Financial Audit
Restated Financial Statements: Agencies' Management and Auditor Disclosures of Causes and Effects and Timely Communication to Users Gao ID: GAO-07-91 October 5, 2006GAO continues to have concerns about restatements to federal agencies' previously issued financial statements. During fiscal year 2005, at least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain of their fiscal year 2004 financial statements to correct misstatements. To study this trend, GAO reviewed the nature and causes of the restatements made by certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003 financial statements. Eleven CFO Act agencies had restatements for fiscal year 2003. Nine of those 11 received unqualified opinions on their originally issued fiscal year 2003 financial statements. GAO's view is that users of federal agencies' financial statements and the related audit reports need to be provided at least a basic understanding of why a restatement was necessary and its effect on the agencies' previously issued financial statements and related audit reports. This report communicates GAO's observations on the transparency and timeliness of the 9 federal agencies' and their auditors' restatement disclosures.
The nine agencies GAO reviewed did not consistently communicate financial statement restatements. GAO found that all nine agencies could have greatly enhanced the adequacy, effectiveness, and timeliness of their restatement disclosures to users. Similar transparency issues existed with the associated audit reports regarding disclosure of all the essential information that would clearly explain the restatements. GAO highlighted the following issues as among the more prevalent issues to be addressed: 1) columns of the agencies' restated financial statements were not labeled as "Restated"; 2) agencies' restatement footnote disclosures lacked clarity or sufficient detail regarding the nature of the restatements and the effect on balances reported in previously issued financial statements; 3) restatement information was not sufficiently disclosed in the agencies' Management Discussion and Analysis; 4) audit reports did not disclose that the respective agencies had restated certain of their fiscal year 2003 financial statements; 5) audit reports did not provide a statement that the previously issued audit report was withdrawn and replaced by the opinion on the restated financial statements; and 6) material misstatements and potential material misstatements were not timely communicated by agencies to either their auditors or to the users of the financial statements. The primary contributing factor for the restatement disclosure issues that GAO identified was insufficient guidance available at the time to both the agencies' management and their respective auditors for disclosure of the restatements and the timeliness of such disclosures. GAO believes that information regarding restatements should be disclosed in a transparent and timely manner consistent with the qualitative characteristics of information in financial reports described in Statement of Federal Financial Accounting Concepts (SFFAC) No. 1. In GAO's view, more detailed accounting and auditing guidance on how to satisfy the financial reporting characteristics as outlined in SFFAC No. 1 as it relates to the disclosure of restatements would have been helpful. OMB revised Circular No. A-136, Financial Reporting Requirements, which provides additional guidance to federal agencies' management regarding disclosure of restatements to previously issued financial statements. Revisions made to OMB Circular No. A-136 address many of GAO's concerns regarding the agencies' disclosure of restatements. In addition, the proposed 2006 revision of generally accepted government auditing standards now includes a section on reporting on restatement of previously issued financial statements. In addition, on August 23, 2006, OMB issued Bulletin No. 06-03, which also provides some information regarding reporting on restatements. However, GAO believes that OMB needs to timely provide additional, though complementary, restatement guidance to both the agencies' management and their respective auditors.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-91, Financial Audit: Restated Financial Statements: Agencies' Management and Auditor Disclosures of Causes and Effects and Timely Communication to Users
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Report to the Director, Office of Management and Budget:
United States Government Accountability Office:
GAO:
October 2006:
FINANCIAL AUDIT:
Restated Financial Statements: Agencies' Management and Auditor
Disclosures of Causes and Effects and Timely Communication to Users:
GAO-07-91:
GAO Highlights:
Highlights of GAO-07-91, a report to the Director of the Office of
Management and Budget
Why GAO Did This Study:
GAO continues to have concerns about restatements to federal agencies‘
previously issued financial statements. During fiscal year 2005, at
least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated
certain of their fiscal year 2004 financial statements to correct
misstatements. To study this trend, GAO reviewed the nature and causes
of the restatements made by certain CFO Act agencies in fiscal year
2004 to their fiscal year 2003 financial statements. Eleven CFO Act
agencies had restatements for fiscal year 2003. Nine of those 11
received unqualified opinions on their originally issued fiscal year
2003 financial statements. GAO‘s view is that users of federal
agencies‘ financial statements and the related audit reports need to be
provided at least a basic understanding of why a restatement was
necessary and its effect on the agencies‘ previously issued financial
statements and related audit reports. This report communicates GAO‘s
observations on the transparency and timeliness of the 9 federal
agencies‘ and their auditors‘ restatement disclosures.
What GAO Found:
The nine agencies GAO reviewed did not consistently communicate
financial statement restatements. GAO found that all nine agencies
could have greatly enhanced the adequacy, effectiveness, and timeliness
of their restatement disclosures to users. Similar transparency issues
existed with the associated audit reports regarding disclosure of all
the essential information that would clearly explain the restatements.
GAO highlighted the following issues as among the more prevalent issues
to be addressed:
* columns of the agencies‘ restated financial statements were not
labeled as ’Restated,“
* agencies‘ restatement footnote disclosures lacked clarity or
sufficient detail regarding the nature of the restatements and the
effect on balances reported in previously issued financial statements,
* restatement information was not sufficiently disclosed in the
agencies‘ Management Discussion and Analysis,
* audit reports did not disclose that the respective agencies had
restated certain of their fiscal year 2003 financial statements,
* audit reports did not provide a statement that the previously issued
audit report was withdrawn and replaced by the opinion on the restated
financial statements, and
* material misstatements and potential material misstatements were not
timely communicated by agencies to either their auditors or to the
users of the financial statements.
The primary contributing factor for the restatement disclosure issues
that GAO identified was insufficient guidance available at the time to
both the agencies‘ management and their respective auditors for
disclosure of the restatements and the timeliness of such disclosures.
GAO believes that information regarding restatements should be
disclosed in a transparent and timely manner consistent with the
qualitative characteristics of information in financial reports
described in Statement of Federal Financial Accounting Concepts (SFFAC)
No. 1. In GAO‘s view, more detailed accounting and auditing guidance on
how to satisfy the financial reporting characteristics as outlined in
SFFAC No. 1 as it relates to the disclosure of restatements would have
been helpful. OMB revised Circular No. A-136, Financial Reporting
Requirements, which provides additional guidance to federal agencies‘
management regarding disclosure of restatements to previously issued
financial statements. Revisions made to OMB Circular No. A-136 address
many of GAO‘s concerns regarding the agencies‘ disclosure of
restatements. In addition, the proposed 2006 revision of generally
accepted government auditing standards now includes a section on
reporting on restatement of previously issued financial statements. In
addition, on August 23, 2006, OMB issued Bulletin No. 06-03, which also
provides some information regarding reporting on restatements. However,
GAO believes that OMB needs to timely provide additional, though
complementary, restatement guidance to both the agencies‘ management
and their respective auditors.
What GAO Recommends:
GAO is making 11 recommendations to the Office of Management and Budget
(OMB) to further improve the restatement guidance available to
agencies‘ management and the agencies‘ respective auditors. OMB stated
that it would take GAO‘s recommendations under advisement. GAO
reiterates its concern that it is critical for OMB to timely provide
additional restatement guidance.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-91].
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gary T. Engel at (202) 512-3406 or
engelg@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
Insufficient and Inconsistent Disclosure of Financial Statement
Restatements by Certain Federal Agencies and Their Auditors:
Timely Communication of Material Misstatements to Users of Previously
Issued Financial Statements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Recommendations to OMB:
Recommendations Regarding OMB Circular No. A-136:
Recommendations Regarding OMB Bulletin No. 06-03:
Appendix II: GAO Contact and Staff Acknowledgments:
Related GAO Products:
United States Government Accountability Office:
Washington, DC 20548:
October 5, 2006:
The Honorable Rob Portman:
Director:
Office of Management and Budget:
Dear Mr. Portman:
We continue to have concerns about restatements to federal agencies'
previously issued financial statements. During fiscal year 2005, at
least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated
certain of their fiscal year 2004 financial statements to correct
misstatements. To study this trend, we reviewed the nature and causes
of the restatements made by certain CFO Act agencies in fiscal year
2004 to their fiscal year 2003 financial statements.[Footnote 1] Our
audit of the consolidated financial statements of the U.S. government
(CFS) for fiscal years 2004 and 2003 showed that 11 CFO Act agencies
had restated one or more of their fiscal year 2003 financial statements
to correct misstatements.[Footnote 2] Nine of the 11 agencies had
received an unqualified audit opinion on their originally issued
financial statements. Because of the significant increase in the number
of restatements identified during our fiscal year 2004 audit, we
initiated a review of the nature and causes of these 9 federal
agencies' restatements.
Accounting principles attribute errors in recognition, measurement,
presentation, or disclosure in previously issued financial statements
to (1) mathematical mistakes, (2) mistakes in the application of
generally accepted accounting principles (GAAP), or (3) oversight or
misuse of facts when the financial statements were prepared.
Restatements occur when an entity, either voluntarily or prompted by
its auditors or regulators, revises previously issued financial
statements. Accounting standards state that financial statements should
only be restated for the correction of errors that would have caused
any statements to be materially misstated. Therefore, restatements
should not occur if misstatements in previously issued financial
statements are not material. Such standards further state that the
restated financial statements should disclose the nature of the
misstatement and effect of its correction on relevant balances. The
Office of Management and Budget (OMB) has issued guidance to federal
agencies' management regarding disclosure of restatements to previously
issued financial statements. Generally accepted government auditing
standards (GAGAS)[Footnote 3] discuss the auditors' responsibilities
when they become aware of information affecting previously issued
financial statements, including corrections of material misstatements.
GAGAS stress the importance of timely communication of restatements to
users relying or likely to rely on the previously issued financial
statements. The proposed 2006 revision of GAGAS includes an additional
section on reporting on restatement of previously issued financial
statements. In addition, on August 23, 2006, OMB issued Bulletin No. 06-
03,[Footnote 4] which also provides some information regarding
reporting on restatements.
We believe that federal agencies' financial statements and the related
audit reports should provide users with at least a basic understanding
of why a restatement was necessary and the effect of the restatement on
the agencies' previously issued financial statements and related audit
reports. In keeping with full transparency,[Footnote 5] when
restatements occur, restated financial statements should clearly
communicate that the financial statements previously issued by
management and the opinion thereon should no longer be relied on and
instead the restated financial statements and the related auditor's
opinion should be used. In addition, timely communication of
restatements is critical to prevent users of federal agencies'
financial statements and the related audit reports from inadvertently
relying on inaccurate information.
Restatements are not unique to the federal government. Over the past
several years, we have seen a number of corporate scandals as well as
restatements by public companies.[Footnote 6] In response, the Congress
enacted the Sarbanes-Oxley Act[Footnote 7] in 2002 to strengthen
corporate governance and improve transparency and accountability to
help ensure the accuracy and integrity of the financial reporting
system in the private sector to protect investors. In addition, in May
2005, the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards (FAS) No. 154, Accounting Changes and
Error Corrections,[Footnote 8] was issued. FAS No. 154 requires
nongovernmental entities to disclose that their previously issued
financial statements have been restated, a description of the nature of
the error, the effect of the correction on each financial statement
line item, and the cumulative effect of change in the statement of
financial position. Further, the Securities and Exchange Commission
(SEC) now requires companies to disclose restatements in the Form 8-
K.[Footnote 9] Specifically, under the Form 8-K requirements, if a
company is advised by its auditor that disclosure should be made to
prevent future reliance on a previously issued audit report or
completed interim review related to previously issued financial
statements, the company should disclose (1) the date on which it was so
advised or notified, (2) the financial statements that should no longer
be relied upon, (3) a brief description of the information provided by
the auditor, and (4) a statement of whether the audit committee or the
board of directors discussed with the auditor the matters disclosed in
the filing.
America's taxpayers deserve no less in terms of transparency,
accountability, disclosure, and notification from federal agencies.
Between September 2005 and January 2006, we issued reports covering
five of the nine CFO Act agencies that had received unqualified audit
opinions on, but subsequently restated, their originally issued fiscal
year 2003 financial statements.[Footnote 10] We reported that these
restatements generally resulted from (1) lack of effective internal
controls over the processing and reporting of certain transactions and
(2) failure of the auditors to design and/or perform adequate audit
procedures to detect such misstatements. During our fieldwork, December
2004 through October 2005, our review of these nine agencies also
focused on the following two key areas: (1) the extent of transparency
exhibited in disclosing the nature and cause of the misstatement and
its impact on the financial statements and the reissued or updated
audit report and (2) the timing of communicating the material
misstatement to users of the financial statements. This capping report,
which summarizes the results of our review of the nine agencies,
provides our overall observations on their transparency and timeliness,
and includes governmentwide recommendations based on our work at these
agencies.
Results in Brief:
The nine agencies we reviewed did not consistently communicate
financial statement restatements. Further, we believe that all nine
agencies could greatly enhance the adequacy, effectiveness, and
timeliness of their restatement disclosures to users. Specifically, we
found that:
* two agencies did not label their financial statements as "Restated";
* of the six agencies that restated their Statements of Changes in Net
Position, two of the agencies' restatement presentations could be
misinterpreted because the agencies' fiscal year 2004 beginning
financial statement balances did not agree with the restated fiscal
year 2003 ending balances;
* all nine agencies' restatement footnotes[Footnote 11] lacked
sufficient clarity or sufficient detail regarding the nature of the
restatements and the effect on balances reported in previously issued
financial statements; and:
* seven of the nine agencies asserted in their fiscal year 2004
Management Discussion and Analysis (MD&A) that they had achieved a
consecutive number of unqualified opinions on their respective
financial statements. Of these, six did not acknowledge restatements to
certain of these financial statements in the intervening years, which
we believe is misleading to users.
We also found transparency issues with all nine agencies' audit reports
related to the disclosure of all the essential information that would
clearly explain the restatement. Specifically, we found that:
* seven of the nine audit reports did not provide a statement that the
previously issued audit report was withdrawn[Footnote 12] and replaced
by the opinion on the restated financial statements and:
* three of the nine audit reports either did not disclose the
restatement or refer to the restatement footnote in the financial
statements.
With regard to the timely communication of material misstatements
affecting previously issued financial statements and restatement of
such financial statements, we found that:
* three of the nine agencies identified potential material
misstatements prior to the fourth quarter of fiscal year 2004 and did
not timely communicate that a potential material misstatement had been
identified to either their auditor or to the users of the financial
statements,
* six of the nine agencies identified potential material misstatements
in their fiscal year 2003 financial statements after the third quarter
of fiscal year 2004 but before that year's comparative financial
statements were issued and did not timely communicate that a potential
material misstatement had been identified to the users of the financial
statements, and:
* at least one agency's auditor did not advise the agency's management
to timely notify users of the financial statements as to the potential
material misstatements affecting the agency's previously issued
financial statements.
The primary contributing factor for these issues was insufficient
guidance available at the time to both the agencies' management and
their respective auditors for disclosure of the restatements and the
timeliness of such disclosures.
Although the guidance available did not provide explicit details for
disclosing restatements, we believe that information regarding
restatements should be disclosed in a transparent and timely manner
consistent with the qualitative characteristics of information in
financial reports described in Statement of Federal Financial
Accounting Concepts (SFFAC) No. 1.[Footnote 13] In our view, more
detailed accounting and auditing guidance on how to satisfy the
financial reporting characteristics outlined in SFFAC No. 1 as it
relates to the disclosure of restatements would have been helpful.
Nevertheless, a number of federal agencies included information in
their restatement disclosures that improved the transparency of the
restatement. For example, during fiscal year 2004, seven of the nine
agencies labeled their restated financial statements as "Restated,"
although not expressly required by accounting standards at that time.
In addition, during fiscal year 2005, we found that one agency, the
Department of State (State), went far beyond guidance available for
agency management and timely notified its users not to rely on its
fiscal year 2004 comparative financial statements and the related audit
report because of a potential material misstatement in the financial
statements. State's action serves as a model for what we believe is
appropriate for fully and timely notifying users of potential material
misstatements.
During our review, OMB revised Circular No. A-136, Financial Reporting
Requirements,[Footnote 14] which provides additional guidance to
federal agencies' management regarding disclosure of restatements to
previously issued financial statements. The revised OMB Circular No. A-
136, issued August 23, 2005,[Footnote 15] addresses many of our
concerns regarding the agencies' disclosure of restatements. In
addition, OMB issued OMB Bulletin No. 06-03, dated August 23, 2006,
which provided additional guidance concerning (1) audit report language
when the financial statements are restated, (2) actions the auditor
should take when previously issued audit reports are not reliable due
to material misstatements, and (3) the timing of the restated financial
statements and audit reports. However, we believe that additional
restatement guidance is needed for both the agencies' management and
their respective auditors. As such, this report contains 11
recommendations to assist OMB in updating OMB Circular No. A-136 as
well as OMB Bulletin No. 06-03 to further improve guidance to agencies'
management and the agencies' respective auditors regarding the timely
disclosure of material misstatements in previously issued financial
statements and the presentation and disclosure of restatements.
In oral comments on a draft of this report, OMB stated that it would
take our recommendations under advisement, but that there were no
current plans to update guidance that has been recently
issued.[Footnote 16] OMB also noted that any future plans to update
guidance would carefully consider issues already currently being
addressed by the American Institute of Certified Public Accountants'
(AICPA) Codification of Auditing Standards. In addition, OMB provided
some technical comments, which we have incorporated as appropriate.
As noted in this report, we found inconsistent communications and
insufficient disclosures of financial statement restatements by agency
management and their auditors. As such, we reiterate our concern that
it is critical for OMB to timely offer separate, though complementary,
guidance to agency management and to agency auditors that provides more
explicit and detailed guidance concerning their respective roles and
responsibilities when an actual or potential material misstatement is
identified in previously issued financial statements. Separate guidance
is important because agency management and agency auditors have
different roles and responsibilities. For example, management is
responsible for preparing the financial statements and adjusting them
to correct any material misstatements. The auditor is responsible for
expressing or disclaiming an opinion on the financial statements
prepared by management. The auditor has certain additional
responsibilities should management not properly respond to actual or
potential material misstatements.
Background:
Federal agencies' management responsibilities for their financial
statements include, among other things, preparing the financial
statements in conformity with GAAP and establishing and maintaining
internal controls over financial reporting. Auditors of these financial
statements are required to plan and perform their audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. While restatements to previously issued
financial statements can happen and may not be surprising given
weaknesses in the financial reporting environment at many federal
agencies, inherently, restatements raise questions about the
reliability of other information in previously issued financial
statements. In addition, frequent restatements to correct misstatements
can undermine public trust and confidence in both the entity and all
responsible parties. Adequate transparency and timely notification of
restatements are essential to help preclude users of agencies'
financial statements and the related audit reports from inadvertently
relying on inaccurate information and allow them to make more informed
and relevant decisions.
According to SFFAC No. 1, the primary intended users of federal
agencies' financial reports are citizens, the Congress, federal
executives, and federal program managers. Each of these groups may use
federal agencies' financial statements to satisfy their specific needs.
Citizens are interested in many aspects of the federal government,
especially those federal programs that affect their well-being. The
Congress uses the agencies' financial statements to monitor and
evaluate the efficiency and effectiveness of federal programs. Federal
executives, such as central agency officials at OMB and the Department
of the Treasury (Treasury), use the federal agencies' financial
statements to oversee government spending. Specifically, OMB assists
the President in overseeing the preparation of the federal budget by
formulating the President's spending plans, evaluating the
effectiveness of agency programs, assessing competing funding demands
among agencies, and setting funding priorities. Treasury assists the
President in managing the finances of the federal government and
prepares the CFS, which is based on audited financial statements
prepared by federal agencies. GAO uses the agencies' financial
statements and the work of their respective auditors during its annual
audit of the CFS. Federal program managers also use agencies' financial
statements as a tool for managing their respective agencies' operations
within the limits of the spending authority granted by the Congress.
Objectives, Scope, and Methodology:
The objectives of our review were to determine the transparency and
timeliness of the restatement disclosures by the nine CFO Act agencies'
management and their respective auditors. For the nine agencies we
reviewed, we interviewed the preparers and auditors of the agencies'
fiscal year 2003 financial statements, including staff from the
agencies' Offices of Inspector General (OIG), and we obtained and
reviewed relevant audit documentation. Because the OIGs typically
contracted with various independent public accountants (IPA) to audit
the agencies' financial statements, we expanded our contacts to include
such IPAs. Our work was not designed to and we did not test the
accuracy or appropriateness of the restatements. In addition, our
review did not include restatements[Footnote 17] reported in fiscal
year 2005 financial statements since such financial statements were
issued during November 2005, one month after the completion of our
fieldwork. With respect to the two key areas, we reviewed the nine
agencies' fiscal years 2004 and 2003 comparative financial statements
and the related audit reports to determine, among other things, whether
the:
* appropriate columns of the agencies' restated financial statements
were labeled "Restated";
* fiscal year 2003 ending balance agreed with the fiscal year 2004
beginning balance on the agencies' Statement of Changes in Net
Position, if restated;
* agencies' restatement footnotes were properly labeled;
* agencies asserted in their MD&A that they had received a consecutive
number of clean audit opinions, and if so, whether they disclosed that
certain of their previously issued financial statements were
subsequently restated to correct for a material misstatement;
* audit reports referred the reader to the agencies' restatement
footnote;
* agencies timely notified their auditors and users of their financial
statements of the material misstatement and plans for correcting the
misstatement in the financial statements; and:
* auditors were aware of a material misstatement to previously issued
financial statements prior to the beginning of the fourth quarter of
the following fiscal year and whether the amount and effect were known,
and if so, did the auditors advise the agencies' management to reissue
the financial statements.
For this capping report, which is based on our review of the nine
federal agencies that reported restatements in fiscal year 2004
financial statements, we considered certain accounting and auditing
standards that were applicable to fiscal year 2004 federal financial
reporting as well as accounting standards that were issued subsequent
to fiscal year 2004. These standards consist of the Federal Accounting
Standards Advisory Board's (FASAB) Statement of Federal Financial
Accounting Standards (SFFAS) No. 15, Management's Discussions and
Analysis; SFFAS No. 21, Reporting Corrections of Errors and Changes in
Accounting Principles; FAS No. 16, Prior Period Adjustments; FAS No.
154, Accounting Changes and Error Corrections; and the AICPA's
Codification of Auditing Standards, AU section 110, Responsibilities
and Functions of the Independent Auditor, AU section 420, Consistency
of Application of Generally Accepted Accounting Principles, AU section
508, Reports on Audited Financial Statements, and AU section 561,
Subsequent Discovery of Facts Existing at the Date of the Auditor's
Report. We also considered the following OMB guidance: OMB Bulletins
No. 06-03 and No. 01-02, Audit Requirements for Federal Financial
Statements; OMB Bulletin No. 01-09, Form and Content of Agency
Financial Statements; and OMB Circular No. A-136, Financial Reporting
Requirements.[Footnote 18]
We performed our detailed review and analysis of the fiscal year 2003
restatements reported in agencies' fiscal year 2004 financial
statements from December 2004 to October 2005. Between September 2005
and January 2006, we issued reports to five of the nine CFO Act
agencies that had received unqualified audit opinions on, but
subsequently restated in fiscal year 2004, their originally issued
fiscal year 2003 financial statements. In conjunction with our fiscal
year 2005 CFS audit, we identified continued restatements of previously
issued agency financial statements and the need for additional guidance
to agencies and their auditors governmentwide. Our work was performed
in accordance with GAGAS.
We requested comments on a draft of this report from the Director of
OMB or his designee. OMB provided oral comments, which are discussed in
the Agency Comments and Our Evaluation section of this report.
Insufficient and Inconsistent Disclosure of Financial Statement
Restatements by Certain Federal Agencies and Their Auditors:
During our review of the nine CFO Act agencies' restatements reported
in fiscal year 2004, we identified issues with the disclosures made by
those agencies and their respective auditors regarding the
restatements. The primary contributing factor for these disclosure
issues was insufficient guidance available at the time to both the
agencies' management and their auditors for disclosing the restatements.
Although the available guidance did not provide explicit details for
disclosing restatements, we believe that information regarding
restatements should be disclosed in a transparent and timely manner
consistent with the qualitative characteristics of information in
financial reports described in SFFAC No. 1. In our view, more detailed
accounting and auditing guidance on how to satisfy the financial
reporting characteristics in SFFAC No. 1 as it relates to the
disclosure of restatements would have been helpful. Regardless, as
discussed later in the report, several agencies included information in
their restatement disclosures that improved the transparency of the
restatement.
Given the issues we identified in our review of restatements reported
in fiscal year 2004 financial statements, we believe it would be
appropriate to offer more explicit or detailed guidance for how agency
management and their respective auditors should disclose restatements.
Specifically, although SFFAS No. 21 required that the nature of an
error in previously issued financial statements and the effect of its
correction on relevant balances be disclosed, the standard did not
provide a detailed explanation of the type of information that should
be disclosed or what the nature of an error means. OMB Bulletin No. 01-
09, which specifies the form and content for federal financial
statements, also did not provide specific guidance on how an agency's
management should disclose restatement information in its financial
statements. As for the auditor's disclosure of the agency's
restatements in its audit report, AU section 561 only stated that the
audit report usually should refer to the note to the financial
statements that describes the restatement. Thus, if for no other reason
than avoiding interpretation issues as to how much disclosure and in
what form is appropriate, we believe that guidance to agency auditors
should be enhanced to attain some added level of uniform treatment
regarding the disclosure of restatements.
Issues Regarding Agencies' Restatement Disclosures:
We identified the following four issues related to the agencies'
reporting of the restatements.
Labeling of Restated Financial Statements:
While guidance available during fiscal year 2004 did not expressly
require agencies to label the columns of restated financial statements
as "Restated," seven of the nine agencies labeled their financial
statements as such. Such labeling is a common practice in reporting
restated financial statements. Two of the nine agencies did not label
their financial statements as "Restated," and as a result, users of
such statements may be unaware that a restatement occurred.
OMB Circular No. A-136 was revised during fiscal year 2005 to provide
additional guidance for disclosing restatements; however, it does not
require agencies to label their financial statements as "Restated." In
our view, revising OMB Circular No. A-136 to require agencies to label
the columns of the restated financial statements as "Restated" would
make the existence of restated financial statements more evident to the
readers of the financial statements.
Restatements to Certain Agencies' Statement of Changes in Net Position:
We also found issues regarding certain agencies' restated Statement of
Changes in Net Position. Of the six agencies that restated their
originally issued fiscal year 2003 Statements of Changes in Net
Position to correct for material misstatements, two of the restatement
presentations could be misinterpreted because the fiscal year 2004
beginning balances did not agree with the restated fiscal year 2003
ending balances. Instead of carrying forward the restated fiscal year
2003 ending balance to the fiscal year 2004 beginning balance, these
two agencies made prior period adjustments to the fiscal year 2004
beginning balances to reflect the restated fiscal year 2003 ending
balances. We believe that a clearer presentation on the agencies'
fiscal years 2004 and 2003 comparative Statement of Changes in Net
Position would have been to carry forward the restated fiscal year 2003
ending balances and present them as the fiscal year 2004 beginning
balances instead of presenting prior period adjustments in the fiscal
year 2004 column.
Although authoritative guidance available during fiscal year 2004 did
not expressly prohibit agencies from reflecting prior year restatements
as adjustments to the current year's beginning balances on the
Statement of Changes in Net Position, we found that the other four
agencies' restated fiscal year 2003 ending balances agreed with the
fiscal year 2004 beginning balances on their Statement of Changes in
Net Position. The current version of OMB Circular No. A-136 includes
guidance from SFFAS No. 21, which states that the adjustment should be
made to the beginning balance of cumulative results of operations, in
the Statement of Changes in Net Position for the earliest period
presented. In our view, OMB Circular No. A-136 would be enhanced if it
explicitly stated that the current year unadjusted beginning balances
on the Statement of Changes in Net Position are to agree with the
restated ending balances on the prior year's statement (i.e., that
adjustments are to be made only to the prior year and carried forward
as restated).
Agencies' Restatement Footnotes:
In our view, all nine of the agencies' restatement footnotes lacked
sufficient clarity or sufficient detail regarding the restatements in
at least one of the following two areas: (1) the title of the footnote
or (2) the content of the footnote.
For five agencies, the title of the restatement footnote did not
reflect the existence of a restatement. Specifically, three agencies
titled their restatement footnotes as either "Prior Period Adjustments"
or "Prior Period Reclassification," which could be misinterpreted since
the changes to the financial statements represented restatements
because of material misstatements rather than prior period
adjustments[Footnote 19] or prior period reclassifications.[Footnote
20] The other two agencies did not include separate footnotes
disclosing the restatement information. Instead, one agency provided
the restatement information under its "Significant Accounting Policies"
and the other included it under its "Statement of Changes in Net
Position" and its "Statement of Budgetary Resources" notes. The
remaining four agencies appropriately titled their restatement
disclosures by entitling their footnote "Restatement."
With respect to restatement footnote content, five clearly explained
the misstatement and reason for the restatement while the other four
agencies did not. Accordingly, it was not clear if these four agencies'
misstatements were attributed to errors in recognition, measurement,
presentation, or disclosure in financial statements resulting from
mathematical mistakes, mistakes in the application of GAAP, or
oversight or misuse of facts that existed at the time the financial
statements were prepared. In addition, one of the nine agencies did not
disclose the specific year(s) being restated, while two other agencies
did not disclose all of the financial statements impacted by the
restatements.
Further, we also believe some additional language should be included in
related footnotes. Specifically, in our view, a sufficient restatement
footnote would also include (1) the specific amount(s) of the material
misstatement(s) and the related effect(s) on the previously issued
financial statement(s) (e.g., year(s) being restated and the specific
financial statement(s) affected and line items restated); (2) the
overall impact the restatement has on the current year financial
statements (e.g., the change in overall net position, change in the
audit opinion); and (3) a discussion of the corrective actions taken by
the agency's management. Although six agencies appropriately disclosed
the amounts being restated, the remaining three did not disclose the
specific line items restated and the related amounts. In addition, five
agencies did not disclose the effect of the restatement on the
financial statements as a whole. Further, none of the nine agencies'
restatement footnotes discussed the actions taken by the agency's
management after discovering the misstatement, such as measures taken
to better prevent similar misstatements from occurring in the future
(e.g., improvements in internal controls).
Authoritative guidance available during fiscal year 2004 did not
provide explicit guidance to the agencies as to what information should
be included in the agencies' footnotes or how the restatement note
should be titled. Revisions made to OMB Circular No. A-136 address a
number of these areas. Specifically, OMB Circular No. A-136 now
requires agencies to provide restatement information in a separate note
entitled "Restatements." In addition, regarding content of the note,
the revised circular calls for the following information to be included
in the note: the nature of the error and the reason for the
restatement, the year(s) being restated, which financial statements are
impacted, the amounts being restated, and the effect of the restatement
on the financial statements as a whole (i.e., change in overall net
position, change in audit opinion, etc.) Further, per the revised OMB
Circular No. A-136, agencies should discuss the actions management took
after discovering the error.
The additional requirements in OMB Circular No. A-136 address many of
our concerns with the transparency of the restatement footnote. We did,
though, identify three areas where OMB Circular No. A-136 could further
enhance transparency. The first is to clarify that when agencies
disclose the amounts being restated, it is important that they also
disclose the specific line items restated and the related amounts. In
our view, this additional information will allow the readers of the
restated financial statements to more clearly see how the restatement
affected such statements. The second is to define the meaning of the
"nature" of an error. The third is to explicitly state what type of
information should be provided when discussing the actions management
took after discovering the error.
Disclosure of Restatements in Agencies' Management's Discussion and
Analysis:
We also found that certain agencies' presentation of restatements in
their MD&A could be misleading. Seven of the nine agencies we reviewed
stated in their fiscal year 2004 MD&A that they had achieved a
consecutive number of unqualified opinions on their respective
financial statements. However, six did not acknowledge that one or more
of these financial statements had been restated in the intervening
years to correct for material misstatements. We believe stating that
there have been consecutive years of unqualified audit opinions without
the appropriate context could be misleading to the reader of the
financial statements. It erroneously conveys an impression of
consistent, accurate financial reporting over a period of time, when in
fact this was not the case because subsequently, the financial
statements and the opinion were found to be incorrect.
According to SFFAS No. 15, Management's Discussions and Analysis,
management should have great discretion regarding what to say in its
MD&A. At the same time, the standard also states that the pervasive
requirement is that the MD&A not be misleading. In our view, it is
misleading for an agency to state in its MD&A that it has received a
consecutive number of unqualified opinions on its financial statements
when one or more of its financial statements within that time frame
were subsequently restated. In our view, agencies having restated their
financial statements should either refrain from such claims or clearly
disclose in their MD&A which of the agency's prior year financial
statements, as originally issued, were materially misstated and
subsequently restated. Although standards do not specifically state
that agencies shall disclose restatement information in their MD&A, we
found that one of the seven agencies did state that it had received a
clean audit opinion for 7 consecutive years but appropriately disclosed
that its fiscal year 2003 financial statements were restated to correct
misstatements.
Issues Regarding Auditors' Restatement Disclosures:
During our review, we found issues regarding how agency auditors
disclosed the agencies' restatements in their audit reports. According
to AU section 561, the restatement footnote in the agency's financial
statements "usually should" be referred to in the audit report, but
given the latitude, such disclosure is not an across-the-board
requirement. In any report on financial statements, the auditor has the
discretion to add a separate paragraph to the audit report to emphasize
a matter regarding the financial statements. In our view, such matters
include the effect of the material misstatements on previously audited
financial statements and the accompanying audit report. Also, we
believe that if the agency's restatement footnote does not provide a
clear and adequate description of the restatement, then the auditor
should go beyond merely referencing the restatement footnote and add a
separate paragraph to the audit report that provides additional details
regarding the effects of the restatement and should consider whether it
is necessary to modify the audit opinion.
In our view, none of the nine agencies' audit reports we reviewed
sufficiently disclosed all the essential information that would clearly
explain the restatement. Specifically, we found that:
* seven of the nine audit reports did not provide a statement that the
previously issued audit report was withdrawn and replaced by the
opinion on the restated financial statements,
* three of the nine audit reports either did not disclose the
restatement or include a reference to the agency restatement footnote
in the financial statements,[Footnote 21] and:
* none of the nine agencies provided a sufficient description of the
restatement (i.e., the nature and cause of the misstatement, year(s)
being restated, financial statements and line items impacted, specific
amount(s) of the material misstatement(s) and the related effects on
the previously issued financial statements, and actions management took
after discovering the misstatement) in the notes to their financial
statements and none of these agencies' auditors compensated for this by
providing such information in their audit reports.
In our view, the auditor plays an important role in ensuring proper
disclosure of restatements. Accordingly, if any of the prior year
financial statements are restated and management did not already
provide a sufficient description of the restatement in the note(s) to
the financial statements, the audit report should include such
information. In addition, although none of the nine agencies' auditors
disclosed misstatements of unknown amounts, we believe that if at the
time of issuance of the audit report, a material misstatement or
potential material misstatement has been identified in any of the prior
years' financial statements but the specific amount of the misstatement
and the related effects of such are not yet known, it is important for
the auditor to disclose the situation in its audit report and modify
its opinion or disclaim an opinion on the prior year financial
statements as appropriate.
Timely Communication of Material Misstatements to Users of Previously
Issued Financial Statements:
We also identified issues with the timeliness of management and auditor
communication regarding material misstatements affecting certain
agencies' previously issued financial statements. We attributed these
issues to a combination of the lack of specific guidance at that time
for both agencies management and their respective auditors and the lack
of compliance with the related accounting and auditing standards that
were in effect during fiscal year 2004.
During fiscal year 2004, neither OMB Bulletin No. 01-09 nor SFFAS No.
21, which apply primarily to agency management, provided specific
guidance on the timely investigation and reporting of a material
misstatement or potential material misstatement in a previously issued
financial statement following its discovery. The guidance available to
auditors at that time was AU section 561 and OMB Bulletin No. 01-02,
which provided guidance to the agencies' auditors regarding the timely
communication of restatements for corrections of misstatements. While
this audit guidance conveyed the intent of timely communication, it did
not provide much guidance for how the agencies' management or their
respective auditors should timely communicate such restatements.
OMB Bulletin No. 01-02 stated that there shall be open and timely
communication throughout the audit process between the agencies'
management and their auditors, which includes potential audit findings,
materially misstated or unsupported amounts in the financial
statements, and material weaknesses in internal control. The bulletin
did not provide guidance for what the auditor should communicate to
management for when and how an actual or potential restatement should
be disclosed to the users of the agency's financial statements. With
respect to the auditor's responsibilities for timely communication, AU
section 561 states that consideration should be given to, among other
things, the "time elapsed" since the erroneous financial statements
were issued. According to AU section 561, when the auditor has
concluded that action should be taken to prevent future reliance on the
audit report, the auditor should advise the auditee to make appropriate
disclosure of the newly discovered facts and their impact on the
financial statements to persons who are known to be currently relying
or who are likely to rely on the financial statements and the related
auditor's report. AU section 561 also states that if an auditor
determines that issuance of financial statements accompanied by the
audit report for a subsequent period is "imminent," appropriate
disclosures can be made in such statements rather than by separately
issuing the restated financial statements. However, guidance available
during fiscal year 2004, AU section 561 and OMB Bulletin No. 01-
02,[Footnote 22] did not define "time elapsed" or "imminent." In
addition, existing standards and guidance do not provide sufficient
explicit or detailed guidance to management and auditors regarding
ensuring the timely disclosure of material misstatements affecting
previously issued financial statements.
Issues Regarding Timeliness of Management's Communication of
Misstatements to Auditors and Users:
In our view, none of the agencies timely communicated that a potential
material misstatement had been identified to either their auditor or to
the users of the financial statements. Agency management is responsible
for reporting key information in a timely manner, including timely
notification of known material or potential material misstatements in
previously issued financial statements.
During fiscal year 2004, OMB Bulletin No. 01-02 called for
communication between the agencies' management and their auditors, but
it did not provide details for disclosing restatements to users of
agency financial statements. In addition, as noted above, neither OMB
Bulletin No. 01-09 nor SFFAS No. 21 provided specific guidance on the
timely investigation and reporting of a material misstatement or
potential material misstatement in a previously issued financial
statement following its discovery. Our review of the nine CFO Act
agencies that restated certain of their fiscal year 2003 financial
statements found that three of these agencies identified potential
material misstatements prior to the beginning of the fourth quarter of
fiscal year 2004, and in our view, did not timely communicate that a
potential misstatement had been identified either to their auditors or
to the users of their financial statements. The remaining six agencies
identified potential material misstatements after the third quarter of
fiscal year 2004 but before that year's comparative financial
statements were issued. These six agencies, in our view, also did not
timely communicate the potential material misstatements to the users of
their financial statements since they did not notify the users of the
potential material misstatement prior to the issuance of the restated
fiscal year 2003 financial statements during fiscal year 2004.
We believe that the current version of OMB Circular No. A-136, if
properly implemented, should address many of our concerns regarding
agencies' timely communication of restatements. For example, according
to this version of OMB Circular No. A-136, "management shall assume
responsibility for any false or misleading information in the financial
statements, or omissions that render information made in the financial
statements misleading. As such, as soon as possible after errors are
detected, management shall notify their auditors and inform their
primary users of their financial statements of the error and plans for
correcting it in the financial statements — it is imperative that
management work with their auditor as soon as the error is detected to
assist the auditor in any actions that need to be taken."
These are important advances. We do, though, have some remaining
concerns regarding the adequacy of guidance to agencies relating to the
timely communication of material misstatements in previously issued
financial statements. Specifically, we believe it is important for
subsequently discovered material misstatements and potential material
misstatements be disclosed to OMB in the agencies' quarterly financial
statements for the reporting period in which the misstatements were
discovered. In our view, agencies need to report on the misstatement
within a reasonable time period following the discovery of the
misstatement. In particular, if the specific amount of a material
misstatement and the related effect of such on the previously issued
financial statements are known and the issuance of the subsequent
period audited financial statements is not imminent, then we believe it
is important that the agencies promptly (1) reissue the most recently
issued fiscal year financial statements before issuing the current
year's financial statements and (2) communicate the reissuance (a) in
writing to the Congress, OMB, Treasury, and GAO; and (b) to the public
on the Internet pages where the agencies' audited financial statements
that were affected by the material misstatements were published. If a
material misstatement is identified when issuance of the subsequent
period audited financial statements is imminent, we believe it is
important that the agencies (1) issue restated financial statements as
part of the current year's comparative financial statements and (2)
communicate the restatement (a) in writing to the Congress, OMB,
Treasury, and GAO; and (b) to the public on the same Internet page
where the agencies' audited financial statements that were affected by
the material misstatements were published.
Further, in our view, if at any time an agency identifies a material
misstatement or potential material misstatement and the effects of it
on the financial statements are not known or cannot be determined
without a prolonged investigation, the agencies should timely notify
persons that are known to be relying or who are likely to rely on the
previously issued financial statements and the related audit report
that the (1) previously issued financial statements will or may be
restated and therefore, (2) the related audit report is no longer
reliable. It is important that the agencies include the Congress, OMB,
Treasury, and GAO in any such notification and notify the public by
posting such notification on the same Internet pages where the
agencies' previously issued financial statements that were affected by
the material or potential material misstatement were published.
An example of how to appropriately convey this type of information is
State's communication and disclosure of a potential material
misstatement in its fiscal year 2004 financial statements.
Specifically, State identified a potential material misstatement during
the fourth quarter of fiscal year 2005 and, in our view, went beyond
the then existing guidance and appropriately disclosed the problem.
Guidance available to agency management at that time, SFFAS No. 21 and
OMB Bulletin No. 01-09, did not provide explicit guidance for timely
communication of a restatement to users of financial statements. State
also complied with the revised OMB Circular No. A-136, issued August
23, 2005, even though it was not effective until the end of fiscal year
2005. Specifically, during September 2005, State's CFO timely notified
external parties, including GAO, to which State's fiscal year 2004
comparative financial statements were directly distributed, not to rely
on its fiscal year 2004 comparative financial statements and the
related audit report. The notification also stated that State was
committed to resolving this issue as quickly as possible. State also
notified the public of this issue in the form of a cautionary note on
the same Internet pages where the agency's audited financial statements
that were affected by the material misstatement were published. State's
cautionary note included a statement that such actions were necessary
because State recently became aware of a potential material
misstatement affecting the previously issued financial statements and
the related audit report. State noted that due to the need for a
complete and thorough analysis, the complexity of the matters involved,
and the accelerated financial reporting requirements, State was unable
to satisfy the independent auditors by November 15 as to the amount of
the potential material misstatement. As a result, the independent
auditors issued a qualified opinion on the fiscal year 2005 and 2004
financial statements. State's CFO also sent a subsequent letter to GAO
on December 23, 2005, to inform us that the independent auditors had
satisfied themselves about the amounts presented and the auditor
updated its opinion on the fiscal year 2005 and 2004 financial
statements from a qualified to an unqualified opinion. State was fully
transparent in its reports of the restatement in all respects and
showed how disclosing the restatement should be done. As such, in our
view, State's actions serve as a model for full and timely notification
of a potential material misstatement found in a previously issued
financial statement when identified after the third quarter of the
current fiscal year and before the current year's comparative financial
statements are issued.
Issues Regarding Timeliness of Certain Auditors' Restatement
Disclosures:
Auditors play a critical role in helping to ensure that users of
financial statements are timely notified of material misstatements
affecting previously issued financial statements and restatement of
such financial statements.
AU section 561, guidance available during fiscal year 2004, requires
that auditors consider the "time elapsed" since the financial
statements were issued when a material misstatement is discovered.
According to AU section 561, if an auditor determines that issuance of
financial statements accompanied by the audit report for a subsequent
period is "imminent," appropriate disclosures can be made in such
statements rather than in reissued statements. However, neither "time
elapsed" nor "imminent" is defined in AU section 561. We found that at
least one of the auditors of the three agencies that had discovered
misstatements prior to the fourth quarter of the current fiscal year
did not advise its respective agency to make such a disclosure because
(1) in May 2004 the auditor did not think that there were any users who
would still be relying on the fiscal year 2003 financial statements and
the related audit report and (2) the auditor considered issuance of the
fiscal years 2004 and 2003 comparative financial statements to be
imminent.[Footnote 23] We have concerns that, without notification,
anyone who may have been relying on the fiscal year 2003 financial
statements would not have known for more than 5 months that the
agency's originally issued financial statements, which received an
unqualified opinion, were materially misstated and should not be relied
on.
In our view, existing auditing standards and guidance, including OMB
Bulletin No. 06-03, while conveying the need for appropriate
notifications, do not provide sufficient explicit or detailed guidance
to auditors regarding ensuring the timely disclosure of material
misstatements affecting previously issued financial statements. Our
position is that when a material misstatement or potential material
misstatement affecting previously issued financial statements and the
related audit report is identified, the auditor has a responsibility to
advise the agency's management to timely notify users such as the
Congress, OMB, Treasury, and GAO in writing as well as the public and
clearly disclose the situation to them. If the agency's management does
not timely provide adequate disclosure to the relevant users, the
auditor has the responsibility to do so.
We believe that it is also important that the auditor advise the
agency's management of its responsibility to determine the specific
amount of the material misstatement or potential material misstatement
and the related effects of such on the previously issued financial
statements as soon as reasonably possible. In those cases where the
specific amount of the material misstatement and the related effects of
such on a previously issued financial statement are known and issuance
of the subsequent period audited financial statements is not imminent,
we believe that the auditor would need to also advise the agency's
management to promptly reissue the most recently issued fiscal year
financial statements before issuing the current fiscal year financial
statements and to communicate the reissuance to relevant users in
writing as well as the public to clearly disclose the situation to
them. If the agency's management does not reissue the financial
statements or communicate the reissuance as required, our position is
that the auditor has the responsibility to notify the Congress, OMB,
Treasury, and GAO in writing as well as any other users known to be
relying on the previously issued financial statements. If the specific
amount of the material misstatement and the related effects of such on
a previously issued financial statement are known and issuance of the
subsequent period audited financial statements is imminent, it is
important that the auditor advise the agency's management to issue
restated financial statements as part of the current year comparative
financial statements and disclose restatements in the audit report. If
the specific amount of the misstatement and the related effect of such
on a previously issued financial statement remain unknown when the
current year financial statements are issued, it is necessary that the
auditor disclose such information when issuing the audit report and
modify or disclaim the opinion on the previously issued financial
statements as appropriate.
Conclusions:
The issues we identified regarding the transparency and timeliness of
restatement disclosures primarily resulted from insufficient guidance
available during fiscal year 2004 to both the agencies' management and
their respective auditors for disclosure of the restatements and the
timeliness of such disclosures. It will be important that those
agencies needing, in the future, to restate their prior year financial
statements ensure the adequacy of the disclosure and presentation of
such restatements as well as timely notifying users known to be relying
on the previously issued financial statements. It will also be
important that the agencies' financial statements and the related audit
reports provide sufficient detail so that the reader will be able to
gain at least a basic understanding of why the agencies needed to
restate their previously issued financial statements and the effects of
such on the agencies' previously issued financial statements. The
revision of OMB Circular No. A-136 during fiscal year 2005 addressed
many of our concerns regarding the agencies' disclosure of
restatements; however, additional guidance is still needed. In this
regard, we are making recommendations for further revisions to OMB
Circular No. A-136 as well as OMB Bulletin No. 06-03. We have provided
our views, as outlined in appendix I, on how OMB guidance could be
further enhanced to ensure that future restatement disclosures are
uniform and more transparent.
Recommendations for Executive Action:
We recommend that the Director of OMB direct the Controller of OMB's
Office of Federal Financial Management to incorporate the restatement
guidance and requirements, as detailed in appendix I, into Circular No.
A-136 to assist OMB in addressing the issues we found with the
agencies' restatement disclosures and the timeliness of such
disclosures. Appendix I incorporates seven recommendations as specific
changes to Circular No. A-136 that focus on the:
* timely disclosure by agency management of material misstatement(s) or
potential material misstatement(s) and the related effect(s) of such in
the previously issued financial statements and:
* presentation and disclosure of restatements in the agencies' MD&A and
financial statements and related footnotes.
We also recommend that the Director of OMB direct the Controller of
OMB's Office of Federal Financial Management to incorporate the
restatement guidance and requirements, as detailed in appendix I, into
Bulletin No. 06-03 to assist OMB in addressing the issues we found with
auditors' restatement disclosures and the timeliness of such
disclosures. Appendix I incorporates four recommendations as specific
changes to Bulletin No. 06-03 that focus on the:
* auditor's timely disclosure of material misstatement(s) or potential
material misstatement(s) and the related effect(s) of such in the
previously issued financial statements and:
* presentation and disclosure of restatements in the audit report.
Agency Comments and Our Evaluation:
In oral comments on a draft of this report, OMB stated that it would
take our recommendations under advisement, but that there were no
current plans to update guidance that has been recently
issued.[Footnote 24] OMB also noted that any future plans to update
guidance would carefully consider issues already currently being
addressed by the AICPA's Codification of Auditing Standards. In
addition, OMB provided some technical comments, which we have
incorporated as appropriate.
As noted in this report, we found inconsistent communications and
insufficient disclosures of financial statement restatements by agency
management and their auditors. As such, we reiterate our concern that
it is critical for OMB to timely offer separate, though complementary,
guidance to agency management and to agency auditors that provides more
explicit and detailed guidance concerning their respective roles and
responsibilities when an actual or potential material misstatement is
identified in previously issued financial statements. Separate guidance
is important because agency management and agency auditors have
different roles and responsibilities. For example, management is
responsible for preparing the financial statements and adjusting them
to correct any material misstatements. The auditor is responsible for
expressing or disclaiming an opinion on the financial statements
prepared by management. The auditor has certain additional
responsibilities should management not properly respond to actual or
potential material misstatements.
This report contains recommendations to the Director of OMB. The head
of a federal agency is required by 31 U.S.C. § 720 to submit a written
statement on actions taken on these recommendations. You should submit
your statement to the Senate Committee on Homeland Security and
Governmental Affairs and the House Committee on Government Reform
within 60 days of the date of this report. A written statement also
must be sent to the House and Senate Committees on Appropriations with
the agency's first request for appropriations made more than 60 days
after the date of the report.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Federal Financial Management,
Government Information, and International Security, Senate Committee on
Homeland Security and Governmental Affairs; the House Committee on
Government Reform; and the Subcommittee on Government Management,
Finance, and Accountability, House Committee on Government Reform. In
addition, we are sending copies to the Secretary of the Treasury and
the Fiscal Assistant Secretary of the Treasury. Copies will be made
available to others upon request. This report is also available at no
charge on GAO's Web site at http://www.gao.gov.
We acknowledge and appreciate the cooperation and assistance provided
by OMB and the nine CFO Act agencies' management and their respective
auditors throughout our work. We look forward to continuing to work
with your office to help improve financial management in the federal
government. If you or your staff have any questions about the contents
of this report, please contact Gary T. Engel, Director, Financial
Management and Assurance, at (202) 512-3406 or by e-mail at
engelg@gao.gov. Staff acknowledgments are provided in appendix II.
Sincerely yours,
[Signed by]
David M. Walker:
Comptroller General:
of the United States:
[End of section]
Appendix I: Recommendations to OMB:
As noted throughout this report, we believe that additional restatement
guidance is needed for both the agencies' management and their
respective auditors. To facilitate in this process, we are providing
the following 11 requirements that, in our view, should be incorporated
into Office of Management and Budget (OMB) Circular No. A-136 and OMB
Bulletin No. 06-03.
Recommendations Regarding OMB Circular No. A-136:
GAO recommends that the following requirement be added to sections
II.4.3.1, II.4.4.1, II.4.5.1, II.4.6.1, and II.4.7.1 of OMB Circular
No. A-136, Financial Reporting Requirements:
Agencies shall label restated financial statements as "Restated."
GAO recommends that the "Management Actions Related to Corrections of
Errors" subsection of section II.4.5.5 of OMB Circular No. A-136,
Financial Reporting Requirements, be modified to read as follows:
If the agency's management becomes aware of a material misstatement(s)
or potential material misstatement(s) affecting a previously issued
financial statement(s), then the agency's management, in coordination
with their respective auditor, shall do the following:
1. Communicate the following information to those charged with
governance, oversight bodies, funding agencies, and others who are
relying or are likely to rely on the financial statement(s). This
includes communication (1) in writing to the Congress, OMB, Treasury,
and GAO; (2) to the public on the Internet pages where the agency's
previously issued financial statements that were affected by the
material misstatement(s) or potential material misstatement(s) are
published; and (3) to OMB in the agency's next quarterly financial
statements and in subsequent quarterly financial statements until the
specific amount(s) of the material misstatement(s) and the related
effect(s) of such on the previously issued financial statement(s) are
known and reported:
(a) the nature and cause(s) of the known or likely material
misstatement(s),
(b) the amount(s) of known or likely material misstatement(s) and the
related effect(s) on the previously issued financial statement(s)
(e.g., disclosure of the specific financial statement(s) and line
item(s) affected). If this information is not known, then the
disclosure includes information that is known and a statement that
management cannot determine the amount(s) and the related effect(s) on
the previously issued financial statement(s) without further
investigation, and:
(c) a notice that (1) a previously issued financial statement(s) will
or may be restated[Footnote 25] and, therefore, (2) the related
auditor's report is no longer reliable.
2. Promptly determine the financial statement effects of the known or
potential material misstatement(s) on the previously issued financial
statement(s).
(a) If the specific amount(s) of the material misstatement(s) and the
related effect(s) of such on a previously issued financial statement(s)
are known and issuance of the subsequent period audited financial
statements is not imminent,[Footnote 26] then the agency's management
shall promptly:
i. reissue the most recently issued fiscal year financial statements
before issuing the current fiscal year's financial statements;
ii. communicate the reissuance to those charged with governance,
oversight bodies, funding agencies, and others who are relying or are
likely to rely on the financial statement(s). This includes
communication (a) in writing to the Congress, OMB, Treasury, and GAO
and (b) to the public on the Internet pages where the agency's
previously issued financial statements that were affected by the
material misstatement(s) are published; and:
iii. disclose the following information, at a minimum, in the agency's
restatement footnotes:
1. the nature and cause(s) of the misstatement(s) that led to the need
for restatement, and:
2. the specific amount(s) of the material misstatement(s) and the
related effect(s) on the previously issued financial statement(s)
(e.g., year(s) being restated, specific financial statement(s) affected
and line items restated, actions the agency's management took after
discovering the misstatement), and the impact on the financial
statements as a whole (e.g., change in overall net position, change in
the audit opinion).
(b) If the specific amount(s) of the material misstatement(s) and the
related effect(s) of such on a previously issued financial statement(s)
are known and issuance of the subsequent period audited financial
statements is imminent, then the agency's management shall:
i.issue restated financial statement(s) as part of the current year's
comparative financial statements;
ii.communicate the restatement to those charged with governance,
oversight bodies, funding agencies, and others who are relying or are
likely to rely on the financial statement(s). This includes
communication (a) in writing to the Congress, OMB, Treasury, and GAO
and (b) to the public on the Internet pages where the agency's
previously issued financial statements that were affected by the
material misstatement(s) are published; and:
iii. disclose the following information, at a minimum, in the agency's
restatement footnote:
1. the nature and cause(s) of the misstatement(s) that led to the need
for restatement, and:
2. the specific amount(s) of the material misstatement(s) and the
related effect(s) on the previously issued financial statement(s)
(e.g., year(s) being restated, specific financial statement(s) affected
and line items restated, actions the agency's management took after
discovering the misstatement), and the impact on the financial
statements as a whole (e.g., change in overall net position, change in
the audit opinion).
(c) If the specific amount(s) of the misstatement(s) and the related
effect(s) of such on a previously issued financial statement(s) remain
unknown when the current year's financial statements are issued, then
the agency's management shall follow section II.4.5.5 (1) above and
include the following, at a minimum, in its restatement footnote:
i. a statement disclosing that a material misstatement(s) or potential
material misstatement(s) affects a previously issued financial
statement(s), but the specific amount(s) of the misstatement(s) and the
related effect(s) of such are not known,
ii. the nature and cause(s) of the misstatement(s) or potential
misstatement(s),
iii. an estimate of the magnitude of the misstatement(s) or potential
misstatement(s) and the related effect(s) of such on a previously
issued financial statement(s) (e.g., disclosure of the specific
financial statement(s) and line items affected) that are known and a
statement that the specific amount(s) and the related effect(s) of such
cannot be determined without further investigation, and:
iv. a statement disclosing that a restatement(s) to a previously issued
financial statement(s) will or may occur.
GAO also recommends that the following requirement be added to the
"Corrections of Errors" subsection of section II.4.5.5 of OMB Circular
No. A-136, Financial Reporting Requirements:
The Statement of Changes in Net Position's current year's unadjusted
beginning balances shall agree with the restated ending balances on the
agency's prior year's Statement of Changes in Net Position.
GAO recommends that section II.4.10.43, of OMB Circular No. A-136,
Financial Reporting Requirements, be revised to:
* clarify the definition of the "nature" of an error,
* include an explanation that the disclosure of the "amounts being
restated" specifically refers to the disclosure of the specific line
items restated and the related amounts, and:
* clarify how an agency should specifically further discuss the actions
management took after discovering the error.
GAO recommends that the following requirement be added to section
II.2.7 of OMB Circular No. A-136, Financial Reporting Requirements,
which discusses guidance for information included in the Management
Discussion and Analysis (MD&A):
Agency's management shall disclose the existence of restatements in its
MD&A if the agency asserts in its MD&A that it received an unqualified
opinion on any previously issued financial statement and that
respective financial statement was subsequently restated.
Recommendations Regarding OMB Bulletin No. 06-03:
GAO recommends that section 5.2 of OMB Bulletin No. 06-03, Audit
Requirements for Federal Financial Statements, be modified to read as
follows:
5.2: The nature or amount of known or likely misstatement(s) in
previously issued audited financial statement(s) may lead the auditor
to believe that the auditor's report would or could reasonably have
been affected if the auditor had known of the misstatement(s) when the
auditor issued the auditor's report. When this condition exists, the
auditor shall advise management to communicate the following
information to those charged with governance, oversight bodies, funding
agencies, and others who are relying or are likely to rely on the
financial statement(s):
* the nature and cause(s) of the known or likely material
misstatement(s),
* the amount(s) of known or likely material misstatement(s) and the
related effect(s) on the previously issued financial statement(s)
(e.g., disclosure of the specific financial statement(s) and line
item(s) affected). If this information is not known, then the
disclosure includes information that is known and a statement that
management cannot determine the amount(s) and the related effect(s) on
the previously issued financial statement(s) without further
investigation, and:
* a notice that (1) a previously issued financial statement(s) will or
may be restated and, therefore, (2) the related auditor's report is no
longer reliable.
This includes communication (1) in writing to the Congress, OMB,
Treasury, and GAO; (2) to the public on the Internet pages where the
agency's previously issued financial statements that were affected by
the material misstatement(s) or potential material misstatement(s) are
published; and (3) to OMB in the agency's next quarterly financial
statements and in subsequent quarterly financial statements until the
specific amount(s) of the material misstatement(s) and the related
effect(s) of such on the previously issued financial statement(s) are
known and reported.
GAO also recommends that the following requirements be added to section
5 of OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
Statements, as follows:
5.3: The auditor shall review the adequacy of management's
communication information about the known or potential material
misstatement(s) to report users, including those charged with
governance, oversight bodies, and funding agencies. When performing
this review, the auditor shall consider whether (1) management acted
timely to determine the financial statement effects of the potential
material misstatement(s), (2) management acted timely to communicate
with appropriate parties, and (3) management disclosed the nature and
extent of the known or likely material misstatement(s) on Internet
pages where the agency's previously issued financial statements are
published.
5.4: The auditor shall notify those charged with governance if the
auditor believes that management is unduly delaying its determination
of the effect(s) of the misstatement(s) on a previously issued
financial statement(s).
5.5: The auditor shall evaluate the timeliness and appropriateness of
management's decision whether to issue restated financial statement(s).
Management may separately issue the restated financial statement(s) or
may present the restated financial statement(s) on a comparative basis
with those of a subsequent period. Ordinarily, the auditor would expect
management to issue restated financial statement(s) as soon as
practicable. However, it may not be necessary for management to
separately issue the restated financial statement(s) and the auditor's
report when issuance of the subsequent period audited financial
statements is imminent.[Footnote 27]
5.6: If the auditor becomes aware of a material misstatement(s) or
potential misstatement(s) affecting a previously issued financial
statement(s), then the auditor shall advise the agency's management to
determine the specific amount(s) of the material misstatement(s) or
potential material misstatement(s) and the related effect(s) of such on
the previously issued financial statement(s) as soon as reasonably
possible.
5.7: If the specific amount(s) of the material misstatement(s) and the
related effect(s) of such on a previously issued financial statement(s)
are known and the issuance of the subsequent period audited financial
statements is not imminent, then the auditor shall advise the agency's
management to promptly:
* reissue the most recently issued fiscal year financial statements
before issuing the current fiscal year's financial statements;
* communicate the reissuance to those charged with governance,
oversight bodies, funding agencies, and others who are relying or are
likely to rely on the financial statement(s). This includes
communication (1) in writing to the Congress, OMB, Treasury, and GAO
and (2) to the public on the Internet pages where the agency's
previously issued financial statements that were affected by the
material misstatement(s) are published; and:
* disclose the following information, at a minimum, in the agency's
restatement footnotes: (1) the nature and cause(s) of the
misstatement(s) that led to the need for restatement, and (2) the
specific amount(s) of the material misstatement(s) and the related
effect(s) on the previously issued financial statement(s) (e.g.,
year(s) being restated, specific financial statement(s) affected and
line items restated, actions the agency's management took after
discovering the misstatement), and the impact on the financial
statements as a whole (e.g., change in overall net position, change in
the audit opinion).
5.8: If the specific amount(s) of the material misstatement(s) and the
related effect(s) of such on a previously issued financial statement(s)
are known and issuance of the subsequent period audited financial
statements is imminent, then the auditor shall disclose restatements in
the auditor's report as listed in 7.7 and advise agency's management to:
* issue restated financial statement(s) as part of the current year's
comparative financial statements;
* communicate the restatement to those charged with governance,
oversight bodies, funding agencies, and others who are relying or are
likely to rely on the financial statement(s). This includes
communication (a) in writing to the Congress, OMB, Treasury, and GAO
and (b) to the public on the Internet pages where the agency's
previously issued financial statements that were affected by the
material misstatement(s) are published; and:
* disclose the following information, at a minimum, in the agency's
restatement footnote: (1) the nature and cause(s) of the
misstatement(s) that led to the need for restatement and (2) the
specific amount(s) of the material misstatement(s) and the related
effect(s) on the previously issued financial statement(s) (e.g.,
year(s) being restated, specific financial statement(s) affected and
line items restated, actions the agency's management took after
discovering the misstatement), and the impact on the financial
statements as a whole (e.g., change in overall net position, change in
the audit opinion).
5.9: If the specific amount(s) of the misstatement(s) and the related
effect(s) of such on a previously issued financial statement(s) remain
unknown when the current year's financial statements are issued, then
the auditor shall follow 7.8 when issuing the auditor's report and
advise the agency's management as required in 5.2.
5.10: The auditor shall notify those charged with governance, oversight
bodies, and funding agencies when management (1) does not take the
necessary steps to promptly inform report users of the situation or (2)
does not restate with appropriate timeliness the financial statements
in circumstances when the auditor believes they need to be restated.
The auditor shall inform these parties that the auditor will take steps
to prevent future reliance on the auditor's report. The steps taken
will depend on the facts and circumstances, including legal
considerations. This includes communication in writing to the Congress,
OMB, Treasury, and GAO as well as any other users known to be relying
on the previously issued financial statement(s).
GAO recommends that section 7.7 of OMB Bulletin No. 06-03, Audit
Requirements for Federal Financial Statements, be modified to read as
follows:
7.7: When management restates a previously issued financial
statement(s), the auditor shall perform audit procedures sufficient to
reissue or update the auditor's report on the restated financial
statement(s). The auditor shall fulfill these responsibilities whether
the restated financial statement(s) are separately issued or presented
on a comparative basis with those of a subsequent period. The auditor
shall include the following information in an explanatory paragraph in
the reissued or updated auditor's report on the restated financial
statement(s):
* a statement disclosing that a previously issued financial
statement(s) has been restated,
* a statement that the previously issued financial statement(s) was
materially misstated and that the previously issued auditor's report
(including report date) is withdrawn and replaced by the auditor's
report on the restated financial statement(s),
* a reference to the note(s) to the restated financial statement(s)
that discusses the restatement,
* a description of the following if not already provided in the note(s)
to the financial statement(s): (1) the nature and cause(s) of the
misstatement(s) that led to the need for restatement and (2) the
specific amount(s) of the material misstatement(s) and the related
effect(s) on the previously issued financial statement(s) (e.g.,
year(s) being restated and the specific financial statement(s) affected
and line items restated) and the impact on the financial statements as
a whole (e.g., change in overall net position, change in the audit
opinion), and:
* a discussion of any significant internal control deficiency that
failed to prevent or detect the misstatement and what action management
has taken about the deficiency.
GAO also recommends that the following requirements be added to section
7 of OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
Statements, as follows:
7.8: If at the time of issuance of the auditor's report a material
misstatement(s) or potential material misstatement(s) has been
identified in any of the previously issued financial statements and the
specific amount(s) of the misstatement(s) and the related effect(s) of
such are not known, then the auditor shall update the auditor's report
on the previously issued financial statement(s) as appropriate.
Furthermore, the auditor's report shall disclose, at a minimum, the
following:
* a statement disclosing that a material misstatement(s) or potential
material misstatement(s) affects a previously issued financial
statement(s) but the specific amount(s) of the misstatement(s) and the
related effect(s) of such are not known;
* a reference to note(s) to the financial statements that discusses the
restatement or potential restatement;
* a description of the following, if not already provided in the
agency's note(s) to the financial statements: (1) the nature and
cause(s) of the misstatement(s) or potential misstatement(s), and (2)
an estimate of the magnitude of the misstatement(s) or potential
misstatement(s) and the related effect(s) of such on a previously
issued financial statement(s) (e.g., disclosure of the specific
financial statement(s) and line items affected) that are known and a
statement that the specific amount(s) and the related effect(s) of such
cannot be determined without further investigation; and:
* a statement disclosing that a restatement(s) to a previously issued
financial statement(s) will or may occur.
[End of section]
Appendix II GAO Contact and Staff Acknowledgments:
GAO Contact:
Gary T. Engel, (202) 512-3406.
Acknowledgments:
Arthur W. Brouk, Alberto Garza, Michael D. Hansen, Malissa Livingston,
and Michelle Philpott made key contributions to this report.
[End of section]
Related GAO Products:
Fiscal Year 2004 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing
Our Nation's Future Fiscal Challenges. GAO-05-284T. Washington, D.C.:
February 9, 2005.
Financial Audit: Restatements to the Department of State's Fiscal Year
2003 Financial Statements. GAO-05-814R. Washington, D.C.: September 20,
2005.
Financial Audit: Restatements to the Nuclear Regulatory Commission's
Fiscal Year 2003 Financial Statements. GAO-06-30R. Washington, D.C.:
October 27, 2005.
Financial Audit: Restatement to the General Services Administration's
Fiscal Year 2003 Financial Statements. GAO-06-70R. Washington, D.C.:
December 6, 2005.
Financial Audit: Restatements to the National Science Foundation's
Fiscal Year 2003 Financial Statements. GAO-06-229R. Washington, D.C.:
December 22, 2005.
Financial Audit: Restatements to the Department of Agriculture's Fiscal
Year 2003 Consolidated Financial Statements. GAO-06-254R. Washington,
D.C.: January 26, 2006.
Fiscal Year 2005 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management is Crucial to Addressing
Our Nation's Financial Condition and Long-term Fiscal Imbalance. GAO-
06-406T. Washington, D.C.: March 1, 2006.
[End of section]
FOOTNOTES
[1] This report focuses only on those corrections of errors that
resulted in restatements to agencies' fiscal year 2003 financial
statements. Changes to prior period financial statements may also occur
as a result of changes in accounting principles, where specifically
required by Federal Accounting Standards Advisory Board (FASAB)
standards, and changes in reporting entity.
[2] According to American Institute of Certified Public Accountants,
Codification of Auditing Standards, AU section 110, Responsibilities
and Functions of the Independent Auditor (1972), misstatements can be
caused by error (unintentional) or fraud (intentional). The meaning of
the term "error," as used in accounting principles, is consistent with
the meaning of the term "misstatement."
[3] GAGAS, promulgated by the Comptroller General of the United States,
are to be followed by federal auditors and audit organizations and by
other auditors auditing federal organizations, programs, or activities
when required by law, contract, or policy. These standards pertain to
auditors' professional qualifications, the quality of audit effort, and
the characteristics of professional and meaningful audit reports. GAGAS
incorporate American Institute of Certified Public Accountants' field
work and reporting standards and the related Statements on Auditing
Standards for financial audits unless the Comptroller General of the
United States excludes them by formal announcement.
[4] OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
Statements, August 23, 2006, supersedes OMB Bulletin No. 01-02, Audit
Requirements for Federal Financial Statements, October 16, 2000.
[5] Transparency is the full, accurate, and timely disclosure of
information.
[6] GAO, Financial Statement Restatements: Trends, Market Impacts,
Regulatory Responses, and Remaining Challenges, GAO-03-138 (Washington,
D.C.: Oct. 4, 2002).
[7] Pub. L. No. 107-204, 116 Stat. 745 (July 30, 2002).
[8] Financial Accounting Standards Board, Statement of Financial
Accounting Standards No. 154, Accounting Changes and Error Corrections.
[9] Form 8-K is the "current report" companies must file with the SEC
to announce major events that shareholders should know about.
[10] Our review did not include 2 of the 11 agencies that had
restatements for fiscal year 2003 because these agencies did not
receive unqualified opinions on their originally issued fiscal year
2003 financial statements. Reports were issued to the Department of
Agriculture, Department of State, General Services Administration,
National Science Foundation, and Nuclear Regulatory Commission. We did
not issue separate reports dealing with the other 4 agencies
(Departments of Justice, Transportation, and Health and Human Services,
and the Office of Personnel Management) since those agencies'
restatements primarily dealt with material misstatements affecting the
Statement of Budgetary Resources, which we have already reported on in
our February 2005 and March 2006 testimonies. See our Related GAO
Products page for a list of these reports as well as other related GAO
products.
[11] According to Federal Accounting Standards Advisory Board,
Statement of Federal Financial Accounting Concepts No. 2, Entity and
Display, financial information is also conveyed with accompanying
footnotes, which are an integral part of the financial statements.
Footnotes typically provide additional disclosures that are necessary
to make the financial statements more informative and not misleading.
[12] According to American Institute of Certified Public Accountants,
Codification of Auditing Standards, AU section 561, Subsequent
Discovery of Facts Existing at the Date of the Auditor's Report (1972),
when the auditor has concluded that subsequently discovered information
would have affected the previously issued audit report and believes
there are persons relying or likely to rely on the previously issued
financial statements, the auditor should take action to prevent future
reliance on the previously issued audit report. To appropriately
withdraw the previously issued audit report, the auditor may reissue
the audit report separately from the audit report on the current-period
financial statements or issue an updated report in conjunction with the
audit report on the current-period financial statements as discussed in
American Institute of Certified Public Accountants, Codification of
Auditing Standards, AU section 508, Reports on Audited Financial
Statements (1989).
[13] According to Federal Accounting Standards Advisory Board,
Statement of Federal Financial Accounting Concepts No. 1, Objectives of
Federal Financial Reporting, financial reports must be understandable,
reliable, relevant, timely, consistent, and comparable.
[14] Office of Management and Budget, Circular No. A-136 Revised,
Financial Reporting Requirements, August 23, 2005.
[15] OMB revised Circular No. A-136 again on July 24, 2006; however,
there were minimal changes to guidance related to restatements.
[16] As noted previously, OMB issued guidance to agency management and
agency auditors on July 24, 2006 and August 23, 2006, respectively.
[17] At least 7 of the 24 CFO Act agencies restated certain of their
fiscal year 2004 financial statements to correct misstatements. Three
of these agencies had received an unqualified opinion on their
originally issued fiscal year 2004 financial statements while the
remaining 4 had received a disclaimer of opinion on their financial
statements. The auditor for one of the agencies withdrew the
unqualified opinion that had been previously rendered on the agency's
fiscal year 2004 financial statements and issued a qualified opinion on
the restated financial statements.
[18] OMB Circular No. A-136 was revised during fiscal years 2005 and
2006 and supersedes OMB Bulletin No. 01-09.
[19] According to Federal Accounting Standards Advisory Board,
Statement of Federal Financial Accounting Standards No. 21, Reporting
Corrections of Errors and Changes in Accounting Principles, a prior
period adjustment is defined as a correction for an error that occurred
in and whose cumulative effect is attributable to periods not presented
in the current financial statements.
[20] According to American Institute of Certified Public Accountants,
Codification of Auditing Standards, AU section 420, Consistency of
Application of Generally Accepted Accounting Principles (1972),
classifications in the current financial statements may be different
from classifications in the prior year's financial statements. Although
changes in classification are usually not of sufficient importance to
necessitate disclosure, material changes in classification should be
indicated and explained in the financial statements or notes.
[21] Specifically, two audit reports neither disclosed the restatement
nor referred to the restatement footnote and another audit report
disclosed the restatement, but did not refer to the restatement
footnote.
[22] Subsequent to our initial review, OMB issued OMB Bulletin No. 06-
03, Audit Requirements for Federal Financial Statements on August 23,
2006, which now supersedes OMB Bulletin No. 01-02. OMB Bulletin No. 06-
03 provides a definition for what is considered "imminent."
Specifically, OMB defines imminent as being "within 90 calendar days of
the subsequent period financial statements planned issue date."
[23] The auditor did not provide us with documentation of the basis for
its conclusion that users were not likely to still be relying on fiscal
year 2003 financial statements and would not attach importance to the
correction of the material error.
[24] As noted previously, OMB issued guidance to agency management and
agency auditors on July 24, 2006 and August 23, 2006, respectively.
[25] Financial statements are restated to correct an error(s) in
previously issued financial statement(s).
[26] For purposes of this guidance, imminent means within 90 days of
determining the effect of the misstatement(s) on the previously issued
financial statements.
[27] For purposes of this guidance, imminent means within 90 days of
determining the effect of the misstatement(s) on the previously issued
financial statements.
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