Financial Audit:

Restatement to the General Services Administration's Fiscal Year 2003 Financial Statements

GAO-06-70R: Published: Dec 6, 2005. Publicly Released: Dec 6, 2005.

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The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding GSA's fiscal year 2003 restatement. Going forward, we hope that the lessons learned from the fiscal year 2003 restatement, together with our recommendations, will help GSA and its auditor avoid the need for restatements to GSA's future financial statements. We reviewed four key areas with respect to the restatement of GSA's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatement, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatement during the audit of the agency's fiscal year 2003 financial statements.

Improperly transferring costs related to one major construction project out of the Construction in Process (CIP) account and into the Buildings account led to the material misstatement that necessitated the restatement of two separate and distinct line items on GSA's originally issued fiscal year 2003 Balance Sheet. Specifically, at fiscal year 2003 year end, GSA recorded an adjusting journal entry to transfer about $952 million of construction costs from the CIP account to the Buildings account. This amount was derived based on a statistical sample of construction projects included in GSA's unadjusted year-end balance for the CIP account. The largest project included in GSA's statistical sample was a multiphase project totaling about $68.6 million, which was incorrectly classified as substantially complete at that time. This incorrect classification, when projected to the population of CIP projects, was the basis for about $921 million of the $952 million, or over 96 percent, of the estimated costs transferred at year end. GSA's auditor did not detect the error because its fiscal year 2003 audit tests were not adequately designed to test the validity of GSA's transfers of construction costs between the two accounts. Although the journal entry used to record the transfer between the accounts involved a material amount and GSA's contracted independent public accountant (IPA) had reported a reportable condition relating to CIP transfers in its previous two years audit reports, in our view, the IPA did not adequately understand the significant components underlying this journal entry. As a result, the IPA randomly selected 10 projects from GSA's statistical sample of 99 projects and did not review the above noted project that GSA had incorrectly classified. Further, in our view, the title of GSA's note disclosure of the restatement could be misinterpreted.

Status Legend:

More Info
  • 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: GSA's Chief Financial Officer should ensure that GSA fully and effectively implements control procedures to properly transfer costs from the CIP account to the Buildings account.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: In response to our recommendation, GSA's CFO implemented mitigating controls to ensure that GSA fully and effectively implements control procedures to properly transfer costs from the CIP account to the Buildings account. Specifically, during fiscal year 2005, GSA conducted a 100 percent review of all high dollar CIP projects comprised of 70 percent of the outstanding CIP balance. Also, GSA performed a statistical sample process of the remaining outstanding CIP projects to determine the amounts to be reported in the financial statements. By implementing sufficient controls over GSA's transfer cost from the CIP accounts to Buildings account, GSA has improved its controls over financial reporting.

    Recommendation: GSA's Inspector General should work with GSA's IPA so that audit procedures to sufficiently test adjusting journal entries related to the transfer of amounts from the CIP account to the Buildings account are fully and effectively implemented.

    Agency Affected: General Services Administration

    Status: Closed - Implemented

    Comments: In response to our recommendation, GSA's IG stated that his office will continue to monitor the IPA's efforts to plan and perform its tests of the adjusting journal entries related to the transfer of amounts from the CIP account to the Buildings account. Further, the GSA Regional Inspector General for Auditing stated that her office reviews and focuses on, among other areas, the GSA IPA's audit procedures for testing adjusting journal entries. Specifically, GSA's OIG examines the IPA's audit planning and testing procedures of the adjusting journal entries related to the transfer of amounts from the CIP account to the Buildings account to determine whether the work is sufficient for detecting similar errors. GSA's OIG has not found discrepancies for the last 8 quarters. By taking these actions, GSA's OIG has improved its ability to detect the type of errors that caused the restatements and our ability to use the audit work in this area on future audits of the CFS.

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