Page 1 GAO-05-814R State Department Fiscal Year 2003 Restatement 

United States Government Accountability Office

Washington, DC 20548 

September 20, 2005 

Mr. Sid L. Kaplan 

Acting Assistant Secretary and Chief Financial Officer 

Department of State 

The Honorable Howard J. Krongard 

Inspector General 

Department of State 

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

Year 2003 Financial Statements

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

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

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

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

the results of our work.1

 An issue meriting concern and close scrutiny that emerged 

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

Officers (CFO) Act agencies that restated2 certain of their financial statements for 

fiscal year 2003 to correct errors.3 Errors in financial statements can result from 

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

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

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

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

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

the restated financial statements understand that the financial statements originally 

issued by management in the previous year and the opinion thereon should no longer 

 

1

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

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

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

and judicial branches in the CFS as well. 

2

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

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

3

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

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

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

caused such statements to be materially misstated. 
Page 2 GAO-05-814R State Department Fiscal Year 2003 Restatement 

be relied on and instead the restated financial statements and related auditor’s 

opinion should be used. 

Eleven of the 23 CFO Act agencies4

 restated certain of their financial statements for 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

financial statements because they could not determine whether there were any 

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

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

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

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

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

Our review focused on the 9 agencies with restatements for fiscal year 2003 that 

received unqualified opinions on their originally issued fiscal year 2003 financial 

statements.5 These were the Department of Agriculture, Department of State (State), 

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

Human Services, General Services Administration, National Science Foundation, 

Nuclear Regulatory Commission, and Office of Personnel Management. 

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

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

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

 

4

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

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

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

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

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

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

5

The 2 agencies that had restatements for fiscal year 2003 but did not receive unqualified opinions on 

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

Small Business Administration. 
Page 3 GAO-05-814R State Department Fiscal Year 2003 Restatement 

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

our recommendations, (1) help State avoid the need for restatements to its future 

financial statements and (2) help ensure that State’s auditor applies appropriate 

auditing procedures for journal voucher entries in the Bureau of International 

Organizations unfunded and funded liabilities accounts, which is where the original 

fiscal year 2003 financial statements were subsequently found to have been 

misstated. 

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

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

restatements, including planned corrective actions by the agency and its auditors; (2) 

the timing of communicating the material misstatement to users of the financial 

statements; (3) the extent of transparency6

 exhibited in disclosing the nature and 

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

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

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

2003 financial statements. 

Results in Brief 

Failure to properly record journal voucher entries for two large transactions that 

together accounted for most of a $927 million error and inadequate management 

review of these journal vouchers to detect the improper entries led to the material 

error that necessitated State’s restatements of certain of its fiscal year 2003 financial 

statements. We determined that State’s auditor did not detect the errors because the 

fiscal year 2003 audit tests performed by the auditor were not designed to detect 

journal voucher entry errors for the affected accounts. In addition, the title of State’s 

note disclosure of the restatements could be misinterpreted. 

We are making a recommendation to State’s Acting CFO to address the issues we 

identified with respect to the journal voucher errors that necessitated the fiscal year 

2003 restatements. We are also making a recommendation to State’s Inspector 

General to work with the contracted independent public accountant (IPA) to ensure 

that audit tests to detect any similar journal voucher errors in the future are 

implemented. 

In commenting on a draft of this report, State’s Acting CFO stated that his office 

agrees with our recommendation for management to evaluate whether State’s new 

journal voucher review procedures are effective and that State is currently reviewing 

the effectiveness of these procedures. State’s Inspector General concurred with our 

recommendation and stated that his office will work with the IPA to implement audit 

 

6

Transparency is the full, accurate, and timely disclosure of information. 
Page 4 GAO-05-814R State Department Fiscal Year 2003 Restatement 

steps in conformance with the Financial Audit Manual (FAM)7

 to test journal 

vouchers in the Bureau of International Organizations unfunded and funded liabilities 

accounts. We also received technical comments from State’s Acting CFO and 

Inspector General, which we have incorporated as appropriate. 

Background 

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

agencies’ performance and accountability reports for possible restatements and 

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

financial statements. 

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

Congress, federal executives, and federal program managers.8 Each of these groups 

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

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

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

and assessing the efficiency and effectiveness of federal programs. Federal 

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

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

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

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

evaluating the effectiveness of agency programs, assessing competing funding 

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

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

which is based on audited financial statements prepared by federal agencies. GAO 

audits the CFS and reports on the results of its audit. Finally, federal program 

managers use agency financial statements as tools for managing their operations 

within the limits of the spending authority granted by Congress. 

The primary accounting and auditing standards that apply to restatement disclosures 

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

of Federal Financial Accounting Standards (SFFAS) No. 21, Reporting Corrections of 

Errors and Changes in Accounting Principles, and the American Institute of 

Certified Public Accountants (AICPA) Codification of Auditing Standards, AU section 

561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report.

9

 

 

7

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

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

8

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

No. 1, Objectives of Federal Financial Reporting. 

9

Generally accepted government auditing standards incorporate AICPA reporting and auditing 

standards unless the Comptroller General of the United States excludes them by formal 

announcement. 
Page 5 GAO-05-814R State Department Fiscal Year 2003 Restatement 

Objective, Scope, and Methodology 

The objective of our review of restatements of State’s fiscal year 2003 financial 

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

timing of communicating the material misstatements, any audit issues relating to 

such misstatements, and any actions being taken to help preclude similar errors from 

occurring in the future. 

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

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

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

financial statements, including staff from the agency’s Office of Inspector General 

(OIG), and we obtained and reviewed relevant audit documentation. 

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

SFFAS No. 21; the Financial Accounting Standards Board’s Statement of Financial 

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

of Auditing Standards, AU section 420, Consistency of Application of Generally 

Accepted Accounting Principles, AU section 508, Reports on Audited Financial 

Statements, and AU section 561. 

We performed our review of the restatements of State’s fiscal year 2003 financial 

statements from December 2004 to July 2005 in accordance with U.S. generally 

accepted government auditing standards. 

We requested comments on a draft of this report from State’s Acting CFO and 

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

Inspector General are reprinted in enclosures I and II, respectively, and are also 

discussed in the Agency Comments section. 

Issues Related to Restatement of Certain of State’s Fiscal Year 2003 

Financial Statements 

With respect to the restatement of certain of State’s fiscal year 2003 financial 

statements, we identified the following three areas that need improvement: (1) review 

of journal voucher transactions for the Bureau of International Organizations 

accounts, (2) design of journal voucher audit steps for the Bureau of International 

Organizations accounts, and (3) the title of the note disclosure of the restatements. 

These issues are discussed in detail below. 

Bureau of International Organizations Journal Voucher Transactions Were Not 

Sufficiently Reviewed

Certain of State’s financial statements for fiscal year 2003 were restated to reflect 

activity related to approximately $927 million in liabilities incurred by the 

department’s Bureau of International Organizations. Specifically, in connection with 

recording two large transactions in fiscal year 2003 that involved the reclassification 
Page 6 GAO-05-814R State Department Fiscal Year 2003 Restatement 

of certain liabilities as funded liabilities from unfunded liabilities, a State official 

informed us that State failed to record the companion proprietary10 journal entries 

that are necessary once a liability has been funded. As a result, Unexpended 

Appropriations—Used was overstated by approximately $927 million, and Expended 

Appropriations was understated by approximately $927 million. The overall effect of 

the errors was that the amounts for Unexpended Appropriations and Cumulative 

Results of Operations on the originally issued fiscal year 2003 Balance Sheet and 

fiscal year 2003 Statement of Changes in Net Position were materially overstated and 

understated, respectively, by $927 million.

State officials discovered the fiscal year 2003 errors in late October 2004, during 

State’s year-end analysis of the fiscal year 2004 financial statements. Through 

analytical procedures and research, State observed inconsistencies between the 

unfunded and funded liabilities accounts. Following the discovery, State informed its 

IPA of the errors, which was appropriate. State completed its analysis of the errors 

on November 10, 2004. According to State, two incorrectly entered journal vouchers 

primarily caused the errors. 

Although State had a process for reviewing journal vouchers, it was not followed in 

the case of these two journal vouchers. The process called for a supervisor to 

approve journal vouchers before they were entered into the general ledger. According 

to a State official, however, the erroneous journal vouchers were not reviewed by a 

supervisor before they were entered into the accounting system. According to 

another State official, prior to the discovery of these errors, State took steps to 

improve its journal voucher postings by strengthening its journal voucher review 

process. Specifically, accounting personnel who create journal vouchers are now 

required to have a coworker review and sign the journal voucher before forwarding it 

for supervisory approval. The Director or Deputy Director of Financial Reporting and 

Analysis is then required to enforce compliance with the approval process by 

reviewing the approved journal vouchers—including determining that they have been 

signed by a supervisor—before the journal vouchers are entered into the accounting 

system. 

Journal Voucher Audit Steps Did Not Detect Errors in the Bureau of International 

Organizations Accounts

The above-noted accounting breakdown was not discovered during the audit of the 

department’s fiscal year 2003 financial statements because the fiscal year 2003 audit 

tests performed by State’s IPA were not designed to detect journal voucher errors in 

the Bureau of International Organizations unfunded and funded liabilities accounts. 

The FAM states that during the audit planning process, the auditor should identify 

conditions that significantly increase inherent, fraud, and control risk. Among other 

 

10Proprietary accounts provide the information for the financial statements based on Federal 

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

a budgetary, measure of operations and resources. 
Page 7 GAO-05-814R State Department Fiscal Year 2003 Restatement 

things, the auditor should perform procedures to identify account balances and 

transactions that might signal inherent risk. According to FAM 260.40, to detect 

evidence of possible material misstatement due to fraud, the auditor should examine 

journal entries and other adjustments, including reclassifications, consolidating 

entries, and other routine and nonroutine journal entries and adjustments. This 

section of the FAM also states that the auditor should obtain an understanding of the 

financial reporting process and the controls over journal entries and other 

adjustments; identify and select journal entries and other adjustments for testing; 

determine the nature, timing, and extent of the testing; and inquire of individuals 

involved in the financial reporting process about inappropriate or unusual activity 

related to the processing of journal entries and adjustments. If the IPA had identified 

the journal vouchers involving the Bureau of International Organizations accounts as 

presenting increased inherent, fraud, or control risk and had then followed the abovenoted FAM procedures, the errors that necessitated the restatements might have 

been detected. 

According to State’s OIG, future audit tests will be designed to detect any material 

journal voucher errors in the Bureau of International Organizations unfunded and 

funded liabilities accounts. 

The Title of State’s Note Disclosure of the Restatements Could Be Misinterpreted

The notes to State’s comparative fiscal years 2004 and 2003 financial statements 

included a note disclosure titled “Prior Period Adjustment.” This title could be 

misinterpreted, since the note disclosure discussed the adjustment to correct the 

$927 million material misstatement and the adjustment represented a restatement 

rather than a prior period adjustment as defined by SFFAS No. 21. 

Conclusions 

The restatements were caused by an error that State identified. State corrected the 

error and issued restated financial statements. Going forward, the key will be for 

State to ensure that the planned corrective actions to address the cause of the error 

are fully and effectively implemented. In addition, it will be important that State’s OIG 

work with State’s IPA to ensure that audit tests to detect any similar errors in the 

future are fully and effectively implemented. 

Recommendations for Executive Action 

We recommend that State’s Acting CFO determine whether the new journal voucher 

review procedures established to ensure adequate review of Bureau of International 

Organizations journal voucher transactions are being fully and effectively 

implemented. 

We recommend that State’s Inspector General work with State’s IPA to ensure that 

audit tests in conformance with the FAM to test journal vouchers in the Bureau of 
Page 8 GAO-05-814R State Department Fiscal Year 2003 Restatement 

International Organizations unfunded and funded liabilities accounts are fully and 

effectively implemented. 

Agency Comments 

In commenting on a draft of this report, State’s Acting CFO stated that his office 

agrees with our recommendation for management to evaluate whether State’s new 

journal voucher review procedures are effective and that State is currently reviewing 

the effectiveness of these procedures. State’s Inspector General concurred with our 

recommendation and stated that his office will work with the IPA to implement audit 

steps in conformance with the FAM to test journal vouchers in the Bureau of 

International Organizations’ unfunded and funded liabilities accounts. We also 

received technical comments from State’s Acting CFO and Inspector General, which 

we have incorporated as appropriate. 

- - - - - 

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

statement on actions taken to address these recommendations. 

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

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

Subcommittee on Federal Financial Management, Government Information, and 

International Security, Senate Committee on Homeland Security and Governmental 

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

Government Management, Finance and Accountability, House Committee on 

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

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

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

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

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

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

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

Gary T. Engel 

Director 

Financial Management and Assurance 
Enclosure I: Comments from the Acting Assistant Secretary and Chief 

Financial Officer, Department of State 

Page 9 GAO-05-814R State Department Fiscal Year 2003 Restatement 
Enclosure II: Comments from the Inspector General, Department of State 

Page 10 GAO-05-814R State Department Fiscal Year 2003 Restatement 

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