GAO-06-254R USDA Fiscal Year 2003 Restatements 

United States Government Accountability Office

Washington, DC 20548 

January 26, 2006 

Mr. Charles R. Christopherson, Jr. 

Chief Financial Officer 

Department of Agriculture 

The Honorable Phyllis K. Fong 

Inspector General 

Department of Agriculture 

Subject: Financial Audit: Restatements to the Department of Agriculture’s Fiscal 

Year 2003 Consolidated Financial Statements

As you know, the Secretary of the Treasury, in coordination with the Director of the 

Office of Management and Budget (OMB), is required to annually prepare and submit 

audited financial statements of the U.S. government to the President and Congress. 

We are required to audit these consolidated financial statements (CFS) and report on 

the results of our work.1

 An issue meriting concern and close scrutiny that emerged 

during our fiscal year 2004 CFS audit was the growing number of Chief Financial 

Officers (CFO) Act agencies that restated2

 certain of their financial statements for 

fiscal year 2003 to correct errors.3

 Errors in financial statements can result from 

mathematical mistakes, mistakes in the application of accounting principles, or 

oversight or misuse of facts that existed at the time the financial statements were 

prepared. Frequent restatements to correct errors can undermine public trust and 

confidence in both the entity and all responsible parties. Further, when restatements 

do occur, it is important that financial statements clearly communicate, and readers 

of the restated financial statements understand, that the financial statements 

originally issued by management in the previous year and the opinion thereon should 

no longer be relied on and instead the restated financial statements and related 

auditor’s opinion should be used. 

 

1

The Government Management Reform Act of 1994 has required such reporting, covering the executive 

branch of government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. § 

331 (e). The federal government has elected to include certain financial information on the legislative 

and judicial branches in the CFS as well. 

2

A financial statement restatement occurs when an entity either voluntarily or prompted by its auditors 

or regulators revises public financial information that has previously been reported. 3

According to Federal Accounting Standards Advisory Board, Statement of Federal Financial 

Accounting Standards (SFFAS) No. 21, Reporting Corrections of Errors and Changes in Accounting 

Principles, prior period financial statements presented should be restated only to correct errors that 

caused such statements to be materially misstated. 
Page 2 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

Eleven of the 23 CFO Act agencies4

 restated certain of their financial statements for 

fiscal year 2003. Five CFO Act agencies had restatements in fiscal year 2003 covering 

their fiscal year 2002 financial statements. Three CFO Act agencies had restatements 

covering both years. We noted that the extent of the restatements to CFO Act 

agencies’ fiscal year 2003 financial statements varied from agency to agency, ranging 

from correcting two line items on one agency’s balance sheet to correcting numerous 

line items on several of another agency’s financial statements. In some cases, the net 

operating results of an agency were affected by the restatement. The amounts of the 

agencies’ restatements ranged from several million dollars to more than $91 billion. 

Nine of the 11 agencies that had restatements for fiscal year 2003 received unqualified 

opinions on their originally issued fiscal year 2003 financial statements. The auditors 

for 6 of these 9 agencies issued unqualified opinions on the restated financial 

statements, replacing the previous unqualified opinions on the respective agencies’ 

original fiscal year 2003 financial statements. The auditors for 2 of these 9 withdrew 

their unqualified opinions on the fiscal year 2003 financial statements and issued 

other than unqualified opinions on the respective agencies’ restated fiscal year 2003 

financial statements because they could not determine whether there were any 

additional misstatements and the effect of any such misstatements on the restated 

fiscal year 2003 financial statements. For the remaining agency, the principal auditor 

of the agency’s fiscal year 2004 financial statements was not the principal auditor of 

the agency’s fiscal year 2003 financial statements, and an audit opinion on the 

agency’s restated fiscal year 2003 financial statements was not issued. 

Our review focused on the nine agencies with restatements for fiscal year 2003 that 

received unqualified opinions on their originally issued fiscal year 2003 financial 

statements.5

 These were the Department of Agriculture (USDA), Department of State, 

Department of Justice, Department of Transportation, Department of Health and 

Human Services, General Services Administration, National Science Foundation, 

Nuclear Regulatory Commission, and Office of Personnel Management. 

Because of the varying nature and circumstances surrounding the restatements, we 

are issuing a number of separate reports on the matter. This report communicates 

our observations regarding USDA’s fiscal year 2003 restatements. Going forward, we 

hope that the lessons learned from the fiscal year 2003 restatements, together with 

our recommendations, will help (1) USDA avoid the need for restatements to its 

future financial statements and ensure the adequacy of the disclosure and 

presentation of audit results and any restatements and (2) ensure that USDA’s Office 

4

The Federal Emergency Management Agency (FEMA) was transferred to the Department of 

Homeland Security (DHS) effective March 1, 2003. With this transfer, FEMA was no longer required to 

prepare and have audited stand-alone financial statements under the CFO Act, leaving 23 CFO Act 

agencies for the remainder of fiscal year 2003 and for fiscal year 2004. The DHS Financial 

Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004), added DHS to the list of CFO Act 

agencies, increasing the number of CFO Act agencies again to 24 beginning in fiscal year 2005. 

5

The two agencies that had restatements for fiscal year 2003 but did not receive unqualified opinions 

on their originally issued fiscal year 2003 financial statements were the Department of Defense and the 

Small Business Administration. 
Page 3 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

of Inspector General (OIG) and other auditors apply appropriate audit procedures in 

future audits so that similar errors, which caused the original fiscal year 2003 

financial statements to be misstated, as noted in this report, are identified before the 

financial statements are issued. 

We reviewed four key areas with respect to the restatements of USDA’s fiscal year 

2003 financial statements: (1) the nature and cause of the errors that necessitated the 

restatements, including planned corrective actions by the agency and its auditors; 

(2) the timing of communicating the material misstatement to users of the financial 

statements; (3) the extent of transparency6

 exhibited in disclosing the nature and 

impact of the material misstatement in the financial statements and the reissued 

auditor’s report; and (4) audit issues that contributed to the failure to detect the 

errors that necessitated the restatements during the audit of the agency’s fiscal year 

2003 financial statements. 

Results in Brief 

Material errors identified at three of USDA’s component agencies led to the 

restatement of four of the five statements in USDA’s originally issued fiscal year 2003 

consolidated financial statements.7 The material errors resulted from the lack of or 

ineffective implementation of several key internal control procedures related to 

(1) recording appropriations, (2) the proper reporting of material items on the 

Statement of Financing, and (3) processing nonroutine journal vouchers. We believe 

that more effective audit procedures applied by USDA’s auditors could have detected 

the material errors noted in this report. 

In addition, certain aspects of the footnote disclosure and financial statement 

presentation relating to the restatements could be misinterpreted. Specifically, the 

footnote disclosure related to the restatements was titled Prior Period Adjustments, 

which could be misinterpreted since most of the corrections discussed in the note 

were not prior period adjustments.8

 USDA’s presentation of its fiscal year 2004 

Consolidated Statement of Changes in Net Position may also be misinterpreted 

because the fiscal year 2004 beginning balances did not agree with the restated fiscal 

year 2003 ending balances. Further, USDA asserted in its fiscal year 2004 

Management Discussion and Analysis (MD&A) that the agency has sustained 

6

Transparency is the full, accurate, and timely disclosure of information. 7

USDA restated certain of its originally issued fiscal year 2003 consolidated financial statements to 

correct for material errors identified at its Food and Nutrition Service, Forest Service, and Risk 

Management Agency’s Federal Crop Insurance Corporation. According to USDA officials, since USDA 

was already restating the fiscal year 2003 financial statements for material errors, it also decided to 

correct for less significant errors that had been identified. Specifically, certain less significant errors 

identified at Animal and Plant Health Inspection Service, Credit Commodity Corporation, Forest 

Service, Natural Resources Conservation Service, and the departmentwide level were also included in 

the restatement note disclosure. 8

SFFAS No. 21 defines a prior period adjustment as a correction for an error that occurred in and 

whose cumulative effect is attributable to periods not presented in the current financial statements. 
Page 4 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

unqualified or “clean” opinions on its financial statements since fiscal year 2002 but 

did not specifically acknowledge in its MD&A that it restated both originally issued 

fiscal years 2003 and 2002 financial statements for material errors. In addition, USDA 

did not completely disclose in the MD&A the nature and extent of the restatements to 

its originally issued fiscal year 2003 financial statements. We believe that not 

including this information in the MD&A could be misleading. Although the OIG told 

us that it believed disclosure of such information in its audit report was not 

necessary, in our view, such disclosure could have reduced the potential for a reader 

to be misled. 

We are making three recommendations on this matter, including two 

recommendations to USDA’s CFO. We recommend that USDA’s CFO ensure (1) that 

procedures to prevent any similar errors from occurring and going undetected in 

future years are effectively implemented and (2) for future years, the adequacy of the 

disclosure and presentation of audit results and any restatements. We are also 

making a recommendation to USDA’s Inspector General to ensure, in conjunction 

with the contracted independent public accountant (IPA) if one is used, that audit 

procedures are effectively implemented to test for any (1) improperly recorded 

appropriations transactions in the general ledger, (2) improperly reported material 

items on the Statement of Financing, and (3) incorrect nonroutine journal vouchers. 

In commenting on a draft of this report, USDA’s CFO expressed confidence that his 

office’s current plans and efforts would ensure that its consolidated financial 

statements are accurate and timely and contain adequate disclosure. In a separate 

letter, the Inspector General concurred with our recommendations. 

Background 

In conducting the fiscal year 2004 audit of the CFS, we reviewed the 23 CFO Act 

agencies’ performance and accountability reports for possible restatements and 

identified 11 agencies that had restated certain of their audited fiscal year 2003 

financial statements. 

The primary intended users of federal agencies’ financial reports are citizens, 

Congress, federal executives, and federal program managers.9

 Each of these groups 

may use federal agencies’ financial statements to satisfy their specific needs. Citizens 

are interested in many aspects of the federal government, particularly federal 

programs that affect their financial well-being. Congress is interested in monitoring 

and assessing the efficiency and effectiveness of federal programs. Federal 

executives, such as central agency officials at OMB and the Department of the 

Treasury (Treasury), are interested in federal financial statements to assist the 

President of the United States. OMB assists the President in overseeing the 

preparation of the federal budget by formulating the President’s spending plans, 

evaluating the effectiveness of agency programs, assessing competing funding 

9

Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting Concepts 

No. 1, Objectives of Federal Financial Reporting. 
Page 5 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

demands among agencies, and setting funding priorities. Treasury assists the 

President in managing the finances of the federal government and prepares the CFS, 

which are based on audited financial statements prepared by federal agencies. We 

audit the CFS and report on the results of our audit. Finally, federal program 

managers use agency financial statements as tools for managing their operations 

within the limits of the spending authority granted by Congress. 

The primary accounting and auditing standards that apply to restatement disclosures 

by federal entities are Federal Accounting Standards Advisory Board’s Statement of 

Federal Financial Accounting Standards (SFFAS) No. 21, and the American Institute 

of Certified Public Accountants’ (AICPA) Codification of Auditing Standards, 

AU section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s 

Report.

10

 

Objective, Scope, and Methodology 

The objective of our review of restatements of USDA’s fiscal year 2003 consolidated 

financial statements was to determine the nature and cause of the errors, the 

transparency and timing of communicating the material misstatements, any audit 

issues relating to such misstatements, and any actions being taken to help preclude 

similar errors from occurring in the future. 

We reviewed the nature and causes of the restatements, and we also examined 

corrective actions taken by USDA to help preclude similar errors from occurring in 

the future. We interviewed the preparers and auditors of USDA’s fiscal year 2003 

consolidated and certain component agencies’ financial statements, including staff 

from the agency’s OIG, and we obtained and reviewed relevant audit documentation. 

Because USDA’s OIG contracted with various IPAs for the audits of certain USDA 

component agencies’ financial statements, such as the Forest Service and Risk 

Management Agency’s Federal Crop Insurance Corporation, we also had to expand 

our contacts to include such IPAs. Our work was not designed to and we did not test 

the accuracy or appropriateness of the restatements. 

In our review, we considered certain accounting and auditing standards, including 

SFFAS No. 21; OMB Bulletin 01-09, Form and Content of Agency Financial 

Statements;

11 the Financial Accounting Standards Board’s Statement of Financial 

Accounting Standards No. 16, Prior Period Adjustments; and the AICPA Codification 

of Auditing Standards, AU section 329, Analytical Procedures, AU section 420, 

Consistency of Application of Generally Accepted Accounting Principles, AU 

section 508, Reports on Audited Financial Statements, and AU section 561. 

10Generally accepted government auditing standards incorporate AICPA reporting standards and 

Statements on Auditing Standards unless the Comptroller General of the United States excludes them 

by formal announcement. 

11Office of Management and Budget, Bulletin 01-09, Form and Content of Agency Financial 

Statements (Washington, D.C.: Sept. 25, 2001). 
Page 6 GAO-06-254R USDA Fiscal Year 2003 Restatements 

We performed our review of the restatements of USDA’s fiscal year 2003 consolidated 

financial statements from December 2004 to October 2005 in accordance with U.S. 

generally accepted government auditing standards. 

We requested comments on a draft of this report from USDA’s CFO and Inspector 

General or their designees. Written comments from USDA’s CFO and Inspector 

General are reprinted in enclosures I and II, respectively, and are discussed in the 

Agency Comments section. 

Issues Related to Restatements of USDA’s Fiscal Year 2003 Consolidated 

Financial Statements 

USDA restated four of the five statements in its originally issued fiscal year 2003 

consolidated financial statements to reflect material errors detected at three of its 

component agencies. These errors affected USDA’s originally issued fiscal year 2003 

Consolidated Statement of Changes in Net Position, Consolidated Balance Sheet, 

Combined Statement of Budgetary Resources, and Consolidated Statement of 

Financing. 

During our review of the restatements, we identified the following areas that need 

improvement: 

• internal control procedures over recording appropriations, 

• internal control procedures related to the proper reporting of material items 

on the Statement of Financing, 

• internal control procedures over processing nonroutine journal vouchers, 

• audit procedures for detecting errors similar to those discussed throughout 

this report, and 

• disclosure and presentation of the restatements. 

These issues are discussed in detail below. 

Material Error in Recording Certain Appropriations General Ledger Accounts

USDA restated its originally issued fiscal year 2003 Consolidated Statement of 

Changes in Net Position and its Consolidated Balance Sheet for an incorrect 

recording of Appropriations Used in fiscal year 2003 by its Food and Nutrition 

Service (FNS). In our view, the approximately $4.7 billion error was not detected by 

FNS due to a lack of key internal control procedures over recording appropriations. 

USDA and USDA’s OIG officials provided us the following perspectives on the events 

that led to the needed restatements. FNS incorrectly recorded a transfer of 

intragovernmental funds as Unexpended Appropriations – Transfers – In during 

fiscal year 2003, expended those moneys during the fiscal year, and incorrectly 

recorded the expenditures as Unexpended Appropriations – Used in its general 

ledger. FNS recorded the transfer of intragovernmental funds in such a manner 

because FNS’s general ledger at that time did not have the standard general ledger 

account Nonexpenditure Financing Sources – Transfers – In. Later in fiscal year 
Page 7 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

2003, the Office of the Chief Financial Officer (OCFO) implemented this standard 

general ledger account to account for transfers of intragovernmental funds. In late 

October 2003, FNS discovered and corrected the transfer recording error by 

reclassifying the transfer of intragovernmental funds from Unexpended 

Appropriations – Transfers – In to Nonexpenditure Financing Sources – Transfers 

– In.

12 However, FNS did not correct the accounting entries related to expending 

those funds, which led to the need to restate USDA’s originally issued fiscal year 2003 

Consolidated Statement of Changes in Net Position and Consolidated Balance Sheet. 

It was not until October 2004, during FNS’s year-end analysis of its fiscal year 2004 

financial statements that FNS determined that the fiscal year 2003 recording errors 

were not fully corrected. 

A USDA OIG official told us that it was first notified of the material error by FNS at 

the end of fiscal year 2004 and subsequently informed USDA’s OCFO that USDA 

would need to restate its originally issued fiscal year 2003 Consolidated Statement of 

Changes in Net Position and Consolidated Balance Sheet for the material error 

detected at FNS.13 The error caused the ending balances for Cumulative Results of 

Operations and Unexpended Appropriations on the fiscal year 2003 Consolidated 

Statement of Changes in Net Position and Consolidated Balance Sheet to be 

materially overstated and understated by approximately $4.7 billion, respectively.14

Although Total Net Position was unchanged, these two accounts represent distinct 

components of net position. Specifically, according to Statements of Federal 

Financial Accounting Concepts No. 2, Cumulative Results of Operations generally 

includes the amounts accumulated over the years by an entity from its financing 

sources less its expenses and losses, while Unexpended Appropriations represents 

appropriations not yet obligated or expended, including undelivered orders. 

12According to Treasury’s U.S. Standard General Ledger (USSGL) Supplement No. S2 Treasury 

Financial Manual (Hyattsville, Md.: September 2002), the Unexpended Appropriations – Transfers – 

In represents the amount of unexpended appropriations from current or prior years that were 

transferred in during the fiscal year, while Nonexpenditure Financing Sources – Transfers – In

represents funds transferred in, or to be transferred in, that occur as a result of a nonexchange 

nonexpenditure transaction. According to Federal Accounting Standards Advisory Board, Original 

Pronouncements, a nonexchange transaction occurs when one party involved in a transaction 

(1) receives value without giving or promising value in return or (2) gives or promises value without 

receiving value in return. GAO’s Glossary of Terms Used in the Federal Budget Process, 

GAO-05-734SP, states that for accounting and reporting purposes, a nonexpenditure transfer includes 

transactions between appropriation and fund accounts that do not represent payments for goods and 

services received or to be received but rather serves only to adjust the amounts available in the 

accounts for making payments. 

13USDA officials stated that once notified of the error, they researched whether other USDA 

component agencies had similar errors. According to the officials, their research identified that 

USDA’s Animal and Plant Health Inspection Service and Natural Resources Conservation Service had 

similar situations where they had improperly recognized Appropriations Used in the approximate 

amounts of $311 million and $478 million, respectively. 

14This is because the material error caused the Appropriations Used component of Cumulative 

Results of Operations and the Appropriations Used component of Unexpended Appropriations on 

USDA’s originally issued fiscal year 2003 Consolidated Statement of Changes in Net Position to be 

materially overstated and understated by approximately $4.7 billion, respectively. 
Page 8 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

Material Error Was Not Detected Due to a Lack of Key Internal Control 

Procedures over Recording Appropriations 

USDA officials told us that the FNS error was not detected during fiscal year 2003 

because the department did not have internal control procedures requiring (1) a 

reconciliation of current year appropriations reported in USDA’s general ledger with 

Treasury’s record of USDA’s appropriations accounts and (2) that any exceptions 

identified during the reconciliation be adequately researched and resolved. According 

to the Treasury Financial Manual (TFM),

15 agencies (1) must compare their Fund 

Balance with Treasury account16 in their internal ledgers with reports furnished by 

Treasury17 and (2) should use guidelines in the TFM supplement, Fund Balance with 

Treasury Reconciliation Procedures,

18 as a basis for tailoring procedures for their 

own operations. Specifically, this supplement outlines generic operating procedures 

for reconciling the Fund Balance with Treasury account, including performing a 

reconciliation that involves comparing an agency’s current year appropriations 

reported in the agency’s general ledger to Treasury’s record of the agency’s 

appropriations accounts. Such a reconciliation and effective research would have 

identified Nonexpenditure Financing Sources – Transfers – In that were 

inappropriately classified as Unexpended Appropriations – Transfers – In, which in 

turn, could have led to the identification of the recording error in Unexpended 

Appropriations – Used. According to the TFM, failure to implement effective and 

timely reconciliation procedures could (1) increase the risks of fraud, waste, and 

mismanagement of funds; (2) affect the federal government’s ability to effectively 

monitor budget execution; and (3) affect the federal government’s ability to 

accurately measure the full cost of its programs. 

According to USDA officials, USDA formally established procedures in June 2005 

requiring monthly reconciliations of certain19 current year appropriations reported in 

USDA’s general ledger with Treasury’s record of USDA’s appropriations accounts and 

resolution of any identified differences. This procedure is intended to provide 

reasonable assurance, on a timely basis, that USDA’s appropriations transactions are 

properly recorded in its general ledger, by detecting and correcting errors similar to 

those that led to the fiscal year 2003 restatement. 

15Department of the Treasury, Treasury Financial Manual, vol. 1, pt. 2, ch. 5100, I TFM 2-5100 

(Hyattsville, Md.: Oct. 18, 1999). 

16The Fund Balance with Treasury account is an asset account representing the future economic 

benefits of moneys that agencies can spend for future authorized transactions. Transactions, such as 

nonexpenditure transfers, affect the Fund Balance with Treasury account. 17Treasury’s Financial Management Service maintains a summary account for each appropriation and 

fund showing transactions relating to appropriations. For example, at the close of each month, 

agencies are furnished FMS 6653, a ledger for each appropriation and fund account. The ledger shows 

the opening balance, classified transactions for the month, and the resultant closing balance as well as 

appropriation warrants issued. 

18Department of the Treasury, Fund Balance with Treasury Reconciliation Procedures A Supplement 

to the Treasury Financial Manual, I TFM 2-5100 (November 1999). 19According to a USDA official, USDA’s Controller Operations Division Financial Reporting Branch 

performs the reconciliation for all of the USDA component agencies it services. 
Page 9 GAO-06-254R USDA Fiscal Year 2003 Restatements 

Audit Procedures Were Not Adequately Designed to Detect the Material Error in 

Certain Recorded Appropriations 

USDA’s OIG officials stated that the OIG’s fiscal year 2003 audit procedures did not 

detect the material error in Appropriations Used. In addition, according to an OIG 

official, FNS did not timely notify the OIG that the OCFO had implemented the abovenoted standard general ledger account. The OIG official stated that FNS informed the 

OIG that no changes in accounting operations were made and that the OIG’s various 

audit procedures did not identify any information that contradicted what FNS had 

told the OIG. 

According to the Financial Audit Manual (FAM),20 the auditor should perform audit 

procedures to test for all significant assertions21 in significant financial statement line 

items and accounts. An OIG official stated that the OIG performed audit procedures 

on funds FNS received during its fiscal year 2003 audit, which included tracing funds 

to source documents, but its procedures did not detect the material error. 

The official stated that if an appropriate analytical procedure had been performed 

during fiscal year 2003, then the material error would have been detected. The FAM 

states that as required by AU 329, Analytical Procedures, auditors must perform 

overall analytical procedures in order to determine if the auditor has obtained an 

adequate understanding of all fluctuations and relationships in the financial 

statements. According to AU 329, analytical procedures involve comparisons of 

recorded amounts, or ratios developed from recorded amounts, to expectations 

developed by the auditor. The OIG official stated that the analytical procedure that 

could have detected this material error was not performed during fiscal year 2003, 

but that the OIG included such an analytical procedure during its fiscal year 2004 and 

fiscal year 2005 audits. Specifically, according to an OIG official, the OIG performed 

an analytical procedure to calculate the cumulative results of operations 

independently and then compared the expected results with amounts reported in the 

financial statements. 

Material Error Due to Improperly Reported Material Items on the Statement of 

Financing

In fiscal year 2004, USDA restated its originally issued fiscal year 2003 Combined 

Statement of Budgetary Resources and Consolidated Statement of Financing to 

address a material error that occurred at USDA’s Risk Management Agency’s Federal 

Crop Insurance Corporation (FCIC) when FCIC tried to correct, per OMB’s 

advisement, the way it recorded Obligations Incurred. 

 

20GAO/President’s Council on Integrity and Efficiency, Financial Audit Manual, GAO-01-765G 

(Washington, D.C.: July 2001), updated by GAO-04-1015G and GAO-04-942G (July 2004). 

21Financial statement assertions are management representations that are embodied in financial 

statement components. The assertions can be either explicit or implicit and can be classified into the 

following categories: (1) existence or occurrence, (2) completeness, (3) rights and obligations, 

(4) valuation or allocation, and (5) presentation and disclosure. 
Page 10 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

According to an FCIC official, FCIC received a letter from OMB, dated December 19, 

2002, requesting that FCIC properly record insurance fund program obligations 

incurred during the fiscal year when individual claims are approved to be paid for 

insured events. According to OMB’s letter, FCIC instead was recording estimated 

obligations during the fiscal year in which the insured event occurred, which 

potentially placed FCIC in the untenable position of violating the Anti-Deficiency 

Act22 should actual claims exceed estimates. The FCIC official stated that as a result 

of OMB’s letter, FCIC modified the way it recorded Obligations Incurred before the 

fiscal year 2002 financial statements were issued; however, FCIC failed to remove all 

of its estimated accrued obligations (i.e., claims not yet approved to be paid for 

insured events) from the fiscal year 2002 beginning obligated balance. The FCIC 

official told us that as a result, an incorrect fiscal year 2002 ending obligated balance 

was carried forward to become the fiscal year 2003 beginning balance. This material 

error caused the Beginning of Period Obligated Balance, Net and Beginning of 

Period Unobligated Balance on FCIC’s originally issued fiscal year 2003 Statement of 

Budgetary Resources to be materially overstated and understated by approximately 

$1.2 billion, respectively. In addition, due to the same error, Obligations Incurred on 

FCIC’s originally issued fiscal year 2003 Statement of Budgetary Resources and 

Statement of Financing were materially understated by approximately $1.2 billion.23

 

According to OMB Bulletin 01-09, the Statement of Financing (1) is the bridge 

between an entity’s budgetary and proprietary24 accounting25 and (2) articulates the 

relationships between net obligations derived from an entity’s budgetary accounts 

and net cost of operations derived from the entity’s proprietary accounts by 

identifying and explaining key differences between the two numbers. As stated in 

SFFAS No. 7, the Statement of Financing reconciles the budgetary resources 

obligated for a federal entity’s programs and operations (i.e., Obligations Incurred) 

to the net cost of operating that entity (i.e., Net Cost of Operations). As a result, 

because Obligations Incurred was materially understated, the Net Cost of 

Operations reported on FCIC’s draft of its fiscal year 2003 Statement of Financing did 

not match the Net Cost of Operations reported on FCIC’s draft of its fiscal year 2003 

Statement of Net Cost. According to an FCIC official, in fiscal year 2003, FCIC was 

aware that the Net Cost of Operations as reported on both draft statements did not 

match but did not research the issue to determine the exact accounting entries 

2231 U.S.C. § 1341. 

23This is because there is a relationship between Beginning of Period Obligated Balance, Net and 

Obligations Incurred such that if there is an overstatement of the Beginning of Period Obligated 

Balance, Net, then, provided no other errors have occurred on the Statement of Budgetary Resources, 

Obligations Incurred would be understated. 24Proprietary accounts provide the information for the financial statements based on Federal 

Accounting Standards Advisory Board standards and are intended to provide an economic, rather than 

a budgetary, measure of operations and resources. 

25Certain transactions affect both proprietary and budgetary accounts. Although budgetary and 

proprietary accounting information are complementary, both the types of information and the timing 

of their recognition are different, which is caused by differences in the basis of accounting. For 

example, under budgetary accounting, a federal entity records an obligation when it places a purchase 

order or signs a contract. Under proprietary accounting, liabilities are recognized when goods and 

services are received or are recognized based on an estimate of work completed under a contract or 

agreement. 
Page 11 GAO-06-254R USDA Fiscal Year 2003 Restatements 

necessary to correct the error. The official stated that instead of researching the 

issue, FCIC made an unsupported adjustment to Other Components Requiring or 

Generating Resources in Future Periods on the Statement of Financing in order to 

force the Net Cost of Operations reported on FCIC’s draft of its fiscal year 2003 

Statement of Financing to match Net Cost of Operations reported on FCIC’s draft of 

its fiscal year 2003 Statement of Net Cost. While this adjustment eliminated the 

imbalance between Net Cost of Operations reported on the two statements, it also 

caused Other Components Requiring or Generating Resources in Future Periods to 

be overstated by approximately $1.2 billion. 

The material error at FCIC also affected USDA’s consolidated financial statements. 

Specifically, the material error caused the same line items, as noted above, to be 

materially misstated on USDA’s originally issued fiscal year 2003 Combined 

Statement of Budgetary Resources and Consolidated Statement of Financing. This 

material error resulted in USDA’s originally issued fiscal year 2003 Combined 

Statement of Budgetary Resources showing that USDA had fewer budgetary 

resources than it actually did. 

Material Error Resulted from a Lack of Key Internal Control Procedures Related 

to the Proper Reporting of Material Items on FCIC’s Statement of Financing 

FCIC’s IPA’s audit report, dated November 4, 2004, found that FCIC’s preparation of 

its Statement of Financing needed improvements. Specifically, the IPA found that 

FCIC made unsupported adjustments to its originally issued fiscal year 2003 

Statement of Financing instead of performing research and taking corrective action. 

In this case, the fiscal year 2003 year-end unsupported adjustment, which was made 

in order to force the Net Cost of Operations reported on FCIC’s draft of its fiscal year 

2003 Statement of Financing to match Net Cost of Operations reported on FCIC’s 

draft of its fiscal year 2003 Statement of Net Cost, was incorrect. 

FCIC’s IPA noted in its independent auditor’s report that this material error resulted 

from FCIC’s lack of key internal control procedures related to the proper reporting of 

material items on the Statement of Financing. Specifically, the IPA noted that FCIC 

did not have procedures requiring its accounting staff to research and identify why 

Net Cost of Operations as reported on FCIC’s draft of its fiscal year 2003 Statement 

of Financing did not match Net Cost of Operations as reported on FCIC’s draft of its 

fiscal year 2003 Statement of Net Cost. As a result, FCIC made the unsupported 

manual adjustment to force the Net Cost of Operations reported on the two draft 

statements to match. If such above-noted research procedures had been performed, 

we believe that FCIC could have identified and corrected the error in Beginning of 

Period Obligated Balance, Net and Beginning of Period Unobligated Balances,

which caused Obligations Incurred to be materially understated and, in turn, could 

have prevented the need to make an unsupported adjustment to Other Components 

Requiring or Generating Resources in Future Periods on the Statement of 

Financing, which created an additional error. 
Page 12 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

According to our Internal Control Management and Evaluation Tool,

26 when 

assessing whether necessary control activities are in place and being applied, 

agencies should consider if timely action is taken on exceptions, implementation 

problems, or information that requires follow-up. Such consideration may have 

identified that FCIC lacked key internal control procedures requiring timely action be 

taken to investigate and resolve identified exceptions, such as the above-noted 

exception that led to FCIC’s fiscal year 2003 material error. Failure to timely 

investigate and resolve exceptions, implementation problems, or information that 

requires follow-up could, among other things, (1) increase the risks of fraud, waste, 

and mismanagement of funds and (2) result in materially inaccurate reporting of 

financial information. 

In April 2005, FCIC established internal control procedures related to reporting of 

material items on FCIC’s Statement of Financing. These procedures require FCIC’s 

financial management staff to (1) prepare supporting documentation for manual 

adjustments to FCIC’s Statement of Financing; (2) increase their review of the 

financial statements, including incorporating analytical analyses of the relationships 

among balances into the review process; and (3) attend additional training on 

budgetary accounting and the related statements. In addition, the newly established 

procedures require an accountant to review FCIC’s Statement of Financing for 

consistency and accuracy with other financial statements, such as FCIC’s Statement 

of Net Cost and Statement of Budgetary Resources. These procedures are intended to 

support the proper reporting of material line items on FCIC’s Statement of Financing

so that errors, similar to those noted above, are identified and corrected before the 

financial statements are issued. 

Audit Procedures Did Not Detect the Material Error on FCIC’s Statement of 

Financing 

FCIC’s IPA for fiscal year 2003 stated that its audit procedures did not detect the 

material error in FCIC’s fiscal year 2003 reported unobligated and obligated beginning 

account balances. FCIC’s IPA for fiscal year 2003 stated that it was not the IPA for 

fiscal year 2002. Accordingly, FCIC’s IPA for fiscal year 2003 told us that it reviewed 

the predecessor auditor’s working papers to determine the nature, timing, and extent 

of the fiscal year 2003 audit procedures that the IPA would perform over opening 

balances. FCIC’s IPA for fiscal year 2003 told us that it relied upon the work of the 

previous auditor with respect to the fiscal year 2002 ending obligated and unobligated 

balances that were, in turn, the beginning balances for fiscal year 2003, which were 

subsequently determined to be materially overstated and understated, respectively. 

In addition, FCIC’s IPA for fiscal year 2003 stated that it had designed and applied 

audit procedures in fiscal year 2003 to analyze differences between budgetary and 

proprietary accounts. However, FCIC’s IPA for fiscal year 2003 stated that such audit 

procedures did not identify the material error in Obligations Incurred, which 

26GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 

2001). 
Page 13 GAO-06-254R USDA Fiscal Year 2003 Restatements 

resulted from improperly recorded obligations in fiscal year 2002. Although we 

requested FCIC’s IPA’s audit documentation related to its review of FCIC’s fiscal year 

2003 Statement of Financing, we were not provided with such information. Without 

documentation of the IPA’s audit procedures in this area, we are unable to determine 

whether the lack of detection of the material error was a result of inadequate design 

or implementation of audit procedures. 

We believe that analytical procedures could also have detected the error. Specifically, 

as previously mentioned, the FAM states that as required by AU 329, the auditor must 

perform overall analytical procedures in order to determine if the auditor has 

obtained an adequate understanding of all fluctuations and relationships in the 

financial statements. The FAM states that the auditor should understand the causes 

of fluctuations and determine if its understanding is consistent with other audit 

evidence; if the auditor is unable to do so, the auditor should perform appropriate 

procedures to obtain an understanding or to resolve any inconsistencies. According 

to the FAM, one such analytical procedure involves comparing current year amounts 

in the financial statements with comparative financial information (i.e., amounts 

reported in prior years). We believe that this type of analytical procedure could have 

identified the significant increase in Other Components Requiring or Generating 

Resources in Future Periods, which resulted from the above-noted unsupported 

adjustment. Specifically, the reported balance for Other Components Requiring or 

Generating Resources in Future Periods on the Statement of Financing increased 

from $148 million for fiscal year 2002 to $1,520 million for fiscal year 2003. In our 

view, an investigation of the cause of this increase could have detected the abovenoted material error. 

Both FCIC’s IPA and USDA’s OIG stated that they plan to dedicate more resources to 

ensure the proper reporting of material items on the Statement of Financing. 

However, it is going to be important that in future years, audit procedures are 

performed to identify and investigate any material unsupported adjustments made to 

FCIC’s as well as USDA’s consolidated financial statements. 

USDA Restated Its Combined Statement of Budgetary Resources Due to an Incorrect 

Nonroutine Journal Voucher

In fiscal year 2004, USDA restated its originally issued fiscal year 2003 Combined 

Statement of Budgetary Resources to correct for a material accounting error made by 

USDA’s Forest Service (FS).27 According to an FS official, the restatement to USDA’s 

fiscal year 2003 Combined Statement of Budgetary Resources corrected an 

approximately $178 million overstatement of the ending unobligated balance, an 

approximately $16 million overstatement of Net Transfers, and an approximately 

$193 million understatement of Total Obligated Balance, Net, End of Period. The FS 

 

27USDA’s consolidated financial statements were also corrected for less significant errors identified at 

FS. According to the OIG’s audit report, FS corrected errors for alignment of budgetary and 

proprietary account relationships and posting errors, unsupported balances in various suspense and 

deposit clearing funds, Fund Balance with Treasury and associated custodial liability, and certain 

revenue transactions. According to FS, the IPA, and the OIG, of the errors that were corrected, only 

the nonroutine journal voucher, noted above, was material. 
Page 14 GAO-06-254R USDA Fiscal Year 2003 Restatements 

 

official stated that the error was caused by an incorrect, nonroutine journal voucher28

processed by FS in October 2003 and recorded in the general ledger activity for fiscal 

year 2003. 

Material Error Resulted from Ineffective Internal Control Procedures over 

Processing Nonroutine Journal Vouchers 

FS’s IPA stated that as a result of FS’s fiscal year-end 2003 account analyses, FS 

processed several nonroutine journal vouchers, including one that incorrectly 

adjusted three budgetary accounts and led to the restatement of USDA’s originally 

issued fiscal year 2003 Combined Statement of Budgetary Resources. According to an 

FS official, inexperienced FS personnel used a nonroutine journal voucher to adjust 

an out-of-balance condition between FS’s budgetary accounts and the corresponding 

financial information submitted to Treasury without identifying the underlying cause 

of the out-of-balance condition and without sufficient approval. In an FS memo to its 

IPA dated November 12, 2004, FS noted that it did not have properly designed and/or 

effective internal control procedures to prevent and/or detect errors in the processing 

of its financial transactions, primarily related to the processing and approval of 

nonroutine transactions through the use of journal vouchers. 

 

According to our Standards for Internal Control in the Federal Government,

29

control activities, such as internal control procedures, help to ensure that 

transactions are completely and accurately recorded. Properly designed and 

effectively implemented internal control procedures over processing nonroutine 

journal vouchers, which according to FS’s IPA is an inherently high-risk area, could 

have prevented or detected the material error that led to the restatement of USDA’s 

originally issued fiscal year 2003 Combined Statement of Budgetary Resources. 

Failure to have properly designed and effective internal control procedures over 

processing nonroutine journal vouchers could, among other things, (1) increase the 

risks of fraud, waste, and mismanagement of funds and (2) result in materially 

inaccurate reporting of financial information. 

An FS official stated that during fiscal year 2004, FS established new internal control 

procedures requiring multiple supervisory reviews of nonroutine journal vouchers 

with final approval by FS’s CFO. These procedures, if effectively implemented, 

should help ensure that nonroutine journal vouchers are appropriate. According to 

FS’s IPA, as of October 30, 2005, FS had not processed any nonroutine journal 

vouchers during fiscal year 2005. 

28According to an FS official, FS’s nonroutine journal vouchers do not follow the USSGL posting model 

logic, since nonroutine journal vouchers allow for posting increases and decreases to any account in 

the general ledger. The USSGL provides basic standard posting logic for financial events across the 

federal government and illustrates both proprietary and budgetary entries for each accounting event. 29GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, 

D.C.: November 1999). 
Page 15 GAO-06-254R USDA Fiscal Year 2003 Restatements 

Audit Procedures Were Not Effectively Implemented to Detect FS’s Material 

Error 

According to FS’s IPA, its staff selected and reviewed the nonroutine journal voucher 

that resulted in the material error, but did not identify the above-noted problems 

related to the material error. According to the FAM, there are many aspects of an 

audit that require technical judgments, and the auditor should ensure that persons 

with adequate technical expertise are available to make such decisions. FS’s IPA 

stated that starting in fiscal year 2004, it has staffed the audit with personnel more 

experienced in budgetary accounting and reporting and plans to continue staffing the 

FS audit with similarly experienced personnel. 

In addition, FS’s IPA noted in its fiscal year 2004 audit documentation that 

throughout fiscal year 2004, it tested FS’s new internal control procedures for 

processing nonroutine journal vouchers by sampling nonroutine journal vouchers to 

determine whether they were accurately prepared, properly supported, correctly 

posted, and properly reviewed and approved. As a result of its internal control 

testing, FS’s IPA found that (1) some journal vouchers were not accurately prepared, 

properly supported, and correctly posted and (2) in some instances, FS personnel had 

already identified the errors and made corrections. FS’s IPA also noted that it 

discussed all errors disclosed by its test work with FS, and FS made appropriate 

corrections. 

Disclosure and Presentation of USDA’s Restatements Could Be Misinterpreted

Certain aspects of the footnote disclosure and financial statement presentation 

relating to the restatements could be misinterpreted. Specifically, the notes to 

USDA’s comparative fiscal years 2004 and 2003 consolidated financial statements 

included a note disclosure titled Prior Period Adjustments, which could be 

misinterpreted since most of the corrections discussed in the note were not prior 

period adjustments as defined by SFFAS No. 21. In addition, we found that USDA’s 

presentation of the restatements in its comparative fiscal years 2004 and 2003 

consolidated financial statements could also be misinterpreted. Specifically, on 

USDA’s fiscal years 2004 and 2003 comparative Consolidated Statement of Changes in 

Net Position, the fiscal year 2004 beginning balances did not agree with the restated 

fiscal year 2003 ending balances, and amounts were reported in the fiscal year 2004 

column as prior period adjustments to the fiscal year 2004 beginning balances to 

reflect the restated fiscal year 2003 ending balances. We believe that a clearer 

presentation on USDA’s fiscal years 2004 and 2003 comparative Consolidated 

Statement of Changes in Net Position would have been to carry forward the restated 

fiscal year 2003 ending balances and present them as the fiscal year 2004 beginning 

balances instead of presenting prior period adjustments in the fiscal year 2004 

column. 
Page 16 GAO-06-254R USDA Fiscal Year 2003 Restatements 

Other Matters Related to the Disclosure of the Restatements

According to SFFAS No. 15, Management’s Discussions and Analysis, management 

should have great discretion regarding what to say in its MD&A, but the pervasive 

requirement is that the MD&A not be misleading. USDA asserted in its fiscal year 

2004 MD&A that an unqualified financial statement audit opinion indicates that a 

department’s financial statements are free of significant errors or misstatements. 

USDA also stated in its MD&A that “in fiscal year 2002, USDA—and all its agencies—

achieved their first unqualified consolidated financial audit opinion in the 

Department’s 140-year history ... USDA’s clean audit opinion was sustained in fiscal 

years 2003 and 2004.” However, USDA did not specifically acknowledge in the MD&A 

that its fiscal year 2003 and its fiscal year 2002 consolidated financial statements, as 

originally issued, were both materially misstated and subsequently restated. 

Furthermore, in its MD&A, USDA did not completely disclose the nature and extent 

of the restatements to its originally issued fiscal year 2003 financial statements. 

Specifically, USDA disclosed in the MD&A only one of the three restatements 

discussed in this report. We believe not including the above-noted information in the 

MD&A could be misleading. Although the OIG told us that it believed disclosure of 

such information in its audit report was not necessary, in our view, such disclosure 

could have reduced the potential for a reader to be misled. 

Conclusions 

The material errors in USDA’s originally issued fiscal year 2003 consolidated financial 

statements could have been detected by more effective internal controls and audit 

procedures. USDA corrected the errors and issued restated financial statements. 

Going forward, it will be important for USDA to ensure that corrective actions are 

taken to prevent any similar errors from going undetected. In addition, for future 

years, USDA should ensure the adequacy of the disclosure and presentation of audit 

results and any restatements. Further, it will be important that USDA’s OIG and other 

auditors effectively implement audit procedures to detect any similar errors in the 

future. 

Recommendations for Executive Action 

We are making three recommendations on this matter, including two 

recommendations to USDA’s CFO. We recommend that USDA’s CFO ensure (1) that 

procedures to prevent any errors similar to those that resulted in the need to restate 

USDA’s originally issued fiscal year 2003 financial statements are effectively 

implemented and (2) for future years, the adequacy of the disclosure and 

presentation of audit results and any restatements. 

We also recommend that USDA’s Inspector General, in conjunction with the IPA if 

one is used, ensure that audit procedures are effectively implemented to test for any 

(1) improperly recorded appropriations transactions in the general ledger, 
Page 17 GAO-06-254R USDA Fiscal Year 2003 Restatements 

(2) improperly reported material items on the Statement of Financing, and (3) 

incorrect nonroutine journal vouchers. 

Agency Comments 

USDA’s CFO and Inspector General provided written comments on a draft of this 

report. (See encs. I and II.) The CFO expressed confidence that his office’s current 

plans and efforts would ensure that the financial statements are accurate and timely 

and contain adequate disclosures. The Inspector General agreed with our 

recommendations and stated that her office has instituted, in conjunction with the 

IPAs, strengthened quality control measures over its audit procedures. 

- - - - - 

Within 60 days of the date of this report, we would appreciate receiving a written 

statement on actions taken to address these recommendations. 

We are sending copies of this report to the Chairmen and Ranking Minority Members 

of the Senate Committee on Homeland Security and Governmental Affairs; the 

Subcommittee on Federal Financial Management, Government Information, and 

International Security, Senate Committee on Homeland Security and Governmental 

Affairs; the House Committee on Government Reform; and the Subcommittee on

Government Management, Finance and Accountability, House Committee on 

Government Reform. In addition, we are sending copies to the Fiscal Assistant 

Secretary of the Treasury and the Controller of OMB. This report is also available at 

no charge on GAO’s Web site at www.gao.gov. 

We appreciate the courtesy and cooperation extended to us by your staff throughout 

our work. We look forward to continuing to work with your offices to help improve 

financial management in the federal government. If you have any questions about the 

contents of this report, please contact me at (202) 512-3406 or engelg@gao.gov. 

Contact points for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. 

Gary T. Engel 

Director 

Financial Management and Assurance 
Page 18 GAO-06-254R USDA Fiscal Year 2003 Restatements 

Enclosure I: Comments from the Chief Financial Officer, Department of

Agriculture
Page 19 GAO-06-254R USDA Fiscal Year 2003 Restatements 

Enclosure II: Comments from the Inspector General, Department of 

Agriculture

(198397)
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