United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:00 p.m. EST 

Wednesday, March 3, 2004 FISCAL YEAR 2003 

U.S. GOVERNMENT 

FINANCIAL STATEMENTS 

Sustained Improvement in 

Federal Financial 

Management Is Crucial to 

Addressing Our Nation’s 

Future Fiscal Challenges 

Statement of David M. Walker 

Comptroller General of the United States 

GAO-04-477T 

Testimony 

Before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 
As in the 6 previous fiscal years, certain material weaknesses in internal 

control and in selected accounting and reporting practices resulted in 

conditions that continued to prevent GAO from being able to provide the 

Congress and American citizens an opinion as to whether the consolidated 

financial statements of the U.S. government are fairly stated in conformity 

with U.S. generally accepted accounting principles. Three major 

impediments to an opinion on the consolidated financial statements 

continue to be (1) serious financial management problems at DOD, (2) the 

federal government’s inability to fully account for and reconcile transactions 

between federal government entities, and (3) the federal government’s 

ineffective process for preparing the consolidated financial statements. 

For fiscal year 2003, 20 of 23 Chief Financial Officers (CFO) Act agencies 

received unqualified opinions, the same number received by these agencies 

for fiscal year 2002, up from 6 for fiscal year 1996. However, only 3 of the 

CFO Act agencies had neither a material weakness in internal control, an 

issue involving compliance with applicable laws and regulations, nor an 

instance of lack of substantial compliance with Federal Financial 

Management Improvement Act requirements. 

The requirement for timely, accurate, and useful financial and performance 

management information is greater than ever as the nation faces major longterm fiscal challenges that will require tough choices in setting priorities and 

linking resources to results. Given the nation’s large and growing long-term 

fiscal imbalance, which is driven largely by known demographic trends and 

health care costs, coupled with new homeland security and defense 

commitments, the status quo is unsustainable. Current financial reporting 

does not clearly and transparently show the wide range of responsibilities, 

programs, and activities that may either obligate the federal government to 

future spending or create an expectation for such spending and provides an 

unrealistic and even misleading picture of the federal government’s overall 

performance and financial condition. In addition, too many significant 

federal government commitments and obligations, such as Social Security 

and Medicare, are not fully and consistently disclosed in the federal 

government’s financial statements and budget, and current federal financial 

reporting standards do not require such disclosure. 

A top-to-bottom review of government activities to ensure their relevance 

and fit for the 21st century and their relative priority is long overdue. The 

federal government needs a three-pronged approach to (1) restructure 

existing entitlement programs, (2) reexamine the base of discretionary and 

other spending, and (3) review and revise the federal government’s tax 

policy and enforcement programs. New accounting and reporting 

approaches, budget control mechanisms, and metrics are needed for 

considering and measuring the impact of spending and tax policies and 

decisions over the long term. 

GAO is required to audit the 

consolidated financial statements 

of the U.S. government. 

Proper accounting and reporting 

practices are essential in the public 

sector. The U.S. government is the 

largest, most diverse, most 

complex, and arguably the most 

important entity on earth today. Its 

services—homeland security, 

national defense, Social Security, 

mail delivery, and food inspection, 

to name a few—directly affect the 

well-being of almost every 

American. But sound decisions on 

the future direction of vital federal 

government programs and policies 

are made more difficult without 

timely, accurate, and useful 

financial and performance 

information. 

Until the problems discussed in 

GAO’s audit report on the U.S. 

government’s consolidated 

financial statements are adequately 

addressed, they will continue to 

(1) hamper the federal 

government’s ability to accurately 

report a significant portion of its 

assets, liabilities, and costs; (2) 

affect the federal government’s 

ability to accurately measure the 

full cost as well as the financial and 

nonfinancial performance of 

certain programs while effectively 

managing related operations; and 

(3) significantly impair the federal 

government’s ability to adequately 

safeguard certain significant assets 

and properly record various 

transactions. 

www.gao.gov/cgi-bin/getrpt?GAO-04-477T.

To view the full testimony, click on the link 

above. For more information, contact Jeffrey 

Steinhoff or Gary Engel at (202) 512-2600. 

Highlights of GAO-04-477T, testimony 

before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

March 3, 2004

FISCAL YEAR 2003 U.S. GOVERNMENT 

FINANCIAL STATEMENTS 

Sustained Improvement in Federal 

Financial Management Is Crucial to 

Addressing Our Nation’s Future Fiscal 

Challenges 
Page 1 GAO-04-477T 

Mr. Chairman and Members of the Subcommittee: 

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

government’s consolidated financial statements for fiscal years 2003 and 

2002. Both the consolidated financial statements and our report are 

included in the fiscal year 2003 Financial Report of the United States 

Government, which was issued by the Department of the Treasury 

(Treasury) on February 27, 2004, and is available through GAO’s Internet 

site, at www.gao.gov, and Treasury’s Internet site, at 

www.fms.treas.gov/fr/index.html. 

At the outset, I would like to thank the subcommittee for continuing an 

annual tradition of oversight hearings on this important subject. The work 

of the Subcommittee on Government Efficiency and Financial 

Management and its predecessor has for years been a catalyst to facilitate 

government management reform. The involvement of this subcommittee 

remains critical to ultimately assuring public confidence in the federal 

government as a financial steward that is accountable for its finances. 

As in the 6 previous fiscal years, certain material weaknesses1

 in internal 

control and in selected accounting and reporting practices resulted in 

conditions that continued to prevent us from being able to provide the 

Congress and American citizens an opinion as to whether the consolidated 

financial statements of the U.S. government are fairly stated in conformity 

with U.S. generally accepted accounting principles (GAAP). Until the 

problems discussed in our report are adequately addressed, they will 

continue to (1) hamper the federal government’s ability to accurately 

report a significant portion of its assets, liabilities, and costs; (2) affect the 

federal government’s ability to accurately measure the full cost as well as 

the financial and nonfinancial performance of certain programs while 

effectively managing related operations; and (3) significantly impair the 

federal government’s ability to adequately safeguard certain significant 

assets and properly record various transactions. 

While the federal government has not yet been able to prepare auditable 

financial statements, the requirement to do so at the consolidated level as 

well as at the agency level has already yielded important results. We see 

 1

A material weakness is a condition that precludes the entity’s internal control from 

providing reasonable assurance that misstatements, losses, or noncompliance material in 

relation to the financial statements or to stewardship information would be prevented or 

detected on a timely basis. 
Page 2 GAO-04-477T 

continuous movement toward the ultimate goals of annual accountability 

and, more importantly, of development of the day-to-day financial 

information that the federal government will need to best address today’s 

budgetary challenges and the looming longer-term fiscal imbalance driven 

by demographic trends, rising health care costs, and new homeland 

security and defense commitments. Across government, financial 

management improvement initiatives are under way that, if effectively 

implemented, have the potential to appreciably improve the quality of the 

federal government’s financial management and reporting. Federal 

agencies continue to make progress in their efforts to modernize their 

financial management systems and improve financial management 

performance as called for in the President’s Management Agenda.2

The Principals of the Joint Financial Management Improvement Program 

(JFMIP)3

 agreed with the Office of Management and Budget’s (OMB) 

initiative to accelerate the agency financial statements reporting date to 

November 15 for fiscal year 2004. For fiscal year 2003, OMB required the 

Chief Financial Officers (CFO) Act agencies4

 to deliver their Performance 

and Accountability Reports, including their audited financial statements, 

to OMB by January 30, 2004. However, to prepare for meeting the required 

November 15 accelerated reporting date for fiscal year 2004, OMB 

encouraged the CFO Act agencies to accelerate the issuance of their fiscal 

year 2003 audited financial statements to November 15, 2003, or as close to 

that date as possible. OMB reported that 8 CFO Act agencies—the 

Department of Education, the Environmental Protection Agency, the 

 2

The President’s Management Agenda is the Bush administration’s strategy for improving 

the management and performance of the federal government. Its purpose is to identify and 

address the most significant problems facing the federal government. It contains five 

governmentwide and nine agency-specific goals to improve federal management and 

deliver results to the American people. 

3

JFMIP is a joint and cooperative undertaking of the Department of the Treasury, GAO, the 

Office of Management and Budget (OMB), and the Office of Personnel Management 

working in cooperation with each other and other federal agencies to improve financial 

management practices in the federal government. Leadership and program guidance are 

provided by the four Principals of the JFMIP—the Comptroller General of the United 

States, the Secretary of the Treasury, and the Directors of OMB and the Office of Personnel 

Management. 

4

31 U.S.C. 901(b). One of the 24 CFO Act agencies, the Federal Emergency Management 

Agency, was transferred to the new Department of Homeland Security effective March 1, 

2003. With this transfer, the Federal Emergency Management Agency will no longer be 

required to prepare and have audited stand-alone financial statements under the CFO Act, 

leaving 23 CFO Act agencies. 
Page 3 GAO-04-477T 

Department of Health and Human Services, the National Science 

Foundation, the Social Security Administration, the Department of the 

Treasury, the Agency for International Development, and the Department 

of Veterans Affairs—were able to issue their fiscal year 2003 financial 

statements with unqualified audit opinions by mid-November 2003. 

Another 10 CFO Act agencies issued their financial statements by 

December 31, 2003, and the remaining 5 CFO Act agencies issued by the 

end of January 2004. A 24th major agency, the Department of Homeland 

Security (DHS),5

 issued its financial statements on February 13, 2004. DHS 

faced a herculean challenge with respect to issuing audited financial 

statements, since the department had been in operation only for the last 7 

months of the fiscal year and involved a transfer of operations from a 

number of diverse entities, some with known financial management 

problems. 

While these results represent a significant improvement over previous 

years in the timeliness of CFO Act agencies’ issuance of audited financial 

statements, they also demonstrate the significant challenges that the 

federal government will face in meeting the November 15 accelerated 

reporting date for fiscal year 2004. Auditors at several of the CFO Act 

agencies reported that the agencies may not be able to produce auditable 

financial statements within the accelerated time frame for fiscal year 2004 

without making fundamental changes to improve a number of their 

financial management practices. For example, certain federal agency 

auditors reported that major improvements are needed in (1) management 

controls to monitor established policies and procedures for conducting 

financial analyses and reconciliations throughout the year, (2) fully 

integrating financial management systems, and (3) providing adequate and 

skilled staff to support efficient, effective preparation of federal agency 

consolidated financial statements. Our experience as the auditor of the 

financial statements of the Internal Revenue Service, which successfully 

accelerated its reporting to November 15 beginning with its fiscal year 

2002 financial statements, showed that significant changes had to be made 

 5

DHS is not a CFO Act agency and is therefore not subject to CFO Act requirements. 

However, along with most other executive branch agencies not covered by the CFO Act, 

DHS is required to prepare and have audited financial statements under the Accountability 

of Tax Dollars Act of 2002, Pub. L. No. 107-289, 116 Stat. 2049. For fiscal year 2003, the act 

provided that OMB could grant executive branch agencies’ requests for waivers from 

having audited financial statements for fiscal year 2003. However, DHS and certain other 

agencies chose to prepare and have their fiscal year 2003 financial statements audited. 
Page 4 GAO-04-477T 

to improve routine financial management procedures in order to be able to 

accelerate reporting. 

For fiscal year 2003, as in fiscal year 2002, 20 of 23 CFO Act agencies were 

able to attain unqualified audit opinions on their financial statements (see 

app. I),6

 up from 6 agencies for fiscal year 1996. This is the same number of 

unqualified opinions received by these CFO Act agencies for fiscal year 

2002. However, 2 agencies’ fiscal year 2003 opinions were different from 

those they received for fiscal year 2002. The Agency for International 

Development received an unqualified opinion on all of its fiscal year 2003 

financial statements for the first time, while the National Aeronautics and 

Space Administration, which for fiscal year 2002 received an unqualified 

opinion on its financial statements, received a disclaimer of opinion for 

fiscal year 2003. DHS, which as I mentioned before prepared consolidated 

financial statements for fiscal year 2003 covering its first 7 months of 

operations, received a qualified opinion on two of the six required 

financial statements.7

In identifying improved financial performance as one of its five 

governmentwide initiatives, the President’s Management Agenda 

recognized that a clean (unqualified) financial audit opinion is a basic 

prescription for any well-managed organization. At the same time, it 

recognized that “most federal agencies that obtain clean audits only do so 

after making extraordinary, labor-intensive assaults on financial records” 

at or after year-end. The President’s Management Agenda further 

recognized that without sound internal control and accurate and timely 

financial information, it is not possible to accomplish the agenda and 

secure the best performance and highest measure of accountability for the 

 6

At least 4 CFO Act agencies restated certain of their audited fiscal year 2002 financial 

statements to correct misstatements in such financial statements. All 4 of the agencies had 

received unqualified opinions on their fiscal year 2002 financial statements. These 

restatements were not material to the consolidated financial statements. 

7

DHS began operations as an agency 5 months after the start of the fiscal year, on March 1, 

2003. Transfers of funds, assets, liabilities, and obligations from 22 existing federal 

agencies to DHS began on March 1, 2003. DHS’s auditors issued a qualified opinion on the 

consolidated balance sheet and statement of custodial activity as of September 30, 2003, 

and disclaimed on the consolidated statement of net cost, consolidated statement of 

changes in net position, combined statement of budgetary resources, and consolidated 

statement of financing for the 7 months ended September 30, 2003. In accordance with 

Federal Accounting Standards Advisory Board Technical Bulletin 2003-1, Certain 

Questions and Answers Related to the Homeland Security Act of 2002, the fiscal year 

2003 activities that occurred prior to the transfer of operations to DHS were to be reflected 

in the transferring agencies’ financial statements. 
Page 5 GAO-04-477T 

American people. The JFMIP Principals have defined certain measures, in 

addition to receiving an unqualified financial statement opinion, for 

achieving financial management success. These additional measures 

include being able to routinely provide timely, accurate, and useful 

financial and performance information and having no material internal 

control weaknesses or material noncompliance with laws and regulations 

and the requirements of the Federal Financial Management Improvement 

Act of 1996 (FFMIA). As shown in figure 1, while the severity and 

magnitude of the problems identified vary greatly, reports of inspectors 

general and their contract auditors indicated that for fiscal year 2003 only 

3 of the 23 CFO Act agencies had neither a material weakness in internal 

control, an issue involving compliance with applicable laws and 

regulations, nor an instance of lack of substantial compliance with the 

requirements of FFMIA. 

Figure 1: Fiscal Year 2003 CFO Act Agency Results Reported by Auditors 

Agencies with unqualified opinions 

Agencies with unqualified opinions and 

no material weaknesses or 

noncompliances 

20a3b

Source: GAO. 

a

Agriculture, Commerce, Education, Energy, Health and Human Services, Housing and Urban 

Development, Interior, Justice, Labor, State, Transportation, Treasury, Veterans Affairs, Agency for 

International Development, Environmental Protection Agency, General Services Administration, 

National Science Foundation, Nuclear Regulatory Commission, Office of Personnel Management, 

and Social Security Administration. 

b

Energy, National Science Foundation, and Social Security Administration. 

In this testimony, I will highlight the major issues relating to the 

consolidated financial statements for fiscal years 2003 and 2002, discuss 

systems problems that continue to hinder federal agency accountability, 

and describe progress that has been made toward addressing major 

impediments to an opinion on the consolidated financial statements. I will 

then discuss why sound financial management today and in the future is 

critical to meeting tomorrow’s fiscal needs and the need for “truth and 

transparency” in connection with our nation’s financial condition and 

fiscal outlook. 
Page 6 GAO-04-477T 

As I mentioned earlier, as has been the case for the previous 6 fiscal years, 

the federal government continues to have a significant number of material 

weaknesses related to financial systems, fundamental recordkeeping and 

financial reporting, and incomplete documentation. Several of these 

material weaknesses (referred to hereafter as material deficiencies) 

resulted in conditions that continued to prevent us from forming and 

expressing an opinion on the U.S. government’s consolidated financial 

statements for the fiscal years ended September 30, 2003 and 2002.8

 There 

may also be additional issues that could affect the consolidated financial 

statements that have not been identified. 

Major challenges include the federal government’s inability to 

• properly account for and report property, plant, and equipment and 

inventories and related property, primarily at the Department of Defense 

(DOD); 

• reasonably estimate or adequately support amounts reported for certain 

liabilities, such as environmental and disposal liabilities and related costs 

at DOD, and ensure complete and proper reporting for commitments and 

contingencies; 

• support major portions of the total net cost of government operations, 

most notably related to DOD, and ensure that all disbursements are 

properly recorded; 

• fully account for and reconcile intragovernmental activity and balances; 

• demonstrate how net outlay amounts reported in the consolidated 

financial statements were related to net outlay amounts reported in the 

underlying federal agencies’ financial statements; and 

• effectively prepare the federal government’s financial statements, 

including ensuring that the consolidated financial statements are 

consistent with the underlying audited agency financial statements, 

balanced, and in conformity with GAAP. 

In addition to these material deficiencies, we identified four other material 

weaknesses in internal control related to loans receivable and loan 

guarantee liabilities, improper payments, information security, and tax 

collection activities. 

 8

We previously reported that material deficiencies prevented us from expressing an opinion 

on the fiscal years 1997, 1998, 1999, 2000, 2001, and 2002 consolidated financial statements 

of the U.S. government. 

Highlights of Major 

Issues Related to the 

U.S. Government’s 

Consolidated 

Financial Statements 

for Fiscal Years 2003 

and 2002 
Page 7 GAO-04-477T 

The material weaknesses identified by our work are discussed in more 

detail in appendix III. 

The ability to produce the data needed to efficiently and effectively 

manage the day-to-day operations of the federal government and provide 

accountability to taxpayers and the Congress has been a long-standing 

challenge at most federal agencies. The results of the fiscal year 2003 

assessments performed by agency inspectors general or their contract 

auditors under FFMIA9

 show that these problems continue to plague the 

financial management systems used by most of the CFO Act agencies. 

While the problems are much more severe at some agencies than at others, 

their nature and severity indicate that overall, management at most CFO 

Act agencies lacks the full range of information needed for accountability, 

performance reporting, and decision making. These problems include 

nonintegrated financial systems, lack of accurate and timely recording of 

data, inadequate reconciliation procedures, and noncompliance with 

accounting standards and the U.S. Government Standard General Ledger 

(SGL). 

Agencies’ inability to meet the federal financial management systems 

requirements continues to be the major barrier to achieving compliance 

with FFMIA. Under FFMIA, CFO Act agency auditors are required to 

report, as part of the agencies’ financial statement audits, whether 

agencies’ financial management systems substantially comply with (1) 

federal financial management systems requirements, (2) applicable federal 

accounting standards, and (3) the SGL at the transaction level. As shown 

in figure 2, auditors most frequently reported instances of noncompliance 

with federal financial management systems requirements. These instances 

of noncompliance involved not only core financial systems, but also 

administrative and programmatic systems. 

 9

Pub. L. No. 104-208, § 101(f)(title VIII), 110 Stat. 3009-389. 

Recurring Systems 

Problems Hinder 

Accountability 
Page 8 GAO-04-477T 

Figure 2: Auditors’ FFMIA Assessments for Fiscal Years 2000, 2001, 2002, and 2003 

For fiscal year 2003, auditors for 17 of the 23 CFO Act agencies reported 

that the agencies’ financial management systems did not comply 

substantially with one or more of FFMIA’s three requirements. For the 

remaining 6 CFO Act agencies, auditors provided negative assurance, 

meaning that nothing came to their attention indicating that the agencies’ 

financial management systems did not substantially meet FFMIA 

requirements. The auditors for these 6 agencies did not definitively state 

whether the agencies’ systems substantially complied with FFMIA 

requirements, as is required under the statute. DHS is not subject to the 

requirements of the CFO Act and, consequently, is not required to comply 

with FFMIA. Accordingly, DHS’s auditors did not report on DHS’s 

compliance with FFMIA. However, the auditors identified and reported 

deficiencies that related to the aforementioned three requirements of 

FFMIA. 

Federal agencies have recognized the seriousness of their financial 

systems weaknesses and have efforts under way to implement or upgrade 

their financial systems to alleviate long-standing problems. We recognize 
Page 9 GAO-04-477T 

that it will take time, investment, and sustained emphasis to improve 

agencies’ underlying financial management systems. 

As I mentioned earlier, for the past 7 fiscal years, the federal government 

has been required to prepare, and have audited, consolidated financial 

statements. Successfully meeting this requirement is tightly linked to the 

requirements for the CFO Act agencies to also have audited financial 

statements. This has stimulated extensive cooperative efforts and 

considerable attention by agency chief financial officers, inspectors 

general, Treasury and OMB officials, and GAO. With the benefit of the past 

7 years’ experience by the federal government in having the required 

financial statements subjected to audit, more intensified attention will be 

needed on the most serious obstacles to achieving an opinion on the U.S. 

government’s consolidated financial statements. Three major impediments 

to an opinion on the consolidated financial statements are (1) serious 

financial management problems at DOD, (2) the federal government’s 

inability to fully account for and reconcile transactions between federal 

government entities, and (3) the federal government’s ineffective process 

for preparing the consolidated financial statements. 

Essential to achieving an opinion on the consolidated financial statements 

is resolution of the serious financial management problems at DOD, which 

we have designated as high risk10 since 1995. In accordance with section 

1008 of the National Defense Authorization Act for Fiscal Year 2002,11 DOD 

reported that for fiscal year 2003, it was not able to provide adequate 

evidence supporting material amounts in its financial statements. DOD 

stated that it is unable to comply with applicable financial reporting 

requirements for (1) property, plant, and equipment (PP&E); (2) inventory 

and operating materials and supplies; (3) environmental liabilities; (4) 

intragovernmental eliminations and related accounting adjustments; (5) 

disbursement activity; and (6) cost accounting by responsibility segment. 

Although DOD represented that the military retirement health care liability 

data had improved for fiscal year 2003, the cost of direct health care 

provided by DOD-managed military treatment facilities was a significant 

 10GAO identifies areas at high risk due to either their greater vulnerabilities to waste, fraud, 

abuse, and mismanagement or major challenges associated with their economy, efficiency, 

or effectiveness. 

11Pub. L. No. 107-107, 115 Stat. 1012, 1204 (2001). 

Addressing Major 

Impediments to an 

Opinion on 

Consolidated 

Financial Statements 

Financial Management at 

DOD 
Page 10 GAO-04-477T 

amount of DOD’s total recorded health care liability and was based on 

estimates for which adequate support was not available. 

Overhauling DOD’s financial management operations represents a 

challenge that goes far beyond financial accounting to the very fiber of 

DOD’s range of business operations, management information systems, 

and culture. As I have reported in past years, DOD’s financial management 

problems are pervasive, complex, long-standing, and deeply rooted in 

virtually all business operations throughout the department. To date, none 

of the military services or major DOD components has passed the test of 

an independent financial audit12 because of pervasive weaknesses in 

financial management systems, operations, and controls. DOD has been up 

front about the seriousness of these problems and the need to transform 

the way it does business. To address these problems, DOD has taken 

several positive steps in many key areas. For example, the Secretary of 

Defense has included improving DOD’s financial management as one of his 

top 10 priorities, and the department has taken a number of actions under 

its Business Management Modernization Program, including development 

in April 2003 of an initial business enterprise architecture to guide 

operational and technological changes.13 DOD is currently working to 

refine and implement that architecture and expects to issue new versions 

of it during 2004. DOD reports that it is also developing detailed financial 

improvement plans intended to provide disciplined leadership, identify 

corrective actions, implement solutions, and result in a favorable audit 

opinion on the fiscal year 2007 DOD-wide financial statements. But DOD 

still has a long way to go, and top leadership must continue to stress the 

importance of achieving lasting improvement that truly transforms the 

department’s business systems and operations. Only through major 

transformation, which will take time and sustained leadership from top 

management, will DOD be able to meet the mandate of the CFO Act and 

achieve the President’s Management Agenda goal of improved financial 

performance. 

 12Although not major DOD components, the Military Retirement Fund received an 

unqualified opinion on its fiscal year 2003 financial statements, and the DOD MedicareEligible Retiree Health Care Fund received a qualified opinion on its fiscal year 2003 

financial statements. 

13See U.S. General Accounting Office, Business Systems Modernization: Summary of 

GAO’s Assessment of the Department of Defense’s Initial Business Enterprise 

Architecture, GAO-03-877R (Washington, D.C.: July 7, 2003). 
Page 11 GAO-04-477T 

OMB and Treasury require the CFOs of 35 executive departments and 

agencies, including the 23 CFO Act agencies, to reconcile selected 

intragovernmental activity and balances with their “trading partners”14 and 

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

extent and results of intragovernmental activity and balances 

reconciliation efforts. A substantial number of the agencies continue to be 

unable to fully perform reconciliations of intragovernmental activity and 

balances with their trading partners, citing reasons such as (1) trading 

partners not providing needed data; (2) limitations and incompatibility of 

agency and trading partner information systems; and (3) lack of human 

resources. Amounts reported for federal agency trading partners for 

certain intragovernmental accounts were significantly out of balance in 

the aggregate for both fiscal years 2003 and 2002. 

We reported in previous years that the heart of the intragovernmental 

transactions issue was that the federal government lacked clearly 

articulated business rules for these transactions so that they would be 

handled consistently by agencies. In this regard, at the start of fiscal year 

2003, OMB issued business rules to transform and standardize 

intragovernmental ordering and billing. To address long-standing problems 

with intragovernmental exchange transactions between federal agencies, 

Treasury provided federal agencies with quarterly detailed trading partner 

information during fiscal year 2003 to help them better perform their 

trading partner reconciliations. In addition, the federal government began 

a three-phase Intragovernmental Transactions e-gov project to define a 

governmentwide data architecture and provide a single source of detailed 

trading partner data. Resolving the intragovernmental transactions 

problem, though, still remains a difficult challenge and will require a 

commitment by the CFO Act agencies and continued strong leadership by 

OMB. 

The federal government did not have adequate systems, controls, and 

procedures to ensure that the consolidated financial statements are 

consistent with the underlying audited agency financial statements, 

balanced, and in conformity with GAAP. In this regard, Treasury is 

developing a new system and procedures to prepare the consolidated 

financial statements beginning with the statements for fiscal year 2004. 

 14Trading partners are U.S. government agencies, departments, or other components 

included in the consolidated financial statements that do business with each other. 

Intragovernmental 

Transactions 

Preparing the 

Consolidated Financial 

Statements 
Page 12 GAO-04-477T 

Treasury officials have stated that these actions are intended to, among 

other things, directly link information from federal agencies’ audited 

financial statements to amounts reported in the consolidated financial 

statements and resolve many of the issues we identified in the process for 

preparing the consolidated financial statements. Resolving issues 

surrounding preparing the consolidated financial statements will require 

continued strong leadership by Treasury management. 

Our nation’s large and growing long-term fiscal imbalance, which is driven 

largely by known demographic trends and rising health care costs—

coupled with new homeland security and defense commitments—serves 

to sharpen the need to fundamentally review and re-examine basic federal 

entitlements, as well as other mandatory and discretionary spending, and 

tax policies. As we look ahead, our nation faces an unprecedented 

demographic challenge with significant implications, among them 

budgetary and economic. Between now and 2035, the number of people 

who are 65 years old or over will double, driving federal spending on the 

elderly to a larger and ultimately unsustainable share of the federal 

budget. As a result, tough choices will be required to address the resulting 

structural imbalance. 

GAO prepares long-term budget simulations that seek to illustrate the 

likely fiscal consequences of the coming demographics and rising health 

care costs. Our latest long-term budget simulations reinforce the need for 

change in the major cost drivers—Social Security and health care 

programs. As shown in figure 3, by 2040, absent reform of these 

entitlement programs, projected federal revenues may be adequate to pay 

little beyond interest on the debt. 

Truth and 

Transparency in the 

Fiscal Outlook 
Page 13 GAO-04-477T 

Figure 3: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP after 2004 and All Expiring Tax Provisions Are Extended 

Note: Although expiring tax provisions are extended, revenue as a share of gross domestic product 

(GDP) increases through 2014 due to (1) real bracket creep, (2) more taxpayers becoming subject to 

the alternative minimum tax, and (3) increased revenue from tax-deferred retirement accounts. After 

2014, revenue as a share of GDP is held constant. 

Current financial reporting does not clearly and transparently show the 

wide range of responsibilities, programs, and activities that may either 

obligate the federal government to future spending or create an 

expectation for such spending and provides an unrealistic and even 

misleading picture of the federal government’s overall performance and 

financial condition. Few agencies adequately show the results they are 

getting with the taxpayer dollars they spend. In addition, too many 

significant federal government commitments and obligations, such as 

Social Security and Medicare, are not fully and consistently disclosed in 

the federal government’s consolidated financial statements and budget, 

and current federal financial reporting standards do not require such 
Page 14 GAO-04-477T 

disclosure.15 Figure 4 shows some selected fiscal exposures. The spectrum 

of these exposures ranges from covering only the explicit liabilities that 

are shown on the consolidated financial statements to implicit promises 

embedded in current policy or public expectations. These liabilities, 

commitments, and promises have created a fiscal imbalance that will put 

unprecedented strains on the nation’s spending and tax policies. Although 

economic growth can help, the projected fiscal gap is now so large that the 

federal government will not be able to simply grow its way out of the 

problem. Tough choices are inevitable. 

Figure 4: Selected Fiscal Exposures 

a

This amount includes $774 billion in securities held by military and civilian pension funds that would 

offset the explicit liabilities reported by those funds. 

b

Figures for Social Security and Medicare are as of January 1, 2003, and are estimated over a 75-

year period. These amounts represent net present value and are net of debt held by the trust funds 

($1,378 billion for Social Security, $235 billion for Medicare Part A, and $34 billion for Medicare Part 

B). The estimate for Social Security over an infinite horizon would be $10.5 trillion according to the 

Social Security Trustees’ 2003 annual report. There is no infinite horizon estimate for Medicare 

included in the Medicare Trustees’ 2003 annual report. Medicare Part D was enacted after the end of 

fiscal year 2003. 

 15The Federal Accounting Standards Advisory Board has a project under way to consider 

recognition, measurement, and display of social insurance obligations. 

Explicit financial 

contingencies

Explicit financial 

commitments

Explicit liabilities

Example (dollars in billions)

Publicly held debt ($3,913)

Military and civilian pension and post-retirement health ($2,857)

Veterans benefits payable ($955)

Environmental and disposal liabilities ($250)

Loan guarantees ($35)

Undelivered orders ($596)

Long-term leases ($47)

Unadjudicated claims ($9)

Pension Benefit Guaranty Corporation ($86)

Other national insurance programs ($7)

Government corporations e.g., Ginnie Mae

Debt held by government accounts ($2,859)a

Future Social Security benefit payments ($3,550)b

Future Medicare Part A benefit payments ($5,931)b

Future Medicare Part B benefit payments ($9,619)b

Life cycle cost including deferred and future maintenance and 

 operating costs (amount unknown)

Government Sponsored Enterprises e.g., Fannie Mae and 

 Freddie Mac

Type

Source: GAO analysis.

Implicit exposures implied by 

current policies or the public's 

expectations about the role of 

government
Page 15 GAO-04-477T 

Particularly troubling are the many big-ticket items that taxpayers will 

eventually have to deal with. The federal government has pledged its 

support to a long list of programs and activities, including pension and 

health care benefits for senior citizens, medical care for veterans, and 

contingencies associated with various government-sponsored entities, 

whose claims on future spending total trillions of dollars. Despite their 

serious implications for future budgets, tax burdens, and spending 

flexibilities, these unfunded commitments get short shrift in the federal 

government’s current financial statements and in budgetary deliberations. 

The federal government’s gross debt as of September 2003 was about 

$7 trillion, or about $24,000 for every man, woman, and child in this 

country today. But that number excludes items such as the gap between 

promised and funded Social Security and Medicare commitments and 

veterans health care benefit commitments provided through the 

Department of Veterans Affairs. If these items are factored in, the burden 

for every American rises to well over $100,000. In addition, the new 

Medicare prescription drug benefit will add thousands more to that tab. 

The new drug benefit is one of the largest unfunded commitments ever 

undertaken by the federal government. The Trustees of the Social Security 

and Medicare trust funds will include an official estimate of the discounted 

present value cost of this new benefit over the next 75 years in their 

annual report,16 which is scheduled for issuance later this month. 

Preliminary estimates of its long-term cost range up to $7 trillion in 

discounted present value terms over a 75-year period. To put that number 

into perspective, it is as much as the total amount of the federal 

government’s gross debt outstanding as of September 30, 2003. Even 

before the prescription drug benefit was enacted, our long-term budget 

simulations showed that by 2040, the federal government may have to cut 

federal spending in half or double taxes to pay for the mounting cost of the 

government’s current unfunded commitments. Either would be 

devastating. 

Proper accounting and reporting practices are essential in the public 

sector. After all, the U.S. government is the largest, most diverse, most 

complex, and arguably the most important entity on earth today. Its 

services—homeland security, national defense, Social Security, mail 

 16The Trustees of the Social Security and Medicare trust funds report annually on the 

current and projected status of these programs over the next 75 years. 
Page 16 GAO-04-477T 

delivery, and food inspection, to name a few—directly affect the wellbeing of almost every American. But sound decisions on the future 

direction of vital federal government programs and policies are made 

more difficult without timely, accurate, and useful financial and 

performance information. 

Fortunately, we are starting to see efforts to address the shortcomings in 

federal financial reporting. The President’s Management Agenda, which 

closely reflects GAO’s list of high-risk government programs, is bringing 

attention to troubled areas across the federal government and is taking 

steps to better assess the results that programs are getting with the 

resources they are given. The Federal Accounting Standards Advisory 

Board is also making progress on many key financial reporting issues. 

In addition to these efforts, we have published a framework for analyzing 

various Social Security reform proposals17 and will soon publish a 

framework for analyzing health care reform proposals. We have also 

helped to create a consortium of “good government” organizations to 

stimulate the development of a set of key national indicators to assess the 

United States’ overall position and progress over time and in comparison 

to those of other industrialized nations. 

Budget experts at the Congressional Budget Office (CBO) and GAO 

continue to encourage reforms to the federal budget process to better 

reflect the federal government’s commitments and signal emerging 

problems. Among other things, we have recommended that the federal 

government issue an annual report on major fiscal exposures. The 

President’s fiscal year 2005 budget also proposes that future President’s 

budgets report on any enacted legislation in the past year that worsens the 

unfunded obligations of programs with long-term actuarial projections, 

with CBO to make a similar report. Such reporting could be a good 

starting point. 

Although these are positive initial steps, much more must be done given 

the magnitude of the federal government’s fiscal challenge. A top-tobottom review of government activities to ensure their relevance and fit 

for the 21st century and their relative priority is long overdue. As I have 

 17U.S. General Accounting Office, Social Security Reform: Analysis of Reform Models 

Developed by the President’s Commission to Strengthen Social Security, GAO-03-310

(Washington, D.C.: Jan. 15, 2003). 
Page 17 GAO-04-477T 

spoken about in the past, the federal government needs a three-pronged 

approach to (1) restructure existing entitlement programs, (2) reexamine 

the base of discretionary and other spending, and (3) review and revise the 

federal government’s tax policy and enforcement programs. New 

accounting and reporting approaches, budget control mechanisms, and 

metrics are needed for considering and measuring the impact of spending 

and tax policies and decisions over the long term. 

Our report on the U.S. government’s consolidated financial statements for 

fiscal years 2003 and 2002 highlights the need to continue addressing the 

federal government’s serious financial management weaknesses. With the 

significantly accelerated financial reporting time frame for fiscal year 2004 

and beyond, it is essential that the federal government move away from 

the extraordinary efforts many federal agencies continue to make to 

prepare financial statements and toward giving prominence to 

strengthening the federal government’s financial systems, reporting, and 

controls. This is the only way the federal government can meet the end 

goal of making timely, accurate, and useful financial and performance 

information routinely available to the Congress, other policymakers, and 

the American public. The requirement for timely, accurate, and useful 

financial and performance management information is greater than ever as 

our nation faces major long-term fiscal challenges that will require tough 

choices in setting priorities and linking resources to results. 

The Congress and the President face the challenge of sorting out the many 

claims on the federal budget without the budget enforcement mechanisms 

or fiscal benchmarks that guided the federal government through the 

previous years of deficit reduction into the brief period of surplus. While a 

number of steps will be necessary to address this challenge, truth and 

transparency in federal government reporting are essential elements of 

any attempt to address the nation’s long-term fiscal challenges. The fiscal 

risks I mentioned earlier can be managed only if they are properly 

accounted for and publicly disclosed. A crucial first step will be to face 

facts and identify the significant commitments facing the federal 

government. If citizens and federal government officials come to 

understand various fiscal exposures and their potential claims on future 

budgets, they are more likely to insist on prudent policy choices today and 

sensible levels of fiscal risk in the future. In addition, new budget control 

mechanisms will be required, along with effective approaches to 

successfully engage in a fundamental review, reassessment, and 

reprioritization of the base of federal government programs and policies 

that I have recommended previously. 

Closing Comments 
Page 18 GAO-04-477T 

Public officials will have more incentive to make difficult but necessary 

choices if the public has the facts and comes to support serious and 

sustained action to address the nation’s fiscal challenges. Without 

meaningful public debate, however, real and lasting change is unlikely. 

Clearly, the sooner action is taken, the easier it will be to turn things 

around. 

I believe a national education campaign and outreach effort is needed to 

help the public understand the nature and magnitude of the long-term 

financial challenge facing this nation. An informed electorate is essential 

for a sound democracy. Members of Generation X and Y especially need to 

become active in this discussion because they and their children will bear 

the heaviest burden if policymakers fail to act in a timely and responsible 

manner. 

We at GAO are committed to doing our part, but others also need to step 

up to the plate. By working together, I believe we can make a meaningful 

difference for our nation, fellow citizens, and future generations of 

Americans. 

In closing Mr. Chairman, I want to reiterate the value of sustained 

congressional interest in these issues, as demonstrated by this 

subcommittee’s hearings and those the former Subcommittee on 

Government Efficiency, Financial Management, and Intergovernmental 

Relations held over the past several years to oversee financial 

management reform. It will also be key that the appropriations, budget, 

authorizing, and oversight committees hold agency top leadership 

accountable for resolving these problems and that they support 

improvement efforts. 

For further information regarding this testimony, please contact Jeffrey C. 

Steinhoff, Managing Director, and Gary T. Engel, Director, Financial 

Management and Assurance, at (202) 512-2600. 

Contacts 
Page 19 GAO-04-477T 

23 CFO Act agencies Audit results Principal auditor 

Number of other 

audit contractors 

Agency for International Development Unqualified Inspector General 1 

Agriculture Unqualified Inspector General 3 

Commerce Unqualified KPMG LLP 0 

Defense Disclaimer Inspector General 1 

Education Unqualified Ernst & Young LLP 0 

Energy Unqualified KPMG LLP 0 

Environmental Protection Agency Unqualified Inspector General 0 

General Services Administration Unqualified PricewaterhouseCoopers LLP 0 

Health and Human Services Unqualified Inspector General 4 

Housing and Urban Development Unqualified Inspector General 1 

Interior Unqualified KPMG LLP 0 

Justice Unqualified PricewaterhouseCoopers LLP 2 

Labor Unqualified R. Navarro & Associates, Inc. 2 

National Aeronautics and Space Administration Disclaimer PricewaterhouseCoopers LLP 2 

National Science Foundation Unqualified KPMG LLP 0 

Nuclear Regulatory Commission Unqualified R. Navarro & Associates, Inc. 0 

Office of Personnel Management Unqualified KPMG LLP 0 

Small Business Administration Disclaimer Cotton & Company LLP 0 

Social Security Administration Unqualified PricewaterhouseCoopers LLP 0 

State Unqualified Leonard G. Birnbaum and Company, LLP 2 

Transportation Unqualified Inspector General 2 

Treasury Unqualified Inspector General 6a

Veterans Affairs Unqualified Deloitte & Touche LLP 0 

Other major agency 

Homeland Security Disclaimerb KPMG LLP 0 

Source: GAO. 

a

In addition, GAO audited the Internal Revenue Service’s financial statements and the Schedules of 

Federal Debt Managed by the Bureau of the Public Debt. 

b

DHS began operations as an agency 5 months after the start of the fiscal year, on March 1, 2003. 

Transfers of funds, assets, liabilities, and obligations from 22 existing federal agencies to DHS began 

on March 1, 2003. DHS’s auditors issued a qualified opinion on the consolidated balance sheet and 

statement of custodial activity as of September 30, 2003, and disclaimed on the consolidated 

statement of net cost, consolidated statement of changes in net position, combined statement of 

budgetary resources, and consolidated statement of financing for the 7 months ended September 30, 

2003. 

Appendix I: Selected Major Federal 

Departments and Agencies: Fiscal Year 2003 

Audit Results, Principal Auditors, and 

Number of Other Audit Contractors 
Page 20 GAO-04-477T 

Areas Involving Material Weaknesses 

Primary Effects on the Fiscal Years 2003 and 2002 Consolidated Financial 

Statements and the Management of Government Operations 

Property, plant, and equipment and 

inventories and related property 

Without accurate asset information, the federal government does not fully know the assets 

it owns and their location and condition and cannot effectively (1) safeguard assets from 

physical deterioration, theft, or loss, (2) account for acquisitions and disposals of such 

assets, (3) ensure the assets are available for use when needed, (4) prevent unnecessary 

storage and maintenance costs or purchase of assets already on hand, and (5) determine 

the full costs of programs that use these assets. 

Liabilities and commitments and 

contingencies 

Problems in accounting for liabilities affect the determination of the full cost of the federal 

government’s current operations and the extent of its liabilities. Also, improperly stated 

environmental and disposal liabilities and weak internal control supporting the process for 

their estimation affect the federal government’s ability to determine priorities for cleanup 

and disposal activities and to allow for appropriate consideration of future budgetary 

resources needed to carry out these activities. In addition, when disclosures of 

commitments and contingencies are incomplete or incorrect, reliable information is not 

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

Cost of government operations and 

disbursement activity 

Inaccurate cost information affects the federal government’s ability to control and reduce 

costs, assess performance, evaluate programs, and set fees to recover costs where 

required. Improperly recorded disbursements could result in misstatements in the financial 

statements and in certain data provided by federal agencies for inclusion in the President’s 

budget concerning obligations and outlays. 

Accounting for and reconciliation of 

intragovernmental activity and balances 

Problems in accounting for and reconciling intragovernmental activity and balances impair 

the government’s ability to account for billions of dollars of transactions between 

governmental entities. 

Net outlays Until the differences between the total net outlays reported in federal agencies’ Statements 

of Budgetary Resources and the records used by the Department of the Treasury to 

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

Activities are reconciled, the effect that these differences may have on the U.S. 

government’s consolidated financial statements will be unknown. 

Preparation of consolidated financial 

statements 

Because the federal government did not have adequate systems, controls, and procedures 

to prepare its consolidated financial statements, the federal government’s ability to ensure 

that the consolidated financial statements are consistent with the underlying audited 

agency financial statements, balanced, and in conformity with U.S. generally accepted 

accounting principles was impaired. 

Improper payments Without a systematic measurement of the extent of improper payments, federal agency 

management cannot determine (1) if improper payment problems exist that require 

corrective action, (2) mitigation strategies and the appropriate amount of investments to 

reduce them, and (3) the success of efforts implemented to reduce improper payments. 

Loans receivable and loan guarantee 

liabilities 

Weaknesses in the processes and procedures for estimating credit program costs affect 

the government’s ability to support annual budget requests for these programs, make 

future budgetary decisions, manage program costs, and measure the performance of 

lending activities. 

Information security weaknesses Information security weaknesses over computerized operations are placing enormous 

amounts of federal assets at risk of inadvertent or deliberate misuse, financial information 

at risk of unauthorized modification or destruction, sensitive information at risk of 

inappropriate disclosure, and critical operations at risk of disruption. 

Appendix II: Primary Effects of the Material 

Weaknesses Described in This Report 
Page 21 GAO-04-477T 

Areas Involving Material Weaknesses 

Primary Effects on the Fiscal Years 2003 and 2002 Consolidated Financial 

Statements and the Management of Government Operations 

Tax collection activities Weaknesses in controls over tax collection activities continue to affect the federal 

government’s ability to efficiently and effectively account for and collect revenue. 

Additionally, weaknesses in financial reporting affect the federal government’s ability to 

make informed decisions about collection efforts. As a result, the federal government is 

vulnerable to loss of tax revenue and exposed to potentially billions of dollars in losses due 

to inappropriate refund disbursements. 

Source: GAO. 
Page 22 GAO-04-477T 

The federal government did not maintain adequate systems or have 

sufficient, reliable evidence to support information reported in the 

consolidated financial statements of the U.S. government, as described 

below. These material deficiencies contributed to our disclaimer of 

opinion on the consolidated financial statements and also constitute 

material weaknesses in internal control. 

The federal government could not satisfactorily determine that all PP&E 

and inventories and related property were included in the consolidated 

financial statements, verify that certain reported assets actually exist, or 

substantiate the amounts at which they were valued. Most of the PP&E 

and inventories and related property are the responsibility of DOD. As in 

past years, DOD did not maintain adequate systems or have sufficient 

records to provide reliable information on these assets. Other agencies, 

most notably the National Aeronautics and Space Administration, reported 

continued weaknesses in internal control procedures and processes 

related to PP&E. 

The federal government could not reasonably estimate or adequately 

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

not able to estimate with assurance key components of its environmental 

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

amount of its estimated military postretirement health benefits liabilities 

included in federal employee and veteran benefits payable. These 

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

DOD-managed military treatment facilities. Further, the federal 

government could not determine whether commitments and 

contingencies, including those related to treaties and other international 

agreements entered into to further the U.S. government’s interests, were 

complete and properly reported. 

The previously discussed material deficiencies in reporting assets and 

liabilities, material deficiencies in financial statement preparation, as 

discussed below, and the lack of adequate disbursement reconciliations at 

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

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

of operations, most notably related to DOD. 

With respect to disbursements, DOD and certain other federal agencies did 

not adequately reconcile disbursement activity. For fiscal years 2003 and 

Appendix III: Material Deficiencies 

Property, Plant, and 

Equipment and Inventories 

and Related Property 

Liabilities and 

Commitments and 

Contingencies 

Cost of Government 

Operations and 

Disbursement Activity 
Page 23 GAO-04-477T 

2002 there were unsupported adjustments to federal agencies’ records and 

unreconciled disbursement activity, including unreconciled differences 

between federal agencies’ and Treasury’s records of disbursements, 

totaling billions of dollars, which could also affect the balance sheet. 

OMB and Treasury require the CFOs of 35 executive departments and 

agencies, including the 23 CFO Act agencies, to reconcile selected 

intragovernmental activity and balances with their “trading partners”1

 and 

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

extent and results of intragovernmental activity and balances 

reconciliation efforts. A substantial number of the agencies did not fully 

perform the required reconciliations for fiscal years 2003 and 2002, citing 

reasons such as (1) trading partners not providing needed data, (2) 

limitations and incompatibility of agency and trading partner information 

systems, and (3) lack of human resources. For both of these years, 

amounts reported for federal agency trading partners for certain 

intragovernmental accounts were significantly out of balance. Treasury’s 

ability to eliminate certain intragovernmental activity and balances is 

impaired by these federal agencies’ problems in handling their 

intragovernmental transactions. 

OMB Bulletin 01-09, Form and Content of Agency Financial Statements,2

states that outlays in federal agencies’ Statements of Budgetary Resources 

(SBR) should agree with the respective agency’s 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 

net outlays) and the amounts described as “actual” in the budget of the 

U.S. government. 

We found material differences between the total net outlays reported in 

selected federal agencies’ audited SBRs and the records used to prepare 

 1

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

included in the consolidated financial statements that do business with each other. 

2

Office of Management and Budget Bulletin No. 01-09, Form and Content of Agency 

Financial Statements (Washington, D.C.: Sept. 25, 2001). This bulletin is OMB’s official 

guidance for the form and content of federal agencies’ financial statements. 

Accounting for and 

Reconciliation of 

Intragovernmental Activity 

and Balances 

Net Outlays 
Page 24 GAO-04-477T 

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

Activities (Statement of Changes in Cash Balance),3

 totaling about $140 

billion and $186 billion for fiscal years 2003 and 2002, respectively.4

 Two 

agencies (Treasury and the Department of Health and Human Services 

(HHS)) accounted for about 83 percent and 75 percent of the differences 

identified in fiscal years 2003 and 2002, respectively. We found that the 

major cause of the differences for the two agencies was the treatment of 

offsetting receipts.5

 Some offsetting receipts for these two agencies had 

not been included in the agencies’ SBRs, which would have reduced the 

agencies’ net outlays and made the amounts more consistent with the 

records used to prepare the Statement of Changes in Cash Balance.6

 For 

example, we found that HHS reported net outlays for fiscal year 2003 as 

$596 billion on its audited SBR, while the records that Treasury uses to 

prepare the Statement of Changes in Cash Balance showed $505 billion for 

fiscal year 2003 for this agency. Until these differences between the total 

net outlays reported in the federal agencies’ SBRs and the records used to 

prepare the Statement of Changes in Cash Balance are reconciled, the 

effect that these differences may have on the U.S. government’s 

consolidated financial statements will be unknown. OMB has stated that it 

plans to work with the agencies to address this issue. 

The federal government did not have adequate systems, controls, and 

procedures to ensure that the consolidated financial statements are 

consistent with the underlying audited agency financial statements, 

 3

OMB and U.S. generally accepted accounting principles (GAAP) require agencies to report 

net outlays in the SBR. The Statement of Changes in Cash Balance also reports unified 

budget outlays-actual. Both are intended to represent the same amount and be consistent 

with the information presented in the budget of the U.S. government. 

4

In some agencies’ fiscal year 2003 financial statements, the comparable fiscal year 2002 

amounts were restated. 

5

Offsetting receipts are collections that are credited to general fund, special fund, or trust 

fund receipt accounts and that offset gross outlays at the agency or governmentwide level. 

6

These two agencies did not adequately explain their fiscal year 2002 differences between 

the net outlays reported on the SBR and the budget of the U.S. government in their notes to 

the fiscal year 2003 financial statements. 

Preparation of 

Consolidated Financial 

Statements 
Page 25 GAO-04-477T 

balanced, and in conformity with generally accepted accounting principles 

(GAAP). During our fiscal year 2003 audit, we found the following:7

• The process for compiling the consolidated financial statements does not 

directly link information from federal agencies’ audited financial 

statements to amounts reported in the consolidated financial statements, 

and therefore does not ensure that the information in the consolidated 

financial statements is consistent with the underlying information in 

federal agencies’ audited financial statements and other financial data. 

• Internal control weaknesses exist in Treasury’s process for preparing the 

consolidated financial statements, such as a lack of (1) segregation of 

duties and (2) appropriate documentation of certain policies and 

procedures for preparing the consolidated financial statements. 

• The net position reported in the consolidated financial statements is 

derived by subtracting liabilities from assets, rather than through balanced 

accounting entries. To make the fiscal years 2003 and 2002 consolidated 

financial statements balance, Treasury recorded a net $24.5 billion and a 

net $17.1 billion decrease, respectively, to net operating cost on the 

Statements of Operations and Changes in Net Position, which it labeled 

“Unreconciled Transactions Affecting the Change in Net Position.”8

 An 

additional net $11.3 billion and $12.5 billion of unreconciled transactions 

were recorded in the Statements of Net Cost for fiscal years 2003 and 2002, 

respectively. Treasury does not identify and quantify all components of 

these unreconciled activities, nor does Treasury perform reconciliation 

procedures, which would aid in understanding and controlling the net 

position balance as well as eliminating the unreconciled transactions 

associated with compiling the consolidated financial statements. 

• Significant differences in other intragovernmental accounts, primarily 

related to appropriations, still remain unresolved. Intragovernmental 

activity and balances are “dropped” or “offset” in the preparation of the 

consolidated financial statements rather than eliminated through balanced 

 7

The same issues we identified in fiscal year 2003 existed in fiscal year 2002, and some have 

existed for a number of years. In October 2003, we reported in greater detail on the issues 

we identified, in U.S. General Accounting Office, Financial Audit: Process for Preparing 

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

GAO-04-45 (Washington, D.C.: Oct. 30, 2003). This report included 44 recommendations to 

address weaknesses we identified. It also included recommendations related to 16 

disclosure areas that are required by GAAP. We recommended that the 16 disclosures that 

are not included in the consolidated financial statements either be included or that the 

rationale for their exclusion be documented. 

8

Although Treasury was unable to determine how much of the unreconciled transactions, if 

any, relate to operations, it reported unreconciled transactions as a component of net 

operating cost in the consolidated financial statements. 
Page 26 GAO-04-477T 

accounting entries. This contributes to the federal government’s inability 

to determine the impact of these differences on amounts reported in the 

consolidated financial statements. 

• The federal government did not have an adequate process to identify and 

report items needed to reconcile the operating results, which for fiscal 

year 2003 showed a net operating cost of $665 billion, to the budget 

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

$374.8 billion. 

• The consolidated financial statements include 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, costs, and revenues that are not included, and the federal 

government did not provide evidence or disclose in the consolidated 

financial statements that such excluded financial information was 

immaterial. 

• Treasury lacks an adequate process to ensure that the financial 

statements, related notes, Stewardship Information, and Supplemental 

Information are presented in conformity with GAAP. We found that certain 

financial information required by GAAP was not disclosed in the 

consolidated financial statements. Treasury did not provide us with 

documentation of its rationale for excluding this information. As a result 

of this and certain material deficiencies noted above, we were unable to 

determine if the missing information was material to the consolidated 

financial statements. 

In addition to the material deficiencies noted above, we found four other 

material weaknesses in internal control as of September 30, 2003: 

(1) several federal agencies continue to have deficiencies in the processes 

and procedures used to estimate the costs of their lending programs and 

value their related loans receivable; (2) most federal agencies have not 

reported the magnitude of improper payments in their programs and 

activities; (3) federal agencies have not yet fully institutionalized 

comprehensive security management programs; and (4) material internal 

control weaknesses and systems deficiencies continue to affect the federal 

government’s ability to effectively manage its tax collection activities. 

Other Material Weaknesses 
Page 27 GAO-04-477T 

In general, federal agencies continue to make progress in reducing the 

number of material weaknesses and reportable conditions9

 related to their 

lending activities. However, significant deficiencies in the processes and 

procedures used to estimate the costs of certain lending programs and 

value the related loans receivable still remain. The most notable 

deficiencies existed at the Small Business Administration (SBA), which, 

while improved from last year, continues to have a material weakness 

related to this area. For example, SBA did not adequately document its 

estimation methodologies, lacked the management controls necessary to 

ensure that appropriate estimates were prepared and reported based on 

complete and accurate data, and could not fully support the 

reasonableness of the costs of its lending programs and valuations of its 

loan portfolio. SBA’s material weakness plus deficiencies at other federal 

credit agencies relating to the processes and procedures for estimating 

credit program costs continue to adversely affect the government’s ability 

to support annual budget requests for these programs, make future 

budgetary decisions, manage program costs, and measure the performance 

of lending activities. 

Across the federal government, improper payments occur in a variety of 

programs and activities, including those related to health care, contract 

management, federal financial assistance, and tax refunds.10 While 

complete information on the magnitude of improper payments is not yet 

available, based on available data, OMB has estimated that improper 

payments exceed $35 billion annually. Many improper payments occur in 

federal programs that are administered by entities other than the federal 

government, such as states. Improper payments often result from a lack of 

or an inadequate system of internal controls. Although the President’s 

Management Agenda includes an initiative to reduce improper payments, 

most federal agencies have not reported the magnitude of improper 

payments in their programs and activities. 

 9

Reportable conditions are matters coming to our attention that, in our judgment, should be 

communicated because they represent significant deficiencies in the design or operation of 

internal control that could adversely affect the federal government’s ability to meet the 

internal control objectives relating to financial reporting and compliance with laws and 

regulations. 

10Improper payments include inadvertent errors, such as duplicate payments and 

miscalculations, payments for unsupported or inadequately supported claims, payments for 

services not rendered, payments to ineligible beneficiaries, and payments resulting from 

fraud and abuse by program participants and/or federal employees. 

Loans Receivable and Loan 

Guarantee Liabilities 

Improper Payments 
Page 28 GAO-04-477T 

The Improper Payments Information Act of 2002 provides for federal 

agencies to estimate and report on their improper payments.11 It requires 

federal agencies to (1) annually review programs and activities that they 

administer to identify those that may be susceptible to significant 

improper payments, (2) estimate improper payments in susceptible 

programs and activities, and (3) provide reports to the Congress that 

discuss the causes of improper payments identified and the status of 

actions to reduce them. In accordance with the legislation, OMB issued 

guidance for federal agencies’ use in implementing the act. Among other 

things, the guidance requires federal agencies to report on their improper 

payment-related activities in the Management Discussion and Analysis 

section of their annual Performance and Accountability Reports (PAR). 

While the act does not require such reporting by all federal agencies until 

fiscal year 2004, OMB required 44 programs and 14 CFO Act agencies to 

report improper payment information in their fiscal year 2003 PARs. Our 

preliminary review of the PARs found that 12 of the 14 agencies reported 

improper payment amounts for 27 of the 44 programs identified in the 

guidance. We also found that, for the programs where improper payments 

were identified, the reports often contained information on the causes of 

the payments but little information that addressed the other reporting 

requirements cited in the legislation. 

Although progress has been made, serious and widespread information 

security weaknesses continue to place federal assets at risk of inadvertent 

or deliberate misuse, financial information at risk of unauthorized 

modification or destruction, sensitive information at risk of inappropriate 

disclosure, and critical operations at risk of disruption. GAO has reported 

information security as a high-risk area across government since February 

1997. Such information security weaknesses could result in compromising 

the reliability and availability of data that are recorded in or transmitted by 

federal financial management systems. A primary reason for these 

weaknesses is that federal agencies have not yet fully institutionalized 

comprehensive security management programs, which are critical to 

identifying information security weaknesses, resolving information 

security problems, and managing information security risks on an ongoing 

basis. The Congress has shown continuing interest in addressing these 

risks, as evidenced by recent hearings on information security and 

 11Pub. L. No. 107-300, 116 Stat. 2350. The act’s reporting requirement applies only to an 

agency program or activity with estimated improper payments exceeding $10 million. 

Information Security
Page 29 GAO-04-477T 

enactment of the Federal Information Security Management Act of 200212

and the Cyber Security Research and Development Act.13 In addition, the 

administration has taken important actions to improve information 

security, such as integrating information security into the Executive 

Branch Management Scorecard.14

Material internal control weaknesses and systems deficiencies continue to 

affect the federal government’s ability to effectively manage its tax 

collection activities.15 Due to errors and delays in recording activity in 

taxpayer accounts, taxpayers were not always credited for payments made 

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

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

unreported or underreported taxes and did not always pursue collection 

efforts against taxpayers owing taxes to the federal government. 

 12Title III of the E-Government Act of 2002, Pub. L. No. 107-347, 116 Stat. 2899. 

13Pub. L. No. 107-305, 116 Stat. 2367 (2002). 

14The Executive Branch Management Scorecard highlights agencies’ progress in achieving 

management and performance improvements embodied in the President’s Management 

Agenda. 

15U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2003 and 2002 

Financial Statements, GAO-04-126 (Washington, D.C.: Nov. 13, 2003). 

Tax Collection Activities 

(198250) 
Page 30 GAO-04-477T 

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