Financial Audit

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.

Material errors identified at three of USDA's component agencies led to the restatement of four of the five statements in USDA's originally issued fiscal year 2003 consolidated financial statements. The material errors resulted from the lack of or ineffective implementation of several key internal control procedures related to (1) recording appropriations, (2) the proper reporting of material items on the Statement of Financing, and (3) processing nonroutine journal vouchers. We believe that more effective audit procedures applied by USDA's auditors could have detected the material errors noted in this report. In addition, certain aspects of the footnote disclosure and financial statement presentation relating to the restatements could be misinterpreted. Specifically, the footnote disclosure related to the restatements was titled Prior Period Adjustments, which could be misinterpreted since most of the corrections discussed in the note were not prior period adjustments. USDA's presentation of its fiscal year 2004 Consolidated Statement of Changes in Net Position may also be misinterpreted because the fiscal year 2004 beginning balances did not agree with the restated fiscal year 2003 ending balances. Further, USDA asserted in its fiscal year 2004 Management Discussion and Analysis (MD&A) that the agency has sustained unqualified or "clean" opinions on its financial statements since fiscal year 2002 but did not specifically acknowledge in its MD&A that it restated both originally issued fiscal years 2003 and 2002 financial statements for material errors. In addition, USDA did not completely disclose in the MD&A the nature and extent of the restatements to its originally issued fiscal year 2003 financial statements. We believe that not including this information in the MD&A could be misleading. Although the OIG told us that it believed disclosure of such information in its audit report was not necessary, in our view, such disclosure could have reduced the potential for a reader to be misled.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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