Auditing the Nation's Finances

Since fiscal year 1996, the 24 major agencies and departments have had to prepare annual audited financial statements--a requirement that is critical to the success of financial management reform in the federal government. The number of agencies that have received unqualified opinions on their financial statements has risen steadily. The agencies' timeliness in issuing their financial statements has also improved. So far, 13 of the 24 major agencies have received unqualified opinions on their fiscal year 1999 financial statements; only six agencies achieved that goal in fiscal year 1996. Several agencies, most notably the Social Security Administration, have made good progress toward achieving financial management reform goals, and others have solved previously reported deficiencies in their financial statements. But several major agencies are still unable to produce auditable financial statements on a consistent basis--most notably the Defense Department, which accounts for a large share of the government's assets, liabilities, and net costs. Although clean audit opinions are essential to providing an annual public scorecard, they do not guarantee that agencies have the financial systems needed to dependably produce reliable financial information. Agency financial systems overall are in poor shape and cannot provide sound financial information for managing government operations and holding managers accountable. Over the long term, agencies will need to apply the information technology management framework outlined in the Clinger-Cohen Act. Continuing serious and widespread computer security weaknesses put vast federal assets at risk of misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption. Another critical aspect to financial management reform is the revamping of human capital practices to build greater capacity and implementing change management to achieve the discipline needed to follow sound management and reporting practices.

GAO noted that: (1) significant financial systems weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal controls continue to prevent the government from accurately reporting a significant portion of its assets, liabilities, and costs; (2) major challenges include the federal government's inability to: (a) properly account for and report material amounts of property, equipment, materials, and supplies and certain stewardship assets, primarily at the Department of Defense (DOD); (b) properly estimate the cost of certain major federal credit programs and the related loans receivable and loan guarantee liabilities, primarily at the Department of Agriculture; (c) estimate and reliably report material amounts of environmental and disposal liabilities and related costs, primarily at DOD; (d) determine the proper amount of various reported liabilities, including postretirement health benefits for military employees and accounts payable and other liabilities for certain agencies; (e) accurately report major portions of the net cost of government operations; (f) ensure that all disbursements are properly recorded; and (g) properly prepare the federal government's financial statements, including balancing the statements, accounting for substantial amounts of transactions between governmental entities, properly and consistently compiling the information in the financial statements, and reconciling the results of operations to budget results; (3) in addition, GAO found that: (a) the government is unable to determine the full extent of improper payments--estimated to total billions of dollars annually--and therefore cannot develop effective strategies to reduce them; (b) serious, long-standing computer security weaknesses expose the government's financial and other sensitive information to inappropriate disclosure, destruction, modification, and fraud, and critical operations to disruption; and (c) material control weaknesses affect the government's tax collection activities; and (4) the financial management systems of almost all agencies were again found not to be in substantial compliance with the requirements of the Federal Financial Management Improvement Act of 1996.