Financial Audits
The Vast Majority of Executive Branch Entities Included in the Federal Budget Are Statutorily Required to Have Their Financial Statements Audited
Gao ID: GAO-05-1024R September 30, 2005
The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government Management Reform Act of 1994, requires 24 major executive branch departments and agencies to prepare annual financial statements and have them audited. The Accountability of Tax Dollars Act of 2002 (ATD Act) extended this requirement to most executive agencies not explicitly subject to the CFO Act, unless they received a waiver or exemption from the Director of the Office of Management and Budget (the Director). Further, chapter 91 of title 31 of the United States Code, commonly referred to as the Government Corporation Control Act, and certain federal agencies' enabling legislation also require annual financial statement audits. Given the importance of timely, reliable, and useful financial information in assessing the overall financial management of the government, Congress asked us to identify executive branch entities that are not subject to the requirements of preparing annual financial statements and having them audited. In addition, Congress was interested in knowing certain budget information related to executive branch entities covered by the ATD Act that had received an exemption or waiver from the Director for fiscal years 2003 and 2004. This report summarizes the information provided during our June 27, 2005, briefing to congressional staff. Based on request letters and subsequent discussions with congressional staff, our objectives were to determine (1) which executive branch entities had received an exemption or waiver from the Director for preparing fiscal years 2003 and 2004 financial statements and having them audited in accordance with the ATD Act, (2) the amount of net budget authority and net outlays for these entities, and (3) which executive branch entities other than those subject to the CFO Act, ATD Act, Government Corporation Control Act, and enabling legislation do not annually prepare financial statements and have them audited.
We determined that almost 94 percent of the executive branch entities included in the federal budget are statutorily required to have their financial statements audited. Looking at the federal government as a whole, we determined that about 83 percent of federal entities (including the legislative and judicial branches) included in the federal budget are statutorily required to have their financial statements audited. To put this in perspective to federal spending, in fiscal year 2004, federal entities' reported net outlays totaled about $2.797 trillion, of which approximately $2.784 trillion, or about 99.5 percent, was related to federal entities whose fiscal year 2004 financial statements were subjected to audit. The ATD Act provided the Director with the authority to waive entities from having to prepare financial statements and having them audited for fiscal years 2002 and 2003, the initial phase in period of the act. In addition, beginning with fiscal year 2002, the Director could exempt an ATD Act agency if the total budget authority of the agency for the fiscal year does not exceed $25 million and if the Director determines that requiring annual audited financial statements for the agency with respect to the fiscal year is not warranted due to the absence of risks associated with the agency's operations, the agency's demonstrated performance, or other factors that the Director considers relevant. As a result, we found that primarily due to the expiration of the Director's authority to waive the requirements of the ATD Act, for fiscal year 2004, the Director granted exemptions to 12 ATD Act agencies with net outlays totaling approximately $30 million. By comparison, 21 ATD Act agencies were granted exemptions or waivers for fiscal year 2003 with net outlays totaling about $1.669 billion. Enclosure II documents which federal executive branch entities were granted waivers or exemptions from the Director and the amount of net budget authority and net outlays for these entities. Aside from these 12, another 9 agencies with net outlays totaling about $521 million did not prepare and have audited financial statements for fiscal year 2004. Their reasons varied. However, officials for 5 of the 9 agencies stated that they will prepare and have audited financial statements for fiscal year 2005. Of the remaining 4, one official expressed the view that his agency is exempt from the ATD Act, one stated that it is not cost effective for it to prepare financial statements and have them audited, one has already requested an exemption from the Director for fiscal year 2005, and one stated that it plans to request an exemption for fiscal year 2005. Based on inquiries to OMB and others, we are not aware of any comprehensive list or database of other executive branch entities that receive federal funding. Such other entities include temporary commissions, task forces, and advisory boards. However, based on the limited information available, we were able to determine that the costs related to these types of entities are primarily administrative, such as travel, payroll, rent, and procurements, and may or may not be covered by separate appropriations.
GAO-05-1024R, Financial Audits: The Vast Majority of Executive Branch Entities Included in the Federal Budget Are Statutorily Required to Have Their Financial Statements Audited
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September 30, 2005:
Congressional Requesters:
Subject: Financial Audits: The Vast Majority of Executive Branch
Entities Included in the Federal Budget Are Statutorily Required to
Have Their Financial Statements Audited:
The Chief Financial Officers Act of 1990 (CFO Act),[Footnote 1] as
expanded by the Government Management Reform Act of 1994,[Footnote 2]
requires 24 major executive branch departments and agencies to prepare
annual financial statements and have them audited. The Accountability
of Tax Dollars Act of 2002 (ATD Act) extended this requirement to most
executive agencies not explicitly subject to the CFO Act, unless they
received a waiver or exemption from the Director of the Office of
Management and Budget (the Director).[Footnote 3] Further, chapter 91
of title 31 of the United States Code, commonly referred to as the
Government Corporation Control Act, and certain federal agencies'
enabling legislation also require annual financial statement audits.
Given the importance of timely, reliable, and useful financial
information in assessing the overall financial management of the
government, you asked us to identify executive branch entities that are
not subject to the requirements of preparing annual financial
statements and having them audited.. In addition, you were interested
in knowing certain budget information related to executive branch
entities covered by the ATD Act that had received an exemption or
waiver from the Director for fiscal years 2003 and 2004. This report
summarizes the information provided during our June 27, 2005, briefing
to your staff. The enclosed briefing slides and table highlight the
results of our work and the information provided at the briefing.
Based on your request letters and subsequent discussions with your
staff, our objectives were to determine (1) which executive branch
entities had received an exemption or waiver from the Director for
preparing fiscal years 2003 and 2004 financial statements and having
them audited in accordance with the ATD Act, (2) the amount of net
budget authority and net outlays for these entities, and (3) which
executive branch entities other than those subject to the CFO Act, ATD
Act, Government Corporation Control Act, and enabling legislation do
not annually prepare financial statements and have them audited. Such
other entities include temporary commissions, task forces, advisory
boards, and other special purpose entities.
When performing our work, we (1) made inquiries to personnel from
various federal agencies, including the Office of Management and Budget
(OMB) and the General Services Administration (GSA),[Footnote 4] as
well as personnel from selected ATD Act agencies and federal
commissions not currently required to prepare financial statements and
have them audited; (2) reviewed the CFO Act, the ATD Act, the
Government Corporation Control Act, and enabling legislation requiring
certain federal entities to prepare financial statements annually and
have them audited; (3) obtained and analyzed the OMB letters that
notified the required congressional committees of the names of the
executive branch agencies for which the Director granted waivers or
exemptions from having to prepare financial statements and having them
audited for fiscal years 2003 and 2004; and (4) obtained and summarized
certain net budget authority and net outlays reported in the Budget of
the United States Government, Fiscal Years 2006 and 2005 Appendices
(federal budget). We requested comments on a draft of this report from
the Chief of the Financial Standards and Grants Branch at OMB and a
Committee Management Specialist at GSA. We performed our work from
January 2005 through June 2005 in accordance with U.S. generally
accepted government auditing standards.
In summary, we determined that almost 94 percent of the executive
branch entities included in the federal budget are statutorily required
to have their financial statements audited. Looking at the federal
government as a whole, we determined that about 83 percent of federal
entities (including the legislative and judicial branches) included in
the federal budget are statutorily required to have their financial
statements audited.[Footnote 5] To put this in perspective to federal
spending, in fiscal year 2004, federal entities' reported net
outlays[Footnote 6] totaled about $2.797 trillion, of which
approximately $2.784 trillion, or about 99.5 percent, was related to
federal entities whose fiscal year 2004 financial statements were
subjected to audit.[Footnote 7]
The ATD Act provided the Director with the authority to waive entities
from having to prepare financial statements and having them audited for
fiscal years 2002 and 2003, the initial phase in period of the
act.[Footnote 8] In addition, beginning with fiscal year 2002, the
Director could exempt an ATD Act agency if the total budget authority
of the agency for the fiscal year does not exceed $25 million and if
the Director determines that requiring annual audited financial
statements for the agency with respect to the fiscal year is not
warranted due to the absence of risks associated with the agency's
operations, the agency's demonstrated performance, or other factors
that the Director considers relevant.[Footnote 9] As a result, we found
that primarily due to the expiration of the Director's authority to
waive the requirements of the ATD Act, for fiscal year 2004, the
Director granted exemptions to 12 ATD Act agencies with net outlays
totaling approximately $30 million. By comparison, 21 ATD Act agencies
were granted exemptions or waivers for fiscal year 2003 with net
outlays totaling about $1.669 billion. Enclosure II documents which
federal executive branch entities were granted waivers or exemptions
from the Director and the amount of net budget authority and net
outlays for these entities.
Aside from these 12, another 9 agencies with net outlays totaling about
$521 million did not prepare and have audited financial statements for
fiscal year 2004. Their reasons varied. However, officials for 5 of the
9 agencies stated that they will prepare and have audited financial
statements for fiscal year 2005. Of the remaining 4, one official
expressed the view that his agency is exempt from the ATD Act, one
stated that it is not cost effective for it to prepare financial
statements and have them audited, one has already requested an
exemption from the Director for fiscal year 2005, and one stated that
it plans to request an exemption for fiscal year 2005.
In addition, we found that the timing of when the Director notifies
certain congressional committees of the ATD Act agencies exempted from
preparing financial statements and having them audited may not be
optimal for congressional consideration in its decision making and
oversight. The ATD Act is silent on when, other than annually, OMB
should provide Congress with a list of executive branch agencies
exempted from preparing financial statements and having them audited.
For fiscal years 2003 and 2004, OMB's letters related to waivers or
exemptions were provided to Congress after the end of each fiscal year
subject to audit.
Based on inquiries to OMB and others, we are not aware of any
comprehensive list or database of other executive branch entities that
receive federal funding. Such other entities include temporary
commissions, task forces, and advisory boards. However, based on the
limited information available, we were able to determine that the costs
related to these types of entities are primarily administrative, such
as travel, payroll, rent, and procurements, and may or may not be
covered by separate appropriations. For example, we noted that entities
subject to the Federal Advisory Committee Act included committees,
boards, and councils that generally do not receive separately allocated
budgets; therefore, the costs reported would likely be included in the
costs of the departments, agencies, or bureaus involved.[Footnote 10]
As a result, such costs could be subjected to audit as part of the
annual audits of those entities' financial statements.
Finally, the Federal Accounting Standards Advisory Board
(FASAB)[Footnote 11] is currently considering undertaking a project
that would, among other things, reconsider the definition of a federal
entity and address criteria and possible disclosures relative to
entities not considered federal entities under Statement of Federal
Financial Accounting Concepts No. 2, Entity and Display,[Footnote 12]
but which present significant financial or other accountability issues
for the federal government. Such a project could identify special
purpose and other entities funded by the federal government.[Footnote
13]
OMB and GSA officials orally agreed with the matters discussed in this
report. In response to an OMB suggestion, we modified the report to
include the percentage of executive branch agencies statutorily
required to have their financial statements audited.
We are sending copies of this report to other congressional committees,
the Director of OMB, the Administrator of GSA, and other interested
parties. Copies will be made available to others upon request. This
report is also available at no charge on:
GAO's Web site at www.gao.gov. We look forward to continuing to work
with your staff to help improve financial management in the federal
government. If you have any questions about the contents of this
report, please contact me at (202) 512-3406.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
Enclosure -2:
List of Congressional Requesters:
The Honorable Tom Coburn, Chairman:
The Honorable Thomas R. Carper, Ranking Minority Member:
Subcommittee on Federal Financial Management, Government Information,
and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Daniel K. Akaka, Ranking Minority Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Tom Davis, Chairman:
The Honorable Henry A. Waxman, Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The Honorable Todd Platts, Chairman:
Subcommittee on Government Management, Finance and Accountability:
Committee on Government Reform:
House of Representatives:
Enclosure I:
[See PDF for images]
[End of slide presentation]
[End of section]
Enclosure II: Federal Entities for Which the Director of OMB Granted
Waivers or Exemptions from the Accountability of Tax Dollars
Act's Audit Requirements for FY 2003 or FY 2004 (dollars in millions):
[See PDF for image]
[End of table]
[End of section]
FOOTNOTES
[1] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
[2] Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).
[3] Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002); see 31 U.S.C. §
3515.
[4] GSA is responsible for developing regulations and guidance and
maintaining data for advisory committees as defined by and subject to
the Federal Advisory Committee Act, as amended. It also provides
support services, including accounting services, to various commissions
and boards.
[5] Federal entities include executive, legislative, and judicial
branch entities. Seven government-sponsored enterprises and an
additional entity funded from Federal Home Loan banks' contributions,
although statutorily required to be audited, are not included in the
federal budget and therefore are not included in this report.
[6] Net outlays represent gross outlays net of offsetting collections.
[7] Certain federal entities, although subject to audit, received
disclaimers of opinion on their fiscal year 2004 financial statements.
[8] Sections 2(a)(1)(c) and (b)(1) of the ATD Act.
[9] Sections 2(a)(4) of the ATD Act.
[10] GSA's fiscal year 2004 Federal Advisory Committee Act database, as
of May 2005, reported 944 advisory committees with total costs of about
$300 million.
[11] The Federal Accounting Standards Advisory Board was established by
the Secretary of the Treasury, the Director of OMB, and the Comptroller
General in October 1990. It is responsible for promulgating accounting
standards for the United States government. These standards are
recognized as generally accepted accounting principles (GAAP) for the
federal government.
[12] In FASAB's current exposure draft, Technical Agenda Options, it is
noted that in SFFAC 2, FASAB established concepts for identifying what
components to include in reporting entities.
[13] Such as federally funded research and development centers and
public private partnerships.
