United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Government 

Management, Organization, and Procurement, 

Committee on Oversight and Government 

Reform, House of Representatives 

FISCAL YEAR 2007 U.S. 

GOVERNMENT 

FINANCIAL STATEMENTS 

Sustained Improvement in 

Financial Management Is 

Crucial to Improving 

Accountability and 

Addressing the Long-Term 

Fiscal Challenge 

Statement of Gene L. Dodaro 

Acting Comptroller General of the United States 

For Release on Delivery

Expected at 2:00 p.m. EDT

Thursday, June 5, 2008 

 

GAO-08-847T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 5, 2008

FISCAL YEAR 2007 U.S. GOVERNMENT 

FINANCIAL STATEMENTS 

Sustained Improvement in Financial Management Is

Crucial to Improving Accountability and Addressing

the Long-Term Fiscal Challenge 

Highlights of GAO-08-847T, a testimony 

before the Subcommittee on Government 

Management, Organization, and 

Procurement, Committee on Oversight 

and Government Reform, House of 

Representatives 

For the 11th consecutive year, three major impediments prevented GAO from 

rendering an opinion on the federal government's accrual basis consolidated 

financial statements: (1) serious financial management problems at the 

Department of Defense, (2) the federal government's inability to adequately 

account for and reconcile intragovernmental activity and balances between 

federal agencies, and (3) the federal government's ineffective process for 

preparing the consolidated financial statements. In addition, financial 

management system problems continue to hinder federal agency

accountability. Although the federal government still has a long way to go, 

significant progress has been made in improving federal financial 

management. For example, audit results for many federal agencies have

improved and federal financial system requirements have been developed. In 

addition, GAO was able to render an unqualified opinion on the 2007 

Statement of Social Insurance. Further, for the first time, the federal 

government issued a summary financial report which is intended to make the 

information in the Financial Report of the U.S. Government (Financial 

Report) more understandable and accessible to a broader audience. 

It is important that this progress be sustained by the current administration as 

well as the new administration that will be taking office next year and that the 

Congress continues its oversight to bring about needed improvements to 

federal financial management. Given the federal government's current 

financial condition and the nation's long-term fiscal challenge, the need for the 

Congress and federal policymakers and management to have reliable, useful,

and timely financial and performance information is greater than ever. 

Information included in the Financial Report, such as the Statement of Social 

Insurance along with long-term fiscal simulations and fiscal sustainability 

reporting, can help increase understanding of the nation's long-term fiscal 

outlook. 

The nation's long-term fiscal challenge is a matter of utmost concern. The

federal government faces large and growing structural deficits due primarily

to rising health care costs and known demographic trends. Simply put, the 

federal government is on an imprudent and unsustainable long-term fiscal 

path. Addressing this challenge will require a multipronged approach. 

Moreover, the longer that action is delayed, the greater the risk that the 

eventual changes will be disruptive and destabilizing. 

 

Finally, the federal government should consider the need for further revisions 

to the current federal financial reporting model to recognize the unique needs

of the federal government. A broad reconsideration of issues, such as the 

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

could lead to reporting enhancements that might help provide the Congress 

and the President with more useful financial information to deliberate 

strategies to address the nation's long-term fiscal challenge.

The Congress and the President 

need to have reliable, useful and 

timely financial and performance

information to make sound

decisions on the current and future 

direction of vital federal 

government programs and policies. 

Unfortunately, except for the 2007

Statement of Social Insurance, 

GAO was again unable to provide 

assurance on the reliability of the

consolidated financial statements 

of the U.S. government (CFS) due

primarily to certain material 

weaknesses in the federal 

government's internal control.

GAO has reported that unless these 

weaknesses are adequately

addressed, they will, among other 

things, (1) hamper the federal 

government's ability to reliably

report a significant portion of its

assets, liabilities, costs, and other 

related information; and (2) affect 

the federal government's ability to 

reliably measure the full cost as 

well as the financial and 

nonfinancial performance of 

certain programs and activities. 

This testimony presents the results 

of GAO’s audit of the CFS for fiscal

year 2007 and discusses the federal

government's long-term fiscal

outlook. 

What GAO Recommends

Over the years, GAO has made

numerous recommendations

directed at improving federal 

financial management, including 

ones regarding issues addressed in

this testimony.

To view the full product, including the scope 

and methodology, click on GAO-08-847T. 

For more information, contact McCoy 

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

or Susan Irving at (202) 512-9142.
Mr. Chairman and Members of the Subcommittee: 

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

government’s consolidated financial statements for fiscal years 2007 and

2006. I would like to thank you for continuing the annual tradition of 

oversight hearings on this important subject. The involvement of your 

subcommittee remains critical to ultimately assuring the continued 

progress in improving federal financial management while enhancing 

public confidence in the government as a steward that is accountable for

its finances. Such hearings play a vital role in ensuring that the federal

government is held accountable to the American people. 

In this testimony, I will discuss (1) the major issues relating to the 

consolidated financial statements for fiscal years 2007 and 2006, including

progress that has been made toward addressing major impediments to an 

opinion on the consolidated financial statements; (2) financial 

management systems problems that continue to hinder federal agency 

accountability; (3) the challenges posed by the federal government’s longterm fiscal condition and GAO’s views on a possible way forward; and 

(4) the need for an improved federal financial reporting model. Until these 

issues are adequately addressed, they will continue to have adverse 

implications for the federal government and the taxpayers. 

Both the consolidated financial statements and our related audit report are 

included in the fiscal year 2007 Financial Report of the United States 

Government (Financial Report).1

 The Financial Report was issued by the 

Department of the Treasury (Treasury) on December 17, 2007.2

 In addition, 

for the first time, Treasury and the Office of Management and Budget 

(OMB) in coordination with GAO issued on February 14, 2008, a summary 

financial report entitled, The Federal Government’s Financial Health: A 

Citizens Guide to the 2007 Financial Report of the United States 

Government. This guide is intended to make the information in the 

Financial Report more understandable and more accessible to a broader

audience. The Director of OMB, the Secretary of the Treasury, and I 

 1

Our audit work regarding the U.S. government’s consolidated financial statements was 

conducted in accordance with U.S. generally accepted government auditing standards. 

2

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

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

which was prepared to help those who seek to obtain a better understanding of the

Financial Report.

Page 1 GAO-08-847T 
believe that the information discussed in this guide is important to all 

Americans. This is a good first step, and I am confident that the guide will 

evolve over time. Both of these reports are available through GAO’s 

Internet site, at http://www.gao.gov/financial/fy2007financialreport.html

and Treasury’s Internet site, at http://www.fms.treas.gov/fr/index.html. 

Certain material weaknesses3

 in financial reporting and other limitations 

on the scope of our work resulted in conditions that for the 11th 

consecutive year prevented us from providing the Congress and the 

American people an opinion on the federal government’s financial 

statements, other than the Statement of Social Insurance, which are 

referred to as the federal government’s accrual basis consolidated 

financial statements.4

 However, since the enactment of key financial 

management reforms in the 1990’s, the federal government has made 

significant progress in improving financial management activities and 

practices. As shown in appendix III, for fiscal year 2007, 19 of 24 Chief 

Financial Officers (CFO) Act agencies were able to attain unqualified audit 

opinions on their financial statements. In contrast, only 6 CFO Act 

agencies received unqualified audit opinions for fiscal year 1996. In 

addition, federal financial systems requirements have been developed. 

Also, accounting and financial reporting standards have continued to 

evolve to provide greater transparency and accountability over the federal 

government’s operations, financial condition, and fiscal outlook. Further, 

fiscal year 2007 marked the second year in which the Statement of Social 

Insurance has been provided as a basic financial statement.5

 The 

Summary 

 3

A material weakness is a significant deficiency, or combination of significant deficiencies, 

that results in more than a remote likelihood that a material misstatement of the financial 

statements will not be prevented or detected. A significant deficiency is a control 

deficiency, or combination of control deficiencies, that adversely affects the entity’s ability 

to initiate, authorize, record, process, or report financial data reliably in accordance with 

generally accepted accounting principles such that there is more than a remote likelihood 

that a misstatement of the entity’s financial statements that is more than inconsequential 

will not be prevented or detected. A control deficiency exists when the design or operation 

of a control does not allow management or employees, in the normal course of performing

their assigned functions, to prevent or detect misstatements on a timely basis. 

4

Most revenues reported in the accrual basis consolidated financial statements are 

recorded on a modified cash basis.

5

We disclaimed an opinion on the fiscal year 2006 consolidated financial statements, 

including the Statement of Social Insurance. Social insurance programs included in the 

Statement of Social Insurance are Social Security, Medicare, Railroad Retirement, and 

Black Lung. 

Page 2 GAO-08-847T 
Statement of Social Insurance displays the present value6

 of projected 

revenues and expenditures for scheduled benefits of certain benefit 

programs that are referred to as social insurance (e.g., Social Security, 

Medicare). Importantly, we were able to render an unqualified opinion on

the 2007 Statement of Social Insurance—a significant accomplishment for 

the federal government. 

The federal government, however, still has a long way to go to address 

several principal challenges to fully realizing strong federal financial 

management.7

 For example, three major impediments continue to prevent 

GAO from rendering an opinion on the federal government’s accrual basis 

consolidated financial statements: (1) serious financial management 

problems at the Department of Defense, (2) the federal government’s 

inability to adequately account for and reconcile intragovernmental 

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

government’s ineffective process for preparing the consolidated financial 

statements. Further, in our opinion, the federal government did not 

maintain effective internal controls over financial reporting and 

compliance with significant laws and regulations as of September 30, 2007, 

due to numerous material weaknesses. Moreover, financial management 

system problems continue to hinder federal agency accountability. 

In our audit report, we also emphasized that the federal government’s 

current fiscal path is unsustainable and that tough choices by the Congress

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

challenge. The fiscal and cash flow implications of the federal 

government’s large and growing Social Security and Medicare

commitments will be felt as the large baby boom generation leaves the 

work force and collects benefits. In fact, the oldest members of the baby

boom generation are now eligible for Social Security retirement benefits.

The budget and economic implications of the baby boom generation’s 

retirement will only intensify as the baby boomers age. Given these and 

other factors, it seems clear that the nation is on an imprudent and 

unsustainable long-term fiscal path that is getting worse with the passage 

of time. The issues raised by this long-term fiscal challenge are issues of 

significance that affect every American. Committed leadership and 

 6

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

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

7

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

GAO-07-542T (Washington, D.C.: Mar. 1, 2007). 

Page 3 GAO-08-847T 
sustained efforts by the Congress, the President, and other key individuals 

throughout the federal financial management community will be needed to 

put our nation on a more prudent and sustainable long-term fiscal path. 

Given the government’s current financial condition and the nation’s longterm fiscal challenge, the need for the Congress and federal policymakers 

and management to have reliable, useful, and timely 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. Information 

included in the Financial Report, such as the Statement of Social 

Insurance along with long-term fiscal simulations and fiscal sustainability 

reporting can help increase understanding of the federal government’s 

long-term fiscal outlook.

Finally, we believe the federal government should consider the need for 

further revisions to the current federal financial reporting model to 

recognize the unique needs of the federal government. The current 

reporting model recognizes some of these needs; however, a broad 

reconsideration of issues, such as the kind of information that may be 

relevant and useful for a sovereign nation, could lead to reporting 

enhancements that might help provide the Congress and the President 

with more useful financial information to deliberate strategies to address 

the nation’s long-term fiscal challenge. 

As has been the case for the previous 10 fiscal years, the federal 

government did not maintain adequate systems or have sufficient, reliable 

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

government’s accrual basis consolidated financial statements. The 

underlying material weaknesses in internal control, which generally have 

existed for years, contributed to our disclaimer of opinion on the U.S. 

government’s accrual basis consolidated financial statements for the fiscal 

years ended 2007 and 2006.8

 Appendix I describes the material weaknesses 

that contributed to our disclaimer of opinion in more detail and highlights 

the primary effects of these material weaknesses on the accrual basis 

consolidated financial statements and on the management of federal 

government operations. 

Highlights of Major 

Issues Related to the 

U.S. Government’s 

Consolidated 

Financial Statements 

for Fiscal Years 2007 

and 2006 

 8

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

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

1997 through 2006. 

Page 4 GAO-08-847T 
The material weaknesses that contributed to our disclaimer of opinion 

were the federal government’s inability to 

• satisfactorily determine that property, plant, and equipment and 

inventories and related property, primarily held by the Department of 

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

statements; 

• implement effective credit reform estimation and related financial 

reporting processes at certain federal credit agencies; 

• reasonably estimate or adequately support amounts reported for certain 

liabilities, such as environmental and disposal liabilities, or determine 

whether commitments and contingencies were complete and properly 

reported; 

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

notably related to DOD, and adequately reconcile disbursement activity at 

certain agencies; 

• adequately account for and reconcile intragovernmental activity and 

balances between federal agencies; 

• ensure that the federal government’s consolidated financial statements 

were (1) consistent with the underlying audited agency financial 

statements, (2) properly balanced, and (3) in conformity with Generally 

Accepted Accounting Principles; and,

• identify and either resolve or explain material differences that exist 

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

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

Unified Budget Deficit and Statement of Changes in Cash Balance from 

Unified Budget and Other Activities, and related amounts reported in 

federal agencies’ financial statements and underlying financial information 

and records.

Due to the material weaknesses and the additional limitations on the 

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

additional issues that could affect the accrual basis consolidated financial 

statements that have not been identified. 

In addition to the material weaknesses that contributed to our disclaimer 

of opinion, which were discussed above, we found three other material 

weaknesses in internal control as of September 30, 2007. These 

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

primary effects of the material weaknesses on the accrual basis 

consolidated financial statements and on the management of federal 

government operations. These other material weaknesses were the federal 

government’s inability to 

Page 5 GAO-08-847T 
• determine the full extent to which improper payments occur, 

• identify and resolve information security control weaknesses and manage

information security risks on an ongoing basis, and 

• effectively manage its tax collection activities. 

Further, our audit report discusses certain significant deficiencies in 

internal control at the governmentwide level.9

 These significant 

deficiencies involve the following areas: 

• preparing the Statement of Social Insurance for certain programs, and 

• monitoring and oversight regarding certain federal grants and entities that 

offer Medicare health plan options. 

Individual federal agency financial statement audit reports identify 

additional control deficiencies which were reported by agency auditors as 

material weaknesses or significant deficiencies at the individual agency

level. We do not deem these additional control deficiencies to be material 

weaknesses at the governmentwide level. 

Regarding agencies’ internal controls, in December 2004, OMB revised 

OMB Circular No. A-123, Management’s Responsibility for Internal 

Control, which became effective for fiscal year 2006. In fiscal year 2006,

agencies began to implement the more rigorous requirements of the 

revised OMB Circular No. A-123, which include management 

identification, assessment, testing, correction, and documentation of 

internal controls over financial reporting for each account or group of 

accounts, as well as an annual assurance statement from the agency head

as to whether internal control over financial reporting is effective. 

OMB recognized that due to the complexity of some agencies, 

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

Accordingly, certain agencies have adopted multiyear implementation 

plans. According to OMB’s Federal Financial Management Report for 

2007, 16 of the 24 CFO Act agencies have performed assessments required 

by OMB Circular No. A-123 for all key processes, while the remaining 8 

CFO Act agencies are phasing in implementation of the requirements by 

testing a portion of the key processes and providing plans for testing the 

remaining processes within 3 years. Also, according to that report, to 

 9

See page 182 of the Financial Report for more details regarding these significant 

deficiencies. 

Page 6 GAO-08-847T 
achieve its strategic goal of improving effectiveness of internal control 

over financial reporting, OMB has developed priority actions that include

updating guidance, as necessary, based on lessons learned from agencies’ 

implementation of the circular. It will be important that OMB continue to 

monitor and oversee federal agencies’ implementation of these new 

requirements. 

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

government’s accrual basis consolidated financial statements continued to 

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

government’s inability to adequately account for and reconcile 

intragovernmental activity and balances between federal agencies, and 

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

consolidated financial statements. Extensive efforts by DOD officials and 

cooperative efforts between agency chief financial officers, Treasury 

officials, and OMB officials will be needed to resolve these serious 

obstacles to achieving an opinion on the U.S. government’s accrual basis 

consolidated financial statements. 

Essential to further improving financial management governmentwide and

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

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

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

organizations in the world. Since the first financial statement audit of a 

major DOD component was attempted almost 20 years ago, we have 

reported that weaknesses in DOD’s business operations, including 

financial management, not only adversely affect the reliability of reported 

financial data, but also the economy, efficiency, and effectiveness of its 

operations. 

DOD continues to dominate GAO’s list of high-risk programs designated as 

vulnerable to waste, fraud, abuse, and mismanagement, bearing 

responsibility, in whole or in part, for 15 of 27 high-risk areas.10 Eight of 

these areas are specific to DOD and include DOD’s overall approach to 

business transformation, as well as business systems modernization and 

financial management. Collectively, these high-risk areas relate to DOD’s 

major business operations, including financial management, which directly 

support the warfighters, including their pay, the benefits provided to their 

Addressing Major 

Impediments to an Opinion 

on the Accrual Basis 

Consolidated Financial 

Statements 

Financial Management at DOD 

 10GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: January 2007). 

Page 7 GAO-08-847T 
families, and the availability and condition of equipment and supplies they 

use both on and off the battlefield. 

Successful transformation of DOD’s financial management operations will 

require a multifaceted, cross-organizational approach that addresses the 

contribution and alignment of key elements, including sustained 

leadership, strategic plans, people, processes, and technology. Congress 

clearly recognized, in the National Defense Authorization Act for Fiscal 

Year 2008,11 the need for executive-level attention in ensuring that DOD 

was on a sustainable path toward achieving business transformation. This 

legislation codifies Chief Management Officer (CMO) responsibilities at a 

high level in the department—assigning them to the Deputy Secretary of 

Defense—and establishing a full-time Deputy CMO and designating CMO 

responsibilities within the military services. However, in less than a year, 

our government will undergo a change in administrations, which raises 

questions about the continuity of effort and the sustainability of the 

progress that DOD has made to date. As such, we believe the CMO 

position should be codified as a separate position from the Deputy 

Secretary of Defense in order to provide full-time attention to business 

transformation over the long term, subject to an extended term

appointment. Because business transformation is a long-term and complex 

process, we have recommended a term of at least 5 to 7 years to provide 

sustained leadership and accountability. 

Importantly, DOD has taken steps toward developing and implementing a 

framework for addressing the department’s long-standing financial 

management weaknesses and improving its capability to provide timely, 

reliable, and relevant financial information for analysis, decision making, 

and reporting, a key defense transformation priority. Specifically, this 

framework, which is discussed in both the department’s Enterprise 

Transition Plan (ETP)12 and the Financial Improvement and Audit 

Readiness (FIAR) Plan,13 includes the department’s Standard Financial 

 11Pub. L. No. 110-181, § 904 (2008). 

12The Enterprise Transition Plan is intended to describe how DOD will transition from its 

current or “as is” operational environment to its intended or “to be” operational 

capabilities. The Business Transformation Agency is the DOD agency responsible for 

DOD’s business transformation and the development and implementation of the ETP. 

13DOD’s FIAR Plan, initially issued in December 2005 and updated each June and 

September, is intended to provide DOD components with a framework for resolving 

problems affecting the accuracy, reliability, and timeliness of financial information and 

obtaining clean financial statement audit opinions. 

Page 8 GAO-08-847T 
Information Structure (SFIS) and Business Enterprise Information System 

(BEIS). DOD intends this framework to define and put into practice a 

standard DOD-wide financial management data structure as well as 

enterprise-level capabilities to facilitate reporting and comparison of 

financial data across the department. 

DOD’s efforts to develop and implement SFIS and BEIS should help to 

improve the consistency and comparability of the department’s financial 

information and reporting; however, a great deal of work remains before 

the financial management capabilities of DOD and its components’ 

transformation efforts achieve financial visibility.14 Examples of work 

remaining include data cleansing; improvements to current policies, 

processes, procedures, and controls; and implementation of fully 

integrated systems. 

In 2007, DOD introduced refinements to its approach for achieving 

financial statement auditability. These refinements include the following: 

• Requesting audits of entire financial statements rather than attempting to 

build upon audits of individual financial statement line items. 

• Focusing on improvements in end-to-end business processes, or 

segments15 that underlie the amounts reported on the financial statements. 

• Using audit readiness validations and annual verification reviews of 

segment improvements to help ensure sustainability of corrective actions 

and improvements. 

• Forming a working group to begin auditability risk assessments of 

financial systems at key decision points in their development and 

deployment life cycle to help ensure that the processes and internal 

controls support repeatable production of auditable financial statements. 

We are encouraged by DOD’s efforts and emphasize the necessity for 

consistent management oversight toward achieving financial management 

capabilities and reporting of meaningful and measurable transformation

 14DOD defines financial visibility as providing immediate access to accurate and reliable 

financial information (planning, programming, budgeting, accounting, and cost 

information) in support of financial accountability and efficient and effective decision 

making through the department in support of the missions of the warfighter. 

15DOD defines a segment as a component of an entity’s business and financial environment.

A segment can include (1) complete or partial business processes; (2) financial systems,

business systems, or both; or (3) commands or installations. According to DOD, the

environment’s complexity, materiality, and timing of corrective actions are all factors that 

are taken into consideration when defining a segment. 

Page 9 GAO-08-847T 
effort benchmarks and accomplishments. We will continue to monitor 

DOD’s efforts to transform its business operations and address its 

financial management challenges as part of our continuing DOD business 

enterprise architecture and financial audit readiness oversight. 

Federal agencies are unable to adequately account for and reconcile 

intragovernmental activity and balances. OMB and Treasury require the 

chief financial officers (CFO) of 35 executive departments and agencies to 

reconcile, on a quarterly basis, selected intragovernmental activity and

balances with their trading partners. In addition, these agencies are 

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

the extent and results of intragovernmental activity and balances 

reconciliation efforts as of the end of the fiscal year. 

A substantial number of the agencies did not adequately perform the 

required reconciliations for fiscal years 2007 and 2006. For these fiscal 

years, based on trading partner information provided to Treasury via 

agencies’ closing packages, Treasury produced a “Material Difference 

Report” for each agency showing amounts for certain intragovernmental 

activity and balances that significantly differed from those of its 

corresponding trading partners as of the end of the fiscal year. Based on 

our analysis of the “Material Difference Reports” for fiscal year 2007, we 

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

the differences with their trading partners or did not provide adequate 

documentation to support responses. For both fiscal years 2007 and 2006,

amounts reported by federal agency trading partners for certain 

intragovernmental accounts were not in agreement by significant amounts. 

In addition, a significant number of CFOs cited differing accounting 

methodologies, accounting errors, and timing differences for their material 

differences with their trading partners. Some CFOs simply indicated that 

they were unable to explain the differences with their trading partners 

with no indication when the differences will be resolved. As a result of the 

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

differences on the amounts reported in the accrual basis consolidated 

financial statements is significantly impaired. 

In 2006, OMB issued Memorandum No. M-07-03, Business Rules for 

Intragovernmental Transactions (Nov. 13, 2006), and Treasury issued the 

Treasury Financial Manual Bulletin No. 2007-03, Intragovernmental 

Business Rules (Nov. 15, 2006). This guidance added criteria for resolving 

intragovernmental disputes and major differences between trading 

partners for certain intragovernmental transactions and called for the 

establishment of an Intragovernmental Dispute Resolution Committee. 

Intragovernmental Activity and 

Balances 

Page 10 GAO-08-847T 
OMB is currently working with the Chief Financial Officers Council to 

create the Intragovernmental Dispute Resolution Committee.16 Treasury is 

also taking steps to help resolve material differences in intragovernmental

activity and balances. For example, Treasury is requiring federal agencies 

to provide a plan of action on how the agency is addressing certain of its 

unresolved material differences. Resolving the intragovernmental 

transactions problem remains a difficult challenge and will require a 

strong commitment by federal agencies to fully implement the recently 

issued business rules and continued strong leadership by OMB and 

Treasury. 

Although further progress was demonstrated in fiscal year 2007, 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, 

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

accounting principles (GAAP).17 Treasury has showed progress by 

demonstrating that amounts in the Statement of Social Insurance were 

consistent with the underlying federal agencies’ audited financial 

statements and that the Balance Sheet and the Statement of Net Cost were 

consistent with federal agencies’ financial statements prior to eliminating 

intragovernmental activity and balances. However, Treasury’s process for 

compiling the consolidated financial statements did not ensure that the 

information in the remaining three principal financial statements and 

notes were fully consistent with the underlying information in federal 

agencies’ audited financial statements and other financial data. During 

fiscal year 2007, Treasury, in coordination with OMB, continued to develop

and implement corrective action plans and milestones for short-term and 

long-range solutions for certain internal control weaknesses we have 

reported regarding the process for preparing the consolidated financial

statements. Resolving some of these internal control weaknesses will be a 

Preparing the Consolidated 

Financial Statements 

 16The U.S. Chief Financial Officers Council is an organization of the CFOs and Deputy 

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

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

17Most of the issues regarding the preparation of the consolidated financial statements that 

we identified in fiscal year 2007 existed in fiscal year 2006, and many have existed for a

number of years. In July 2007, we reported the issues we identified to Treasury and OMB 

and provided new recommendations for corrective action and discussed the status of 

certain previously issued recommendations in GAO, Financial Audit: Significant Internal 

Control Weaknesses Remain in the Preparation of the Consolidated Financial Statements

of the U.S. Government, GAO-07-805 (Washington, D.C.: July 23, 2007). 

Page 11 GAO-08-847T 
difficult challenge and will require a strong commitment from Treasury 

and OMB as they execute and implement their corrective action plans. 

Under the Federal Financial Management Improvement Act of 1996 

(FFMIA), as a part of the CFO Act agencies’ financial statement audits, 

auditors are required to report whether agencies’ financial management 

systems comply substantially with (1) federal financial management 

systems requirements, (2) applicable federal accounting standards, and 

(3) the U.S. Government Standard General Ledger (SGL) at the 

transaction level. These factors, if implemented successfully, help provide

a solid foundation for improving accountability over government 

operations and routinely producing sound cost and operating performance 

information. 

As shown in figure 1, 19 out of the 24 CFO Act agencies received an 

unqualified opinion on their financial statements in fiscal year 2007; 

however, 8 of these 19 agencies’ systems did not substantially comply with 

one or more of the three FFMIA requirements. This shows that 

irrespective of these unqualified “clean” opinions on the financial 

statements, many agencies still do not have reliable, useful and timely 

financial information with which to make informed decisions and ensure 

accountability on an ongoing basis. 

Figure 1: Comparison of 2007 Financial Statement Audit Results to FFMIA 

Assessments

Note: Data are compiled from CFO Act agencies’ Performance and Accountability Reports for fiscal 

year 2007. 

Federal Agencies’ 

Financial 

Management Systems 

Source: CFO Act agencies.

5 agencies

Disclaimer

or qualified

opinion

5 agencies

Disclaimer

or qualified

opinion

8 agencies

Unqualified

opinion

19 agencies

Unqualified opinion

CFO Act agencies’ financial

statement audit results

CFO Act agencies’ systems not

substantially compliant with FFMIA

Page 12 GAO-08-847T 
The modernization of federal financial management systems has been a 

long-standing challenge at many federal agencies. As shown in figure 1,

auditors reported that 13 of the 24 CFO Act agencies’ systems did not 

substantially comply with one or more of the three FFMIA requirements 

for fiscal year 2007. This compares with 17 agencies for fiscal year 2006.

Although the number of agencies reported as not substantially compliant 

has declined, the federal government’s capacity to manage with timely and

useful data remains limited, thereby hampering its ability to effectively 

administer and oversee its major programs. 

For fiscal year 2007, noncompliance with federal financial management 

systems requirements was the most frequently cited deficiency of the three 

FFMIA requirements. One of the federal financial management systems 

requirements is for agencies to have integrated financial management 

systems. Based on our review of the fiscal year 2007 audit reports, we 

identified the lack of integrated financial management systems to be one 

of the six problem areas for the 13 agency systems that are reported as not 

being substantially compliant with FFMIA. Figure 2 summarizes these six 

areas and the number of agencies with problems reported in each area.

18

 18The same six types of problems have been cited by auditors although the auditors may 

not have reported these problems as specific reasons for the agency systems not being

substantially compliant with the FFMIA requirements. 

Page 13 GAO-08-847T 
Figure 2: Number of CFO Act Agencies with Reported FFMIA Compliance Problems 

for Fiscal Year 2007 

The lack of integrated financial management systems typically results in 

agencies expending major time, effort, and resources, including in some 

cases, hiring external consultants to develop information that their 

systems should be able to provide on a daily or recurring basis. In 

addition, nonintegrated systems are more prone to error which could 

result in information that is not reliable, useful, or timely. Figure 2 also 

shows that auditors for 11 CFO Act agencies had reported the lack of 

accurate and timely recording of financial information as a problem in 

fiscal year 2007. Accurate and timely recording of financial information is 

essential for effective financial management. Furthermore, the majority of 

0

4

8

12

16

20

24

Weak security

over

information

systems

Lack of

adherence

to federal

accounting

standards

Noncompliance

with the SGL

Lack of

accurate

and timely

recording

Inadequate

reconciliation

procedures

Nonintegrated

financial

management

systems

CFO Act agencies

Source: GAO analysis based on independent auditors’ financial statement audit reports prepared by agency inspectors general

and contract auditors for fiscal year 2007.

Problem areas

8

10

11

5

7

11

Page 14 GAO-08-847T 
participants at a recent Comptroller General’s forum19 on improving 

financial management systems agreed that financial management systems 

are not able to provide, or provide little, information that is reliable, 

useful, and timely to assist management in their day-to-day decision 

making, which is the ultimate goal of FFMIA. 

Participants at the forum also discussed current financial management 

initiatives and the strategies for transformation of federal financial 

management. To reduce the cost and improve the outcome of federal 

financial management systems implementations, OMB continues to move 

forward on a key initiative—the financial management line of business 

(line of business), by leveraging common standards and shared solutions. 

OMB anticipates that the line of business initiative will help achieve the 

goals of improving the cost, quality, and performance of financial 

management operations. OMB and the Financial Systems Integration 

Office have demonstrated continued progress toward implementation of 

the line of business initiative by issuing a common governmentwide 

accounting classification structure, financial services assessment guide, 

and exposure drafts of certain standard business processes. However, as 

we previously recommended,20 OMB needs to continue defining standard 

business processes. A critical factor for success will be ensuring that 

agencies cannot continue developing and implementing their own 

stovepiped systems. Failure to do so may require additional work, increase 

costs to adopt these standard business processes, and further delay the 

transformation of federal financial management systems. 

In a January 2008 memo, OMB recognized the risks associated with 

nonstandardized processes and updated its guidance on the line of 

business. Current plans are for the Financial Systems Integration Office to

continue developing business standards and incorporate them into 

software requirements and permit agencies and shared service providers 

 19On December 11, 2007, the Comptroller General of the United States hosted a forum in 

Washington, D.C., attended by Chief Financial Officers, Chief Information Officers, 

Inspectors General (IG) from several of the 24 CFO Act agencies, and other knowledgeable 

officials in the public and private sector, to discuss issues related to effective financial 

management system implementation across the federal government and to address longstanding federal financial management issues. See GAO, Highlights of a Forum: 

Improving the Federal Government’s Financial Management Systems, GAO-08-447SP 

(Washington, D.C.: Apr. 16, 2008). 

20GAO, Financial Management Systems: Additional Efforts Needed to Address Key 

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

Page 15 GAO-08-847T 
to utilize only the certified products as configured. Along with these 

changes, continued high-priority and sustained top-level commitment by 

OMB and leaders throughout the federal government will be necessary to

fully and effectively achieve the common goals of the line of business and 

FFMIA. 

The nation’s long-term fiscal challenge is a matter of utmost concern. The 

federal government faces large and growing structural deficits due 

primarily to rising health care costs and known demographic trends. There 

is a need to engage in a fundamental review of what the federal 

government does, how it does it, and how it is financed. Understanding 

and addressing the federal government’s financial condition and the 

nation’s long-term fiscal challenge are critical to maintain fiscal flexibility 

so that policymakers can respond to current and emerging social, 

economic, and security challenges. 

While some progress has been made in recent years in addressing the 

federal government’s short-term fiscal condition, the nation has not made 

progress on its long-term fiscal challenge. However, even this short-term 

deficit is understated: It masks the fact that the federal government has 

been using the Social Security surplus to offset spending in the rest of 

government for many years. If the Social Security surplus is excluded, the

on-budget deficit21 in fiscal year 2007 was more than double the size of the 

unified deficit. For example, Treasury reported a unified deficit of $163 

billion and an on-budget deficit of $344 billion in fiscal year 2007. 

While the federal government’s unified budget deficit has declined in 

recent years, its liabilities, contingencies and commitments, and social 

insurance responsibilities have increased. As of September 30, 2007, the 

U.S. government reported in the 2007 Financial Report that it owed (i.e., 

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

Further, the Statement of Social Insurance in the Financial Report 

disclosed $41 trillion in social insurance responsibilities, including 

Medicare and Social Security, up more than $2 trillion from September 30, 

2006. 

The Nation’s LongTerm Fiscal Challenge 

 21The on-budget deficit includes all budgetary accounts other than those designated by law 

as off-budget. The off-budget accounts are the Postal Service and Social Security trust 

funds. The unified budget is a comprehensive measure of all federal activities, including

those that are on-budget and off-budget. 

Page 16 GAO-08-847T 
Information included in the Financial Report, such as the Statement of 

Social Insurance along with long-term fiscal simulations and fiscal 

sustainability reporting can help increase understanding of the federal 

government’s long-term fiscal outlook. Over the next few decades, the

nation’s fiscal challenge will be shaped largely by rising health care costs 

and known demographic trends. As the baby boom generation retires, 

federal spending on retirement and health care programs—Social Security 

and Medicare, and Medicaid—will grow dramatically. 

The future costs of Social Security and Medicare commitments are 

reported in the Statement of Social Insurance in the Financial Report. We 

were able to render an unqualified opinion on the 2007 Statement of Social 

Insurance—a significant accomplishment for the federal government. The 

statement displays the present value of projected revenues and 

expenditures for scheduled benefits of social insurance programs. For 

Social Security and Medicare alone, projected expenditures for scheduled 

benefits exceed earmarked revenues (i.e., dedicated payroll taxes and 

premiums) by approximately $41 trillion over the next 75 years in present 

value terms. Stated differently, one would need approximately $41 trillion 

invested today to deliver on the currently promised benefits not covered

by earmarked revenues for the next 75 years. 

Table 1 shows a simplified version of the Statement of Social Insurance by

its primary components. 

Table 1: Simplified Statement of Social Insurance as of January 1, 2007 

Dollars in trillions 

Social 

Security

Medicare 

Hospital 

Insurance 

(Part A)

Medicare 

Supplementary 

Medical Insurance 

(Part B) 

Medicare 

Supplementary 

Medical Insurance

(Part D) Total

Present value of future revenue (earmarked 

contributions, taxes, and premiums) $34 $11 $5 $2 $52

Present value of expenditures for scheduled

future benefitsa

41 23 18 11 93

Present value of future expenditures in excess 

of future revenueb

($7) ($12) ($13) ($8) ($41)

Source: The Department of the Treasury. 

Notes: Data are from the fiscal year 2007 Financial Report. Totals do not necessarily equal the sum

of the components due to rounding. 

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. 

Page 17 GAO-08-847T 
Although these social insurance commitments dominate the long-term 

outlook, they are not the only federal programs or activities that bind the 

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

framework for considering the wide range of responsibilities, programs, 

and activities that may explicitly or implicitly expose the federal 

government to future spending.22 In addition to the social insurance 

commitments, the federal government’s fiscal exposures include about $11 

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

commitments and contingencies, as well as other potential exposures that 

cannot be quantified. So beyond dealing with Medicare and Social 

Security, policymakers need to look at other policies that limit the federal

government’s flexibility—not necessarily to eliminate all of them but to at 

least be aware of them and make a conscious decision to reform them in a 

manner that will be responsible, equitable, and sustainable. 

Long-term fiscal simulations of future revenues and costs for all federal

programs offer a comprehensive assessment of the federal government’s 

long-term fiscal outlook. Since 1992, GAO has published long-term fiscal 

simulations of what might happen to federal deficits and debt levels under

varying policy assumptions. GAO’s 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. For example, figure 3 shows GAO’s 

simulation of the deficit path based on recent trends and policy 

preferences. In this simulation, we start with the Congressional Budget 

Office’s (CBO) baseline and then assume that (1) all expiring tax 

provisions are extended through 2018—and then revenues are brought to

their historical level as a share of gross domestic product (GDP) plus 

expected revenue from deferred taxes—(2) discretionary spending grows 

with the economy, and (3) no structural changes are made to Social 

Security, Medicare, or Medicaid.23

 22GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and

Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

23Social Security and Medicare spending are based on the 2008 Trustees’ intermediate 

projections. Medicare spending is adjusted using the Centers for Medicare and Medicaid 

Services’ estimates assuming that physician payments are not reduced as required under 

current law. Medicaid spending is based on CBO’s December 2007 long-term projections

adjusted to reflect excess cost growth consistent with the Trustees’ intermediate 

projections. Additional information about GAO’s simulation model, assumptions, data, and

results can be found at http://www.gao.gov/special.pubs/longterm/. 

Page 18 GAO-08-847T 
Figure 3: Unified Surpluses and Deficits under GAO’s Alternative Simulation

-25

-20

-15

-10

-5

0

5

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Percent of GDP

Source: GAO’s April 2008 analysis.

Fiscal year

Note: Assumes currently scheduled Social Security and Medicare Part A benefits are paid in full 

throughout the simulation period. 

Over the long term, the nation’s fiscal challenge stems primarily from 

rising health care costs and, to a lesser extent, the aging of the population.

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. 

Figure 4 looks behind the deficit path to the composition of federal 

spending. It shows that the estimated growth in the major entitlement 

programs leads to an unsustainable fiscal future. In this figure, the 

category “all other spending” includes much of what many think of as 

“government”—discretionary spending on such activities as national 

defense, homeland security, veterans health benefits, national parks, 

highways and mass transit, and foreign aid, plus mandatory spending on 

the smaller entitlement programs such as Supplemental Security Income, 

Temporary Assistance for Needy Families, and farm price supports.24 The 

growth in Social Security, Medicare, Medicaid, and interest on debt held 

by the public dwarfs the growth in all other types of spending. A 

 24Discretionary spending refers to spending based on authority provided in annual 

appropriations acts. Mandatory spending refers to spending that the Congress has 

authorized in legislation other than appropriations acts that entitles beneficiaries to receive

payment or that otherwise obligates the federal government to make payment. 

Page 19 GAO-08-847T 
government that in one generation does nothing more than pay interest on

its debt and mail checks to retirees and some of their health providers is 

unacceptable. 

Figure 4: Potential Fiscal Outcomes under GAO’s Alternative Simulation: Revenues 

and Composition of Spending as Shares of GDP 

Percent of GDP

Fiscal year

All other spending

Medicare & Medicaid

Social Security

Net interest

Source: GAO’s April 2008 analysis. 

0

10

20

30

40

50

2008 2018 2030 2040

Revenue

Note: Discretionary spending grows with GDP after 2008. Alternative minimum tax exemption amount 

is retained at the 2007 level through 2018 and expiring tax provisions are extended. After 2018, 

revenue as a share of GDP returns to its historical level of 18.3 percent of GDP plus expected 

revenues from deferred taxes, (i.e., taxes on withdrawals from retirement accounts). Medicare 

spending is based on the Trustees’ 2008 projections adjusted for the Centers for Medicare and 

Medicaid Services’ alternative assumption that physician payments are not reduced as specified 

under current law. 

The federal government’s increased spending and rising deficits will drive 

a rising debt burden. At the end of fiscal year 2007, debt held by the public

exceeded $5 trillion. Figure 5 shows that this growth in the federal 

government’s debt cannot continue unabated without causing serious 

harm to the economy. In the last 200 years, only during and after World 

War II has debt held by the public exceeded 50 percent of GDP. But this is 

only part of the story. The federal government for years has been 

Page 20 GAO-08-847T 
borrowing the surpluses in the Social Security trust funds and other 

similar funds and using them to finance federal government costs. When 

such borrowings occur, Treasury issues federal securities to these 

government funds that are backed by the full faith and credit of the U.S. 

government. Although borrowing by one part of the federal government 

from another may not have the same economic and financial implications 

as borrowing from the public, it represents a claim on future resources 

and hence a burden on future taxpayers and the future economy. If federal 

securities held by those funds are included, the federal government’s total 

debt is much higher—about $9 trillion as of the end of fiscal year 2007. 

Figure 5: Debt Held by the Public under GAO’s Alternative Simulation

0

50

100

150

200

250

300

2000 2010 2020 2030 2040 2050

Percent of GDP

Source: GAO’s April 2008 analysis.

Fiscal year

Note: Assumes currently scheduled Social Security and Medicare Part A benefits are paid in full 

throughout the simulation period. 

As shown in figure 6, total federal debt increased over each of the last four

fiscal years.

Page 21 GAO-08-847T 
Figure 6: Total Federal Debt Outstanding

0

2,000

4,000

6,000

8,000

10,000

2003 2004 2005 2006 2007

$4,297 $4,589 $4,826 $3,913

$5,033

$3,663

$3,346

$3,071

$2,859

$3,962

$8,489

$7,935

$7,368

$6,772

$8,995

Held by the public

Intragovernmental holdings

Total

As of September 30

Dollars in billions

Source: The Department of the Treasury.

On September 29, 2007, the statutory debt limit had to be raised for the 

third time in 4 years in order to avoid being breached; between the end of

fiscal year 2003 and the end of fiscal year 2007, the debt limit had to be

increased by about one-third. It is anticipated that actions will need to be 

taken in fiscal year 2009 to avoid breaching the current statutory debt limit 

of $9,815 billion. 

A quantitative measure of the long-term fiscal challenge measure is called 

“the fiscal gap.” The fiscal gap is the amount of spending reduction or tax 

increases that would be needed today to keep debt as a share of GDP at or 

below today’s ratio. The fiscal gap is an estimate of the action needed to 

achieve fiscal balance over a certain time period such as 75 years. Another 

way to say this is that the fiscal gap is the amount of change needed to

Page 22 GAO-08-847T 
prevent the kind of debt explosion implicit in figure 5. The fiscal gap can

be expressed as a share of the economy or in present value dollars. 

Under GAO’s alternative simulation, closing the fiscal gap would require 

spending cuts or tax increases equal to 6.7 percent of the entire economy 

over the next 75 years, or about $54 trillion in present value terms. To put 

this in perspective, closing the gap would require an increase in today’s 

federal tax revenues of about 36 percent or an equivalent reduction in 

today’s federal program spending (i.e., in all spending except for interest 

on the debt held by the public, which cannot be directly controlled) to be 

maintained over the entire period. 

Policymakers could phase in the policy changes so that the tax increases 

or spending cuts would grow over time and allow people to adjust. The 

size of these annual tax increases and spending cuts would be more than 

five times the fiscal year 2007 deficit of 1.2 percent of GDP. Delaying

action would make future adjustments even larger. Under our alternative 

simulation, waiting even 10 years would require a revenue increase of 

about 45 percent or noninterest spending cuts of about 40 percent. This 

gap is too large for the federal government to grow its way out of the 

problem. To be sure, additional economic growth would certainly help the 

federal government’s financial condition and ability to address this fiscal 

gap, but it will not eliminate the need for action. 

Understanding and addressing the federal government’s financial 

condition and the nation’s long-term fiscal challenge are critical to the 

nation’s future. As we reported in December 2007,25 several countries have 

begun preparing fiscal sustainability reports to help assess the 

implications of their public pension and health care programs and other 

challenges in the context of overall sustainability of government finances. 

European Union members also annually report on longer-term fiscal 

sustainability. The goal of these reports is to increase public awareness 

and understanding of the long-term fiscal outlook in light of escalating 

health care cost growth and population aging, to stimulate public and 

policy debates, and to help policymakers make more informed decisions. 

These countries used a variety of measures, including projections of future 

revenue and spending and summary measures of fiscal imbalance and

 25GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but Does Not Provide

Sufficient Information for Reporting on Our Nation’s Longer-Term Fiscal Challenge, 

GAO-08-206 (Washington, D.C.: Dec. 20, 2007). 

Page 23 GAO-08-847T 
fiscal gaps, to assess fiscal sustainability. Last year, we recommended that

the United States should prepare and publish a long-range fiscal 

sustainability report.26 I am pleased to note that the Federal Accounting 

Standards Advisory Board (FASAB) will soon issue a draft of a proposed 

standard on fiscal sustainability reporting. 

Here in the first half of 2008, the long-term fiscal challenge is not in the 

distant future. In fact, the oldest members of the baby boom generation 

are now eligible for Social Security retirement benefits and will be eligible 

for Medicare benefits in less than 3 years. The budget and economic 

implications of the baby boom generation’s retirement have already 

become a factor in CBO’s 10-year budget projections and that impact will 

only intensify as the baby boomers age. 

The financial markets also are noticing. Earlier this year, Moody’s 

Investors Service issued its annual report on the United States. In that 

report, it noted that absent Medicare and Social Security reforms, the longterm fiscal health of the United States and the federal government’s 

current Aaa sovereign credit rating were at risk. Likewise, Standard and 

Poor’s noted in a recent report that Medicare and Social Security reform is 

necessary to prevent a much worse long-term fiscal deterioration. These 

comments serve to note the significant longer-term interest rate risk that 

the federal government faces absent meaningful action to address these 

long-range challenges. Higher longer-term interest costs would only serve 

to complicate the nation’s fiscal, economic, and other challenges in future

years. 

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

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

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

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

changes will be disruptive and destabilizing and future generations will 

have to bear a greater burden of the cost. Simply put, the federal 

government is on an imprudent and unsustainable long-term fiscal path 

that is getting worse with the passage of time. 

 26GAO, Long-Term Fiscal Challenge: Additional Transparency and Controls Are Needed, 

GAO-07-1144T (Washington, D.C.: July 25, 2007), and Long-Term Budget Outlook: Deficits

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

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

Page 24 GAO-08-847T 
Meeting this long-term fiscal challenge overarches everything. It is the 

nation’s largest sustainability challenge, but it is not the only one. 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. 

A Possible Way Forward 

In addressing the growing costs of the major entitlement programs and 

reexamining other major programs, policies, and activities, attention 

should be paid to both the spending and the revenue sides of the budget. 

Programs that run through the tax code—sometimes referred to as tax 

expenditures27—must be reexamined along with those that run through the 

spending side. Moving forward, the federal government needs to start 

making tough choices in setting priorities and linking resources and 

activities to results. 

Meeting the nation’s long-term fiscal challenge will require a multipronged 

approach bringing people together to tackle health care, Social Security, 

and the tax system as well as 

• 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. 

There are also some process changes that might help the discussion by 

increasing the transparency and relevancy of key financial, performance, 

and budget reporting and estimates that highlight the fiscal challenge. 

Stronger budget controls for both spending and tax policies to deal with 

both near-term and longer-term deficits may also be helpful.

In summary, to effectively address the nation’s long-term fiscal challenge,

tackling health care cost growth and other existing entitlement programs 

will be essential. However, this entitlement reform alone will not get the 

job done. The federal government also needs to reprioritize and constrain 

other spending and consider whether revenues at the historical average of 

18.3 percent of GDP will be sufficient—that may involve discussion of the 

 27In 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 25 GAO-08-847T 
tax system. I am pleased that GAO has been able to offer you specific 

analysis and tools to assist you in this important work. 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 the fiscal clock is ticking. 

The Financial Report provides useful information on the government’s 

financial position at the end of the fiscal year and changes that have

occurred over the course of the year. However, in evaluating the nation’s 

fiscal condition, it is critical to look beyond the short-term results and 

consider the overall long-term financial condition and long-term fiscal 

challenge 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. 

The current federal financial reporting model does not clearly, 

comprehensively and transparently show the wide range of 

responsibilities, programs, and activities that may either obligate the 

federal government to future spending or create an expectation for such 

spending. Thus, it does not provide the best possible picture of the federal 

government’s overall performance, financial condition, and future fiscal 

outlook. 

Accounting and financial reporting standards have continued to evolve to

provide adequate transparency and accountability over the federal 

government’s operations, financial condition and fiscal outlook. However, 

after 11 years of reporting at the governmentwide level, it is appropriate to 

consider the need for further revisions to the current federal financial 

reporting model, which could affect both consolidated and agency 

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: 

The Federal Financial 

Reporting Model 

• 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? 

Page 26 GAO-08-847T 
• How should items that are unique to the federal government, such as 

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

In addition, further enhancements to accounting and financial reporting 

standards are needed to effectively convey the long-term financial 

condition of the U.S. government and annual changes therein. 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 

(1) a Statement of Fiscal Sustainability28 that provides a long-term look at 

the sustainability of social insurance programs in the context of all federal

programs, and (2) other sustainability information, including 

intergenerational equity.29 The Federal Accounting Standards Advisory 

Board is currently considering possible changes to social insurance 

reporting and has initiated a project on fiscal sustainability reporting. 

Engaging in a reevaluation of the federal financial reporting model could

stimulate discussion that would bring about a new way of thinking about 

the federal government’s financial and performance reporting needs. To 

understand various perceptions and needs of the stakeholders for federal 

financial reporting, a wide variety of stakeholders from the public and 

private sector should be consulted. Ultimately, the goal of such a 

reevaluation would be reporting enhancements that can help the Congress 

deliberate on strategies to address the federal government’s challenges, 

including its long-term fiscal challenge. 

In closing, it is important that the progress that has been made in 

improving federal financial management activities and practices be 

sustained by the current administration as well as the new administration

that will be taking office next year. Across government, financial 

management improvement initiatives are underway, and if effectively 

implemented, they have the potential to greatly improve the quality of 

financial management information as well as the efficiency and 

effectiveness of agency operations. However, the federal government still 

Closing Comments 

 28The Statement of Fiscal Sustainability would show the relationship between the present

value of projected revenues and outlays for social insurance and for all other federal 

programs. 

29Intergenerational equity assesses the extent to which different age groups may be 

required to assume financial burdens to sustain federal responsibilities. 

Page 27 GAO-08-847T 
has a long way to go before realizing strong federal financial management. 

For DOD, the challenges are many. We are encouraged by DOD’s efforts 

toward addressing its long-standing financial management weaknesses, 

but consistent and diligent management oversight toward achieving 

financial management capabilities, including audit readiness is needed. 

Federal agencies need to improve the government’s financial management 

systems. The civilian CFO Act agencies must continue to strive toward 

routinely producing not only annual financial statements that can pass the 

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

other meaningful financial and performance data to help guide decision 

makers on a day-to-day basis. 

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

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

GAO is committed to sustained attention to this fiscal challenge to help 

ensure that this is not the first generation to leave its children and 

grandchildren a legacy of failed fiscal stewardship and the hardships that 

would bring. Given the size of the projected deficit, the leadership and 

efforts of many people will be needed to put the nation on a more prudent 

and sustainable longer-term fiscal path. 

Given the federal government’s current financial condition and the 

nation’s long-term fiscal challenge, the need for the Congress and federal 

policymakers and management to have reliable, useful, and timely 

financial and performance information is greater than ever. Sound 

decisions on the current and future direction of vital federal government 

programs and policies are more difficult without such information. We will 

continue to stress the need for development of more meaningful financial

and performance reporting on the federal government. Until the problems 

discussed in this testimony are effectively addressed, they will continue to

have adverse implications for the federal government and the taxpayers. 

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

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

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

oversight committees hold agency top leadership accountable for 

resolving the remaining problems and that they support improvement 

efforts. 

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

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

subcommittee may have at this time. 

Page 28 GAO-08-847T 
For further information regarding this testimony, please contact McCoy 

Williams, Managing Director; and Gary Engel, Director; Financial 

Management and Assurance at (202) 512-2600, as well as Susan Irving, 

Director; Federal Budget Analysis, Strategic Issues at (202) 512-9142. Key

contributions to this testimony were also made by staff on the 

Consolidated Financial Statement audit team. 

GAO Contacts and 

Acknowledgments 

Page 29 GAO-08-847T 
Appendix

C

the A

Statements 

 I: Material Weaknesses 

ontributing to Our Disclaimer of Opinion on

ccrual Basis Consolidated Financial 

Page 30 GAO-08-847T 

Appendix I: Material Weaknesses Contributing 

to Our Disclaimer of Opinion on the Accrual 

Basis Consolidated Financial Statements 

The continuing material weaknesses discussed below contributed to our 

disclaimer of opinion on the federal government’s accrual basis 

consolidated financial statements. The federal government did not 

maintain adequate systems or have sufficient reliable evidence to support 

information reported in the accrual basis consolidated financial 

statements, as described below. 

The federal government could not satisfactorily determine that property, 

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

properly reported in the consolidated financial statements. Most of the 

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

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

adequate systems or have sufficient records to provide reliable 

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

Aeronautics and Space Administration, reported continued weaknesses in

internal control procedures and processes related to PP&E. 

Without reliable asset information, the federal government does not fully 

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

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

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

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

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

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

Federal agencies that account for the majority of the reported balances for 

direct loans and loan guarantee liabilities continue to have internal control 

weaknesses related to their credit reform estimation and related financial 

reporting processes. While progress in addressing these long-standing 

weaknesses was reported by certain federal credit agencies, certain 

deficiencies in the Department of Agriculture’s credit reform processes 

contributed to its auditor being unable to obtain sufficient, appropriate 

evidence to support related accounts. As such, for fiscal year 2007, we 

have added this area to the list of material weaknesses contributing to our 

disclaimer of opinion on the accrual basis consolidated financial 

statements. 

These issues and the complexities associated with estimating the costs of

lending activities significantly increase the risk that material 

misstatements in agency and governmentwide financial statements could 

occur and go undetected. Moreover, these weaknesses continue to 

Property, Plant, and 

Equipment and 

Inventories and 

Related Property 

Loans Receivable and 

Loan Guarantee 

Liabilities 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

adversely affect the federal government’s ability to support annual budget 

requests for federal lending programs, make future budgetary decisions, 

manage program costs, and measure the performance of lending activities. 

The federal government could not reasonably estimate or adequately 

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

not able to estimate with assurance key components of its environmental 

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

amount of its estimated military postretirement health benefits liabilities 

included in federal employee and veteran benefits payable. These 

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

DOD-managed military treatment facilities. This year, the auditor’s report 

on the financial statements that include the estimated military 

postretirement health benefits liabilities had not been issued as of the date 

of our audit report.1

 Further, the federal government could not determine 

whether commitments and contingencies, including those related to 

treaties and other international agreements entered into to further the U.S. 

government’s interests, were complete and properly reported. 

Problems in accounting for liabilities affect the determination of the full 

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

liabilities. Also, weaknesses in internal control supporting the process for 

estimating environmental and disposal liabilities could result in 

improperly stated liabilities as well as affect the federal government’s 

ability to determine priorities for cleanup and disposal activities and to 

appropriately consider future budgetary resources needed to carry out 

these activities. In addition, if disclosures of commitments and 

contingencies are incomplete or incorrect, reliable information is not 

available about the extent of the federal government’s obligations. 

The previously discussed material weaknesses in reporting assets and 

liabilities, material weaknesses in financial statement preparation, as 

discussed below, and the lack of adequate disbursement reconciliations at 

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

Liabilities and 

Commitments and 

Contingencies 

Cost of Government 

Operations and 

Disbursement Activity 

 1

The auditor’s report on these financial statements was issued subsequent to the date of 

our audit report. The auditor continued to report issues related to the cost of direct health 

care provided by DOD-managed military treatment facilities. 

Page 31 GAO-08-847T 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

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

of operations, most notably related to DOD. 

With respect to disbursements, DOD and certain other federal agencies 

reported continued weaknesses in reconciling disbursement activity. For

fiscal years 2007 and 2006, there was unreconciled disbursement activity, 

including unreconciled differences between federal agencies’ and 

Treasury’s records of disbursements and unsupported federal agency 

adjustments, totaling billions of dollars, which could also affect the 

balance sheet. 

Unreliable cost information affects the federal government’s ability to 

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

fees to recover costs where required. If disbursements are improperly 

recorded, this could result in misstatements in the financial statements 

and in certain data provided by federal agencies for inclusion in The 

Budget of the United States Government (hereafter referred to as “the 

President’s Budget”) concerning obligations and outlays. 

Federal agencies are unable to adequately account for and reconcile 

intragovernmental activity and balances. OMB and Treasury require the 

chief financial officers (CFO) of 35 executive departments and agencies to 

reconcile, on a quarterly basis, selected intragovernmental activity and

balances with their trading partners. In addition, these agencies are 

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

the extent and results of intragovernmental activity and balances 

reconciliation efforts as of the end of the fiscal year. 

A substantial number of the agencies did not adequately perform the 

required reconciliations for fiscal years 2007 and 2006. For these fiscal 

years, based on trading partner information provided to Treasury via 

agencies’ closing packages, Treasury produced a “Material Difference 

Report” for each agency showing amounts for certain intragovernmental 

activity and balances that significantly differed from those of its 

corresponding trading partners as of the end of the fiscal year. Based on 

our analysis of the “Material Difference Reports” for fiscal year 2007, we 

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

the differences with their trading partners or did not provide adequate 

documentation to support responses. For both fiscal years 2007 and 2006,

amounts reported by federal agency trading partners for certain 

intragovernmental accounts were not in agreement by significant amounts. 

In addition, a significant number of CFOs cited differing accounting 

Accounting for and 

Reconciliation of 

Intragovernmental 

Activity and Balances 

Page 32 GAO-08-847T 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

methodologies, accounting errors, and timing differences for their material 

differences with their trading partners. Some CFOs simply indicated that 

they were unable to explain the differences with their trading partners 

with no indication when the differences will be resolved. As a result of the 

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

differences on the amounts reported in the accrual basis consolidated 

financial statements is significantly impaired. 

While further progress was demonstrated in fiscal year 2007, 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, 

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

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

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

fiscal year 2007 accrual basis consolidated financial statements and 

adequate supporting documentation in time for us to complete all of our 

planned auditing procedures. During our fiscal year 2007 audit, we found 

the following: 

Preparation of 

Consolidated 

Financial Statements 

• Treasury has showed progress by demonstrating that amounts in the 

Statement of Social Insurance were consistent with the underlying federal

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

Statement of Net Cost were consistent with federal agencies’ financial 

statements prior to eliminating intragovernmental activity and balances. 

However, Treasury’s process for compiling the consolidated financial 

statements did not ensure that the information in the remaining three 

principal financial statements and notes were fully consistent with the 

underlying information in federal agencies’ audited financial statements 

and other financial data.

• At the federal agency level, for fiscal year 2007, auditors for many of the 

CFO Act agencies reported material weaknesses or other significant 

deficiencies regarding agencies’ financial reporting processes which, in 

turn, could affect the preparation of the consolidated financial statements. 

For example, auditors for several agencies reported that a significant 

number of adjustments were required to prepare the agencies’ financial 

statements. These and other auditors are also required to separately audit 

financial information sent by the federal agencies to Treasury via a closing 

package. In connection with preparing the consolidated financial 

statements, Treasury had to create adjustments to correct significant 

errors found in agencies’ audited closing package information. 

Page 33 GAO-08-847T 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

• To make the fiscal years 2007 and 2006 consolidated financial statements 

balance, Treasury recorded net decreases of $6.7 billion and $11 billion, 

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

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

transactions and balances."2

 An additional net $2.5 billion and $10.4 billion 

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

fiscal years 2007 and 2006, respectively. Treasury is unable to fully identify 

and quantify all components of these unreconciled activities. 

• The federal government could not demonstrate that it had fully identified

and reported all items needed to reconcile the operating results, which for 

fiscal year 2007 showed a net operating cost of $275.5 billion, to the budget 

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

$162.8 billion. 

• Treasury’s elimination of certain intragovernmental activity and balances 

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

their intragovernmental transactions. As previously discussed, amounts 

reported for federal agency trading partners for certain intragovernmental

accounts were not in agreement by significant amounts. This resulted in 

the need for intragovernmental elimination entries by Treasury that 

recorded the net differences between trading partners as “Other – 

Unmatched transactions and balances,” in order to force the Statements of 

Operations and Changes in Net Position into balance. In addition, 

differences in other intragovernmental accounts, primarily related to 

transactions with the General Fund, have not been reconciled, still remain 

unresolved, and total hundreds of billions of dollars. Therefore, the federal 

government continues to be unable to determine the impact of

unreconciled intragovernmental activity and balances on the accrual basis 

consolidated financial statements. 

• We have consistently reported that certain financial information required 

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

2006, the Federal Accounting Standards Advisory Board issued a new 

standard that eliminated or lessened the disclosure requirements for the 

consolidated financial statements related to certain information that 

 2

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

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

operating cost in the consolidated financial statements. 

Page 34 GAO-08-847T 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

Treasury had not been reporting.3 While Treasury made progress in 

addressing some of the remaining omitted information, there continue to

be disclosures required by GAAP that are excluded from the consolidated 

financial statements. Also, certain material weaknesses noted in this 

report, for example, commitments and contingencies related to treaties 

and other international agreements, preclude Treasury from determining if 

a disclosure is required by GAAP in the consolidated financial statements 

and us from determining if the omitted information is material. Further, 

Treasury’s ability to report information in accordance with GAAP will also 

remain impaired until federal agencies, such as DOD, can provide Treasury 

with complete and reliable information required to be reported in the 

consolidated financial statements. 

• Other internal control weaknesses existed in Treasury’s process for 

preparing the consolidated financial statements, involving inadequate or 

ineffective (1) documentation of certain policies and procedures; 

(2) management reviews of adjustments and key iterations of the financial 

statements, notes, and management discussion and analysis provided to 

GAO for audit; (3) supporting documentation for certain adjustments 

made to the consolidated financial statements; (4) processes for 

monitoring the preparation of the consolidated financial statements; and 

(5) spreadsheet controls.

• The consolidated financial statements include financial information for the 

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

agencies within those branches have provided Treasury such information. 

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

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

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

disclose in the consolidated financial statements that the excluded 

financial information was immaterial. 

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

personnel to address the magnitude of the fiscal year 2007 financial 

reporting challenges it faced, such as weaknesses in Treasury’s process for 

preparing the consolidated financial statements noted above. We found 

that personnel at Treasury’s Financial Management Service had excessive 

workloads that required an extraordinary amount of effort and dedication

 3

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

Requirements: Implementing Statement of Federal Financial Accounting Concepts 4

“Intended Audience and Qualitative Characteristics for the Consolidated Financial 

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

Page 35 GAO-08-847T 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

to compile the consolidated financial statements; however, there were not

enough personnel with specialized financial reporting experience to help

ensure reliable financial reporting by the reporting date. In addition, the 

federal government does not perform quarterly compilations at the 

governmentwide level, which leads to almost all of the compilation effort

being performed during a condensed time period at the end of the year. 

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit 

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

Activities report a budget deficit for fiscal years 2007 and 2006 of $162.8 

billion and $247.7 billion, respectively.4

 The budget deficit is calculated by

subtracting actual budget outlays (outlays) from actual budget receipts 

(receipts). 

For several years, we have been reporting material unreconciled 

differences between the total net outlays reported in selected federal 

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

accounting records used to compute the budget deficit5

 reported in the 

consolidated financial statements. OMB and Treasury have continued to 

work with federal agencies to reduce these material unreconciled 

differences. However, billions of dollars of differences still exist in this 

and other components of the deficit because the federal government does 

not have effective processes and procedures for identifying, resolving, and 

explaining material differences in the components of the deficit between 

Treasury’s central accounting records and information reported in agency

financial statements and underlying agency financial information and 

records. Until these differences are timely reconciled by the federal 

government, their effect on the U.S. government’s consolidated financial

statements will be unknown. 

In fiscal year 2007, we again noted that several agencies’ auditors reported 

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

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

Components of the 

Budget Deficit 

 4

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

Treasury Statement and the President’s Budget. 

5

See 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. Also, see GAO, Financial Audit: Process for Preparing the 

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

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

Page 36 GAO-08-847T 
Appendix I: Material Weaknesses 

Contributing to Our Disclaimer of Opinion on

the Accrual Basis Consolidated Financial 

Statements 

transactions. These weaknesses could affect the reporting and calculation

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

weaknesses also affect the agencies’ ability to report reliable budgetary 

information to Treasury and OMB and may affect the unified budget 

outlays reported by Treasury in its Combined Statement of Receipts, 

Outlays, and Balances,6

 and certain amounts reported in the President’s 

Budget. 

 6

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

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

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

and outlays of the federal government based on agency reporting. 

Page 37 GAO-08-847T 
Appendix II: Other Material Weaknesses 

Page 38 GAO-08-847T 

Appendix II: Other Material Weaknesses 

The federal government did not maintain effective internal control over 

financial reporting (including safeguarding assets) and compliance with 

significant laws and regulations as of September 30, 2007. In addition to 

the material weaknesses discussed in appendix I that contributed to our 

disclaimer of opinion on the accrual basis consolidated financial 

statements, we found the following three other material weaknesses in 

internal control. 

Although showing progress under OMB’s continuing leadership, agencies’ 

fiscal year 2007 reporting under the Improper Payments Information Act of 

2002 (IPIA)1

 does not reflect the full scope of improper payments. For 

fiscal year 2007, federal agencies’ estimates of improper payments, based 

on available information, totaled about $55 billion.2

 The increase from the 

prior year estimate of $41 billion3

 was primarily attributable to a 

component of the Medicaid program reporting improper payments for the 

first time totaling about $13 billion for fiscal year 2007, which we view as a 

positive step to improve transparency over the full magnitude of improper 

payments. 

Major challenges remain in meeting the goals of the act and ultimately 

better ensuring the integrity of payments.4

 For fiscal year 2007, four agency 

auditors reported noncompliance issues with IPIA related to agencies’ risk 

assessments, sampling methodologies, implementing corrective action 

plans, and recovering improper payments. We also identified issues with 

agencies’ risk assessments such as not completing risk assessments of all 

programs and activities or not conducting annual reviews of any programs 

Improper Payments 

 1

Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). The IPIA requires federal agencies to 

review all programs and activities, identify those that may be susceptible to significant 

improper payments, estimate and report the annual amount of improper payments for

those programs, and implement actions to cost-effectively reduce improper payments. 

2

The $55 billion includes 19 newly reported programs with improper payment estimates 

totaling about $16 billion. Of the 19 programs, 5 reported zero improper payment estimates 

for fiscal year 2007. 

3

In their fiscal year 2007 Performance and Accountability Reports (PAR), selected federal 

agencies updated their fiscal year 2006 improper payment estimates to reflect changes 

since issuance of their fiscal year 2006 PARs. These updates decreased the 

governmentwide improper payment estimate for fiscal year 2006 from $42 billion to $41

billion.

4

GAO, Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery

Auditing Requirements Continue, GAO-07-635T (Washington, D.C.: Mar. 29, 2007). 
Appendix II: Other Material Weaknesses 

and activities. OMB’s current guidance allows for annual risk assessments 

to be conducted less often than annually (generally every 3 years) for 

programs where baselines are already established, are in the process of 

being measured, or are scheduled to be measured by an established date.

For fiscal year 2007, we noted that 4 agencies were implementing a 3-year

cycle for conducting risk assessments. Furthermore, select agencies have 

not reported improper payment estimates for 14 risk-susceptible federal

programs with total program outlays of about $170 billion for fiscal year 

2007. Lastly, we found that major management challenges and internal 

control weaknesses continue to plague agency operations and programs 

susceptible to significant improper payments. For example, in the 

Department of Education’s fiscal year 2007 Performance and

Accountability Report, the Office of Inspector General reported that its 

recent investigations continue to uncover problems, including inadequate

attention to improper payments and failure to identify and take corrective 

action to detect and prevent fraudulent activities by grantees. 

Although progress has been made, serious and widespread information 

security control weaknesses continue to place federal assets at risk of 

inadvertent or deliberate misuse, financial information at risk of 

unauthorized modification or destruction, sensitive information at risk of 

inappropriate disclosure, and critical operations at risk of disruption. GAO 

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

since February 1997. During fiscal year 2007, federal agencies did not 

consistently implement effective controls to prevent, limit, or detect 

unauthorized access to computing resources. Specifically, agencies did not 

always (1) identify and authenticate users to prevent unauthorized access; 

(2) enforce the principle of least privilege to ensure that authorized access 

was necessary and appropriate; (3) apply encryption to protect sensitive 

data on networks and portable devices; (4) log, audit, and monitor 

security-relevant events; and (5) restrict physical access to information 

assets. In addition, agencies did not consistently configure network 

devices and services to prevent unauthorized access and ensure system 

integrity, such as patching key servers and workstations in a timely 

manner; assign incompatible duties to different individuals or groups so 

that one individual does not control all aspects of a process or transaction; 

and maintain or test continuity of operations plans for key information 

systems. Such information security control weaknesses unnecessarily 

increase the risk that the reliability and availability of data that are 

recorded in or transmitted by federal financial management systems could 

be compromised. A primary reason for these weaknesses is that federal 

agencies have not yet fully institutionalized comprehensive security 

Information Security 

Page 39 GAO-08-847T 
Appendix II: Other Material Weaknesses 

management programs, which are critical to identifying information 

security control weaknesses, resolving information security problems, and 

managing information security risks on an ongoing basis. The 

administration has taken important actions to improve information 

security, such as issuing extensive guidance on information security and 

requiring agencies to perform specific actions to protect certain personally 

identifiable information. However, until agencies effectively and fully 

implement agencywide information security programs, federal data and 

systems, including financial information, will remain at risk. 

During fiscal year 2007, material internal control weaknesses and systems 

deficiencies continued to affect the federal government’s ability to 

effectively manage its tax collection activities, an issue that has been 

reported in our financial statement audit reports for the past 10 years. Due 

to errors and delays in recording taxpayer information, payments, and 

other activities, taxpayers were not always credited for payments made on 

their taxes owed, which could result in undue taxpayer burden. In 

addition, the federal government did not always follow up on potential 

unreported or underreported taxes and did not always pursue collection 

efforts against taxpayers owing taxes to the federal government. 

Moreover, the federal government did not have cost benefit information, 

related cost-based performance measures, or a systematic process for 

ensuring it is using its resources to maximize its ability to collect what is 

owed and minimize the disbursements of improper tax refunds. As a 

result, the federal government is vulnerable to loss of tax revenue and 

exposed to potentially billions of dollars in losses due to inappropriate 

refund disbursements. 

Tax Collection 

Activities 

Page 40 GAO-08-847T 
Appendix II: Other Material Weaknesses 

Page 41 GAO-08-847T 

Appendix III: Fiscal Year 2007 Audit Results 

Table 2: CFO Act Agencies: Fiscal Year 2007 Audit Results and Principal Auditors 

CFO Act agencies 

Opinion rendered

by agency auditor 

Agencies’ auditors 

reported material 

weaknesses or

noncompliancea

Principal auditor

Agency for International Development Unqualified OIG

Agriculture Qualified √ OIG

Commerce Unqualified √ KPMG LLP

Defense Disclaimer √ OIG

Education Unqualified √ Ernst & Young, LLP 

Energy Unqualified KPMG LLP

Environmental Protection Agency Unqualified √ OIG

General Services Administration Unqualified Pricewaterhouse Coopers LLP 

Health and Human Services Unqualified √ Pricewaterhouse Coopers LLP 

Homeland Security b √ KPMG LLP

Housing and Urban Development Unqualified √ OIG

Interior Unqualified √ KPMG LLP

Justice Unqualified KPMG LLP

Labor Unqualified √ KPMG LLP

National Aeronautics and Space Administration Disclaimer √ Ernst & Young, LLP 

National Science Foundation Unqualified Clifton Gunderson LLP 

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

Office of Personnel Management Unqualified KPMG LLP

Small Business Administration Unqualified √ KPMG LLP

Social Security Administration Unqualified Pricewaterhouse Coopers LLP 

State Disclaimer √ Leonard G. Birnbaum and 

Company, LLP

Transportation Unqualified √ OIG

Treasury Unqualified √ KPMG LLP

Veterans Affairs Unqualified √ Deloitte & Touche LLP 

Source: GAO.

a

Reported noncompliance with applicable laws and regulations and/or substantial noncompliance with 

one or more of the Federal Financial Management Improvement Act requirements. 

b

For fiscal year 2007, only the Consolidated Balance Sheet and the related Statement of Custodial 

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

express an opinion on these two financial statements. 

(198548) 
This is a work of the U.S. government and is not subject to copyright protection in the 

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

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

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

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

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

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

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

and provides analyses, recommendations, and other assistance to help

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

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

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

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

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

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

to www.gao.gov and select “E-mail Updates.” 

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

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

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

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

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, DC 20548 

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

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

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

E-mail: fraudnet@gao.gov

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

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400 

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

Washington, DC 20548 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

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

Washington, DC 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER