United States Government Accountability Office

GAO Report to the Director, Office of 

Management and Budget 

FINANCIAL AUDIT

Restated Financial 

Statements: Agencies’ 

Management and 

Auditor Disclosures of 

Causes and Effects 

and Timely 

Communication to 

Users 

October 2006 

 

GAO-07-91 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

October 2006

FINANCIAL AUDIT

Restated Financial Statements: Agencies’ 

Management and Auditor Disclosures of 

Causes and Effects and Timely 

Communication to Users 

Highlights of GAO-07-91, a report to the 

Director of the Office of Management and 

Budget 

GAO continues to have concerns

about restatements to federal 

agencies’ previously issued financial

statements. During fiscal year 2005, 

at least 7 of the 24 Chief Financial

Officers (CFO) Act agencies restated 

certain of their fiscal year 2004

financial statements to correct

misstatements. To study this trend, 

GAO reviewed the nature and causes

of the restatements made by certain 

CFO Act agencies in fiscal year 2004

to their fiscal year 2003 financial

statements. Eleven CFO Act agencies

had restatements for fiscal year 2003. 

Nine of those 11 received unqualified 

opinions on their originally issued

fiscal year 2003 financial statements. 

GAO’s view is that users of federal

agencies’ financial statements and the

related audit reports need to be

provided at least a basic 

understanding of why a restatement 

was necessary and its effect on the 

agencies’ previously issued financial

statements and related audit reports.

This report communicates GAO’s

observations on the transparency and 

timeliness of the 9 federal agencies’

and their auditors’ restatement 

disclosures. 

What GAO Recommends

GAO is making 11 recommendations

to the Office of Management and 

Budget (OMB) to further improve the 

restatement guidance available to

agencies’ management and the 

agencies’ respective auditors. OMB 

stated that it would take GAO’s 

recommendations under advisement. 

GAO reiterates its concern that it is

critical for OMB to timely provide 

additional restatement guidance. 

The nine agencies GAO reviewed did not consistently communicate financial 

statement restatements. GAO found that all nine agencies could have greatly 

enhanced the adequacy, effectiveness, and timeliness of their restatement 

disclosures to users. Similar transparency issues existed with the associated 

audit reports regarding disclosure of all the essential information that would 

clearly explain the restatements. GAO highlighted the following issues as

among the more prevalent issues to be addressed: 

• columns of the agencies’ restated financial statements were not labeled 

as “Restated,” 

• agencies’ restatement footnote disclosures lacked clarity or sufficient 

detail regarding the nature of the restatements and the effect on 

balances reported in previously issued financial statements, 

• restatement information was not sufficiently disclosed in the agencies’ 

Management Discussion and Analysis, 

• audit reports did not disclose that the respective agencies had restated

certain of their fiscal year 2003 financial statements, 

• audit reports did not provide a statement that the previously issued audit 

report was withdrawn and replaced by the opinion on the restated 

financial statements, and 

• material misstatements and potential material misstatements were not 

timely communicated by agencies to either their auditors or to the users 

of the financial statements. 

The primary contributing factor for the restatement disclosure issues that 

GAO identified was insufficient guidance available at the time to both the 

agencies’ management and their respective auditors for disclosure of the 

restatements and the timeliness of such disclosures. GAO believes that 

information regarding restatements should be disclosed in a transparent and 

timely manner consistent with the qualitative characteristics of information 

in financial reports described in Statement of Federal Financial Accounting 

Concepts (SFFAC) No. 1. In GAO’s view, more detailed accounting and 

auditing guidance on how to satisfy the financial reporting characteristics as 

outlined in SFFAC No. 1 as it relates to the disclosure of restatements would 

have been helpful. OMB revised Circular No. A-136, Financial Reporting 

Requirements, which provides additional guidance to federal agencies’ 

management regarding disclosure of restatements to previously issued 

financial statements. Revisions made to OMB Circular No. A-136 address 

many of GAO’s concerns regarding the agencies’ disclosure of restatements. 

In addition, the proposed 2006 revision of generally accepted government 

auditing standards now includes a section on reporting on restatement of 

previously issued financial statements. In addition, on August 23, 2006, OMB 

issued Bulletin No. 06-03, which also provides some information regarding

reporting on restatements. However, GAO believes that OMB needs to timely

provide additional, though complementary, restatement guidance to both the 

agencies’ management and their respective auditors. 

www.gao.gov/cgi-bin/getrpt?GAO-07-91.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gary T. Engel 

at (202) 512-3406 or engelg@gao.gov. 
Contents 

Letter 1

Results in Brief 4

Background 8

Objectives, Scope, and Methodology 9 

Insufficient and Inconsistent Disclosure of Financial Statement 

Restatements by Certain Federal Agencies and Their Auditors 11 

Timely Communication of Material Misstatements to Users of

Previously Issued Financial Statements 18 

Conclusions 24

Recommendations for Executive Action 24 

Agency Comments and Our Evaluation 25 

Appendix I Recommendations to OMB 27 

Recommendations Regarding OMB Circular No. A-136 27 

Recommendations Regarding OMB Bulletin No. 06-03 31 

Appendix II GAO Contact and Staff Acknowledgments 37 

Related GAO Products 38 

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Page i GAO-07-91 Fiscal Year 2003 Restatements
United States Government Accountability Office

Washington, DC 20548 

Comptroller General

of the United States

October 5, 2006 

The Honorable Rob Portman 

Director 

Office of Management and Budget 

Dear Mr. Portman: 

We continue to have concerns about restatements to federal agencies’ 

previously issued financial statements. During fiscal year 2005, at least 7 of 

the 24 Chief Financial Officers (CFO) Act agencies restated certain of their

fiscal year 2004 financial statements to correct misstatements. To study 

this trend, we reviewed the nature and causes of the restatements made by 

certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003 

financial statements.1

 Our audit of the consolidated financial statements of 

the U.S. government (CFS) for fiscal years 2004 and 2003 showed that 11

CFO Act agencies had restated one or more of their fiscal year 2003 

financial statements to correct misstatements.2

 Nine of the 11 agencies had 

received an unqualified audit opinion on their originally issued financial 

statements. Because of the significant increase in the number of 

restatements identified during our fiscal year 2004 audit, we initiated a

review of the nature and causes of these 9 federal agencies’ restatements. 

Accounting principles attribute errors in recognition, measurement, 

presentation, or disclosure in previously issued financial statements to 

(1) mathematical mistakes, (2) mistakes in the application of generally 

accepted accounting principles (GAAP), or (3) oversight or misuse of facts 

when the financial statements were prepared. Restatements occur when 

an entity, either voluntarily or prompted by its auditors or regulators, 

 1

This report focuses only on those corrections of errors that resulted in restatements to 

agencies’ fiscal year 2003 financial statements. Changes to prior period financial statements 

may also occur as a result of changes in accounting principles, where specifically required 

by Federal Accounting Standards Advisory Board (FASAB) standards, and changes in 

reporting entity. 

2

According to American Institute of Certified Public Accountants, Codification of Auditing 

Standards, AU section 110, Responsibilities and Functions of the Independent Auditor 

(1972), misstatements can be caused by error (unintentional) or fraud (intentional). The 

meaning of the term “error,” as used in accounting principles, is consistent with the

meaning of the term “misstatement.” 

Page 1 GAO-07-91 Fiscal Year 2003 Restatements
revises previously issued financial statements. Accounting standards state 

that financial statements should only be restated for the correction of 

errors that would have caused any statements to be materially misstated. 

Therefore, restatements should not occur if misstatements in previously 

issued financial statements are not material. Such standards further state 

that the restated financial statements should disclose the nature of the 

misstatement and effect of its correction on relevant balances. The Office 

of Management and Budget (OMB) has issued guidance to federal 

agencies’ management regarding disclosure of restatements to previously 

issued financial statements. Generally accepted government auditing 

standards (GAGAS)

3

 discuss the auditors’ responsibilities when they 

become aware of information affecting previously issued financial 

statements, including corrections of material misstatements. GAGAS 

stress the importance of timely communication of restatements to users 

relying or likely to rely on the previously issued financial statements. The 

proposed 2006 revision of GAGAS includes an additional section on 

reporting on restatement of previously issued financial statements. In 

addition, on August 23, 2006, OMB issued Bulletin No. 06-03,

4

 which also 

provides some information regarding reporting on restatements. 

We believe that federal agencies’ financial statements and the related audit 

reports should provide users with at least a basic understanding of why a 

restatement was necessary and the effect of the restatement on the 

agencies’ previously issued financial statements and related audit reports. 

In keeping with full transparency,5

 when restatements occur, restated 

financial statements should clearly communicate that the financial 

statements previously issued by management and the opinion thereon 

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

and the related auditor’s opinion should be used. In addition, timely 

 3

GAGAS, promulgated by the Comptroller General of the United States, are to be followed 

by federal auditors and audit organizations and by other auditors auditing federal 

organizations, programs, or activities when required by law, contract, or policy. These 

standards pertain to auditors’ professional qualifications, the quality of audit effort, and the 

characteristics of professional and meaningful audit reports. GAGAS incorporate American 

Institute of Certified Public Accountants’ field work and reporting standards and the

related Statements on Auditing Standards for financial audits unless the Comptroller 

General of the United States excludes them by formal announcement. 

4

OMB Bulletin No. 06-03, Audit Requirements for Federal Financial Statements, August 

23, 2006, supersedes OMB Bulletin No. 01-02, Audit Requirements for Federal Financial

Statements, October 16, 2000. 

5

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

Page 2 GAO-07-91 Fiscal Year 2003 Restatements
communication of restatements is critical to prevent users of federal 

agencies’ financial statements and the related audit reports from 

inadvertently relying on inaccurate information. 

Restatements are not unique to the federal government. Over the past 

several years, we have seen a number of corporate scandals as well as 

restatements by public companies.6

 In response, the Congress enacted the 

Sarbanes-Oxley Act7

 in 2002 to strengthen corporate governance and 

improve transparency and accountability to help ensure the accuracy and 

integrity of the financial reporting system in the private sector to protect

investors. In addition, in May 2005, the Financial Accounting Standards 

Board’s (FASB) Statement of Financial Accounting Standards (FAS) No. 

154, Accounting Changes and Error Corrections,

8

 was issued. FAS 

No. 154 requires nongovernmental entities to disclose that their previously 

issued financial statements have been restated, a description of the nature

of the error, the effect of the correction on each financial statement line 

item, and the cumulative effect of change in the statement of financial

position. Further, the Securities and Exchange Commission (SEC) now 

requires companies to disclose restatements in the Form 8-K.9

 Specifically, 

under the Form 8-K requirements, if a company is advised by its auditor 

that disclosure should be made to prevent future reliance on a previously 

issued audit report or completed interim review related to previously 

issued financial statements, the company should disclose (1) the date on

which it was so advised or notified, (2) the financial statements that 

should no longer be relied upon, (3) a brief description of the information 

provided by the auditor, and (4) a statement of whether the audit 

committee or the board of directors discussed with the auditor the matters 

disclosed in the filing. 

America’s taxpayers deserve no less in terms of transparency, 

accountability, disclosure, and notification from federal agencies. Between 

September 2005 and January 2006, we issued reports covering five of the 

 6

GAO, Financial Statement Restatements: Trends, Market Impacts, Regulatory

Responses, and Remaining Challenges, GAO-03-138 (Washington, D.C.: Oct. 4, 2002). 

7

Pub. L. No. 107-204, 116 Stat. 745 (July 30, 2002). 

8

Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 

154, Accounting Changes and Error Corrections. 

9

Form 8-K is the “current report” companies must file with the SEC to announce major 

events that shareholders should know about. 

Page 3 GAO-07-91 Fiscal Year 2003 Restatements
nine CFO Act agencies that had received unqualified audit opinions on, but 

subsequently restated, their originally issued fiscal year 2003 financial 

statements.10 We reported that these restatements generally resulted from 

(1) lack of effective internal controls over the processing and reporting of 

certain transactions and (2) failure of the auditors to design and/or 

perform adequate audit procedures to detect such misstatements. During 

our fieldwork, December 2004 through October 2005, our review of these 

nine agencies also focused on the following two key areas: (1) the extent 

of transparency exhibited in disclosing the nature and cause of the 

misstatement and its impact on the financial statements and the reissued 

or updated audit report and (2) the timing of communicating the material 

misstatement to users of the financial statements. This capping report, 

which summarizes the results of our review of the nine agencies, provides

our overall observations on their transparency and timeliness, and 

includes governmentwide recommendations based on our work at these 

agencies. 

The nine agencies we reviewed did not consistently communicate financial 

statement restatements. Further, we believe that all nine agencies could 

greatly enhance the adequacy, effectiveness, and timeliness of their 

restatement disclosures to users. Specifically, we found that 

Results in Brief 

• two agencies did not label their financial statements as “Restated”; 

• of the six agencies that restated their Statements of Changes in Net 

Position, two of the agencies’ restatement presentations could be 

misinterpreted because the agencies’ fiscal year 2004 beginning

financial statement balances did not agree with the restated fiscal year 

2003 ending balances; 

 10Our review did not include 2 of the 11 agencies that had restatements for fiscal year 2003

because these agencies did not receive unqualified opinions on their originally issued fiscal

year 2003 financial statements. Reports were issued to the Department of Agriculture, 

Department of State, General Services Administration, National Science Foundation, and

Nuclear Regulatory Commission. We did not issue separate reports dealing with the other 4 

agencies (Departments of Justice, Transportation, and Health and Human Services, and the 

Office of Personnel Management) since those agencies’ restatements primarily dealt with 

material misstatements affecting the Statement of Budgetary Resources, which we have

already reported on in our February 2005 and March 2006 testimonies. See our Related

GAO Products page for a list of these reports as well as other related GAO products. 

Page 4 GAO-07-91 Fiscal Year 2003 Restatements
• all nine agencies’ restatement footnotes11 lacked sufficient clarity or 

sufficient detail regarding the nature of the restatements and the effect

on balances reported in previously issued financial statements; and 

• seven of the nine agencies asserted in their fiscal year 2004 

Management Discussion and Analysis (MD&A) that they had achieved a

consecutive number of unqualified opinions on their respective 

financial statements. Of these, six did not acknowledge restatements to 

certain of these financial statements in the intervening years, which we 

believe is misleading to users. 

We also found transparency issues with all nine agencies’ audit reports 

related to the disclosure of all the essential information that would clearly

explain the restatement. Specifically, we found that 

• seven of the nine audit reports did not provide a statement that the 

previously issued audit report was withdrawn12 and replaced by the 

opinion on the restated financial statements and 

• three of the nine audit reports either did not disclose the restatement or 

refer to the restatement footnote in the financial statements. 

 11According to Federal Accounting Standards Advisory Board, Statement of Federal 

Financial Accounting Concepts No. 2, Entity and Display, financial information is also

conveyed with accompanying footnotes, which are an integral part of the financial 

statements. Footnotes typically provide additional disclosures that are necessary to make

the financial statements more informative and not misleading. 

12According to American Institute of Certified Public Accountants, Codification of Auditing 

Standards, AU section 561, Subsequent Discovery of Facts Existing at the Date of the 

Auditor’s Report (1972), when the auditor has concluded that subsequently discovered 

information would have affected the previously issued audit report and believes there are 

persons relying or likely to rely on the previously issued financial statements, the auditor 

should take action to prevent future reliance on the previously issued audit report. To

appropriately withdraw the previously issued audit report, the auditor may reissue the 

audit report separately from the audit report on the current-period financial statements or 

issue an updated report in conjunction with the audit report on the current-period financial 

statements as discussed in American Institute of Certified Public Accountants, Codification 

of Auditing Standards, AU section 508, Reports on Audited Financial Statements (1989). 

Page 5 GAO-07-91 Fiscal Year 2003 Restatements
With regard to the timely communication of material misstatements 

affecting previously issued financial statements and restatement of such 

financial statements, we found that 

• three of the nine agencies identified potential material misstatements 

prior to the fourth quarter of fiscal year 2004 and did not timely 

communicate that a potential material misstatement had been 

identified to either their auditor or to the users of the financial 

statements, 

• six of the nine agencies identified potential material misstatements in 

their fiscal year 2003 financial statements after the third quarter of 

fiscal year 2004 but before that year’s comparative financial statements 

were issued and did not timely communicate that a potential material 

misstatement had been identified to the users of the financial

statements, and 

• at least one agency’s auditor did not advise the agency’s management to 

timely notify users of the financial statements as to the potential 

material misstatements affecting the agency’s previously issued 

financial statements. 

The primary contributing factor for these issues was insufficient guidance

available at the time to both the agencies’ management and their 

respective auditors for disclosure of the restatements and the timeliness of 

such disclosures. 

Although the guidance available did not provide explicit details for 

disclosing restatements, we believe that information regarding

restatements should be disclosed in a transparent and timely manner 

consistent with the qualitative characteristics of information in financial

reports described in Statement of Federal Financial Accounting Concepts

(SFFAC) No. 1.13 In our view, more detailed accounting and auditing 

guidance on how to satisfy the financial reporting characteristics outlined 

in SFFAC No. 1 as it relates to the disclosure of restatements would have 

been helpful. Nevertheless, a number of federal agencies included 

information in their restatement disclosures that improved the 

transparency of the restatement. For example, during fiscal year 2004,

 13According to Federal Accounting Standards Advisory Board, Statement of Federal 

Financial Accounting Concepts No. 1, Objectives of Federal Financial Reporting, financial 

reports must be understandable, reliable, relevant, timely, consistent, and comparable. 

Page 6 GAO-07-91 Fiscal Year 2003 Restatements
seven of the nine agencies labeled their restated financial statements as 

“Restated,” although not expressly required by accounting standards at 

that time. In addition, during fiscal year 2005, we found that one agency,

the Department of State (State), went far beyond guidance available for 

agency management and timely notified its users not to rely on its fiscal 

year 2004 comparative financial statements and the related audit report 

because of a potential material misstatement in the financial statements. 

State’s action serves as a model for what we believe is appropriate for fully 

and timely notifying users of potential material misstatements. 

During our review, OMB revised Circular No. A-136, Financial Reporting

Requirements,

14 which provides additional guidance to federal agencies’ 

management regarding disclosure of restatements to previously issued 

financial statements. The revised OMB Circular No. A-136, issued August 

23, 2005,

15 addresses many of our concerns regarding the agencies’ 

disclosure of restatements. In addition, OMB issued OMB Bulletin No. 06-

03, dated August 23, 2006, which provided additional guidance concerning 

(1) audit report language when the financial statements are restated, 

(2) actions the auditor should take when previously issued audit reports 

are not reliable due to material misstatements, and (3) the timing of the 

restated financial statements and audit reports. However, we believe that 

additional restatement guidance is needed for both the agencies’ 

management and their respective auditors. As such, this report contains 11

recommendations to assist OMB in updating OMB Circular No. A-136 as 

well as OMB Bulletin No. 06-03 to further improve guidance to agencies’ 

management and the agencies’ respective auditors regarding the timely 

disclosure of material misstatements in previously issued financial 

statements and the presentation and disclosure of restatements. 

In oral comments on a draft of this report, OMB stated that it would take 

our recommendations under advisement, but that there were no current

plans to update guidance that has been recently issued.16 OMB also noted 

that any future plans to update guidance would carefully consider issues 

already currently being addressed by the American Institute of Certified 

 14Office of Management and Budget, Circular No. A-136 Revised, Financial Reporting 

Requirements, August 23, 2005. 

15OMB revised Circular No. A-136 again on July 24, 2006; however, there were minimal 

changes to guidance related to restatements. 

16As noted previously, OMB issued guidance to agency management and agency auditors on

July 24, 2006 and August 23, 2006, respectively. 

Page 7 GAO-07-91 Fiscal Year 2003 Restatements
Public Accountants’ (AICPA) Codification of Auditing Standards. In 

addition, OMB provided some technical comments, which we have 

incorporated as appropriate. 

As noted in this report, we found inconsistent communications and 

insufficient disclosures of financial statement restatements by agency 

management and their auditors. As such, we reiterate our concern that it is 

critical for OMB to timely offer separate, though complementary, guidance 

to agency management and to agency auditors that provides more explicit 

and detailed guidance concerning their respective roles and 

responsibilities when an actual or potential material misstatement is 

identified in previously issued financial statements. Separate guidance is 

important because agency management and agency auditors have different 

roles and responsibilities. For example, management is responsible for 

preparing the financial statements and adjusting them to correct any 

material misstatements. The auditor is responsible for expressing or 

disclaiming an opinion on the financial statements prepared by

management. The auditor has certain additional responsibilities should 

management not properly respond to actual or potential material 

misstatements. 

Federal agencies’ management responsibilities for their financial 

statements include, among other things, preparing the financial statements 

in conformity with GAAP and establishing and maintaining internal 

controls over financial reporting. Auditors of these financial statements 

are required to plan and perform their audits to obtain reasonable 

assurance about whether the financial statements are free of material 

misstatement. While restatements to previously issued financial 

statements can happen and may not be surprising given weaknesses in the 

financial reporting environment at many federal agencies, inherently, 

restatements raise questions about the reliability of other information in 

previously issued financial statements. In addition, frequent restatements 

to correct misstatements can undermine public trust and confidence in

both the entity and all responsible parties. Adequate transparency and 

timely notification of restatements are essential to help preclude users of 

agencies’ financial statements and the related audit reports from 

inadvertently relying on inaccurate information and allow them to make 

more informed and relevant decisions. 

According to SFFAC No. 1, the primary intended users of federal agencies’ 

financial reports are citizens, the Congress, federal executives, and federal 

program managers. Each of these groups may use federal agencies’ 

Background 

Page 8 GAO-07-91 Fiscal Year 2003 Restatements
financial statements to satisfy their specific needs. Citizens are interested 

in many aspects of the federal government, especially those federal 

programs that affect their well-being. The Congress uses the agencies’

financial statements to monitor and evaluate the efficiency and 

effectiveness of federal programs. Federal executives, such as central 

agency officials at OMB and the Department of the Treasury (Treasury), 

use the federal agencies’ financial statements to oversee government 

spending. Specifically, 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 demands among agencies, and setting funding 

priorities. Treasury assists the President in managing the finances of the 

federal government and prepares the CFS, which is based on audited 

financial statements prepared by federal agencies. GAO uses the agencies’ 

financial statements and the work of their respective auditors during its 

annual audit of the CFS. Federal program managers also use agencies’ 

financial statements as a tool for managing their respective agencies’

operations within the limits of the spending authority granted by the 

Congress. 

The objectives of our review were to determine the transparency and

timeliness of the restatement disclosures by the nine CFO Act agencies’ 

management and their respective auditors. For the nine agencies we 

reviewed, we interviewed the preparers and auditors of the agencies’ fiscal 

year 2003 financial statements, including staff from the agencies’ Offices of 

Inspector General (OIG), and we obtained and reviewed relevant audit 

documentation. Because the OIGs typically contracted with various 

independent public accountants (IPA) to audit the agencies’ financial 

statements, we expanded 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 addition, our review did not include restatements17

reported in fiscal year 2005 financial statements since such financial 

statements were issued during November 2005, one month after the 

Objectives, Scope, 

and Methodology 

 17At least 7 of the 24 CFO Act agencies restated certain of their fiscal year 2004 financial 

statements to correct misstatements. Three of these agencies had received an unqualified 

opinion on their originally issued fiscal year 2004 financial statements while the remaining 

4 had received a disclaimer of opinion on their financial statements. The auditor for one of 

the agencies withdrew the unqualified opinion that had been previously rendered on the

agency’s fiscal year 2004 financial statements and issued a qualified opinion on the restated

financial statements. 

Page 9 GAO-07-91 Fiscal Year 2003 Restatements
completion of our fieldwork. With respect to the two key areas, we 

reviewed the nine agencies’ fiscal years 2004 and 2003 comparative 

financial statements and the related audit reports to determine, among 

other things, whether the 

• appropriate columns of the agencies’ restated financial statements were 

labeled “Restated”; 

• fiscal year 2003 ending balance agreed with the fiscal year 2004 

beginning balance on the agencies’ Statement of Changes in Net 

Position, if restated; 

• agencies’ restatement footnotes were properly labeled; 

• agencies asserted in their MD&A that they had received a consecutive 

number of clean audit opinions, and if so, whether they disclosed that 

certain of their previously issued financial statements were 

subsequently restated to correct for a material misstatement; 

• audit reports referred the reader to the agencies’ restatement footnote; 

• agencies timely notified their auditors and users of their financial 

statements of the material misstatement and plans for correcting the 

misstatement in the financial statements; and 

• auditors were aware of a material misstatement to previously issued 

financial statements prior to the beginning of the fourth quarter of the 

following fiscal year and whether the amount and effect were known, 

and if so, did the auditors advise the agencies’ management to reissue 

the financial statements. 

For this capping report, which is based on our review of the nine federal

agencies that reported restatements in fiscal year 2004 financial 

statements, we considered certain accounting and auditing standards that 

were applicable to fiscal year 2004 federal financial reporting as well as 

accounting standards that were issued subsequent to fiscal year 2004. 

These standards consist of the Federal Accounting Standards Advisory 

Board’s (FASAB) Statement of Federal Financial Accounting Standards 

(SFFAS) No. 15, Management’s Discussions and Analysis; SFFAS No. 21, 

Reporting Corrections of Errors and Changes in Accounting Principles; 

FAS No. 16, Prior Period Adjustments; FAS No. 154, Accounting Changes 

and Error Corrections; and the AICPA’s Codification of Auditing 

Standards, AU section 110, Responsibilities and Functions of the 

Page 10 GAO-07-91 Fiscal Year 2003 Restatements
Independent Auditor, AU section 420, Consistency of Application of 

Generally Accepted Accounting Principles, AU section 508, Reports on 

Audited Financial Statements, and AU section 561, Subsequent Discovery 

of Facts Existing at the Date of the Auditor’s Report. We also considered

the following OMB guidance: OMB Bulletins No. 06-03 and No. 01-02, 

Audit Requirements for Federal Financial Statements; OMB Bulletin No. 

01-09, Form and Content of Agency Financial Statements; and OMB 

Circular No. A-136, Financial Reporting Requirements.

18

We performed our detailed review and analysis of the fiscal year 2003 

restatements reported in agencies’ fiscal year 2004 financial statements 

from December 2004 to October 2005. Between September 2005 and 

January 2006, we issued reports to five of the nine CFO Act agencies that 

had received unqualified audit opinions on, but subsequently restated in 

fiscal year 2004, their originally issued fiscal year 2003 financial 

statements. In conjunction with our fiscal year 2005 CFS audit, we 

identified continued restatements of previously issued agency financial

statements and the need for additional guidance to agencies and their 

auditors governmentwide. Our work was performed in accordance with 

GAGAS. 

We requested comments on a draft of this report from the Director of OMB 

or his designee. OMB provided oral comments, which are discussed in the 

Agency Comments and Our Evaluation section of this report. 

During our review of the nine CFO Act agencies’ restatements reported in 

fiscal year 2004, we identified issues with the disclosures made by those 

agencies and their respective auditors regarding the restatements. The 

primary contributing factor for these disclosure issues was insufficient 

guidance available at the time to both the agencies’ management and their 

auditors for disclosing the restatements. 

Although the available guidance did not provide explicit details for 

disclosing restatements, we believe that information regarding

restatements should be disclosed in a transparent and timely manner 

consistent with the qualitative characteristics of information in financial

reports described in SFFAC No. 1. In our view, more detailed accounting 

Insufficient and 

Inconsistent 

Disclosure of 

Financial Statement 

Restatements by 

Certain Federal 

Agencies and Their 

Auditors 

 18OMB Circular No. A-136 was revised during fiscal years 2005 and 2006 and supersedes 

OMB Bulletin No. 01-09. 

Page 11 GAO-07-91 Fiscal Year 2003 Restatements
and auditing guidance on how to satisfy the financial reporting 

characteristics in SFFAC No. 1 as it relates to the disclosure of 

restatements would have been helpful. Regardless, as discussed later in 

the report, several agencies included information in their restatement 

disclosures that improved the transparency of the restatement. 

Given the issues we identified in our review of restatements reported in 

fiscal year 2004 financial statements, we believe it would be appropriate to 

offer more explicit or detailed guidance for how agency management and 

their respective auditors should disclose restatements. Specifically, 

although SFFAS No. 21 required that the nature of an error in previously 

issued financial statements and the effect of its correction on relevant

balances be disclosed, the standard did not provide a detailed explanation

of the type of information that should be disclosed or what the nature of 

an error means. OMB Bulletin No. 01-09, which specifies the form and 

content for federal financial statements, also did not provide specific 

guidance on how an agency’s management should disclose restatement 

information in its financial statements. As for the auditor’s disclosure of 

the agency’s restatements in its audit report, AU section 561 only stated 

that the audit report usually should refer to the note to the financial 

statements that describes the restatement. Thus, if for no other reason 

than avoiding interpretation issues as to how much disclosure and in what 

form is appropriate, we believe that guidance to agency auditors should be 

enhanced to attain some added level of uniform treatment regarding the 

disclosure of restatements. 

We identified the following four issues related to the agencies’ reporting of 

the restatements. 

While guidance available during fiscal year 2004 did not expressly require

agencies to label the columns of restated financial statements as 

“Restated,” seven of the nine agencies labeled their financial statements as 

such. Such labeling is a common practice in reporting restated financial

statements. Two of the nine agencies did not label their financial 

statements as “Restated,” and as a result, users of such statements may be 

unaware that a restatement occurred. 

OMB Circular No. A-136 was revised during fiscal year 2005 to provide 

additional guidance for disclosing restatements; however, it does not 

require agencies to label their financial statements as “Restated.” In our 

view, revising OMB Circular No. A-136 to require agencies to label the

columns of the restated financial statements as “Restated” would make the 

Issues Regarding Agencies’ 

Restatement Disclosures 

Labeling of Restated Financial 

Statements 

Page 12 GAO-07-91 Fiscal Year 2003 Restatements
existence of restated financial statements more evident to the readers of 

the financial statements. 

We also found issues regarding certain agencies’ restated Statement of 

Changes in Net Position. Of the six agencies that restated their originally 

issued fiscal year 2003 Statements of Changes in Net Position to correct 

for material misstatements, two of the restatement presentations could be

misinterpreted because the fiscal year 2004 beginning balances did not 

agree with the restated fiscal year 2003 ending balances. Instead of 

carrying forward the restated fiscal year 2003 ending balance to the fiscal 

year 2004 beginning balance, these two agencies made 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 the agencies’ fiscal years 2004 and 2003 comparative 

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. 

Although authoritative guidance available during fiscal year 2004 did not 

expressly prohibit agencies from reflecting prior year restatements as 

adjustments to the current year’s beginning balances on the Statement of 

Changes in Net Position, we found that the other four agencies’ restated 

fiscal year 2003 ending balances agreed with the fiscal year 2004 beginning

balances on their Statement of Changes in Net Position. The current 

version of OMB Circular No. A-136 includes guidance from SFFAS No. 21, 

which states that the adjustment should be made to the beginning balance

of cumulative results of operations, in the Statement of Changes in Net 

Position for the earliest period presented. In our view, OMB Circular 

No. A-136 would be enhanced if it explicitly stated that the current year 

unadjusted beginning balances on the Statement of Changes in Net 

Position are to agree with the restated ending balances on the prior year’s 

statement (i.e., that adjustments are to be made only to the prior year and 

carried forward as restated). 

In our view, all nine of the agencies’ restatement footnotes lacked 

sufficient clarity or sufficient detail regarding the restatements in at least 

one of the following two areas: (1) the title of the footnote or (2) the 

content of the footnote.

For five agencies, the title of the restatement footnote did not reflect the 

existence of a restatement. Specifically, three agencies titled their 

restatement footnotes as either “Prior Period Adjustments” or “Prior 

Restatements to Certain 

Agencies’ Statement of

Changes in Net Position

Agencies’ Restatement 

Footnotes 

Page 13 GAO-07-91 Fiscal Year 2003 Restatements
Period Reclassification,” which could be misinterpreted since the changes

to the financial statements represented restatements because of material

misstatements rather than prior period adjustments19 or prior period 

reclassifications.20 The other two agencies did not include separate 

footnotes disclosing the restatement information. Instead, one agency 

provided the restatement information under its “Significant Accounting 

Policies” and the other included it under its “Statement of Changes in Net 

Position” and its “Statement of Budgetary Resources” notes. The 

remaining four agencies appropriately titled their restatement disclosures 

by entitling their footnote “Restatement.” 

With respect to restatement footnote content, five clearly explained the

misstatement and reason for the restatement while the other four agencies 

did not. Accordingly, it was not clear if these four agencies’ misstatements 

were attributed to errors in recognition, measurement, presentation, or 

disclosure in financial statements resulting from mathematical mistakes, 

mistakes in the application of GAAP, or oversight or misuse of facts that 

existed at the time the financial statements were prepared. In addition, 

one of the nine agencies did not disclose the specific year(s) being 

restated, while two other agencies did not disclose all of the financial 

statements impacted by the restatements. 

Further, we also believe some additional language should be included in 

related footnotes. Specifically, in our view, a sufficient restatement 

footnote would also include (1) the specific amount(s) of the material 

misstatement(s) and the related effect(s) on the previously issued 

financial statement(s) (e.g., year(s) being restated and the specific 

financial statement(s) affected and line items restated); (2) the overall

impact the restatement has on the current year financial statements (e.g.,

the change in overall net position, change in the audit opinion); and (3) a 

discussion of the corrective actions taken by the agency’s management. 

 19According to Federal Accounting Standards Advisory Board, Statement of Federal 

Financial Accounting Standards No. 21, Reporting Corrections of Errors and Changes in

Accounting Principles, a prior period adjustment is defined as a correction for an error 

that occurred in and whose cumulative effect is attributable to periods not presented in the

current financial statements. 

20According to American Institute of Certified Public Accountants, Codification of Auditing 

Standards, AU section 420, Consistency of Application of Generally Accepted Accounting 

Principles (1972), classifications in the current financial statements may be different from 

classifications in the prior year’s financial statements. Although changes in classification 

are usually not of sufficient importance to necessitate disclosure, material changes in 

classification should be indicated and explained in the financial statements or notes. 

Page 14 GAO-07-91 Fiscal Year 2003 Restatements
Although six agencies appropriately disclosed the amounts being restated, 

the remaining three did not disclose the specific line items restated and 

the related amounts. In addition, five agencies did not disclose the effect 

of the restatement on the financial statements as a whole. Further, none of

the nine agencies’ restatement footnotes discussed the actions taken by 

the agency’s management after discovering the misstatement, such as 

measures taken to better prevent similar misstatements from occurring in 

the future (e.g., improvements in internal controls). 

Authoritative guidance available during fiscal year 2004 did not provide 

explicit guidance to the agencies as to what information should be 

included in the agencies’ footnotes or how the restatement note should be 

titled. Revisions made to OMB Circular No. A-136 address a number of 

these areas. Specifically, OMB Circular No. A-136 now requires agencies to 

provide restatement information in a separate note entitled 

“Restatements.” In addition, regarding content of the note, the revised 

circular calls for the following information to be included in the note: the 

nature of the error and the reason for the restatement, the year(s) being 

restated, which financial statements are impacted, the amounts being 

restated, and the effect of the restatement on the financial statements as a 

whole (i.e., change in overall net position, change in audit opinion, etc.). 

Further, per the revised OMB Circular No. A-136, agencies should discuss 

the actions management took after discovering the error. 

The additional requirements in OMB Circular No. A-136 address many of 

our concerns with the transparency of the restatement footnote. We did,

though, identify three areas where OMB Circular No. A-136 could further 

enhance transparency. The first is to clarify that when agencies disclose 

the amounts being restated, it is important that they also disclose the 

specific line items restated and the related amounts. In our view, this 

additional information will allow the readers of the restated financial 

statements to more clearly see how the restatement affected such 

statements. The second is to define the meaning of the “nature” of an 

error. The third is to explicitly state what type of information should be 

provided when discussing the actions management took after discovering 

the error. 

We also found that certain agencies’ presentation of restatements in their 

MD&A could be misleading. Seven of the nine agencies we reviewed stated

in their fiscal year 2004 MD&A that they had achieved a consecutive

number of unqualified opinions on their respective financial statements. 

However, six did not acknowledge that one or more of these financial 

statements had been restated in the intervening years to correct for 

Disclosure of Restatements in 

Agencies’ Management’s 

Discussion and Analysis 

Page 15 GAO-07-91 Fiscal Year 2003 Restatements
material misstatements. We believe stating that there have been 

consecutive years of unqualified audit opinions without the appropriate 

context could be misleading to the reader of the financial statements. It 

erroneously conveys an impression of consistent, accurate financial 

reporting over a period of time, when in fact this was not the case because

subsequently, the financial statements and the opinion were found to be 

incorrect. 

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

management should have great discretion regarding what to say in its 

MD&A. At the same time, the standard also states that the pervasive 

requirement is that the MD&A not be misleading. In our view, it is 

misleading for an agency to state in its MD&A that it has received a 

consecutive number of unqualified opinions on its financial statements 

when one or more of its financial statements within that time frame were 

subsequently restated. In our view, agencies having restated their financial 

statements should either refrain from such claims or clearly disclose in 

their MD&A which of the agency’s prior year financial statements, as 

originally issued, were materially misstated and subsequently restated. 

Although standards do not specifically state that agencies shall disclose 

restatement information in their MD&A, we found that one of the seven

agencies did state that it had received a clean audit opinion for 

7 consecutive years but appropriately disclosed that its fiscal year 2003 

financial statements were restated to correct misstatements. 

During our review, we found issues regarding how agency auditors 

disclosed the agencies’ restatements in their audit reports. According to 

AU section 561, the restatement footnote in the agency’s financial 

statements “usually should” be referred to in the audit report, but given the 

latitude, such disclosure is not an across-the-board requirement. In any 

report on financial statements, the auditor has the discretion to add a 

separate paragraph to the audit report to emphasize a matter regarding the 

financial statements. In our view, such matters include the effect of the 

material misstatements on previously audited financial statements and the 

accompanying audit report. Also, we believe that if the agency’s 

restatement footnote does not provide a clear and adequate description of 

the restatement, then the auditor should go beyond merely referencing the 

restatement footnote and add a separate paragraph to the audit report that 

provides additional details regarding the effects of the restatement and 

should consider whether it is necessary to modify the audit opinion. 

Issues Regarding Auditors’ 

Restatement Disclosures 

Page 16 GAO-07-91 Fiscal Year 2003 Restatements
In our view, none of the nine agencies’ audit reports we reviewed 

sufficiently disclosed all the essential information that would clearly 

explain the restatement. Specifically, we found that 

• seven of the nine audit reports did not provide a statement that the 

previously issued audit report was withdrawn and replaced by the 

opinion on the restated financial statements, 

• three of the nine audit reports either did not disclose the restatement or 

include a reference to the agency restatement footnote in the financial 

statements,21 and 

• none of the nine agencies provided a sufficient description of the 

restatement (i.e., the nature and cause of the misstatement, year(s) 

being restated, financial statements and line items impacted, specific 

amount(s) of the material misstatement(s) and the related effects on 

the previously issued financial statements, and actions management 

took after discovering the misstatement) in the notes to their financial 

statements and none of these agencies’ auditors compensated for this 

by providing such information in their audit reports. 

In our view, the auditor plays an important role in ensuring proper 

disclosure of restatements. Accordingly, if any of the prior year financial

statements are restated and management did not already provide a 

sufficient description of the restatement in the note(s) to the financial 

statements, the audit report should include such information. In addition, 

although none of the nine agencies’ auditors disclosed misstatements of 

unknown amounts, we believe that if at the time of issuance of the audit 

report, a material misstatement or potential material misstatement has 

been identified in any of the prior years’ financial statements but the 

specific amount of the misstatement and the related effects of such are not 

yet known, it is important for the auditor to disclose the situation in its 

audit report and modify its opinion or disclaim an opinion on the prior 

year financial statements as appropriate. 

 21Specifically, two audit reports neither disclosed the restatement nor referred to the

restatement footnote and another audit report disclosed the restatement, but did not refer 

to the restatement footnote.

Page 17 GAO-07-91 Fiscal Year 2003 Restatements
We also identified issues with the timeliness of management and auditor 

communication regarding material misstatements affecting certain 

agencies’ previously issued financial statements. We attributed these 

issues to a combination of the lack of specific guidance at that time for 

both agencies management and their respective auditors and the lack of 

compliance with the related accounting and auditing standards that were 

in effect during fiscal year 2004. 

During fiscal year 2004, neither OMB Bulletin No. 01-09 nor SFFAS No. 21, 

which apply primarily to agency management, provided specific guidance 

on the timely investigation and reporting of a material misstatement or 

potential material misstatement in a previously issued financial statement 

following its discovery. The guidance available to auditors at that time was 

AU section 561 and OMB Bulletin No. 01-02, which provided guidance to

the agencies’ auditors regarding the timely communication of restatements 

for corrections of misstatements. While this audit guidance conveyed the 

intent of timely communication, it did not provide much guidance for how 

the agencies’ management or their respective auditors should timely 

communicate such restatements. 

OMB Bulletin No. 01-02 stated that there shall be open and timely 

communication throughout the audit process between the agencies’ 

management and their auditors, which includes potential audit findings, 

materially misstated or unsupported amounts in the financial statements, 

and material weaknesses in internal control. The bulletin did not provide 

guidance for what the auditor should communicate to management for 

when and how an actual or potential restatement should be disclosed to 

the users of the agency’s financial statements. With respect to the auditor’s

responsibilities for timely communication, AU section 561 states that 

consideration should be given to, among other things, the “time elapsed” 

since the erroneous financial statements were issued. According to AU 

section 561, when the auditor has concluded that action should be taken to

prevent future reliance on the audit report, the auditor should advise the 

auditee to make appropriate disclosure of the newly discovered facts and

their impact on the financial statements to persons who are known to be 

currently relying or who are likely to rely on the financial statements and 

the related auditor’s report. AU section 561 also states that if an auditor 

determines that issuance of financial statements accompanied by the audit

report for a subsequent period is “imminent,” appropriate disclosures can 

be made in such statements rather than by separately issuing the restated 

Timely

Communication of 

Material 

Misstatements to 

Users of Previously 

Issued Financial 

Statements 

Page 18 GAO-07-91 Fiscal Year 2003 Restatements
financial statements. However, guidance available during fiscal year 2004,

AU section 561 and OMB Bulletin No. 01-02,

22 did not define “time elapsed” 

or “imminent.” In addition, existing standards and guidance do not provide 

sufficient explicit or detailed guidance to management and auditors 

regarding ensuring the timely disclosure of material misstatements 

affecting previously issued financial statements. 

In our view, none of the agencies timely communicated that a potential 

material misstatement had been identified to either their auditor or to the 

users of the financial statements. Agency management is responsible for 

reporting key information in a timely manner, including timely notification 

of known material or potential material misstatements in previously issued 

financial statements. 

During fiscal year 2004, OMB Bulletin No. 01-02 called for communication 

between the agencies’ management and their auditors, but it did not 

provide details for disclosing restatements to users of agency financial 

statements. In addition, as noted above, neither OMB Bulletin No. 01-09

nor SFFAS No. 21 provided specific guidance on the timely investigation 

and reporting of a material misstatement or potential material 

misstatement in a previously issued financial statement following its 

discovery. Our review of the nine CFO Act agencies that restated certain 

of their fiscal year 2003 financial statements found that three of these 

agencies identified potential material misstatements prior to the beginning 

of the fourth quarter of fiscal year 2004, and in our view, did not timely 

communicate that a potential misstatement had been identified either to 

their auditors or to the users of their financial statements. The remaining 

six agencies identified potential material misstatements after the third 

quarter of fiscal year 2004 but before that year’s comparative financial

statements were issued. These six agencies, in our view, also did not 

timely communicate the potential material misstatements to the users of 

their financial statements since they did not notify the users of the 

potential material misstatement prior to the issuance of the restated fiscal 

year 2003 financial statements during fiscal year 2004. 

Issues Regarding 

Timeliness of 

Management’s 

Communication of 

Misstatements to Auditors 

and Users 

 22Subsequent to our initial review, OMB issued OMB Bulletin No. 06-03, Audit 

Requirements for Federal Financial Statements on August 23, 2006, which now

supersedes OMB Bulletin No. 01-02. OMB Bulletin No. 06-03 provides a definition for what

is considered “imminent.” Specifically, OMB defines imminent as being “within 90 calendar

days of the subsequent period financial statements planned issue date.” 

Page 19 GAO-07-91 Fiscal Year 2003 Restatements
We believe that the current version of OMB Circular No. A-136, if properly 

implemented, should address many of our concerns regarding agencies’ 

timely communication of restatements. For example, according to this 

version of OMB Circular No. A-136, “management shall assume 

responsibility for any false or misleading information in the financial 

statements, or omissions that render information made in the financial

statements misleading. As such, as soon as possible after errors are 

detected, management shall notify their auditors and inform their primary 

users of their financial statements of the error and plans for correcting it 

in the financial statements ... it is imperative that management work with 

their auditor as soon as the error is detected to assist the auditor in any 

actions that need to be taken.” 

These are important advances. We do, though, have some remaining 

concerns regarding the adequacy of guidance to agencies relating to the

timely communication of material misstatements in previously issued 

financial statements. Specifically, we believe it is important for 

subsequently discovered material misstatements and potential material 

misstatements be disclosed to OMB in the agencies’ quarterly financial

statements for the reporting period in which the misstatements were 

discovered. In our view, agencies need to report on the misstatement 

within a reasonable time period following the discovery of the 

misstatement. In particular, if the specific amount of a material 

misstatement and the related effect of such on the previously issued 

financial statements are known and the issuance of the subsequent period

audited financial statements is not imminent, then we believe it is 

important that the agencies promptly (1) reissue the most recently issued 

fiscal year financial statements before issuing the current year’s financial 

statements and (2) communicate the reissuance (a) in writing to the 

Congress, OMB, Treasury, and GAO; and (b) to the public on the Internet 

pages where the agencies’ audited financial statements that were affected

by the material misstatements were published. If a material misstatement 

is identified when issuance of the subsequent period audited financial 

statements is imminent, we believe it is important that the agencies 

(1) issue restated financial statements as part of the current year’s 

comparative financial statements and (2) communicate the restatement 

(a) in writing to the Congress, OMB, Treasury, and GAO; and (b) to the 

public on the same Internet page where the agencies’ audited financial

statements that were affected by the material misstatements were 

published. 

Further, in our view, if at any time an agency identifies a material 

misstatement or potential material misstatement and the effects of it on 

Page 20 GAO-07-91 Fiscal Year 2003 Restatements
the financial statements are not known or cannot be determined without a 

prolonged investigation, the agencies should timely notify persons that are 

known to be relying or who are likely to rely on the previously issued 

financial statements and the related audit report that the (1) previously 

issued financial statements will or may be restated and therefore, (2) the 

related audit report is no longer reliable. It is important that the agencies 

include the Congress, OMB, Treasury, and GAO in any such notification 

and notify the public by posting such notification on the same Internet 

pages where the agencies’ previously issued financial statements that were 

affected by the material or potential material misstatement were 

published. 

An example of how to appropriately convey this type of information is 

State’s communication and disclosure of a potential material misstatement 

in its fiscal year 2004 financial statements. Specifically, State identified a

potential material misstatement during the fourth quarter of fiscal year 

2005 and, in our view, went beyond the then existing guidance and 

appropriately disclosed the problem. Guidance available to agency 

management at that time, SFFAS No. 21 and OMB Bulletin No. 01-09, did 

not provide explicit guidance for timely communication of a restatement 

to users of financial statements. State also complied with the revised OMB 

Circular No. A-136, issued August 23, 2005, even though it was not 

effective until the end of fiscal year 2005. Specifically, during September 

2005, State’s CFO timely notified external parties, including GAO, to which 

State’s fiscal year 2004 comparative financial statements were directly 

distributed, not to rely on its fiscal year 2004 comparative financial 

statements and the related audit report. The notification also stated that 

State was committed to resolving this issue as quickly as possible. State

also notified the public of this issue in the form of a cautionary note on the 

same Internet pages where the agency’s audited financial statements that 

were affected by the material misstatement were published. State’s 

cautionary note included a statement that such actions were necessary 

because State recently became aware of a potential material misstatement 

affecting the previously issued financial statements and the related audit

report. State noted that due to the need for a complete and thorough 

analysis, the complexity of the matters involved, and the accelerated 

financial reporting requirements, State was unable to satisfy the 

independent auditors by November 15 as to the amount of the potential

material misstatement. As a result, the independent auditors issued a 

qualified opinion on the fiscal year 2005 and 2004 financial statements. 

State’s CFO also sent a subsequent letter to GAO on December 23, 2005, to

inform us that the independent auditors had satisfied themselves about the 

amounts presented and the auditor updated its opinion on the fiscal year 

Page 21 GAO-07-91 Fiscal Year 2003 Restatements
2005 and 2004 financial statements from a qualified to an unqualified 

opinion. State was fully transparent in its reports of the restatement in all 

respects and showed how disclosing the restatement should be done. As 

such, in our view, State’s actions serve as a model for full and timely 

notification of a potential material misstatement found in a previously 

issued financial statement when identified after the third quarter of the 

current fiscal year and before the current year’s comparative financial

statements are issued. 

Auditors play a critical role in helping to ensure that users of financial 

statements are timely notified of material misstatements affecting 

previously issued financial statements and restatement of such financial

statements. 

AU section 561, guidance available during fiscal year 2004, requires that 

auditors consider the “time elapsed” since the financial statements were 

issued when a material misstatement is discovered. According to AU 

section 561, if an auditor determines that issuance of financial statements 

accompanied by the audit report for a subsequent period is “imminent,” 

appropriate disclosures can be made in such statements rather than in 

reissued statements. However, neither “time elapsed” nor “imminent” is 

defined in AU section 561. We found that at least one of the auditors of the 

three agencies that had discovered misstatements prior to the fourth 

quarter of the current fiscal year did not advise its respective agency to 

make such a disclosure because (1) in May 2004 the auditor did not think 

that there were any users who would still be relying on the fiscal year 2003 

financial statements and the related audit report and (2) the auditor 

considered issuance of the fiscal years 2004 and 2003 comparative 

financial statements to be imminent.23 We have concerns that, without 

notification, anyone who may have been relying on the fiscal year 2003 

financial statements would not have known for more than 5 months that 

the agency’s originally issued financial statements, which received an 

unqualified opinion, were materially misstated and should not be relied on.

In our view, existing auditing standards and guidance, including OMB 

Bulletin No. 06-03, while conveying the need for appropriate notifications, 

Issues Regarding 

Timeliness of Certain 

Auditors’ Restatement 

Disclosures 

 23The auditor did not provide us with documentation of the basis for its conclusion that 

users were not likely to still be relying on fiscal year 2003 financial statements and would 

not attach importance to the correction of the material error. 

Page 22 GAO-07-91 Fiscal Year 2003 Restatements
do not provide sufficient explicit or detailed guidance to auditors 

regarding ensuring the timely disclosure of material misstatements 

affecting previously issued financial statements. Our position is that when 

a material misstatement or potential material misstatement affecting 

previously issued financial statements and the related audit report is 

identified, the auditor has a responsibility to advise the agency’s 

management to timely notify users such as the Congress, OMB, Treasury, 

and GAO in writing as well as the public and clearly disclose the situation 

to them. If the agency’s management does not timely provide adequate 

disclosure to the relevant users, the auditor has the responsibility to do so. 

We believe that it is also important that the auditor advise the agency’s 

management of its responsibility to determine the specific amount of the 

material misstatement or potential material misstatement and the related

effects of such on the previously issued financial statements as soon as 

reasonably possible. In those cases where the specific amount of the 

material misstatement and the related effects of such on a previously 

issued financial statement are known and issuance of the subsequent 

period audited financial statements is not imminent, we believe that the 

auditor would need to also advise the agency’s management to promptly 

reissue the most recently issued fiscal year financial statements before 

issuing the current fiscal year financial statements and to communicate 

the reissuance to relevant users in writing as well as the public to clearly

disclose the situation to them. If the agency’s management does not 

reissue the financial statements or communicate the reissuance as 

required, our position is that the auditor has the responsibility to notify the 

Congress, OMB, Treasury, and GAO in writing as well as any other users 

known to be relying on the previously issued financial statements. If the 

specific amount of the material misstatement and the related effects of 

such on a previously issued financial statement are known and issuance of 

the subsequent period audited financial statements is imminent, it is 

important that the auditor advise the agency’s management to issue 

restated financial statements as part of the current year comparative 

financial statements and disclose restatements in the audit report. If the 

specific amount of the misstatement and the related effect of such on a 

previously issued financial statement remain unknown when the current 

year financial statements are issued, it is necessary that the auditor 

disclose such information when issuing the audit report and modify or 

disclaim the opinion on the previously issued financial statements as 

appropriate.

Page 23 GAO-07-91 Fiscal Year 2003 Restatements
The issues we identified regarding the transparency and timeliness of 

restatement disclosures primarily resulted from insufficient guidance 

available during fiscal year 2004 to both the agencies’ management and 

their respective auditors for disclosure of the restatements and the 

timeliness of such disclosures. It will be important that those agencies 

needing, in the future, to restate their prior year financial statements 

ensure the adequacy of the disclosure and presentation of such

restatements as well as timely notifying users known to be relying on the 

previously issued financial statements. It will also be important that the 

agencies’ financial statements and the related audit reports provide 

sufficient detail so that the reader will be able to gain at least a basic 

understanding of why the agencies needed to restate their previously 

issued financial statements and the effects of such on the agencies’ 

previously issued financial statements. The revision of OMB Circular No. 

A-136 during fiscal year 2005 addressed many of our concerns regarding 

the agencies’ disclosure of restatements; however, additional guidance is 

still needed. In this regard, we are making recommendations for further 

revisions to OMB Circular No. A-136 as well as OMB Bulletin No. 06-03. We

have provided our views, as outlined in appendix I, on how OMB guidance 

could be further enhanced to ensure that future restatement disclosures 

are uniform and more transparent. 

We recommend that the Director of OMB direct the Controller of OMB’s 

Office of Federal Financial Management to incorporate the restatement 

guidance and requirements, as detailed in appendix I, into Circular No. A136 to assist OMB in addressing the issues we found with the agencies’ 

restatement disclosures and the timeliness of such disclosures. Appendix I 

incorporates seven recommendations as specific changes to Circular No. 

A-136 that focus on the 

Conclusions 

Recommendations for 

Executive Action 

• timely disclosure by agency management of material misstatement(s) 

or potential material misstatement(s) and the related effect(s) of such 

in the previously issued financial statements and 

• presentation and disclosure of restatements in the agencies’ MD&A and 

financial statements and related footnotes. 

We also recommend that the Director of OMB direct the Controller of 

OMB’s Office of Federal Financial Management to incorporate the 

restatement guidance and requirements, as detailed in appendix I, into 

Bulletin No. 06-03 to assist OMB in addressing the issues we found with 

auditors’ restatement disclosures and the timeliness of such disclosures. 

Page 24 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I incorporates four recommendations as specific changes to 

Bulletin No. 06-03 that focus on the 

• auditor’s timely disclosure of material misstatement(s) or potential 

material misstatement(s) and the related effect(s) of such in the 

previously issued financial statements and 

• presentation and disclosure of restatements in the audit report. 

In oral comments on a draft of this report, OMB stated that it would take 

our recommendations under advisement, but that there were no current

plans to update guidance that has been recently issued.24 OMB also noted 

that any future plans to update guidance would carefully consider issues 

already currently being addressed by the AICPA’s Codification of Auditing 

Standards. In addition, OMB provided some technical comments, which 

we have incorporated as appropriate. 

As noted in this report, we found inconsistent communications and 

insufficient disclosures of financial statement restatements by agency 

management and their auditors. As such, we reiterate our concern that it is 

critical for OMB to timely offer separate, though complementary, guidance 

to agency management and to agency auditors that provides more explicit 

and detailed guidance concerning their respective roles and 

responsibilities when an actual or potential material misstatement is 

identified in previously issued financial statements. Separate guidance is 

important because agency management and agency auditors have different 

roles and responsibilities. For example, management is responsible for 

preparing the financial statements and adjusting them to correct any 

material misstatements. The auditor is responsible for expressing or 

disclaiming an opinion on the financial statements prepared by

management. The auditor has certain additional responsibilities should 

management not properly respond to actual or potential material 

misstatements. 

This report contains recommendations to the Director of OMB. The head

of a federal agency is required by 31 U.S.C. § 720 to submit a written 

Agency Comments 

and Our Evaluation 

 24As noted previously, OMB issued guidance to agency management and agency auditors on

July 24, 2006 and August 23, 2006, respectively. 

Page 25 GAO-07-91 Fiscal Year 2003 Restatements
statement on actions taken on these recommendations. You should submit 

your statement to the Senate Committee on Homeland Security and 

Governmental Affairs and the House Committee on Government Reform 

within 60 days of the date of this report. A written statement also must be 

sent to the House and Senate Committees on Appropriations with the 

agency’s first request for appropriations made more than 60 days after the

date of the report. 

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 

Secretary of the Treasury and the Fiscal Assistant Secretary of the 

Treasury. Copies will be made available to others upon request. This 

report is also available at no charge on GAO’s Web site at 

http://www.gao.gov. 

We acknowledge and appreciate the cooperation and assistance provided 

by OMB and the nine CFO Act agencies’ management and their respective 

auditors throughout our work. We look forward to continuing to work 

with your office to help improve financial management in the federal 

government. If you or your staff have any questions about the contents of 

this report, please contact Gary T. Engel, Director, Financial Management 

and Assurance, at (202) 512-3406 or by e-mail at engelg@gao.gov. Staff

acknowledgments are provided in appendix II. 

Sincerely yours, 

David M. Walker 

Comptroller General 

of the United States 

Page 26 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

Page 27 GAO-07-91

Appendix I: Recommendations to OMB 

As noted throughout this report, we believe that additional restatement 

guidance is needed for both the agencies’ management and their 

respective auditors. To facilitate in this process, we are providing the 

following 11 requirements that, in our view, should be incorporated into 

Office of Management and Budget (OMB) Circular No. A-136 and OMB 

Bulletin No. 06-03. 

GAO recommends that the following requirement be added to sections 

II.4.3.1, II.4.4.1, II.4.5.1, II.4.6.1, and II.4.7.1 of OMB Circular No. A-136,

Financial Reporting Requirements: 

Agencies shall label restated financial statements as “Restated.” 

GAO recommends that the “Management Actions Related to Corrections 

of Errors” subsection of section II.4.5.5 of OMB Circular No. A-136, 

Financial Reporting Requirements, be modified to read as follows: 

If the agency’s management becomes aware of a material 

misstatement(s) or potential material misstatement(s) affecting a 

previously issued financial statement(s), then the agency’s 

management, in coordination with their respective auditor, shall do the 

following: 

Recommendations 

Regarding OMB 

Circular No. A-136 

1. Communicate the following information to those charged with

governance, oversight bodies, funding agencies, and others who 

are relying or are likely to rely on the financial statement(s). This 

includes communication (1) in writing to the Congress, OMB, 

Treasury, and GAO; (2) to the public on the Internet pages where 

the agency’s previously issued financial statements that were 

affected by the material misstatement(s) or potential material 

misstatement(s) are published; and (3) to OMB in the agency’s next 

quarterly financial statements and in subsequent quarterly financial 

statements until the specific amount(s) of the material 

misstatement(s) and the related effect(s) of such on the previously 

issued financial statement(s) are known and reported: 

(a) the nature and cause(s) of the known or likely material 

misstatement(s), 

(b) the amount(s) of known or likely material misstatement(s) and 

the related effect(s) on the previously issued financial 

statement(s) (e.g., disclosure of the specific financial 

statement(s) and line item(s) affected). If this information is 

 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

not known, then the disclosure includes information that is 

known and a statement that management cannot determine the 

amount(s) and the related effect(s) on the previously issued 

financial statement(s) without further investigation, and 

(c) a notice that (1) a previously issued financial statement(s) will 

or may be restated1

 and, therefore, (2) the related auditor’s 

report is no longer reliable. 

2. Promptly determine the financial statement effects of the known or 

potential material misstatement(s) on the previously issued 

financial statement(s). 

(a) If the specific amount(s) of the material misstatement(s) and 

the related effect(s) of such on a previously issued financial 

statement(s) are known and issuance of the subsequent period 

audited financial statements is not imminent,2

 then the agency’s 

management shall promptly: 

i. reissue the most recently issued fiscal year financial 

statements before issuing the current fiscal year’s financial 

statements; 

ii. communicate the reissuance to those charged with 

governance, oversight bodies, funding agencies, and others 

who are relying or are likely to rely on the financial 

statement(s). This includes communication (a) in writing 

to the Congress, OMB, Treasury, and GAO and (b) to the 

public on the Internet pages where the agency’s previously 

issued financial statements that were affected by the 

material misstatement(s) are published; and 

iii. disclose the following information, at a minimum, in the 

agency’s restatement footnotes: 

1. the nature and cause(s) of the misstatement(s) that led 

to the need for restatement, and 

 1

Financial statements are restated to correct an error(s) in previously issued financial 

statement(s). 

2

For purposes of this guidance, imminent means within 90 days of determining the effect of

the misstatement(s) on the previously issued financial statements. 

Page 28 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

2. the specific amount(s) of the material misstatement(s) 

and the related effect(s) on the previously issued 

financial statement(s) (e.g., year(s) being restated, 

specific financial statement(s) affected and line items 

restated, actions the agency’s management took after 

discovering the misstatement), and the impact on the 

financial statements as a whole (e.g., change in overall 

net position, change in the audit opinion). 

(b) If the specific amount(s) of the material misstatement(s) and 

the related effect(s) of such on a previously issued financial 

statement(s) are known and issuance of the subsequent period 

audited financial statements is imminent, then the agency’s 

management shall: 

i. issue restated financial statement(s) as part of the current 

year’s comparative financial statements; 

ii. communicate the restatement to those charged with 

governance, oversight bodies, funding agencies, and others 

who are relying or are likely to rely on the financial 

statement(s). This includes communication (a) in writing 

to the Congress, OMB, Treasury, and GAO and (b) to the 

public on the Internet pages where the agency’s previously 

issued financial statements that were affected by the 

material misstatement(s) are published; and 

iii. disclose the following information, at a minimum, in the 

agency’s restatement footnote: 

1. the nature and cause(s) of the misstatement(s) that led 

to the need for restatement, and 

2. the specific amount(s) of the material misstatement(s) 

and the related effect(s) on the previously issued 

financial statement(s) (e.g., year(s) being restated, 

specific financial statement(s) affected and line items 

restated, actions the agency’s management took after 

discovering the misstatement), and the impact on the 

financial statements as a whole (e.g., change in overall 

net position, change in the audit opinion). 

(c) If the specific amount(s) of the misstatement(s) and the related 

effect(s) of such on a previously issued financial statement(s) 

remain unknown when the current year’s financial statements 

Page 29 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

are issued, then the agency’s management shall follow section 

II.4.5.5 (1) above and include the following, at a minimum, in its 

restatement footnote: 

i. a statement disclosing that a material misstatement(s) or 

potential material misstatement(s) affects a previously 

issued financial statement(s), but the specific amount(s) 

of the misstatement(s) and the related effect(s) of such are 

not known, 

ii. the nature and cause(s) of the misstatement(s) or 

potential misstatement(s), 

iii. an estimate of the magnitude of the misstatement(s) or 

potential misstatement(s) and the related effect(s) of such 

on a previously issued financial statement(s) (e.g.,

disclosure of the specific financial statement(s) and line 

items affected) that are known and a statement that the 

specific amount(s) and the related effect(s) of such cannot

be determined without further investigation, and

iv. a statement disclosing that a restatement(s) to a 

previously issued financial statement(s) will or may occur. 

GAO also recommends that the following requirement be added to the 

“Corrections of Errors” subsection of section II.4.5.5 of OMB Circular No. 

A-136, Financial Reporting Requirements: 

The Statement of Changes in Net Position’s current year’s unadjusted 

beginning balances shall agree with the restated ending balances on 

the agency’s prior year’s Statement of Changes in Net Position. 

GAO recommends that section II.4.10.43, of OMB Circular No. A-136,

Financial Reporting Requirements, be revised to: 

• clarify the definition of the “nature” of an error, 

• include an explanation that the disclosure of the “amounts being 

restated” specifically refers to the disclosure of the specific line items 

restated and the related amounts, and 

• clarify how an agency should specifically further discuss the actions 

management took after discovering the error. 

Page 30 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

GAO recommends that the following requirement be added to section 

II.2.7 of OMB Circular No. A-136, Financial Reporting Requirements, 

which discusses guidance for information included in the Management 

Discussion and Analysis (MD&A): 

Agency’s management shall disclose the existence of restatements in 

its MD&A if the agency asserts in its MD&A that it received an

unqualified opinion on any previously issued financial statement and 

that respective financial statement was subsequently restated. 

GAO recommends that section 5.2 of OMB Bulletin No. 06-03, Audit 

Requirements for Federal Financial Statements, be modified to read as 

follows: 

5.2 The nature or amount of known or likely misstatement(s) in 

previously issued audited financial statement(s) may lead the auditor to 

believe that the auditor’s report would or could reasonably have been 

affected if the auditor had known of the misstatement(s) when the auditor 

issued the auditor’s report. When this condition exists, the auditor shall 

advise management to communicate the following information to those 

charged with governance, oversight bodies, funding agencies, and others 

who are relying or are likely to rely on the financial statement(s): 

Recommendations 

Regarding OMB 

Bulletin No. 06-03 

• the nature and cause(s) of the known or likely material 

misstatement(s), 

• the amount(s) of known or likely material misstatement(s) and the 

related effect(s) on the previously issued financial statement(s) (e.g., 

disclosure of the specific financial statement(s) and line item(s) 

affected). If this information is not known, then the disclosure includes 

information that is known and a statement that management cannot 

determine the amount(s) and the related effect(s) on the previously 

issued financial statement(s) without further investigation, and 

• a notice that (1) a previously issued financial statement(s) will or may 

be restated and, therefore, (2) the related auditor’s report is no longer 

reliable. 

This includes communication (1) in writing to the Congress, OMB, 

Treasury, and GAO; (2) to the public on the Internet pages where the 

agency’s previously issued financial statements that were affected by the

material misstatement(s) or potential material misstatement(s) are 

Page 31 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

published; and (3) to OMB in the agency’s next quarterly financial 

statements and in subsequent quarterly financial statements until the 

specific amount(s) of the material misstatement(s) and the related 

effect(s) of such on the previously issued financial statement(s) are known 

and reported. 

GAO also recommends that the following requirements be added to 

section 5 of OMB Bulletin No. 06-03, Audit Requirements for Federal 

Financial Statements, as follows: 

5.3 The auditor shall review the adequacy of management’s 

communication information about the known or potential material 

misstatement(s) to report users, including those charged with governance, 

oversight bodies, and funding agencies. When performing this review, the

auditor shall consider whether (1) management acted timely to determine 

the financial statement effects of the potential material misstatement(s), 

(2) management acted timely to communicate with appropriate parties,

and (3) management disclosed the nature and extent of the known or 

likely material misstatement(s) on Internet pages where the agency’s 

previously issued financial statements are published. 

5.4 The auditor shall notify those charged with governance if the 

auditor believes that management is unduly delaying its determination of 

the effect(s) of the misstatement(s) on a previously issued financial 

statement(s). 

5.5 The auditor shall evaluate the timeliness and appropriateness of 

management’s decision whether to issue restated financial statement(s). 

Management may separately issue the restated financial statement(s) or 

may present the restated financial statement(s) on a comparative basis 

with those of a subsequent period. Ordinarily, the auditor would expect 

management to issue restated financial statement(s) as soon as 

practicable. However, it may not be necessary for management to 

separately issue the restated financial statement(s) and the auditor’s 

report when issuance of the subsequent period audited financial 

statements is imminent.3

 3

For purposes of this guidance, imminent means within 90 days of determining the effect of

the misstatement(s) on the previously issued financial statements. 

Page 32 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

5.6 If the auditor becomes aware of a material misstatement(s) or 

potential misstatement(s) affecting a previously issued financial 

statement(s), then the auditor shall advise the agency’s management to 

determine the specific amount(s) of the material misstatement(s) or 

potential material misstatement(s) and the related effect(s) of such on the 

previously issued financial statement(s) as soon as reasonably possible. 

5.7 If the specific amount(s) of the material misstatement(s) and the 

related effect(s) of such on a previously issued financial statement(s) are 

known and the issuance of the subsequent period audited financial 

statements is not imminent, then the auditor shall advise the agency’s 

management to promptly: 

• reissue the most recently issued fiscal year financial statements before 

issuing the current fiscal year’s financial statements; 

• communicate the reissuance to those charged with governance, 

oversight bodies, funding agencies, and others who are relying or are 

likely to rely on the financial statement(s). This includes 

communication (1) in writing to the Congress, OMB, Treasury, and 

GAO and (2) to the public on the Internet pages where the agency’s 

previously issued financial statements that were affected by the 

material misstatement(s) are published; and 

• disclose the following information, at a minimum, in the agency’s 

restatement footnotes: (1) the nature and cause(s) of the 

misstatement(s) that led to the need for restatement, and (2) the 

specific amount(s) of the material misstatement(s) and the related 

effect(s) on the previously issued financial statement(s) (e.g., year(s) 

being restated, specific financial statement(s) affected and line items 

restated, actions the agency’s management took after discovering the 

misstatement), and the impact on the financial statements as a whole 

(e.g., change in overall net position, change in the audit opinion). 

5.8 If the specific amount(s) of the material misstatement(s) and the 

related effect(s) of such on a previously issued financial statement(s) are 

known and issuance of the subsequent period audited financial statements 

is imminent, then the auditor shall disclose restatements in the auditor’s 

report as listed in 7.7 and advise agency’s management to: 

• issue restated financial statement(s) as part of the current year’s 

comparative financial statements; 

Page 33 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

• communicate the restatement to those charged with governance, 

oversight bodies, funding agencies, and others who are relying or are 

likely to rely on the financial statement(s). This includes 

communication (a) in writing to the Congress, OMB, Treasury, and 

GAO and (b) to the public on the Internet pages where the agency’s 

previously issued financial statements that were affected by the 

material misstatement(s) are published; and 

• disclose the following information, at a minimum, in the agency’s 

restatement footnote: (1) the nature and cause(s) of the 

misstatement(s) that led to the need for restatement and (2) the 

specific amount(s) of the material misstatement(s) and the related 

effect(s) on the previously issued financial statement(s) (e.g., year(s) 

being restated, specific financial statement(s) affected and line items 

restated, actions the agency’s management took after discovering the 

misstatement), and the impact on the financial statements as a whole 

(e.g., change in overall net position, change in the audit opinion). 

5.9 If the specific amount(s) of the misstatement(s) and the related 

effect(s) of such on a previously issued financial statement(s) remain 

unknown when the current year’s financial statements are issued, then the 

auditor shall follow 7.8 when issuing the auditor’s report and advise the 

agency’s management as required in 5.2. 

5.10 The auditor shall notify those charged with governance, oversight 

bodies, and funding agencies when management (1) does not take the 

necessary steps to promptly inform report users of the situation or 

(2) does not restate with appropriate timeliness the financial statements in 

circumstances when the auditor believes they need to be restated. The 

auditor shall inform these parties that the auditor will take steps to 

prevent future reliance on the auditor’s report. The steps taken will 

depend on the facts and circumstances, including legal considerations. 

This includes communication in writing to the Congress, OMB, Treasury, 

and GAO as well as any other users known to be relying on the previously

issued financial statement(s). 

GAO recommends that section 7.7 of OMB Bulletin No. 06-03, Audit 

Requirements for Federal Financial Statements, be modified to read as 

follows: 

7.7 When management restates a previously issued financial 

statement(s), the auditor shall perform audit procedures sufficient to 

reissue or update the auditor’s report on the restated financial 

Page 34 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

statement(s). The auditor shall fulfill these responsibilities whether the 

restated financial statement(s) are separately issued or presented on a 

comparative basis with those of a subsequent period. The auditor shall 

include the following information in an explanatory paragraph in the 

reissued or updated auditor’s report on the restated financial statement(s): 

• a statement disclosing that a previously issued financial statement(s) 

has been restated, 

• a statement that the previously issued financial statement(s) was 

materially misstated and that the previously issued auditor’s report 

(including report date) is withdrawn and replaced by the auditor’s 

report on the restated financial statement(s), 

• a reference to the note(s) to the restated financial statement(s) that 

discusses the restatement, 

• a description of the following if not already provided in the note(s) to 

the financial statement(s): (1) the nature and cause(s) of the 

misstatement(s) that led to the need for restatement and (2) the 

specific amount(s) of the material misstatement(s) and the related 

effect(s) on the previously issued financial statement(s) (e.g., year(s) 

being restated and the specific financial statement(s) affected and line

items restated) and the impact on the financial statements as a whole 

(e.g., change in overall net position, change in the audit opinion), and 

• a discussion of any significant internal control deficiency that failed to 

prevent or detect the misstatement and what action management has 

taken about the deficiency. 

GAO also recommends that the following requirements be added to 

section 7 of OMB Bulletin No. 06-03, Audit Requirements for Federal 

Financial Statements, as follows: 

7.8 If at the time of issuance of the auditor’s report a material 

misstatement(s) or potential material misstatement(s) has been identified 

in any of the previously issued financial statements and the specific 

amount(s) of the misstatement(s) and the related effect(s) of such are not

known, then the auditor shall update the auditor’s report on the previously 

issued financial statement(s) as appropriate. Furthermore, the auditor’s 

report shall disclose, at a minimum, the following: 

Page 35 GAO-07-91 Fiscal Year 2003 Restatements
Appendix I: Recommendations to OMB 

• a statement disclosing that a material misstatement(s) or potential 

material misstatement(s) affects a previously issued financial 

statement(s) but the specific amount(s) of the misstatement(s) and the 

related effect(s) of such are not known; 

• a reference to note(s) to the financial statements that discusses the 

restatement or potential restatement; 

• a description of the following, if not already provided in the agency’s 

note(s) to the financial statements: (1) the nature and cause(s) of the 

misstatement(s) or potential misstatement(s), and (2) an estimate of 

the magnitude of the misstatement(s) or potential misstatement(s) and 

the related effect(s) of such on a previously issued financial 

statement(s) (e.g., disclosure of the specific financial statement(s) and 

line items affected) that are known and a statement that the specific 

amount(s) and the related effect(s) of such cannot be determined 

without further investigation; and 

• a statement disclosing that a restatement(s) to a previously issued 

financial statement(s) will or may occur. 

Page 36 GAO-07-91 Fiscal Year 2003 Restatements
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 37 GAO-07-91

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact Gary T. Engel, (202) 512-3406. 

Arthur W. Brouk, Alberto Garza, Michael D. Hansen, Malissa Livingston, 

and Michelle Philpott made key contributions to this report. Acknowledgments 

 Fiscal Year 2003 Restatements
Related GAO Products Related GAO Products 

Fiscal Year 2004 U.S. Government Financial Statements: Sustained 

Improvement in Federal Financial Management Is Crucial to 

Addressing Our Nation’s Future Fiscal Challenges. GAO-05-284T. 

Washington, D.C.: February 9, 2005. 

Financial Audit: Restatements to the Department of State’s Fiscal Year

2003 Financial Statements. GAO-05-814R. Washington, D.C.: September 

20, 2005. 

Financial Audit: Restatements to the Nuclear Regulatory Commission’s 

Fiscal Year 2003 Financial Statements. GAO-06-30R. Washington, D.C.: 

October 27, 2005. 

Financial Audit: Restatement to the General Services Administration’s 

Fiscal Year 2003 Financial Statements. GAO-06-70R. Washington, D.C.: 

December 6, 2005. 

Financial Audit: Restatements to the National Science Foundation’s 

Fiscal Year 2003 Financial Statements. GAO-06-229R. Washington, D.C.: 

December 22, 2005. 

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

Year 2003 Consolidated Financial Statements. GAO-06-254R. 

Washington, D.C.: January 26, 2006. 

Fiscal Year 2005 U.S. Government Financial Statements: Sustained 

Improvement in Federal Financial Management is Crucial to 

Addressing Our Nation’s Financial Condition and Long-term Fiscal 

Imbalance. GAO-06-406T. Washington, D.C.: March 1, 2006. 

(198416) Page 38 GAO-07-91 Fiscal Year 2003 Restatements
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