Financial Audit:

Material Weaknesses in Internal Control over the Processes Used to Prepare the Consolidated Financial Statements of the U.S. Government

GAO-08-748: Published: Jun 17, 2008. Publicly Released: Jun 17, 2008.

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For the past 11 years, since GAO's 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 prevented GAO from expressing an opinion on the CFS. GAO has consistently reported that the U.S. government did not have adequate systems, controls, and procedures to properly prepare the CFS. GAO's December 2007 disclaimer of opinion on the fiscal year 2007 accrual basis consolidated financial statements included a discussion of continuing control deficiencies related to the preparation of the CFS. The purpose of this report is to (1) provide details of continuing material weaknesses, (2) recommend improvements, and (3) provide the status of corrective actions taken to address the 81 open recommendations related to the preparation of the CFS that GAO reported in July 2007.

GAO identified continuing and new control deficiencies during its audit of the fiscal year 2007 CFS that relate to the federal government's processes used to prepare the CFS. These control deficiencies contribute to material weaknesses in internal control regarding the U.S. government's inability to (1) adequately account for and reconcile intragovernmental activity and balances between federal agencies; (2) ensure that the CFS was consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and (3) identify and either resolve or explain material differences that exist between certain components of the budget deficit reported in the Department of the Treasury's records, used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal agencies' financial statements and underlying financial information and records. The control deficiencies GAO identified during its tests of the processes used to prepare the fiscal year 2007 CFS involved the following areas: documenting a key standard operating procedure for preparing the CFS, reporting in conformity with U.S. generally accepted accounting principles, reconciling distributed offsetting receipts, maintaining adequate control over spreadsheets used in preparing the CFS, monitoring internal control over the processes used to prepare the CFS, using interim financial information in the CFS preparation process, and various other control deficiencies that were identified in previous years' audits but remained in fiscal year 2007. Of the 81 open recommendations GAO reported in July 2007 regarding the processes used to prepare the CFS, 35 were closed and 46 remained open as of December 10, 2007, the date of our report on our audit of the fiscal year 2007 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations and the new remaining balance of 56 open recommendations during its fiscal year 2008 audit of the CFS.

Recommendations for Executive Action

  1. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury has obtained and utilized third quarter financial information from agencies, focusing on key topics and issues to compile a major part of the CFS for fiscal years 2012 and 2013. In fiscal year 2014, Treasury will increase the number of key topics and will identify subject matters that can be completed before fiscal year-end. 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, working in coordination with the Controller of OMB's Office of Federal Financial Management, to develop and implement alternative solutions to performing almost all of the compilation effort at the end of the year, including obtaining and utilizing interim financial information from federal agencies.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: Treasury has taken several actions to address this recommendation, such as those related to analytical procedures. To provide recommendations that are better aligned with the current status of remaining deficiencies related to this area, we have (1) closed this recommendation based on Treasury's significant progress and (2) included new recommendations for corrective action for the remaining deficiencies 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 enhance and fully document all practices referred to in the standard operating procedure (SOP) entitled "Standard Operating Procedures for Preparing the Financial Report of the U.S. Government" to better ensure that practices are proper, complete, and can be consistently applied by staff members.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: Over the past few years, Treasury has taken several actions to address this recommendation. In fiscal year 2011, Treasury further enhanced the SOP to include procedures to periodically update the CFS disclosure checklist to reflect new and amended disclosure requirements and document preparer sign-offs and managerial approvals. These actions have improved the CFS disclosure checklist and Treasury's ability to identify GAAP disclosure requirements and assess disclosure at the governmentwide level. To provide recommendations that are better aligned with the current status of remaining deficiencies related to this area, we have (1) closed this recommendation based on Treasury's significant progress and (2) included new recommendations for corrective actions for the remaining deficiencies in GAO-12-529 CFS management report under "Timely Review and Approval of the Financial Reporting Disclosure Checklist".

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance its checklist or design an alternative and use it to adequately and timely document Treasury's assessment of the relevance, usefulness, or materiality of information reported by the federal agencies for use at the governmentwide level.

    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 Director of OMB should direct the Controller of OMB's Office of Federal Financial Management, in coordination with Treasury's Fiscal Assistant Secretary, to develop formal processes and procedures for identifying and resolving any material differences in distributed offsetting receipt amounts included in the net outlay calculation of federal agencies' Statement of Budgetary Resources (SBRs) and the amounts included in the computation of the budget deficit in the CFS.

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

  5. Status: Closed - Implemented

    Comments: In fiscal year 2008, Treasury implemented password protection on spreadsheets used to compile the CFS to protect files from inadvertent change.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish effective internal control to ensure the spreadsheets used to compile the CFS are protected from inadvertent change.

    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 towards achieving a sound internal control environment. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, in coordination with the Controller of OMB's Office of Federal Financial Management, to develop and implement effective processes for monitoring and assessing the effectiveness of internal control over the processes used to prepare the CFS.

    Agency Affected: Department of the Treasury

  7. Status: Closed - Implemented

    Comments: During fiscal year 2008, Treasury redesigned its checklist to consider accounting standards other than those issued by the Federal Accounting Standards Advisory Board when preparing the CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance its checklist or design an alternative and use it to adequately and timely document Treasury's consideration of relevant accounting standards other than those issued by the Federal Accounting Standards Advisory Board (FASAB).

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: In fiscal year 2008, Treasury began documenting in the checklist its final decisions regarding the inclusion or exclusion of federal agencies' disclosure information in the existing notes to the fiscal year 2008 CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance its checklist or design an alternative and use it to adequately and timely document Treasury's final decisions regarding the inclusion or exclusion of federal agencies' disclosure information in the existing notes to the CFS.

    Agency Affected: Department of the Treasury

  9. Status: Closed - Implemented

    Comments: During fiscal year 2008, Treasury established and implemented a process to detect, track, and approve changes made to the spreadsheets used to compile the CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish effective internal control to ensure the spreadsheets used to compile the CFS are documented to facilitate detection and tracking of changes to key formulas and data.

    Agency Affected: Department of the Treasury

  10. Status: Closed - Implemented

    Comments: During fiscal year 2008, Treasury revised the format of key spreadsheets used to compile the CFS to identify the section in the CFS to which the data pertained.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to ensure that columns within key spreadsheets used to compile the CFS are labeled and properly aligned to reflect the data contained within.

    Agency Affected: Department of the Treasury

 

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