GAO Critical About U.S. Government Financial Reporting

Posted by Sanjay Vani 

It may be a strange kind of reassurance to developing countries that governments in advanced economies can also have serious problems with getting their annual accounts certified by the Supreme Audit Institution (SAI). You may have read in the newspapers that the U.S. Government Accountability Office (GAO) has refused to provide an opinion on the fiscal year 2009 consolidated financial statements of the U.S. government. This is now for the 13th time in a row that such an opinion has been refused. The GAO can hardly be accused of not being consistent! Not providing an opinion is similar, but technically not exactly the same, as not certifying the accounts. 

The GAO notes three major impediments that prevented it from rendering an opinion (see also First it notes serious financial management problems at the Department of Defense (DOD) that have prevented DOD’s financial statements from being auditable. In addition, the financial statements of the Department of Homeland Security and the National Aeronautics and Space Administration for fiscal years 2009 and 2008 were determined as not being auditable. Second, the U.S. federal government was unable to adequately account for and reconcile intragovernmental activity and balances between federal entities and the Department of Treasury’s (Treasury) records of disbursements. Third, the federal government’s process for preparing consolidated financial statements is seen as ineffective due to a number of important issues, including having inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles (GAAP).

Other noteworthy observations in the GAO’s annual report are the following: 
• Improper Payments: Federal entities reported estimates of improper payment amounts that totaled $98.7 billion for fiscal year 2009, which represented about 5 percent of $1.9 trillion of reported outlays for the related programs.
• Information Security Control Deficiencies: Serious and widespread information security control deficiencies continue to place federal assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption. The GAO has reported information security as a high-risk area across government since February 1997.
• Weaknesses in Tax Collection System: Material weaknesses and systems deficiencies continued to affect the federal government’s ability to effectively manage its tax collection activities.
• Fixed Asset Accounting: The federal government could not satisfactorily determine that property, plant, and equipment (PP&E) and inventories were properly reported in the accrual-based consolidated financial statements (mainly belonging to DOD).
• Accounting for Liabilities: The federal government could not reasonably estimate or adequately support amounts reported for certain liabilities (again main culprit DOD).
• Unreported Government Operations: There continue to be undetermined amounts of assets, liabilities, costs, and revenues that are not included. 
• Weak Capacity to compile Consolidated Financial Statements: the Treasury did not have adequate systems and personnel to address the magnitude of the fiscal year 2009 financial reporting challenges it faced. The financial crisis and the federal government’s response to it may have played a role here.
• No preparation of interim Financial Statements: The federal government does not perform interim compilations at the government-wide level.
• Individual agency financial statements are often only audited by internal auditors: It is important to note that GAO does NOT audit annual financial statements of individual federal agencies (except a few such as the IRS, SEC, and Federal Housing Finance Agency). Inspectors General of 24 major federal agencies are responsible for annual audits of agency-wide financial statements prepared by these agencies and GAO is only responsible for the audit of the U.S. government’s consolidated financial statements. In a way, internal auditors audit agency financial statements, which are then consolidated into federal government financial statements. Some may consider this an unacceptable arrangement, despite the independence of Inspector Generals.