United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Government 

Management, Organization, and Procurement, 

Committee on Oversight and Government 

Reform, House of Representatives 

FISCAL YEAR 2006 

U.S. GOVERNMENT 

FINANCIAL STATEMENTS 

Sustained Improvement in 

Federal Financial 

Management Is Crucial to 

Addressing Our Nation’s 

Accountability and Fiscal 

Stewardship Challenges 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 2:00 p.m. EDT

Tuesday, March 20, 2007

 

GAO-07-607T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 20, 2007

FISCAL YEAR 2006 U.S. GOVERNMENT 

FINANCIAL STATEMENTS 

Sustained Improvement in Federal 

Financial Management Is Crucial to 

Addressing Our Nation’s Accountability 

and Fiscal Stewardship Challenges 

Highlights of GAO-07-607T, a testimony 

before the Subcommittee on Government 

Management, Organization, and 

Procurement, Committee on Oversight 

and Government Reform, House of 

Representatives 

GAO is required by law to annually

audit the consolidated financial 

statements of the U.S. government. 

The Congress and the President 

need to have timely, reliable, and 

useful financial and performance 

information. Sound decisions on

the current results and future 

direction of vital federal 

government programs and policies 

are made more difficult without 

such information. 

Until the problems discussed in 

GAO’s audit report on the U.S.

government’s consolidated

financial statements are adequately

addressed, they will continue to (1) 

hamper the federal government’s 

ability to reliably report a 

significant portion of its assets, 

liabilities, costs, and other related 

information; (2) affect the federal 

government’s ability to reliably

measure the full cost as well as the

financial and nonfinancial 

performance of certain programs 

and activities; (3) impair the federal

government’s ability to adequately 

safeguard significant assets and 

properly record various 

transactions; and (4) hinder the

federal government from having

reliable financial information to 

operate in an economical, efficient, 

and effective manner. 

For the 10th consecutive year, certain material weaknesses in financial 

reporting and other limitations on the scope of GAO’s work resulted in 

conditions that continued to prevent GAO from being able to provide 

Congress and the American people an opinion as to whether the 

consolidated financial statements of the U.S. government are fairly stated in 

conformity with U.S. generally accepted accounting principles. While over 

the past 10 years significant progress has been made in improving financial 

management since the U.S. government began preparing consolidated 

financial statements, three major impediments continue to prevent GAO 

from rendering an opinion on the consolidated financial statements: (1) 

serious financial management problems at the Department of Defense, (2) 

the federal government’s inability to adequately account for and reconcile 

intragovernmental activity and balances between federal agencies, and (3) 

the federal government’s ineffective process for preparing the consolidated 

financial statements. Further, in GAO’s opinion, as of September 30, 2006, 

the federal government did not maintain effective internal controls over 

financial reporting and compliance with significant laws and regulations due 

to numerous material weaknesses. 

From a broad federal financial management perspective, the federal

government’s financial condition and fiscal outlook are worse than many 

may understand. The U.S. government’s total reported liabilities, net social 

insurance commitments, and other fiscal exposures continue to grow and 

now total over $50 trillion, representing approximately four times the 

nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or 

two times GDP in fiscal year 2000. The federal government faces large and 

growing structural deficits in the future due primarily to known 

demographic trends and rising health care costs. These structural deficits 

which are virtually certain given the design of our current programs and 

policies will mean escalating and ultimately unsustainable federal deficits 

and debt levels. Based on various measures and using reasonable 

assumptions the federal government’s current fiscal policy is unsustainable. 

Continuing on this imprudent and unsustainable path will gradually erode, if 

not suddenly damage, our economy, our standard of living, and ultimately 

our domestic tranquility and national security. Tough choices by the 

President and the Congress are necessary in order to address the nation’s 

large and growing long-term fiscal imbalance. 

The federal government should consider the need for further revisions to the 

current federal financial reporting model to recognize the unique needs of 

the federal government. While the current reporting model recognizes some 

of these needs, a broad reconsideration of issues such as the kind of 

information that may be relevant and useful for a sovereign nation, could 

stimulate needed discussion and lead to reporting enhancements that might 

help the Congress deliberate strategies to address the nation’s growing longterm fiscal imbalance. Furthermore, additional transparency in connection 

with federal budget reporting and legislative proposals is needed. 

www.gao.gov/cgi-bin/getrpt?GAO-07-607T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jeffrey C. 

Steinhoff or Gary T. Engel at (202) 512-2600 

or engelg@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am most pleased to be here today to discuss our report on the U.S. 

government’s consolidated financial statements for fiscal years 2006 and

2005. I would like to thank you for continuing the annual tradition of 

oversight hearings on this important subject. The involvement of your 

subcommittee remains critical to ultimately assuring the continued 

progress in the financial management area while enhancing public 

confidence in the federal government as a financial steward that is 

accountable for its finances. Such hearings play a vital role in ensuring 

that the federal government is held accountable to the American people. 

Our work was conducted in accordance with U.S. generally accepted

government auditing standards. 

Both the consolidated financial statements and our report on them are 

included in the fiscal year 2006 Financial Report of the United States 

Government (Financial Report). The most recent report was issued by 

the Department of the Treasury (Treasury) on December 15, 2006, and is 

available through GAO’s Internet site, at 

http://www.gao.gov/financial/fy2006financialreport.html, and Treasury’s 

Internet site, at http://www.fms.treas.gov/fr/06frusg/06frusg.pdf. I also 

would like to highlight a guide we issued in September 2005 titled 

Understanding the Primary Components of the Annual Financial Report 

of the United States Government,

1

 which was prepared to help those who 

seek to obtain a better understanding of the Financial Report. This guide 

can also be found on GAO’s Internet site at 

http://www.gao.gov/new.items/d05958sp.pdf. 

Since the enactment of key financial management reforms, the federal 

government has made substantial progress in improving financial 

management activities and practices. Federal financial systems 

requirements have been developed and internal control has been 

strengthened. Nonetheless, as I recently testified before the Senate 

Subcommittee on Federal Financial Management, Government 

Information, Federal Services, and International Security, Committee on 

Homeland Security and Governmental Affairs, the federal government still 

has a long way to go to address several principal challenges to fully 

 1

GAO, Understanding the Primary Components of the Annual Financial Report of the 

United States Government, GAO-05-958SP (Washington, D.C.: September 2005). 

Page 1 GAO-07-607T 
realizing strong federal financial management.2

 For the 10th consecutive 

year, certain material weaknesses3

 in financial reporting and other 

limitations on the scope of our work resulted in conditions that continued

to prevent us from being able to provide the Congress and the American 

people an opinion as to whether the consolidated financial statements of 

the U.S. government were fairly stated in conformity with U.S. generally 

accepted accounting principles (GAAP). Further, we also reported that the 

federal government did not maintain effective internal control over 

financial reporting (including safeguarding assets) and compliance with 

significant laws and regulations as of September 30, 2006. Until the 

problems that I will discuss today and that are discussed in our audit 

report are adequately addressed, they will continue to have adverse 

implications for the federal government and the taxpayers. 

GAO’s audit report also included an emphasis paragraph for the 3rd 

consecutive year noting that the nation’s current fiscal path is 

unsustainable and that tough choices by the President and the Congress 

are necessary to address the nation’s large and growing long-term fiscal 

imbalance. In fact, the federal government’s financial condition and fiscal 

outlook are worse than many may understand. The value of the federal

government’s net social insurance commitments, liabilities, and other 

fiscal exposures is now reported at over $50 trillion, representing close to

four times Gross Domestic Product (GDP) in fiscal year 2006 and up from 

about $20 trillion or two times GDP in 2000. One way to think about it is: if

we wanted to put aside today enough to cover these promises, it would 

take about $440,000 per American household, up from $190,000 in 2000. As 

these numbers indicate, the federal government faces large and growing 

structural deficits primarily related to Medicare and other social insurance 

commitments. These structural deficits—which are virtually certain given 

the design of our current programs and policies—will mean escalating and 

ultimately unsustainable federal deficits and debt levels. Simply put, 

despite an almost 12 percent increase in federal revenues this year, our 

nation’s financial condition and long-term fiscal imbalance continue to 

deteriorate and are on an imprudent and unsustainable course. 

 2

GAO, Critical Accountability and Fiscal Stewardship Challenges Facing Our Nation, 

GAO-07-542T (Washington, D.C.: March 2007). 

3

A material weakness is a condition that precludes the entity’s internal control from

providing reasonable assurance that misstatements, losses, or noncompliance material in

relation to the financial statements or to stewardship information would be prevented or 

detected on a timely basis. 

Page 2 GAO-07-607T 
In this testimony, I will discuss (1) the challenges posed by the federal

government’s fiscal condition and my views on a possible way forward, 

including ideas for consideration to improve the transparency of long-term 

costs; (2) our continued concerns about restatements to prior year 

financial statements; (3) the major issues relating to the consolidated 

financial statements for fiscal years 2006 and 2005, including systems 

problems that continue to hinder federal agency accountability; and 

(4) the need for an improved federal financial reporting model. I will also 

describe progress that has been made toward addressing major 

impediments to an opinion on the consolidated financial statements. 

From a broad financial management perspective, the federal government’s 

deteriorating long-range financial condition and long-term fiscal imbalance 

are matters of increasing concern. We face large and growing structural 

deficits due primarily to known demographic trends and rising health care 

costs. There is a need to engage in a fundamental review, repriorization, 

and reengineering of the base of the government. Understanding and 

addressing the federal government’s financial condition and long-term 

fiscal imbalance are critical to maintain fiscal flexibility so that we can 

respond to current and emerging social, economic, and security 

challenges. 

The Nation’s Fiscal 

Imbalance 

The Reported Long-Term 

Fiscal Outlook 

The fiscal year 2006 Financial Report disclosed that, despite a reported 

increase in revenues in fiscal year 2006 of about $255 billion, the federal 

government’s costs exceeded its revenues by $450 billion (i.e., net 

operating cost). Further, as of September 30, 2006, the U.S. government 

reported in the 2006 Financial Report that it owed (i.e., liabilities) more 

than it owned (i.e., assets) by almost $9 trillion. In addition, the Statement 

of Social Insurance in the Financial Report disclosed an additional $39 

trillion of the government’s social insurance responsibilities, including 

Medicare and Social Security. The total of the reported liabilities (e.g., 

debt), contingencies (e.g., insurance), and social insurance and other 

commitments and promises (e.g., Social Security, Medicare)—rose from 

$20 trillion to about $50 trillion in the last 6 years. 

Over the next few decades, the nation’s fiscal outlook will be shaped 

largely by known demographic trends and rising health care costs. As the 

baby-boom generation retires, federal spending on current retirement and 

health care programs—Social Security, Medicare, and Medicaid—will 

grow dramatically. These programs represent $39 trillion of the $50 trillion 

long-term fiscal exposure. A range of other federal fiscal commitments, 

Page 3 GAO-07-607T 
some explicit and some representing implicit public expectations, also 

bind the nation’s fiscal future. Absent policy changes, a growing imbalance 

between expected federal spending and tax revenues will mean escalating 

and ultimately unsustainable federal deficits and debt levels. 

There are various ways to consider and assess the long-term fiscal 

outlook. In this regard, information included in the Financial Report, and 

other information and analyses, can be used to more fully understand the 

nation’s long-term fiscal outlook, including: 

• the Statement of Social Insurance, 

• major reported long-term fiscal exposures, and 

• long-term fiscal simulations. 

The Statement of Social Insurance in the Financial Report displays the 

present value4

 of projected revenues and expenditures for scheduled 

benefits of certain benefit programs that are referred to as social 

insurance (e.g., Social Security, Medicare). For Social Security and 

Medicare alone, projected expenditures for scheduled benefits for the next 

75 years exceed earmarked revenues (e.g., dedicated payroll taxes, 

premiums, and existing government bonds in the trust funds) for the same 

period by approximately $39 trillion in present value terms. Stated 

differently, one would need approximately $39 trillion invested today to 

deliver on the currently promised benefits not covered by earmarked 

revenues for the next 75 years. Table 1 shows a simplified version of the 

Statement of Social Insurance by its primary components. 

Statement of Social Insurance 

 4

Present value is the discounted value of a payment or stream of payments to be received

or paid in the future, taking into consideration a specific interest or discount rate. 

Page 4 GAO-07-607T 
Table 1: Simplified Statement of Social Insurance as of January 1, 2006 

Source: The Department of the Treasury.

Dollars in trillions

Present value of future revenue

(earmarked contributions,

taxes, and premiums)

Total

$50 

Present value of expenditures

for scheduled future

benefitsa (89)

Present value of future

expenditures in excess

of future revenueb ($39)

Medicare

Supplementary

Medical

Insurance – Part B

$5 

(18)

($13)

Medicare

Supplementary

Medical

Insurance – Part D

$2 

(10)

($8)

Medicare

Hospital

Insurance (Part A)

$11 

(22)

($11)

Social

Security

$32 

(39)

($7)

a

These amounts include administrative expenses for the programs.

b

Under current law, Social Security and Federal Hospital Insurance (Medicare Part A) payments are 

limited to amounts available to the respective trust funds. 

Note: Data are from the fiscal year 2006 Financial Report. 

GAO developed the concept of “fiscal exposures” to provide a framework 

for considering the wide range of responsibilities, programs, and activities 

that explicitly or implicitly expose the federal government to future 

spending. 

Major Reported Long-Term 

Fiscal Exposures 

The concept of fiscal exposures is meant to provide a broader perspective 

on long-term costs. Major reported long-term fiscal exposures in fiscal 

year 2006 with a present value totaling over $50 trillion consisted of about 

$10 trillion of liabilities reported on the Balance Sheet, $1 trillion of other

commitments and contingencies, and the $39 trillion of social insurance 

responsibilities, the last two of which are reported elsewhere in the 

Financial Report. This $50 trillion compares to about $20 trillion in fiscal 

year 2000. 

These large numbers are difficult to comprehend. Table 2 seeks to 

translate them into several figures and ratios that are more 

understandable. 

Page 5 GAO-07-607T 
Table 2: Understanding the Size of Major Reported Fiscal Exposures 

Sources: GAO analysis of data from the Department of the Treasury, Federal Reserve Board, U.S. Census Bureau, and Bureau of

Economic Analysis.

Major fiscal exposures

Percentage increase

147%

 Per person 132%

 Median household income 10%

 Disposable personal income per capita 25%

 Per full-time worker 143%

 Per household 134%

Total household net worth 27%

 Ratio of fiscal exposures to net worth 94%

2006

$50.5 trillion

$170,000

$46,326

$31,519

$400,000

$440,000

$53.3 trillion

95 percent

2000

$20.4 trillion

$70,000

$41,990

$25,127

$165,000

$190,000

$42.0 trillion

Ratio of household burden to median income 4.5 9.5 112%

49 percent

Burden

Income

Note: Percentage increases reflect actual data and may differ from calculation of rounded numbers 

presented in table. 

Another way to assess the U.S. government’s long-term fiscal outlook and

the sustainability of federal programs is to run simulations of future 

revenues and costs for all federal programs, based on a continuation of 

current or proposed policy. The simulations GAO has published since 1992 

are designed to do that. As shown in figure 1, GAO’s long-term 

simulations—which are neither forecasts nor predictions—continue to 

show ever-increasing long-term deficits resulting in a federal debt level 

that ultimately spirals out of control. The timing of deficits and the 

resulting debt buildup varies depending on the assumptions used; one 

alternative (baseline extended) takes the legislatively-mandated baseline

from the Congressional Budget Office (CBO) for the first 10 years and then 

keeps discretionary spending and revenues constant as a share of GDP 

while letting Social Security, Medicare, and Medicaid grow as projected by 

the Trustees and CBO under midrange assumptions. The other, perhaps 

more realistic, scenario based on the administration’s announced policy 

preferences changes only two things in the first 10 years: discretionary 

spending grows with the economy and all expiring tax provisions are 

extended. Like the “baseline extended” scenario, after 10 years both 

revenues and discretionary spending remain constant as a share of the 

economy. Under either optimistic set of assumptions, the federal 

government’s current fiscal policy is unsustainable. 

Long-Term Fiscal Simulations 

Page 6 GAO-07-607T 
Figure 1: Unified Surpluses and Deficits as a Share of Gross Domestic Product 

(GDP) under Alternative Fiscal Policy Simulations

Note: The simulation assumes currently scheduled Social Security benefits are paid in full throughout 

the simulation period. 

Over the long term, the nation’s growing fiscal imbalance stems primarily 

from the aging of the population and rising health care costs. Absent 

significant changes on the spending or revenue sides of the budget or both, 

these long-term deficits will encumber a growing share of federal 

resources and test the capacity of current and future generations to afford 

both today’s and tomorrow’s commitments. Continuing on this

unsustainable path will gradually erode, if not suddenly damage our 

economy, our standard of living, and ultimately our domestic tranquility 

and national security. 

If, for example, as shown in figure 2, it is assumed that recent tax 

reductions are made permanent and discretionary spending keeps pace 

with the growth of our economy, our long-term simulations suggest that by 

2040 federal revenues may be adequate to pay little more than interest on 

debt held by the public and some Social Security benefits. Neither slowing 

the growth in discretionary spending nor allowing the tax provisions, 

including the tax cuts enacted in 2001 and 2003, to expire—nor both 

together—would eliminate the imbalance. As figures 1 and 2 illustrate, 

Page 7 GAO-07-607T 
regardless of the assumptions used, the problem is too big to be solved by

economic growth alone.

Figure 2: Potential Fiscal Outcomes under Alternative Simulation: Discretionary 

Spending Grows with GDP after 2007 and All Expiring Tax Provisions Are Extended

Note: Alternative Minimum Tax (AMT) exemption amount is retained at the 2006 level through 2017 

and expiring tax provisions are extended. After 2017, revenue as a share of GDP is held constant—

implicitly assuming that action is taken to offset increased revenue from real bracket creep, the AMT,

and tax-deferred retirement accounts. 

At some point, action will need to be taken to change the nation’s fiscal 

course. The sooner appropriate actions are taken, the sooner the miracle 

of compounding will begin to work for the federal budget rather than 

against it. Conversely, the longer that action to deal with the nation’s longterm fiscal outlook is delayed, the greater the risk that the eventual 

changes will be disruptive and destabilizing. Acting sooner rather than 

later will give us more time to phase in gradual changes, while also 

providing more time for those likely to be most affected to make 

compensatory changes. 

The “fiscal gap” is a quantitative measure of long-term fiscal imbalance. 

Under GAO’s more realistic simulation, assuming debt held by the public

Page 8 GAO-07-607T 
remains at the current share of the economy (i.e., GDP), closing the fiscal

gap would require spending cuts or tax increases equal to 8 percent of the 

entire economy each year over the next 75 years, or a total of about $61 

trillion in present value terms. To put this in perspective, closing the gap 

would require an immediate and permanent increase in federal tax 

revenues of more than 40 percent or an equivalent reduction in federal 

program spending (i.e., in all spending except for interest on the debt held

by the public, which cannot be directly controlled). 

A Possible Way Forward Although the long-term fiscal outlook is driven primarily by rising health 

care costs and known demographics, we cannot ignore other government 

programs and activities. There is a need to engage in a fundamental 

review, reprioritization, and reengineering of the base of government. 

Aligning the federal government to meet the challenges and capitalize on 

the opportunities of the 21st century will require a fundamental review of 

what the federal government does, how it does it, and how it is financed. 

Many of the federal government’s current policies, programs, functions, 

and activities are based on conditions that existed decades ago, are not

results-based, and are not well aligned with 21st century realities. We need

to address the growing costs of the major entitlement programs and also 

review and reexamine all other major programs, policies, and activities on 

both the spending and the revenue side of the budget. Programs that run 

through the tax code—sometimes referred to as tax expenditures5

—must 

be reexamined along with those that run through the spending side. As we 

move forward, the federal government needs to start making tough 

choices in setting priorities and linking resources and activities to results. I 

recently provided all members of the new Congress with a package of 

materials to help them understand facts regarding the long-term fiscal 

 5

In addition to the reported net cost, the federal government foregoes tax revenues as a 

result of preferential provisions, such as tax exclusions, credits, and deductions. These

revenue losses are referred to as tax expenditures. 

Page 9 GAO-07-607T 
imbalance of the federal government, why we should act sooner rather 

than later, and what types of changes need to be considered.6

Meeting our nation’s large, growing, and structural fiscal imbalance will 

require a multipronged approach: 

• increasing transparency and enhancing the relevancy of key financial,

performance, and budget reporting and estimates to highlight our longterm fiscal challenges; 

• reinstituting and strengthening budget controls for both spending and tax

policies to deal with both near-term and longer-term deficits; 

• strengthening oversight of programs and activities, including creating 

approaches to better facilitate the discussion of integrated solutions to 

crosscutting issues; and 

• reengineering and reprioritizing the federal government’s existing 

programs, policies, and activities to address 21st century challenges and

capitalize on related opportunities. 

In two of my January 2007 testimonies,7

 I proposed a number of ideas for 

consideration to improve the transparency of long-term costs, including 

supplemental reporting in the President’s budget submission and 

additional cost information on proposals before adoption. In November 

2006, I provided the congressional leadership with recommendations, 

based on the work of GAO, for consideration for the agenda of the 110th 

Congress.8

 These recommendations focused on three areas: (1) targets for 

near-term oversight, (2) policies and programs that are in need of 

fundamental reform and reengineering, and (3) governance issues. One of 

 6

GAO, Fiscal Stewardship: A Critical Challenge Facing Our Nation, GAO-07-362SP 

(Washington, D.C.: January 2007); The Nation’s Long-Term Fiscal Outlook: September 

2006 Update, GAO-06-1077R (Washington, D.C.: Sept. 15, 2006); Understanding the 

Similarities and Differences between Accrual and Cash Deficits, GAO-07-117SP 

(Washington, D.C.: December 2006) and its supplement, Accrual and Cash Deficits: 

Update for Fiscal Year 2006, GAO-07-341SP (Washington, D.C.: Jan. 22, 2007); 

Understanding the Primary Components of the Annual Financial Report of the United

States, GAO-05-958SP (Washington, D.C.: September 2005); and Statement of the 

Comptroller General of the United States transmitting GAO’s report on the U.S.

government’s consolidated financial statements for fiscal years 2006 and 2005. 

7

GAO, Long-term Budget Outlook: Saving Our Future Requires Tough Choices Today, 

GAO-07-342T (Washington, D.C.: Jan. 11, 2007); Long-term Budget Outlook: Deficits 

Matter—Saving Our Future Requires Tough Choices Today, GAO-07-389T (Washington,

D.C.: Jan. 23, 2007). 

8

GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-235R (Washington,

D.C.: Nov. 17, 2006). 

Page 10 GAO-07-607T 
the areas I pointed out that warranted congressional attention was the 

development of a portfolio of outcome-based key national indicators (e.g., 

economic, security, social, environmental) to help measure progress 

toward national outcomes, assess conditions and trends, and help 

communicate complex issues. The Congress could take a leadership role 

in highlighting the need for a U.S. national indicator system to inform 

strategic planning, enhance performance and accountability reporting, 

inform congressional oversight and decision making, and stimulate greater 

citizen engagement. In my view, this should include consideration of a 

public/private partnership to help make this key concept a reality sooner 

rather than later. 

In order to effectively address our long-term fiscal imbalance, fundamental 

reform of existing entitlement programs is essential. However, entitlement 

reform alone will not get the job done. We also need to reprioritize and 

constrain other federal government spending and generate more 

revenues—hopefully through a reformed tax system. GAO’s 21st Century 

Challenges: Reexamining the Base of the Federal Government

9

 contains a 

suggested list of specific federal activities for reexamination, illustrative 

reexamination questions, and perspectives on various strategies, 

processes, and approaches for congressional consideration stemming from

our audit and evaluation work that can be used in reexamining the federal 

base. Answers to these questions may draw on the work of GAO and 

others; however, only elected officials can and should decide which issues 

to address as well as how and when to address them. Addressing these 

problems will require tough choices, and our fiscal clock is ticking. As a 

result, the time to start is now, to help save our future. 

The federal government restated certain of its fiscal year 2005 

consolidated financial statements to correct errors.10 Restatements relating

to property, plant, and equipment resulted from misstatements by the 

Restatements to 

Financial Statements 

 9

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP, (Washington, D.C.: February 2005). 

10According to Statement of Federal Financial Accounting Standards (SFFAS) No. 21, 

Reporting Corrections of Errors and Changes in Accounting Principles, prior-period

financial statements presented should only be restated for corrections of errors, when such

errors caused the financial statements to be materially misstated. Errors in financial 

statements can result from mathematical mistakes, mistakes in the application of 

accounting principles, or oversight or misuse of facts that existed at the time the financial 

statements were prepared. 

Page 11 GAO-07-607T 
Department of Defense, which had received a disclaimer on its originally

issued as well as its restated fiscal year 2005 financial statements.11 Certain 

other restatements that were made to the consolidated financial 

statements related to errors that occurred during the preparation of the 

fiscal year 2005 Reconciliation of Net Operating Cost and Unified Budget 

Deficit. 

Since fiscal year 2004, we have reported our concerns about restatements 

to federal agencies’ previously issued financial statements. During fiscal 

year 2005, we reviewed the causes and nature of the restatements made by 

nine CFO act agencies in fiscal year 2004 to their fiscal year 2003 financial 

statements. Between 2005 and 2006 we issued reports covering five of

these nine CFO act agencies that included recommendations for 

improvements in internal controls and procedures to prevent or detect 

future similar errors.12 In October 2006, we issued a capping report to the 

Office of Management and Budget (OMB), which communicated our 

observations on the transparency and timeliness of the nine federal 

agencies and their auditor’s restatement disclosures.13 The primary 

contributing factor for the restatement disclosure issues that we 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. In August 2005, 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 our concerns 

 11In addition to the Department of Defense, at least three other Chief Financial Officers 

(CFO) act agencies restated certain of their fiscal year 2005 financial statements to correct

misstatements.

12GAO, Financial Audit: Restatements to the Department of State’s Fiscal Year 2003 

Financial Statements, GAO-05-814R (Washington, D.C.: Sept. 20, 2005); Financial Audit: 

Restatements to the Nuclear Regulatory Commission’s Fiscal Year 2003 Financial 

Statements, GAO-06-30R (Washington, D.C.: Oct. 27, 2005); Financial Audit: Restatements

to the General Services Administration’s Fiscal Year 2003 Financial Statements, 

GAO-06-70R (Washington, D.C.: Dec. 6, 2005); Financial Audit: Restatements to the 

National Science Foundation’s Fiscal Year 2003 Financial Statements, GAO-06-229R 

(Washington, D.C.: Dec. 22, 2005); and Financial Audit: Restatements to the Department 

of Agriculture’s Fiscal Year 2003 Financial Statements, GAO-06-254R (Washington, D.C.: 

Jan. 26, 2006). 

13GAO, Financial Audit: Restated Financial Statements: Agencies’ Management and

Auditor Disclosures of Causes and Effects and Timely Communication to Users, 

GAO-07-91 (Washington, D.C.: Oct. 5, 2006). 

Page 12 GAO-07-607T 
regarding the agencies’ disclosure of restatements. In addition, in August 

2006, OMB issued Bulletin No. 06-03, Audit Requirements for Federal 

Financial Statements, which provides some information regarding 

reporting on restatements. However, we believe that OMB needs to timely 

provide additional, though complementary, restatement guidance. As such, 

our October 2006 report contained recommendations to OMB to further 

improve the restatement guidance available to agencies’ management and 

the agencies’ respective auditors. In addition, the January 2007 revision of

generally accepted government auditing standards (GAGAS) includes a 

section on reporting on restatement of previously issued financial 

statements.14

Frequent restatements to correct errors can undermine public trust and 

confidence in both the entity and all responsible parties. Material internal 

control weaknesses discussed in our fiscal year 2006 audit report serve to 

increase the risk that additional errors may occur and not be identified on 

a timely basis by agency management or their auditors, resulting in further 

restatements. 

As has been the case for the previous nine fiscal years, the federal 

government did not maintain adequate systems or have sufficient, reliable 

evidence to support certain material information reported in the U.S. 

government’s consolidated financial statements. The underlying material 

weaknesses in internal control, which generally have existed for years, 

contributed to our disclaimer of opinion on the U.S. government’s 

consolidated financial statements for the fiscal years ended September 30, 

2006, and 2005.15

Appendix I describes the material weaknesses that contributed to our 

disclaimer of opinion in more detail and highlights the primary effects of 

Highlights of Major 

Issues Related to the 

U.S. Government’s 

Consolidated 

Financial Statements 

for Fiscal Years 2006 

and 2005 

 14GAGAS, 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. 

15We previously reported that certain material weaknesses prevented us from expressing an 

opinion on the consolidated financial statements of the U.S. government for fiscal years 

1997 through 2005. 

Page 13 GAO-07-607T 
these material weaknesses on the consolidated financial statements and 

on the management of federal government operations. The material 

weaknesses that contributed to our disclaimer of opinion were the federal 

government’s inability to 

• satisfactorily determine that property, plant, and equipment and 

inventories and related property, primarily held by the Department of 

Defense (DOD), were properly reported in the consolidated financial 

statements; 

• reasonably estimate or adequately support amounts reported for certain 

liabilities, such as environmental and disposal liabilities, or determine 

whether commitments and contingencies were complete and properly 

reported; 

• support significant portions of the total net cost of operations, most 

notably related to DOD, and adequately reconcile disbursement activity at 

certain agencies; 

• adequately account for and reconcile intragovernmental activity and 

balances between federal agencies; 

• ensure that the federal government’s consolidated financial statements 

were (1) consistent with the underlying audited agency financial 

statements, (2) balanced, and (3) in conformity with GAAP; and 

• identify and either resolve or explain material differences that exist 

between certain components of the budget deficit reported in Treasury’s 

records, used to prepare the Reconciliation of Net Operating Cost and 

Unified Budget Deficit and Statement of Changes in Cash Balance from 

Unified Budget and Other Activities, and related amounts reported in 

federal agencies’ financial statements and underlying financial information 

and records.

Due to the material weaknesses and the additional limitations on the 

scope of our work, as discussed in our audit report, there may also be 

additional issues that could affect the consolidated financial statements 

that have not been identified. 

In addition to the material weaknesses that contributed to our disclaimer 

of opinion, which were discussed above, we found the following four other 

material weaknesses in internal control as of September 30, 2006. These 

weaknesses are discussed in more detail in appendix II, including the 

primary effects of the material weaknesses on the consolidated financial 

statements and on the management of federal government operations. 

These other material weaknesses were the federal government’s inability 

to 

Page 14 GAO-07-607T 
• implement effective credit reform estimation and related financial 

reporting processes, 

• determine the full extent to which improper payments exist, 

• identify and resolve information security control weaknesses and manage

information security risks on an ongoing basis, and 

• effectively manage its tax collection activities. 

Individual federal agency financial statement audit reports identify 

additional reportable conditions16 in internal control, some of which were 

reported by agency auditors as being material weaknesses at the 

individual agency level. These additional reportable conditions do not 

represent material weaknesses at the governmentwide level. Regarding 

agencies’ internal controls, in December 2004, OMB revised its Circular 

No. A-123, Management’s Responsibility for Internal Control, to provide 

guidance to federal managers on improving the accountability and 

effectiveness of federal programs and operations by establishing, 

assessing, correcting, and reporting on management controls. Requiring 

federal managers, at the executive level, to focus on internal control 

demonstrates a renewed emphasis on identifying and addressing internal 

control weaknesses. 

OMB recognized that due to the complexity of some agencies, 

implementation of these new requirements may span more than 1 year. 

Accordingly, certain agencies have adopted multiyear implementation 

plans. OMB stated that it will continue to work with the Chief Financial 

Officers Council to identify potential areas for additional guidance and 

share agencies’ best practices. It will be important that OMB monitor and 

oversee federal agencies’ implementation of these new requirements. 

For fiscal year 2006, 18 of 24 CFO Act agencies were able to attain 

unqualified opinions on their financial statements by the November 15, 

2006, reporting deadline established by OMB (see app. III). The 

independent auditor of the Department of State subsequently withdrew its 

disclaimer of opinion on the department’s fiscal year 2006 financial 

statements and reissued an unqualified opinion on such financial 

statements dated December 12, 2006. As a result, 19 CFO Act agencies 

System Problems at 

Agencies Continue to 

Hinder Accountability 

 16Reportable conditions are matters coming to our attention that, in our judgment, should

be communicated because they represent significant deficiencies in the design or operation 

of internal control that could adversely affect the federal government’s ability to meet the

internal control objectives described in our audit report. 

Page 15 GAO-07-607T 
received unqualified opinions on their fiscal year 2006 financial 

statements. However, irrespective of these unqualified opinions, many 

agencies do not have timely, reliable, and useful financial information and 

effective controls with which to make informed decisions and ensure 

accountability on an ongoing basis. The ability to produce the data needed 

for efficient and effective management of day-to-day operations in the 

federal government and provide the necessary accountability to taxpayers 

and the Congress has been a long-standing challenge at most federal 

agencies. 

The results of the fiscal year 2006 assessments performed by agency 

inspectors general or their contract auditors under the Federal Financial

Management Improvement Act of 1996 (FFMIA) show that serious 

problems continue to affect financial management systems at most of the 

24 CFO Act agencies. These problems include nonintegrated financial 

systems, lack of accurate and timely recording of data, inadequate 

reconciliation procedures, noncompliance with accounting standards and 

the U.S. Government Standard General Ledger (SGL), and weak security 

over information systems. While the problems are much more severe at 

some agencies than at others, the nature and severity of the problems 

indicate that overall, management at most CFO Act agencies lacks the 

complete range of information needed for accountability, decision making, 

and performance reporting. 

Under FFMIA, as a part of the CFO Act agencies’ financial statement 

audits, CFO Act agency auditors are required to report whether agencies’ 

financial management systems substantially comply with (1) federal 

financial management systems requirements, (2) applicable federal 

accounting standards, and (3) the SGL at the transaction level. These 

factors are critical for improving accountability over government 

operations and routinely producing sound cost and operating performance 

information. Noncompliance with federal financial management systems 

requirements was the deficiency most frequently reported by auditors. 

These deficiencies involved not only core financial systems, but also 

administrative and programmatic systems. 

The ability of federal financial management systems to substantially 

address FFMIA requirements has not advanced at the same pace as 

obtaining unqualified opinions on agency financial statements. As shown 

in figure 3, in fiscal year 2006, auditors for 17 of the 24 CFO Act agencies 

reported that the agencies’ financial management systems did not 

substantially comply with one or more of FFMIA’s three requirements 

compared to auditors for 20 of the 24 CFO Act agencies in fiscal year 1997. 

Page 16 GAO-07-607T 
Figure 3: Auditors’ FFMIA Assessments for Fiscal Years 1997 through 2006 

Note: Data come from independent auditors’ reports for fiscal years 1997 through 2006 prepared by

agency inspectors general and contract auditors. 

For 6 of the 7 CFO Act agencies whose auditors did not report substantial 

noncompliance with FFMIA requirements for fiscal year 2006, auditors 

provided negative assurance, meaning that nothing came to their attention 

indicating that the agencies’ financial management systems did not 

substantially fulfill FFMIA requirements. The auditors for these 6 

agencies17 did not definitively state whether the agencies’ systems 

substantially complied with FFMIA requirements, as is required under the 

statute. In contrast, auditors for the Agency for International Development 

(AID) provided positive assurance by stating that the agency’s financial 

management systems substantially complied with the requirements of 

FFMIA. AID’s auditors had not reported AID’s financial management 

systems as substantially compliant in prior years. Further, auditors for 

GSA cited actions taken to address financial reporting controls and 

provided negative assurance on FFMIA in fiscal year 2006; whereas, in 

0

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

CFO Act agencies systems not in compliance

Source: Independent auditors' reports for fiscal years 1997 through 2006 prepared by agency inspectors general and contract auditors. 

Year

20

21 21

19

20

19

17

16

18

17

 17The CFO Act agencies whose auditors provided negative assurance were the Department 

of Commerce, Environmental Protection Agency, General Services Administration (GSA), 

National Science Foundation, Office of Personnel Management, and the Social Security 

Administration.

Page 17 GAO-07-607T 
fiscal year 2005 they had reported the agency’s systems as not compliant. 

Conversely, auditors for the Department of Labor (Labor) reported that 

the agencies’ financial management systems did not substantially comply 

with FFMIA requirements in fiscal year 2006 due to newly identified 

weaknesses in Labor’s information security controls. The auditors had not 

reported any FFMIA compliance issues at the agency in fiscal years 2004 

and 2005. 

In an effort to address FFMIA-related problems such as nonintegrated 

systems, inadequate reconciliations, and lack of compliance with the SGL, 

a number of agencies have efforts underway to implement new financial 

management systems or to upgrade existing systems. Agencies expect that

the new systems will provide reliable, useful, and timely data to support 

managerial decision making, help provide accountability to taxpayers, and 

assist in congressional oversight. Whether in government or the private

sector, implementing and upgrading systems is a resource-consuming and 

difficult job that brings a degree of risk. Organizations that follow and 

effectively implement accepted best practices in systems development and 

implementation (commonly referred to as disciplined processes) can 

manage and reduce these risks to acceptable levels. The failure to do so 

can have serious repercussions. For example, auditors at the Department 

of Energy (Energy) and the National Aeronautical and Space 

Administration (NASA) have reported many issues related to the 

implementation of new financial management systems at those agencies. 

NASA has received disclaimers of opinion on their financial statements 

since implementing their new system in fiscal year 2003. While 

management at both agencies are taking actions to address the problems 

resulting from the systems implementation, more work is needed to meet

FFMIA requirements and obtain an unqualified opinion on their financial

statements. 

The financial management line of business is OMB’s initiative to help 

address the need to reduce the cost and improve the outcome of federal 

financial systems implementations. This initiative promotes leveraging of

shared service solutions to enhance the government’s performance and 

services. OMB has projects under way to develop standard business 

processes, a common governmentwide accounting structure, and specific 

measures to assess the performance of shared service providers to help 

provide a foundation for the financial management line of business 

initiative. Because the federal government is one of the largest, most 

complex organizations in the world, operating, maintaining, and 

modernizing its financial management systems represents a monumental 

challenge—from both cost and technical perspectives. As pressure mounts 

Page 18 GAO-07-607T 
to increase accountability, and efforts to diminish federal spending 

intensify, sustained and committed leadership will be a key factor in the 

successful implementation of governmentwide initiatives. 

Three major impediments to our ability to render an opinion on the U.S. 

government’s consolidated financial statements continued to be: 

(1) serious financial management problems at DOD, (2) the federal 

government’s inability to adequately account for and reconcile 

intragovernmental activity and balances between federal agencies, and 

(3) the federal government’s ineffective process for preparing the 

consolidated financial statements. Extensive efforts by DOD officials and 

cooperative efforts between agency chief financial officers, inspectors 

general, Treasury officials, and OMB officials will be needed to resolve 

these serious obstacles to achieving an opinion on the U.S. government’s 

consolidated financial statements. 

Essential to further improving financial management governmentwide and

ultimately to achieving an opinion on the U.S. government’s consolidated 

financial statements is the resolution of serious weaknesses in DOD’s 

business operations. DOD is one of the largest and most complex 

organizations in the world. For decades, we have reported on the lack of 

efficiency and effectiveness in DOD’s business operations, including 

financial management, and the effect these deficiencies have had on the 

department’s, and the government’s, ability to oversee, manage, and report 

on its operations. DOD’s financial management weaknesses are pervasive, 

complex, long-standing, and deeply rooted in virtually all its business 

operations. Execution of DOD’s business operations spans a wide range of 

defense organizations, including the military services and their respective 

major commands and functional activities, numerous large defense 

agencies and field activities, and various combatant and joint operational 

commands that are responsible for military operations for specific 

geographic regions or theaters of operations. The nature and severity of 

DOD’s business operations and system deficiencies not only affect 

financial reporting, but also impede the ability of DOD managers to receive 

and utilize the full range of information needed to effectively manage dayto-day operations. Such weaknesses adversely affect DOD’s (and the 

government’s) ability to control costs; ensure basic accountability; 

anticipate future costs and claims on the budget; measure performance; 

maintain funds control; prevent fraud, waste, and abuse; and address 

Addressing Major 

Impediments to an Opinion 

on the Consolidated 

Financial Statements 

Financial Management at DOD 

Page 19 GAO-07-607T 
pressing management issues, including supporting warfighters and their 

families. To date, none of the military services or major DOD components 

has passed the test of an independent financial audit18 because of 

pervasive weaknesses in business management processes, controls, and 

systems. Moreover, of the 27 areas on GAO’s high-risk list, DOD has 8 of 

its own high-risk areas and shares responsibility for 7 governmentwide 

high-risk areas.19

Effective oversight, reporting, and decision making depends upon 

information that is timely, reliable, and useful. DOD has transformation 

efforts underway to improve its business management processes, control, 

and systems. These efforts will take many years to complete and represent 

a huge challenge to the department since improvements must be made 

while continuing to support ongoing operations and activities. While the 

department is making progress in developing and implementing 

approaches to better understand and address weaknesses in its business 

operations, more remains to be done. 

On March 1, 2006, I testified20 that DOD had issued a third key component 

of its business transformation strategy: the Financial Improvement and 

Audit Readiness (FIAR) Plan.21 According to DOD, the FIAR Plan, which 

was issued in December 2005 and updated in June and September of 2006, 

is intended to provide DOD components with a construct for resolving 

problems affecting the accuracy, reliability, and timeliness of financial 

 18Although not major DOD components, the Military Retirement Fund received an

unqualified audit opinion on its fiscal year 2006 financial statements, and the DOD 

Medicare Eligible Retiree Health Care Fund received a qualified audit opinion on its fiscal 

year 2006 financial statements. 

19GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: January 2007). The 

eight specific DOD high-risk areas are: (1) approach to business transformation, (2)

business systems modernization, (3) contract management, (4) financial management, (5)

personnel security clearance program, (6) supply chain management, (7) support

infrastructure management, and (8) weapon systems acquisition. The seven

governmentwide high-risk areas are (1) disability programs, (2) interagency contracting, 

(3) information systems and critical infrastructure, (4) information sharing for homeland

security, (5) human capital, (6) real property, and (7) protection of critical technologies.

20GAO, 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.: Mar. 1,

2006). 

21The Business Enterprise Architecture and the Enterprise Transition Plan are the other

two key components of DOD’s business transformation strategy. 

Page 20 GAO-07-607T 
information, and obtaining clean financial statement audit opinions. In 

addition, the FIAR Plan outlines the business rules and oversight structure 

DOD has established to guide financial improvement activities and audit 

preparation efforts. According to DOD, its June and September 2006 FIAR 

Plan updates were largely intended to refine previous versions of the plan

by (1) identifying milestones that must be met for assertions regarding the 

reliability of reported financial statement information to occur on time, (2) 

improving consistency between components regarding their corrective 

actions and milestones, and (3) expanding on earlier descriptions of how 

the FIAR Plan will be integrated with the Enterprise Transition Plan. We 

have reported and made numerous recommendations to DOD regarding 

DOD’s efforts to develop and implement its Business Enterprise 

Architecture and Transition Plan and obtain favorable audit opinions. In 

addition, we have reviewed the FIAR Plan and related updates, and 

discussed them with DOD and OMB. However, we cannot comment on 

specific focus areas or milestones identified in the FIAR Plan because we 

have not seen any of the underlying component or other subordinate plans 

upon which the FIAR Plan is based. 

DOD has taken important steps toward developing key components of its 

business transformation strategy. However, we continue to stress that 

while the reliability of reported financial statement information is 

important, the effectiveness of DOD’s FIAR Plan in addressing the 

department’s financial management deficiencies will ultimately be 

measured by the department’s ability to provide timely, reliable, and useful 

information for day-to-day management and decision making. 

Furthermore, the department continues to lack a comprehensive, 

enterprisewide approach to planning and decision making and the 

sustained leadership needed to ensure successful transformation and 

address systemic business challenges. More specifically, DOD has not yet 

developed a plan that covers all key business functions, and contains 

results-oriented goals, measures, and expectations that link organizational 

and individual performance goals, while also being clearly linked to DOD’s 

overall investment plans. Furthermore, as we previously testified, because 

of the complexity and long-term nature of business transformation, we 

continue to believe that DOD needs a Chief Management Official (CMO) 

with significant authority, experience, and tenure to provide sustained 

leadership and integrate DOD’s overall business transformation efforts. 

The National Defense Authorization Act for Fiscal Year 200622 directs the 

 22National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163, § 907, 119

Stat. 3136, 3403 (Jan. 6, 2006). 

Page 21 GAO-07-607T 
department to study the feasibility of a CMO position in DOD. In this 

regard, the Institute for Defense Analysis issued its report in December 

2006 and, among other things, called upon the Congress to establish a 

Deputy CMO (executive level III official) at the department. Further, in 

May 2006, the Defense Business Board recommended, among other things, 

the creation of a Principal Under Secretary of Defense, as a level II official

with a 5-year term appointment, to serve as CMO. I strongly support an 

executive level II official and believe that someone at this level is needed 

to be successful given the magnitude of the challenge and the need to 

effect change across the department. It is important to note that a CMO 

would not assume the responsibilities of the undersecretaries of defense,

the service secretaries, or other DOD officials for the day-to-day 

management of the department. Rather, the CMO would be responsible 

and accountable for planning, integrating, and executing the overall 

business transformation effort. The reason I am so passionate about the 

need for a CMO at DOD is that progress at DOD has historically been 

painfully slow. A host of well-intended past improvement initiatives have 

largely failed. I am concerned that without a CMO who is responsible and 

accountable for demonstrable results and sustained success, history will 

continue to repeat itself.

We will continue to monitor DOD’s efforts to transform its business 

operations and address its financial management deficiencies as part of 

our continuing DOD business enterprise architecture work and our 

oversight of DOD’s financial statement audit. 

Federal agencies are unable to adequately account for and reconcile 

intragovernmental activity and balances. OMB and Treasury require the 

CFOs of 35 executive departments and agencies to reconcile, on a 

quarterly basis, selected intragovernmental activity and balances with 

their trading partners.23 In addition, these agencies are required to report 

to Treasury, the agency’s inspector general, and GAO on the extent and

results of intragovernmental activity and balances reconciliation efforts as 

of the end of the fiscal year. 

A substantial number of the CFO Act agencies did not adequately perform 

the required reconciliations for fiscal years 2006 and 2005. For these fiscal 

years, based on trading partner information provided in the 

Intragovernmental Activity and 

Balances 

 23Trading partners are U.S. government agencies, departments, or other components

included in the consolidated financial statements that do business with each other. 

Page 22 GAO-07-607T 
Governmentwide Financial Reporting System (GFRS) discussed below, 

Treasury produced a “Material Difference Report” for each agency 

showing amounts for certain intragovernmental activity and balances that 

significantly differed from those of its corresponding trading partners as of 

the end of the fiscal year. After analysis of the “Material Difference 

Reports” for fiscal year 2006, we noted that a significant number of CFOs 

were unable to adequately explain the differences with their trading 

partners or did not provide adequate documentation to support responses 

on the CFO Representations. For both fiscal years 2006 and 2005, amounts 

reported by federal agency trading partners for certain intragovernmental

accounts were significantly out of balance. In addition, for fiscal year 2006, 

about 31 percent of the significant agencies identified by Treasury and 

OMB did not perform the required audit procedures on their 

intragovernmental trading partner data included in the footnotes to their 

closing packages.24 As a result of the above, the federal government’s 

ability to determine the effect of these differences on the amounts 

reported in the consolidated financial statements is significantly impaired. 

To help address this longstanding problem, on November 13, 2006, OMB 

issued Memorandum No. M-07-03, Business Rules for Intragovernmental 

Transactions, which has also been incorporated in the Treasury Financial

Manual.25 The OMB memorandum added criteria for resolving 

intragovernmental disputes and major differences between trading 

partners for certain intragovernmental transactions by creating the Chief 

Financial Officers Council’s Intragovernmental Dispute Resolution 

Committee.26 Resolving the intragovernmental transactions problem 

remains a difficult challenge and will require a strong commitment by 

federal agencies to fully implement the recently issued business rules, and 

continued strong leadership by OMB. 

While further progress was demonstrated in fiscal year 2006, the federal

government continued to have inadequate systems, controls, and 

procedures to ensure that the consolidated financial statements are 

Preparing the Consolidated 

Financial Statements 

 24GFRS uses a closing package methodology that has been developed to capture each

federal agency’s information and link the agencies’ audited financial statements to the 

governmentwide consolidated financial statements. 

25Treasury Financial Manual, Bulletin No. 2007-3, Intragovernmental Business Rules.

26The U.S. Chief Financial Officer’s Council is an organization of the CFOs and Deputy 

CFOs of the largest federal agencies and senior officials of OMB and Treasury who work

collaboratively to improve financial management in the U.S. government.

Page 23 GAO-07-607T 
consistent with the underlying audited agency financial statements, 

balanced, and in conformity with GAAP. For fiscal year 2006, Treasury 

showed progress by demonstrating that amounts in the Statement of 

Social Insurance were consistent with the underlying federal agencies’ 

audited financial statements and that the Balance Sheet and Statement of

Net Cost were consistent with federal agencies’ audited financial 

statements prior to eliminating intragovernmental activity and balances. 

However, Treasury’s process for compiling the consolidated financial 

statements did not ensure that the information in the remaining three 

principal financial statements and notes were fully consistent with the 

underlying information in federal agencies’ audited financial statements 

and other financial data. During fiscal year 2006, Treasury, in coordination

with OMB, developed and began implementing corrective action plans and 

milestones for short-term and long-range solutions for certain internal 

control weaknesses we have previously reported regarding the process for 

preparing the consolidated financial statements. Resolving some of these 

internal control weaknesses will be a difficult challenge and will require a 

strong commitment from Treasury and OMB as they execute and 

implement their corrective action plans. 

The Financial Report of the United States Government provides useful 

information on the government’s financial position at the end of the fiscal 

year and changes that have occurred over the course of the year. However, 

in evaluating the nation’s fiscal condition, it is critical to look beyond the 

short-term results and consider the overall long-term financial condition 

and long-term fiscal imbalance of the government—that is, the 

sustainability of the federal government’s programs, commitments, and 

responsibilities in relation to the resources expected to be available. More 

important than the government’s $450 billion net operating cost for the 

year ended September 30, 2006, fiscal simulations by GAO and others 

show that over the long-term, we face large and growing structural deficits

due primarily to Medicare and other social insurance commitments. 

As I have testified before, the current financial reporting model does not 

clearly, comprehensively and transparently show the wide range of 

responsibilities, programs, and activities that may either obligate the 

federal government to future spending or create an expectation for such 

spending. Thus, it provides a potentially unrealistic and misleading picture 

of the federal government’s overall performance, financial condition, and 

future fiscal outlook. 

The Need for an 

Improved Federal 

Financial Reporting 

Model 

Page 24 GAO-07-607T 
After a decade of reporting at the governmentwide level perhaps now is an 

appropriate time to step back and consider the need for further revisions 

to the current federal financial reporting model, which would affect both

consolidated and agency financial reporting. While the current reporting 

model recognizes some of the unique needs of the federal government, a 

broad reconsideration of the federal financial reporting model could 

address the following types of questions: 

• What kind of information is most relevant and useful for a sovereign 

nation? 

• Do traditional financial statements convey information in a transparent 

manner? 

• What is the role of the balance sheet in the federal government reporting 

model? 

• How should items that are unique to the federal government, such as 

social insurance commitments and the power to tax, be reported? 

Engaging in a reevaluation of this nature could stimulate discussion that 

would bring about a new way of thinking about the federal government’s 

financial and performance reporting needs. To understand various 

perceptions and needs of the stakeholders for federal financial reporting, a 

wide variety of stakeholders from the public and private sector should be 

consulted. Ultimately, the goal of such a reevaluation would be reporting 

enhancements that can help the Congress deliberate strategies to address 

the federal government’s challenges, including those of our growing longterm fiscal imbalance. 

More specifically, we continue to support several specific improvements 

to federal financial reporting. For example, the federal government’s 

financial reporting should be expanded to disclose the reasons for 

significant changes during the year in scheduled social insurance benefits 

and funding. It should also include a Statement of Fiscal Sustainability—

providing a long-term look at the sustainability of current federal fiscal 

policy in the context of all major federal spending programs and tax 

policies. The reporting on fiscal sustainability should include additional 

information that will assist in understanding the sustainability of current 

social insurance and other federal programs, including key measures of 

fiscal sustainability and intergenerational equity,27 projected annual cash 

 27Intergenerational equity assesses the extent to which different age groups may be 

required to assume financial burdens to sustain federal responsibilities. 

Page 25 GAO-07-607T 
flows, and changes in fiscal sustainability during the reporting period. We 

believe that such reporting needs to reflect the significant commitments 

associated with the Social Security and Medicare programs while 

recognizing a liability for the net assets (principally investments in special 

U.S. Treasury securities) of the “trust funds.” Other areas to consider 

might include the reporting of key outcome-based performance 

information. We support the current efforts of the Federal Accounting 

Standards Advisory Board (FASAB) to begin a project on fiscal 

sustainability reporting. In addition, an easily understandable summary 

annual report should be prepared and published that includes in a clear, 

concise, and transparent manner, key financial and performance 

information embodied in the Financial Report. 

In closing, given the federal government’s current financial condition and 

growing long-term fiscal imbalance, the need for the Congress and the 

President to have timely, reliable, and useful financial and performance 

information is greater than ever. Sound decisions on the current results 

and future direction of vital federal government programs and policies are 

more difficult without such information. Until the problems discussed in 

this testimony are effectively addressed, they will continue to have 

adverse implications for the federal government and the taxpayers. 

Addressing the nation’s long-term fiscal imbalance constitutes a major 

transformational challenge that may take a generation or more to resolve. 

Given the size of the projected deficit, the U.S. government will not be able

to grow its way out of this problem—tough choices will be required. 

Across government, financial management improvement initiatives are 

underway, and if effectively implemented, have the potential to greatly 

improve the quality of financial management information as well as the 

efficiency and effectiveness of agency operations. By the end of my term 

as Comptroller General, I would like to see the civilian CFO Act agencies 

routinely producing not only annual financial statements that can pass the 

scrutiny of a financial audit, but also quarterly financial statements and 

other meaningful financial and performance data to help guide decision 

makers on a day-to-day basis. For DOD, my expectations are not as high 

given the current status of DOD’s financial management practices, yet it is 

realistic for at least major portions of DOD’s financial information to 

become auditable by the end of my term. Moreover, progress on 

developing meaningful financial and performance reporting on the federal 

government will be a key area that I will continue to champion. I am 

determined to do whatever I can to help ensure that we are not the first 

Closing Comments 

Page 26 GAO-07-607T 
generation to leave our children and grandchildren a legacy of failed fiscal 

stewardship and the hardships that would bring. 

Finally, I want to emphasize the value of sustained congressional interest 

in these issues, as demonstrated by this subcommittee’s leadership. It will 

be key that, going forward, the appropriations, budget, authorizing, and 

oversight committees hold agency top leadership accountable for 

resolving the remaining problems and that they support improvement 

efforts. 

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions that you or other members of the 

subcommittee may have at this time. 

For further information regarding this testimony, please contact Jeffrey C. 

Steinhoff, Managing Director; Gary T. Engel, Director; and Paula Rascona,

Acting Director; Financial Management and Assurance, at (202) 512-2600.

Key contributions to this testimony were also made by staff on the 

Consolidated Financial Statement audit team. 

GAO Contacts and 

Acknowledgments 

Page 27 GAO-07-607T 
Page 28 GAO-07-607T 

Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion 

The continuing material weaknesses discussed below contributed to our 

disclaimer of opinion on the federal government’s consolidated financial

statements. The federal government did not maintain adequate systems or 

have sufficient, reliable evidence to support information reported in the 

consolidated financial statements, as described below. 

The federal government could not satisfactorily determine that property, 

plant, and equipment (PP&E) and inventories and related property were 

properly reported in the consolidated financial statements. Most of the 

PP&E and inventories and related property are the responsibility of the 

Department of Defense (DOD). As in past years, DOD did not maintain 

adequate systems or have sufficient records to provide reliable 

information on these assets. Other agencies, most notably the National 

Aeronautics and Space Administration, reported continued weaknesses in

internal control procedures and processes related to PP&E. 

Without reliable asset information, the federal government does not fully 

know the assets it owns and their location and condition and cannot 

effectively (1) safeguard assets from physical deterioration, theft, or loss; 

(2) account for acquisitions and disposals of such assets; (3) ensure that 

the assets are available for use when needed; (4) prevent unnecessary 

storage and maintenance costs, or purchase of assets already on hand; and 

(5) determine the full costs of programs that use these assets. 

The federal government could not reasonably estimate or adequately 

support amounts reported for certain liabilities. For example, DOD was 

not able to estimate with assurance key components of its environmental 

and disposal liabilities. In addition, DOD could not support a significant 

amount of its estimated military postretirement health benefits liabilities 

included in federal employee and veteran benefits payable. These 

unsupported amounts related to the cost of direct health care provided by 

DOD-managed military treatment facilities. Further, the federal 

government could not determine whether commitments and 

contingencies, including those related to treaties and other international 

agreements entered into to further the U.S. government’s interests, were 

complete and properly reported. 

Problems in accounting for liabilities affect the determination of the full 

cost of the federal government’s current operations and the extent of its 

liabilities. Also, improperly stated environmental and disposal liabilities 

and weak internal control supporting the process for their estimation 

Property, Plant, and 

Equipment and 

Inventories and 

Related Property 

Liabilities and 

Commitments and 

Contingencies 
affect the federal government’s ability to determine priorities for cleanup 

and disposal activities and to appropriately consider future budgetary 

resources needed to carry out these activities. In addition, when 

disclosures of commitments and contingencies are incomplete or 

incorrect, reliable information is not available about the extent of the 

federal government’s obligations. 

The previously discussed material weaknesses in reporting assets and 

liabilities, material weaknesses in financial statement preparation, as 

discussed below, and the lack of adequate disbursement reconciliations at 

certain federal agencies affect reported net costs. As a result, the federal 

government was unable to support significant portions of the total net cost 

of operations, most notably related to DOD. 

With respect to disbursements, DOD and certain other federal agencies 

reported continued weaknesses in reconciling disbursement activity. For

fiscal years 2006 and 2005, there was unreconciled disbursement activity, 

including unreconciled differences between federal agencies’ and the 

Department of the Treasury’s (Treasury) records of disbursements and 

unsupported federal agency adjustments, totaling billions of dollars, which 

could also affect the balance sheet. 

Unreliable cost information affects the federal government’s ability to 

control and reduce costs, assess performance, evaluate programs, and set 

fees to recover costs where required. Improperly recorded disbursements 

could result in misstatements in the financial statements and in certain 

data provided by federal agencies for inclusion in The Budget of the 

United States Government concerning obligations and outlays. 

Federal agencies are unable to adequately account for and reconcile 

intragovernmental activity and balances. The Office of Management and 

Budget (OMB) and Treasury require the chief financial officers (CFO) of 

35 executive departments and agencies to reconcile, on a quarterly basis, 

selected intragovernmental activity and balances with their trading 

partners. In addition, these agencies are required to report to Treasury, the 

agency’s inspector general, and GAO on the extent and results of 

intragovernmental activity and balances reconciliation efforts as of the 

end of the fiscal year. 

A substantial number of the agencies did not adequately perform the 

required reconciliations for fiscal years 2006 and 2005. For these fiscal 

Cost of Government 

Operations and 

Disbursement Activity 

Accounting for and 

Reconciliation of 

Intragovernmental 

Activity and Balances 

Page 29 GAO-07-607T 
years, based on trading partner information provided in the 

Governmentwide Financial Report System (GFRS), Treasury produced a 

“Material Difference Report” for each agency showing amounts for certain 

intragovernmental activity and balances that significantly differed from 

those of its corresponding trading partners as of the end of the fiscal year.

After analysis of the Material Difference Reports for fiscal year 2006, we 

noted that a significant number of CFOs were unable to adequately explain 

the differences with their trading partners or did not provide adequate 

documentation to support responses on the CFO Representations. For 

both fiscal years 2006 and 2005, amounts reported by federal agency

trading partners for certain intragovernmental accounts were significantly 

out of balance. In addition, for fiscal year 2006, about 31 percent of the 

significant agencies identified by Treasury and OMB did not perform the 

required audit procedures on their intragovernmental trading partner data

included in the footnotes to their closing packages.1

 As a result of the 

above, the federal government’s ability to determine the impact of these 

differences on the amounts reported in the consolidated financial 

statements is significantly impaired. 

While further progress was demonstrated in fiscal year 2006, the federal

government continued to have inadequate systems, controls, and 

procedures to ensure that the consolidated financial statements are 

consistent with the underlying audited agency financial statements, 

balanced, and in conformity with U.S. generally accepted accounting 

principles (GAAP). In addition, as discussed in our scope limitation 

section of our audit report, Treasury could not provide the final fiscal year 

2006 consolidated financial statements and supporting documentation in 

time for us to complete all of our planned auditing procedures. During our 

fiscal year 2006 audit, we found the following:2

Preparation of 

Consolidated 

Financial Statements 

 1

GFRS uses a closing package methodology that has been developed to capture each

federal agency’s information and link the agencies’ audited financial statements to the 

governmentwide consolidated financial statements. 

2

Most of the issues we identified in fiscal year 2006 existed in fiscal year 2005, and many 

have existed for a number of years. In April 2006, we reported in greater detail on the 

issues we identified, in GAO, Financial Audit: Significant Internal Control Weaknesses 

Remain in Preparing the Consolidated Financial Statements of the U.S. Government, 

GAO-06-415 (Washington, D.C.: Apr. 21, 2006). This report includes numerous

recommendations to Treasury and OMB.

Page 30 GAO-07-607T 
• Treasury showed progress by demonstrating that amounts in the 

Statement of Social Insurance were consistent with the underlying federal

agencies’ audited financial statements and that the Balance Sheet and the

Statement of Net Cost were consistent with federal agencies’ financial 

statements prior to eliminating intragovernmental activity and balances. 

However, Treasury’s process for compiling the consolidated financial 

statements did not ensure that the information in the remaining three 

principal financial statements and notes were fully consistent with the 

underlying information in federal agencies’ audited financial statements 

and other financial data.

• To make the fiscal years 2006 and 2005 consolidated financial statements 

balance, Treasury recorded net decreases of $11 billion and $4.1 billion, 

respectively, to net operating cost on the Statement of Operations and 

Changes in Net Position, which it labeled “Other—Unmatched 

transactions and balances.”3

 An additional net $10.4 billion and $3.2 billion 

of unmatched transactions were recorded in the Statement of Net Cost for 

fiscal years 2006 and 2005, respectively. Treasury is unable to fully identify 

and quantify all components of these unreconciled activities. 

• The federal government did not have an adequate process to fully identify 

and report items needed to reconcile the operating results, which for fiscal

year 2006 showed a net operating cost of $449.5 billion, to the budget

results, which for the same period showed a unified budget deficit of 

$247.7 billion. 

• Treasury’s elimination of certain intragovernmental activity and balances 

continues to be impaired by the federal agencies’ problems in handling 

their intragovernmental transactions. As discussed above, amounts 

reported for federal agency trading partners for certain intragovernmental

accounts were significantly out of balance. This resulted in the need for 

unsupported intragovernmental elimination entries by Treasury in order to 

force the Statements of Operations and Changes in Net Position into 

balance. In addition, differences in other intragovernmental accounts, 

primarily related to transactions with the General Fund, have not been 

reconciled, still remain unresolved, and total hundreds of billions of 

dollars. Therefore, the federal government continues to be unable to 

determine the impact of unreconciled intragovernmental activity and 

balances on the consolidated financial statements. 

• We have consistently reported that certain financial information required 

by GAAP was not disclosed in the consolidated financial statements. In 

2006, the Federal Accounting Standards Advisory Board issued a new 

 3

Although Treasury was unable to determine how much of the unmatched transactions and

balances, if any, relate to operations, it reported this amount as a component of net 

operating cost in the consolidated financial statements. 

Page 31 GAO-07-607T 
standard that eliminated or lessened the disclosure requirements for the 

consolidated financial statements related to certain information that 

Treasury had not been reporting.4 There continued, though, to be other 

disclosures required by GAAP that are not disclosed in the consolidated 

financial statements. Treasury has plans to address certain of the omitted 

disclosures in future years’ consolidated financial statements. Because of 

certain of the material weaknesses noted in our audit report, we were 

unable to determine if the omitted information was material to the 

consolidated financial statements. 

• Treasury continued to make progress in addressing certain other internal 

control weaknesses in Treasury’s process for preparing the consolidated

financial statements. However, internal control weaknesses continued to

exist involving a lack of (1) appropriate documentation of certain policies 

and procedures for preparing the consolidated financial statements, 

(2) adequate supporting documentation for certain adjustments made to 

the consolidated financial statements, and (3) effective management 

reviews. 

• The consolidated financial statements include financial information for the 

executive, legislative, and judicial branches, to the extent that federal 

agencies within those branches have provided Treasury such information. 

However, as we have reported in past years, there continue to be 

undetermined amounts of assets, liabilities, costs, and revenues that are 

not included, and the federal government did not provide evidence or 

disclose in the consolidated financial statements that the excluded 

financial information was immaterial. 

• As in previous years, Treasury did not have adequate systems and 

personnel to address the magnitude of the fiscal year 2006 financial 

reporting challenges it faced, such as (1) GFRS undergoing further 

development

5

 and not yet being fully operational, and (2) weaknesses in 

Treasury’s process for preparing the consolidated financial statements as 

discussed above. We found that personnel at Treasury’s Financial 

Management Service had excessive workloads that required an 

extraordinary amount of effort and dedication to compile the consolidated 

financial statements; however, there were not enough personnel with 

specialized financial reporting experience to help ensure reliable financial 

reporting by the reporting date. 

 4

SFFAS No. 32, Consolidated Financial Report of the United States Government

Requirements, Implementing Statement of Federal Financial Accounting Concepts 4,

“Intended Audience and Qualitative Characteristics for the Consolidated Financial Report

of the United States Government” (Washington, D.C.: Sept. 28, 2006). 

5

See GAO, Financial Management Systems: Lack of Disciplined Processes Puts Effective

Implementation of Treasury’s Governmentwide Financial Report System at Risk, 

GAO-06-413 (Washington, D.C.: Apr. 21, 2006). 

Page 32 GAO-07-607T 
• During fiscal year 2006, Treasury, in coordination with OMB, developed 

and began implementing corrective action plans and milestones for shortterm and long-range solutions for certain internal control weaknesses we 

have previously reported regarding the process for preparing the 

consolidated financial statements. Resolving some of these internal 

control weaknesses will be a difficult challenge and will require a strong 

commitment from Treasury and OMB as they execute and implement their 

corrective action plans.

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit 

and Statement of Changes in Cash Balance from Unified Budget and Other 

Activities report the budget deficit for fiscal years 2006 and 2005 of $247.7 

billion and $318.6 billion, respectively.6

 The budget deficit is calculated by

subtracting actual budget outlays (outlays) from actual budget receipts 

(receipts). 

For several years, we have been reporting material unreconciled 

differences between the total net outlays reported in selected federal 

agencies’ Statement of Budgetary Resources (SBR) and Treasury’s central 

accounting records used to compute the budget deficit7

 reported in the 

consolidated financial statements. OMB and Treasury have been working

with federal agencies to reduce these material unreconciled differences. 

Such efforts have resulted in significantly reducing the net outlay 

differences in fiscal year 2006. However, billions of dollars of differences 

still exist in this and other components of the deficit because the federal

government does not have effective processes and procedures for 

identifying, resolving, and explaining material differences in the 

components of the deficit between Treasury’s central accounting records 

and information reported in agency financial statements and underlying 

agency financial information and records. Until these differences are 

timely reconciled by the federal government, their effect on the U.S. 

government’s consolidated financial statements will be unknown. 

Outlays and 

Receipts—

Components of the 

Budget Deficit 

 6

The budget deficit, receipts, and outlays amounts are reported in Treasury’s Monthly 

Treasury Statement and the Budget of the United States Government. 

7

See GAO’s audit report on its audit of the federal government’s fiscal year 2005 financial 

statements that was incorporated in the 2005 Financial Report of the U.S. Government

published by Treasury. Also, see GAO, Financial Audit: Process for Preparing the 

Consolidated Financial Statements of the U.S. Government Needs Improvement, 

GAO-04-45 (Washington, D.C.: Oct. 30, 2003). 

Page 33 GAO-07-607T 
In fiscal year 2006, we again noted that several agencies’ auditors reported 

internal control weaknesses (1) affecting the agencies’ SBRs, and 

(2) relating to monitoring, accounting, and reporting of budgetary 

transactions. These weaknesses could affect the reporting and calculation

of the net outlay amounts in the agencies’ SBRs. In addition, such 

weaknesses also affect the agencies’ ability to report reliable budgetary 

information to Treasury and OMB and may affect the unified budget 

outlays reported by Treasury in its Combined Statement of Receipts, 

Outlays, and Balances,8

 and certain amounts reported in the President’s 

Budget. 

 8

Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget 

results and cash-related assets and liabilities of the federal government with supporting

details. Treasury represents this report as the recognized official publication of receipts

and outlays of the federal government based on agency reporting. 

Page 34 GAO-07-607T 
Page 35 GAO-07-607T 

Appendix II: Other Material Weaknesses 

The federal government did not maintain effective internal control over 

financial reporting (including safeguarding assets) and compliance with 

significant laws and regulations as of September 30, 2006. In addition to 

the material weaknesses discussed in appendix I that contributed to our 

disclaimer of opinion, we found the following four other material 

weaknesses in internal control. 

Federal agencies accounting for the majority of the reported balances for 

direct loans and loan guarantee liabilities continue to have internal control 

weaknesses related to their credit reform estimation and related financial 

reporting processes. While progress in addressing these long-standing 

weaknesses was reported by federal credit agencies, these issues and the 

complexities associated with estimating the costs of lending activities 

significantly increase the risk that material misstatements in agency and 

governmentwide financial statements could occur and go undetected.

Further, these weaknesses continue to adversely affect the federal 

government’s ability to support annual budget requests for these 

programs, make future budgetary decisions, manage program costs, and 

measure the performance of lending activities. 

Under the leadership of OMB, agencies have continued to make progress 

in addressing improper payments. Improvements, though, are still needed 

to fully address the requirements of the Improper Payments Information 

Act of 2002 (IPIA).1

 Major challenges remain in meeting the goals of the act

and ultimately better ensuring the integrity of payments.2

 The IPIA requires 

federal agencies to review all programs and activities, identify those that 

may be susceptible to significant improper payments,3

 estimate and report 

the annual amount of improper payments for those programs, and 

Loans Receivable and 

Loan Guarantee 

Liabilities 

Improper Payments 

 1

Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

2

See GAO, Improper Payments: Incomplete Reporting under the Improper Payments 

Information Act Masks the Extent of the Problem, GAO-07-254T (Washington, D.C.: Dec. 5,

2006). 

3

IPIA defines improper payments as any payment that should not have been made or that

was made in an incorrect amount (including overpayments and underpayments) under

statutory, contractual, administrative, or other legally applicable requirements. It includes 

any payment to an ineligible recipient, any payment for an ineligible service, any duplicate 

payment, payments for services not received, and any payment that does not account for 

credit for applicable discounts. OMB’s guidance defines significant improper payments as

those in any particular program that exceed both 2.5 percent of program payments and $10

million annually. 
implement actions to cost-effectively reduce improper payments. In 

addition, OMB has established a program-specific initiative under the 

President’s Management Agenda for 15 federal agencies to hold federal 

agency managers accountable for meeting the goals of IPIA and to ensure

that the necessary attention and resources are dedicated to meeting the 

IPIA requirements. 

For fiscal year 2006, federal agencies’ estimates of improper payments, 

based on available information, totaled about $42 billion, a net increase of

about $4 billion, or an 11 percent increase, from the prior year improper 

payment estimate of $38 billion.4

 This increase was primarily attributable 

to 10 newly reported programs with improper payment estimates totaling 

about $2.3 billion and certain federal agencies reporting an increase in 

estimates for programs that had previously reported. 

We found that some agencies have not annually reviewed all programs and 

activities, have not estimated improper payments for all risk-susceptible 

programs, or have not estimated improper payments for all components of 

risk-susceptible programs. For example, we noted that in fiscal year 2006,

improper payment estimates were not made for 9 risk-susceptible federal

programs, including Medicaid, with total program outlays of about $183 

billion for fiscal year 2006. Further, we noted some agencies reported 

noncompliance issues and major management challenges related to IPIA 

implementation, including the methodologies used to estimate improper 

payments, adequacy of agency documentation, management oversight, and 

contract management. 

Although progress has been made, serious and widespread information 

security control weaknesses 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. GAO 

has reported information security as a high-risk area across government 

since February 1997. Such information security control weaknesses could 

result in compromising the reliability and availability of data that are 

recorded in or transmitted by federal financial management systems. A 

Information Security 

 4

In their fiscal year 2006 Performance and Accountability Reports (PAR), selected federal 

agencies updated their fiscal year 2005 improper payment estimates to reflect changes 

since issuance of their fiscal year 2005 PARs. These updates increased the governmentwide 

improper payment estimate for fiscal year 2005 from $38 billion to $39 billion. 

Page 36 GAO-07-607T 
primary reason for these weaknesses is that federal agencies have not yet

fully institutionalized comprehensive security management programs, 

which are critical to identifying information security control weaknesses, 

resolving information security problems, and managing information 

security risks on an ongoing basis. The Congress has shown continuing 

interest in addressing these risks, as evidenced by hearings on the 

implementation of the Federal Information Security Management Act of 

20025

 and on information security. In addition, the administration has 

taken important actions to improve information security, such as requiring 

agencies in OMB Memorandum M-06-166

 to perform specific actions to 

protect certain personally identifiable information and issuing extensive 

guidance on information security. 

Material internal control weaknesses and systems deficiencies continue to 

affect the federal government’s ability to effectively manage its tax 

collection activities,7

 an issue that has been reported in our financial 

statement audit reports for the past 9 years. Due to errors and delays in 

recording taxpayer information, payments, and other activities, taxpayers 

were not always credited for payments made on their taxes owed, which 

could result in undue taxpayer burden. In addition, the federal government 

did not always follow up on potential unreported or underreported taxes 

and did not always pursue collection efforts against taxpayers owing taxes 

to the federal government. 

Weaknesses in controls over tax collection activities continue to affect the 

federal government’s ability to efficiently and effectively account for and 

collect revenue. Additionally, weaknesses in financial reporting of 

revenues affect the federal government’s ability to make informed 

decisions about collection efforts. As a result, the federal government is 

vulnerable to loss of tax revenue and exposed to potentially billions of 

dollars in losses due to inappropriate refund disbursements. 

Tax Collection 

Activities 

 5

Title III of the E-Government Act of 2002, Pub. L. No. 107-347, 116 Stat. 2899, 2946 (Dec. 

17, 2002). 

6

OMB Memorandum No. M-06-16, Protection of Sensitive Agency Information (June 23,

2006). 

7

GAO, Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements, 

GAO-07-136 (Washington, D.C.: Nov. 9, 2006).

Page 37 GAO-07-607T 
Page 38 GAO-07-607T 

Appendix III: Fiscal Year 2006 Audit Results 

Table 3: CFO Act Agencies: Fiscal Year 2006 Audit Results and Principal Auditors 

CFO Act agencies 

Opinion rendered by

agency auditor 

Agencies’ auditors reported

material weaknesses or

noncompliance Principal auditor

Agency for International Development Unqualified √ OIG 

Agriculture Unqualified √ OIG 

Commerce Unqualified √ KPMG LLP 

Defense Disclaimer √ OIG 

Education Unqualified √ Ernst & Young, LLP 

Energy a√ KPMG LLP 

Environmental Protection Agency Unqualified √ OIG 

General Services Administration Unqualified √ Pricewaterhouse Coopers LLP

Health and Human Services Unqualified √ Pricewaterhouse Coopers LLP

Homeland Security b√ KPMG LLP 

Housing and Urban Development Unqualified √ OIG 

Interior Unqualified √ KPMG LLP 

Justice Unqualified √ KPMG LLP 

Labor Unqualified √ KPMG LLP 

National Aeronautics and Space 

Administration

Disclaimer √ Ernst & Young, LLP 

National Science Foundation Unqualified Clifton Gunderson LLP 

Nuclear Regulatory Commission Unqualified √ R. Navarro & Associates, Inc. 

Office of Personnel Management Unqualified √ KPMG LLP 

Small Business Administration Unqualified √ KPMG LLP 

Social Security Administration Unqualified Pricewaterhouse Coopers LLP

State c√ Leonard G. Birnbaum and 

Company, LLP

Transportation Qualified √ OIG 

Treasury Unqualified √ KPMG LLP 

Veterans Affairs Unqualified √ Deloitte & Touche LLP 

Source: GAO.

a

For fiscal year 2006, only the Consolidated Balance Sheet of the Department of Energy was 

subjected to audit, and the auditor qualified its opinion on this statement. 

b

For fiscal year 2006, only the Consolidated Balance Sheet and the related Statement of Custodial 

Activity of the Department of Homeland Security were subjected to audit; the auditor was unable to 

express an opinion on these two financial statements. 

c

The auditor of the Department of State’s (State) fiscal year 2006 financial statements disclaimed an 

opinion because they were not provided complete financial statements or responses to certain 

requests for evidential material in time to meet the November 15, 2006, reporting deadline. 

Subsequently, the auditors satisfied themselves about the amounts presented on the financial 

statements. As a result, the auditor issued an unqualified opinion on State’s fiscal year 2006 financial 

statements dated December 12, 2006. 

(198511) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER