U.S. Government Financial Statements
Fiscal Year 2009 Audit Highlights Financial Management Challenges and Unsustainable Long-Term Fiscal Path Gao ID: GAO-10-483T April 14, 2010GAO annually audits the consolidated financial statements of the U.S. government (CFS). Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies. The federal government began preparing the CFS 13 years ago. Over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities. This testimony presents the results of GAO's audit of the CFS for fiscal year 2009 and discusses certain of the federal government's significant near- and long-term fiscal challenges.
For the third consecutive year, GAO rendered an unqualified opinion on the Statement of Social Insurance (SOSI). Given the importance of social insurance programs like Medicare and Social Security to the federal government's long-term fiscal outlook, the SOSI is critical to understanding the federal government's financial condition and fiscal sustainability. Three major impediments continued to prevent GAO from rendering an opinion on the federal government's consolidated financial statements other than the SOSI: (1) serious financial management problems at the Department of Defense, (2) federal entities' inability to adequately account for and reconcile intragovernmental activity and balances, and (3) an ineffective process for preparing the consolidated financial statements. In addition to the material weaknesses underlying these major impediments, GAO noted material weaknesses involving improper payments estimated to be at least $98 billion for fiscal year 2009, information security, and tax collection activities. The recession and the federal government's unprecedented actions intended to stabilize the financial markets and to promote economic recovery have significantly affected the federal government's financial condition. The resulting substantial investments and increases in liabilities, net operating cost, the unified budget deficit, and debt held by the public are reported in the U.S. government's consolidated financial statements for fiscal year 2009. The ultimate cost of these actions and their impact on the federal government's financial condition will not be known for some time in part because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently uncertain. Looking ahead, the federal government will need to determine the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. In addition, problems in the nation's financial sector have exposed serious weaknesses in the current U.S. financial regulatory system. If those weaknesses are not adequately addressed, we could see similar or even worse crises in the future. Consequently, meaningful financial regulatory reform is of utmost concern. The federal government faces a long-term fiscal challenge resulting from large and growing structural deficits that are driven on the spending side primarily by rising health care costs and known demographic trends. GAO prepares long-term fiscal simulations that include projections of revenue and expenditures for all federal programs. As a result, these simulations present a comprehensive analysis of the sustainability of the federal government's long-term fiscal outlook. Many of the pressures highlighted in GAO's simulations, including health care cost growth and the aging population, have already begun to affect the federal budget--in some cases sooner than previously estimated--and the pressures only grow in the coming decade. For example, Social Security cash surpluses have previously served to reduce the unified budget deficit; however, the Congressional Budget Office recently estimated that due to current economic conditions the program will run small temporary cash deficits for the next 4 years and then, similar to the Trustees' estimates, run persistent cash deficits beginning in 2016. The fluctuation and eventual disappearance of the Social Security cash surplus will put additional pressure on the rest of the federal budget.
GAO-10-483T, U.S. Government Financial Statements: Fiscal Year 2009 Audit Highlights Financial Management Challenges and Unsustainable Long-Term Fiscal Path
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Testimony before the Subcommittee on Government Management,
Organization, and Procurement, Committee on Oversight and Government
Reform, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Wednesday, April 14, 2010:
U.S. Government Financial Statements:
Fiscal Year 2009 Audit Highlights Financial Management Challenges and
Unsustainable Long-Term Fiscal Path:
Statement of Gene L. Dodaro:
Acting Comptroller General of the United States:
GAO-10-483T:
GAO Highlights:
Highlights of GAO-10-483T, a testimony before the subcommittee on
Government Management, Organization, and Procurement, Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
GAO annually audits the consolidated financial statements of the U.S.
government (CFS). Congress and the President need reliable, useful,
and timely financial and performance information to make sound
decisions and conduct effective oversight of federal government
programs and policies.
The federal government began preparing the CFS 13 years ago. Over the
years, certain material weaknesses in internal control over financial
reporting have prevented GAO from expressing an opinion on the accrual-
based consolidated financial statements. Unless these weaknesses are
adequately addressed, they will, among other things, continue to (1)
hamper the federal government‘s ability to reliably report a
significant portion of its assets, liabilities, costs, and other
related information; and (2) affect the federal government‘s ability
to reliably measure the full cost as well as the financial and
nonfinancial performance of certain programs and activities.
This testimony presents the results of GAO‘s audit of the CFS for
fiscal year 2009 and discusses certain of the federal government‘s
significant near- and long-term fiscal challenges.
What GAO Found:
For the third consecutive year, GAO rendered an unqualified opinion on
the Statement of Social Insurance (SOSI). Given the importance of
social insurance programs like Medicare and Social Security to the
federal government‘s long-term fiscal outlook, the SOSI is critical to
understanding the federal government‘s financial condition and fiscal
sustainability. Three major impediments continued to prevent GAO from
rendering an opinion on the federal government's consolidated
financial statements other than the SOSI: (1) serious financial
management problems at the Department of Defense, (2) federal entities‘
inability to adequately account for and reconcile intragovernmental
activity and balances, and (3) an ineffective process for preparing
the consolidated financial statements. In addition to the material
weaknesses underlying these major impediments, GAO noted material
weaknesses involving improper payments estimated to be at least $98
billion for fiscal year 2009, information security, and tax collection
activities.
The recession and the federal government‘s unprecedented actions
intended to stabilize the financial markets and to promote economic
recovery have significantly affected the federal government‘s
financial condition. The resulting substantial investments and
increases in liabilities, net operating cost, the unified budget
deficit, and debt held by the public are reported in the U.S. government
‘s consolidated financial statements for fiscal year 2009. The
ultimate cost of these actions and their impact on the federal
government‘s financial condition will not be known for some time in
part because the valuation of these assets and liabilities is based on
assumptions and estimates that are inherently uncertain. Looking
ahead, the federal government will need to determine the most
expeditious manner in which to bring closure to its financial
stabilization initiatives while optimizing its investment returns. In
addition, problems in the nation‘s financial sector have exposed
serious weaknesses in the current U.S. financial regulatory system. If
those weaknesses are not adequately addressed, we could see similar or
even worse crises in the future. Consequently, meaningful financial
regulatory reform is of utmost concern.
The federal government faces a long-term fiscal challenge resulting
from large and growing structural deficits that are driven on the
spending side primarily by rising health care costs and known
demographic trends. GAO prepares long-term fiscal simulations that
include projections of revenue and expenditures for all federal
programs. As a result, these simulations present a comprehensive
analysis of the sustainability of the federal government‘s long-term
fiscal outlook. Many of the pressures highlighted in GAO‘s
simulations, including health care cost growth and the aging
population, have already begun to affect the federal budget”in some
cases sooner than previously estimated”and the pressures only grow in
the coming decade. For example, Social Security cash surpluses have
previously served to reduce the unified budget deficit; however, the
Congressional Budget Office recently estimated that due to current
economic conditions the program will run small temporary cash deficits
for the next 4 years and then, similar to the Trustees‘ estimates, run
persistent cash deficits beginning in 2016. The fluctuation and
eventual disappearance of the Social Security cash surplus will put
additional pressure on the rest of the federal budget. As shown in the
figure, absent a change in policy, federal debt held by the public as
a share of gross domestic product (GDP) could exceed the historical
high reached in the aftermath of World War II by 2020”10 years sooner
than GAO‘s simulation showed just 2 years ago. Although the economy is
still fragile, there is wide agreement on the need to begin to change
the long-term fiscal path as soon as possible without slowing the
recovery because the magnitude of the changes required grows with
time. Consequently, the administration and Congress will need to apply
the same level of intensity to the nation‘s long-term fiscal challenge
as they have to the recent economic and financial market issues.
Congress recently enacted a return to statutory PAYGO and, in
February, the President established a commission to identify policies
to change the fiscal path and stabilize the debt-to-GDP ratio. In
addition, comprehensive long-term fiscal projections will be required
in the federal government‘s financial statements beginning in fiscal
year 2010, under a new accounting standard.
Figure: Debt Held by the Public Under Two Fiscal Policy Simulations:
(Percent of GDP):
[Refer to PDF for image: line graph]
Year: 2000;
Baseline Extended: 35.1%;
Alternative: 35.1%.
Year: 2001;
Baseline Extended: 33.0%;
Alternative: 33.0%.
Year: 2002;
Baseline Extended: 34.1%;
Alternative: 34.1%.
Year: 2003;
Baseline Extended: 36.2%;
Alternative: 36.2%.
Year: 2004;
Baseline Extended: 37.3%;
Alternative: 37.3%.
Year: 2005;
Baseline Extended: 37.5%;
Alternative: 37.5%.
Year: 2006;
Baseline Extended: 36.5%;
Alternative: 36.5%.
Year: 2007;
Baseline Extended: 36.2%;
Alternative: 36.2%.
Year: 2008;
Baseline Extended: 40.1%;
Alternative: 40.1%.
Year: 2009;
Baseline Extended: 53.0%;
Alternative: 53.0%;
Year: 2010;
Baseline Extended: 60.3%;
Alternative: 60.7%.
Year: 2011;
Baseline Extended: 65.3%;
Alternative: 68.0%.
Year: 2012;
Baseline Extended: 66.6%;
Alternative: 72.8%.
Year: 2013;
Baseline Extended: 66.3%;
Alternative: 76.2%.
Year: 2014;
Baseline Extended: 65.6%;
Alternative: 79.6%.
Year: 2015;
Baseline Extended: 65.4%;
Alternative: 83.7%.
Year: 2016;
Baseline Extended: 65.5%;
Alternative: 88.3%.
Year: 2017;
Baseline Extended: 65.5%;
Alternative: 93.0%.
Year: 2018;
Baseline Extended: 65.7%;
Alternative: 98.2%.
Year: 2019;
Baseline Extended: 66.1%;
Alternative: 103.8%.
Year: 2020;
Baseline Extended: 66.7%;
Alternative: 109.8%.
Year: 2021;
Baseline Extended: 67.5%;
Alternative: 116.0%.
Year: 2022;
Baseline Extended: 68.5%;
Alternative: 122.0%.
Year: 2023;
Baseline Extended: 69.8%;
Alternative: 128.3%.
Year: 2024;
Baseline Extended: 71.4%;
Alternative: 134.7%.
Year: 2025;
Baseline Extended: 73.3%;
Alternative: 141.4%.
Year: 2026;
Baseline Extended: 75.6%;
Alternative: 148.6%.
Year: 2027;
Baseline Extended: 78.2%;
Alternative: 156.2%.
Year: 2028;
Baseline Extended: 84.4%;
Alternative: 172.5%.
Year: 2030;
Baseline Extended: 88.0%;
Alternative: 181.2%.
Year: 2031;
Baseline Extended: 91.8%;
Alternative: 190.3%.
Year: 2032;
Baseline Extended: 96.0%;
Alternative: 199.8%.
Year: 2033;
Baseline Extended: 100.5%.
Year: 2034;
Baseline Extended: 105.2%.
Year: 2035;
Baseline Extended: 110.2%.
Year: 2036;
Baseline Extended: 115.5%.
Year: 2037;
Baseline Extended: 121.0%.
Year: 2038;
Baseline Extended: 126.8%.
Year: 2039;
Baseline Extended: 132.8%.
Year: 2040;
Baseline Extended: 139.1%.
Year: 2041;
Baseline Extended: 145.5%.
Year: 2042;
Baseline Extended: 152.2%.
Year: 2043;
Baseline Extended: 159.1%.
Year: 2044;
Baseline Extended: 166.2%.
Year: 2045;
Baseline Extended: 173.5%.
Year: 2046;
Baseline Extended: 181.0%.
Year: 2047;
Baseline Extended: 188.7%.
Year: 2048;
Baseline Extended: 196.8%.
Source: GAO.
[End of figure]
What GAO Recommends:
Over the years, GAO has made numerous recommendations directed at
improving federal financial management. The federal government has
generally taken or plans to take actions to address our
recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-483T] or key
components. For more information, contact Jeanette M. Franzel or Gary
T. Engel at (202) 512-2600 or Susan J. Irving at (202) 512-6806.
[End of section]
Madam Chairwoman, Ranking Member Bilbray and Other Members of the
Subcommittee:
I appreciate the opportunity to be here today to discuss our report on
the U.S. government's consolidated financial statements for fiscal
years 2009 and 2008. Given the federal government's near-and long-term
fiscal challenges, the need for transparency and for Congress, the
administration, and federal managers to have reliable, useful, and
timely financial and performance information is greater than ever. As
our report illustrates, however, even though certain progress has been
made, much work remains to improve federal financial management.
Consequently, financial management needs to be a top priority of this
administration and Congress. I would like to commend you, Madam
Chairwoman, and this Subcommittee, for continuing the annual tradition
of oversight hearings on this important subject. Your involvement is
critical to assuring progress.
Our testimony today discusses (1) the major issues relating to the
consolidated financial statements for fiscal years 2009 and 2008,
including continued major impediments to an opinion on the
consolidated financial statements other than the Statement of Social
Insurance;[Footnote 1] (2) the impacts of the economic recession and
the federal government's unprecedented actions intended to stabilize
the financial markets and to promote economic recovery on the federal
government's financial condition; and (3) challenges posed by the
federal government's current long-term fiscal outlook. Our audit was
conducted in accordance with U.S. generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.[Footnote 2]
Both the consolidated financial statements and our related audit
report are included in the fiscal year 2009 Financial Report of the
United States Government (Financial Report). Our audit report would
not be possible without the commitment and professionalism of
inspectors general throughout the federal government who are
responsible for annually auditing the financial statements of
individual federal agencies. The Financial Report was issued by the
Department of the Treasury (Treasury) on February 26, 2010.[Footnote
3] This report is available through GAO's Internet site, at
[hyperlink, http://www.gao.gov/financial/fy2009financialreport.html]
and Treasury's Internet site, at [hyperlink,
http://www.fms.treas.gov/fr/index.html].
Highlights of Major Issues Related to the U.S. Government's
Consolidated Financial Statements for Fiscal Years 2009 and 2008:
Since the enactment of key financial management reforms in the 1990s,
the federal government has made significant progress in improving
financial management activities and practices. As shown in appendix I,
20 of 24 Chief Financial Officers (CFO) Act agencies were able to
attain unqualified audit opinions on their fiscal year 2009 financial
statements. In contrast, only 6 CFO Act agencies received unqualified
audit opinions for fiscal year 1996. Also, accounting and financial
reporting standards have continued to evolve to provide greater
transparency and accountability over the federal government's
operations, financial condition, and fiscal outlook. Further, we were
able to render unqualified opinions on the 2009, 2008, and 2007
Statements of Social Insurance.[Footnote 4] Given the importance of
social insurance programs like Medicare and Social Security to the
federal government's long-term fiscal outlook, the Statement of Social
Insurance is critical to understanding the federal government's
financial condition and fiscal sustainability.
Although this progress is commendable, the federal government did not
maintain adequate systems or have sufficient, reliable evidence to
support certain significant information reported in the U.S.
government's accrual-based consolidated financial statements.
Underlying material weaknesses in internal control,[Footnote 5] which
generally have existed for years,[Footnote 6] contributed to our
disclaimer of opinion on the U.S. government's accrual-based
consolidated financial statements for the fiscal years ended 2009 and
2008.[Footnote 7] Those material weaknesses relate to the federal
government's inability to:
* satisfactorily determine that property, plant, and equipment and
inventories and related property, primarily held by the Department of
Defense (DOD), were properly reported in the accrual-based
consolidated financial statements;
* reasonably estimate or adequately support amounts reported for
certain liabilities, such as environmental and disposal liabilities,
or determine whether commitments and contingencies were complete and
properly reported;
* support significant portions of the total net cost of operations,
most notably related to DOD, and adequately reconcile disbursement
activity at certain federal entities;
* adequately account for and reconcile intragovernmental activity and
balances between federal entities;
* ensure that the federal government's accrual-based consolidated
financial statements were (1) consistent with the underlying audited
entities' financial statements, (2) properly balanced, and (3) in
conformity with U.S. generally accepted accounting principles (GAAP);
and:
* identify and either resolve or explain material differences between
certain components of the budget deficit reported in Treasury's
records, which are used to prepare the Reconciliation of Net Operating
Cost and Unified Budget Deficit and Statement of Changes in Cash
Balance from Unified Budget and Other Activities, and related amounts
reported in federal entities' financial statements and underlying
financial information and records.
In addition to the material weaknesses that contributed to our
disclaimer of opinion on the accrual-based consolidated financial
statements, we found three other material weaknesses in internal
control.[Footnote 8] These other material weaknesses were the federal
government's inability to:
* determine the full extent to which improper payments occur and
reasonably assure that appropriate actions are taken to reduce
improper payments,[Footnote 9]
* identify and resolve information security control deficiencies and
manage information security risks on an ongoing basis, and:
* effectively manage its tax collection activities.
The material weaknesses discussed in our audit report continued to (1)
hamper the federal government's ability to reliably report a
significant portion of its assets, liabilities, costs, and other
related information; (2) affect the federal government's ability to
reliably measure the full cost as well as the financial and
nonfinancial performance of certain programs and activities; (3)
impair the federal government's ability to adequately safeguard
significant assets and properly record various transactions; and (4)
hinder the federal government from having reliable financial
information to operate in an efficient and effective manner.
Also, many of the CFO Act agencies continue to struggle with financial
systems that are not integrated and do not meet the needs of
management for reliable, useful, and timely financial information.
Often, agencies expend major time, effort, and resources to develop
information that their systems should be able to provide on a daily or
recurring basis.
Addressing Impediments to an Opinion on the Accrual-Based Consolidated
Financial Statements:
Three major impediments continued to prevent us from rendering an
opinion on the U.S. government's accrual-based consolidated financial
statements: (1) serious financial management problems at DOD that have
prevented DOD's financial statements from being auditable, (2) the
federal government's inability to adequately account for and reconcile
intragovernmental activity and balances between federal entities, and
(3) the federal government's ineffective process for preparing the
consolidated financial statements. Additional impediments, such as
certain entities' fiscal year 2009 financial statements that, as of
the date of our audit report, received disclaimers of opinion or were
not audited, also contributed to our inability to render an opinion on
the U.S. government's accrual-based consolidated financial statements.
Extensive efforts by DOD and other entity officials and cooperative
efforts between entity chief financial officers, Treasury officials,
and Office of Management and Budget (OMB) officials will be needed to
resolve these obstacles to achieving an opinion on the U.S.
government's accrual-based consolidated financial statements.
Improving Financial Management at DOD:
Given DOD's significant size and complexity, the resolution of its
serious financial management problems is an essential element in
further improving financial management governmentwide and ultimately
to achieving an opinion on the U.S. government's consolidated
financial statements. Reported weaknesses in DOD's financial
management and other business operations adversely affect the
reliability of DOD's financial data; the economy, efficiency, and
effectiveness of its operations; and its ability to produce auditable
financial statements. DOD continues to dominate GAO's list of high-
risk programs designated as vulnerable to waste, fraud, abuse, and
mismanagement.[Footnote 10] Eight of the high-risk areas are specific
to DOD and include DOD's overall approach to business transformation,
and financial and contract management.
To effectively transform its business operations, DOD management must
have reliable financial information. Without it, DOD is severely
hampered in its ability to make sound budgetary and programmatic
decisions, monitor trends, make adjustments to improve performance,
reduce operating costs, or maximize the use of resources.[Footnote 11]
DOD continues to take steps toward addressing the department's long-
standing financial management weaknesses. The current DOD
Comptroller's focus on improving the department's budgetary
information and asset accountability will result in a change in
emphasis within the Financial Improvement and Audit Readiness (FIAR)
Plan, DOD's plan for improving its financial management. The emphasis
is now on two areas--first, strengthening information and processes
supporting the department's Statements of Budgetary Resources; and
second, improving the accuracy and reliability of management
information pertaining to the department's mission-critical assets,
including weapons systems, real property, and general equipment, and
validating improvement through existence and completeness testing.
Budgetary and asset-accountability information is widely used by DOD
managers at all levels. As such, its reliability is vital to daily
operations and management. In this regard, the Marine Corps recently
began an audit of its fiscal year 2010 Statement of Budgetary
Resources. DOD intends to share with the other services the approaches
and lessons learned from the Marine Corps audit.
A concentrated focus such as the DOD Comptroller's emphasis on budget
and asset information may increase the department's ability to show
incremental progress toward achieving auditability in the short term.
In response to GAO's recommendations, the department has also put in
place a process to improve standardization and comparability of
financial management improvement efforts among the military services.
The success of this process will depend on top management support and
oversight, as well as high-quality planning and effective
implementation at all levels.
The National Defense Authorization Act for Fiscal Year 2010 (NDAA)
[Footnote 12] lists corrective and improvement actions that DOD is
required to take in developing and implementing the FIAR Plan.
Consistent with recommendations we made in May 2009 regarding DOD's
FIAR Plan,[Footnote 13] the NDAA requires DOD to:
* develop standardized guidance for financial improvement plans by
components of the department;
* establish a baseline of financial management capabilities and
weaknesses at the component level;
* provide results-oriented metrics for measuring and reporting
quantifiable results toward addressing financial management
deficiencies;
* define the oversight roles of the Chief Management Officer (CMO) of
the department, the CMOs of the military services, and other
appropriate elements of the department to ensure that the FIAR
requirements are carried out;
* assign to appropriate officials and organizations at the component
level accountability for carrying out specific elements of the FIAR
Plan;
* develop mechanisms to track budgets and expenditures for
implementation of the FIAR requirements; and:
* develop a mechanism to conduct audits of the military intelligence
programs and agencies and submit the audited financial statements to
Congress in a classified manner.
We are encouraged by continuing congressional oversight of DOD's
business transformation and financial management improvement efforts
and the commitment of DOD's leaders to implementing sustained
improvements in the department's ability to produce reliable, useful,
and timely information for decision making and reporting. We will
continue to monitor DOD's progress in addressing its financial
management weaknesses and transforming its business operations. As
part of this effort, we are also monitoring DOD's specific actions to
achieve financial statement auditability for its components.
Reconciling Intragovernmental Activity and Balances:
Federal entities are unable to adequately account for and reconcile
intragovernmental activity and balances. For both fiscal years 2009
and 2008, amounts reported by federal entity trading partners for
certain intragovernmental accounts were not in agreement by
significant amounts. Although OMB and Treasury require the CFOs of 35
federal entities to reconcile, on a quarterly basis, selected
intragovernmental activity and balances with their trading partners, a
substantial number of the entities did not adequately perform those
reconciliations for fiscal years 2009 and 2008.
In addition, these entities are required to report to Treasury, the
entity's inspector general, and GAO on the extent and results of
intragovernmental activity and balance-reconciliation efforts as of
the end of the fiscal year. A significant number of CFOs were unable
to adequately explain or support the material differences with their
trading partners. Many cited differing accounting methodologies,
accounting errors, and timing differences for their material
differences with their trading partners. Some CFOs simply indicated
that they were unable to explain the differences with their trading
partners with no indication as to when the differences would be
resolved. As a result of these circumstances, the federal government's
ability to determine the impact of these differences on the amounts
reported in the accrual-based consolidated financial statements is
significantly impaired.
GAO has identified and reported on numerous intragovernmental
activities and balances issues and has made several recommendations to
Treasury and OMB to address those issues. Treasury and OMB have
generally taken or plan to take actions to address these
recommendations. Treasury continues to take steps to help resolve
material differences in intragovernmental activity and balances. For
example, beginning in the third quarter of 2009, Treasury required
entities to perform additional reconciliations related to certain
intragovernmental appropriations and transfer activity. Resolving the
intragovernmental transactions problem remains a difficult challenge
and will require a strong commitment by federal entities to fully
implement guidance regarding business rules for intragovernmental
transactions issued by OMB and Treasury as well as continued strong
leadership by OMB and Treasury.[Footnote 14]
Preparing the Consolidated Financial Statements:
While further progress was demonstrated in fiscal year 2009, the
federal government continued to have inadequate systems, controls, and
procedures to ensure that the consolidated financial statements are
consistent with the underlying audited entity financial statements,
properly balanced, and in conformity with GAAP.[Footnote 15] For
example,
* Treasury's process did not ensure that the information in the
Statement of Operations and Changes in Net Position, Reconciliations
of Net Operating Cost and Unified Budget Deficit, and Statements of
Changes in Cash Balance from Unified Budget and Other Activities was
fully consistent with the underlying information in federal entities'
audited financial statements and other financial data.
* To make the fiscal years 2009 and 2008 consolidated financial
statements balance, Treasury recorded net increases of $17.4 billion
and $29.8 billion, respectively, to net operating cost on the
Statement of Operations and Changes in Net Position, which it labeled
"Unmatched transactions and balances."[Footnote 16] An additional net
$8 billion and $11 billion of unmatched transactions were recorded in
the Statement of Net Cost for fiscal years 2009 and 2008,
respectively. Treasury is unable to fully identify and quantify all
components of these unreconciled activities.
* Treasury's reporting of certain financial information required by
GAAP continues to be impaired. Due to certain material weaknesses
noted in our audit report--for example, commitments and contingencies
related to treaties and other international agreements--Treasury is
precluded from determining if additional disclosure is required by
GAAP in the consolidated financial statements, and we are precluded
from determining whether the omitted information is material. Further,
Treasury's ability to report information in accordance with GAAP will
also remain impaired until federal entities, such as DOD, can provide
Treasury with complete and reliable information required to be
reported in the consolidated financial statements.
A detailed discussion of additional control deficiencies regarding the
process for preparing the consolidated financial statements can be
found on pages 226 through 229 of the Financial Report.
During fiscal year 2009, Treasury, in coordination with OMB, continued
implementing corrective action plans and made progress in addressing
certain internal control deficiencies we have previously reported
regarding the process for preparing the consolidated financial
statements. Resolving some of these internal control deficiencies will
be a difficult challenge and will require a strong commitment from
Treasury and OMB as they continue to execute and implement their
corrective action plans.
Addressing Other Impediments:
While not as significant as the major impediments noted above,
financial management problems at the Department of Homeland Security
(DHS), the National Aeronautics and Space Administration (NASA), and
the Department of State (State) also contributed to the disclaimer of
opinion on the federal government's accrual-based consolidated
financial statements for fiscal year 2009. About $48 billion, or about
2 percent, of the federal government's reported total assets as of
September 30, 2009, and approximately $101 billion, or about 3
percent, of the federal government's reported net cost for fiscal year
2009 relate to these three agencies. According to auditors for DHS,
NASA, and State, these agencies continue to have reported material
weaknesses in internal control. While the auditors for DHS and NASA
noted certain progress in financial reporting, each of the three
agency auditors also reported that they were unable to provide
opinions on the financial statements because they were not able to
obtain sufficient evidential support for amounts presented in certain
financial statements. For example,
* only selected DHS financial statements were subjected to audit, and
the auditors stated that DHS was unable to provide sufficient evidence
to support certain financial statements balances at the Coast Guard
and Transportation Security Administration;
* auditors for NASA identified issues related to internal control in
its property accounting, principally relating to assets capitalized in
prior years; and:
* auditors for State reported that the department was unable to
provide sufficient support for the amounts presented in the fiscal
year 2009 Combined Statement of Budgetary Resources and the property
and equipment balance.
The auditors for DHS, NASA, and State made recommendations to address
control deficiencies at the agencies, and management for these
agencies generally expressed commitment to resolve the deficiencies.
It will be important that management at each of these agencies remain
committed to addressing noted control deficiencies and improving
financial reporting.
Impacts of the Recession and Stabilization Efforts on the Federal
Government's Financial Condition:
The federal government reported a net operating cost of $1.3 trillion
and a unified budget deficit of $1.4 trillion for fiscal year 2009,
significantly higher than the amounts in fiscal year 2008. As of
September 30, 2009, debt held by the public increased to 53 percent of
gross domestic product (GDP). These increases are primarily the result
of the effects of the recession and the costs of the federal
government's actions to stabilize the financial markets and to help
promote economic recovery.
In December 2007, the United States entered what has turned out to be
its deepest recession since the end of World War II. Between the
fourth quarter of 2007 and the third quarter of 2009, GDP fell by
about 2.8 percent. The nation's unemployment rate rose from 4.9
percent in 2007 to 10.2 percent in October 2009, a level not seen
since April 1983. Federal tax revenues automatically decline when GDP
and incomes fall, and at the same time, spending on unemployment
benefits and other income-support programs automatically increases.
As of September 30, 2009, the federal government's actions to
stabilize the financial markets and to promote economic recovery
resulted in an increase in reported federal assets of over $500
billion (e.g., Troubled Asset Relief Program (TARP) equity
investments, and investments in the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac) and mortgage-backed securities guaranteed by
them), which is net of about $80 billion in valuation losses. In
addition, the federal government reported incurring additional
significant liabilities (e.g., liquidity guarantees to Fannie Mae and
Freddie Mac) and related net cost resulting from these actions.
Because the valuation of these assets and liabilities is based on
assumptions and estimates that are inherently subject to substantial
uncertainty arising from the uniqueness of certain transactions and
the likelihood of future changes in general economic, regulatory, and
market conditions, actual results may be materially different from the
reported amounts.
In addition, the federal government's financial condition will be
further affected as its actions continue to be implemented in fiscal
year 2010 and later. For example, several hundred billion dollars of
the total estimated $862 billion cost under the American Recovery and
Reinvestment Act of 2009 (Recovery Act)[Footnote 17] remain to be
disbursed.[Footnote 18] Also, continued implementation of TARP,
[Footnote 19] which was extended through October 3, 2010, is likely to
result in additional cost, and the Federal Housing Administration
(FHA) mortgage guarantee program could result in additional cost.
Consequently, the ultimate cost of the federal government's actions
and their effect on the federal government's financial condition will
not be known for some time.
Further, there are risks that the federal government's financial
condition could be affected in the future by other factors, including
the following:
* Several initiatives undertaken in 2009 by the Federal Reserve to
stabilize the financial markets have led to a significant change in
the reported composition and size of the Federal Reserve's balance
sheet, including the purchase of over $900 billion in mortgage-backed
securities guaranteed by Fannie Mae, Freddie Mac, and the Government
National Mortgage Association as of the end of 2009. If the Federal
Reserve sells these securities at a loss, additional federal
government deposits at the Federal Reserve may be needed, future
payments of Federal Reserve earnings to the federal government may be
reduced, or both.[Footnote 20]
* Although the Recovery Act provided some fiscal relief to the states,
expected continued state fiscal challenges could place pressure on the
federal government to provide further relief to them.
Looking ahead, the federal government will need to determine the most
expeditious manner in which to bring closure to its financial
stabilization initiatives while optimizing its investment returns. In
addition to managing these actions, problems in the nation's financial
sector have exposed serious weaknesses in the current U.S. financial
regulatory system, which, if not effectively addressed, may cause the
system to fail to prevent similar or even worse crises in the future.
The current system, which was put into place over the past 150 years,
is fragmented and complex and simply has not kept pace with the major
financial structures, innovations, and products that emerged during
the years leading up to the recent financial crisis. Consequently,
meaningful financial regulatory reform is of utmost concern. In
crafting and evaluating proposals for financial regulatory reform, it
will be important for Congress and others to be mindful of the need to
use a framework that facilitates a comprehensive assessment of the
relative strengths and weaknesses of each proposal. GAO has previously
set forth such a framework that involves nine key elements that are
critically important in establishing the most effective and efficient
financial regulatory system possible: (1) clearly defined regulatory
goals; (2) appropriately comprehensive; (3) systemwide focus; (4)
flexible and adaptive; (5) efficient and effective; (6) consistent
consumer and investor protection; (7) regulator provided with
independence, prominence, authority, and accountability; (8)
consistent financial oversight; and (9) minimal taxpayer exposure.
[Footnote 21]
The Near-and Long-Term Fiscal Challenges:
The economic downturn and the nature and magnitude of the actions
taken to stabilize the financial markets and to promote economic
recovery will continue to shape the federal government's near-term
budget and debt outlook. Actions taken to stabilize financial markets--
including aid to the automotive industry--increased borrowing and
added to the federal debt. The revenue decreases and spending
increases enacted in the Recovery Act also added to borrowing and
debt. As shown in figure 1, the President's budget projects debt held
by the public growing from 53.0 percent of GDP in fiscal year 2009 to
63.6 percent by the end of fiscal year 2010 and 68.6 percent by the
end of fiscal year 2011. While deficits are projected to decrease as
federal support for states and the financial sector winds down and the
economy recovers, the increased debt and related interest costs will
remain.
Figure 1: Debt Held by the Public Under the President's Fiscal Year
2011 Budget:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2009;
Percent of GDP: 53.0%.
Fiscal year: 2010;
Percent of GDP: 63.6%.
Fiscal year: 2011;
Percent of GDP: 68.6%.
Fiscal year: 2012;
Percent of GDP: 70.8%.
Fiscal year: 2013;
Percent of GDP: 71.7%.
Fiscal year: 2014;
Percent of GDP: 72.2%.
Fiscal year: 2015;
Percent of GDP: 72.9%.
Fiscal year: 2016;
Percent of GDP: 73.6%.
Fiscal year: 2017;
Percent of GDP: 74.2%.
Fiscal year: 2018;
Percent of GDP: 74.9%.
Fiscal year: 2019;
Percent of GDP: 75.9%.
Fiscal year: 2020;
Percent of GDP: 77.2%.
Source: Office of Management and Budget.
Note: The data are from Budget of the United States Government, Fiscal
Year 2011: Summary Tables.
[End of figure]
Further, all of this takes place in the context of the current long-
term fiscal outlook. The federal government faced large and growing
structural deficits--and hence rising debt--before the instability in
financial markets and the economic downturn. While the drivers of the
long-term fiscal outlook have not changed, the sense of urgency has.
As table 1 shows, many of the pressures highlighted in GAO's
simulations, including health care cost growth and the aging
population, have already begun to affect the federal budget--in some
cases sooner than previously estimated--and the pressures only grow in
the coming decade. For example, Social Security cash surpluses have
previously served to reduce the unified budget deficit; however, the
Congressional Budget Office (CBO) recently estimated that due to
current economic conditions the program will run small temporary cash
deficits for the next 4 years and then, similar to the Trustees'
estimates, run persistent cash deficits beginning in 2016. The
fluctuation and eventual disappearance of the Social Security cash
surplus will put additional pressure on the rest of the federal
budget. With the passage of time the window to address this challenge
narrows.
Table 1: Pressures on the Federal Budget in the Near Term:
2008:
Oldest members of the baby-boom generation became eligible for early
Social Security retirement benefits.
2008:
Medicare Hospital Insurance (HI) outlays exceeded cash income.
2010:
Social Security runs first cash deficit since 1984[A].
2011:
Oldest members of the baby-boom generation become eligible for
Medicare.
2014:
45 percent of Medicare outlays funded by general revenue[B].
2016:
Social Security begins running consistent annual cash deficits.
2017:
Medicare HI trust fund exhausted. Income sufficient to pay about 81
percent of benefits[B].
2020:
Debt held by the public under GAO's Alternative simulation exceeds the
historical high reached in the aftermath of World War II.
Source: GAO analysis.
[A] Based on CBO's January 2010 baseline projections.
[B] Based on 2009 Annual Report of the Boards of Trustees of the
Federal Hospital Insurance and Federal Supplementary Medical Insurance
Trust Funds (May 12, 2009). Projections showing the percentage of
funding from general revenue reaching 45 percent by law trigger a
"Medicare funding warning," requiring a proposal from the President in
response.
[End of table]
The federal government is on an unsustainable long-term fiscal path
driven on the spending side primarily by rising health care costs and
known demographic trends. The Statement of Social Insurance, for
example, shows that the present value of projected scheduled benefits
exceed earmarked revenues for social insurance programs (e.g., Social
Security and Medicare) by approximately $46 trillion[Footnote 22] over
the 75-year period. Since GAO's long-term fiscal simulations include
projections of revenue and expenditures for all federal programs, they
present a comprehensive analysis of the sustainability of the federal
government's long-term fiscal outlook. Figures 2, 3, and 4 show the
results of our most recent long-term fiscal simulations that were
issued in March 2010.[Footnote 23]
Absent a change in policy, federal debt held by the public as a share
of GDP could exceed the historical high reached in the aftermath of
World War II by 2020 (see figure 2)[Footnote 24]--10 years sooner than
our simulation showed just 2 years ago. As a result, the
administration and Congress will need to apply the same level of
intensity to the nation's long-term fiscal challenge as they have to
the recent economic and financial market issues. Although the economy
is still fragile, there is wide agreement on the need to begin to
change the long-term fiscal path as soon as possible without slowing
the recovery because the magnitude of the changes required grows with
time. Congress recently enacted a return to statutory PAYGO--a
budgetary control requiring that the aggregate impact of increases in
mandatory spending or reductions in revenue generally be offset.
[Footnote 25] Although this can prevent further deterioration of the
fiscal position, it does not deal with the existing imbalance. In
February, the President established a commission to identify policies
to change the fiscal path and stabilize the debt-to-GDP ratio.
Figure 2: Debt Held by the Public Under Two Fiscal Policy Simulations:
[Refer to PDF for image: line graph]
Year: 2000;
Baseline Extended: 35.1%;
Alternative: 35.1%.
Year: 2001;
Baseline Extended: 33.0%;
Alternative: 33.0%.
Year: 2002;
Baseline Extended: 34.1%;
Alternative: 34.1%.
Year: 2003;
Baseline Extended: 36.2%;
Alternative: 36.2%.
Year: 2004;
Baseline Extended: 37.3%;
Alternative: 37.3%.
Year: 2005;
Baseline Extended: 37.5%;
Alternative: 37.5%.
Year: 2006;
Baseline Extended: 36.5%;
Alternative: 36.5%.
Year: 2007;
Baseline Extended: 36.2%;
Alternative: 36.2%.
Year: 2008;
Baseline Extended: 40.1%;
Alternative: 40.1%.
Year: 2009;
Baseline Extended: 53.0%;
Alternative: 53.0v
Year: 2010;
Baseline Extended: 60.3%;
Alternative: 60.7%.
Year: 2011;
Baseline Extended: 65.3%;
Alternative: 68.0%.
Year: 2012;
Baseline Extended: 66.6%;
Alternative: 72.8%.
Year: 2013;
Baseline Extended: 66.3%;
Alternative: 76.2%.
Year: 2014;
Baseline Extended: 65.6%;
Alternative: 79.6%.
Year: 2015;
Baseline Extended: 65.4%;
Alternative: 83.7%.
Year: 2016;
Baseline Extended: 65.5%;
Alternative: 88.3%.
Year: 2017;
Baseline Extended: 65.5%;
Alternative: 93.0%.
Year: 2018;
Baseline Extended: 65.7%;
Alternative: 98.2%.
Year: 2019;
Baseline Extended: 66.1%;
Alternative: 103.8%.
Year: 2020;
Baseline Extended: 66.7%;
Alternative: 109.8%.
Year: 2021;
Baseline Extended: 67.5%;
Alternative: 116.0%.
Year: 2022;
Baseline Extended: 68.5%;
Alternative: 122.0%.
Year: 2023;
Baseline Extended: 69.8%;
Alternative: 128.3%.
Year: 2024;
Baseline Extended: 71.4%;
Alternative: 134.7%.
Year: 2025;
Baseline Extended: 73.3%;
Alternative: 141.4%.
Year: 2026;
Baseline Extended: 75.6%;
Alternative: 148.6%.
Year: 2027;
Baseline Extended: 78.2%;
Alternative: 156.2%.
Year: 2028;
Baseline Extended: 84.4%;
Alternative: 172.5%.
Year: 2030;
Baseline Extended: 88.0%;
Alternative: 181.2%.
Year: 2031;
Baseline Extended: 91.8%;
Alternative: 190.3%.
Year: 2032;
Baseline Extended: 96.0%;
Alternative: 199.8%.
Year: 2033;
Baseline Extended: 100.5%.
Year: 2034;
Baseline Extended: 105.2%.
Year: 2035;
Baseline Extended: 110.2%.
Year: 2036;
Baseline Extended: 115.5%.
Year: 2037;
Baseline Extended: 121.0%.
Year: 2038;
Baseline Extended: 126.8%.
Year: 2039;
Baseline Extended: 132.8%.
Year: 2040;
Baseline Extended: 139.1%.
Year: 2041;
Baseline Extended: 145.5%.
Year: 2042;
Baseline Extended: 152.2%.
Year: 2043;
Baseline Extended: 159.1%.
Year: 2044;
Baseline Extended: 166.2%.
Year: 2045;
Baseline Extended: 173.5%.
Year: 2046;
Baseline Extended: 181.0%.
Year: 2047;
Baseline Extended: 188.7%.
Year: 2048;
Baseline Extended: 196.8%.
Source: GAO.
Note: Information presented for fiscal years 2000 through 2009 is
based on historical data and for fiscal years 2010 through 2050 is
derived from fiscal policy simulations. See [hyperlink,
http://www.gao.gov/products/GAO-10-468SP].
[End of figure]
Figure 3: Revenues and Composition of Spending as Shares of GDP Under
GAO's Alternative Simulation:
[Refer to PDF for image: combination stacked vertical bar and line
graph]
Fiscal year: 2010;
Net interest: 1.4%;
Social Security: 4.8%;
Medicare & Medicaid: 5%;
All other spending: 12.9%;
Revenue: 14.8%.
Fiscal year: 2020;
Net interest: 3.2%;
Social Security: 5.2%;
Medicare & Medicaid: 6%;
All other spending: 8.9%;
Revenue: 20.2%.
Fiscal year: 2030;
Net interest: 4.1%;
Social Security: 6%;
Medicare & Medicaid: 7.9%;
All other spending: 8.9%;
Revenue: 20.2%.
Fiscal year: 2040;
Net interest: 6.5%;
Social Security: 6.1%;
Medicare & Medicaid: 9.8%;
All other spending: 8.9%;
Revenue: 20.2%.
Source: GAO.
[End of figure]
Note: Data from GAO's January 2010 analysis based on the Trustees'
assumptions for Social Security and Medicare. See [hyperlink,
http://www.gao.gov/products/GAO-10-468SP].
One quantitative measure of the long-term fiscal challenge is called
the "fiscal gap." The fiscal gap is the amount of spending reductions
or tax increases, over a certain time period such as 75 years, that
would be needed to keep debt as a share of GDP at or below today's
ratio. Another way to say this is that the fiscal gap is the amount of
change needed to prevent the kind of debt explosion implicit in figure
2. The fiscal gap can be expressed as a share of the economy or in
present value dollars.
Under GAO's Alternative simulation, closing the fiscal gap would
require spending cuts or tax increases, or some combination of the two
averaging 9.0 percent of the entire economy over the next 75 years, or
about $76.4 trillion in present value terms. To put this in
perspective, closing the gap solely through revenue increases would
require annual increases in federal tax revenues of about 50 percent
on average, or to do it solely through spending reductions would
require annual reductions in federal program spending (i.e., in all
spending except for interest on the debt held by the public, which
cannot be directly controlled) of about 34 percent on average over the
entire 75-year period.
Policymakers could phase in policy changes so that tax increases or
spending cuts or both would grow over time allowing time for the
economy to recover and for people to adjust to the changes. However,
the longer action to deal with the long-term outlook is delayed, the
greater the risk that the eventual changes will be disruptive and
destabilizing.
Comprehensive long-term fiscal projections will be required in the
federal government's financial statements beginning in fiscal year
2010, under a new accounting standard.[Footnote 26] Such reporting
will include information about the long-term fiscal condition of the
federal government and annual changes therein, and will expand upon
the information currently provided in the Management's Discussion and
Analysis section of the Financial Report.
It is not only the federal government that faces a long-term fiscal
challenge. Figure 4 shows the federal and combined federal, state, and
local surpluses and deficits as a share of GDP from our most recent
simulation results.[Footnote 27]
Figure 4: Federal and Combined Federal, State, and Local Surpluses and
Deficits:
[Refer to PDF for image: multiple line graph]
Fiscal year: 2000;
Federal only: 2.4%;
Federal, state, and local: 2.1%.
Fiscal year: 2001;
Federal only: 1.3%;
Federal, state, and local: 0.3%.
Fiscal year: 2002;
Federal only: -1.5%;
Federal, state, and local: -2.9%.
Fiscal year: 2003;
Federal only: -3.5%;
Federal, state, and local: -4.7%.
Fiscal year: 2004;
Federal only: -3.6%;
Federal, state, and local: -4.5%.
Fiscal year: 2005;
Federal only: -2.6%;
Federal, state, and local: -3.1%.
Fiscal year: 2006;
Federal only: -1.9%;
Federal, state, and local: -2.2%.
Fiscal year: 2007;
Federal only: -1.2%;
Federal, state, and local: -1.8%.
Fiscal year: 2008;
Federal only: -3.2%;
Federal, state, and local: -4.2%.
Fiscal year: 2009;
Federal only: -9.9%;
Federal, state, and local: -10.9%.
Fiscal year: 2010;
Federal only: -9.6%;
Federal, state, and local: -10.6%.
Fiscal year: 2011;
Federal only: -8.9%;
Federal, state, and local: -10.4%.
Fiscal year: 2012;
Federal only: -7.7%;
Federal, state, and local: -9.2%.
Fiscal year: 2013;
Federal only: -7.3%;
Federal, state, and local: -8.7%.
Fiscal year: 2014;
Federal only: -7.2%;
Federal, state, and local: -8.5%.
Fiscal year: 2015;
Federal only: -7.5%;
Federal, state, and local: -8.8%.
Fiscal year: 2016;
Federal only: -8%;
Federal, state, and local: -9.3%.
Fiscal year: 2017;
Federal only: -8.3%;
Federal, state, and local: -9.7%.
Fiscal year: 2018;
Federal only: -8.7%;
Federal, state, and local: -10.2%.
Fiscal year: 2019;
Federal only: -9.5%;
Federal, state, and local: -11%.
Fiscal year: 2020;
Federal only: -10%;
Federal, state, and local: -11.5%.
Fiscal year: 2021;
Federal only: -10.3%;
Federal, state, and local: -11.9%.
Fiscal year: 2022;
Federal only: -10.7%;
Federal, state, and local: -12.3%.
Fiscal year: 2023;
Federal only: -11%;
Federal, state, and local: -12.7%.
Fiscal year: 2024;
Federal only: -11.4%;
Federal, state, and local: -13.1%.
Fiscal year: 2025;
Federal only: -11.9%;
Federal, state, and local: -13.7%.
Fiscal year: 2026;
Federal only: -12.5%;
Federal, state, and local: -14.4%.
Fiscal year: 2027;
Federal only: -13.2%;
Federal, state, and local: -15%.
Fiscal year: 2028;
Federal only: -13.8%;
Federal, state, and local: -15.8%.
Fiscal year: 2029;
Federal only: -14.4%;
Federal, state, and local: -16.5v
Fiscal year: 2030;
Federal only: -15.1%;
Federal, state, and local: -17.2%.
Fiscal year: 2031;
Federal only: -15.8%;
Federal, state, and local: -18%.
Fiscal year: 2032;
Federal only: -16.5%;
Federal, state, and local: -18.7%.
Fiscal year: 2033;
Federal only: -17.2%;
Federal, state, and local: -19.5%.
Fiscal year: 2034;
Federal only: -17.9%;
Federal, state, and local: -20.3%.
Fiscal year: 2035;
Federal only: -18.6%;
Federal, state, and local: -21.1%.
Fiscal year: 2036;
Federal only: -19.3%;
Federal, state, and local: -21.9%.
Fiscal year: 2037;
Federal only: -20%;
Federal, state, and local: -22.8%.
Fiscal year: 2038;
Federal only: -20.7%;
Federal, state, and local: -23.6%.
Fiscal year: 2039;
Federal only: -21.4%;
Federal, state, and local: -24.4%.
Fiscal year: 2040;
Federal only: -22.1%;
Federal, state, and local: -25.2%.
Source: GAO.
Note: Information presented for fiscal years 2000 through 2009 is
based on historical data and for fiscal years 2010 through 2040 is
derived from fiscal policy simulations. The federal data are from
GAO's Alternative simulation.
[End of figure]
Closing Comments:
In closing, even though progress has been made in improving federal
financial management activities and practices, much work remains given
the federal government's near-and long-term fiscal challenges and the
need for Congress, the administration, and federal managers to have
reliable, useful, and timely financial and performance information to
effectively meet these challenges.
The need for such information and transparency in financial reporting
is clearly evident. The recession and the federal government's
unprecedented actions intended to stabilize the financial markets and
to promote economic recovery have significantly affected the federal
government's financial condition, especially with regard to certain of
its investments and increases in its liabilities and net operating
cost. Importantly, while such increases are reported in the U.S.
government's consolidated financial statements for fiscal year 2009,
the valuation of certain assets and liabilities is based on
assumptions and estimates that are inherently subject to substantial
uncertainty arising from the uniqueness of certain transactions and
the likelihood of future changes in general economic, regulatory, and
market conditions. Going forward, a great amount of attention will
need to be devoted to ensuring (1) that sufficient internal controls
and transparency are established and maintained for all financial
stabilization and economic recovery initiatives; and (2) that all
related financial transactions are reported on time, accurately, and
completely.
Further, sound decisions on the current and future direction of all
vital federal government programs and policies are more difficult
without reliable, useful, and timely financial and performance
information. In this regard, for DOD, the challenges are many. We are
encouraged by DOD's efforts toward addressing its long-standing
financial management weaknesses and its efforts to achieve
auditability. Consistent and diligent top management oversight toward
achieving financial management capabilities, including audit
readiness, will be needed. Moreover, the civilian CFO Act agencies
must continue to strive toward routinely producing not only annual
financial statements that can pass the scrutiny of a financial audit,
but also quarterly financial statements and other meaningful financial
and performance data to help guide decision makers on a day-to-day
basis. Federal entities need to improve the government's financial
management systems to achieve this goal.
Moreover, of utmost concern are the federal government's long-term
fiscal challenges that result from large and growing structural
deficits that are driven on the spending side primarily by rising
health care costs and known demographic trends. This unsustainable
path must be addressed soon by policymakers.
Finally, I want to emphasize the value of sustained congressional
interest in these issues, as demonstrated by this Subcommittee's
leadership. It will be key that, going forward, the appropriations,
budget, authorizing, and oversight committees hold the top leadership
of federal entities accountable for resolving the remaining problems
and that they support improvement efforts.
Madam Chairwoman and Ranking Member Bilbray, this concludes my
prepared statement. I would be pleased to respond to any questions
that you or other members of the Subcommittee may have at this time.
GAO Contacts and Acknowledgments:
For further information regarding this testimony, please contact
Jeanette M. Franzel, Managing Director, and Gary T. Engel, Director,
Financial Management and Assurance, at (202) 512-2600, as well as
Susan J. Irving, Director, Federal Budget Analysis, Strategic Issues,
at (202) 512-6806. Key contributions to this testimony were also made
by staff on the Consolidated Financial Statement audit team.
[End of section]
Appendix I: Fiscal year 2009 Audit Results:
Table 2: Chief Financial Officers (CFO) Act Agencies: Fiscal Year 2009
Audit Results and Principal Auditors:
CFO Act agencies: Agency for International Development;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Office of Inspector General (OIG).
CFO Act agencies: Agriculture;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: OIG.
CFO Act agencies: Commerce;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: KPMG LLP.
CFO Act agencies: Defense;
Opinion rendered by agency auditor: Disclaimer;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: OIG.
CFO Act agencies: Education;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Ernst & Young, LLP.
CFO Act agencies: Energy;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: KPMG LLP.
CFO Act agencies: Environmental Protection Agency;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: OIG.
CFO Act agencies: General Services Administration;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: KPMG LLP.
CFO Act agencies: Health and Human Services;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Ernst & Young, LLP.
CFO Act agencies: Homeland Security;
Opinion rendered by agency auditor: [B];
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: KPMG LLP.
CFO Act agencies: Housing and Urban Development;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: OIG.
CFO Act agencies: Interior;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: KPMG LLP.
CFO Act agencies: Justice;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: KPMG LLP.
CFO Act agencies: Labor;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: KPMG LLP.
CFO Act agencies: National Aeronautics and Space Administration;
Opinion rendered by agency auditor: Disclaimer;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Ernst & Young, LLP.
CFO Act agencies: National Science Foundation;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: Clifton Gunderson LLP.
CFO Act agencies: Nuclear Regulatory Commission;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: Urbach Kahn & Werlin LLP.
CFO Act agencies: Office of Personnel Management;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: KPMG LLP.
CFO Act agencies: Small Business Administration;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: KPMG LLP.
CFO Act agencies: Social Security Administration;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Empty];
Principal auditor: OIG.
CFO Act agencies: State;
Opinion rendered by agency auditor: [C];
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Kearney & Company.
CFO Act agencies: Transportation;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Clifton Gunderson LLP.
CFO Act agencies: Treasury;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: KPMG LLP.
CFO Act agencies: Veterans Affairs;
Opinion rendered by agency auditor: Unqualified;
Agencies' auditors reported material weaknesses or noncompliance[A]:
[Check];
Principal auditor: Deloitte & Touche LLP.
Source: GAO.
[A] Reported noncompliance with applicable laws and regulations and/or
substantial noncompliance with one or more of the Federal Financial
Management Improvement Act requirements.
[B] For fiscal year 2009, only the Consolidated Balance Sheet and the
related Statement of Custodial Activity of the Department of Homeland
Security were subject to audit; the auditor was unable to express an
opinion on these two financial statements.
[C] The auditors disclaimed an opinion on the Department of State's
fiscal year 2009 Statement of Budgetary Resources and rendered a
qualified opinion on State's Consolidated Balance Sheet and the
related Statements of Net Cost and Changes in Net Position.
[End of table]
[End of section]
Footnotes:
[1] The consolidated financial statements other than the Statement of
Social Insurance are referred to as the accrual-based consolidated
financial statements. Most revenues reported in these financial
statements are recorded on a modified cash basis.
[2] Our work on the long-term fiscal outlook was conducted in
accordance with all sections of GAO's Quality Assurance Framework that
were relevant to our objectives. The framework requires that we plan
and perform the engagement to obtain sufficient and appropriate
evidence to meet our stated objectives and to discuss any limitations
in our work. We believe that the information and data obtained, and
the analysis conducted, provide a reasonable basis for any findings
and conclusions.
[3] Also, see GAO, Understanding the Primary Components of the Annual
Financial Report of the United States Government, GAO-05-958SP
(Washington, D.C.: September 2005). In September 2009, we issued an
update to this guide to reflect recent changes to the federal
accounting standards and resulting changes to the Financial Report;
see GAO-09-946SP (Washington, D.C.: September 2009).
[4] We disclaimed an opinion on the fiscal year 2006 consolidated
financial statements, including the Statement of Social Insurance.
Social insurance programs included in the Statement of Social
Insurance are Social Security, Medicare, Railroad Retirement, and
Black Lung.
[5] A material weakness is a deficiency, or combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis. A significant deficiency is a deficiency, or a
combination of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to merit attention by
those charged with governance. A deficiency in internal control exists
when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned
functions, to prevent, or detect and correct misstatements on a timely
basis.
[6] We previously reported that certain material weaknesses prevented
us from expressing an opinion on the consolidated financial statements
of the U.S. government for fiscal years 1997 through 2006 and on the
accrual-based consolidated financial statements of the U.S. government
for fiscal years 2007 and 2008.
[7] A more detailed description of the material weaknesses that
contributed to our disclaimer of opinion, including the primary
effects of these material weaknesses on the accrual-based consolidated
financial statements and on the management of federal government
operations, can be found on pages 224 through 230 of the Financial
Report.
[8] A more detailed discussion of these weaknesses, including the
primary effects of the material weaknesses on the accrual-based
consolidated financial statements and on the management of federal
government operations, can be found on pages 231 through 233 of the
Financial Report.
[9] Federal entities reported estimates of improper payment amounts
that totaled $98.7 billion for fiscal year 2009, which represented
about 5 percent of $1.9 trillion of reported outlays for the related
programs.
[10] GAO, High-Risk Series: An Update, GAO-09-271 (Washington, D.C.:
January 2009).
[11] Gene L. Dodaro, "Maximizing DOD's Potential to Face New Fiscal
Challenges and Strengthen Interagency Partnerships." Presented before
the National Defense University, Washington, D.C., January 6, 2010.
[12] Pub. L. No. 111-84, Div. A, title X § 1003, 123 Stat. 2190, 2439-
2441 (Oct. 28, 2009).
[13] GAO, Financial Management: Achieving Financial Statement
Auditability in the Department of Defense, GAO-09-373 (Washington,
D.C.: May 6, 2009).
[14] In 2006, OMB issued Memorandum No. M-07-03, Business Rules for
Intragovernmental Transactions (Nov. 13, 2006), and Treasury issued
the Treasury Financial Manual Bulletin No. 2007-03, Intragovernmental
Business Rules (Nov. 15, 2006). This guidance added criteria for
resolving intragovernmental disputes and major differences between
trading partners for certain intragovernmental transactions.
[15] Most of the issues we identified in fiscal year 2009 existed in
fiscal year 2008, and many have existed for a number of years. In
April 2009, we reported the issues we identified to Treasury and OMB
and provided recommendations for corrective action in GAO, Financial
Audit: Material Weaknesses in Internal Control Continue to Impact
Preparation of the Consolidated Financial Statements on the U.S.
Government, GAO-09-387 (Washington, D.C.: Apr. 21, 2009). We also
reported that as of December 9, 2008, the date of our report on our
audit of the fiscal year 2008 consolidated financial statements, 16 of
the 56 open recommendations from the previous years' audits had been
closed.
[16] Although Treasury was unable to determine how much of the
unmatched transactions and balances, if any, relate to net operating
cost, it reported this amount as a component of net operating cost in
the consolidated financial statements.
[17] Pub. L. 111-5, 123 Stat. 115 (Feb. 17, 2009).
[18] Congressional Budget Office, The Budget and Economic Outlook:
Fiscal Years 2010 to 2020 (Washington, D.C.: January 2010).
[19] GAO, Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Year 2009 Financial Statements, GAO-10-
301 (Washington, D.C.: Dec. 9, 2009).
[20] Under Federal Reserve System policy, Federal Reserve bank
earnings in excess of statutory dividends to member banks are paid to
the federal government. The federal government received about $34
billion of such payments in fiscal year 2009.
[21] GAO, Financial Regulation: A Framework for Crafting and Assessing
Proposals to Modernize the Outdated U.S. Financial Regulatory System,
GAO-09-216 (Washington, D.C.: Jan. 8, 2009).
[22] On an open group basis (current and future participants).
[23] GAO, The Federal Government's Long-Term Fiscal Outlook: January
2010 Update, GAO-10-468SP (Washington, D.C.: March 2010).
[24] This is under GAO's January 2010 Alternative simulation, which
assumes discretionary spending other than the Recovery Act provisions
grows with GDP after 2010; the Recovery Act provisions are included
but assumed to be temporary. Expiring tax provisions are extended and
the 2009 Alternative Minimum Tax exemption amount is indexed to
inflation through 2020. After 2020, revenue as a share of GDP is
brought to its 40-year historical average of 18.1 percent of GDP.
Medicare spending is adjusted based on the assumption that physician
fees are not reduced as specified under current law.
[25] For details on the rules governing the implementation of PAYGO,
see Public Law 111-139.
[26] Statement of Federal Financial Accounting Standards (SFFAS) No.
36, Reporting Comprehensive Long-Term Fiscal Projections for the U.S.
Government (Washington, D.C.: Sept. 28, 2009).
[27] See GAO, State and Local Governments' Fiscal Outlook: March 2010
Update, GAO-10-358 (Washington, D.C.: Mar. 2, 2010).
[End of section]
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