Management Report:

Improvements Needed in Controls over the Processes Used to Prepare the U.S. Consolidated Financial Statements

GAO-14-543: Published: Jun 19, 2014. Publicly Released: Jun 19, 2014.

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What GAO Found

During its audit of the fiscal year 2013 consolidated financial statements of the U.S. government (CFS), GAO identified 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 (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in conformity with U.S. generally accepted accounting principles; and

ensure the consistency of (1) information used by Treasury to compute the budget deficit reported in the consolidated financial statements, (2) Treasury's records of cash transactions, and (3) information reported in federal entity financial statements and underlying financial information and records.

Specifically, for fiscal year 2013, GAO found that

Treasury's and OMB's corrective action plans are not adequate to reasonably assure that internal control deficiencies involving the processes used to prepare the CFS are efficiently and effectively addressed,

Treasury does not have procedures to sufficiently document management's conclusions and the basis for such conclusions regarding the accounting policies for the CFS, and

Treasury does not have adequate procedures for verifying staff's preparation of the narrative within the notes to the CFS to reasonably assure that the narrative is accurate and supported by the underlying financial information of the significant component entities.

GAO also updated the description of the control deficiencies related to the long-standing material weakness regarding the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities. GAO closed 6 recommendations from prior GAO reports and made 4 new recommendations that are better aligned with the remaining internal control deficiencies in this area. In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the processes used to prepare the CFS continued to exist. Specifically, 24 of the 37 recommendations from GAO's prior reports regarding control deficiencies in the processes used to prepare the CFS remained open as of February 19, 2014, the date of GAO's report on its audit of the fiscal year 2013 CFS. GAO will continue to monitor the status of corrective actions taken to address the 7 new recommendations as well as the 24 open recommendations from prior years as part of its fiscal year 2014 CFS audit.

Why GAO Did This Study

Treasury, in coordination with OMB, prepares the Financial Report of the United States Government , 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 its work have prevented GAO from expressing an opinion on the accrual-based CFS. As part of the fiscal year 2013 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 the control deficiencies GAO identified related to the processes used to prepare the CFS, (2) recommend improvements, and (3) provide the status of corrective actions taken by Treasury and OMB to address GAO's prior recommendations relating to the processes used to prepare the CFS that remained open at the end of the fiscal year 2012 audit.

What GAO Recommends

GAO is making seven new recommendations—five to both Treasury and OMB and two to Treasury—to address the control deficiencies identified by GAO during the fiscal year 2013 CFS audit. In commenting on GAO's draft, Treasury and OMB generally concurred with GAO's recommendations.

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

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Priority recommendation

    Comments: As of the completion of our fiscal year 2016 consolidated financial statements (CFS) audit, this recommendation was closed. Treasury and OMB developed a significantly more robust remediation plan in fiscal year 2015. In fiscal year 2016, the plan was enhanced to highlight key milestones and identify outcome measures to help track and maintain progress.

    Recommendation: To efficiently and effectively address internal control deficiencies involving the processes used to prepare the CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to include all key elements recommended by the Implementation Guide and fully consider the interrelationships between deficiencies in the corrective action plans.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2014 consolidated financial statements audit, this recommendation was closed. Treasury developed and implemented procedures to sufficiently document management's conclusions and the basis of such conclusions regarding the accounting policies for the CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to develop and implement procedures to sufficiently document management's conclusions and the basis of such conclusions regarding the accounting policies for the CFS.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2014 consolidated financial statements audit, this recommendation was closed. Treasury updated its standard operating procedure to include specific steps to verify the applicable note narrative, including a review by subject matter accountants of narrative wording "line by line" as well as documented references from each line to the agencies' annual financial reports. Treasury effectively implemented the procedures in fiscal year 2014.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to improve and implement Treasury's procedures for verifying that staff's preparation of the narrative within the notes to the CFS is accurate and supported by the underlying financial information of the significant component entities.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Priority recommendation

    Comments: As of the completion of our fiscal year 2016 consolidated financial statements audit, this recommendation was closed. Treasury required federal entities to provide corrective action plans (CAPs) to identify and resolve the associated root causes of recurring differences, and monitored the entities' implementation of the CAPs.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to continue to build on the procedures in place to effectively identify systemic root causes of intragovernmental differences and monitor how federal entities are addressing the root causes.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Priority recommendation

    Comments: As of the completion of our fiscal year 2016 consolidated financial statements (CFS) audit, this recommendation was closed. Treasury demonstrated that the intragovernmental activity and balances not covered by the scorecard process is immaterial to the CFS.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to expand the scorecard process to include intragovernmental activity and balances that are currently not covered by the process or demonstrate that such information is immaterial to the CFS.

    Agency Affected: Department of the Treasury

  6. Status: Open

    Priority recommendation

    Comments: As of the completion of our fiscal year 2016 consolidated financial statements (CFS) audit, Treasury and OMB agreed that this recommendation remained open. Treasury has established the General Fund as a federal reporting entity. In fiscal year 2017, the focus will be on preparing for the first financial audit of the General Fund. We will follow-up on progress made by Treasury and OMB as part of our fiscal year 2017 CFS audit, which is ongoing as of March 2017.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to establish and implement policies and procedures for accounting for and reporting all significant General Fund activity and balances, obtaining assurance on the reliability of the amounts, and reconciling the activity and balances between the General Fund and federal entities.

    Agency Affected: Department of the Treasury

  7. Status: Open

    Priority recommendation

    Comments: As of the completion of our fiscal year 2016 consolidated financial statements (CFS) audit, Treasury and OMB agreed that this recommendation remained open. As a result of multiple initiatives over the past few years, Treasury and OMB have seen a significant decrease in elimination differences of intragovernmental data submitted by federal entities. Therefore, Treasury and OMB have determined at this time there is not a justified need for the additional cost and burden on federal entities to implement additional audit procedures specifically focused on intragovernmental activity and balances. We will follow-up on progress made by Treasury and OMB as part of our fiscal year 2017 CFS audit, which is ongoing as of March 2017.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to establish a formalized process to require the performance of additional audit procedures specifically focused on intragovernmental activity and balances between federal entities to provide increased audit assurance over the reliability of such information.

    Agency Affected: Department of the Treasury

 

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