years of consolidated financial statements and note information presented are consistently and comparably reported, in all material respects.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury revised and documented its policies and procedures in fiscal year 2006 related to the CFS compilation process, including those related to the consistent and comparable presentation of prior and current year information, in all material respects.

    Recommendation: The Director of OMB should direct the Controller of the Office of Federal Financial Management, in coordination with the Treasury Fiscal Assistant Secretary, to develop an alternative solution for obtaining audit assurance related to the Federal Deposit Insurance Corporation's Funds, National Credit Union Administration, and Farm Credit System Insurance Corporation, which includes the requirement for adequate audit procedures to be performed over significant information included in the CFS for these agencies.

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

    Status: Closed - Implemented

    Comments: OMB developed an alternative solution for obtaining audit assurance related to those verifying agencies that have a calendar year-end. The solution entails the requirement that these entities have an examination attestation engagement performed as of September 30 on line items in the closing package that Treasury deems significant to the CFS.

    Recommendation: The Director of OMB should direct the Controller of the Office of Federal Financial Management to consider not waiving the closing package audit requirement for any verifying agency in future years, such as the Tennessee Valley Authority.

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

    Status: Closed - Implemented

    Comments: We found that for fiscal year 2011, OMB did not waive the closing package audit requirements for any verifying agencies, including TVA and TVA timely submitted its audited closing package to the Treasury. As a result, Treasury was provided with audit assurance that the information included in the fiscal year 2011 CFS for TVA were consistent with TVAs audited financial statements.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB, to develop policies and procedures for monitoring internal control to help ensure that (1) audit findings are promptly evaluated, (2) proper actions are determined in response to audit findings and recommendations such as a documented plan of action with milestones for short-term and long-range solutions, and (3) all actions that correct or otherwise resolve the audit findings are completed within established time frames.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In fiscal year 2010, we validated that Treasury's standard operating procedures entitled "Internal Controls: Monitoring and Assessment" issued in July, 2010, incorporated sufficient procedures for monitoring and resolving deficiencies identified in our annual audit of the CFS and other audit findings and recommendations. Treasury's improved procedural guidance in this area, if fully and effectively implemented, should reduce Treasury's risk of not resolving financial statement preparation audit findings and recommendations timely and properly.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB, to develop an executable plan of action and milestones for short-term and long-range solutions for certain internal control weaknesses we have previously reported regarding the process for preparing the CFS.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury and OMB have developed corrective action plans for certain internal control weaknesses we previously reported regarding the processes used to prepare the CFS. GAO will continue to monitor the implementation of these plans.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the Treasury Financial Manual (TFM) and any other guidance to federal agencies provide clear instructions for providing reliable data to Treasury in relation to restricted cash.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In fiscal year 2008, Treasury updated the Treasury Financial Manual to provide more specific guidance regarding what details agencies were expected to disclose related to restricted cash.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the TFM and any other guidance to federal agencies provide clear instructions for providing reliable data to Treasury in relation to accounts payable.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury updated the TFM in fiscal year 2006 related to the required GAAP disclosures to help ensure accurate financial data reporting by federal agencies regarding accounts payable.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the TFM and any other guidance to federal agencies provide clear instructions for providing reliable data to Treasury in relation to summaries of unadjusted misstatements.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In fiscal year 2008, Treasury updated the Treasury Financial Manual to clarify instructions to federal agencies regarding how to provide to Treasury reliable summaries of uncorrected misstatements.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that the TFM and any other guidance to federal agencies provide clear instructions for providing reliable data to Treasury in relation to certain information reported by the Office of Personnel Management that is used to allocate costs on the Statement of Net Cost.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury updated the Treasury Financial Manual (TFM) in fiscal year 2006 related to the required GAAP disclosures to help ensure accurate financial data reporting by federal agencies, including certain information reported by the Office of Personnel Management that is used to allocate costs on the Statement of Net Cost.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to provide clear guidance to federal agencies as to when the "confirmed reporting" category in the intragovernmental reconciliation report should be selected.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In fiscal year 2007, in addition to providing clearer guidance to federal agencies, Treasury also developed a process for obtaining clarification from federal agencies for inconsistent or incomplete explanations provided in the "confirmed reporting" category by requesting that federal agencies prepare corrective action plans for these differences.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to develop an effective process for obtaining clarification from federal agencies for inconsistent or incomplete explanations provided in all material difference categories.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In fiscal year 2007, Treasury revised its process to require agencies to expand their explanations of differences for all categories, which includes completing a detail explanation form for all intragovernmental differences. In addition, for those differences greater than $50 million in the 3rd quarter, when both trading partners select "confirmed reporting" or the differences are classified as "unknown", Treasury now requires federal agencies to prepare plans of action that describe how the differences will be resolved. These actions should improve the intragovernmental reconciliation process and better enable federal agencies to actively investigate and resolve the differences as part of the annual CFS preparation process.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to accelerate the due date for IGs to complete and report on the results of agreed-upon procedures on the intragovernmental activity and balances or develop an alternative solution that would allow Treasury sufficient time to review the results and make any necessary adjustments to the CFS.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As an alternative solution, Treasury required that the current year intragovernmental trading partner balances and activities be included in the scope of the annual closing package audit. This alternative solution allowed Treasury sufficient time to consider agency audit results on intragovernmental activity and related balances in preparing the year-end CFS.

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