# Presentation: 434100

## Comptroller General of the United States

Federal Financial Management Conference
March 10, 2006

- Federal Financial Management Conference
- March 10, 2006

## The Case for Change

**Government is on a “burning platform,” and the status quo way of doing business is unacceptable for a variety of reasons, including:**** **
- Past fiscal trends and significant long-range challenges
- Rising public expectations for demonstrable results and enhanced responsiveness
- Selected trends and challenges having no boundaries
- Additional resource demands due to recent terrorism events in the United States
- Government performance/accountability and high risk challenges, including the lack of effective human capital strategies

## FY2005 GAO Audit Report – Emphasis of a Matter

-    “...the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow...Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance.”

## Composition of Federal Spending

**Composition of Federal Spending**

**1965**

**1985**

**2005**

**Defense**

**Social Security**

**Net interest**

**Medicare & Medicaid**

**All other spending**

- Source: Office of Management and Budget.

## Federal Spending for Mandatory and Discretionary Programs

**Net Interest**

**Discretionary**

**Mandatory**

- Source: Office of Management and Budget.

## Surplus or Deficit as a Share of GDP   Fiscal Years 1962-2005

- Source:* *Office of Management and Budget

**Percent of GDP**

## Fiscal Year 2004 and 2005 Deficits and Net Operating Costs

|  | Fiscal Year 2004 |  | Fiscal Year 2005 |
| --- | --- | --- | --- |
|  | ($ Billion) |  |  |
| On-Budget Deficit | (568) |  | (494) |
| Off-Budget Surplus* | 155 |  | 175 |
| Unified Deficit |  (413) |  | (319) |
| Net Operating Cost | (616) |  | (760) |

- *Includes $151 billion in fiscal year 2004 and $173 billion in fiscal year 2005 in Social Security surpluses and $4 billion in fiscal year 2004 and $2 billion in fiscal year 2005 in Postal Service surpluses.
- Source: The Office of Management and Budget and the Department of the Treasury.

## Estimated Fiscal Exposures($ trillions)

|  | 2000 | 2005 |
| --- | --- | --- |
| Explicit liabilities | $6.9 | $9.9 |
| Publicly held debt
Military & civilian pensions & retiree health
Other |  |  |
| Commitments & contingencies | 0.5 | 0.9 |
| E.g., PBGC, undelivered orders |  |  |
| Implicit exposures | 13.0 | 35.6 |
| Future Social Security benefits | 3.8 | 5.7 |
| Future Medicare Part A benefits | 2.7 | 8.8 |
| Future Medicare Part B benefits | 6.5 | 12.4 |
| Future Medicare Part D benefits | -- | 8.7 |
| Total | $20.4 | $46.4 |

- Source:  U.S. government’s consolidated financial statements (CFS).
- Note: Estimates for Social Security and Medicare are at present value as of January 1 of each year as reported in the CFS and all other data are as of September 30.

## How Big is OurGrowing Fiscal Burden?

|  | 2000 |  | 2005 |
| --- | --- | --- | --- |
| Total Fiscal Exposures | $20.4 trillion |  | $46.4 trillion |
|  |  |  |  |
| Burden |  |  |  |
| Per Person |  | $72,000 | $156,000 |
| Per Full-time Worker |  | $165,000 | $375,000 |
| Per Household |  | $189,000 | $411,000 |

- Sources: GAO analysis.

## Composition of Spending as a Share of GDPUnder Baseline Extended

**Composition of Spending as a Share of GDP****Under Baseline Extended**

**Revenue**

**Social Security**

**Medicare & Medicaid**

**Net Interest**

**All other spending**

**Percent of GDP**

- Notes:  In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2016 due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts.  After 2016, revenue as a share of GDP is held constant.
- Source:  GAO’s January 2006 analysis.

## Composition of Spending as a Share of GDPAssuming Discretionary Spending Grows with GDP after 2006 and All Expiring Tax Provisions are Extended

**Revenue**

**Social Security**

**Medicare & Medicaid**

**Net Interest**

**All other spending**

**Percent of GDP**

- Note:  This includes certain tax provisions that expired at the end of 2005, such as the increased AMT exemption amount.
- Source:  GAO’s January 2006 analysis.

## Current Fiscal Policy Is Unsustainable

**The “Status Quo” is Not an Option**
- We face large and growing structural deficits largely due to known demographic trends and rising health care costs.
- GAO’s simulations show that balancing the budget in 2040 could require actions as large as
- Cutting total federal spending by 60 percent or
- Raising federal taxes to 2 times today's level* *
**Faster Economic Growth Can Help, but It Cannot Solve the Problem**
- Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double digit range every year for the next 75 years.
- During the 1990s, the economy grew at an average 3.2 percent per year.
- As a result, we cannot simply grow our way out of this problem.  Tough choices will be required.

## The Way Forward:  Three Pronged Approach

**Re-impose Budget Controls**
- Discretionary spending caps
- PAYGO rules on both sides of the ledger
- Mandatory spending triggers
**Improve Accounting and Reporting and Metrics:**
- Enhanced financial statement presentation
- Automatic present value disclosures for legislative debate on major tax and spending bills
- Develop key national (outcome-based) indicators
**Re-examine Policies and Programs:**
- Restructure existing entitlement programs
- Reexamine the base of all other spending programs
- Review and revise existing tax policy, including tax preferences and enforcement programs
- Expand scrutiny of proposed new programs, policies, or activities

## 21st Century Challenges Report

- Provides background, framework, and questions to assist in reexamining the base
- Covers entitlements & other mandatory spending, discretionary spending, and tax policies and programs
- Based on GAO’s work for the Congress

## Twelve Reexamination Areas

- Defense
- Education & Employment
- Financial Regulation &Housing
- Health Care
- Homeland Security

** **
- International Affairs
- Natural Resources,Energy & Environment
- Retirement & Disability
- Science & Technology
- Transportation

**Twelve Reexamination Areas**

** ****MISSION AREAS**

** ****CROSSCUTTING AREAS**

** **
- Reexamining the Tax System

- Improving Governance

## Generic Reexamination Criteria and Sample Questions

**Relevance of purpose and the federal role**
- 	Why did the federal government initiate this program and what was the government trying to accomplish?
- 	Have there been significant changes in the country or the world that relate to the reason for initiating it?
**Measuring success**
- 	Are there outcome-based measures? If not, why?
- 	If there are outcome-based measures, how successful is it based on these measures?
**Targeting benefits**
- 	 Is it well targeted to those with the greatest needs and the least capacity to meet those needs?
**Affordability and cost effectiveness**
- 	Is it using the most cost-effective or net beneficial approaches when compared to other tools and program designs?
**Best practices**
- 	Is the responsible entity employing prevailing best practices to discharge its responsibilities and achieve its mission?

## Key National Indicators

**WHAT**:  A portfolio of economic, social, and environmental outcome-based measures that could be used to help assess the nation’s and other governmental jurisdictions’ position and progress
**WHO**:  Many countries and several states, regions, and localities have already undertaken related initiatives (e.g., Australia, New Zealand, Canada, United Kingdom, Oregon, Silicon Valley (California) and Boston).
**WHY**:  Development of such a portfolio of indicators could have a number of possible benefits, including
- Serving as a framework for related strategic planning efforts
- Enhancing performance and accountability reporting
- Informing public policy decisions, including much needed baseline reviews of existing government policies, programs, functions, and activities
- Facilitating public education and debate as well as an informed electorate
**WAY FORWARD**: Consortium of key players housed by the National Academies domestically and related efforts by the OECD and others internationally.

## Audit Results for 24 CFO Act Agencies

|  | 2005(1) |  | 2000 |  | 1996 |
| --- | --- | --- | --- | --- | --- |
| Unqualified | 19 |  | 18 |  | 6 |
| Qualified | 0 |  | 3 |  | 4 |
| Mixed
Disclaimed | 1
4 |  | 0
3 |  | 0
14 |
| Total | 24 |  | 24 |  | 24 |

**Audit Results for 24 CFO Act Agencies**

- (1) 2005 includes the Department of Homeland Security (DHS), which became a CFO Act agency in FY 2005. FEMA, which became part of DHS, is included in prior years.

## 2005 Audit Resultsfor 24 CFO Act Agencies

| Unqualified |
| --- |
| 19 agencies |
| Qualified |
| None |
| Mixed |
| 1 agency (GSA) |
| Disclaimed |
| 4 agencies (DOD, DHS, NASA, DOE) |
| Approx. $848 billion (58%) of reported total assets at September 30, 2005 |
| Approx. $751 billion (25%) of net costs as of September 30, 2005 |
| Restatements |
| 7 agencies (USAID, DOD, DHS, HUD, Justice, State, DOT) |

## Selected Accountability Issues

**Leading by Example**

**Definition of success in financial management**
- Clean opinion on financial statements
- No material internal control weaknesses
- No significant compliance issues
- Systems that produce timely, accurate, and useful financial and management information
**Opinions on internal control**
**Additional issues**
- Accelerated and enhanced financial reporting (all agencies)
- Audit/financial management committees (selected agencies)

## Selected Reporting Challenges

**Financial and Performance Reporting**
- DOD assets, liabilities, and contingencies - DOD
- restatements - certain agencies
- performance reporting - all agencies
- “trust funds” (e.g., restricted vs. unrestricted revenues, intra-governmental obligations) - OMB
- long-range fiscal challenges (e.g., per capita burden, sustainability, intergenerational impact) - GAO
- summary annual report - Treasury

## The Federal Financial Audit Environment

- The federal financial audit environment is evolving:
- Closer to an opinion on the consolidated financial statements of the U.S. government (CFS), but DOD is the key challenge
- GAO, as the auditor of the CFS, needs to be able to use the work of the auditors of the agency financial statements
- Agencies need to meet accelerated due dates, maintain unqualified opinions, and address their internal control and financial management system deficiencies
- More timely financial and performance reporting should not come at the price of less reliable reporting

## GAO’s Work to Modernize the Accountability Profession

- 	**GAO is actively working to modernize and transform the accountability profession, both inside the government and in the private sector, and to lead by example in this area: **
- Definition of success in financial management: clean opinion, no major weaknesses in controls or compliance, and financial systems that produce timely, accurate and useful information for management
- Acceleration of financial reporting and related other reports
- Opinion on system of internal control
- 2003 revision of *Government Auditing Standards*  (2006 revision is in process)
- Creation of the U.S Auditing Standards Coordinating Forum (i.e., GAO, PCAOB, ASB)
- Coordination with accountability organizations around the world (e.g., INTOSAI)
- Modernization of the accounting/reporting and audit models (e.g. IFAC, IAASB, FASB, GASB, FASAB, etc. )
- Assure appropriate treatment of restatements by auditors and others
- Monitor implementation of the Sarbanes-Oxley Act, including providing suggestions for possible actions by the PCAOB and the SEC in connection with the internal control reporting requirements under Section 404
- Consider whether reform elements similar to those in Sarbanes-Oxley make sense for the federal government
- Explore additional opportunities for employing more frequent reporting and continuous auditing approaches
- Explore revised approaches to quality assurance programs, including internal inspections and peer reviews

**Notes:**
GAO also had a large role in supporting and assisting the Congress in the development of the Sarbanes-Oxley Act

## Financial Statement Audit Peer Review

- Performed by a large, international accounting firm (KPMG LLP) in accordance with AICPA peer review standards and Government Auditing Standards
- Clean opinion – fourth straight time
- Reviewers cited numerous good practices:
- Major issues and significant consultations well documented
- Internal inspection and peer review taken seriously
- Comprehensive sampling plans used
- Good use of tracking sheets and routing slips
- Reviewers also suggested clarifying policies and procedures for documenting references to prior year testing and the assessment of management’s internal control evaluation process

## International Peer Review Team

- Australia
- Mexico
- Norway
- South Africa

- Canada
- Netherlands
- Sweden

## Performance Audit Peer Review

**Clean Opinion**
**Global Good Practices**
- Strategic planning process
- Audit risk assessment
- Agency Protocols
- Use of experts
- E.A.G.L.E
- Report design
**Other Observations**
- Distinguishing between audit and non-audit services
- Reporting additional details on sources of critical information and methodological choices
- Reviewing the quality assurance system for further efficiencies
- Streamlining the documentation requirements
- Making the inspection program more efficient
**Report Has Been Made Public**

## How Do We Move Forward?

- Good governance, transparency,  and accountability are critical
- in the private sector to promote efficiency and effectiveness in the capital and credit markets, and overall economic growth, both domestically and internationally
- in the public sector for the effective and credible functioning of a healthy democracy, and in fulfilling the government’s responsibility to citizens and taxpayers
- in both sectors to support a healthy economy that provides economic opportunities and benefits to citizens
- Sorting out the needs and effective and appropriate governance and accountability mechanisms for different sectors and types of organizations and on an international scale will be critical

## Key Ingredients Needed for These Challenging and Changing Times

***Courage***
***Integrity***
***Creativity***
***Stewardship***

## Comptroller General of the United States

Federal Financial Management Conference
March 10, 2006

- Federal Financial Management Conference
- March 10, 2006