Financial Audit: Restatements to the Department of Agriculture's Fiscal Year 2003 Consolidated Financial Statements
Highlights
The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding the Department of Agriculture's (USDA) fiscal year 2003 restatements. Going forward, we hope that the lessons learned from the fiscal year 2003 restatements, together with our recommendations, will help (1) USDA avoid the need for restatements to its future financial statements and ensure the adequacy of the disclosure and presentation of audit results and any restatements and (2) ensure that USDA's Office of Inspector General (OIG) and other auditors apply appropriate audit procedures in future audits so that similar errors, which caused the original fiscal year 2003 financial statements to be misstated, as noted in this report, are identified before the financial statements are issued. We reviewed four key areas with respect to the restatements of USDA's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatements, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatements during the audit of the agency's fiscal year 2003 financial statements.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Agriculture | USDA's CFO should ensure that procedures to prevent any errors similar to those that resulted in the need to restate USDA's originally issued fiscal year 2003 financial statements are effectively implemented. |
Closed – Implemented
In response to our recommendation, USDA's Office of the Chief Financial Officer(OCFO) strengthened internal control procedures to prevent any errors similar to those that resulted in the need to restate USDA's originally issued fiscal year 2003 financial statements. Specifically, USDA established procedures in June 2005 that required (1) monthly reconciliations of certain current year appropriations reported in USDA's general ledger with Treasury's record of USDA's appropriations accounts and (2) resolution of any identified differences. The OCFO's new policy stated that the use of such vouchers would be limited to situations when (1) another option to correct a prior recording error was not available and (2) the OCFO reviewed and approved the voucher. By taking these actions, USDA has improved its internal controls over financial reporting and its ability to prevent or detect errors causing financial statement restatements.
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| Department of Agriculture | USDA's CFO should ensure, for future years, the adequacy of the disclosure and presentation of audit results and any restatements. |
Closed – Implemented
In response to our recommendation, USDA's CFO has taken action to assure that their consolidated financial statements are accurate and timely and contain clear and full disclosures in accordance with requirements. In the event of any future restatements, USDA's CFO also stated that USDA will address carrying forward the restated prior year ending balances and presenting them as the current year beginning balances. As a result, USDA's future disclosures and presentations of audit results and any restatements should be improved.
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| Department of Agriculture | USDA's Inspector General, in conjunction with the independent public accountant if one is used, should ensure that audit procedures are effectively implemented to test for any (1) improperly recorded appropriations transactions in the general ledger, (2) improperly reported material items on the Statement of Financing, and (3) incorrect nonroutine journal vouchers. |
Closed – Implemented
In response to our recommendation, USDA's Office of Inspector General (OIG), in conjunction with the IPAs, strengthened quality control measures over their audit procedures by extensively employing analytical procedures intended to detect fluctuations in general ledger account balances and relationships between financial statements. These analytical procedures are designed to detect the improper (1) recording of appropriations and (2) reporting of material items on the Statement of Financing. Specifically, during FY 2005, the OIG implemented audit procedures requiring a variance analysis at the general ledger account level and verifying relationships between proprietary and budgetary general ledger accounts. In addition, in FY 2007, the OIG established audit procedures which require a review of all agency preliminary financial statements and to determine if expected relationships exist between financial statement lines. Further, the OIG's audit procedures require testing of a sample of non-routine journal vouchers to verify the propriety and methodology of these journal vouchers. Our fiscal year 2007 audit work showed that as a result of the new policy, the number of non-routine journal vouchers has significantly decreased from 1,429 in 2004 to 19 in 2007. By taking these actions to strengthen its financial audit procedures, USDA's Inspector General has improved its ability to detect the type of errors that caused USDA to restate its fiscal year 2003 financial statements and our ability to rely on the Inspector General's work in this area in conjunction with our responsibility to conduct future audits of the consolidated financial statements of the U.S. government.
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