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United States Government Accountability Office: 
Washington, DC 20548: 

May 20, 2008: 

Mr. Gregory Spencer: 
Chairman, Financial Statement Audit Network: 

Subject: Governmentwide Accounts Payable: 

Dear Mr. Spencer: 

The Government Accountability Office (GAO) is required by the 
Government Management Reform Act of 1994 to audit the Consolidated 
Financial Statements of the U.S. Government (CFS).[Footnote 1] Certain 
material weaknesses in financial reporting and other limitations on the 
scope of our work have continued to result in conditions that have 
prevented us from expressing an opinion on the federal government's 
accrual basis consolidated financial statements.[Footnote 2],[Footnote 
3] To assist us in planning future audits, when we anticipate being 
able to eventually issue an opinion on the accrual basis consolidated 
financial statements, we have performed and plan to continue performing 
selected procedures on certain line items and other areas of interest. 
The purpose of these procedures is to obtain an understanding of 
selected federal agencies' accounting and reporting and the audit work 
being performed in these areas. This letter relates to the fiscal year 
2006 accounts payable (A/P) line item. The federal government reported 
about $58 billion of A/P as of September 30, 2006. Certain federal 
agencies' auditors reported internal control deficiencies related to A/ 
P. These weaknesses contributed to the CFS material weakness for 
"Liabilities and Commitments and Contingencies" reported in our fiscal 
years 2007 and 2006 CFS audit reports. 

Our procedures regarding A/P focused on 15 federal agencies whose A/P 
balances were reported in Note 9, Accounts Payable, of the fiscal year 
2006 CFS. We reviewed those agencies' relevant written policies for A/ 
P accounting and reporting, fiscal year 2006 financial statements and 
closing packages submitted to the Department of the Treasury 
(Treasury), and the A/P audit documentation prepared by the agencies' 
offices of the inspectors general and/or the contracted independent 
public accountants. We discussed our results with the auditors and 
management officials at the selected federal agencies. We also 
discussed our results with Office of Management and Budget and Treasury 
representatives. We considered their comments and incorporated them as 

We provided a briefing of the results of our work at the April 15, 
2008, Financial Statement Audit Network meeting. The purpose of this 
letter is to transmit that briefing to you as chairman of the Financial 
Statement Audit Network to distribute as you deem appropriate. The 
enclosed briefing slides summarize our observations related to: 

* federal agencies' written A/P policies; 
* federal agencies' financial statement disclosure/reporting of A/P; 
* federal agencies' A/P reporting to Treasury (closing package); 
* A/P reporting guidance, and; 
* federal agency auditors' A/P cycle memos. 

We appreciate the courtesy and cooperation extended to us by agency and 
auditor staff throughout our work. We look forward to continuing to 
work with you and other members of the Financial Statement Audit 
Network to help improve financial management in the federal government. 
If you have any questions about this letter, please contact me at (202) 
512-3406 or 

Sincerely yours, 

Signed by: 

Gary T. Engel: 
Financial Management and Assurance: 


[End of correspondence] 

Enclosure: Briefing, April 15, 2008, Financial Statement Audit Network 

Governmentwide Accounts Payable: 

Financial Statement Audit Network: 

April 15, 2008: 

Briefing Topics: 

* Background & Objectives; 
* Scope; 
* Methodology; 
* Observations; 
* A/P Follow-up. 

Background & Objectives: 


Internal control deficiencies in certain federal agencies’ reporting of 
accounts payable (A/P) contributed to a material weakness for 
“Liabilities and Commitments and Contingencies” reported in GAO’s 
fiscal year 2007 Consolidated Financial Statement (CFS) audit report. 

To obtain a better understanding of agencies’ accounting and reporting 
for A/P and the audit work performed by agencies’ auditors –in 
connection with our requirements for auditing the CFS. 

Scope: Selected Agencies: 

* DOD -$27.4 billion; 
* USDA -$4.2 billion; 
* DHS -$2.8 billion; 
* AID -$2.3 billion; 
* Justice -$2.3 billion; 
* PBGC -$2.2 billion; 
* USPS -$2.0 billion; 
* GSA -$2.0 billion; 
* NASA -$1.7 billion; 
* Energy -$1.3 billion; 
* State -$1.3 billion; 
* Interior -$1.1 billion; 
* TVA -$1.1 billion; 
* Labor -$.9 billion; 
* Education $.9 billion. 

To obtain an understanding of agency A/P policies and auditor 
procedures, we: 

* identified relevant criteria; 
* sent questionnaires to the auditors of the 15 selected agencies; 
* reviewed the selected agencies’ financial statements, written 
policies, and closing packages, and; 
* reviewed the selected auditors’ cycle memos, audit programs, specific 
control evaluations (SCE), account risk analyses (ARA), summaries of 
tests, notices of findings, and other relevant documents regarding A/P. 


* Agency Written Policies; 
* Agency Financial Statement Disclosure/Reporting; 
* Agency Reporting to Treasury (Closing Package); 
* A/P Reporting Guidance; 
* Auditor Cycle Memos. 

Observations: Agency Written Policies -Criteria: 

Standards for Internal Control in the Federal Government (GAO/AIMD-00-
21.3.1, Nov 1999): 

* “Control activities, including policies and procedures, help ensure 
that management’s directives are carried out;” 

* “internal controls and all transactions and other significant events 
need to be clearly documented and the documentation should be readily 
available for examination.” 

Observations: Agency Written Policies: 

For most of the 15 selected agencies, we noted that their written 
policies regarding A/P did not include one or more of the following key 

* A/P accounting recognition criteria; 
* Significant A/P transactions/events; 
* Estimation policies (for those agencies that were estimating their 
A/P balances); 
* Policies for identifying unrecorded A/P at fiscal year-end. 

Also, one of the selected agencies did not provide any written policies 
for A/P accounting and reporting. 

Observations: Agency Financial Statement Disclosure/Reporting -

* The definition of A/P per Statement of Federal Financial Accounting 
Standard (SFFAS) #1 is “amounts owed by a federal entity for goods and 
services received from, progress in contract performance made by, and 
rents due to other entities”. A/P is not intended to include 
liabilities related to ongoing continuous expenses such as employee 
salary and benefits, which are covered by other current liabilities. 

* The definition of A/P per OMB Circular A-136, “Financial Reporting 
Requirements” is consistent with SFFAS #1. OMB A-136 further states 
that disclosure of accounting policies should identify and describe the 
entity’s accounting principles and the methods of applying those 
principles, including important judgments about recognition and 

Observations: Agency Financial Statement Disclosure/Reporting: 

Three agencies with significant A/P balances did not disclose: 

* A/P recognition criteria and/or; 
* key valuation policies for estimating grants payable. 

Observations: Agency Reporting to Treasury (Closing Package) -Criteria: 

Treasury Financial Manual, Volume I, Part 2, Chapter 4700 (TFM 2-4700), 
Appendix 1, section 6.1, states that A/P should include: 

* Amounts owed to a non-Federal entity for goods and other property 
ordered and received; 

* Services rendered by other than Federal employees; 

* Voucher schedule payments transmitted but not yet processed; 

* Interest accrued and owed to others; and; 

* A/P canceled reported by a department. 

TFM 2-4700 Appendix 1, section 6.8, states that Other Liabilities 
should include the following: 

* Deferred Revenue; 

* Accrued Wages & Benefits; 

* Gold Certificates; 

* Exchange Stabilization Fund; 

* Other Debt; 

* Deposited Funds and Undeposited Collections; 

* Advances from Foreign Governments; 

* Carriers Claim Payable; 

* Accrued Grant Liability; 

* Contractual Services (Obligations); 

* Advances from Others; 

* Energy Employees Occupational Illness Compensation Act; 

* Nuclear Waste Fund, and; 

* “all other liabilities not classified” here. 

Observations: Agency Reporting to Treasury (Closing Package): 

None of the selected agencies that included grants payable amounts in 
A/P reclassified such amounts to Other Liabilities consistent with TFM 

Observations: A/P Reporting Guidance: 

Consistency of OMB and Treasury Guidance: 

* TFM 2-4700 is very specific about including certain types of 
transactions, such as grants payable and interest payable, in Other 
Liabilities versus A/P. 

* There is no specific guidance in OMB A-136 about where to classify 
grants payable or interest payable. 

Observations: Auditor Cycle Memos -Criteria: 

* Government Auditing Standards state that "auditors must prepare audit 
documentation in sufficient detail to provide a clear understanding of 
the work performed, the audit evidence obtained and its source, and the 
conclusions reached". 

* The GAO/PCIE FAM (2007 Exposure Draft) provides specific guidance in 
section 390.05 on what should be included in the cycle memo. For 
example, the FAM states that, among other things, a cycle memo should 
clearly describe the accounting system, identify the cycle transactions 
for each significant cycle, and identify major controls and agency 

Observations: Auditor Cycle Memos: 

We observed that the following were not always documented: 

* Significant transactions –i.e. types of transactions included in A/P. 

* Significant internal controls and agency policies: 
- A/P accounting recognition criteria; 
- AP and/or grants payable estimation policies (for those agencies that 
were estimating the majority of their A/P and/or grants payable 

A/P Follow-up: 

We plan to follow-up with selected agency auditors regarding the 
observations we discussed with them during recent agency A/P 


Suzanne Murphy, GAO, Assistant Director, 404-679-1940: 

Carolyn Voltz, GAO, Auditor in Charge, 404-679-2088: 

[End of enclosure] 


[1] 31 U.S.C. 331(e). The act states that not later than March 31, 
1998, and each year thereafter, the Secretary of the Treasury, in 
coordination with the Director of the Office of Management and Budget, 
shall annually prepare and submit to the President and the Congress an 
audited financial statement for the preceding fiscal year, covering all 
accounts and associated activities of the executive branch of the 
United States Government. The federal government has elected to include 
certain financial information on the legislative and judicial branches 
in the consolidated financial statements as well. 

[2] Accrual basis consolidated financial statements refers to all of 
the consolidated financial statements and notes except for those 
related to the Statement of Social Insurance. 

[3] The CFS and our audit report on them are included in the fiscal 
year 2007 Financial Report of the United States Government and are 
available through GAO's website at [hyperlink,]. 

[End of section] 

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