Management Report:

Improvements Needed in Controls over the Preparation of the U.S. Consolidated Financial Statements

GAO-12-529: Published: Jun 27, 2012. Publicly Released: Jun 27, 2012.

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engelg@gao.gov

 

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What GAO Found

During its audit of the fiscal year 2011 consolidated financial statements of the U.S. government (CFS), GAO identified new and continuing control deficiencies in the Department of the Treasury’s (Treasury) and the Office of Management and Budget’s (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control over the federal government’s ability to

  • adequately account for and reconcile intragovernmental activity and balances between federal entities;
  • ensure that the federal government’s accrual-based consolidated financial statements were consistent with the underlying audited entities’ financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and
  • identify and either resolve or explain material differences between (1) components of the budget deficit that are used to prepare certain information in the CFS and (2) related amounts reported in federal entities’ financial statements and underlying financial information and records.

GAO identified new control deficiencies involving the need to

  • develop or revise and implement written procedures for appropriate Treasury and OMB officials to (1) review and approve the drafts of the Financial Report of the United States Government (Financial Report) before they are provided to GAO and (2) better ensure that key federal entity personnel are actively involved in the process for preparing and reviewing the Financial Report;
  • enhance procedures for timely review, approval, and use of the CFS disclosure checklist;
  • develop procedures for pursuing indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with applicable accounting standards;
  • enhance Treasury’s intragovernmental data validation process; and
  • enhance procedures for timely identifying, notifying, and obtaining closing packages from federal entities as they first become significant to the Financial Report.

In addition, GAO found that various other control deficiencies identified in previous years’ audits with respect to the CFS preparation continued to exist. Specifically, of the 50 open recommendations from GAO’s prior reports regarding control deficiencies in the CFS preparation process,12 were closed and 38 remained open as of December 12, 2011, the date of GAO’s report on its audit of the fiscal year 2011 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations as well as the 38 open recommendations from prior years as part of its fiscal year 2012 CFS audit.

Why GAO Did This Study

Treasury, in coordination with OMB, is primarily responsible for preparing the Financial Report, which contains the CFS. Since GAO’s first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of GAO’s work have prevented GAO from expressing an opinion on the CFS, exclusive of the Statement of Social Insurance (SOSI). Also, GAO was unable to express opinions on the 2011 and 2010 SOSI and the 2011 Statement of Changes in Social Insurance Amounts because of significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth, reflected in these statements.

As part of the fiscal year 2011 CFS audit, GAO identified material weaknesses and other control deficiencies in the processes used to prepare the CFS. The purpose of this report is to (1) provide details on new control deficiencies GAO identified related to the preparation of the CFS, (2) recommend improvements, and (3) provide the status of corrective actions taken to address GAO’s prior recommendations in this area that remained open at the end of the fiscal year 2010 audit.

What GAO Recommends

GAO is making 10 recommendations —9 to Treasury and 1 to OMB—to address new control deficiencies. In commenting on GAO’s draft report, Treasury and OMB generally concurred with GAO’s findings.

For more information, contact Gary Engel at (202) 512-3406 or engelg@gao.gov.

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: To help to provide reasonable assurance that the information reported in the CFS is complete, accurate, and in conformity with generally accepted accounting principles (GAAP), the Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish a mechanism to ensure that Treasury’s CFS disclosure checklist is reviewed and approved by the date in Treasury’s policies and procedures.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help to provide reasonable assurance that the information reported in the CFS is complete, accurate, and in conformity with generally accepted accounting principles (GAAP), the Secretary of the Treasury should direct the Fiscal Assistant Secretary to revise the standard operating procedure (SOP) to include requirements for using the CFS disclosure checklist to prepare the format draft of the CFS and to update the CFS disclosure checklist as necessary when subsequent drafts of the CFS are prepared.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: As of the completion of our fiscal year 2012 CFS audit, Treasury agreed that this recommendation remained open. Treasury stated that during fiscal year 2013, it will utilize the CFS disclosure checklists for all drafts of the CFS, including the format draft. We will follow-up on progress made by the Treasury as part of our fiscal year 2013 CFS audit.

    Recommendation: To help to provide reasonable assurance that financial information is properly reported in the CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the SOP entitled “Data Analysis” to include required steps for pursuing any instances where the information provided to Treasury contains indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with GAAP, particularly with respect to any recent changes in GAAP.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help to provide reasonable assurance that appropriate controls are in place to reduce the risk of errors in IRAS reports, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the IRAS validation procedures, at a minimum, to include specific steps for testing intragovernmental data of the administrator’s assigned entity.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help to provide reasonable assurance that appropriate controls are in place to reduce the risk of errors in IRAS reports, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish a mechanism for ensuring that all steps in the required validation process are completed, documented, and reviewed prior to the distribution of Intragovernmental Reporting and Analysis System (IRAS) reports.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: As of the completion of our fiscal year 2012 CFS audit, Treasury agreed that this recommendation remained open. Treasury stated that during fiscal year 2013, it will complete and document all steps in the required IRAS validation process prior to the distribution of the IRAS reports. We will follow-up on progress made by the Treasury as part of our fiscal year 2013 CFS audit.

    Recommendation: To help to provide reasonable assurance that Treasury timely receives the audited closing package from those federal entities that are newly identified as being significant to the Financial Report, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled “Significant Federal Entities Identification” to include procedures for identifying any entities that become significant to the Financial Report during the fiscal year but were not identified as significant in the prior fiscal year.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help to provide reasonable assurance that Treasury timely receives the audited closing package from those federal entities that are newly identified as being significant to the Financial Report, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled “Significant Federal Entities Identification” to include procedures for obtaining audited closing packages from newly identified significant entities in the year they become significant, including timely written notification to newly identified significant entities.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Acting Director of OMB should direct the Controller of OMB to develop and implement written procedures specifying the steps required for effectively reviewing and approving the drafts of the Financial Report before they are provided to GAO, to include clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in OMB's Office of Federal Financial Management, including the Controller of OMB.

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

    Status: Open

    Comments: As of the completion of our fiscal year 2012 CFS audit, OMB agreed that this recommendation remained open. OMB stated that it developed and implemented written procedures specifying its review process of the Financial Report. GAO noted that OMB's written procedures state that the Office of Federal Financial Management provides certification that the Financial Report was reviewed and approved by OMB management. However, these procedures do not clearly delineate the review and approval roles and responsibilities of designated appropriate higher-level officials, including the Controller of OMB. We will follow-up on progress made by OMB as part of our fiscal year 2013 CFS audit.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to revise and implement Treasury's procedures related to preparing and reviewing the drafts of the Financial Report before they are provided to GAO, to include clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in the Office of the Fiscal Assistant Secretary, including the Fiscal Assistant Secretary.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. During fiscal year 2012, we found that Treasury revised and implemented its procedures related to preparing and reviewing the drafts of the Financial Report before they are provided to GAO, including clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in the Office of the Fiscal Assistant Secretary, including the Fiscal Assistant Secretary.

    Recommendation: To help to provide reasonable assurance that the information reported in the CFS is complete, accurate, and in conformity with generally accepted accounting principles (GAAP), the Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish a mechanism to ensure that Treasury's CFS disclosure checklist is reviewed and approved by the date in Treasury's policies and procedures.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. We found that in fiscal year 2012, Treasury established a mechanism to ensure that Treasury's CFS disclosure checklist is reviewed and approved by the date in Treasury's policies and procedures.

    Recommendation: To help to provide reasonable assurance that financial information is properly reported in the CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the SOP entitled 'Data Analysis" to include required steps for pursuing any instances where the information provided to Treasury contains indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with GAAP, particularly with respect to any recent changes in GAAP.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. We found that during fiscal year 2012, Treasury enhanced the Data Analysis SOP to include required steps for pursuing instances where information provided to Treasury contained indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with GAAP, particularly with respect to any recent changes in GAAP.

    Recommendation: To help to provide reasonable assurance that appropriate controls are in place to reduce the risk of errors in IRAS reports, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the IRAS validation procedures, at a minimum, to include specific steps for testing intragovernmental data of the administrator's assigned entity.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. In fiscal year 2012, Treasury enhanced the IRAS validation procedures to include specific steps for testing intragovernmental data of the administrator's assigned entity.

    Recommendation: To help to provide reasonable assurance that Treasury timely receives the audited closing package from those federal entities that are newly identified as being significant to the Financial Report, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled 'Significant Federal Entities Identification" to include procedures for identifying any entities that become significant to the Financial Report during the fiscal year but were not identified as significant in the prior fiscal year.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: As of the completion of our fiscal year 2012 CFS audit, Treasury agreed that this recommendation remained open. Treasury stated that it will work with OMB to assess an approach for identifying new entities that become significant to the Financial Report during the fiscal year. We will follow-up on progress made by the Treasury as part of our fiscal year 2013 CFS audit.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to develop and implement procedures to provide for the active involvement of key federal entity personnel with technical expertise in relatively new areas and more complex areas in the preparation and review process of the Financial Report.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: As of the completion of our fiscal year 2012 CFS audit, Treasury agreed that this recommendation remained open. Treasury stated that during fiscal year 2013, it will identify complex areas needing key federal entity involvement and will obtain their review of the Financial Report related to their specific area prior to the completion of the first draft of the Financial Report. We will follow-up on progress made by the Treasury as part of our fiscal year 2013 CFS audit.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to revise and implement Treasury’s procedures related to preparing and reviewing the drafts of the Financial Report before they are provided to GAO, to include clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in the Office of the Fiscal Assistant Secretary, including the Fiscal Assistant Secretary.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: To help to provide reasonable assurance that Treasury timely receives the audited closing package from those federal entities that are newly identified as being significant to the Financial Report, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled 'Significant Federal Entities Identification" to include procedures for obtaining audited closing packages from newly identified significant entities in the year they become significant, including timely written notification to newly identified significant entities.

    Agency Affected: Department of the Treasury

    Status: Open

    Comments: As of the completion of our fiscal year 2012 CFS audit, Treasury agreed that this recommendation remained open. Treasury stated that it will work with OMB to assess an approach for obtaining timely audited closing packages from these newly identified entities in the fiscal year that they become significant to the Financial Report. We will follow-up on progress made by the Treasury as part of our fiscal year 2013 CFS audit.

    Recommendation: The Acting Director of OMB should direct the Controller of OMB to develop and implement written procedures specifying the steps required for effectively reviewing and approving the drafts of the Financial Report before they are provided to GAO, to include clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in OMB’s Office of Federal Financial Management, including the Controller of OMB.

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

    Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

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