United States General Accounting Office 

GAO Report to the Secretary of the Treasury 

and the Director of the Office of 

Management and Budget 

October 2003 FINANCIAL AUDIT 

Process for Preparing 

the Consolidated 

Financial Statements 

of the U.S. 

Government Needs 

Improvement 

GAO-04-45


a
Highlights of GAO-04-45, a report to the 

Secretary of the Treasury and the Director 

of the Office of Management and Budget 

For the past 6 years, since GAO 

began auditing the consolidated 

financial statements of the U.S. 

government (CFS), GAO has been 

unable to express an opinion on 

them because of material 

weaknesses in internal control and 

financial reporting. Contributing to 

GAO’s inability to express an 

opinion has been the federal 

government’s lack of adequate 

systems, controls, and procedures 

to properly prepare its 

consolidated financial statements. 

The purpose of this report is to 

discuss in greater detail 

weaknesses in financial reporting 

procedures and internal control 

over the process for preparing the 

CFS that GAO identified and to 

recommend improvements to 

address those weaknesses. 

GAO makes 44 recommendations 

to address weaknesses identified, 

including a recommendation that 

Treasury, in coordination with the 

Office of Management and Budget 

(OMB), design its new compilation 

process to directly link information 

from federal agencies’ audited 

financial statements to amounts 

reported in the CFS. GAO also 

makes 16 recommendations that 

address CFS disclosures required 

by U.S. generally accepted 

accounting principles. Treasury 

and OMB stated that many of our 

recommendations will improve the 

usefulness and accuracy of the 

CFS, but disagreed with 

recommendations in two areas. 

www.gao.gov/cgi-bin/getrpt?GAO-04-45. 

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. 

October 2003 

FINANCIAL AUDIT 

Process for Preparing the Consolidated 

Financial Statements of the U.S. 

Government Needs Improvement 

GAO found deficiencies in the compilation and reporting process in the 

following areas: 

• controls over the compilation process, 

• unreconciled transactions affecting the change in net position, 

• reconciliation of intragovernmental activity and balances, 

• elimination of intragovernmental activity and balances, 

• 	 reconciliation of net operating costs and unified budget surplus (or 

deficit), 

• 	 statements of changes in cash balance from unified budget and other 

activities, 

• defining and documenting of the reporting entity, and 

• conformity with U.S. generally accepted accounting principles. 

Another key deficiency in the compilation and reporting process for the CFS 

was the failure of the Department of the Treasury’s process for compiling 

the CFS to directly link information from federal agencies’ audited financial 

statements to amounts reported in the CFS (see figure below). Without this 

direct link, the information in the CFS may not be reliable. The lack of a 

direct link also affects the efficiency and effectiveness of the CFS audit. 

Treasury is designing a new compilation process that it expects to directly 

link this information beginning with the fiscal year 2004 CFS. 

GAO identified three additional areas related to the compilation and 

reporting process for the CFS that warrant the attention of Treasury and the 

Office of Management and Budget: (1) management representation letters, 

(2) legal representation letters, and (3) information on treaties and other 

international agreements. 

Lack of Direct Link between Audited Agency Financial Statements and the CFS 
Contents


Letter


Results in Brief 


Scope and Methodology 


Directly Linking Audited Agency Financial Statements to the CFS 


Controls over the Compilation Process 


Unreconciled Transactions Affecting the Change in Net Position 


Reconciliation of Intragovernmental Activity and Balances 


Elimination of Intragovernmental Activity and Balances


Reconciliation of Net Operating Cost and Unified Budget Surplus (or 


Deficit) 


Statements of Changes in Cash Balance from Unified Budget and 


Other Activities 


Defining the Reporting Entity 


Conformity with U.S. Generally Accepted Accounting Principles 


Other Weaknesses Identified 


Agency Comments and Our Evaluation


1 

1 

3 

3 

5 

7 

8 

10 

11 

14 

16 

18 

19 

24 

Appendixes 

Appendix I:


Appendix II: 

Disclosure Issues 28


Loans Receivable and Loan Guarantee Liabilities 28


Inventories and Related Property 29


Property, Plant, and Equipment 32


Federal Employee and Veteran Benefits Payable 32


Environmental and Disposal Liabilities 33


Other Liabilities 33


Commitments and Contingencies 35


Collections and Refunds of Federal Revenue 36


Dedicated Collections 36


Indian Trust Funds 37


Social Insurance 37


Nonfederal Physical Property 39


Human Capital 39


Research and Development 40


Deferred Maintenance 40


Risk Assumed 41


Comments from Department of the Treasury and the Office 


of Management and Budget 42


GAO Comment 44


Page i GAO-04-45 Process for Preparing CFS Needs Improvement 
Contents 

Figure Figure 1:	 Lack of Direct Link between Audited Agency Financial 

Statements and CFS 4 

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Page ii GAO-04-45 Process for Preparing CFS Needs Improvement 
Page 1 GAO-04-45 Process for Preparing CFS Needs Improvement 

A

United States General Accounting Office 

Washington, D.C. 20548 

October 30, 2003


The Honorable John W. Snow


The Secretary of the Treasury


The Honorable Joshua B. Bolten


Director, Office of Management and Budget


In March 2003, we issued our disclaimer of opinion on the consolidated 


financial statements for the U.S. government (CFS) for the fiscal years 


ended September 30, 2002 and 2001. For the past 6 years, certain material 


weaknesses in internal control and in financial reporting resulted in


conditions that prevented us from expressing an opinion on the CFS. 


Specifically, we have reported that the federal government did not have 


adequate systems, controls, and procedures to properly prepare its 


consolidated financial statements. Many of these weaknesses in internal 


control that contributed to our disclaimer of opinion were identified during 


the audit of federal agencies’ financial statements by the agency financial 


statement auditors and reported in detail with recommendations to the 


agencies in separate reports. However, some of the internal control 


weaknesses were identified during our tests of the U.S. Department of the 


Treasury’s (Treasury) process for preparing the CFS. Such weaknesses


impaired the federal government’s ability to fully ensure that the CFS is 


consistent with the underlying audited agency financial statements, 


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


accounting principles. Consequently, these weaknesses also contributed to 


our inability to render an opinion on the CFS.


The purpose of this report is to discuss in greater detail weaknesses we 


identified during our fiscal year 2002 audit regarding financial reporting 


procedures and internal control over the process for preparing the CFS. 


We have discussed each of these weaknesses with your staff during this


past audit, and some of the weaknesses have been communicated for a 


number of years. 


Results in Brief	 The deficiencies in the compilation and reporting processes involve the 

following nine areas: (1) directly linking audited agency financial 

statements to the CFS, (2) controls over the compilation process, 

(3) unreconciled transactions affecting the change in net position, 

(4) reconciliation of intragovernmental activity and balances, 

(5) elimination of intragovernmental activity and balances, 

Page 1 GAO-04-45 Process for Preparing CFS Needs Improvement 
(6) reconciliation of net operating costs and unified budget surplus (or 

deficit), (7) statements of changes in cash balance from unified budget and 

other activities, (8) defining and documenting of the reporting entity, and 

(9) conformity with U.S. generally accepted accounting principles. 

We also identified and discuss in this report certain issues related to 

(1) management representation letters, (2) legal representation letters, and 

(3) information on treaties and other international agreements that will 

require actions by Treasury and the Office of Management and Budget 

(OMB). Other issues related to these three areas need to be addressed by 

federal agencies and their auditors. We plan to separately communicate to 

agency Chief Financial Officers (CFO) and Inspectors General the details 

of our concerns regarding these issues. 

This report includes 44 recommendations to address weaknesses we 

identified. It also includes recommendations related to 16 disclosures 

identified in appendix I that are required by U.S. generally accepted 

accounting principles. We are recommending that these 16 disclosures that 

are not included in the most recent CFS either be included or that the 

rationale for their exclusion be documented. 

Treasury and OMB stated that many of our recommendations will improve 

the usefulness and accuracy of the CFS and that they have already 

incorporated many of them into their new system and processes that are 

being developed for preparing the fiscal year 2004 CFS. However, Treasury 

and OMB disagreed with our recommendations related to unreconciled 

transactions affecting net position and the Statement of Changes in Cash 

Balance from Unified Budget and Other Activities. 

In response to their concerns and recognizing that there are various ways 

to correct an identified weakness, we modified our recommendation 

related to unreconciled transactions affecting net position to be less 

prescriptive as to the action to take, but retained the intent of our proposed 

recommendation. Treasury and OMB also disagreed with what they 

perceived as our recommendation to use agency data to prepare the 

Statement of Changes in Cash Balance from Unified Budget and Other 

Activities. They disagreed with that approach because they stated that it 

would be time consuming and costly, and they prefer to obtain the 

information from Treasury’s central accounting system rather than from 

agencies’ financial statements. This is not what we recommended. 

Instead, because we found unexplained material differences between 

Treasury’s records and some agencies’ financial statements, we 

Page 2 GAO-04-45 Process for Preparing CFS Needs Improvement 
recommended that Treasury collect certain information already reported in 

federal agencies’ audited financial statements and develop procedures that 

ensure consistency of the significant line items on the Statement of 

Changes in Cash Balance from Unified Budget and Other Activities with the 

agency-reported information. 

Scope and 

Methodology 

As part of our audit of the fiscal years 2002 and 2001 CFS, we evaluated 

Treasury’s financial reporting procedures and related internal control. In 

our report, which is included in the fiscal year 2002 Financial Report of the 

United States Government,1 we reported material deficiencies relating to 

Treasury’s financial reporting procedures and internal control. These 

material deficiencies contributed to our disclaimer of opinion on the CFS 

and also constitute material weaknesses in internal control, which 

contributed to our adverse opinion on internal control. We performed 

sufficient audit work to provide the disclaimer of opinion and issued our 

audit report, dated March 20, 2003, in accordance with U.S. generally 

accepted government auditing standards. This report is based on the audit 

work we performed for the fiscal years 2002 and 2001 CFS. 

We requested comments on a draft of this report from the Secretary of the 

Treasury and the Director of OMB or their designees. Treasury’s and OMB’s 

comments are reprinted in appendix II, discussed in the Agency Comments 

and Our Evaluation section of this report, and incorporated in the report as 

applicable. 

Directly Linking 

Audited Agency 

Financial Statements 

to the CFS 

Treasury’s current process for compiling the CFS does not directly link 

information from federal agencies’ audited financial statements to amounts 

reported in the CFS, and therefore cannot fully ensure that the information 

in the CFS is consistent with the underlying information in federal 

agencies’ audited financial statements and other financial data (see fig. 1). 

Treasury, as the preparer of the CFS, currently collects approximately 2,400 

trial balances through the Federal Agencies’ Centralized Trial Balance 

System (FACTS I) from federal agencies and information from the Treasury 

1

The fiscal year 2002 Financial Report of the United States Government was issued by the 

Department of the Treasury on March 31, 2003, and is available through GAO’s Web site at 

www.gao.gov and Treasury’s web site at www.fms.treas.gov/fr/index.html. 

Page 3 GAO-04-45 Process for Preparing CFS Needs Improvement 
Central Accounting and Reporting System (STAR) to compile the financial 

statements. 

Figure 1: Lack of Direct Link between Audited Agency Financial Statements and 

CFS 

The Federal Accounting Standards Advisory Board’s (FASAB) Statement of 

Federal Financial Accounting Concepts No. 4, Intended Audience and 

Qualitative Characteristics for the Consolidated Financial Report of the 

United States Government, states that the consolidated financial report 

should be a general purpose report that is aggregated from agency reports 

and that it should tell users where to find information in other formats, 

both aggregated and disaggregated, such as individual agency reports, 

agency websites, and the President’s Budget. 

Without directly linking financial information from agencies’ audited 

financial statements, the information in the CFS may not be reliable. The 

lack of direct linkage also affects the efficiency and effectiveness of the 

audit of the CFS. In addition, the reliability of certain information in 

Management’s Discussion and Analysis, Stewardship Information, and 

Supplemental Information may be affected. 

As Treasury is designing its new compilation process, which it expects to 

implement beginning with the fiscal year 2004 CFS, we recommend that the 

Secretary of the Treasury direct the Fiscal Assistant Secretary, working in 

Page 4 GAO-04-45 Process for Preparing CFS Needs Improvement 
coordination with the Controller of OMB’s Office of Federal Financial 

Management, to 

•	 design the new compilation process to directly link information from 

federal agencies’ audited financial statements to amounts reported in all 

the applicable CFS and related footnotes, and 

•	 consider the other applicable recommendations in this report when 

designing and implementing the new compilation process. 

Controls over the 

Compilation Process 

We identified specific areas of internal control in Treasury’s process for 

preparing the CFS that need to be strengthened. Internal control should 

provide, among other things, reasonable assurance that financial reporting 

is reliable. GAO’s Standards for Internal Control in the Federal 

Government2 defines the minimum level of quality acceptable for internal 

control in the federal government and provides the standards against which 

internal control is to be evaluated. These standards state that internal 

controls should include, among other items, (1) segregation of duties, 

(2) appropriate documentation of transactions and internal control, and 

(3) reviews by management at the functional or activity level. We found 

many controls in place, but we identified three areas that need to be 

improved. Although Treasury is developing a new system and procedures 

for preparing the CFS, the need for adequate internal control remains 

important and needs to be considered during the development process. 

Segregation of Duties	 Segregation of duties is the practice of dividing the steps in a critical 

function among different individuals in order to reduce the risk of error or 

fraud, thus preventing a single individual from having full control of a 

transaction or event. FACTS I and the Financial Management Service’s 

Hyperion database are used to compile the CFS. We found that Treasury’s 

systems administrators responsible for processing the FACTS I data have 

the capability to enter, change, and delete data within FACTS I and the 

Hyperion database without any supervisory review. They are also able to 

post adjustments to the CFS without formal approval. Lack of proper 

segregation of duties for critical functions leaves the CFS vulnerable to 

2

U.S. General Accounting Office, Internal Control: Standards for Internal Control in the 

Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

Page 5 GAO-04-45 Process for Preparing CFS Needs Improvement 
errors and could result in incomplete and inaccurate summarization of data 

within these financial statements. 

Documentation of 

Transactions and Internal 

Control 

While Treasury has documented some portions of its process for compiling 

the CFS, it has not fully documented its policies and procedures for 

preparing the CFS report. Agency management is responsible for 

developing detailed policies, procedures, and practices to fit agency 

operations and ensuring that internal control is built into and is an integral 

part of operations. Although GAO’s Standards for Internal Control in the 

Federal Government calls for clear documentation of policies and 

procedures, we found that Treasury has not fully implemented this key 

control activity. Without documented policies and procedures, staff could 

follow inconsistent standards and practices or not follow them at all. This 

potential for inconsistency increases the risk that errors in the compilation 

process could go undetected and could result in an incomplete and 

inaccurate summarization of data within the CFS, creating a financial 

report that is not an accurate representation of the financial position of the 

U.S. government. 

Management Review	 We found that Treasury management did not review transactions within 

several key compilation processes. Transactions and other significant 

events should be authorized and executed only by persons acting within 

the scope of their authority. Appropriate reviews by management of key 

decisions and data are vital controls to ensure that only authorized actions 

occur. For example, Treasury’s FACTS I system allows for master 

appropriation files, the files that list all federal agencies by appropriation 

code, to be updated by review accountants without supervisory approval. 

Also, there is no requirement for supervisory review of changes made to 

agency data as a result of issues identified during the “agency data analysis 

process” performed by Treasury. In some instances, supervisory reviews 

were required, but any reviews that may have been performed were not 

documented. For example, there was no documentation of supervisory 

review of changes to the Hyperion system software and chart of accounts 

used to compile the data for the CFS. Records of changes and reviews of 

the changes made to the templates used to create the CFS were also 

inadequate. 

Inadequate supervisory review and inadequate documentation of changes 

and reviews could allow data that go into the CFS to be manipulated or 

changed without any supervisory control or review, resulting in the 

Page 6 GAO-04-45 Process for Preparing CFS Needs Improvement 
possibility that agency data could be changed or incorrectly compiled in 

the CFS. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, in connection with Treasury’s current compilation 

process and the development of Treasury’s new compilation system and 

process, to 

•	 segregate the duties of individuals who have the capability to enter, 

change, and delete data within FACTS I and the Hyperion database and 

post adjustments to the CFS; 

•	 develop and fully document policies and procedures for the 

consolidated financial statement preparation process so that they are 

proper, complete, and consistently applied among staff members; and 

•	 require and document reviews by management of all procedures that 

result in data changes to the CFS. 

Unreconciled 

Transactions Affecting 

the Change in Net 

Position 

The net position reported in the CFS is derived by subtracting liabilities 

from assets, rather than through balanced accounting entries. In other 

words, the CFS is “plugged” to make it balance. To make the fiscal year 

2002 CFS balance, Treasury recorded a net $17.1 billion decrease to net 

operating cost on the Statement of Operations and Changes in Net Position, 

which it labeled “Unreconciled Transactions Affecting the Change in Net 

Position.” Treasury does not identify and quantify all components of this 

unreconciled activity. 

Treasury attributes these net unreconciled transaction amounts to 

(1) improper recording of intragovernmental transactions by federal 

agencies, (2) transactions affecting assets and liabilities not being 

identified properly by federal agencies as prior period adjustments, and 

(3) timing differences and errors in reporting transactions. Treasury stated 

in its November 2001 report on its CFS improvement project3

 that in order 

to properly reconcile net position, federal agencies would need to split net 

position between intragovernmental and public components, including 

ending balances and the year’s activity. Currently, OMB requires federal 

3

U.S. Department of the Treasury, Consolidated Financial Report Improvement Project: 

Recommendations to the Consolidation Process (Washington D.C.: Nov. 15, 2001). 

Page 7 GAO-04-45 Process for Preparing CFS Needs Improvement 
agencies to identify intragovernmental assets and liabilities on their 

audited balance sheets but does not require the intragovernmental portion 

of net position to be identified. Without a process in place to identify and 

quantify all components of the activity in the net position line item, 

revenues, costs, assets, and liabilities may be misstated, thereby affecting 

the reliability of the CFS. 

As Treasury is designing its new financial statement compilation process to 

begin with the fiscal year 2004 CFS, we recommend that the Secretary of 

the Treasury direct the Fiscal Assistant Secretary, working in coordination 

with the Controller of OMB’s Office of Federal Financial Management, to 

•	 develop reconciliation procedures which will aid in understanding and 

controlling the net position balance as well as eliminate the plugs 

previously associated with compiling the CFS; and 

•	 use balanced accounting entries to account for the change in net 

position rather than simple subtraction of liabilities from assets. 

Reconciliation of 

Intragovernmental 

Activity and Balances 

Federal agencies are unable to fully reconcile intragovernmental activity 

and balances. OMB and Treasury require CFO Act agencies to reconcile 

selected intragovernmental activity and balances with their “trading 

partners”4 and to report on the extent and results of intragovernmental 

activity and balances reconciliation efforts. The Inspectors General 

reviewed these reports and communicated the results of their reviews to 

OMB, Treasury, and us. A substantial number of the CFO Act agencies did 

not fully perform the required reconciliations for fiscal year 2002, citing 

reasons such as (1) failure of trading partners to provide needed data, 

(2) limitations and incompatibility of agency and trading partner systems, 

and (3) human resource issues. For fiscal year 2002, amounts reported for 

federal agency trading partners for certain intragovernmental accounts 

were significantly out of balance. A lack of standardization in transaction 

processing and a lack of sufficient communication between trading 

partners contribute significantly to federal agencies’ inability to fully 

reconcile intragovernmental activity and balances. Without improvement 

in this area, Treasury cannot properly eliminate intragovernmental activity 

4

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

included in the CFS that do business with each other. 

Page 8 GAO-04-45 Process for Preparing CFS Needs Improvement 
and balances and, as a result, assets, liabilities, revenue, and costs reported 

in the CFS may not be fairly stated. 

Federal agencies are required to consistently and fully account for, 

reconcile, and report intragovernmental activity and balances across the 

federal government. To address certain issues that have contributed to the 

out-of-balance condition for intragovernmental activity and balances, OMB 

has established a set of standard business rules, OMB Memorandum 

M-03-01, Business Rules for Intragovernmental Transactions, for 

governmentwide transactions among trading partners; the memorandum 

requires quarterly reconciliations of intragovernmental activity and 

balances, beginning with fiscal year 2003. Treasury Financial Manual, 

section 4030, also requires reconciliation of intragovernmental activity and 

balances. Further, Treasury has begun a process to help federal agencies 

better perform their reconciliations, by providing each agency with 

detailed trading partner information. Also, Treasury is planning to require 

federal agencies, beginning with fiscal year 2004, to report in Treasury’s 

new closing package intragovernmental activity and balances by trading 

partner. 

As OMB continues to make strides to address issues related to 

intragovernmental transactions, we recommend that the Director of the 

Office of Management and Budget direct the Controller of the Office of 

Federal Financial Management to 

•	 develop policies and procedures that document how OMB will enforce 

the business rules provided in OMB Memorandum M-03-01, Business 

Rules for Intragovernmental Transactions, and 

•	 require that significant differences noted between business partners be 

resolved and the resolution be documented. 

We also recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with the Controller of the 

Office of Management and Budget, to implement the plan to require federal 

agencies to report in Treasury’s new closing package, beginning with fiscal 

year 2004, intragovernmental activity and balances by trading partner and 

indicate amounts that have not been reconciled with trading partners and 

amounts, if any, that are in dispute. 

Page 9 GAO-04-45 Process for Preparing CFS Needs Improvement 
Elimination of 

Intragovernmental 

Activity and Balances 

During our audits, we found the following: 

•	 Intragovernmental activity and balances are “dropped” or “offset” in the 

preparation of the CFS rather than eliminated through balanced 

accounting entries. 

•	 Certain intragovernmental activity and balances, primarily related to 

appropriations, are not being properly considered in the consolidation 

process. 

•	 No reconciliation is performed for the change in intragovernmental 

assets and liabilities for the fiscal year, including the amount and nature 

of all changes in intragovernmental assets or liabilities not attributable 

to cost and revenue activity recognized during the fiscal year, such as 

differences due to purchases that are capitalized as inventory or 

equipment and revenue that is deferred. 

Consolidated financial statements are intended to present the results of 

operations and financial position of the components that make up the 

reporting entity as if the entity were a single enterprise. Therefore, when 

preparing the CFS, intragovernmental activity and balances between 

federal agencies must be eliminated. As mentioned above, federal 

agencies’ problems in handling their intragovernmental transactions impair 

Treasury’s ability to properly eliminate these transactions, and significant 

differences in intragovernmental accounts have been identified. Without 

an effective process, intragovernmental activity and balances are not fully 

accounted for and eliminated in the process used to prepare the CFS. As a 

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

differences on the amounts reported in the CFS is impaired and, 

consequently, the CFS may be misstated. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with OMB’s Controller of the 

Office of Federal Financial Management, to 

•	 design procedures that will account for the difference in 

intragovernmental assets and liabilities throughout the compilation 

process by means of formal consolidating and elimination accounting 

entries; 

Page 10 GAO-04-45 Process for Preparing CFS Needs Improvement 
•	 develop solutions for intragovernmental activity and balance issues 

relating to federal agencies’ accounting, reconciling, and reporting in 

areas other than those OMB now requires be reconciled, primarily areas 

relating to appropriations; and 

•	 reconcile the change in intragovernmental assets and liabilities for the 

fiscal year, including the amount and nature of all changes in 

intragovernmental assets or liabilities not attributable to cost and 

revenue activity recognized during the fiscal year. Examples of these 

differences would include capitalized purchases such as inventory or 

equipment and deferred revenue. 

Reconciliation of Net 

Operating Cost and 

Unified Budget Surplus 

(or Deficit) 

Treasury did not have an adequate process to identify and report items 

needed to reconcile the U.S. government’s fiscal year 2002 net operating 

cost of $364.9 billion to the fiscal year 2002 unified budget deficit, which 

was reported as $157.7 billion. The Reconciliation of Net Operating Cost 

and Unified Budget Surplus (or Deficit) (hereafter referred to as the 

reconciliation statement) is expected to explain certain differences that 

occur because the CFS are prepared on the accrual basis in accordance 

with U.S. generally accepted accounting principles. Under accrual 

accounting, transactions are reported when the event or transaction is 

recognizable under U.S. generally accepted accounting principles rather 

than when cash is received and paid. By contrast, federal budgetary 

reporting is, with certain exceptions, on the cash basis, in accordance with 

accepted budget concepts and policies. Statement of Federal Financial 

Accounting Standards (SFFAS) No. 24, Selected Standards for the 

Consolidated Financial Report of the United States Government, effective 

in fiscal year 2002, requires the reconciliation statement as part of the CFS. 

In our audit of the reconciliation statement, we found that Treasury was 

unable to identify all the transactions needed to properly reconcile the 

statement. Treasury’s process for compiling the reconciliation statement 

involved the use of two independent sources of information—FACTS data 

from federal agencies’ general ledger systems for the net operating cost and 

most of the reconciliation statement items and Treasury’s central 

accounting and reporting system (STAR) primarily for the unified budget 

surplus/deficit amounts. The reconciliation statement begins with the net 

operating cost amount reported in the Statement of Operations and 

Changes in Net Position (derived through FACTS data). As noted above, 

this amount includes a net $17.1 billion labeled as “unreconciled 

transactions,” which was needed to balance the consolidated Balance 

Page 11 GAO-04-45 Process for Preparing CFS Needs Improvement 
Sheet. Because the net operating cost amount includes this plug, which 

does not correspond to any budget activity, the $17.1 billion should have 

been included as a reconciling item in the reconciliation statement, but it 

was not. In addition, a $1 billion “net amount of all other differences” 

(another plug) was also needed in the reconciliation statement to balance 

net operating cost to the unified budget deficit. Treasury was unable to 

adequately identify and explain the gross components of such amounts. 

Treasury’s process for preparing the reconciliation statement also did not 

ensure completeness of reporting or ascertain the consistency of all the 

amounts reported in the reconciliation statement with the related balance 

sheet line items, related notes, or federal agency financial statements. We 

performed an analysis to determine whether all applicable components 

reported in the other statements (and related note disclosures) included in 

the CFS were properly reflected in the reconciliation statement. We found 

about $21 billion of net changes in various line item account balances on 

the balance sheet that were not explained on either the reconciliation 

statement or the Statement of Changes in Cash Balance from Unified 

Budget Surplus and Other Activities. For example, the reconciliation 

statement reported depreciation expense ($20.5 billion) and total 

capitalized fixed assets ($40.9 billion) as the components of the net change 

in property, plant, and equipment. Although these activities accounted for 

a net increase of $20.4 billion, the balance sheet reflected a smaller net 

increase, $18 billion; Treasury was unable to explain the remaining 

$2.4 billion of the net change. In addition, while we found that the source 

of the line item “principal repayments of precredit reform loans” that is 

reported on the reconciliation statement was from STAR, Treasury was 

unable to link this amount of $8.2 billion to any related agency financial 

statements or the consolidated Balance Sheet and related notes. 

Lastly, Treasury did not establish a reporting materiality threshold for 

purposes of collecting and reporting information in the reconciliation 

statement. For example, some items were reported simply as a net 

“increase/decrease” without considering how material, both quantitatively 

and qualitatively, the gross changes were.5 We noted, for instance, that in 

the “components of the budget surplus (deficit) not part of net operation 

cost” section of the statement, there is a reconciling item titled “increase in 

5

An item’s omission or error is considered material if the surrounding circumstances make it 

probable that the judgment of a reasonable person relying on the information would have 

been changed or influenced by the inclusion or correction of the item. 

Page 12 GAO-04-45 Process for Preparing CFS Needs Improvement 
inventory” rather than accounting for “purchases of inventory” as a 

“component of the budget surplus (deficit) not part of net operation cost” 

and separately reporting the “sales, use, or disposal of inventory” in the 

“components of net operating cost not part of the budget surplus (or 

deficit).” Treasury was unable to demonstrate whether material, 

informative amounts were netted, and pertinent information may therefore 

not be disclosed. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary to develop and implement a process that adequately 

identifies and reports items needed to reconcile its net operating cost and 

unified budget surplus (or deficit). Treasury should 

•	 report “net unreconciled differences” included in the net operating 

results line item as a separate reconciling activity in the reconciliation 

statement, 

•	 develop policies and procedures to ensure completeness of reporting 

and document how all the applicable components reported in the other 

consolidated financial statements (and related note disclosures 

included in the CFS) were properly reflected in the reconciliation 

statement, and 

•	 establish reporting materiality thresholds for determining which agency 

financial statement activities to collect and report at the 

governmentwide level to assist in ensuring that the reconciliation 

statement is useful and conveys meaningful information. 

In addition, if Treasury chooses to continue using information both from 

federal agencies’ financial statements and from the STAR system, we 

recommend that Treasury 

•	 demonstrate how the amounts from STAR reconcile to federal agencies’ 

financial statements and 

•	 identify and document the cause, if any significant differences are 

noted. 

Page 13 GAO-04-45 Process for Preparing CFS Needs Improvement 
Statements of Changes 

in Cash Balance from 

Unified Budget and 

Other Activities 

Treasury was unable to demonstrate how significant amounts reported in 

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

Activities were related to the underlying federal agencies’ financial 

statements. The Statement of Changes in Cash Balance from Unified 

Budget and Other Activities is expected to explain how the annual unified 

budget surplus or deficit relates to the change in the U.S. government’s 

operating cash. SFFAS No. 24, effective in fiscal year 2002, requires the 

Statement of Changes in Cash Balance from Unified Budget and Other 

Activities as part of the CFS. 

For fiscal year 2002, the Statement of Changes in Cash Balance from 

Unified Budget and Other Activities reported a unified budget deficit of 

$157.7 billion, derived as the difference between reported actual unified 

budget receipts of $1,853.3 billion and actual unified budget outlays of 

$2,011 billion. Both line items were material to this statement and were 

compiled from federal agencies’ monthly reports to Treasury in the STAR 

system. 

Treasury was unable to explain material differences, totaling $231 billion 

(absolute) and $166 billion (net), between the actual unified budget net 

outlays reported on this statement and the outlays reported on selected 

individual federal agencies’ audited Combined Statement of Budgetary 

Resources. For example, we found one federal agency that reported net 

outlays for fiscal year 2002 as $479 billion on its audited Combined 

Statement of Budgetary Resources, while Treasury’s records showed $375 

billion for fiscal year 2002 for this agency. This agency had received an 

unqualified auditor opinion on its financial statements. 

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

6 

states that outlays in federal agencies’ Combined Statement of Budgetary 

Resources should agree with the net outlays reported in the budget of the 

U.S. government. In addition, SFFAS No. 7, Accounting for Revenue and 

Other Financing Sources and Concepts for Reconciling Budgetary and 

Financial Accounting, requires explanation of any material differences 

between the information required to be disclosed (including outlays) and 

the amounts described as “actual” in the budget of the U.S. government. 

6

Office of Management and Budget, Form and Content of Agency Financial Statements, 

OMB-01-09 (Washington, D.C.: Sept. 25, 2001). This bulletin is OMB’s official guidance for 

the form and content of federal agencies’ financial statements. 

Page 14 GAO-04-45 Process for Preparing CFS Needs Improvement 
Treasury believes its records for net outlays are reliable and accurate; 

however, many federal agencies are reporting different net outlays and 

receiving clean opinions on their financial statements. 

Treasury was unable to adequately explain the over $24 billion net 

difference between actual unified budget receipts of $1,853.3 billion and 

total operating revenue of $1,877.7 billion reported in the Statements of 

Operations and Changes in Net Position. While these amounts are not 

expected to equal (for example, operating revenues include accrued 

amounts, and budget receipts are reported on the cash basis), there is a 

relationship between operating revenues reported on the Statement of 

Operations and Changes in Net Position and unified budget receipts 

reported on the Statement of Changes in Cash Balance from Unified Budget 

and Other Activities. Therefore, the expectation is that differences 

between these amounts should be explainable. 

Treasury was also not able to provide support for how the line items in the 

“other activities” section of this statement, totaling $13.5 billion, related to 

either the underlying Balance Sheet or related notes accompanying the 

CFS. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with the Controller of OMB’s 

Office of Federal Financial Management, to develop and implement a 

process to ensure that the Statement of Changes in Cash Balance from 

Unified Budget and Other Activities properly reflects the activities reported 

in federal agencies’ audited financial statements. Treasury should 

•	 document the consistency of the significant line items on this statement 

to agencies’ audited financial statements; 

•	 request, through its closing package, that federal agencies provide the 

net outlays reported in their Combined Statement of Budgetary 

Resources and explanations for any significant differences between net 

outlay amounts reported in the Combined Statement of Budgetary 

Resources and the budget of the U.S. government; 

•	 investigate the differences between net outlays reported in federal 

agencies’ Combined Statement of Budgetary Resources and Treasury’s 

records in the STAR system to ensure that the proper amounts are 

reported in the Statement of Changes in Cash Balance from Unified 

Budget and Other Activities; 

Page 15 GAO-04-45 Process for Preparing CFS Needs Improvement 
•	 explain and document the differences between the operating revenue 

amount reported on the Statement of Operations and Changes in Net 

Position and unified budget receipts reported on the Statement of 

Changes in Cash Balance from Unified Budget and Other Activities; and 

•	 provide support for how the line items in the “other activities” section of 

this statement relate to either the underlying Balance Sheet or related 

notes accompanying the CFS. 

Defining the Reporting 

Entity 

The CFS includes certain financial information for the executive, 

legislative, and judicial branches, to the extent that federal agencies within 

those branches have provided Treasury such information. However, there 

are undetermined amounts of assets, liabilities, and revenues that are not 

included, and the government did not provide evidence or disclose in the 

CFS that such financial information was immaterial. 

Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, 

Entity and Display, provides guidance on defining reporting entities. 

Under SFFAC No. 2, a reporting entity for general purpose financial 

statements would “meet all of the following criteria: (1) there is a 

management responsible for controlling and deploying resources, 

producing outputs and outcomes, executing the budget or a portion thereof 

. . ., and held accountable for the entity’s performance; (2) the entity’s scope 

is such that its financial statements would provide a meaningful 

representation of operations and financial condition; and (3) there are 

likely to be users of the financial statements who are interested in and 

could use the information in the statements to help them make resource 

allocation and other decisions and hold the entity accountable for its 

deployment and use of resources.” SFFAC No. 2 also calls for the notes to 

financial statements to provide disclosures that are necessary to make the 

financial statements more informative and not misleading, such as a brief 

description of the reporting entity. The statement also provides criteria for 

including components in a reporting entity. As examples of the application 

of such criteria, SFFAC No. 2 specifically discusses the Federal Reserve 

System and government-sponsored enterprises and the reasons for 

FASAB’s conclusion that these entities would not be considered 

components of the U.S. government reporting entity. 

Page 16 GAO-04-45 Process for Preparing CFS Needs Improvement 
In accordance with SFFAC No. 2, if the government could provide evidence 

that the financial information not included in the CFS is immaterial,7

 then 

the CFS reporting entity could be described as the “U.S. government” and 

would conform materially to the criteria set forth in SFFAC No. 2. 

However, the fiscal year 2002 CFS reporting entity excluded certain entities 

without providing evidence or clearly explaining the reason. 

An appendix to the CFS listed 13 entities that were excluded from the CFS 

reporting entity and specifically explained the reason for excluding one of 

those entities—the Federal Reserve System. However, the appendix did 

not explain the reason for excluding the other entities listed as excluded, 

such as government-sponsored enterprises and military exchanges. While 

exclusion of those entities may be appropriate, some users of the CFS may 

be confused if the reason for excluding entities is not clearly disclosed in 

the CFS. 

We understand the inherent challenges in getting complete information for 

all three branches of the U.S. government. However, not including required 

information for all components included in a reporting entity or not clearly 

explaining the reason for excluding certain entities could mislead some 

users of the financial statements. 

Without evidence of the amounts of information excluded and any related 

disclosures, in particular, evidence that what was excluded was immaterial 

to the CFS, we could not have ample assurance regarding the unknown 

amounts, and, under auditing standards, this issue could impede a future 

opinion on the CFS. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with the Controller of OMB’s 

Office of Federal Financial Management to do the following: 

•	 Perform an assessment to define the reporting entity, including its 

specific components, in conformity with the criteria issued by FASAB. 

Key decisions made in this assessment should be documented, including 

7

To assess the materiality of any issue, the indicative criteria discussed in SFFAC No. 2 state 

that (1) the materiality of the entities and their relationship with one another should be 

considered, (2) materiality should not be measured solely in dollars, and (3) potential 

embarrassment to any of the entities' stakeholders should also be considered. Thus, a bias 

toward expansiveness and comprehensiveness would be justified, particularly if it could 

contribute to maintenance of fiscal control. 

Page 17 GAO-04-45 Process for Preparing CFS Needs Improvement 
the reason for including or excluding components and the basis for 

concluding on any issue. Particular emphasis should be placed on 

demonstrating that any financial information that should be included, 

but is not included, is immaterial. 

•	 Provide in the financial statements all the financial information relevant 

to the defined reporting entity, in all material respects. Such information 

would include, for example, the reporting entity’s assets, liabilities, and 

revenues. 

•	 Disclose in the financial statements all information that is necessary to 

inform users adequately about the reporting entity. Such disclosures 

should clearly describe the reporting entity and explain the reason for 

excluding any components that are not included in the defined reporting 

entity. 

Conformity with U.S. 

Generally Accepted 

Accounting Principles 

Treasury lacks an adequate process to ensure that the financial statements, 

related notes, stewardship, and supplemental information in the CFS are 

presented in conformity with U.S. generally accepted accounting 

principles. SFFAS No. 24 states that FASAB standards apply to all federal 

agencies, including the U.S. government as a whole, unless provision is 

made for different accounting treatment in a current or subsequent 

standard. 

Specifically, we found that Treasury did not (1) timely identify applicable 

generally accepted accounting principles requirements, (2) make timely 

modifications to agency data calls to obtain information needed, (3) assess, 

qualitatively and quantitatively, the materiality of omitted disclosures,8

 or 

(4) document decisions reached with regard to omitted disclosures and the 

rationale for such decisions. We identified numerous disclosures that were 

not in conformity with applicable standards. These needed disclosures are 

described in appendix I. We did note that Treasury is requesting certain 

information in its planned closing package for fiscal year 2004 that may 

address some of the needed disclosures. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary to establish a formal process that will allow the 

8

See footnote 5. 

Page 18 GAO-04-45 Process for Preparing CFS Needs Improvement 
financial statements, related notes, stewardship, and supplemental 

information in the CFS to be presented in conformity with U.S. generally 

accepted accounting principles. The process should 

• timely identify generally accepted accounting principles requirements, 

•	 make timely modifications to Treasury’s closing package requirements 

to obtain information needed, 

•	 assess, qualitatively and quantitatively, the impact of the omitted 

disclosures, and 

• document decisions reached and the rationale for such decisions. 

With respect to the 16 required disclosures identified in appendix I that 

were not included in the CFS, we recommend that each of these 

disclosures be included in the CFS or the rationale for excluding any of 

them be documented. 

Other Weaknesses 

Identified 

During our audit we found certain issues related to (1) management 

representation letters, (2) legal representation letters, and (3) information 

on major treaties and other international agreements that will require 

certain actions by Treasury and OMB. Other issues related to these same 

three areas will need to be addressed by federal agencies and their auditors 

to facilitate Treasury’s and OMB’s preparation of the CFS. We plan to 

separately communicate to agency Chief Financial Officers and Inspectors 

General the details of our concerns for such issues. We have summarized 

our findings below and are providing recommendations to help address the 

issues that require action by Treasury and OMB. 

Management 

Representation Letters and 

the Related Summaries of 

Unadjusted Misstatements 

For each agency financial statement audit, generally accepted auditing 

standards require that agency auditors obtain written representations from 

agency management as part of the audit. In turn, Treasury and OMB are to 

receive all the required management representation letters and the related 

summaries of unadjusted misstatements from the federal agencies. This is 

important because generally accepted auditing standards require Treasury 

and OMB to provide us, as their auditor, a management representation 

letter for the CFS, and their letter depends on the information within 

agencies’ management representation letters. However, we found that 

Page 19 GAO-04-45 Process for Preparing CFS Needs Improvement 
Treasury and OMB did not have policies or procedures to adequately 

review and analyze federal agencies’ management representation letters. 

In a management representation letter, management typically 

acknowledges its responsibility for its financial statements and its belief 

that the financial statements are presented in conformity with U.S. 

generally accepted accounting principles; the completeness of financial 

information in the statements; recognition, measurement, and disclosure; 

and subsequent events. Without performing an adequate review and 

analysis of federal agencies’ management representations letters, Treasury 

and OMB management may not be fully informed of matters that may affect 

their representations made with respect to the audit of the CFS. 

As part of our audit of the CFS, we received and reviewed 30 federal 

agencies’ management representation letters.9 We found that (1) 2 letters 

had discrepancies between what the auditor found and what the agency 

represented in its management representation letter, (2) 8 letters were not 

signed by the appropriate level of management, (3) 25 letters did not 

disclose the materiality threshold used by management in determining 

items to be included in the letter, (4) 4 letters omitted certain 

representations that are ordinarily included, (5) 2 letters did not include a 

schedule of unadjusted misstatements or affirm in their representation 

letter that there were no uncorrected misstatements, and (6) 15 schedules 

of unadjusted misstatements did not provide complete information about 

the misstatements that were identified. Only 1 of the 30 letters we 

reviewed had none of the deficiencies noted above. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with the Controller of OMB’s 

Office of Federal Financial Management, to establish written policies and 

procedures for preparing the governmentwide management representation 

letter to help ensure that it is properly prepared and contains sufficient 

representations. Specifically, these policies and procedures should require 

•	 an analysis of the agency management representations to determine if 

discrepancies exist between what the agency auditor reported and the 

representations made by the agency, including the resolution of such 

discrepancies; 

9

We requested 24 federal agency management representation letters. We received an 

additional 6 letters that we also included in our review. 

Page 20 GAO-04-45 Process for Preparing CFS Needs Improvement 
•	 a determination that the agency management representation letters 

have been signed by the highest-level agency officials that are 

responsible for and knowledgeable about the matters included in the 

agency management representation letters; 

•	 an assessment of the materiality thresholds used by federal agencies in 

their respective management representation letters; 

•	 an assessment of the impact, if any, of federal agencies’ materiality 

thresholds on the management representations made at the 

governmentwide level; 

•	 an evaluation and assessment of the omission of representations 

ordinarily included in agency management representation letters; and 

•	 an analysis and aggregation of the agencies’ summary of unadjusted 

misstatements to determine the completeness of the summaries and to 

ascertain the materiality, both individually and in the aggregate, of such 

unadjusted misstatements to the CFS taken as a whole. 

Legal Representation 

Letters and Related 

Management Schedules in 

Reporting Contingency 

Losses 

For each agency financial statement audit, generally accepted auditing 

standards require that agency auditors obtain written legal representations 

as part of the audit. Legal representation letters, along with related 

management schedules,10 are essential to properly reporting legal 

contingency losses in federal agencies’ financial statements. Inadequate 

information in the legal representation letters could weaken the accuracy 

and reliability of federal agency financial statements and the CFS. 

We reviewed 34 federal agencies’ legal representations letters and related 

management schedules to assess the adequacy of the letters and related 

schedules.11 We found that the adequacy of some legal letters was 

questionable. For example, we found that 2 letters did not express an 

opinion of how the expected outcome of virtually all of the two agencies’ 

10Office of Management and Budget, Audit Requirements for Federal Financial 

Statements, OMB-01-02 (Washington, D.C.: Oct. 16, 2000), requires agency chief financial 

officers to prepare a management schedule that documents how the information obtained in 

the legal counsel’s response was considered in preparing the financial statements. 

11We requested 24 federal agency legal representation letters. We received an additional 10 

letters that we also included in our review. 

Page 21 GAO-04-45 Process for Preparing CFS Needs Improvement 
cases would be resolved, and that 5 agencies did not provide the related 

management schedules. 

In some cases, the lack of adequate information may have resulted from 

legal counsel’s desire to protect the confidentiality of lawyer-client 

communications, the difficulty in predicting the outcome of potential and 

pending litigation with any assurance, and/or legal counsel’s desire to avoid 

the possibility of prejudicing the outcome of the litigation to the client’s 

detriment. While these are understandable reasons, without adequate legal 

contingency information, management of Treasury and OMB may not be 

fully informed of matters that may affect the legal representations made 

with respect to the audit of the CFS. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with the Controller of OMB’s 

Office of Federal Financial Management, to help ensure that agencies 

provide 

•	 adequate information in their legal representation letters regarding the 

expected outcome of the cases and 

• related management schedules. 

Information on Major 

Treaties and Other 

International Agreements 

The CFS note disclosures did not include any information on major treaties 

and other international agreements12 to which the federal government is a 

party. These treaties and other international agreements address various 

issues including, but not limited to, trade, commerce, security, and arms 

that may involve financial obligations or give rise to loss contingencies. 

Treaties and other international agreements may lead to commitments or 

contingencies and therefore should be included in the CFS, in accordance 

with OMB Bulletin No. 01-09 and SFFAS No. 5, Accounting for Liabilities 

12The term treaty in its technical usage in the United States denotes international 

agreements made by the President with the advice and consent of the Senate in accordance 

with Article II, section 2, of the Constitution of the United States. In addition to such 

treaties, authorized representatives of the federal government may, pursuant to existing law 

or treaties, enter into other international agreements that are governed by international law. 

The entering into and record keeping of such international agreements by federal agencies 

are governed by the Case-Zablocki Act, 1 U.S.C. section 112b, and implementing State 

Department regulations, 22 C.F.R. Part 181 (2002). 

Page 22 GAO-04-45 Process for Preparing CFS Needs Improvement 
of the Federal Government, as amended by SFFAS No. 12, Recognition of 

Contingent Liabilities Arising from Litigation. The degree of certainty 

as to whether there will be a cost now or in the future, along with the ability 

to quantify it in advance, determines the appropriate accounting treatment. 

Treaties and other international agreements were not included in the notes 

to the CFS because Treasury and the federal agencies had yet to perform 

the necessary work to determine the nature and magnitude of those in 

force as of September 30, 2002. The State Department publishes a 

document annually called Treaties in Force. The most recent edition of 

Treaties in Force, released in August 2002, lists treaties and other 

international agreements of the United States that were in force on January 

1, 2002. However, according to State Department staff, this document is 

incomplete because federal agencies do not always provide complete 

information on treaties and international agreements when a request for 

data is made. Not having information on major treaties and other 

international agreements in the CFS resulted in incomplete disclosures of 

the possible exposure to loss or obligations of the U.S. government. 

We recommend that the Secretary of the Treasury direct the Fiscal 

Assistant Secretary, working in coordination with the Controller of OMB’s 

Office of Federal Financial Management, to establish written policies and 

procedures to help ensure that major treaty and other international 

agreement information is properly identified and reported in the CFS. 

Specifically, these policies and procedures should require that agencies 

•	 develop a detailed schedule of all major treaties and other international 

agreements that obligate the U.S. government to provide cash, goods, or 

services, or that create other financial arrangements that are contingent 

on the occurrence or nonoccurrence of future events (a starting point 

for compiling these data could be the State Department’s Treaties in 

Force); 

•	 classify all such scheduled major treaties and other international 

agreements as commitments or contingencies; 

•	 disclose in the notes to the CFS amounts for major treaties and other 

international agreements that have a reasonably possible chance of 

resulting in a loss or claim as a contingency; 

Page 23 GAO-04-45 Process for Preparing CFS Needs Improvement 
•	 disclose in the notes to the CFS amounts for major treaties and other 

international agreements that are classified as commitments and that 

may require measurable future financial obligations; and 

•	 take steps to prevent major treaties and other international agreements 

that are classified as remote from being recorded or disclosed as 

probable or reasonably possible in the CFS. 

Agency Comments and 

Our Evaluation 

In written comments on a draft of this report, which are reprinted in 

appendix II, Treasury and OMB stated that our report identified many 

recommendations that will improve the usefulness and accuracy of the CFS 

and that they have already incorporated many of them into their new 

system and processes that are being developed for preparing the fiscal year 

2004 CFS. However, Treasury and OMB disagreed with our 

recommendations related to unreconciled transactions affecting net 

position and the Statement of Changes in Cash Balance from Unified 

Budget and Other Activities. They also stated that they would consider the 

other recommendations in our report as they continue the design and 

implementation of the new process for preparing the CFS. 

On the first matter, Treasury and OMB disagreed with our proposed 

recommendation that federal agencies submit to Treasury an analysis of 

their net position that separates intragovernmental and public transactions. 

The purpose of this recommendation was to help Treasury understand and 

control the U.S. government’s net position, as well as to eliminate the plugs 

associated with compiling the CFS. In response to our draft report, 

Treasury and OMB stated that Treasury had decided not to require agencies 

to split net position between intragovernmental and public transactions as 

Treasury had originally planned and reported in its CFS Improvement 

Project Report because it was unable to develop a procedure that agencies 

could use to provide this split. In addition, Treasury and OMB stated that 

this split would not identify certain items known to affect the unreconciled 

net position transactions. However, because Treasury has not identified 

and quantified all the components of the unreconciled transactions, a 

procedure is still needed that will adequately reconcile net position and 

assist Treasury in identifying and eliminating the plugs needed to balance 

the CFS. Our proposed recommendation in the draft report that we 

provided for comment was one option for Treasury to resolve the 

uncertainties regarding the reliability of these data. We recognize there are 

other ways to gain these assurances. Therefore, we have modified our 

recommendation to recommend that Treasury develop reconciliation 

Page 24 GAO-04-45 Process for Preparing CFS Needs Improvement 
procedures to aid in understanding and controlling the net position 

balance. 

Regarding the second matter, Treasury and OMB stated that we had 

suggested that federal agency data be used to prepare receipts and outlays 

used in the Statement of Changes in Cash Balance from Unified Budget and 

Other Activities. They stated that they disagree with this approach because 

it would be time-consuming and costly to gather such information. 

Treasury and OMB have stated that the Statement of Changes in Cash 

Balance from Unified Budget and Other Activities is prepared from 

information derived from Treasury’s Central Accounting System rather 

than from agencies’ financial statements. 

We were not calling for Treasury to use federal agencies’ financial 

statements to prepare the Statement of Changes in Cash Balance from 

Unified Budget and Other Activities. Instead, we recommended that 

Treasury collect certain information already reported in federal agencies’ 

audited financial statements and develop procedures that ensure 

consistency of the significant line items on the Statement of Changes in 

Cash Balance from Unified Budget and Other Activities with the agencyreported information. As we stated in our report, Treasury has expressed 

the belief that the information it maintains in its system is materially 

reliable. However, federal agencies also believe their amounts are 

materially reliable and their auditors have rendered unqualified audit 

opinions on their financial statements. We found unexplained material 

differences between Treasury’s records and some agencies’ financial 

statements. We provided a schedule of these differences to Treasury and 

requested explanations for the material differences. As discussed in our 

report, Treasury was unable to explain material differences, totaling $231 

billion (absolute) and $166 billion (net), between the actual unified budget 

net outlays reported on this statement and the net outlays reported on 

selected individual federal agencies’ audited Combined Statement of 

Budgetary Resources. 

As stated in our report, OMB Bulletin 01-09, Form and Content of Agency 

Financial Statements, states that outlays in federal agencies’ Combined 

Statement of Budgetary Resources should agree with the net outlays 

reported in the budget of the U.S. government. In some cases, we found 

that net outlay amounts reported in federal agencies’ audited financial 

statements differed from the amounts included in the CFS and budget of 

the U.S. government for these agencies. For example, Treasury did not 

provide us with an explanation of why its own audited Combined 

Page 25 GAO-04-45 Process for Preparing CFS Needs Improvement 
Statement of Budgetary Resources reported net outlays of $479 billion for 

fiscal year 2002, while the amount included in the CFS relating to net 

outlays for the Department of Treasury was only $375 billion for fiscal year 

2002. 

Ensuring that the significant line items on the Statement of Changes in 

Cash Balance from Unified Budget and Other Activities are consistent with 

agencies’ audited financial statements is an important expectation. As 

stated in our report, SFFAS No. 7, Accounting for Revenue and Other 

Financing Sources and Concepts for Reconciling Budgetary and 

Financial Accounting, requires agencies to provide an explanation for any 

material differences between the information required to be disclosed 

(including outlays) in their financial statements and the amounts described 

as “actual” in the budget of the U.S. government. Also, many of the amounts 

reported in the Statement of Changes in Cash Balance from Unified Budget 

and Other Activities are intended to be the same as the amounts reported in 

the budget of the U.S. government. As such, we continue to believe that the 

process we proposed would be the most efficient manner for Treasury, as 

the preparer of the CFS, to obtain the necessary assurance on the 

significant amounts reported in the Statement of Changes in Cash Balance 

from Unified Budget and Other Activities. 

Treasury and OMB also suggested that we not address the 

recommendations in our report related to management representation 

letter and legal representation letter issues to Treasury. Generally accepted 

auditing standards require Treasury and OMB to provide us, as their 

auditor, a management representation letter for the CFS, and their letter 

depends on the information within agencies’ management representation 

letters. However, we found that Treasury and OMB did not have policies or 

procedures to adequately review and analyze federal agencies’ 

management representation letters. As such, we continue to believe that 

both Treasury and OMB need to work together to address the 

recommendations we made in this area. 

In regard to legal representation letters, we identified problems with 

certain agencies’ letters that could weaken the accuracy and reliability of 

federal agencies’ financial statements and the CFS. OMB, in its role of 

providing guidance to agencies and their auditors regarding agencywide 

financial statements, and Treasury, in its role as preparer of the CFS, both 

play an important part in ensuring that legal representation letters provide 

adequate information to enable the proper reporting of legal contingency 

losses in federal financial statements. As such, we continue to believe that 

Page 26 GAO-04-45 Process for Preparing CFS Needs Improvement 
both Treasury and OMB need to work together to address the 

recommendations we made in this area as well. 

This report contains recommendations to you. The head of a federal 

agency is required by 31 U.S.C. 720 to submit a written statement on 

actions taken on these recommendations. You should submit your 

statement to the Senate Committee on Governmental Affairs and the House 

Committee on Government Reform within 60 days of the date of this letter. 

A written statement must also be sent to the House and Senate Committees 

on Appropriations with the agencies’ 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 Governmental Affairs; the 

Subcommittee on Financial Management, the Budget, and International 

Security, Senate Committee on Governmental Affairs; the House 

Committee on Government Reform; and the Subcommittee on Government 

Efficiency and Financial Management, House Committee on Government 

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

of the Treasury and OMB’s Controller of the Office of Federal Financial 

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

report is also available at no charge on GAO’s Web site, at www.gao.gov. 

We acknowledge and appreciate the cooperation and assistance provided 

by Treasury and OMB during our audit. If you or your staff have any 

questions or wish to discuss this report, please contact Jeffrey C. Steinhoff, 

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

2600 or Gary T. Engel, Director, Financial Management and Assurance, on 

(202) 512-3406. 

David M. Walker 

Comptroller General 

of the United States 

Page 27 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues


This enclosure includes 16 disclosures identified that are required by U.S. 

generally accepted accounting principles to either be included in the CFS 

or the rationale for their exclusion documented. However, they were 

neither included nor was their exclusion documented. 

Loans Receivable and 

Loan Guarantee 

Liabilities 

The note disclosure for loans receivable and loan guarantee liabilities 

departed from the following disclosure requirements of Statements of 

Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for 

Inventory and Related Property, and SFFAS No. 18, Amendments to 

Accounting Standards for Direct Loans and Loan Guarantees. 

SFFAS No. 3, paragraph 91, requires the reporting entity to disclose the 

following: 

• valuation basis for foreclosed property; 

• changes from the prior year’s accounting methods, if any; 

• restrictions on the use/disposal of property; 

•	 balances by categories (i.e., pre-1992 and post-1991 foreclosed 

property); 

•	 number of properties held and average holding period by type or 

category; and 

•	 number of properties for which foreclosure proceedings are in process 

at the end of the period for foreclosed assets acquired in full or partial 

settlement of a direct or guaranteed loan. 

SFFAS No. 18, paragraph 9, states that credit programs should reestimate 

the subsidy cost allowance for outstanding direct loans and the liability for 

outstanding loan guarantees. There are two kinds of reestimates: (a) 

interest rate reestimates and (b) technical/default reestimates. Entities 

should measure and disclose each program’s reestimates in these two 

components separately. 

SFFAS No. 18, paragraph 10, requires the reporting entity to display in the 

notes to the financial statements a reconciliation between the beginning 

and ending balances of the subsidy cost allowance for outstanding direct 

Page 28 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

loans and the liability for outstanding loan guarantees reported in the 

entity’s balance sheet. 

SFFAS No. 18, paragraph 11, requires disclosure of 

•	 the total amount of direct or guaranteed loans disbursed for the current 

reporting year and the preceding reporting year; 

•	 the subsidy expense by components, recognized for the direct or 

guaranteed loans disbursed in those years; and 

• the subsidy reestimates by components for those years. 

SFFAS No. 18, paragraph 11, also requires disclosure, at the program level, 

of the subsidy rates for the total subsidy cost and its components for the 

interest subsidy costs, default costs (net of recoveries), fees and other 

collections, and other costs estimated for direct loans and loan guarantees 

in the current year’s budget for the current year’s cohorts. 

SFFAS No. 18, paragraph 11, further requires the reporting entity to 

disclose, discuss, and explain events and changes in economic conditions, 

other risk factors, legislation, credit policies, and subsidy estimation 

methodologies and assumptions that have had a significant and measurable 

effect on subsidy rates, subsidy expense, and subsidy reestimates. 

Inventories and 	 The note disclosure for inventories and related property departed from the 

following disclosure requirements of SFFAS No. 3, Accounting for Related Property Inventory and Related Property. 

Inventory and Operating 

Materials and Supplies 

When inventory or operating materials and supplies are declared excess, 

obsolete, or unserviceable, SFFAS No. 3, paragraph 30, requires the 

difference between the carrying amount and the expected net realizable 

value to be recognized as a loss or gain and either separately reported or 

disclosed. 

Paragraphs 35 and 50 require the following disclosures about inventory and 

operating materials and supplies: 

• general composition; 

Page 29 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

• changes from the prior year’s accounting methods, if any; 

•	 restrictions on the sale of inventory and the use of operating materials 

and supplies; and 

•	 changes in the criteria for categorizing inventory and operating 

materials and supplies. 

Stockpile Material Paragraph 56 requires the following disclosures about stockpile material: 

•	 basis for valuing stockpile material, including valuation method and any 

cost flow assumptions; 

• changes from the prior year’s accounting methods, if any; 

• restrictions on the use of stockpile material; 

•	 balances in each category of stockpile material (i.e., stockpile material 

held and held for sale); 

• criteria for grouping stockpile material held for sale; and 

• changes in criteria for categorizing stockpile material held for sale. 

Paragraph 55 requires the disclosure of any difference between the 

carrying amount (i.e., purchase price or cost) of stockpile material held for 

sale and the estimated selling price of such assets. 

Seized Material Paragraph 66 requires the following disclosures about seized property: 

• valuation method; 

• changes from the prior year’s accounting methods, if any; and 

•	 analysis of change in seized property (including dollar value and number 

of seized properties) that are on hand at the beginning of the year, seized 

during the year, disposed of during the year, and on hand at the end of 

the year, as well as known liens or other claims against the property. 

This information should be presented by type of seizure and method of 

disposition when material. 

Page 30 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

Forfeited Property Paragraph 78 requires the following disclosures about forfeited property: 

• valuation method; 

•	 analysis of the changes in forfeited property by type and dollar amount 

that includes (1) number of forfeitures on hand at the beginning of the 

year, (2) additions, (3) disposals and method of disposition, and (4) endof-year balances; 

• restriction on the use of disposition of the property; and 

•	 if available, an estimate of the value of property to be distributed to 

other federal, state, and local agencies in future reporting periods. 

Goods Held under Price 

Support and Stabilization 

Programs 

Paragraph 98 requires that if a contingent loss is not recognized because it 

is less than probable or it is not reasonably measurable, then disclosure of 

the contingency shall be made if it is at least reasonably possible that a loss 

may occur. 

Paragraph 109 requires the following disclosures for goods held under 

price support and stabilization programs: 

•	 basis for valuing commodities, including valuation method and cost flow 

assumptions; 

• changes from the prior year’s accounting methods; 

• restrictions on the use, disposal, or sale of commodities; and 

•	 analysis of the change in dollar amount and volume of commodities, 

including those (1) on hand at the beginning of the year, (2) acquired 

during the year, (3) disposed of during the year by method of 

disposition, (4) on hand at the end of the year, (5) on hand at year-end 

and estimated to be donated or transferred during the coming period, 

and (6) received as a result of surrender of collateral related to 

nonrecourse loans outstanding. The analysis should also show the 

dollar value and volume of purchase agreement commitments. 

Page 31 GAO-04-45 Process for Preparing CFS Needs Improvement 
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Disclosure Issues 

Property, Plant, and 

Equipment 

The note disclosure for property, plant, and equipment (PP&E) departed 

from the following disclosure requirements of SFFAS No. 6, Accounting for 

Property, Plant, and Equipment; SFFAS No. 10, Accounting for Internal 

Use Software; and SFFAS No. 16, Amendments to Accounting for 

Property, Plant, and Equipment: 

SFFAS No. 6, paragraph 45, states that the following disclosures should be 

included: 

• the estimated useful lives for each major class; 

•	 capitalization thresholds, including any changes in thresholds during the 

period; and 

• restrictions on the use or convertibility of general PP&E. 

SFFAS No. 10, paragraph 35, requires the following disclosures for internal 

use software: 

• the cost, associated amortization, and book value; 

• the estimated useful life for each major class of software; and 

• the method of amortization. 

SFFAS No. 16, paragraph 9, requires an appropriate PP&E note disclosure 

to explain that “physical quantity” information for the multiuse heritage 

assets is included in supplemental stewardship reporting for heritage 

assets. 

Federal Employee and 

Veteran Benefits 

Payable 

The note disclosure for federal employee and veteran benefits payable was 

not complete and properly reported because the liability for military 

pensions and the note disclosure related to the “change in actuarial 

accrued pension liability and components of related expenses” for the 

military retirement fund do not agree with information presented in the 

Department of Defense’s (DOD) financial statements. The note disclosure 

included in the CFS does not include a line for the valuation of plan 

amendments that occurred during the year. DOD correctly reported plan 

amendments separately in its financial statements; however, the 

Page 32 GAO-04-45 Process for Preparing CFS Needs Improvement 
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Disclosure Issues 

mechanism was not available through FACTS submission for DOD to 

report plan amendments separately to the Department of the Treasury. 

Environmental and 


Disposal Liabilities 


The note disclosure for environmental and disposal liabilities departed 

from the requirements of SFFAS No. 6 in two instances. The note 

disclosure on environmental liabilities was not complete and properly 

reported primarily because DOD was unable to fully implement elements of 

U.S. generally accepted accounting principles and OMB guidance. 

Specifically, the disclosures should do the following: 

•	 Estimate and recognize cleanup costs associated with general PP&E at 

the time the PP&E is placed in service. In addition, a liability should be 

recognized for the portion of the estimated total cleanup cost that is 

attributable to that portion of the physical capacity used or that portion 

of the estimated useful life that has passed since the general PP&E was 

placed in service. As Treasury indicated in its note disclosures, DOD 

was unable to fully implement these two elements of U.S. generally 

accepted accounting principles. However, the note disclosure did not 

explain how these limitations prevented DOD from properly estimating 

its environmental liability. Linking the environmental liability to 

weaknesses in the DOD property, plant, and equipment systems would 

have made the CFS more useful to the reader. 

•	 Include material changes in total estimated cleanup costs due to 

changes in laws, technology, or plans. When preparing the CFS, 

Treasury should consider whether the reader would be interested in 

understanding why the liability changed and include the explanation in 

the note disclosure. 

Other Liabilities 	 The note disclosure for other liabilities departed from the following 

disclosure requirements for capital leases and life insurance liabilities: 

Capital Leases	 Financial Accounting Standards Board, Statement of Financial Accounting 

Standards (SFAS) No. 13, Accounting for Leases, paragraph 16, requires 

the following disclosures on capital leases: 

•	 future minimum lease payments as of the date of the latest balance 

sheet presented, in the aggregate and for each of the 5 succeeding fiscal 

Page 33 GAO-04-45 Process for Preparing CFS Needs Improvement 
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Disclosure Issues 

years, with separate deductions from the total for the amount 

representing executory costs, including any profit thereon, included in 

the minimum lease payments, and for the amount of the imputed 

interest necessary to reduce the net minimum lease payments to present 

value; 

•	 a summary of assets under capital lease by major asset category and the 

related total accumulated amortization; and 

•	 a general description of the lessee’s leasing arrangements, including but 

not limited to (1) the basis on which contingent rental payments are 

determined, (2) the existence and terms of renewal or purchase options 

and escalation clauses, and (3) restrictions imposed by lease 

agreements, such as those concerning dividends, additional debt, and 

further leasing. 

Life Insurance Liabilities	 The note disclosure for other liabilities departed from the following 

disclosure requirements of SFFAS No. 5, Accounting for Liabilities of the 

Federal Government, with respect to life insurance liabilities: 

•	 Paragraph 117 states that all federal reporting entities with whole life 

insurance programs should follow the standards as prescribed in the 

private sector standards when reporting the liability for future policy 

benefits. The applicable private sector standards are SFAS No. 60, 

Accounting and Reporting by Insurance Enterprises; SFAS No. 97, 

Accounting and Reporting by Insurance Enterprises for Certain LongDuration Contracts and for Realized Gains and Losses from the Sale 

of Investments; and SFAS No. 120, Accounting and Reporting by 

Mutual Life Insurance Enterprises and by Insurance Enterprises for 

Certain Long-Duration Participating Contracts; and American 

Institute of Certified Public Accountants Statement of Position 95-1, 

Accounting for Certain Insurance Activities of Mutual Life Insurance 

Enterprises. 

•	 SFFAS No. 5, paragraph 121, requires that all components of the liability 

for future policy benefits (i.e., the net-level premium reserve for death 

and endowment policies and the liability for terminal dividends) should 

be separately disclosed in a footnote with a description of each amount 

and an explanation of its projected use and any other potential uses 

(e.g., reducing premiums, determining and declaring dividends 

Page 34 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

available, or reducing federal support in the form of appropriations 

related to administrative cost or subsidies). 

Commitments and 

Contingencies 

Certain disclosed information on major commitments and contingencies in 

the notes to the CFS was inconsistent with disclosed information in 

individual agencies’ financial statements. Examples of such inconsistencies 

are as follows: 

•	 Treasury did not disclose $114 billion in the notes to the CFS for war 

risk insurance. DOT provided temporary war risk insurance to U.S. air 

carriers whose coverage was canceled following the terrorist attacks on 

September 11, 2001. DOT disclosed $114 billion of war risk insurance in 

its notes to the financial statements, but Treasury did not disclose 

similar information in the notes to the CFS. Also, this information was 

included by DOT in the Treasury FACTS database. The risk of loss 

involving this type of insurance is unknown, but another terrorist attack 

against the United States could result in major claims. 

•	 Treasury improperly disclosed $4.5 billion in unadjudicated claims for 

Commerce in the notes to the CFS. In its financial statements, 

Commerce disclosed that the exact amount of these claims against the 

U.S. government is unknown and the range of loss, which may exceed 

$4.5 billion as of September 30, 2002, cannot be estimated. Because 

Commerce had disclosed that it could not estimate the loss from 

unadjudicated claims, which was proper, Treasury should not have 

disclosed an amount in the notes to the CFS. Disclosing information in 

the CFS that is inconsistent with information in an agency’s financial 

statements may confuse users of the CFS or lead them to reach a wrong 

conclusion. 

Treasury did not disclose sufficient information regarding the nature of 

certain major commitments and contingencies in the notes to the CFS. For 

example, Treasury did not clearly disclose in the notes to the CFS 

information regarding a possible capital investment requirement of TVA. 

The Environmental Protection Agency (EPA) had taken judicial and 

administrative actions against TVA that could require TVA to invest an 

estimated $3 billion to purchase equipment in order to comply with the 

Clean Air Act and conform to EPA’s pollution control requirements. TVA is 

challenging this action. Treasury disclosed this $3 billion in the notes as an 

“administrative order against TVA” without providing the additional detail 

that the order represents a capital investment for compliance with the 

Page 35 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

Clean Air Act and pollution control. The lack of such a detailed discussion 

about what the contingency represents could be misleading to readers of 

the CFS. 

Collections and 

Refunds of Federal 

Revenue 

The disclosure for collections and refunds of federal revenue departed 

from the following disclosure requirements of FASAB’s SFFAS No. 7, 

Concepts for Reconciling Budgetary and Financial Accounting: 

•	 Paragraph 64, among other things, requires collecting entities to 

disclose the basis of accounting when the application of the general rule 

results in a modified cash basis of accounting. The CFS incorrectly 

states that the nonexchange revenues are reported on a modified cash 

basis of accounting when actually they are reported on a cash basis. 

•	 Paragraph 69.2 requires collecting entities to provide in the other 

accompanying information any relevant estimates of the annual tax gap 

that become available as a result of federal government surveys or 

studies. The tax gap is defined as taxes or duties due from 

noncompliant taxpayers or importers. Amounts reported should be 

specifically defined (e.g., whether the tax gap includes or excludes 

estimates of taxes due on illegally earned revenue). Appropriate 

explanations of the limited reliability of the estimates also should be 

provided. Cross-references should be made to portions of the tax gap 

due from identified noncompliance assessments and preassessment 

work in process. 

Dedicated Collections 	 The note disclosure for dedicated collections departed from the disclosure 

requirements of SFFAS No. 7, Part I, Accounting for Revenue and Other 

Financing Sources, paragraph 85, by not including the following: 

•	 condensed information about assets and liabilities showing investments 

in Treasury securities, other assets, liabilities due and payable to 

beneficiaries, other liabilities, and fund balance; 

•	 condensed information on net cost and changes to fund balance, 

showing revenues by type (exchange/nonexchange), program expenses, 

other expenses, other financing sources, and other changes in fund 

balance; and 

Page 36 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

•	 any revenues, other financing sources, or costs attributable to the fund 

under accounting standards but not legally allowable as credits or 

charges to the fund. 

Indian Trust Funds 	 The note disclosure for Indian trust funds departed from the following 

disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue 

and Other Financing Sources, paragraph 85, by not including the 

following: 

•	 a description of each fund’s purpose, how the administrative entity 

accounts for and reports the fund, and its authority to use those 

collections; 

•	 the sources of revenue or other financing for the period and an 

explanation of the extent to which they are inflows of resources to the 

government or the result of intragovernmental flows; 

•	 condensed information about assets and liabilities showing investments 

in Treasury securities, other assets, liabilities due and payable to 

beneficiaries, and other liabilities; 

•	 condensed information on net cost and changes to fund balance, 

showing revenues by type (exchange/nonexchange), program expenses, 

other expenses, other financing sources, and other changes in fund 

balance; and 

•	 any revenues, other financing sources, or costs attributable to the fund 

under accounting standards, but not legally allowable as credits or 

charges to the fund. 

Social Insurance 	 The disclosure for social insurance departed from the following 

requirements of SFFAS No. 17, Accounting for Social Insurance: 

•	 Paragraph 31 requires the program descriptions for Hospital Insurance 

and Supplementary Medical Insurance and an explanation of trends 

revealed in Chart 11: Estimated Railroad Retirement Income (Excluding 

Interest) and Expenditures 2002-2076. 

Page 37 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

•	 Paragraph 24 requires a description of statutory or other material 

changes, and the implications thereof, affecting the Medicare and 

Unemployment Insurance programs after the current fiscal year. 

•	 Paragraph 25 requires the significant assumptions used in making 

estimates and projections regarding the Black Lung and Unemployment 

Insurance programs. 

•	 Paragraph 32(1)(b) requires the total cash inflow from all sources, less 

net interest on intragovernmental borrowing and lending and the total 

cash outflow to be shown in nominal dollars for the Hospital Insurance 

program. 

•	 Paragraph 32(1)(a) requires the narrative to accompany the cash flow 

data for Unemployment Insurance. This narrative should include the 

identification of any year or years during the projection period when 

cash outflow exceeds cash inflow, without interest, on 

intragovernmental borrowing or lending. In addition, the presentation 

should include an explanation of material crossover points, if any, 

where cash outflow exceeds cash inflow and the possible reasons for 

this. 

•	 Paragraphs 27(3)(h) and 27(3)(j) require the estimates of the fund 

balances at the respective valuation dates of the social insurance 

programs (except Unemployment Insurance) to be included for each of 

the 4 preceding years. Only 1 year is shown. 

•	 Paragraph 32(4) requires individual program sensitivity analyses for 

projection period cash flow in present value dollars and annual cash 

flow in nominal dollars. The CFS includes only present value sensitivity 

analyses for Social Security and Hospital Insurance. Paragraph 32(4) 

states that, at a minimum, the summary should present Social Security, 

Hospital Insurance, and Supplementary Medical Insurance separately. 

•	 Paragraph 27(4)(a) requires the individual program sensitivity analyses 

for Social Security and Hospital Insurance to include an analysis of 

assumptions regarding net immigration. 

•	 Paragraph 27(4)(a) requires the individual program sensitivity analysis 

for Hospital Insurance to include an analysis of death rates. 

Page 38 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

•	 The actuarial present value information for the Railroad Retirement 

Board should not include financial interchange income 

(intragovernmental income from Social Security). 

Nonfederal Physical 

Property 

The information included in Stewardship Information for nonfederal 

physical property departed from the following disclosure requirements of 

SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87: 

•	 The annual investment, including a description of federally owned 

physical property transferred to state and local governments, must be 

disclosed. This information should be provided for the year ended on 

the balance sheet date as well as for each of the 4 preceding years. If 

data for additional years would provide a better indication of 

investment, reporting of the additional years’ data is encouraged. 

Reporting should be at a meaningful category or level. 

•	 A description of major programs involving federal investments in 

nonfederal physical property, including a description of programs or 

policies under which noncash assets are transferred to state and local 

governments, is to be provided. 

Human Capital 	 The information in stewardship information for human capital departed 

from the disclosure requirements of SFFAS No. 8, Supplementary 

Stewardship Reporting, paragraph 94, by not including the following: 

•	 a narrative description and the full cost of the investment in human 

capital for the year being reported on as well as the preceding 4 years (if 

full cost data are not available, outlay data can be reported); 

•	 the full cost or outlay data for investments in human capital at a 

meaningful category or level (e.g., by major program, agency, or 

department); and 

•	 a narrative description of major education and training programs 

considered federal investments in human capital. 

Page 39 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

Research and 


Development 


The information in stewardship information for research and development 

departed from the disclosure requirements of SFFAS No. 8, Supplementary 

Stewardship Reporting, paragraph 94, by not including the following: 

•	 The annual investment1 made in the year ended on the balance sheet 

date as well as in each of the 4 years preceding that year must be 

reported. If data for additional years would provide a better indication 

of investment, reporting of the additional years’ data is encouraged. In 

those unusual instances when entities have no historical data, only 

current reporting year data need be reported. Reporting must be at a 

meaningful category or level—for example, a major program or 

department. 

•	 A narrative description of major research and development programs is 

to be included. 

Deferred Maintenance 	 The required supplemental information for deferred maintenance departed 

from the following disclosure requirements of SFFAS No. 6, Accounting for 

Property, Plant, and Equipment, paragraphs 83 and 84: 

•	 Method of measuring deferred maintenance for each major class of 

PP&E should be included. 

•	 If the condition assessment survey method of measuring deferred 

maintenance is used, the following should be presented for each major 

class of PP&E: (1) description of requirements or standards for 

acceptable operating condition, (2) any changes in the condition 

requirements or standards, and (3) asset condition and a range estimate 

of the dollar amount of maintenance needed to return the asset to its 

acceptable operating condition. 

•	 If the total life-cycle cost method is used, the following should be 

presented for each major class of PP&E: (1) the original date of the 

maintenance forecast and an explanation for any changes to the 

1

As defined in this standard, “annual investment” includes more than the annual expenditure 

reported by character class for budget execution. Full cost shall be measured and 

accounted for in accordance with SFFAS No. 4, Managerial Cost Accounting Standards for 

the Federal Government. 

Page 40 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix I 

Disclosure Issues 

forecast, (2) prior year balance of the cumulative deferred maintenance 

amount, (3) the dollar amount of maintenance that was defined by the 

professionals who designed, built, or managed the PP&E as required 

maintenance for the reporting period, (4) the dollar amount of 

maintenance actually performed during the period, (5) the difference 

between the forecast and actual maintenance, (6) any adjustments to 

the scheduled amounts deemed necessary by the managers of the PP&E, 

and (7) the ending cumulative balance for the reporting period for each 

major class of asset experiencing deferred maintenance. 

•	 If management elects to disclose critical and noncritical amounts, the 

disclosure is to include management’s definition of these categories. 

Risk Assumed 	 The note disclosure for stewardship responsibilities departed from 

disclosure requirements of SFFAS No. 5, paragraph 106, related to the risk 

assumed for federal insurance and guarantee programs. Risk assumed 

information is important for all federal insurance and guarantee programs 

(except social insurance, life insurance, and loan guarantee programs) and 

is generally measured by the present value of unpaid expected losses net of 

associated premiums, based on the risk inherent in the insurance or 

guarantee coverage in force. Paragraph 106 states that when financial 

information pursuant to FASB’s standards on federal insurance and 

guarantee programs conducted by government corporations is 

incorporated in general purpose financial reports of a larger federal 

reporting entity, the entity should report as required supplementary 

information2

 what amounts and periodic change in those amounts would 

be reported under the “risk assumed” approach. 

2

In July 2003, SFFAS No. 25 reclassified “risk assumed” from Required Supplementary 

Stewardship Information to Required Supplementary Information. 

Page 41 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix II 

Comments from Department of the Treasury 

and the Office of Management and Budget 

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix. 

Page 42 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix II


Comments from Department of the Treasury 


and the Office of Management and Budget


See comment. 

Page 43 GAO-04-45 Process for Preparing CFS Needs Improvement 
Appendix II


Comments from Department of the Treasury 


and the Office of Management and Budget


GAO Comment	 Treasury and OMB did not schedule a meeting or provide us with any 

technical comments on this report. 

(198203) Page 44 GAO-04-45 Process for Preparing CFS Needs Improvement 
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