Management Report: Improvements Needed in Controls over the Processes Used to Prepare the U.S. Consolidated Financial Statements
Fast Facts
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.
Highlights
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.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Treasury | 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) |
Closed – Implemented
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.
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| Department of the Treasury |
Priority Rec.
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) |
Closed – Implemented
As of the completion of our fiscal year 2020 audit of the consolidated financial statements of the U.S. government (CFS), we determined that this recommendation is closed and implemented. Treasury implemented additional reviews and control procedures to reasonably assure that restatements, reclassifications, and adjustments to beginning net position are properly supported and accurately reported. In fiscal year 2020, Treasury made improvements to its standard operating procedures, such as improving consistency with Statement of Federal Financial Accounting Standards 21 by adding specific citations from the standard and clearly defining policies for reporting corrections of errors, changes in accounting principle, and changes in presentation in the CFS. Treasury also continued to improve review procedures and documentation and expanded the general subject matter binder checklist questions.
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| Department of the Treasury | 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) |
Closed – Implemented
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.
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| Department of the Treasury |
Priority Rec.
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) |
Closed – Implemented
As of the completion of our fiscal year 2020 audit of the consolidated financial statements of the U.S. government (CFS), we determined that this recommendation is closed and implemented. Treasury continued to make improvements to the processes and procedures for obtaining and assessing legal contingency information. For example, we noted that Treasury implemented a procedure to verify whether reasonably possible or probably cases with estimated losses above $500 million that agencies included in their year-end management schedules and/or legal representation letters (LRLs), were included in the final government-wide LRL.
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