Management Report:

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

GAO-19-624: Published: Sep 4, 2019. Publicly Released: Sep 4, 2019.

Additional Materials:

Contact:

Dawn B. Simpson
(202) 512-3406
simpsondb@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Every year we audit the consolidated financial statements of the U.S. government.

During our FY 2018 audit, we found that corrective actions were not complete for certain previously reported deficiencies in the processes used to prepare the financial statements. We also identified additional deficiencies related to the preparation process:

Certain disclosures related to new federal accounting standards were not included

Restatements and adjustments to beginning net position were not consistently supported

All appropriate information regarding potential losses from litigation was not reported

We made 4 recommendations to address these new issues.

The entrance to the Treasury Department building.

The entrance to the Treasury Department building.

Additional Materials:

Contact:

Dawn B. Simpson
(202) 512-3406
simpsondb@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

During its audit of the fiscal year 2018 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 that involve the federal government's inability to

adequately account for intragovernmental activity and balances between federal entities;

reasonably assure that the consolidated financial statements are (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in accordance with U.S. generally accepted accounting principles; and

reasonably assure that the information in the (1) Reconciliations of Net Operating Cost and Budget Deficit and (2) Statements of Changes in Cash Balance from Budget and Other Activities is complete, properly supported, and consistent with the underlying information in the audited entities' financial statements and other financial data.

During its audit of the fiscal year 2018 CFS, GAO identified three new internal control deficiencies.

Treasury did not have sufficient procedures to analyze and determine whether appropriate disclosures related to new federal accounting standards were included in the draft fiscal year 2018 Financial Report of the United States Government.

Treasury did not have sufficient procedures to properly support and consistently report restatements, reclassifications, and adjustments to beginning net position in the draft fiscal year 2018 Financial Report of the United States Government.

Treasury and OMB did not have adequate processes and procedures for reporting appropriate information regarding legal contingency losses in the fiscal year 2018 CFS.

In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the processes used to prepare the CFS either were resolved or continued to exist. Specifically, Treasury, in coordination with OMB, implemented corrective actions that resolved the control deficiencies related to two of the 14 recommendations open as of the completion of GAO's fiscal year 2017 CFS audit, and as a result, GAO closed these recommendations. While progress was made, 12 of the 14 recommendations remained open as of March 20, 2019, the date of GAO's report on its audit of the fiscal year 2018 CFS. GAO will continue to monitor the status of corrective actions to address the four new recommendations made in this report as well as the 12 open recommendations from prior years as part of its fiscal year 2019 CFS audit.

Why GAO Did This Study

The Secretary of the Treasury, in coordination with the Director of 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 consolidated financial statements. As part of the fiscal year 2018 CFS audit, GAO identified material weaknesses and other continuing control deficiencies in the processes used to prepare the CFS. The purpose of this report is to provide (1) details on new control deficiencies GAO identified related to the processes used to prepare the CFS, along with related recommendations, and (2) the status of corrective actions that Treasury and OMB have taken to address GAO's prior recommendations related to the processes used to prepare the CFS that remained open as of the completion of GAO's audit of the fiscal year 2017 CFS.

What GAO Recommends

GAO is making four new recommendations—three to Treasury and one to both Treasury and OMB—to address the control deficiencies identified during the fiscal year 2018 CFS audit. In commenting on GAO's draft report, Treasury concurred with the four new recommendations and noted its ongoing commitment to improving federal financial reporting. OMB generally agreed with the draft report and noted its continuing commitment to achieving sound financial management across the federal government.

For more information, contact Dawn B. Simpson at (202) 512-3406 or simpsondb@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2019 audit of the consolidated financial statements of the U.S. government (CFS), we determined that this recommendation is closed and implemented. Treasury implemented procedures to include additional details on new Federal Accounting Standards Advisory Board (FASAB) and Financial Accounting Standards Board (FASB) financial accounting standards, as applicable, to its financial reporting disclosure checklists, improved guidance provided to subject matter accountants to improve analyses of the appropriate disclosures needed, participated in working groups, and consulted with FASAB technical experts.

    Recommendation: The Secretary of the Treasury should ensure that the Fiscal Assistant Secretary develops and implements procedures to enhance Treasury's processes for reasonably assuring that the Financial Report includes disclosures required by new federal accounting standards, such as conducting an appropriate level of analysis to determine whether disclosures are needed, consulting with technical experts, and including additional details on these requirements in its financial reporting disclosure checklists. (Recommendation 1)

    Agency Affected: Department of the Treasury

  2. Status: Open

    Priority recommendation

    Comments: As of the completion of our fiscal year 2019 audit of the consolidated financial statements of the U.S. government (CFS), we determined that this recommendation remains open. Treasury enhanced its procedures to include additional management reviews, particularly the Financial Reports and Advisory Division Director, for restatements, reclassifications, and adjustments to beginning net position. Although FRAD took steps to enhance its review procedures, the additional review did not prevent FRAD from including descriptions in the draft CFS that were not supported by entity financial statements or from excluding some information from the CFS notes. Further steps are needed to define procedures to ensure consistent and accurate treatment of restatements, reclassifications, and adjustments to beginning net position in the CFS. We will follow-up on progress made by Treasury as part of our fiscal year 2020 CFS audit.

    Recommendation: The Secretary of the Treasury should ensure that the Fiscal Assistant Secretary enhances existing procedures for Treasury management to perform additional reviews for restatements, reclassifications, and adjustments to beginning net position to reasonably assure that they are properly supported and accurately reported. (Recommendation 2)

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2019 audit of the consolidated financial statements of the U.S. government (CFS), we determined that this recommendation is closed and implemented. Treasury developed and implemented procedures that reasonably assured that restatements, reclassifications, and adjustments to beginning net position were consistently reported in the CFS. For example, Treasury developed a tool to document all affected financial statement line items and note disclosures along with reporting decisions about each item. Treasury also improved guidance to staff and required additional documentation of all determinations, including those related to restatements, reclassifications, and adjustments to beginning net position that did not meet disclosure thresholds. As a result, reporting of restatements, reclassifications, and adjustments to net position in the draft CFS was improved.

    Recommendation: The Secretary of the Treasury should ensure that the Fiscal Assistant Secretary develops and implements steps to reasonably assure that restatements, reclassifications, and adjustments to beginning net position are consistently reported in the Financial Report, such as developing a tool that identifies all affected financial statement line items and note disclosures. (Recommendation 3)

    Agency Affected: Department of the Treasury

  4. Status: Open

    Priority recommendation

    Comments: As of the completion of our fiscal year 2019 audit of the consolidated financial statements of the U.S. government (CFS), we determined that this recommendation remains open. Treasury and OMB (1) increased guidance to federal entities in the Treasury Financial Manual section 2-4700; (2) included an illustrative Contingent Loss Table in OMB Circular No. A-136 for agencies to use as guidance when reporting probable and reasonably possible losses; (3) provided guidance to agencies through monthly Central Reporting Team (CRT) meetings with the agencies' financial reporting staff and at the Government Financial Management Conference; (4) communicated regularly with Department of Justice officials regarding the preparation of the government-wide legal representation letter; and (5) increased the number of Treasury staff performing the legal letter analysis. However, we noted inconsistencies among the significant component entities' financial statement note disclosures, management schedules, and legal representation letters, and the legal contingency loss information reported in the CFS, as well as inconsistencies between entities' year-end management schedules/legal representation letters and the final government-wide legal representation letter. We will follow-up on progress made by Treasury as part of our fiscal year 2020 CFS audit.

    Recommendation: The Secretary of the Treasury should ensure that the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, establishes effective processes and procedures to reasonably assure that appropriate information regarding legal contingency losses is reported in the CFS. (Recommendation 4)

    Agency Affected: Department of the Treasury

 

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