United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Federal Financial 

Management, Government Information, Federal 

Services, and International Security, Committee on 

Homeland Security and Governmental Affairs, 

U.S. Senate

FEDERAL FINANCIAL 

MANAGEMENT 

Critical Accountability and 

Fiscal Stewardship 

Challenges Facing Our 

Nation 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 3:00 p.m. EST 

March 1, 2007

 

GAO-07-542T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 1, 2007

FEDERAL FINANCIAL MANAGEMENT

Critical Accountability and Fiscal 

Stewardship Challenges Facing Our 

Nation 

Highlights of GAO-07-542T, a testimony 

before the Subcommittee on Federal 

Financial Management, Government 

Information, Federal Services, and 

International Security, Committee on 

Homeland Security and Governmental 

Affairs, U.S. Senate 

The foundation laid by the Chief 

Financial Officers Act of 1990 and 

other management reform 

legislation provided a much needed 

statutory basis to improve the 

accountability of government 

programs and operations. Such

reforms were intended to produce 

reliable, timely, and useful financial 

information to help manage day-today operations and exercise 

oversight and promote fiscal 

stewardship. 

This testimony, based on GAO's 

prior work, addresses (1) the 

progress made and challenges 

remaining to improve federal 

financial management practices,

and (2) the serious challenges 

posed by the government's 

deteriorating long-range fiscal

condition and my views on a

possible way forward. 

What GAO Recommends

GAO has made numerous

recommendations over the years to

federal agencies aimed at 

addressing financial management

weaknesses. Regarding the

government's fiscal imbalance, this

testimony reiterates a possible way 

forward based on a multipronged

approach of increased financial 

reporting transparency; reinstituted

budget controls; strengthened 

oversight; and reprioritized 

programs, policies, and activities. 

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, the federal government still has a long way to go to address the 

six principal challenges to fully realizing strong federal financial 

management: (1) transforming financial management and business practices 

at DOD, (2) improving agency financial and performance reporting, (3) 

modernizing financial management systems, (4) addressing key remaining 

internal control weaknesses, (5) building a financial management workforce 

for the future, and (6) strengthening consolidated financial reporting. 

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

financial condition and fiscal outlook are worse than many understand. We 

are currently experiencing strong economic growth and yet running large onbudget (operating) deficits that are largely unrelated to the Global War on 

Terrorism. The federal government faces large and growing structural 

deficits in future years due primarily to known demographic trends and 

rising health care costs. As shown in the chart below, if it is assumed that 

recent tax reductions are made permanent and discretionary spending keeps 

pace with the growth of our economy, GAO's 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 discretionary spending growth nor allowing certain tax 

provisions to expire—nor both together—would eliminate the imbalance. 

Potential Fiscal Outcomes under Alternative Simulation: Discretionary Spending Grows with 

GDP after 2007 and All Expiring Tax Provisions Are Extended 

Note: The 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. 

www.gao.gov/cgi-bin/getrpt?GAO-07-542T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jeffrey C. 

Steinhoff or McCoy Williams at (202) 512-

2600. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to testify on the progress made towards a 

results-oriented, accountable, and relevant government and the challenges 

that must be addressed to provide accountability and exercise 

stewardship. The foundation laid by the Chief Financial Officers (CFO) 

Act of 19901

 and other management reform legislation provides a basis to 

improve the accountability of government programs and operations as 

well as to routinely produce valuable cost and operating performance 

information. While certain material weaknesses in internal control and in 

selected accounting and financial reporting practices continue to prevent 

GAO from being able to issue an opinion on the consolidated financial

statements of the U.S. government, the federal government has come a 

long way since enactment of the CFO Act. At the same time, there is a 

continuing need to address persistent, long-standing accountability 

problems and to take financial management to the next level. This will be 

important as the federal government faces difficult fiscal challenges that 

will require reliable cost and performance information to support timely 

decisions on spending and, at the same time, pressures to address fraud, 

waste, abuse, and mismanagement will only intensify. 

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, reprioritization, 

and reengineering of the base of 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 emerging social, economic, and security challenges. 

Your decision to begin this Congress with a hearing on these important 

issues demonstrates the seriousness with which this Subcommittee views 

the financial management challenges facing the federal government and 

your commitment to address them. Today I would like to: 

• outline progress made to date and the key challenges in improving 

federal financial management practices, and 

 1

Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990). 

Page 1 GAO-07-542T 
• highlight the challenges posed by the government’s fiscal condition and 

my views on a possible way forward. 

Our prior work on which this testimony is based was performed in 

accordance with generally accepted government auditing standards. 

Since the enactment of key financial management reforms, the federal 

government has made substantial progress in strengthening financial 

management. Since passage of the CFO Act, all of the administrations have 

made financial management reform a priority. Improving financial 

management has been one of the cornerstones of the President’s 

Management Agenda from the outset of the current administration, and 

the Executive Branch Management Scorecard, which tracks the status of 

progress at agencies, has been an effective tool to drive improvement. We

have seen a cultural change in how financial management is viewed and 

carried out in most agencies and a recognition of the value and need for 

good financial management throughout government, which was not the 

case in 1990 when the Congress passed the CFO Act. Financial

management systems have been improved. Internal control has been 

strengthened, and the Office of Management and Budget (OMB) has 

increased emphasis on establishing, assessing, correcting, and reporting 

on internal control. Generally accepted government accounting standards 

have been developed. For fiscal year 2006, 19 of 24 CFO Act agencies 

received clean audit opinions on their financial statements, up from just 6 

for fiscal year 1996. Audited financial statements for federal agencies were

issued just 11⁄2 months after the close of this fiscal year as opposed to 5 

months, which was the case just a few years ago.

Summary 

A number of challenges remain to fully realizing the world-class financial 

management anticipated by the Congress through the enactment of 

financial management reform legislation. It will be critical that the federal

government meet these challenges so that reliable, useful, and timely 

financial information is available not only for day-to-day management, 

decision making, and oversight, but also to provide the key cost and 

performance data needed to help address our nation’s looming fiscal 

crisis. I see six principal challenges, which I will highlight in my testimony 

today against the backdrop of our nation’s deteriorating long-range 

financial condition and long-term fiscal imbalance. 

• There is a need to transform financial management and business 

practices at the Department of Defense (DOD) that adversely affect the

department’s and the federal government’s ability to control costs; 

Page 2 GAO-07-542T 
ensure basic accountability; anticipate future costs and claims on the 

budget; measure performance; maintain funds control; prevent fraud, 

waste, and abuse; and address pressing and persistent management 

problems. Of the 27 areas on GAO’s high-risk list, 15 relate wholly or 

partially to DOD. The problems at DOD are deeply rooted and I do not 

anticipate they will be resolved in the near future, but meaningful 

progress should be expected. Today, we see a commitment from top 

DOD management, and actions are under way, such as the Financial 

Improvement and Audit Readiness (FIAR) plan, to address serious 

problems. In our view, DOD needs to (1) develop and implement a 

viable strategic plan with goals, objectives, key milestones, and 

measures to monitor and report on progress in transforming its key 

business operations, and (2) establish a chief management officer to 

oversee its overall business transformation efforts. 

• Improvements in financial and performance reporting practices are 

needed so that for the remaining 23 CFO Act agencies, unqualified 

opinions on financial statements become routine. In particular, the 

Department of Homeland Security (DHS)—an agency whose 

implementation and transformation we have designated as high risk 

since its inception—faces significant challenges to achieve this 

milestone. Developing and implementing corrective action plans to 

improve the underlying financial management systems and internal 

control will be necessary to address financial reporting problems. 

• Financial management systems must be modernized to provide the 

complete range of information needed for accountability, performance 

reporting, and decision making. While the problems are much more 

severe at some agencies than others, overall, agencies’ current financial

systems do not meet basic statutory systems requirements and, more 

importantly, do not provide timely, reliable, and useful information for 

day-to-day management. Our work has shown that best practices in 

systems implementation that can reduce risk are not being consistently 

applied when agencies undertake a major financial management 

system modernization effort. Full adoption of these best practices is 

equally important as OMB moves forward on its initiative to migrate 

agencies to shared service providers.

• The federal government continues to face a myriad of material 

weaknesses and reportable conditions in internal control related to 

property, plant, and equipment; inventories and related property; 

liabilities and commitments and contingencies; and disbursement 

activities, just to mention a few of the problem areas. Particularly 

problematic to the U.S. government’s consolidated financial statements 

Page 3 GAO-07-542T 
is the lack of internal control to adequately account for and reconcile 

intragovernmental activity and balances. Agencies need to tackle longstanding internal control weaknesses by fully embracing the 

assessment, reporting, and corrective action approach called for in 

OMB’s revised Circular No. A-123 and following intragovernmental 

procedures developed by OMB and the Department of the Treasury 

(Treasury). Another key problem area is the tens of billions of dollars 

federal agencies waste on improper payments.2

 Adopting our specific 

recommendations to improve reporting under the Improper Payments 

Information Act of 20023

 is important to fully understand the nature and 

extent of this problem. 

• The federal financial workforce that supports the business needs of 

today is not well positioned to support the needs of tomorrow. The 

lack of a sufficient number of staff with the requisite knowledge, skills, 

and experience has hampered financial management operations at key 

agencies such as DOD and DHS. At Treasury, during our work on the 

U.S. government consolidated financial statements, we found that there 

were not enough personnel with specialized financial reporting 

experience to help ensure reliable financial reporting by the reporting 

date. Building a sufficient and sustainable financial management 

workforce for the future to support program managers and decision 

makers will require a workforce transformation strategy developed in 

partnership between agency CFOs and Chief Human Capital Officers, 

working with OMB and the Office of Personnel Management (OPM). To 

sustain financial management reform given the leadership changes that 

occur at the end of any administration, establishing management 

accountability at an appropriate level with significant authority, 

experience, and tenure to provide sustained leadership is needed to 

achieve successful and sustainable transformation. Establishing such 

positions at selected agencies, such as DOD and DHS, will be a critical

success factor. 

 2

The Improper Payments Information Act of 2002 (Public Law 107-300) 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. 

3

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

Page 4 GAO-07-542T 
• Three major impediments—that have existed for the entire 10-year 

period GAO has been required to perform this annual audit—continue 

to prevent us from rendering an opinion on the U.S. government’s 

consolidated financial statements: (1) the deeply rooted, long-standing, 

and pervasive financial management problems in DOD; (2) the federal

government’s inability to adequately account for and reconcile 

significant amounts in intragovernmental activity and balances 

between federal agencies; and (3) the federal government’s ineffective 

process for preparing the consolidated financial statements. As I 

previously discussed, addressing the first two impediments will be 

difficult challenges. Resolving the weaknesses in the systems, controls, 

and procedures for preparing the consolidated financial statements will 

require a strong commitment from Treasury and OMB. 

Notwithstanding the difficulties to overcome current challenges, we 

should consider the need for further revisions to the current federal 

financial reporting model to recognize the unique needs of the federal 

government, which would affect both consolidated and agency 

financial reporting. 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 our 

growing long-term fiscal imbalance. In this regard, we support the 

current efforts of the Federal Accounting Standards Advisory Board 

(FASAB) to begin a project on fiscal sustainability reporting. We also 

support a Statement of Fiscal Sustainability that clearly shows the 

extent to which future revenues are sufficient to support the federal 

government’s growing entitlement and other spending. 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.” We also believe that any such 

statements need to consider the intergenerational implications of our 

current fiscal path. Other areas to reconsider might include the 

reporting of key outcome-based performance information, as well as 

the role of a balance sheet in the federal government reporting model. 

In addition, we support the preparation and publication of an easily 

understandable summary annual report that includes in a clear, 

concise, and transparent manner, key financial and performance 

information embodied in the Financial Report of the United States 

Government. 

Addressing the six principal financial management challenges I just 

discussed will help ensure that the financial and performance data 

Page 5 GAO-07-542T 
provided to decision makers are reliable, useful, and timely. Having such

information will be critical to deal with our nation’s significant challenges 

regarding the 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. I 

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

materials to help them understand the facts, why we should start sooner 

rather than later, and what types of changes need to be considered.4

 More 

troubling than the persistent short-term budget deficits, long-range fiscal 

simulations by GAO and others show that over the long term, we face large

and growing structural deficits in future years due primarily to known 

demographic trends and rising health care costs. The federal government’s 

fiscal exposures now total 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. We all know that it is hard to make 

sense of what “trillions” means. 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. Clearly, 

despite recent progress on our short-term deficits, we have been moving in

the wrong direction in connection with our long-range imbalance in recent 

years. 

As members of this Subcommittee know, continuing on our current fiscal 

path would gradually erode, if not suddenly damage, our economy, our 

standard of living, and ultimately even our domestic tranquility and 

national security. 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. Our report, 21st Century Challenges: Reexamining the 

Base of the Federal Government5 provided a suggested list of specific 

 4

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.); 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.); 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. 

5

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP (Washington, D.C.: February 2005). 

Page 6 GAO-07-542T 
federal activities for reexamination, and perspectives on various 

strategies, processes, and approaches for congressional consideration that 

could be used in reexamining the federal base. I have proposed a number 

of ideas for improving the transparency of long-term costs and the 

attention paid to these costs before decisions are made. For example, in 

addition to the Statement of Fiscal Sustainability I just described, a 

portfolio of outcome-based key national indicators could also be a useful

tool to help measure progress, assess trends, and communicate complex 

issues. The Congress should consider supporting a public/private 

partnership approach to making key national indicators a reality. 

The federal government has made substantial progress in financial 

management. If I were to summarize in just a few words the environment 

in 2007 as compared to prior to enactment of key financial management 

laws, financial management has gone from the backroom to the 

boardroom. There has been a cultural change in how financial 

management is viewed and carried out in the agencies and a recognition of

the value and need for good financial management throughout 

government, which was not the case in 1990 when the Congress passed the 

CFO Act. Financial management systems and internal control have been 

strengthened. Generally accepted government accounting standards have 

been developed. For fiscal year 2006, 19 of 24 CFO Act agencies received 

clean audit opinions on their financial statements, up from just 6 for fiscal 

year 1996. While there has been marked progress in federal financial 

management, a number of challenges still remain, including transforming

financial management and business practices at DOD, modernizing 

financial management systems, and building a financial management 

workforce for the future. Fully meeting these challenges will enable the 

federal government to provide the world-class financial management 

anticipated by the CFO Act and other management reform legislation. 

Progress Made and 

the Key Challenges 

that Remain in 

Improving Federal 

Financial 

Management 

Practices 

Progress Made since 

Passage of Key Federal 

Financial Management 

Legislation 

First, I would like to briefly highlight the legislative framework that 

governs federal financial management. The Congress has long recognized

the importance of the federal government implementing strong financial 

management practices. Towards this end, the Congress has passed a series 

of management reform legislation aimed at improving and providing a

strong foundation for federal financial management. This series of 

legislation started with the Federal Managers’ Financial Integrity Act of 

Page 7 GAO-07-542T 
1982 (FMFIA),6

 which the Congress passed to strengthen internal control 

and accounting systems throughout the federal government, among other 

purposes. In accordance with FMFIA, GAO has issued Standards for 

Internal Control in the Federal Government,

7

 which provides the 

standards that are directed at helping agency managers implement 

effective internal control, an integral part of improving financial 

management systems. 

While agencies had achieved some early success in identifying and 

correcting material internal control and accounting system weaknesses, 

their efforts to implement FMFIA had not produced the intended results. 

Therefore, the Congress passed additional management reform legislation 

to improve the general and financial management of the federal 

government. This legislation includes the (1) CFO Act of 1990, (2) 

Government Performance and Results Act of 1993 (GPRA),8

 (3) 

Government Management Reform Act of 1994 (GMRA),9

 (4) Federal 

Financial Management Improvement Act of 1996 (FFMIA),10 (5) ClingerCohen Act of 1996,

11 (6) Accountability of Tax Dollars Act of 2002 

(ATDA),

12 and (7) Improper Payments Information Act of 2002 (IPIA).13

The CFO Act is the most comprehensive and far-reaching financial 

management improvement act since the Budget and Accounting 

Procedures Act of 1950. The CFO Act established a leadership structure, 

provided for long-range planning, required audited financial statements 

and modern financial systems, and strengthened accountability reporting 

for certain agencies. Three years later, the Congress enacted GPRA, which 

required certain agencies to develop strategic plans, set performance 

goals, and report annually on actual performance compared to goals. 

 6

FMFIA is codified at 31 U.S.C. § 3512(c), (d). 

7

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00.21.3.1

(Washington, D.C.: November 1999). 

8

Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). 

9

Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994). 

10Pub. L. No. 104-208, div. A., sec. 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996). 

11Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996). 

12Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002). 

13Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

Page 8 GAO-07-542T 
GPRA’s emphasis on performance management complements the 

concepts in the CFO Act. GPRA was followed by GMRA, which made 

permanent the pilot program in the CFO Act for annual audited agencylevel financial statements, expanded this requirement to all CFO Act 

agencies, and established a requirement for the preparation and audit of 

governmentwide consolidated financial statements. In 1996, FFMIA built 

on the foundation laid by the CFO Act by reflecting the need for CFO Act 

agencies to have systems that can generate reliable, useful, and timely 

information with which to make fully informed decisions and to ensure 

accountability on an ongoing basis. The Clinger-Cohen Act of 1996 (also 

known as the Information Technology Management Reform Act of 1996) 

sets forth a variety of initiatives to support better decision making for 

capital investments in information technology, which has led to the 

development of the Federal Enterprise Architecture and better-informed 

capital investment and control processes within agencies and across 

government. ATDA required most executive agencies that were not 

otherwise required by statute or exempted by OMB, to prepare annual

audited financial statements and to submit such statements to the 

Congress and the Director of OMB. Finally, IPIA has increased visibility 

over improper payments by requiring executive agency heads, based on 

guidance from the OMB,14 to identify programs and activities susceptible to 

significant improper payments,15 estimate amounts improperly paid, and 

report on the amounts of improper payments and their actions to reduce 

them. The combination of reforms ushered in by these laws, if successfully 

implemented, provides a solid foundation to improve the accountability of 

government programs and operations as well as to routinely produce 

valuable cost and operating performance information. 

The five key financial management improvements that we have noted from 

a governmentwide perspective are as follows. 

• Achieving Cultural Change—We have seen true cultural change in 

how financial management is viewed. This has been accomplished 

through a lot of hard work by OMB and the agencies and continued 

 14OMB Memorandum M-03-13, “Improper Payments Information Act of 2002 (Public Law

107-300)” (May 21, 2003), and OMB Circular No. A-136, Financial Reporting Requirements, 

§ II.5.6 (July 24, 2006). OMB recently issued revised guidance for fiscal year 2006 reporting 

in OMB Memorandum M-06-23, “Issuance of Appendix C to OMB Circular No. A-123” (Aug.

10, 2006). 

15OMB’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. 

Page 9 GAO-07-542T 
strong support and oversight by the Congress. At the top level, federal 

financial management reform has gained momentum through the 

committed support of top federal leaders. For example, improved 

financial performance is one of the governmentwide initiatives in the 

President’s Management Agenda (PMA). Under this initiative, agency

CFOs share responsibility—both individually and through the efforts of 

the CFO Council—for improving the financial performance of the 

government. The Executive Branch Management Scorecard, developed 

as part of the PMA, has been an effective tool to monitor progress and 

help drive much needed improvements. 

• Establishing a Governmentwide Leadership Structure—The Joint 

Financial Management Improvement Program (JFMIP)16 Principals—

the Secretary of the Treasury, the Director of OMB, the Director of 

OPM, and myself, the Comptroller General—have provided leadership 

by holding periodic meetings that have resulted in unprecedented 

substantive deliberations and agreements focused on key reform issues 

such as improving accounting for and reporting on social insurance, 

accelerating issuance of audited agency financial statements, and 

advocating audit committees. GAO has led by example in this regard, 

by establishing an audit advisory committee to help us in overseeing 

the effectiveness of our current financial reporting and audit processes. 

As established by the CFO Act, the Office of Federal Financial

Management (OFFM), the OMB organization with governmentwide 

responsibility for federal financial management for executive agencies, 

has demonstrated leadership by undertaking a number of initiatives 

related to improving financial management capabilities ranging from 

requiring the use of commercial off-the-shelf financial systems to the 

promotion of cost accounting to improve the availability of 

management information for decision making. In addition to assessing 

the status of agencies’ progress in improving financial performance for 

the PMA, OFFM has also issued bulletins, circulars, and other guidance 

 16JFMIP was originally formed under the authority of the Budget and Accounting 

Procedures Act of 1950 and was a joint and cooperative undertaking of the Government 

Accountability Office, the Department of the Treasury, OMB, and OPM, working in 

cooperation with each other to improve financial management practices in the federal 

government. A JFMIP Program Management Office developed federal financial 

management systems requirements, and tested core federal financial management systems. 

In a December 2004 memorandum, OMB announced a realignment of JFMIP’s 

responsibilities for financial management policy and oversight in the federal government. 

Page 10 GAO-07-542T 
to provide a broad-based foundation for transforming agencies’ 

financial management operations. 

• Strengthening Internal Control—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. As we testified17 in 2005, many 

internal control problems have been identified and fixed, especially at 

the lower levels where internal control assessments were performed 

and managers could take focused actions to fix relatively simple 

problems. As a recent case in point, based on our 2006 assessment of 

high-risk programs,18 two programs previously designated as high risk, 

largely due to financial management weaknesses, were removed from 

the list. 

Agencies have also made progress in implementing processes and 

controls to identify, estimate, and reduce improper payments. After 

passage of IPIA, OMB established Eliminating Improper Payments in 

2005 as a new program-specific initiative under the PMA. This separate 

PMA program initiative was established in this manner to ensure that 

agency managers are held accountable for meeting the goals of IPIA 

and are, therefore, dedicating the necessary attention and resources to 

meeting IPIA requirements. OMB also issued guidance in August 2006

to help clarify and update requirements to support governmentwide 

IPIA compliance.19

• Improving Financial Management Systems and Operations—Since 

enactment of financial management reform legislation, federal financial

management systems requirements have been developed for the core 

financial system; managerial cost system; and other administrative and 

programmatic systems, such as grants, property, revenue, travel, and 

loans, which are part of an overall financial management system. After 

 17GAO, Financial Management: Effective Internal Control is Key to Accountability, GAO05-321T (Washington, D.C.: Feb. 16, 2005). 

18GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: January 2007). 

19OMB, Issuance of Appendix C to OMB Circular A-123, M-06-23, August 10, 2006.

Page 11 GAO-07-542T 
the realignment of the JFMIP Program Management Office, OFFM has 

continued the practice of issuing these requirements. Beginning in 

1999, OMB required agencies to purchase commercial off-the-shelf 

software that had been tested and certified by the federal government 

against the systems requirements that I just mentioned. With these 

requirements, the federal government has better defined the

functionality needed in its financial management systems, which has 

helped the vendor community understand federal agencies’ needs. 

OMB continues to move forward on initiatives that support the PMA 

with the further development of the financial management line of 

business to promote leveraging shared service solutions to enhance the 

government’s performance and services. The financial management 

line of business initiative is modeled after the consolidation of agencies 

processing payroll, which were dramatically reduced from 22 to 4 

systems. OMB, in conjunction with an interagency task force, estimated 

that these efforts could save billions of taxpayer dollars. Ultimately, 

this initiative is expected to (1) reduce the number of systems that each

individual agency must support, (2) promote standardization, and (3) 

reduce the duplication of efforts. 

• Preparing Auditable Financial Statements—Unqualified audit 

opinions for CFO Act agencies’ financial statements have grown from 6 

in fiscal year 1996 to 19 in fiscal year 2006. Improvements in timeliness 

have been even more dramatic over the years. Agencies were able to

issue their audited financial statements within the accelerated

reporting time frame—all 24 CFO Act agencies issued their audited 

financial statements by the November 15, 2006, deadline,20 set by OMB, 

just 45 days after the close of the fiscal year. Just a few years ago, most 

considered this accelerated time frame unrealistic and unachievable. 

Another definitive example of progress made to date is the 

establishment of the Federal Accounting Standards Advisory Board 

(FASAB). In conjunction with the passage of the CFO Act, the OMB 

Director, Secretary of the Treasury, and the Comptroller General 

established FASAB to develop accounting standards and principles for 

 20The independent auditors for the Department of State’s fiscal year 2006 financial 

statements issued a disclaimer of opinion on November 14, 2006, because the department 

could not provide evidential matter in a timely manner to meet the November 15, 2006, 

reporting deadline. After receiving adequate documentation to support the amounts on the

financial statements, the auditors issued an unqualified opinion on the Department of 

State’s fiscal year 2006 financial statements on December 12, 2006. 

Page 12 GAO-07-542T 
the newly required financial statements. The concepts and standards 

are the basis for OMB’s guidance to agencies on the form and content 

of their financial statements and for the government’s consolidated 

financial statements. FASAB is comprised of a 10-member advisory 

board of 4 knowledgeable individuals from government and 6

nonfederal members selected from the general financial community, 

the accounting and auditing community, and academia to promulgate 

proposed accounting standards designed to meet the needs of federal 

agencies and other users of federal financial information. The mission 

of FASAB is to develop accounting standards after considering the 

financial and budgetary information needs of congressional oversight 

groups, executive agencies, and other users. These accounting and 

reporting standards are essential for public accountability and for an 

efficient and effective functioning of our democratic system of 

government. The standards developed by FASAB have been recognized 

by the American Institute of Certified Public Accountants as generally

accepted accounting standards for federal entities. 

Financial Management 

Challenges Facing the 

Federal Government 

While there has been marked progress in federal financial management, a

number of challenges still remain. The principal challenges remaining are 

(1) transforming financial management and business practices at DOD, 

(2) improving financial and performance reporting, (3) modernizing 

financial management systems, (4) tackling long-standing internal control 

weaknesses, (5) building a financial management workforce for the future, 

and (6) strengthening consolidated financial reporting. Fully meeting these 

challenges will enable the federal government to provide the world-class 

financial management anticipated by the CFO Act and other management 

reform legislation. While there continues to be much focus on the agency

and governmentwide audit opinions, getting a clean audit opinion, though 

important in itself, is not the end goal. The end goal is the establishment of 

a fully functioning CFO operation that includes (1) modern financial 

management systems that provide reliable, timely, and useful information 

to support day-to-day decision making and oversight, and for the 

systematic measurement of performance; (2) sound internal controls that 

safeguard assets and help ensure proper accountability; and (3) a cadre of

highly qualified CFOs and supporting staff. 

DOD’s long-standing financial and business management difficulties are 

pervasive, complex, and deeply rooted in virtually all business operations 

throughout the department. Resolution of these serious problems is 

essential to improving financial management governmentwide and 

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

Transforming DOD’s Financial 

and Business Management 

Practices 

Page 13 GAO-07-542T 
statements. Of the 27 areas on GAO’s high-risk list,21 DOD has 8 of its own 

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

areas. These weaknesses adversely affect the department’s and the federal

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 

pressing management problems. Additionally, the department invests 

billions of dollars each year to operate, maintain, and modernize its 

business systems. But despite this significant annual investment, the 

department has been continually confronted with the difficult task of 

implementing business systems on time, within budget, and with the 

promised capability. 

We also have concerns about the reasonableness, reliability, and 

transparency of DOD’s budget requests, especially the supplemental 

budget requests the department has submitted to the Congress in recent 

years. Reasonableness and reliability are critical factors not only for 

financial information, but also for budget data. As I testified22 last year, our 

prior work found numerous problems with DOD’s processes for recording 

and reporting costs for the Global War on Terrorism (GWOT), the funding 

for which has been provided through regular appropriations as well as 

supplemental appropriations. These problems included long-standing 

deficiencies in DOD’s financial management systems and business 

processes, the use of estimates instead of actual cost data, and the lack of

adequate supporting documentation. As a result, neither DOD nor the 

Congress have reliable information on GWOT costs or the use of 

appropriated funds and also lack historical data useful in considering 

future funding needs. 

The nature and severity of DOD’s financial management, business 

operations, and system deficiencies not only affect financial reporting, but 

also impede the ability of DOD managers to receive the full range of 

information needed to effectively manage day-to-day operations. Such 

weaknesses have adversely affected the ability of DOD to control costs, 

ensure basic accountability, and prevent fraud. The following examples 

illustrate DOD’s continuing problems. 

 21GAO-07-310. 

22 GAO, Global War on Terrorism: Observations on Funding, Costs, and Future

Commitments, GAO-06-885T (Washington, D.C.: July 18, 2006). 

Page 14 GAO-07-542T 
• We found that hundreds of separated battle-injured soldiers were 

pursued for collection of military debts incurred through no fault of 

their own, including 74 soldiers whose debts had been reported to 

credit bureaus, private collection agencies, and the Treasury Offset 

Program at the time we initiated our audit.23 Overpayment of pay and 

allowances (entitlements), pay calculation errors, and erroneous leave 

payments caused 73 percent of the reported debts. 

• Over the past several years, we have reported24 on significant pay 

problems experienced by mobilized Army National Guard and Army 

Reserve (Army Guard and Reserve) soldiers in the wake of the 

September 11, 2001, terrorist attacks. These reports included examples 

of hundreds of soldiers receiving inaccurate and untimely payroll 

payments due to a paper-intensive, error-prone pay process and the 

lack of integrated pay and personnel systems. In response to our 

reports, DOD has taken some action to improve controls designed to 

pay Army Guard and Reserve soldiers accurately and on time, 

especially those who had become sick or injured in the line of duty. 

• In March 2006, we reported25 that DOD’s policies and procedures for 

determining, reporting, and documenting cost estimates associated 

with environmental cleanup or containment activities were not 

consistently followed. Further, none of the military services had 

adequate controls in place to help ensure that all identified 

contaminated sites were included in their environmental liability cost 

 23GAO, Military Pay: Hundreds of Battle-Injured GWOT Soldiers Have Struggled to 

Resolve Military Debts, GAO-06-494 (Washington, D.C.: Apr. 27, 2006).

24GAO, Military Pay: Inadequate Controls for Stopping Overpayments of Hostile Fire and

Hardship Duty Pay to Over 200 Sick or Injured Army National Guard and Army 

Reserve Soldiers Assigned to Fort Bragg, GAO-06-384R (Washington, D.C.: Apr. 27, 2006); 

Military Pay: Gaps in Pay and Benefits Create Financial Hardships for Injured Army 

National Guard and Reserve Soldiers, GAO-05-125 and GAO-05-322T (Washington, D.C.: 

Feb. 17, 2005); Army National Guard: Inefficient, Error-Prone Process Results in Travel 

Reimbursement Problems for Mobilized Soldiers, GAO-05-79 (Washington, D.C.: Jan. 31, 

2005) and GAO-05-400T (Washington, D.C.: Mar. 16, 2005); Military Pay: Army Reserve 

Soldiers Mobilized to Active Duty Experienced Significant Pay Problems, GAO-04-911 

(Washington, D.C.: Aug. 20, 2004) and GAO-04-990T (Washington, D.C.: July 20, 2004); and 

Military Pay: Army National Guard Personnel Mobilized to Active Duty Experienced

Significant Pay Problems, GAO-04-413T (Washington, D.C.: Jan. 28, 2004) and GAO-04-89 

(Washington, D.C.: Nov. 13, 2003). 

25GAO, Environmental Liabilities: Long-Term Fiscal Planning Hampered by Control 

Weaknesses and Uncertainties in the Federal Government’s Estimates, GAO-06-427 

(Washington, D.C.: Mar. 31, 2006). 

Page 15 GAO-07-542T 
estimates. These weaknesses not only affected the reliability of DOD’s 

environmental liability estimate, but also that of the federal 

government as a whole. 

• In May 2005, we reported26 that DOD did not have management controls 

in place to assure that excess inventory was reutilized to the maximum 

extent possible. We found significant waste and inefficiency because 

new, unused, and excellent condition items were transferred and 

donated outside of DOD, sold for pennies on the dollar, or destroyed. 

Root causes for the waste and inefficiency included (1) unreliable 

excess property inventory data; (2) inadequate oversight and physical 

inventory control; and (3) outdated, nonintegrated excess inventory 

and supply management systems. 

The department is provided billions of dollars annually to operate, 

maintain, and modernize its stovepiped, duplicative, legacy business 

systems. Despite this significant investment, the department is severely 

challenged in implementing business systems on time, within budget, and 

with the promised capability. Many of the problems related to DOD’s 

inability to effectively implement its business systems can be attributed to 

its failure to implement the disciplined processes27 necessary to reduce the 

risks associated with these projects to acceptable levels.28 Disciplined 

processes have been shown to reduce the risks associated with software 

development and acquisition efforts and are fundamental to successful 

systems acquisition. The weaknesses that we found in DOD business 

systems implementations such as the Defense Travel System,29 the 

Logistics Modernization Program,30 and the Navy’s Enterprise Resource 

 26 GAO, DOD Excess Property: Management Control Breakdowns Result in Substantial

Waste and Inefficiency, GAO-05-277 (Washington, D.C.: May 13, 2005). 

27Disciplined processes include a wide range of activities, including project planning and 

management, requirements management, risk management, quality assurance, and testing. 

28Acceptable levels refer to the fact that any systems acquisition effort will have risks and 

will suffer the adverse consequences associated with defects in the processes. However, 

effective implementation of disciplined processes reduces the possibility of the potential 

risks actually occurring and prevents significant defects from materially affecting the cost, 

timeliness, and performance of the project.

29GAO, Defense Travel System: Reported Savings Questionable and Implementation 

Challenges Remain, GAO-06-980 (Washington, D.C.: Sept. 26, 2006).

30GAO, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance Operations

and System Implementation Efforts, GAO-05-441 (Washington, D.C.: June 30, 2005).

Page 16 GAO-07-542T 
Planning (ERP) efforts31 illustrate the types of system acquisition and 

investment management controls that need to be effectively implemented 

in order for a given investment to be successfully acquired and deployed.

Meeting the Challenge of Transforming DOD Financial and Business 

Management Practices. Successful reform of DOD’s fundamentally flawed 

financial and business management operations must simultaneously focus 

on its systems, processes, and people. DOD’s top management has 

demonstrated a commitment to transforming the department and has 

launched key initiatives to improve its financial management processes 

and related business systems such as the Financial Improvement and 

Audit Readiness (FIAR) Plan. However, DOD still lacks two key elements 

that are needed to ensure a successful and sustainable transformation 

effort. 

• As we have previously recommended, DOD should develop and 

implement an integrated and strategic business transformation plan. 

Since 1999, we have recommended the need for a comprehensive, 

integrated strategy and action plan for reforming DOD’s major business 

operations and support activities.32 Critical to the success of DOD’s 

ongoing transformation efforts will be top management attention and 

structures that focus on transformation from a broad perspective and a 

clear, comprehensive, integrated, and enterprisewide plan that, at a 

summary level, addresses all of the department’s major business areas. 

• Because of the complexity and long-term nature of DOD’s business 

transformation efforts, we again reiterate the need for a chief

management officer (CMO) to provide sustained leadership and 

 31GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best Business

Practices Critical to Avoid Past Failures, GAO-05-858 (Washington, D.C.: Sept. 29, 2005). 

32GAO, Defense Reform Initiative: Organization, Status, and Challenges, GAO/NSIAD-99-

87 (Washington, D.C.: Apr. 21, 1999). 

Page 17 GAO-07-542T 
maintain momentum, as we have previously testified.33 The National 

Defense Authorization Act for Fiscal Year 200634 directs the 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 (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 a 

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-today 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 has 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. 

In the area of agency financial and performance reporting, I see obtaining

unqualified opinions on financial statements at all CFO Act agencies as the 

primary challenge. While significant progress has been made by many CFO 

Act agencies to prepare timely annual financial statements that can pass 

the scrutiny of a financial audit, several agencies continue to struggle to 

reach this milestone. For fiscal year 2006, five CFO Act agencies—DOD, 

Improving Agency Financial 

and Performance Reporting 

 33GAO, Department of Defense: Long-standing Problems Continue to Impede Financial

and Business Management Transformation, GAO-04-907T (Washington, D.C.: July 7,

2004); Department of Defense: Financial and Business Management Transformation 

Hindered by Long-standing Problems, GAO-04-941T (Washington, D.C.: July 8, 2004);

Department of Defense: Further Actions Are Needed to Effectively Address Business 

Management Problems and Overcome Key Business Transformation Challenges, GAO-05-

140T (Washington, D.C.: Nov. 18, 2004); DOD’s High-Risk Areas: Successful Business 

Transformation Requires Sound Strategic Planning and Sustained Leadership, GAO-05-

520T (Washington, D.C.: Apr. 13, 2005); and Department of Defense: Sustained Leadership 

Is Critical to Effective Financial and Business Management Transformation, GAO-06-

1006T (Washington, D.C.: Aug. 3, 2006). 

34National Defense Authorization Act for Fiscal Year 2006, Pub. L. No. 109-163, § 907, 119

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

Page 18 GAO-07-542T 
DHS, 35 National Aeronautics and Space Administration (NASA), and the 

Departments of Energy36 and Transportation—failed to meet this basic 

requirement. Problems at NASA and the Department of Energy stem from 

deficiencies in those agencies’ implementation of new financial 

management systems, among other things. The Department of 

Transportation auditors cited significant problems with a key accounting 

practice at the Federal Aviation Administration as the underlying cause for 

qualifying their opinion on the department’s financial statements. As I 

previously discussed, the problems faced by DOD are so pervasive that in

accordance with section 1008 of the fiscal year 2002 National Defense 

Authorization Act,37 for the sixth year, DOD acknowledged that its systems 

could not support material amounts on DOD’s fiscal year 2006 financial 

statements and accordingly, the auditors did not perform auditing 

procedures and disclaimed an opinion. At DHS, the auditors recognized 

that the department has not yet established the infrastructure and internal 

control necessary and disclaimed an opinion on its financial statements. 

Problems at these agencies also significantly impact our ability to provide 

an opinion on the U.S. government’s consolidated financial statements. 

Meeting the Challenge of Improved Financial and Performance 

Reporting. Addressing the financial and performance reporting 

weaknesses that impede CFO Act agencies from obtaining unqualified or 

clean opinions on the respective agency financial statements will vary 

depending upon the circumstances at the agency. Developing and 

implementing corrective action plans to address the identified problems 

are time-honored methods for resolving such problems. For example, the 

DOD Comptroller launched the FIAR Plan to guide improvements to 

address financial management deficiencies and achieve clean financial

statement audit opinions. This plan incorporates our prior 

recommendations and ties planned improvement activities at the 

component and department levels together with accountable personnel, 

milestones, and required resources. We view the incremental line item 

approach, integration plans, and oversight structure outlined in the FIAR 

plan for examining DOD’s operations and preparing for an audit as a 

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

Activity were subjected to audit, and the auditor was unable to express an opinion on these

two financial statements. 

36 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. 

37Pub. L. No. 107-107, 115 Stat. 1012, 1206 (Dec. 28, 2001). 

Page 19 GAO-07-542T 
significant improvement over prior financial improvement initiatives. 

However, we continue to stress that the effectiveness of DOD’s FIAR plan 

will ultimately be measured by the department’s ability to provide timely, 

reliable, and useful information for day-to-day management and decision 

making. 

Since the passage of the CFO Act and FFMIA, there has been progress in 

achieving the financial systems requirements of these landmark laws. 

While improvements have been made throughout government, much work 

remains to fulfill the underlying goals of the CFO Act and FFMIA. In fiscal 

year 1997, 20 agencies were reported as having systems that were not in 

substantial compliance with at least one of the three FFMIA systems 

requirements,38 while in fiscal year 2006, auditors for 17 of the CFO Act 

agencies reported that the agencies’ financial management systems did not 

substantially comply with at least one of the three FFMIA requirements. 

The major barrier to achieving compliance with FFMIA continues to be the 

inability of agencies to meet federal financial management systems 

requirements, which involve not only core financial systems, but also 

administrative and programmatic systems. While the problems are much 

more severe at some agencies than at others and progress has been made 

in addressing financial management systems’ weaknesses, the lack of 

substantial compliance with the three requirements of FFMIA, and the 

associated deficiencies, indicates that the financial management systems 

of many agencies are still not able to routinely produce reliable, useful, 

and timely financial information. Consequently, the federal government’s 

access to relevant, timely, and reliable data to effectively manage and 

oversee its major programs, which is the ultimate objective, was and 

continues to be restricted. 

Modernizing Financial 

Management Systems 

What is most important is that the problem has been recognized. Across 

government, agencies have efforts under way 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 

day-to-day managerial decision making and assist taxpayer and 

congressional oversight. Whether in government or the private sector, 

implementing and upgrading information systems is a difficult job and 

brings a degree of new risk. Organizations that follow and effectively

 38FFMIA requires CFO Act agencies financial management systems to comply substantially 

with (1) federal financial management systems requirements, (2) applicable federal 

accounting standards, and (3) the U.S. government standard general ledger at the 

transaction level. 

Page 20 GAO-07-542T 
implement accepted best practices in systems development and 

implementation (commonly referred to as disciplined processes) can 

manage and reduce these risks to acceptable levels. For example, as part 

of our work at DOD,39 NASA,40 and other agencies that have experienced 

significant problems in implementing new financial management systems, 

we have consistently found that these agencies were not following the 

necessary disciplined processes, human capital practices, and information 

technology management practices for efficient and effective development 

and implementation of such systems. 

Challenges also exist in implementing OMB’s financial management line of

business initiative that is aimed at significantly improving the financial 

data government managers need to make timely and successful decisions 

and reduce the cost of government operations. For example, as we 

reported in March 2006,41 the requirements for agencies and private sector

firms to become shared service providers and the services they must 

provide have not been adequately documented or effectively 

communicated to agencies and the private sector. We made several 

recommendations that focused on reducing the risk of this important 

initiative. During 2006, OMB addressed some of the weaknesses by issuing 

an initial version of migration planning guidance and publishing 

competition guidance for shared service providers and agencies. However, 

as OMB acknowledged in the Federal Financial Management Report 

2007, it has not yet developed several critical elements needed to 

minimize risk, provide assurance, and develop understandings with 

software vendors, shared service providers, and agencies on topics such as 

standard business processes and common accounting codes. Further, a 

 39GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best Business

Practices Critical to Avoid Past Failures, GAO-05-858 (Washington, D.C.: Sept. 29, 2005);

Army Depot Maintenance: Ineffective Oversight of Depot Maintenance Operations and

System Implementation Efforts, GAO-05-441 (Washington, D.C.: Jun. 30, 2005); and DOD 

Systems Modernization: Management of Integrated Military Human Capital Program 

Needs Additional Improvements, GAO-05-189 (Washington, D.C.: Feb. 11, 2005). 

40GAO, Business Modernization: Some Progress Made toward Implementing GAO 

Recommendations Related to NASA’s Integrated Financial Management Program, GAO05-799R (Washington, D.C.: Sept. 9, 2005); National Aeronautics and Space 

Administration: Significant Actions Needed to Address Long-standing Financial

Management Problems, GAO-04-754T (Washington, D.C.: May 19, 2004); and Business

Modernization: NASA’s Challenges in Managing Its Integrated Financial Management 

Program, GAO-04-255 (Washington, D.C.: Nov. 21, 2003). 

41GAO, Financial Management Systems: Additional Efforts Needed to Address Key 

Causes of Modernization Failures, GAO-06-184 (Washington, D.C.: Mar. 15, 2006).

Page 21 GAO-07-542T 
governmentwide concept of operations has not been developed that would 

identify interrelationships among federal financial systems and which 

financial management systems should be operated at an agency level and 

which should be operated at a governmentwide level and how those would 

integrate. In addition, processes have not been put in place to facilitate 

agency decisions on selecting a provider or focusing investment decisions 

on the benefits of standard processes and shared service providers. 

Meeting the Challenge of Modernizing Financial Systems. As the federal 

government moves forward with ambitious financial management system 

modernization efforts that identify opportunities to eliminate redundant 

systems and enhance information reliability and availability, adherence to

disciplined processes, sound human capital practices, and proven 

information technology management practices is crucial to reduce risks to 

acceptable levels. 

• To help address the underlying problems agencies face in 

implementing financial management systems that will help them 

adhere to the requirements of the CFO Act and FFMIA, we have made 

numerous specific recommendations to agencies to address the 

specific shortcomings we identified. For example, at NASA we made a 

total of 45 recommendations aimed at addressing weaknesses we 

identified in NASA’s acquisition and implementation strategy for a new 

integrated financial management system. 

• The key to avoiding these long-standing problems is to provide specific 

guidance to agencies that incorporate the best practices identified by 

the Software Engineering Institute, the Institute of Electrical and 

Electronic Engineers, and other experts. Toward this end, we have 

recommended that OMB develop such guidance to help minimize the 

waste of scarce resources from modernization failures. 

• We have also made a number of recommendations to OMB to help it 

provide a solid foundation for the financial management line of 

business initiative. OMB has projects under way to develop standard 

business processes, a common accounting code, and specific measures 

to assess the performance of the shared service providers to help 

address some shortcomings we identified. While all of these projects 

are important, developing a concept of operations is an important step 

because it lays the foundation for many subsequent decisions.

While continuing progress has been made in strengthening internal 

control, at the same time, the federal government faces numerous internal 

Addressing Long-standing 

Internal Control Weaknesses 

Page 22 GAO-07-542T 
control problems, some of which are long-standing and are welldocumented at the agency level and governmentwide. As we have reported

for a number of years in our audit reports on the U.S. government’s 

consolidated financial statements, the federal government continues to 

have material weaknesses and reportable conditions in internal control 

related to property, plant, and equipment; inventories and related 

property; liabilities and commitments and contingencies; cost of 

government operations; and disbursement activities, just to mention a few 

of the problem areas. Particularly problematic to the U.S. government’s 

consolidated financial statements is the lack of internal controls to 

adequately account for and reconcile intragovernmental activity and 

balances between federal agencies. Although OMB and Treasury require 

the CFOs of 35 executive departments and agencies to reconcile 

intragovernmental activity and balances on a quarterly basis, and report 

annually to GAO and others on reconciliation efforts at the end of the 

fiscal year, a substantial number of agencies did not adequately perform 

these reconciliations. To help address this problem, OMB worked with 

Treasury and the CFO Council to revise the business rules for 

intragovernmental transactions. Because these new rules became effective 

on October 1, 2006, it is too soon to tell if they will have the desired effect

of strengthening internal controls. Resolving the intragovernmental 

transactions problem remains a difficult challenge and will require a 

strong commitment by agencies to fully implement the recently issued 

business rules and continued strong leadership by OMB. 

As we testified42 in February 2005, we support OMB’s efforts to revitalize 

internal control assessments and reporting through the December 2004 

revisions to Circular No. A-123. These revisions recognize that effective 

internal control is critical to improving federal agencies’ effectiveness and 

accountability and to achieving the goals established by the Congress. 

They also considered the internal control standards issued by GAO,43

which provide an overall framework for establishing and maintaining 

internal control and for identifying and addressing major performance and 

management challenges and areas at greatest risk of fraud, waste, abuse, 

and mismanagement. OMB reported in its Federal Financial Management 

Report 2007, that CFO Act agencies identified new financial reporting 

material weaknesses under this revised guidance, which is an important 

 42GAO, Financial Management: Effective Internal Control is Key to Accountability, GAO05-321T (Washington, D.C.: Feb. 16, 2005). 

43GAO/AIMD-00-21.3.1. 

Page 23 GAO-07-542T 
first step. As agencies expand their assessments and all agencies complete

a full-scope assessment of internal control over financial reporting, they 

will develop a better understanding of the full nature and extent of 

material weaknesses. 

Effective internal control, as envisioned in the revised Circular No. A-123, 

inherently includes a successful strategy for addressing improper 

payments. Attacking improper payment problems requires a strategy 

appropriate to the organization involved and its particular risks. We have

found that entities using successful strategies to address their improper 

payment problems shared a common focus of improving the internal 

control system—the first line of defense in safeguarding assets and 

preventing and detecting errors and fraud. The Congress acted strongly to

address the improper payment problem by passing IPIA and in fiscal year 

2005, OMB began to separately track the elimination of improper 

payments under the PMA. As I pointed out in testimony44 before this 

Subcommittee in December 2006, while agencies are making progress in 

reporting under IPIA, three major challenges remain in meeting the goals 

of the act. First, the existing reporting was incomplete because some 

agencies still had not instituted systematic methods to review all programs 

and some program estimates were not based on a valid statistical sampling 

methodology as required. Second, 10 risk-susceptible programs with 

outlays totaling over $234 billion in fiscal year 2005 had not provided 

improper payment estimates. Finally, OMB’s implementing guidance 

includes specific criteria that limit the disclosure and transparency of 

agencies’ improper payments. 

Meeting the Challenge of Addressing Internal Control Weaknesses. 

Actions can be taken on several fronts to help resolve internal control 

weaknesses. 

• As pointed out in our February 2005 testimony on internal controls,45

there are six issues critical to effectively implementing the changes to 

Circular No. A-123—specifically, the need for: (1) development of 

supplemental guidance and implementation tools to help ensure that 

agency efforts are properly focused and meaningful; (2) vigilance over 

 44GAO, 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). 

45GAO-05-321T. 

Page 24 GAO-07-542T 
the broader range of controls covering program objectives; (3) strong 

support from managers throughout the agency, and at all levels; (4) 

risk-based assessments and an appropriate balance between the costs 

and benefits of controls; (5) management testing of controls in 

operation to assess if they are designed adequately and operating 

effectively, and to assist in formulating corrective actions; and (6) 

management accountability for control breakdowns. 

• Addressing the multitude of problems in financial reporting internal 

controls, including reconciling intragovernmental activity and balances, 

that have been identified to date will require a significant effort over a 

long time. Many of these problems have been around for years and 

have proven resistant to actions to resolve them. Continuous 

monitoring by top agency management and OMB along with oversight 

by the Congress will be critical to successfully resolving these material 

weaknesses and enhancing financial management. 

• The ultimate success of efforts to reduce improper payments depends, 

in part, on each agency’s continuing diligence and commitment to 

meeting the requirements of IPIA and the related OMB guidance. Full 

and reasonable disclosure of the extent of the problems could be 

enhanced by modifying the act’s underlying criteria used to identify 

which programs and activities are susceptible to significant improper 

payments and we asked46 the Congress to consider amending IPIA to do 

so. We also recommended that OMB’s implementing guidance be 

strengthened in several areas. 

The financial management workforce plays a critical role in government 

because the scale and complexity of federal activities requiring financial 

management and control are monumental. The federal government has 

always faced the challenge of sustaining the momentum of transformation 

because of the limited tenure of key administration officials. The current 

administration’s PMA has served as a driver for governmentwide financial

management improvements. It has been clear from the outset that the 

current administration is serious about improved financial management. 

We have been fortunate that, since the passage of the CFO Act, all three 

administrations have been supportive of financial management reform 

initiatives. And, as I discussed earlier, we have seen a positive cultural 

Building a Financial 

Management Workforce for the 

Future 

 46GAO, Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the Improper 

Payments Information Act Remains Incomplete, GAO-07-92 (Washington, D.C.: Nov. 14, 

2006). 

Page 25 GAO-07-542T 
shift in the way the federal government conducts business. Given the longterm nature of the comprehensive changes needed and challenges still 

remaining to fully realize the goals of the CFO Act, it is unlikely they will 

all occur before the end of the current administration’s term. Therefore, 

sustaining a commitment to transformation in future administrations will 

be critical to ensure that key management reforms, such as the CFO Act, 

are fully attained. 

Changing the way business is done in a large, diverse, and complex 

organization like the federal government is not an easy undertaking. 

According to a survey of federal CFOs,47 federal finance organizations of 

the future will have fewer people, with a greater percentage of analysts, as 

opposed to accounting technicians. However, today most functions within 

federal finance organizations are focused primarily on (1) establishing and 

administering financial management policy; (2) tracking, monitoring, and

reconciling account balances; and (3) ensuring compliance with laws and 

regulations. While they recognize the need for change, according to the 

CFOs surveyed, many questions remain unanswered regarding how best to 

facilitate such changes. 

When it comes to world-class financial management, our study48 of nine 

leading private and public sector financial organizations found that leading 

financial organizations often had the same or similar core functions (i.e., 

budgeting, treasury management, general accounting, and payroll) as the 

federal government. However, the way these functions were put into 

operation varied depending on individual entity needs. Leading 

organizations reduced the number of resources required to perform 

routine financial management activities by (1) consolidating activities at a 

shared service center and (2) eliminating or streamlining duplicative or 

inefficient processes. Their goal was not only to reduce the cost of finance

but also to organize finance to add value by reallocating finance resources 

to more productive and results-oriented activities like measuring financial

performance, developing managerial cost information, and integrating 

financial systems. 

 47Grant Thornton LLP and the Association of Government Accountants, CFO Survey: 

Preparing for Tomorrow’s Way of Doing Business (Alexandria, Va.: March 1998). 

48GAO, Executive Guide: Creating Value Through World-class Financial Management, 

GAO/AIMD-00-134 (Washington, D.C.: April 2000). Appendix II includes a synopsis of the 

key concepts discussed in the study. 

Page 26 GAO-07-542T 
The federal financial workforce that supports the business needs of today 

is not well-positioned to support the needs of tomorrow. A JFMIP study49

indicated that a significant majority of the federal financial management 

workforce performs transaction support functions of a clerical and 

technical nature. These skills do not support the vision of tomorrow’s 

business which will depend on an analytic financial management 

workforce providing decision support. A 2005 survey of senior level 

federal CFO executives50 noted that the respondents still believed that midand lower-level personnel lack the skills needed for modern financial 

management. The 2005 survey indicated that the federal CFO community 

thought that overly complex civil service rules made it difficult to recruit 

entry-level talent and nearly impossible to hire middle managers from 

outside the government. Our work has shown that staffing shortages, 

particularly at key agencies such as DOD, DHS, and Treasury can 

adversely impact financial management operations. For example, as part 

of our work on the U.S. government’s consolidated financial statements, 

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 and that there 

were not enough personnel with specialized financial reporting experience 

to help ensure reliable financial reporting by the reporting date.51

Meeting the Challenge of Building the Financial Management Workforce. 

We have previously identified several factors that are critical to resolving 

financial management human capital issues. 

• Part of the commitment to transformation is the establishment of 

skilled and sustained leadership through the creation of a chief 

management officer (CMO) at selected federal agencies. The CMO 

would serve as the strategic, enterprisewide integrator of efforts to 

transform agency business operations, including financial management. 

While we have called for the creation of such a position specifically at 

DOD and DHS, in July 2006, a major global consulting firm 

 49JFMIP, Building a World Class Financial Workforce, The Federal Financial

Management Workforce of the Future (Washington, D.C.: September 2003).

50Grant Thornton LLP and the Association of Government Accountants, CFO Survey: 

Integrating Internal Control with Performance Management (Alexandria, Va.: 2005). 

51See GAO’s audit report on its audit of the federal government’s fiscal year 2006 financial 

statements that was incorporated in the 2006 Financial Report of the U.S. Government

published by Treasury. 

Page 27 GAO-07-542T 
recommended that the concept of a chief operating officer be instituted 

in many federal agencies as the means to help achieve the 

transformation that many agencies have undertaken.52

• Building a world-class financial workforce will require a workforce 

transformation strategy devised in partnership between CFOs and 

agency human resource departments, now established in law as Chief 

Human Capital Officers, working with OMB and OPM. Agency financial 

management leadership must identify current and future required 

competencies and compare them to an inventory of skills, knowledge, 

and current abilities of current employees. Then they must strategically

manage to fill gaps and minimize overages through informed hiring, 

development, and separation strategies. This is similar to the approach 

that we identified when we designated strategic human capital 

management as a high-risk area in 2001.53 Achieving a successful 

financial management vision of the future will be directly determined 

by the workforce that supports it. In our view, adequate succession 

planning to ensure these positions and other key senior-level financial 

management positions are promptly filled with highly qualified staff 

will be a key success factor to help transform federal financial 

management. 

As you know, GAO is responsible for auditing the consolidated financial 

statements included in the Financial Report of the United States 

Government (Financial Report), but we have been unable to express an 

opinion on them for the 10th year in a row because the federal government 

could not demonstrate the reliability of significant portions of the financial 

statements, especially in connection with major financial management 

challenges that I discussed earlier regarding DOD. The lack of effective 

internal controls to adequately account for and reconcile 

intragovernmental activity and balances is another primary challenge that 

impedes our ability to provide an opinion on the consolidated financial

statements. The third major impediment that prevents us from rendering 

an opinion on the consolidated financial statements is the federal 

government’s ineffective process for preparing the consolidated financial 

statements. As I previously discussed, addressing the first two 

impediments will be difficult challenges. Resolving the weaknesses in the 

Strengthening Consolidated 

Financial Reporting 

 52T. Danker, T. Dohrmann, N. Killefer, and L. Mendonca, How can American government 

meet its productivity challenge? (Washington, D.C.: McKinsey & Company, 2006). 

53GAO-05-207. 

Page 28 GAO-07-542T 
systems, controls, and procedures for preparing the consolidated financial

statements is also a formidable challenge. 

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. 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 addition, 

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: 

• 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 2006 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.”54 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, 

 54Although 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 accompanying consolidated financial statements. 

Page 29 GAO-07-542T 
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. 

We also noted other deficiencies related to the adequacy of required 

disclosures and whether amounts reported are complete. Treasury 

continued to make progress in addressing certain other internal control 

weaknesses in its 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. 

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) the Governmentwide Financial 

Report System (GFRS) undergoing further development55 and not yet being 

fully operational, and (2) weaknesses in Treasury’s process for preparing 

the consolidated financial statements noted above. One of the underlying 

causes of these weaknesses, as I discussed earlier, is the lack of sufficient

personnel with specialized financial reporting experience to help ensure 

reliable financial reporting by the reporting date.

Meeting the Challenge of Strengthening Consolidated Financial 

Reporting. 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. In April 2006, we 

reported56 in greater detail on these issues and provided recommendations 

 55GFRS 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. 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). 

56GAO, 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). 

Page 30 GAO-07-542T 
to OMB and Treasury. Resolving some of these internal control 

weaknesses will require a strong commitment from Treasury and OMB as 

they execute and implement their corrective action plans. 

Overcoming current challenges will be difficult, but 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 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 

Page 31 GAO-07-542T 
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,57 projected annual cash 

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.” 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. Later in this 

statement, I offer other suggestions for improved reporting that will help 

in this regard. 

Successfully addressing the six primary challenges I just described will 

undoubtedly help strengthen the federal government’s financial and 

performance reporting and resolve many accountability and stewardship 

challenges. This will become increasingly important, because as I stated in

our audit report included in the Financial Report, testified before the 

Congress, and emphasized in numerous speeches, the nation’s current 

fiscal path is unsustainable and tough choices by the President and the 

Congress are necessary to address the nation’s large and growing longterm fiscal imbalance. 

Fiscal Stewardship Is 

an Increasingly

Critical Challenge 

The federal government’s financial condition and fiscal outlook are worse 

than many may understand. We are currently experiencing strong 

economic growth and yet running large on-budget (operating) deficits that

are largely unrelated to the Global War on Terrorism. Despite an increase 

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

government reported that its costs exceeded its revenues by $450 billion 

(i.e., net operating cost) and that its cash outlays exceeded its cash 

receipts by $248 billion (i.e., unified budget deficit). Further, as of 

September 30, 2006, the U.S. government reported that it owed (i.e., 

liabilities) more than it owned (i.e., assets) by almost $9 trillion. In 

 57Intergenerational equity assesses the extent to which different age groups may be 

required to assume financial burdens to sustain federal responsibilities. 

Page 32 GAO-07-542T 
addition, the present value of the federal government’s major reported 

long-term “fiscal exposures”—liabilities (e.g., debt), contingencies (e.g.,

insurance), and social insurance and other commitments and promises 

(e.g., Social Security, Medicare)—rose from about $20 trillion to over $50 

trillion in the last 6 years. 

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.

The Long-Term Fiscal 

Outlook 

In addition to considering the federal government’s current financial 

condition, it is critical to look at other measures of the long-term fiscal 

outlook of the federal government. An evaluation of the nation’s long-term 

fiscal outlook should include not only liabilities included in the Financial 

Report but also the implicit promises embedded in current policy and the 

timing of these longer-term obligations and commitments in relation to the 

resources available under various assumptions. 

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. A range of other federal fiscal commitments, 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, including 

• the Statement of Social Insurance, 

• major reported long-term fiscal exposures, and 

• long-term fiscal simulations. 

Page 33 GAO-07-542T 
Statement of Social Insurance. The Statement of Social Insurance in the 

Financial Report displays the present value 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 for the next 

75 years. Table 1 shows a simplified version of the Statement of Social 

Insurance by its primary components. 

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. 

Page 34 GAO-07-542T 
Major Reported Long-Term Fiscal Exposures. 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.

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 $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. 

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. 

Long-Term Fiscal Simulations. 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 

Page 35 GAO-07-542T 
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, but under either optimistic (“Baseline 

extended”) or more realistic assumptions, the federal government’s 

current fiscal policy is unsustainable.

Figure 1: Unified Surpluses and Deficits as a Share of GDP under Alternative Fiscal 

Policy Simulations 

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. 

Page 36 GAO-07-542T 
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. 

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 

Page 37 GAO-07-542T 
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

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 expenditures58—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. 

 58In 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 38 GAO-07-542T 
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 my January 2007 testimony,59 I proposed a number of ideas for 

consideration to improve the transparency of long-term costs. 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.60 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 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. 

 59GAO, Long-term Budget Outlook: Saving Our Future Requires Tough Choices Today, 

GAO-07-342T (Washington, D.C.: Jan. 11, 2007). 

60GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-235R (Washington,

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

Page 39 GAO-07-542T 
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

61 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. 

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. 

Concluding Remarks 

Since enactment of federal financial management reform legislation, we 

have seen continuous movement toward the ultimate goals of

accountability laid out in the different financial management statutes. 

While early on some were skeptical, these laws have dramatically changed 

how financial management is carried out and the value placed on good

financial management across government. 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,

 61GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP, (Washington, D.C.: February 2005). 

Page 40 GAO-07-542T 
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 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 that address the challenges for the future I highlighted today. The

federal government has made tremendous progress, and sustained 

congressional attention has been and will continue to be a critical factor to 

ensuring achievement of the goals and objectives of management reform 

legislation. 

Mr. Chairman, this completes my prepared statement and I want to thank 

you for the opportunity to participate in this hearing and for the strong 

support of this Subcommittee in addressing the need for financial 

management reform and accountability. I would be happy to respond to 

any questions you or other members of the Subcommittee may have at this

time. 

For information about this statement, please contact Jeffrey C. Steinhoff,

Managing Director, Financial Management and Assurance, at (202) 512-

2600 or McCoy Williams, Director, Financial Management and Assurance, 

at (202) 512-9095 or williamsm1@gao.gov. Individuals who made key 

contributions to this testimony include Felicia Brooks, Robert Dacey, Kay 

Daly, Francine DelVecchio, Gary Engel, Susan Irving, Jay McTigue, Diane 

Morris, and Paula Rascona. Numerous other individuals made 

contributions to the GAO reports cited in this testimony. 

Page 41 GAO-07-542T 

Contacts and 

Acknowledgments 

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