Financial Audit
Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Improvement Gao ID: GAO-04-45 October 30, 2003For the past 6 years, since GAO began auditing the consolidated financial statements of the U.S. government (CFS), GAO has been unable to express an opinion on them because of material weaknesses in internal control and financial reporting. Contributing to GAO's inability to express an opinion has been the federal government's lack of adequate systems, controls, and procedures to properly prepare its consolidated financial statements. The purpose of this report is to discuss in greater detail weaknesses in financial reporting procedures and internal control over the process for preparing the CFS that GAO identified and to recommend improvements to address those weaknesses.
GAO found deficiencies in the compilation and reporting process in the following areas: (1) controls over the compilation process, (2) unreconciled transactions affecting the change in net position, (3) reconciliation of intragovernmental activity and balances, (4) elimination of intragovernmental activity and balances, (5) reconciliation of net operating costs and unified budget surplus (or deficit), (6) statements of changes in cash balance from unified budget and other activities, (7) defining and documenting of the reporting entity, and (8) conformity with U.S. generally accepted accounting principles. Another key deficiency in the compilation and reporting process for the CFS was the failure of the Department of the Treasury's process for compiling the CFS to directly link information from federal agencies' audited financial statements to amounts reported in the CFS. Without this direct link, the information in the CFS may not be reliable. The lack of a direct link also affects the efficiency and effectiveness of the CFS audit. Treasury is designing a new compilation process that it expects to directly link this information beginning with the fiscal year 2004 CFS. GAO identified three additional areas related to the compilation and reporting process for the CFS that warrant the attention of Treasury and the Office of Management and Budget (OMB): (1) management representation letters, (2) legal representation letters, and (3) information on treaties and other international agreements.
RecommendationsOur 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.
Director: Team: Phone:GAO-04-45, Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Improvement
This is the accessible text file for GAO report number GAO-04-45
entitled 'Financial Audit: Process for Preparing the Consolidated
Financial Statements of the U.S. Government Needs Improvement' which
was released on October 30, 2003.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Secretary of the Treasury and the Director of the Office
of Management and Budget:
October 2003:
Financial Audit:
Process for Preparing the Consolidated Financial Statements of the U.S.
Government Needs Improvement:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-45] GAO-04-45:
GAO Highlights:
Highlights of GAO-04-45, a report to the Secretary of the Treasury and
the Director of the Office of Management and Budget
Why GAO Did This Study:
For the past 6 years, since GAO began auditing the consolidated
financial statements of the U.S. government (CFS), GAO has been unable
to express an opinion on them because of material weaknesses in
internal control and financial reporting. Contributing to GAO‘s
inability to express an opinion has been the federal government‘s lack
of adequate systems, controls, and procedures to properly prepare its
consolidated financial statements.
The purpose of this report is to discuss in greater detail weaknesses
in financial reporting procedures and internal control over the
process for preparing the CFS that GAO identified and to recommend
improvements to address those weaknesses.
What GAO Found:
GAO found deficiencies in the compilation and reporting process in the
following areas:
* controls over the compilation process,
* unreconciled transactions affecting the change in net position,
* reconciliation of intragovernmental activity and balances,
* elimination of intragovernmental activity and balances,
* reconciliation of net operating costs and unified budget surplus (or
deficit),
* statements of changes in cash balance from unified budget and other
activities,
* defining and documenting of the reporting entity, and
* conformity with U.S. generally accepted accounting principles.
Another key deficiency in the compilation and reporting process for
the CFS was the failure of the Department of the Treasury‘s process
for compiling the CFS to directly link information from federal
agencies‘ audited financial statements to amounts reported in the CFS
(see figure below). Without this direct link, the information in the
CFS may not be reliable. The lack of a direct link also affects the
efficiency and effectiveness of the CFS audit. Treasury is designing a
new compilation process that it expects to directly link this
information beginning with the fiscal year 2004 CFS.
GAO identified three additional areas related to the compilation and
reporting process for the CFS that warrant the attention of Treasury
and the Office of Management and Budget: (1) management representation
letters, (2) legal representation letters, and (3) information on
treaties and other international agreements.
What GAO Recommends:
GAO makes 44 recommendations to address weaknesses identified,
including a recommendation that Treasury, in coordination with the
Office of Management and Budget (OMB), design its new compilation
process to directly link information from federal agencies‘ audited
financial statements to amounts reported in the CFS. GAO also makes 16
recommendations that address CFS disclosures required by U.S.
generally accepted accounting principles. Treasury and OMB stated that
many of our recommendations will improve the usefulness and accuracy
of the CFS, but disagreed with recommendations in two areas.
www.gao.gov/cgi-bin/getrpt?GAO-04-45.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Gary T. Engel at
(202) 512-3406 or engelg@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Scope and Methodology:
Directly Linking Audited Agency Financial Statements to the CFS:
Controls over the Compilation Process:
Unreconciled Transactions Affecting the Change in Net Position:
Reconciliation of Intragovernmental Activity and Balances:
Elimination of Intragovernmental Activity and Balances:
Reconciliation of Net Operating Cost and Unified Budget Surplus (or
Deficit):
Statements of Changes in Cash Balance from Unified Budget and Other
Activities:
Defining the Reporting Entity:
Conformity with U.S. Generally Accepted Accounting Principles:
Other Weaknesses Identified:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Disclosure Issues:
Loans Receivable and Loan Guarantee Liabilities:
Inventories and Related Property:
Property, Plant, and Equipment:
Federal Employee and Veteran Benefits Payable:
Environmental and Disposal Liabilities:
Other Liabilities:
Commitments and Contingencies:
Collections and Refunds of Federal Revenue:
Dedicated Collections:
Indian Trust Funds:
Social Insurance:
Nonfederal Physical Property:
Human Capital:
Research and Development:
Deferred Maintenance:
Risk Assumed:
Appendix II: Comments from Department of the Treasury and the Office of
Management and Budget:
GAO Comment:
Figure:
Figure 1: Lack of Direct Link between Audited Agency Financial
Statements and CFS:
Letter October 30, 2003:
The Honorable John W. Snow
The Secretary of the Treasury:
The Honorable Joshua B. Bolten
Director, Office of Management and Budget:
In March 2003, we issued our disclaimer of opinion on the consolidated
financial statements for the U.S. government (CFS) for the fiscal years
ended September 30, 2002 and 2001. For the past 6 years, certain
material weaknesses in internal control and in financial reporting
resulted in conditions that prevented us from expressing an opinion on
the CFS. Specifically, we have reported that the federal government did
not have adequate systems, controls, and procedures to properly prepare
its consolidated financial statements. Many of these weaknesses in
internal control that contributed to our disclaimer of opinion were
identified during the audit of federal agencies' financial statements
by the agency financial statement auditors and reported in detail with
recommendations to the agencies in separate reports. However, some of
the internal control weaknesses were identified during our tests of the
U.S. Department of the Treasury's (Treasury) process for preparing the
CFS. Such weaknesses impaired the federal government's ability to fully
ensure that the CFS is consistent with the underlying audited agency
financial statements, properly balanced, and in conformity with U.S.
generally accepted accounting principles. Consequently, these
weaknesses also contributed to our inability to render an opinion on
the CFS.
The purpose of this report is to discuss in greater detail weaknesses
we identified during our fiscal year 2002 audit regarding financial
reporting procedures and internal control over the process for
preparing the CFS. We have discussed each of these weaknesses with your
staff during this past audit, and some of the weaknesses have been
communicated for a number of years.
Results in Brief:
The deficiencies in the compilation and reporting processes involve the
following nine areas: (1) directly linking audited agency financial
statements to the CFS, (2) controls over the compilation process, (3)
unreconciled transactions affecting the change in net position, (4)
reconciliation of intragovernmental activity and balances, (5)
elimination of intragovernmental activity and balances, (6)
reconciliation of net operating costs and unified budget surplus (or
deficit), (7) statements of changes in cash balance from unified budget
and other activities, (8) defining and documenting of the reporting
entity, and (9) conformity with U.S. generally accepted accounting
principles.
We also identified and discuss in this report certain issues related to
(1) management representation letters, (2) legal representation
letters, and (3) information on treaties and other international
agreements that will require actions by Treasury and the Office of
Management and Budget (OMB). Other issues related to these three areas
need to be addressed by federal agencies and their auditors. We plan to
separately communicate to agency Chief Financial Officers (CFO) and
Inspectors General the details of our concerns regarding these issues.
This report includes 44 recommendations to address weaknesses we
identified. It also includes recommendations related to 16 disclosures
identified in appendix I that are required by U.S. generally accepted
accounting principles. We are recommending that these 16 disclosures
that are not included in the most recent CFS either be included or that
the rationale for their exclusion be documented.
Treasury and OMB stated that many of our recommendations will improve
the usefulness and accuracy of the CFS and that they have already
incorporated many of them into their new system and processes that are
being developed for preparing the fiscal year 2004 CFS. However,
Treasury and OMB disagreed with our recommendations related to
unreconciled transactions affecting net position and the Statement of
Changes in Cash Balance from Unified Budget and Other Activities.
In response to their concerns and recognizing that there are various
ways to correct an identified weakness, we modified our recommendation
related to unreconciled transactions affecting net position to be less
prescriptive as to the action to take, but retained the intent of our
proposed recommendation. Treasury and OMB also disagreed with what they
perceived as our recommendation to use agency data to prepare the
Statement of Changes in Cash Balance from Unified Budget and Other
Activities. They disagreed with that approach because they stated that
it would be time consuming and costly, and they prefer to obtain the
information from Treasury's central accounting system rather than from
agencies' financial statements. This is not what we recommended.
Instead, because we found unexplained material differences between
Treasury's records and some agencies' financial statements, we
recommended that Treasury collect certain information already reported
in federal agencies' audited financial statements and develop
procedures that ensure consistency of the significant line items on the
Statement of Changes in Cash Balance from Unified Budget and Other
Activities with the agency-reported information.
Scope and Methodology:
As part of our audit of the fiscal years 2002 and 2001 CFS, we
evaluated Treasury's financial reporting procedures and related
internal control. In our report, which is included in the fiscal year
2002 Financial Report of the United States Government,[Footnote 1] we
reported material deficiencies relating to Treasury's financial
reporting procedures and internal control. These material deficiencies
contributed to our disclaimer of opinion on the CFS and also constitute
material weaknesses in internal control, which contributed to our
adverse opinion on internal control. We performed sufficient audit work
to provide the disclaimer of opinion and issued our audit report, dated
March 20, 2003, in accordance with U.S. generally accepted government
auditing standards. This report is based on the audit work we performed
for the fiscal years 2002 and 2001 CFS.
We requested comments on a draft of this report from the Secretary of
the Treasury and the Director of OMB or their designees. Treasury's and
OMB's comments are reprinted in appendix II, discussed in the Agency
Comments and Our Evaluation section of this report, and incorporated in
the report as applicable.
Directly Linking Audited Agency Financial Statements to the CFS:
Treasury's current process for compiling the CFS does not directly link
information from federal agencies' audited financial statements to
amounts reported in the CFS, and therefore cannot fully ensure that the
information in the CFS is consistent with the underlying information in
federal agencies' audited financial statements and other financial data
(see fig. 1). Treasury, as the preparer of the CFS, currently collects
approximately 2,400 trial balances through the Federal Agencies'
Centralized Trial Balance System (FACTS I) from federal agencies and
information from the Treasury Central Accounting and Reporting System
(STAR) to compile the financial statements.
Figure 1: Lack of Direct Link between Audited Agency Financial
Statements and CFS:
[See PDF for image]
[End of figure]
The Federal Accounting Standards Advisory Board's (FASAB) Statement of
Federal Financial Accounting Concepts No. 4, Intended Audience and
Qualitative Characteristics for the Consolidated Financial Report of
the United States Government, states that the consolidated financial
report should be a general purpose report that is aggregated from
agency reports and that it should tell users where to find information
in other formats, both aggregated and disaggregated, such as individual
agency reports, agency websites, and the President's Budget.
Without directly linking financial information from agencies' audited
financial statements, the information in the CFS may not be reliable.
The lack of direct linkage also affects the efficiency and
effectiveness of the audit of the CFS. In addition, the reliability of
certain information in Management's Discussion and Analysis,
Stewardship Information, and Supplemental Information may be affected.
As Treasury is designing its new compilation process, which it expects
to implement beginning with the fiscal year 2004 CFS, we recommend that
the Secretary of the Treasury direct the Fiscal Assistant Secretary,
working in coordination with the Controller of OMB's Office of Federal
Financial Management, to:
* design the new compilation process to directly link information from
federal agencies' audited financial statements to amounts reported in
all the applicable CFS and related footnotes, and:
* consider the other applicable recommendations in this report when
designing and implementing the new compilation process.
Controls over the Compilation Process:
We identified specific areas of internal control in Treasury's process
for preparing the CFS that need to be strengthened. Internal control
should provide, among other things, reasonable assurance that financial
reporting is reliable. GAO's Standards for Internal Control in the
Federal Government[Footnote 2] defines the minimum level of quality
acceptable for internal control in the federal government and provides
the standards against which internal control is to be evaluated. These
standards state that internal controls should include, among other
items, (1) segregation of duties, (2) appropriate documentation of
transactions and internal control, and (3) reviews by management at the
functional or activity level. We found many controls in place, but we
identified three areas that need to be improved. Although Treasury is
developing a new system and procedures for preparing the CFS, the need
for adequate internal control remains important and needs to be
considered during the development process.
Segregation of Duties:
Segregation of duties is the practice of dividing the steps in a
critical function among different individuals in order to reduce the
risk of error or fraud, thus preventing a single individual from having
full control of a transaction or event. FACTS I and the Financial
Management Service's Hyperion database are used to compile the CFS. We
found that Treasury's systems administrators responsible for processing
the FACTS I data have the capability to enter, change, and delete data
within FACTS I and the Hyperion database without any supervisory
review. They are also able to post adjustments to the CFS without
formal approval. Lack of proper segregation of duties for critical
functions leaves the CFS vulnerable to errors and could result in
incomplete and inaccurate summarization of data within these financial
statements.
Documentation of Transactions and Internal Control:
While Treasury has documented some portions of its process for
compiling the CFS, it has not fully documented its policies and
procedures for preparing the CFS report. Agency management is
responsible for developing detailed policies, procedures, and practices
to fit agency operations and ensuring that internal control is built
into and is an integral part of operations. Although GAO's Standards
for Internal Control in the Federal Government calls for clear
documentation of policies and procedures, we found that Treasury has
not fully implemented this key control activity. Without documented
policies and procedures, staff could follow inconsistent standards and
practices or not follow them at all. This potential for inconsistency
increases the risk that errors in the compilation process could go
undetected and could result in an incomplete and inaccurate
summarization of data within the CFS, creating a financial report that
is not an accurate representation of the financial position of the U.S.
government.
Management Review:
We found that Treasury management did not review transactions within
several key compilation processes. Transactions and other significant
events should be authorized and executed only by persons acting within
the scope of their authority. Appropriate reviews by management of key
decisions and data are vital controls to ensure that only authorized
actions occur. For example, Treasury's FACTS I system allows for master
appropriation files, the files that list all federal agencies by
appropriation code, to be updated by review accountants without
supervisory approval. Also, there is no requirement for supervisory
review of changes made to agency data as a result of issues identified
during the "agency data analysis process" performed by Treasury. In
some instances, supervisory reviews were required, but any reviews that
may have been performed were not documented. For example, there was no
documentation of supervisory review of changes to the Hyperion system
software and chart of accounts used to compile the data for the CFS.
Records of changes and reviews of the changes made to the templates
used to create the CFS were also inadequate.
Inadequate supervisory review and inadequate documentation of changes
and reviews could allow data that go into the CFS to be manipulated or
changed without any supervisory control or review, resulting in the
possibility that agency data could be changed or incorrectly compiled
in the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, in connection with Treasury's current compilation
process and the development of Treasury's new compilation system and
process, to:
* segregate the duties of individuals who have the capability to enter,
change, and delete data within FACTS I and the Hyperion database and
post adjustments to the CFS;
* develop and fully document policies and procedures for the
consolidated financial statement preparation process so that they are
proper, complete, and consistently applied among staff members; and:
* require and document reviews by management of all procedures that
result in data changes to the CFS.
Unreconciled Transactions Affecting the Change in Net Position:
The net position reported in the CFS is derived by subtracting
liabilities from assets, rather than through balanced accounting
entries. In other words, the CFS is "plugged" to make it balance. To
make the fiscal year 2002 CFS balance, Treasury recorded a net $17.1
billion decrease to net operating cost on the Statement of Operations
and Changes in Net Position, which it labeled "Unreconciled
Transactions Affecting the Change in Net Position." Treasury does not
identify and quantify all components of this unreconciled activity.
Treasury attributes these net unreconciled transaction amounts to (1)
improper recording of intragovernmental transactions by federal
agencies, (2) transactions affecting assets and liabilities not being
identified properly by federal agencies as prior period adjustments,
and (3) timing differences and errors in reporting transactions.
Treasury stated in its November 2001 report on its CFS improvement
project[Footnote 3] that in order to properly reconcile net position,
federal agencies would need to split net position between
intragovernmental and public components, including ending balances and
the year's activity. Currently, OMB requires federal agencies to
identify intragovernmental assets and liabilities on their audited
balance sheets but does not require the intragovernmental portion of
net position to be identified. Without a process in place to identify
and quantify all components of the activity in the net position line
item, revenues, costs, assets, and liabilities may be misstated,
thereby affecting the reliability of the CFS.
As Treasury is designing its new financial statement compilation
process to begin with the fiscal year 2004 CFS, we recommend that the
Secretary of the Treasury direct the Fiscal Assistant Secretary,
working in coordination with the Controller of OMB's Office of Federal
Financial Management, to:
* develop reconciliation procedures which will aid in understanding and
controlling the net position balance as well as eliminate the plugs
previously associated with compiling the CFS; and:
* use balanced accounting entries to account for the change in net
position rather than simple subtraction of liabilities from assets.
Reconciliation of Intragovernmental Activity and Balances:
Federal agencies are unable to fully reconcile intragovernmental
activity and balances. OMB and Treasury require CFO Act agencies to
reconcile selected intragovernmental activity and balances with their
"trading partners"[Footnote 4] and to report on the extent and results
of intragovernmental activity and balances reconciliation efforts. The
Inspectors General reviewed these reports and communicated the results
of their reviews to OMB, Treasury, and us. A substantial number of the
CFO Act agencies did not fully perform the required reconciliations for
fiscal year 2002, citing reasons such as (1) failure of trading
partners to provide needed data, (2) limitations and incompatibility of
agency and trading partner systems, and (3) human resource issues. For
fiscal year 2002, amounts reported for federal agency trading partners
for certain intragovernmental accounts were significantly out of
balance. A lack of standardization in transaction processing and a lack
of sufficient communication between trading partners contribute
significantly to federal agencies' inability to fully reconcile
intragovernmental activity and balances. Without improvement in this
area, Treasury cannot properly eliminate intragovernmental activity and
balances and, as a result, assets, liabilities, revenue, and costs
reported in the CFS may not be fairly stated.
Federal agencies are required to consistently and fully account for,
reconcile, and report intragovernmental activity and balances across
the federal government. To address certain issues that have contributed
to the out-of-balance condition for intragovernmental activity and
balances, OMB has established a set of standard business rules, OMB
Memorandum M-03-01, Business Rules for Intragovernmental Transactions,
for governmentwide transactions among trading partners; the memorandum
requires quarterly reconciliations of intragovernmental activity and
balances, beginning with fiscal year 2003. Treasury Financial Manual,
section 4030, also requires reconciliation of intragovernmental
activity and balances. Further, Treasury has begun a process to help
federal agencies better perform their reconciliations, by providing
each agency with detailed trading partner information. Also, Treasury
is planning to require federal agencies, beginning with fiscal year
2004, to report in Treasury's new closing package intragovernmental
activity and balances by trading partner.
As OMB continues to make strides to address issues related to
intragovernmental transactions, we recommend that the Director of the
Office of Management and Budget direct the Controller of the Office of
Federal Financial Management to:
* develop policies and procedures that document how OMB will enforce
the business rules provided in OMB Memorandum M-03-01, Business Rules
for Intragovernmental Transactions, and:
* require that significant differences noted between business partners
be resolved and the resolution be documented.
We also recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of the
Office of Management and Budget, to implement the plan to require
federal agencies to report in Treasury's new closing package, beginning
with fiscal year 2004, intragovernmental activity and balances by
trading partner and indicate amounts that have not been reconciled with
trading partners and amounts, if any, that are in dispute.
Elimination of Intragovernmental Activity and Balances:
During our audits, we found the following:
* Intragovernmental activity and balances are "dropped" or "offset" in
the preparation of the CFS rather than eliminated through balanced
accounting entries.
* Certain intragovernmental activity and balances, primarily related to
appropriations, are not being properly considered in the consolidation
process.
* No reconciliation is performed for the change in intragovernmental
assets and liabilities for the fiscal year, including the amount and
nature of all changes in intragovernmental assets or liabilities not
attributable to cost and revenue activity recognized during the fiscal
year, such as differences due to purchases that are capitalized as
inventory or equipment and revenue that is deferred.
Consolidated financial statements are intended to present the results
of operations and financial position of the components that make up the
reporting entity as if the entity were a single enterprise. Therefore,
when preparing the CFS, intragovernmental activity and balances between
federal agencies must be eliminated. As mentioned above, federal
agencies' problems in handling their intragovernmental transactions
impair Treasury's ability to properly eliminate these transactions, and
significant differences in intragovernmental accounts have been
identified. Without an effective process, intragovernmental activity
and balances are not fully accounted for and eliminated in the process
used to prepare the CFS. As a result, the federal government's ability
to determine the impact of these differences on the amounts reported in
the CFS is impaired and, consequently, the CFS may be misstated.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with OMB's Controller of
the Office of Federal Financial Management, to:
* design procedures that will account for the difference in
intragovernmental assets and liabilities throughout the compilation
process by means of formal consolidating and elimination accounting
entries;
* develop solutions for intragovernmental activity and balance issues
relating to federal agencies' accounting, reconciling, and reporting in
areas other than those OMB now requires be reconciled, primarily areas
relating to appropriations; and:
* reconcile the change in intragovernmental assets and liabilities for
the fiscal year, including the amount and nature of all changes in
intragovernmental assets or liabilities not attributable to cost and
revenue activity recognized during the fiscal year. Examples of these
differences would include capitalized purchases such as inventory or
equipment and deferred revenue.
Reconciliation of Net Operating Cost and Unified Budget Surplus (or
Deficit):
Treasury did not have an adequate process to identify and report items
needed to reconcile the U.S. government's fiscal year 2002 net
operating cost of $364.9 billion to the fiscal year 2002 unified budget
deficit, which was reported as $157.7 billion. The Reconciliation of
Net Operating Cost and Unified Budget Surplus (or Deficit) (hereafter
referred to as the reconciliation statement) is expected to explain
certain differences that occur because the CFS are prepared on the
accrual basis in accordance with U.S. generally accepted accounting
principles. Under accrual accounting, transactions are reported when
the event or transaction is recognizable under U.S. generally accepted
accounting principles rather than when cash is received and paid. By
contrast, federal budgetary reporting is, with certain exceptions, on
the cash basis, in accordance with accepted budget concepts and
policies. Statement of Federal Financial Accounting Standards (SFFAS)
No. 24, Selected Standards for the Consolidated Financial Report of the
United States Government, effective in fiscal year 2002, requires the
reconciliation statement as part of the CFS.
In our audit of the reconciliation statement, we found that Treasury
was unable to identify all the transactions needed to properly
reconcile the statement. Treasury's process for compiling the
reconciliation statement involved the use of two independent sources of
information--FACTS data from federal agencies' general ledger systems
for the net operating cost and most of the reconciliation statement
items and Treasury's central accounting and reporting system (STAR)
primarily for the unified budget surplus/deficit amounts. The
reconciliation statement begins with the net operating cost amount
reported in the Statement of Operations and Changes in Net Position
(derived through FACTS data). As noted above, this amount includes a
net $17.1 billion labeled as "unreconciled transactions," which was
needed to balance the consolidated Balance Sheet. Because the net
operating cost amount includes this plug, which does not correspond to
any budget activity, the $17.1 billion should have been included as a
reconciling item in the reconciliation statement, but it was not. In
addition, a $1 billion "net amount of all other differences" (another
plug) was also needed in the reconciliation statement to balance net
operating cost to the unified budget deficit. Treasury was unable to
adequately identify and explain the gross components of such amounts.
Treasury's process for preparing the reconciliation statement also did
not ensure completeness of reporting or ascertain the consistency of
all the amounts reported in the reconciliation statement with the
related balance sheet line items, related notes, or federal agency
financial statements. We performed an analysis to determine whether all
applicable components reported in the other statements (and related
note disclosures) included in the CFS were properly reflected in the
reconciliation statement. We found about $21 billion of net changes in
various line item account balances on the balance sheet that were not
explained on either the reconciliation statement or the Statement of
Changes in Cash Balance from Unified Budget Surplus and Other
Activities. For example, the reconciliation statement reported
depreciation expense ($20.5 billion) and total capitalized fixed assets
($40.9 billion) as the components of the net change in property, plant,
and equipment. Although these activities accounted for a net increase
of $20.4 billion, the balance sheet reflected a smaller net increase,
$18 billion; Treasury was unable to explain the remaining $2.4 billion
of the net change. In addition, while we found that the source of the
line item "principal repayments of precredit reform loans" that is
reported on the reconciliation statement was from STAR, Treasury was
unable to link this amount of $8.2 billion to any related agency
financial statements or the consolidated Balance Sheet and related
notes.
Lastly, Treasury did not establish a reporting materiality threshold
for purposes of collecting and reporting information in the
reconciliation statement. For example, some items were reported simply
as a net "increase/decrease" without considering how material, both
quantitatively and qualitatively, the gross changes were.[Footnote 5]
We noted, for instance, that in the "components of the budget surplus
(deficit) not part of net operation cost" section of the statement,
there is a reconciling item titled "increase in inventory" rather than
accounting for "purchases of inventory" as a "component of the budget
surplus (deficit) not part of net operation cost" and separately
reporting the "sales, use, or disposal of inventory" in the "components
of net operating cost not part of the budget surplus (or deficit)."
Treasury was unable to demonstrate whether material, informative
amounts were netted, and pertinent information may therefore not be
disclosed.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary to develop and implement a process that adequately
identifies and reports items needed to reconcile its net operating cost
and unified budget surplus (or deficit). Treasury should:
* report "net unreconciled differences" included in the net operating
results line item as a separate reconciling activity in the
reconciliation statement,
* develop policies and procedures to ensure completeness of reporting
and document how all the applicable components reported in the other
consolidated financial statements (and related note disclosures
included in the CFS) were properly reflected in the reconciliation
statement, and:
* establish reporting materiality thresholds for determining which
agency financial statement activities to collect and report at the
governmentwide level to assist in ensuring that the reconciliation
statement is useful and conveys meaningful information.
In addition, if Treasury chooses to continue using information both
from federal agencies' financial statements and from the STAR system,
we recommend that Treasury:
* demonstrate how the amounts from STAR reconcile to federal agencies'
financial statements and:
* identify and document the cause, if any significant differences are
noted.
Statements of Changes in Cash Balance from Unified Budget and Other
Activities:
Treasury was unable to demonstrate how significant amounts reported in
the Statement of Changes in Cash Balance from Unified Budget and Other
Activities were related to the underlying federal agencies' financial
statements. The Statement of Changes in Cash Balance from Unified
Budget and Other Activities is expected to explain how the annual
unified budget surplus or deficit relates to the change in the U.S.
government's operating cash. SFFAS No. 24, effective in fiscal year
2002, requires the Statement of Changes in Cash Balance from Unified
Budget and Other Activities as part of the CFS.
For fiscal year 2002, the Statement of Changes in Cash Balance from
Unified Budget and Other Activities reported a unified budget deficit
of $157.7 billion, derived as the difference between reported actual
unified budget receipts of $1,853.3 billion and actual unified budget
outlays of $2,011 billion. Both line items were material to this
statement and were compiled from federal agencies' monthly reports to
Treasury in the STAR system.
Treasury was unable to explain material differences, totaling $231
billion (absolute) and $166 billion (net), between the actual unified
budget net outlays reported on this statement and the outlays reported
on selected individual federal agencies' audited Combined Statement of
Budgetary Resources. For example, we found one federal agency that
reported net outlays for fiscal year 2002 as $479 billion on its
audited Combined Statement of Budgetary Resources, while Treasury's
records showed $375 billion for fiscal year 2002 for this agency. This
agency had received an unqualified auditor opinion on its financial
statements.
OMB Bulletin 01-09, Form and Content of Agency Financial
Statements,[Footnote 6] states that outlays in federal agencies'
Combined Statement of Budgetary Resources should agree with the net
outlays reported in the budget of the U.S. government. In addition,
SFFAS No. 7, Accounting for Revenue and Other Financing Sources and
Concepts for Reconciling Budgetary and Financial Accounting, requires
explanation of any material differences between the information
required to be disclosed (including outlays) and the amounts described
as "actual" in the budget of the U.S. government. Treasury believes its
records for net outlays are reliable and accurate; however, many
federal agencies are reporting different net outlays and receiving
clean opinions on their financial statements.
Treasury was unable to adequately explain the over $24 billion net
difference between actual unified budget receipts of $1,853.3 billion
and total operating revenue of $1,877.7 billion reported in the
Statements of Operations and Changes in Net Position. While these
amounts are not expected to equal (for example, operating revenues
include accrued amounts, and budget receipts are reported on the cash
basis), there is a relationship between operating revenues reported on
the Statement of Operations and Changes in Net Position and unified
budget receipts reported on the Statement of Changes in Cash Balance
from Unified Budget and Other Activities. Therefore, the expectation is
that differences between these amounts should be explainable.
Treasury was also not able to provide support for how the line items in
the "other activities" section of this statement, totaling $13.5
billion, related to either the underlying Balance Sheet or related
notes accompanying the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of
OMB's Office of Federal Financial Management, to develop and implement
a process to ensure that the Statement of Changes in Cash Balance from
Unified Budget and Other Activities properly reflects the activities
reported in federal agencies' audited financial statements. Treasury
should:
* document the consistency of the significant line items on this
statement to agencies' audited financial statements;
* request, through its closing package, that federal agencies provide
the net outlays reported in their Combined Statement of Budgetary
Resources and explanations for any significant differences between net
outlay amounts reported in the Combined Statement of Budgetary
Resources and the budget of the U.S. government;
* investigate the differences between net outlays reported in federal
agencies' Combined Statement of Budgetary Resources and Treasury's
records in the STAR system to ensure that the proper amounts are
reported in the Statement of Changes in Cash Balance from Unified
Budget and Other Activities;
* explain and document the differences between the operating revenue
amount reported on the Statement of Operations and Changes in Net
Position and unified budget receipts reported on the Statement of
Changes in Cash Balance from Unified Budget and Other Activities; and:
* provide support for how the line items in the "other activities"
section of this statement relate to either the underlying Balance Sheet
or related notes accompanying the CFS.
Defining the Reporting Entity:
The CFS includes certain financial information for the executive,
legislative, and judicial branches, to the extent that federal agencies
within those branches have provided Treasury such information. However,
there are undetermined amounts of assets, liabilities, and revenues
that are not included, and the government did not provide evidence or
disclose in the CFS that such financial information was immaterial.
Statement of Federal Financial Accounting Concepts (SFFAC) No. 2,
Entity and Display, provides guidance on defining reporting entities.
Under SFFAC No. 2, a reporting entity for general purpose financial
statements would "meet all of the following criteria: (1) there is a
management responsible for controlling and deploying resources,
producing outputs and outcomes, executing the budget or a portion
thereof . . ., and held accountable for the entity's performance; (2)
the entity's scope is such that its financial statements would provide
a meaningful representation of operations and financial condition; and
(3) there are likely to be users of the financial statements who are
interested in and could use the information in the statements to help
them make resource allocation and other decisions and hold the entity
accountable for its deployment and use of resources." SFFAC No. 2 also
calls for the notes to financial statements to provide disclosures that
are necessary to make the financial statements more informative and not
misleading, such as a brief description of the reporting entity. The
statement also provides criteria for including components in a
reporting entity. As examples of the application of such criteria,
SFFAC No. 2 specifically discusses the Federal Reserve System and
government-sponsored enterprises and the reasons for FASAB's conclusion
that these entities would not be considered components of the U.S.
government reporting entity.
In accordance with SFFAC No. 2, if the government could provide
evidence that the financial information not included in the CFS is
immaterial,[Footnote 7] then the CFS reporting entity could be
described as the "U.S. government" and would conform materially to the
criteria set forth in SFFAC No. 2. However, the fiscal year 2002 CFS
reporting entity excluded certain entities without providing evidence
or clearly explaining the reason.
An appendix to the CFS listed 13 entities that were excluded from the
CFS reporting entity and specifically explained the reason for
excluding one of those entities--the Federal Reserve System. However,
the appendix did not explain the reason for excluding the other
entities listed as excluded, such as government-sponsored enterprises
and military exchanges. While exclusion of those entities may be
appropriate, some users of the CFS may be confused if the reason for
excluding entities is not clearly disclosed in the CFS.
We understand the inherent challenges in getting complete information
for all three branches of the U.S. government. However, not including
required information for all components included in a reporting entity
or not clearly explaining the reason for excluding certain entities
could mislead some users of the financial statements.
Without evidence of the amounts of information excluded and any related
disclosures, in particular, evidence that what was excluded was
immaterial to the CFS, we could not have ample assurance regarding the
unknown amounts, and, under auditing standards, this issue could impede
a future opinion on the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of
OMB's Office of Federal Financial Management to do the following:
* Perform an assessment to define the reporting entity, including its
specific components, in conformity with the criteria issued by FASAB.
Key decisions made in this assessment should be documented, including
the reason for including or excluding components and the basis for
concluding on any issue. Particular emphasis should be placed on
demonstrating that any financial information that should be included,
but is not included, is immaterial.
* Provide in the financial statements all the financial information
relevant to the defined reporting entity, in all material respects.
Such information would include, for example, the reporting entity's
assets, liabilities, and revenues.
* Disclose in the financial statements all information that is
necessary to inform users adequately about the reporting entity. Such
disclosures should clearly describe the reporting entity and explain
the reason for excluding any components that are not included in the
defined reporting entity.
Conformity with U.S. Generally Accepted Accounting Principles:
Treasury lacks an adequate process to ensure that the financial
statements, related notes, stewardship, and supplemental information in
the CFS are presented in conformity with U.S. generally accepted
accounting principles. SFFAS No. 24 states that FASAB standards apply
to all federal agencies, including the U.S. government as a whole,
unless provision is made for different accounting treatment in a
current or subsequent standard.
Specifically, we found that Treasury did not (1) timely identify
applicable generally accepted accounting principles requirements, (2)
make timely modifications to agency data calls to obtain information
needed, (3) assess, qualitatively and quantitatively, the materiality
of omitted disclosures,[Footnote 8] or (4) document decisions reached
with regard to omitted disclosures and the rationale for such
decisions. We identified numerous disclosures that were not in
conformity with applicable standards. These needed disclosures are
described in appendix I. We did note that Treasury is requesting
certain information in its planned closing package for fiscal year 2004
that may address some of the needed disclosures.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary to establish a formal process that will allow the
financial statements, related notes, stewardship, and supplemental
information in the CFS to be presented in conformity with U.S.
generally accepted accounting principles. The process should:
* timely identify generally accepted accounting principles
requirements,
* make timely modifications to Treasury's closing package requirements
to obtain information needed,
* assess, qualitatively and quantitatively, the impact of the omitted
disclosures, and:
* document decisions reached and the rationale for such decisions.
With respect to the 16 required disclosures identified in appendix I
that were not included in the CFS, we recommend that each of these
disclosures be included in the CFS or the rationale for excluding any
of them be documented.
Other Weaknesses Identified:
During our audit we found certain issues related to (1) management
representation letters, (2) legal representation letters, and (3)
information on major treaties and other international agreements that
will require certain actions by Treasury and OMB. Other issues related
to these same three areas will need to be addressed by federal agencies
and their auditors to facilitate Treasury's and OMB's preparation of
the CFS. We plan to separately communicate to agency Chief Financial
Officers and Inspectors General the details of our concerns for such
issues. We have summarized our findings below and are providing
recommendations to help address the issues that require action by
Treasury and OMB.
Management Representation Letters and the Related Summaries of
Unadjusted Misstatements:
For each agency financial statement audit, generally accepted auditing
standards require that agency auditors obtain written representations
from agency management as part of the audit. In turn, Treasury and OMB
are to receive all the required management representation letters and
the related summaries of unadjusted misstatements from the federal
agencies. This is important because generally accepted auditing
standards require Treasury and OMB to provide us, as their auditor, a
management representation letter for the CFS, and their letter depends
on the information within agencies' management representation letters.
However, we found that Treasury and OMB did not have policies or
procedures to adequately review and analyze federal agencies'
management representation letters.
In a management representation letter, management typically
acknowledges its responsibility for its financial statements and its
belief that the financial statements are presented in conformity with
U.S. generally accepted accounting principles; the completeness of
financial information in the statements; recognition, measurement, and
disclosure; and subsequent events. Without performing an adequate
review and analysis of federal agencies' management representations
letters, Treasury and OMB management may not be fully informed of
matters that may affect their representations made with respect to the
audit of the CFS.
As part of our audit of the CFS, we received and reviewed 30 federal
agencies' management representation letters.[Footnote 9] We found that
(1) 2 letters had discrepancies between what the auditor found and what
the agency represented in its management representation letter, (2) 8
letters were not signed by the appropriate level of management, (3) 25
letters did not disclose the materiality threshold used by management
in determining items to be included in the letter, (4) 4 letters
omitted certain representations that are ordinarily included, (5) 2
letters did not include a schedule of unadjusted misstatements or
affirm in their representation letter that there were no uncorrected
misstatements, and (6) 15 schedules of unadjusted misstatements did not
provide complete information about the misstatements that were
identified. Only 1 of the 30 letters we reviewed had none of the
deficiencies noted above.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of
OMB's Office of Federal Financial Management, to establish written
policies and procedures for preparing the governmentwide management
representation letter to help ensure that it is properly prepared and
contains sufficient representations. Specifically, these policies and
procedures should require:
* an analysis of the agency management representations to determine if
discrepancies exist between what the agency auditor reported and the
representations made by the agency, including the resolution of such
discrepancies;
* a determination that the agency management representation letters
have been signed by the highest-level agency officials that are
responsible for and knowledgeable about the matters included in the
agency management representation letters;
* an assessment of the materiality thresholds used by federal agencies
in their respective management representation letters;
* an assessment of the impact, if any, of federal agencies' materiality
thresholds on the management representations made at the governmentwide
level;
* an evaluation and assessment of the omission of representations
ordinarily included in agency management representation letters; and:
* an analysis and aggregation of the agencies' summary of unadjusted
misstatements to determine the completeness of the summaries and to
ascertain the materiality, both individually and in the aggregate, of
such unadjusted misstatements to the CFS taken as a whole.
Legal Representation Letters and Related Management Schedules in
Reporting Contingency Losses:
For each agency financial statement audit, generally accepted auditing
standards require that agency auditors obtain written legal
representations as part of the audit. Legal representation letters,
along with related management schedules,[Footnote 10] are essential to
properly reporting legal contingency losses in federal agencies'
financial statements. Inadequate information in the legal
representation letters could weaken the accuracy and reliability of
federal agency financial statements and the CFS.
We reviewed 34 federal agencies' legal representations letters and
related management schedules to assess the adequacy of the letters and
related schedules.[Footnote 11] We found that the adequacy of some
legal letters was questionable. For example, we found that 2 letters
did not express an opinion of how the expected outcome of virtually all
of the two agencies' cases would be resolved, and that 5 agencies did
not provide the related management schedules.
In some cases, the lack of adequate information may have resulted from
legal counsel's desire to protect the confidentiality of lawyer-client
communications, the difficulty in predicting the outcome of potential
and pending litigation with any assurance, and/or legal counsel's
desire to avoid the possibility of prejudicing the outcome of the
litigation to the client's detriment. While these are understandable
reasons, without adequate legal contingency information, management of
Treasury and OMB may not be fully informed of matters that may affect
the legal representations made with respect to the audit of the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of
OMB's Office of Federal Financial Management, to help ensure that
agencies provide:
* adequate information in their legal representation letters regarding
the expected outcome of the cases and:
* related management schedules.
Information on Major Treaties and Other International Agreements:
The CFS note disclosures did not include any information on major
treaties and other international agreements[Footnote 12] to which the
federal government is a party. These treaties and other international
agreements address various issues including, but not limited to, trade,
commerce, security, and arms that may involve financial obligations or
give rise to loss contingencies.
Treaties and other international agreements may lead to commitments or
contingencies and therefore should be included in the CFS, in
accordance with OMB Bulletin No. 01-09 and SFFAS No. 5, Accounting for
Liabilities of the Federal Government, as amended by SFFAS No. 12,
Recognition of Contingent Liabilities Arising from Litigation. The
degree of certainty as to whether there will be a cost now or in the
future, along with the ability to quantify it in advance, determines
the appropriate accounting treatment.
Treaties and other international agreements were not included in the
notes to the CFS because Treasury and the federal agencies had yet to
perform the necessary work to determine the nature and magnitude of
those in force as of September 30, 2002. The State Department publishes
a document annually called Treaties in Force. The most recent edition
of Treaties in Force, released in August 2002, lists treaties and other
international agreements of the United States that were in force on
January 1, 2002. However, according to State Department staff, this
document is incomplete because federal agencies do not always provide
complete information on treaties and international agreements when a
request for data is made. Not having information on major treaties and
other international agreements in the CFS resulted in incomplete
disclosures of the possible exposure to loss or obligations of the U.S.
government.
We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of
OMB's Office of Federal Financial Management, to establish written
policies and procedures to help ensure that major treaty and other
international agreement information is properly identified and reported
in the CFS. Specifically, these policies and procedures should require
that agencies:
* develop a detailed schedule of all major treaties and other
international agreements that obligate the U.S. government to provide
cash, goods, or services, or that create other financial arrangements
that are contingent on the occurrence or nonoccurrence of future events
(a starting point for compiling these data could be the State
Department's Treaties in Force);
* classify all such scheduled major treaties and other international
agreements as commitments or contingencies;
* disclose in the notes to the CFS amounts for major treaties and other
international agreements that have a reasonably possible chance of
resulting in a loss or claim as a contingency;
* disclose in the notes to the CFS amounts for major treaties and other
international agreements that are classified as commitments and that
may require measurable future financial obligations; and:
* take steps to prevent major treaties and other international
agreements that are classified as remote from being recorded or
disclosed as probable or reasonably possible in the CFS.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, which are reprinted in
appendix II, Treasury and OMB stated that our report identified many
recommendations that will improve the usefulness and accuracy of the
CFS and that they have already incorporated many of them into their new
system and processes that are being developed for preparing the fiscal
year 2004 CFS. However, Treasury and OMB disagreed with our
recommendations related to unreconciled transactions affecting net
position and the Statement of Changes in Cash Balance from Unified
Budget and Other Activities. They also stated that they would consider
the other recommendations in our report as they continue the design and
implementation of the new process for preparing the CFS.
On the first matter, Treasury and OMB disagreed with our proposed
recommendation that federal agencies submit to Treasury an analysis of
their net position that separates intragovernmental and public
transactions. The purpose of this recommendation was to help Treasury
understand and control the U.S. government's net position, as well as
to eliminate the plugs associated with compiling the CFS. In response
to our draft report, Treasury and OMB stated that Treasury had decided
not to require agencies to split net position between intragovernmental
and public transactions as Treasury had originally planned and reported
in its CFS Improvement Project Report because it was unable to develop
a procedure that agencies could use to provide this split. In addition,
Treasury and OMB stated that this split would not identify certain
items known to affect the unreconciled net position transactions.
However, because Treasury has not identified and quantified all the
components of the unreconciled transactions, a procedure is still
needed that will adequately reconcile net position and assist Treasury
in identifying and eliminating the plugs needed to balance the CFS. Our
proposed recommendation in the draft report that we provided for
comment was one option for Treasury to resolve the uncertainties
regarding the reliability of these data. We recognize there are other
ways to gain these assurances. Therefore, we have modified our
recommendation to recommend that Treasury develop reconciliation
procedures to aid in understanding and controlling the net position
balance.
Regarding the second matter, Treasury and OMB stated that we had
suggested that federal agency data be used to prepare receipts and
outlays used in the Statement of Changes in Cash Balance from Unified
Budget and Other Activities. They stated that they disagree with this
approach because it would be time-consuming and costly to gather such
information. Treasury and OMB have stated that the Statement of Changes
in Cash Balance from Unified Budget and Other Activities is prepared
from information derived from Treasury's Central Accounting System
rather than from agencies' financial statements.
We were not calling for Treasury to use federal agencies' financial
statements to prepare the Statement of Changes in Cash Balance from
Unified Budget and Other Activities. Instead, we recommended that
Treasury collect certain information already reported in federal
agencies' audited financial statements and develop procedures that
ensure consistency of the significant line items on the Statement of
Changes in Cash Balance from Unified Budget and Other Activities with
the agency-reported information. As we stated in our report, Treasury
has expressed the belief that the information it maintains in its
system is materially reliable. However, federal agencies also believe
their amounts are materially reliable and their auditors have rendered
unqualified audit opinions on their financial statements. We found
unexplained material differences between Treasury's records and some
agencies' financial statements. We provided a schedule of these
differences to Treasury and requested explanations for the material
differences. As discussed in our report, Treasury was unable to explain
material differences, totaling $231 billion (absolute) and $166 billion
(net), between the actual unified budget net outlays reported on this
statement and the net outlays reported on selected individual federal
agencies' audited Combined Statement of Budgetary Resources.
As stated in our report, OMB Bulletin 01-09, Form and Content of Agency
Financial Statements, states that outlays in federal agencies' Combined
Statement of Budgetary Resources should agree with the net outlays
reported in the budget of the U.S. government. In some cases, we found
that net outlay amounts reported in federal agencies' audited financial
statements differed from the amounts included in the CFS and budget of
the U.S. government for these agencies. For example, Treasury did not
provide us with an explanation of why its own audited Combined
Statement of Budgetary Resources reported net outlays of $479 billion
for fiscal year 2002, while the amount included in the CFS relating to
net outlays for the Department of Treasury was only $375 billion for
fiscal year 2002.
Ensuring that the significant line items on the Statement of Changes in
Cash Balance from Unified Budget and Other Activities are consistent
with agencies' audited financial statements is an important
expectation. As stated in our report, SFFAS No. 7, Accounting for
Revenue and Other Financing Sources and Concepts for Reconciling
Budgetary and Financial Accounting, requires agencies to provide an
explanation for any material differences between the information
required to be disclosed (including outlays) in their financial
statements and the amounts described as "actual" in the budget of the
U.S. government. Also, many of the amounts reported in the Statement of
Changes in Cash Balance from Unified Budget and Other Activities are
intended to be the same as the amounts reported in the budget of the
U.S. government. As such, we continue to believe that the process we
proposed would be the most efficient manner for Treasury, as the
preparer of the CFS, to obtain the necessary assurance on the
significant amounts reported in the Statement of Changes in Cash
Balance from Unified Budget and Other Activities.
Treasury and OMB also suggested that we not address the recommendations
in our report related to management representation letter and legal
representation letter issues to Treasury. Generally accepted auditing
standards require Treasury and OMB to provide us, as their auditor, a
management representation letter for the CFS, and their letter depends
on the information within agencies' management representation letters.
However, we found that Treasury and OMB did not have policies or
procedures to adequately review and analyze federal agencies'
management representation letters. As such, we continue to believe that
both Treasury and OMB need to work together to address the
recommendations we made in this area.
In regard to legal representation letters, we identified problems with
certain agencies' letters that could weaken the accuracy and
reliability of federal agencies' financial statements and the CFS. OMB,
in its role of providing guidance to agencies and their auditors
regarding agencywide financial statements, and Treasury, in its role as
preparer of the CFS, both play an important part in ensuring that legal
representation letters provide adequate information to enable the
proper reporting of legal contingency losses in federal financial
statements. As such, we continue to believe that both Treasury and OMB
need to work together to address the recommendations we made in this
area as well.
This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations. You should submit your
statement to the Senate Committee on Governmental Affairs and the House
Committee on Government Reform within 60 days of the date of this
letter. A written statement must also be sent to the House and Senate
Committees on Appropriations with the agencies' first request for
appropriations made more than 60 days after the date of the report.
:
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Governmental Affairs; the
Subcommittee on Financial Management, the Budget, and International
Security, Senate Committee on Governmental Affairs; the House Committee
on Government Reform; and the Subcommittee on Government Efficiency and
Financial Management, House Committee on Government Reform. In
addition, we are sending copies to the Fiscal Assistant Secretary of
the Treasury and OMB's Controller of the Office of Federal Financial
Management. Copies will be made available to others upon request. This
report is also available at no charge on GAO's Web site, at [Hyperlink,
www.gao.gov] www.gao.gov.
We acknowledge and appreciate the cooperation and assistance provided
by Treasury and OMB during our audit. If you or your staff have any
questions or wish to discuss this report, please contact Jeffrey C.
Steinhoff, Managing Director, Financial Management and Assurance, on
(202) 512-2600 or Gary T. Engel, Director, Financial Management and
Assurance, on (202) 512-3406.
David M. Walker
Comptroller General of the United States:
Signed by David M. Walker:
[End of section]
Appendixes:
Appendix I: Disclosure Issues:
This enclosure includes 16 disclosures identified that are required by
U.S. generally accepted accounting principles to either be included in
the CFS or the rationale for their exclusion documented. However, they
were neither included nor was their exclusion documented.
Loans Receivable and Loan Guarantee Liabilities:
The note disclosure for loans receivable and loan guarantee liabilities
departed from the following disclosure requirements of Statements of
Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for
Inventory and Related Property, and SFFAS No. 18, Amendments to
Accounting Standards for Direct Loans and Loan Guarantees.
SFFAS No. 3, paragraph 91, requires the reporting entity to disclose
the following:
* valuation basis for foreclosed property;
* changes from the prior year's accounting methods, if any;
* restrictions on the use/disposal of property;
* balances by categories (i.e., pre-1992 and post-1991 foreclosed
property);
* number of properties held and average holding period by type or
category; and:
* number of properties for which foreclosure proceedings are in process
at the end of the period for foreclosed assets acquired in full or
partial settlement of a direct or guaranteed loan.
SFFAS No. 18, paragraph 9, states that credit programs should
reestimate the subsidy cost allowance for outstanding direct loans and
the liability for outstanding loan guarantees. There are two kinds of
reestimates: (a) interest rate reestimates and (b) technical/default
reestimates. Entities should measure and disclose each program's
reestimates in these two components separately.
SFFAS No. 18, paragraph 10, requires the reporting entity to display in
the notes to the financial statements a reconciliation between the
beginning and ending balances of the subsidy cost allowance for
outstanding direct loans and the liability for outstanding loan
guarantees reported in the entity's balance sheet.
SFFAS No. 18, paragraph 11, requires disclosure of:
* the total amount of direct or guaranteed loans disbursed for the
current reporting year and the preceding reporting year;
* the subsidy expense by components, recognized for the direct or
guaranteed loans disbursed in those years; and:
* the subsidy reestimates by components for those years.
SFFAS No. 18, paragraph 11, also requires disclosure, at the program
level, of the subsidy rates for the total subsidy cost and its
components for the interest subsidy costs, default costs (net of
recoveries), fees and other collections, and other costs estimated for
direct loans and loan guarantees in the current year's budget for the
current year's cohorts.
SFFAS No. 18, paragraph 11, further requires the reporting entity to
disclose, discuss, and explain events and changes in economic
conditions, other risk factors, legislation, credit policies, and
subsidy estimation methodologies and assumptions that have had a
significant and measurable effect on subsidy rates, subsidy expense,
and subsidy reestimates.
Inventories and Related Property:
The note disclosure for inventories and related property departed from
the following disclosure requirements of SFFAS No. 3, Accounting for
Inventory and Related Property.
Inventory and Operating Materials and Supplies:
When inventory or operating materials and supplies are declared excess,
obsolete, or unserviceable, SFFAS No. 3, paragraph 30, requires the
difference between the carrying amount and the expected net realizable
value to be recognized as a loss or gain and either separately reported
or disclosed.
Paragraphs 35 and 50 require the following disclosures about inventory
and operating materials and supplies:
* general composition;
* changes from the prior year's accounting methods, if any;
* restrictions on the sale of inventory and the use of operating
materials and supplies; and:
* changes in the criteria for categorizing inventory and operating
materials and supplies.
Stockpile Material:
Paragraph 56 requires the following disclosures about stockpile
material:
* basis for valuing stockpile material, including valuation method and
any cost flow assumptions;
* changes from the prior year's accounting methods, if any;
* restrictions on the use of stockpile material;
* balances in each category of stockpile material (i.e., stockpile
material held and held for sale);
* criteria for grouping stockpile material held for sale; and:
* changes in criteria for categorizing stockpile material held for
sale.
Paragraph 55 requires the disclosure of any difference between the
carrying amount (i.e., purchase price or cost) of stockpile material
held for sale and the estimated selling price of such assets.
Seized Material:
Paragraph 66 requires the following disclosures about seized property:
* valuation method;
* changes from the prior year's accounting methods, if any; and:
* analysis of change in seized property (including dollar value and
number of seized properties) that are on hand at the beginning of the
year, seized during the year, disposed of during the year, and on hand
at the end of the year, as well as known liens or other claims against
the property. This information should be presented by type of seizure
and method of disposition when material.
Forfeited Property:
Paragraph 78 requires the following disclosures about forfeited
property:
* valuation method;
* analysis of the changes in forfeited property by type and dollar
amount that includes (1) number of forfeitures on hand at the beginning
of the year, (2) additions, (3) disposals and method of disposition,
and (4) end-of-year balances;
* restriction on the use of disposition of the property; and:
* if available, an estimate of the value of property to be distributed
to other federal, state, and local agencies in future reporting
periods.
Goods Held under Price Support and Stabilization Programs:
Paragraph 98 requires that if a contingent loss is not recognized
because it is less than probable or it is not reasonably measurable,
then disclosure of the contingency shall be made if it is at least
reasonably possible that a loss may occur.
Paragraph 109 requires the following disclosures for goods held under
price support and stabilization programs:
* basis for valuing commodities, including valuation method and cost
flow assumptions;
* changes from the prior year's accounting methods;
* restrictions on the use, disposal, or sale of commodities; and:
* analysis of the change in dollar amount and volume of commodities,
including those (1) on hand at the beginning of the year, (2) acquired
during the year, (3) disposed of during the year by method of
disposition, (4) on hand at the end of the year, (5) on hand at year-
end and estimated to be donated or transferred during the coming
period, and (6) received as a result of surrender of collateral related
to nonrecourse loans outstanding. The analysis should also show the
dollar value and volume of purchase agreement commitments.
Property, Plant, and Equipment:
The note disclosure for property, plant, and equipment (PP&E) departed
from the following disclosure requirements of SFFAS No. 6, Accounting
for Property, Plant, and Equipment; SFFAS No. 10, Accounting for
Internal Use Software; and SFFAS No. 16, Amendments to Accounting for
Property, Plant, and Equipment:
SFFAS No. 6, paragraph 45, states that the following disclosures should
be included:
* the estimated useful lives for each major class;
* capitalization thresholds, including any changes in thresholds during
the period; and:
* restrictions on the use or convertibility of general PP&E.
SFFAS No. 10, paragraph 35, requires the following disclosures for
internal use software:
* the cost, associated amortization, and book value;
* the estimated useful life for each major class of software; and:
* the method of amortization.
SFFAS No. 16, paragraph 9, requires an appropriate PP&E note disclosure
to explain that "physical quantity" information for the multiuse
heritage assets is included in supplemental stewardship reporting for
heritage assets.
Federal Employee and Veteran Benefits Payable:
The note disclosure for federal employee and veteran benefits payable
was not complete and properly reported because the liability for
military pensions and the note disclosure related to the "change in
actuarial accrued pension liability and components of related expenses"
for the military retirement fund do not agree with information
presented in the Department of Defense's (DOD) financial statements.
The note disclosure included in the CFS does not include a line for the
valuation of plan amendments that occurred during the year. DOD
correctly reported plan amendments separately in its financial
statements; however, the mechanism was not available through FACTS
submission for DOD to report plan amendments separately to the
Department of the Treasury.
Environmental and Disposal Liabilities:
The note disclosure for environmental and disposal liabilities departed
from the requirements of SFFAS No. 6 in two instances. The note
disclosure on environmental liabilities was not complete and properly
reported primarily because DOD was unable to fully implement elements
of U.S. generally accepted accounting principles and OMB guidance.
Specifically, the disclosures should do the following:
* Estimate and recognize cleanup costs associated with general PP&E at
the time the PP&E is placed in service. In addition, a liability should
be recognized for the portion of the estimated total cleanup cost that
is attributable to that portion of the physical capacity used or that
portion of the estimated useful life that has passed since the general
PP&E was placed in service. As Treasury indicated in its note
disclosures, DOD was unable to fully implement these two elements of
U.S. generally accepted accounting principles. However, the note
disclosure did not explain how these limitations prevented DOD from
properly estimating its environmental liability. Linking the
environmental liability to weaknesses in the DOD property, plant, and
equipment systems would have made the CFS more useful to the reader.
* Include material changes in total estimated cleanup costs due to
changes in laws, technology, or plans. When preparing the CFS, Treasury
should consider whether the reader would be interested in understanding
why the liability changed and include the explanation in the note
disclosure.
Other Liabilities:
The note disclosure for other liabilities departed from the following
disclosure requirements for capital leases and life insurance
liabilities:
Capital Leases:
Financial Accounting Standards Board, Statement of Financial Accounting
Standards (SFAS) No. 13, Accounting for Leases, paragraph 16, requires
the following disclosures on capital leases:
* future minimum lease payments as of the date of the latest balance
sheet presented, in the aggregate and for each of the 5 succeeding
fiscal years, with separate deductions from the total for the amount
representing executory costs, including any profit thereon, included in
the minimum lease payments, and for the amount of the imputed interest
necessary to reduce the net minimum lease payments to present value;
* a summary of assets under capital lease by major asset category and
the related total accumulated amortization; and:
* a general description of the lessee's leasing arrangements, including
but not limited to (1) the basis on which contingent rental payments
are determined, (2) the existence and terms of renewal or purchase
options and escalation clauses, and (3) restrictions imposed by lease
agreements, such as those concerning dividends, additional debt, and
further leasing.
Life Insurance Liabilities:
The note disclosure for other liabilities departed from the following
disclosure requirements of SFFAS No. 5, Accounting for Liabilities of
the Federal Government, with respect to life insurance liabilities:
* Paragraph 117 states that all federal reporting entities with whole
life insurance programs should follow the standards as prescribed in
the private sector standards when reporting the liability for future
policy benefits. The applicable private sector standards are SFAS No.
60, Accounting and Reporting by Insurance Enterprises; SFAS No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-
Duration Contracts and for Realized Gains and Losses from the Sale of
Investments; and SFAS No. 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-
Duration Participating Contracts; and American Institute of Certified
Public Accountants Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises.
* SFFAS No. 5, paragraph 121, requires that all components of the
liability for future policy benefits (i.e., the net-level premium
reserve for death and endowment policies and the liability for terminal
dividends) should be separately disclosed in a footnote with a
description of each amount and an explanation of its projected use and
any other potential uses (e.g., reducing premiums, determining and
declaring dividends available, or reducing federal support in the form
of appropriations related to administrative cost or subsidies).
Commitments and Contingencies:
Certain disclosed information on major commitments and contingencies in
the notes to the CFS was inconsistent with disclosed information in
individual agencies' financial statements. Examples of such
inconsistencies are as follows:
* Treasury did not disclose $114 billion in the notes to the CFS for
war risk insurance. DOT provided temporary war risk insurance to U.S.
air carriers whose coverage was canceled following the terrorist
attacks on September 11, 2001. DOT disclosed $114 billion of war risk
insurance in its notes to the financial statements, but Treasury did
not disclose similar information in the notes to the CFS. Also, this
information was included by DOT in the Treasury FACTS database. The
risk of loss involving this type of insurance is unknown, but another
terrorist attack against the United States could result in major
claims.
* Treasury improperly disclosed $4.5 billion in unadjudicated claims
for Commerce in the notes to the CFS. In its financial statements,
Commerce disclosed that the exact amount of these claims against the
U.S. government is unknown and the range of loss, which may exceed $4.5
billion as of September 30, 2002, cannot be estimated. Because Commerce
had disclosed that it could not estimate the loss from unadjudicated
claims, which was proper, Treasury should not have disclosed an amount
in the notes to the CFS. Disclosing information in the CFS that is
inconsistent with information in an agency's financial statements may
confuse users of the CFS or lead them to reach a wrong conclusion.
Treasury did not disclose sufficient information regarding the nature
of certain major commitments and contingencies in the notes to the CFS.
For example, Treasury did not clearly disclose in the notes to the CFS
information regarding a possible capital investment requirement of TVA.
The Environmental Protection Agency (EPA) had taken judicial and
administrative actions against TVA that could require TVA to invest an
estimated $3 billion to purchase equipment in order to comply with the
Clean Air Act and conform to EPA's pollution control requirements. TVA
is challenging this action. Treasury disclosed this $3 billion in the
notes as an "administrative order against TVA" without providing the
additional detail that the order represents a capital investment for
compliance with the Clean Air Act and pollution control. The lack of
such a detailed discussion about what the contingency represents could
be misleading to readers of the CFS.
Collections and Refunds of Federal Revenue:
The disclosure for collections and refunds of federal revenue departed
from the following disclosure requirements of FASAB's SFFAS No. 7,
Concepts for Reconciling Budgetary and Financial Accounting:
* Paragraph 64, among other things, requires collecting entities to
disclose the basis of accounting when the application of the general
rule results in a modified cash basis of accounting. The CFS
incorrectly states that the nonexchange revenues are reported on a
modified cash basis of accounting when actually they are reported on a
cash basis.
* Paragraph 69.2 requires collecting entities to provide in the other
accompanying information any relevant estimates of the annual tax gap
that become available as a result of federal government surveys or
studies. The tax gap is defined as taxes or duties due from
noncompliant taxpayers or importers. Amounts reported should be
specifically defined (e.g., whether the tax gap includes or excludes
estimates of taxes due on illegally earned revenue). Appropriate
explanations of the limited reliability of the estimates also should be
provided. Cross-references should be made to portions of the tax gap
due from identified noncompliance assessments and preassessment work in
process.
Dedicated Collections:
The note disclosure for dedicated collections departed from the
disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue
and Other Financing Sources, paragraph 85, by not including the
following:
* condensed information about assets and liabilities showing
investments in Treasury securities, other assets, liabilities due and
payable to beneficiaries, other liabilities, and fund balance;
* condensed information on net cost and changes to fund balance,
showing revenues by type (exchange/nonexchange), program expenses,
other expenses, other financing sources, and other changes in fund
balance; and:
* any revenues, other financing sources, or costs attributable to the
fund under accounting standards but not legally allowable as credits or
charges to the fund.
Indian Trust Funds:
The note disclosure for Indian trust funds departed from the following
disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue
and Other Financing Sources, paragraph 85, by not including the
following:
* a description of each fund's purpose, how the administrative entity
accounts for and reports the fund, and its authority to use those
collections;
* the sources of revenue or other financing for the period and an
explanation of the extent to which they are inflows of resources to the
government or the result of intragovernmental flows;
* condensed information about assets and liabilities showing
investments in Treasury securities, other assets, liabilities due and
payable to beneficiaries, and other liabilities;
* condensed information on net cost and changes to fund balance,
showing revenues by type (exchange/nonexchange), program expenses,
other expenses, other financing sources, and other changes in fund
balance; and:
* any revenues, other financing sources, or costs attributable to the
fund under accounting standards, but not legally allowable as credits
or charges to the fund.
Social Insurance:
The disclosure for social insurance departed from the following
requirements of SFFAS No. 17, Accounting for Social Insurance:
* Paragraph 31 requires the program descriptions for Hospital Insurance
and Supplementary Medical Insurance and an explanation of trends
revealed in Chart 11: Estimated Railroad Retirement Income (Excluding
Interest) and Expenditures 2002-2076.
* Paragraph 24 requires a description of statutory or other material
changes, and the implications thereof, affecting the Medicare and
Unemployment Insurance programs after the current fiscal year.
* Paragraph 25 requires the significant assumptions used in making
estimates and projections regarding the Black Lung and Unemployment
Insurance programs.
* Paragraph 32(1)(b) requires the total cash inflow from all sources,
less net interest on intragovernmental borrowing and lending and the
total cash outflow to be shown in nominal dollars for the Hospital
Insurance program.
* Paragraph 32(1)(a) requires the narrative to accompany the cash flow
data for Unemployment Insurance. This narrative should include the
identification of any year or years during the projection period when
cash outflow exceeds cash inflow, without interest, on
intragovernmental borrowing or lending. In addition, the presentation
should include an explanation of material crossover points, if any,
where cash outflow exceeds cash inflow and the possible reasons for
this.
* Paragraphs 27(3)(h) and 27(3)(j) require the estimates of the fund
balances at the respective valuation dates of the social insurance
programs (except Unemployment Insurance) to be included for each of the
4 preceding years. Only 1 year is shown.
* Paragraph 32(4) requires individual program sensitivity analyses for
projection period cash flow in present value dollars and annual cash
flow in nominal dollars. The CFS includes only present value
sensitivity analyses for Social Security and Hospital Insurance.
Paragraph 32(4) states that, at a minimum, the summary should present
Social Security, Hospital Insurance, and Supplementary Medical
Insurance separately.
* Paragraph 27(4)(a) requires the individual program sensitivity
analyses for Social Security and Hospital Insurance to include an
analysis of assumptions regarding net immigration.
* Paragraph 27(4)(a) requires the individual program sensitivity
analysis for Hospital Insurance to include an analysis of death rates.
* The actuarial present value information for the Railroad Retirement
Board should not include financial interchange income
(intragovernmental income from Social Security).
Nonfederal Physical Property:
The information included in Stewardship Information for nonfederal
physical property departed from the following disclosure requirements
of SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87:
* The annual investment, including a description of federally owned
physical property transferred to state and local governments, must be
disclosed. This information should be provided for the year ended on
the balance sheet date as well as for each of the 4 preceding years. If
data for additional years would provide a better indication of
investment, reporting of the additional years' data is encouraged.
Reporting should be at a meaningful category or level.
* A description of major programs involving federal investments in
nonfederal physical property, including a description of programs or
policies under which noncash assets are transferred to state and local
governments, is to be provided.
Human Capital:
The information in stewardship information for human capital departed
from the disclosure requirements of SFFAS No. 8, Supplementary
Stewardship Reporting, paragraph 94, by not including the following:
* a narrative description and the full cost of the investment in human
capital for the year being reported on as well as the preceding 4 years
(if full cost data are not available, outlay data can be reported);
* the full cost or outlay data for investments in human capital at a
meaningful category or level (e.g., by major program, agency, or
department); and:
* a narrative description of major education and training programs
considered federal investments in human capital.
Research and Development:
The information in stewardship information for research and development
departed from the disclosure requirements of SFFAS No. 8, Supplementary
Stewardship Reporting, paragraph 94, by not including the following:
* The annual investment[Footnote 13] made in the year ended on the
balance sheet date as well as in each of the 4 years preceding that
year must be reported. If data for additional years would provide a
better indication of investment, reporting of the additional years'
data is encouraged. In those unusual instances when entities have no
historical data, only current reporting year data need be reported.
Reporting must be at a meaningful category or level--for example, a
major program or department.
* A narrative description of major research and development programs is
to be included.
Deferred Maintenance:
The required supplemental information for deferred maintenance departed
from the following disclosure requirements of SFFAS No. 6, Accounting
for Property, Plant, and Equipment, paragraphs 83 and 84:
* Method of measuring deferred maintenance for each major class of PP&E
should be included.
* If the condition assessment survey method of measuring deferred
maintenance is used, the following should be presented for each major
class of PP&E: (1) description of requirements or standards for
acceptable operating condition, (2) any changes in the condition
requirements or standards, and (3) asset condition and a range estimate
of the dollar amount of maintenance needed to return the asset to its
acceptable operating condition.
* If the total life-cycle cost method is used, the following should be
presented for each major class of PP&E: (1) the original date of the
maintenance forecast and an explanation for any changes to the
forecast, (2) prior year balance of the cumulative deferred maintenance
amount, (3) the dollar amount of maintenance that was defined by the
professionals who designed, built, or managed the PP&E as required
maintenance for the reporting period, (4) the dollar amount of
maintenance actually performed during the period, (5) the difference
between the forecast and actual maintenance, (6) any adjustments to the
scheduled amounts deemed necessary by the managers of the PP&E, and (7)
the ending cumulative balance for the reporting period for each major
class of asset experiencing deferred maintenance.
* If management elects to disclose critical and noncritical amounts,
the disclosure is to include management's definition of these
categories.
Risk Assumed:
The note disclosure for stewardship responsibilities departed from
disclosure requirements of SFFAS No. 5, paragraph 106, related to the
risk assumed for federal insurance and guarantee programs. Risk assumed
information is important for all federal insurance and guarantee
programs (except social insurance, life insurance, and loan guarantee
programs) and is generally measured by the present value of unpaid
expected losses net of associated premiums, based on the risk inherent
in the insurance or guarantee coverage in force. Paragraph 106 states
that when financial information pursuant to FASB's standards on federal
insurance and guarantee programs conducted by government corporations
is incorporated in general purpose financial reports of a larger
federal reporting entity, the entity should report as required
supplementary information[Footnote 14] what amounts and periodic change
in those amounts would be reported under the "risk assumed" approach.
[End of section]
Appendix II: Comments from Department of the Treasury and the Office of
Management and Budget:
Jeffrey C. Steinhoff:
Managing Director, Financial Management and Assurance
U.S. General Accounting Office:
Washington, D.C. 20548:
Dear Mr. Steinhoff:
We appreciate the opportunity to comment on the draft management report
based on your FY2002 audit of the Financial Report of the United States
Government (Financial Report). We reviewed this draft along with the
associated attachments that will be included in your Financial Audit
Report, Process for Preparing the Consolidated Financial Statements for
the U.S. Government Needs Improvement. The report identified many
recommendations that will improve the usefulness and accuracy of the
Financial Report. We are already incorporating many of them into our
new system and processes that are being developed for preparing the
FY04 Financial Report. We will consider the other recommendations as we
continue the design and implementation of the new compilation process.
There are two significant recommendations in your report with which we
disagree.
Net Position. Treasury has decided not to include in the new
compilation process the procedure that would require agencies to split
their net position between Federal and Non-federal. This process was
originally recommended as part of the Consolidated Financial Statement
Improvement project. However, we were unable to develop a procedure
that agencies could use to provide this split. In addition the net
position split would not identify errors due to unreported
miscellaneous receipts, buy/sell transactions, transfers-in and out,
different basis of accounting, unbilled receivables, or other
interagency transactions known to impact the unreconciled net position
transactions.
Statements of Changes in Cash Balance from Unified Budget and Other
Activities. This statement includes information derived from Treasury's
Central Accounting System rather than from agency data (i.e., the
Statement of Budgetary Resources (SBR)). You have suggested that agency
data be used to prepare receipts and outlays used in our report. While
we agree that management controls over amounts reported by agencies in
the SBRs should be strengthened, we do not agree that the SBR data
should be used to prepare our report or rises to an audit opinion issue
for the government-wide report. Treasury maintains the data used to
compute outlays and receipts used in the President's budget. This same
information is also required by the accounting standard SFFAS 25(5).
Therefore, it would not be appropriate to develop a time consuming and
costly methodology to gather the SBR data for financial reporting
purposes.
We would also request that the recommendations in your report that are
directed to Treasury for action related to (1) management
representation letters be directed to the Office of Management and
Budget (OMB) and (2) legal representation letters be directed to OMB
and the Department of Justice.
We requested that GAO provide a Management Letter because we believe it
will be very helpful in identifying and addressing the audit findings.
This process would be even more helpful to Treasury and OMB in
subsequent years if the Management Letter is furnished in a time frame
shortly after GAO completes its audit work, or within thirty days, so
there will be opportunities to make changes before the fiscal year
ends.
We look forward to continuing to work through these issues with you in
our mutual effort to improve the Government's financial reporting. We
will be scheduling a meeting with your staff to discuss other technical
matters associated with your report.
Sincerely,
Linda M. Springer:
Controller:
Office of Management and Budget:
Donald V. Hammond:
Fiscal Assistant Secretary:
Treasury Department:
Signed by Linda M. Springer and Donald V. Hammond:
GAO Comment:
Treasury and OMB did not schedule a meeting or provide us with any
technical comments on this report.
[End of section]
(198203):
FOOTNOTES
[1] The fiscal year 2002 Financial Report of the United States
Government was issued by the Department of the Treasury on March 31,
2003, and is available through GAO's Web site at www.gao.gov and
Treasury's web site at www.fms.treas.gov/fr/index.html.
[2] U.S. General Accounting Office, Internal Control: Standards for
Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).
[3] U.S. Department of the Treasury, Consolidated Financial Report
Improvement Project: Recommendations to the Consolidation Process
(Washington D.C.: Nov. 15, 2001).
[4] Trading partners are U.S. government agencies, departments, or
other components included in the CFS that do business with each other.
[5] An item's omission or error is considered material if the
surrounding circumstances make it probable that the judgment of a
reasonable person relying on the information would have been changed or
influenced by the inclusion or correction of the item.
[6] Office of Management and Budget, Form and Content of Agency
Financial Statements, OMB-01-09 (Washington, D.C.: Sept. 25, 2001).
This bulletin is OMB's official guidance for the form and content of
federal agencies' financial statements.
[7] To assess the materiality of any issue, the indicative criteria
discussed in SFFAC No. 2 state that (1) the materiality of the entities
and their relationship with one another should be considered, (2)
materiality should not be measured solely in dollars, and (3) potential
embarrassment to any of the entities' stakeholders should also be
considered. Thus, a bias toward expansiveness and comprehensiveness
would be justified, particularly if it could contribute to maintenance
of fiscal control.
[8] See footnote 5.
[9] We requested 24 federal agency management representation letters.
We received an additional 6 letters that we also included in our
review.
[10] Office of Management and Budget, Audit Requirements for Federal
Financial Statements, OMB-01-02 (Washington, D.C.: Oct. 16, 2000),
requires agency chief financial officers to prepare a management
schedule that documents how the information obtained in the legal
counsel's response was considered in preparing the financial
statements.
[11] We requested 24 federal agency legal representation letters. We
received an additional 10 letters that we also included in our review.
[12] The term treaty in its technical usage in the United States
denotes international agreements made by the President with the advice
and consent of the Senate in accordance with Article II, section 2, of
the Constitution of the United States. In addition to such treaties,
authorized representatives of the federal government may, pursuant to
existing law or treaties, enter into other international agreements
that are governed by international law. The entering into and record
keeping of such international agreements by federal agencies are
governed by the Case-Zablocki Act, 1 U.S.C. section 112b, and
implementing State Department regulations, 22 C.F.R. Part 181 (2002).
[13] As defined in this standard, "annual investment" includes more
than the annual expenditure reported by character class for budget
execution. Full cost shall be measured and accounted for in accordance
with SFFAS No. 4, Managerial Cost Accounting Standards for the Federal
Government.
[14] In July 2003, SFFAS No. 25 reclassified "risk assumed" from
Required Supplementary Stewardship Information to Required
Supplementary Information.
GAO's Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office
441 G Street NW,
Room LM Washington,
D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.
General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
