U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 218 

Independent Auditor’s Report

The President

The President of the Senate

The Speaker of the House of Representatives

In our audits of the U.S. government’s consolidated financial statements as of and for the fiscal 

years ended September 30, 2017, and 2016, we found the following:

x Certain material weaknesses1 in internal control over financial reporting and other limitations 

on the scope of our work resulted in conditions that continued to prevent us from expressing 

an opinion on the accompanying accrual-based consolidated financial statements as of and 

for the fiscal years ended September 30, 2017, and 2016.2

x Significant uncertainties (discussed in Note 22 to the consolidated financial statements), 

primarily related to the achievement of projected reductions in Medicare cost growth, 

prevented us from expressing an opinion on the sustainability financial statements,3 which 

consist of the 2017 and 2016 Statements of Long-Term Fiscal Projections;4 the 2017, 2016, 

2015, 2014, and 2013 Statements of Social Insurance;5 and the 2017 and 2016 Statements 

of Changes in Social Insurance Amounts. A material weakness in internal control also 

prevented us from expressing an opinion on the 2017 and 2016 Statements of Long-Term 

Fiscal Projections.

1

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such 

that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be 

prevented, or detected and corrected, on a timely basis. A deficiency in internal control exists when the design or 

operation of a control does not allow management or employees, in the normal course of performing their assigned 

functions, to prevent, or detect and correct, misstatements on a timely basis.

2

The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2017, and 

2016, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, 

(3) Reconciliations of Net Operating Cost and Budget Deficit, (4) Statements of Changes in Cash Balance from 

Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most 

revenues are recorded on a modified cash basis. We previously reported that certain material weaknesses and, for 

some years, other limitations on the scope of our work prevented us from expressing an opinion on the accrual-based 

consolidated financial statements of the U.S. government for fiscal years 1997 through 2016.

3

The sustainability financial statements are based on projections of future receipts and spending, while the accrualbased consolidated financial statements are based on historical information, including the federal government’s 

assets, liabilities, revenue and net cost.

4

The Statements of Long-Term Fiscal Projections for fiscal years 2017 and 2016 present, for all the activities of the 

federal government, the present value of projected receipts and noninterest spending under current policy without 

change, the relationship of these amounts to projected gross domestic product (GDP), and changes in the present 

value of projected receipts and noninterest spending from the prior year. The valuation date for the Statements of 

Long-Term Fiscal Projections is September 30.

5

Statements of Social Insurance are presented for the current year and each of the 4 preceding years as required by 

U.S. generally accepted accounting principles. For the Statements of Social Insurance, the valuation date is January 

1 for the Social Security and Medicare programs, October 1 for the Railroad Retirement program (January 1 for fiscal 

years 2013, 2014, and 2015), and September 30 for the Black Lung program.
219 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

x Material weaknesses resulted in ineffective internal control over financial reporting for fiscal 

year 2017.

x Material weaknesses and other scope limitations discussed in this audit report limited tests 

of compliance with selected provisions of applicable laws, regulations, contracts, and grant 

agreements for fiscal year 2017.

The following sections of this audit report discuss in more detail (1) our report on the 

accompanying consolidated financial statements, which includes (a) two emphasis of matters—

equity investments, related to the federal government’s actions to stabilize financial markets and 

to promote economic recovery, and long-term fiscal challenges, (b) Required Supplementary 

Information (RSI),6 Required Supplementary Stewardship Information (RSSI),7 and Other 

Information8 included with the consolidated financial statements in the Fiscal Year 2017 

Financial Report of the United States Government (2017 Financial Report), and (c) information 

on Chief Financial Officers Act of 1990 (CFO Act) agency financial management systems; 

(2) our Report on Internal Control over Financial Reporting; (3) our Report on Compliance with 

Laws, Regulations, Contracts, and Grant Agreements; and (4) the Department of the Treasury’s 

(Treasury) and the Office of Management and Budget’s (OMB) comments on a draft of this audit 

report. Appendix I discusses our audit objectives, scope, and methodology.

Report on the Consolidated Financial Statements 

The Secretary of the Treasury, in coordination with the Director of OMB, is required to annually 

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

GAO is required to audit these statements.9 As noted above, the consolidated financial 

statements consist of the accrual-based consolidated financial statements as of and for the 

fiscal years ended September 30, 2017, and 2016, and the sustainability financial statements, 

consisting of the 2017 and 2016 Statements of Long-Term Fiscal Projections; the 2017, 2016, 

2015, 2014, and 2013 Statements of Social Insurance; the 2017 and 2016 Statements of 

Changes in Social Insurance Amounts; and the related notes to the financial statements. 

We performed sufficient audit work to provide this report on the consolidated financial 

statements. We considered the limitations on the scope of our work regarding the accrual-based 

consolidated financial statements and the sustainability financial statements in forming our 

conclusions. Our work was performed in accordance with U.S. generally accepted government 

auditing standards.

6

RSI consists of Management’s Discussion and Analysis and information in the Required Supplementary Information 

section of the Fiscal Year 2017 Financial Report of the United States Government.

7

RSSI consists of information on stewardship investments in the Required Supplementary Stewardship Information 

section of the Fiscal Year 2017 Financial Report of the United States Government.

8

Other information consists of information in the Fiscal Year 2017 Financial Report of the United States Government 

other than the consolidated financial statements, RSI, RSSI, the auditor’s report, and the Statement of the 

Comptroller General of the United States.

9

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). Treasury and 

OMB include the legislative and judicial branches in the consolidated financial statements as well.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 220 

Management’s Responsibility

Management of the federal government is responsible for (1) the preparation and fair 

presentation of annual consolidated financial statements of the U.S. government in accordance 

with U.S. generally accepted accounting principles; (2) preparing, measuring, and presenting 

RSI and RSSI in accordance with U.S. generally accepted accounting principles; 

(3) preparing and presenting other information included in documents containing the 

consolidated financial statements and auditor’s report, and ensuring the consistency of that 

information with the consolidated financial statements, RSI, and RSSI; and (4) maintaining 

effective internal control over financial reporting, including the design, implementation, and 

maintenance of internal control relevant to the preparation and fair presentation of financial 

statements that are free from material misstatement, whether due to fraud or error. 

Auditor’s Responsibility

Our responsibility is to express opinions on these consolidated financial statements based on 

conducting the audit in accordance with U.S. generally accepted government auditing 

standards. We are also responsible for applying certain limited procedures to the RSI, RSSI, 

and other information included with the consolidated financial statements. Because of the 

matters discussed below, we were unable to obtain sufficient appropriate evidence to provide a 

basis for audit opinions on the consolidated financial statements.

Basis for Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements 

The federal government is not able to demonstrate the reliability of significant portions of the 

accompanying accrual-based consolidated financial statements as of and for the fiscal years 

ended September 30, 2017, and 2016, principally resulting from limitations related to certain 

material weaknesses in internal control over financial reporting and other limitations affecting 

the reliability of these financial statements and the scope of our work as discussed below.10 As 

a result of these limitations, readers are cautioned that amounts reported in the accrual-based 

consolidated financial statements and related notes may not be reliable.

The federal government did not maintain adequate systems or have sufficient appropriate 

evidence to support certain material information reported in the accompanying accrual-based 

consolidated financial statements. The underlying material weaknesses in internal control, which 

have existed for years, contributed to our disclaimer of opinion on the accrual-based 

consolidated financial statements. Specifically, these weaknesses concerned the federal 

government’s inability to

10Such limitations include (1) the Department of Defense, the Department of Housing and Urban Development, and 

the Railroad Retirement Board each received a disclaimer of opinion on their respective fiscal year 2017 financial 

statements; (2) the Department of Energy’s audited financial statements for fiscal year 2017 were not issued as of the 

date of this audit report; (3) the Department of Agriculture obtained an unmodified opinion on its consolidated Balance 

Sheet as of September 30, 2017, but its consolidated Statement of Net Cost, consolidated Statement of Changes in 

Net Position, combined Statement of Budgetary Resources, and the related Notes for the fiscal year ended 

September 30, 2017, were not audited; and (4) for fiscal year 2017, the financial information for Defense Security 

Cooperation Agency and the General Fund of the U.S. Government was not audited.
221 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

x satisfactorily determine that property, plant, and equipment and inventories and related 

property, primarily held by the Department of Defense (DOD), were properly reported in the 

accrual-based consolidated financial statements; 

x reasonably estimate or adequately support amounts reported for certain liabilities, such as 

environmental and disposal liabilities, or determine whether commitments and contingencies 

were complete and properly reported; 

x support significant portions of the reported total net cost of operations, most notably related 

to DOD, and adequately reconcile disbursement activity at certain federal entities;

x adequately account for and reconcile intragovernmental activity and balances between 

federal entities; 

x reasonably assure that the consolidated financial statements are (1) consistent with the 

underlying audited entities’ financial statements, (2) properly balanced, and (3) in 

accordance with U.S. generally accepted accounting principles; and 

x reasonably assure that the information in the (1) Reconciliations of Net Operating Cost and 

Budget Deficit and (2) Statements of Changes in Cash Balance from Budget and Other 

Activities is complete and consistent with the underlying information in the audited entities’ 

financial statements and other financial data. 

These material weaknesses continued to (1) hamper the federal government’s ability to reliably 

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

the federal government’s ability to reliably measure the full cost, as well as the financial and 

nonfinancial performance, of certain programs and activities; (3) impair the federal government’s 

ability to adequately safeguard significant assets and properly record various transactions; and 

(4) hinder the federal government from having reliable financial information to operate in an 

efficient and effective manner. Due to these material weaknesses and to other limitations on the 

scope of our work discussed below, additional issues may exist that were not identified and 

could affect the accrual-based consolidated financial statements. Appendix II describes these 

material weaknesses in more detail and highlights the primary effects of these material 

weaknesses on the accompanying accrual-based consolidated financial statements and on the 

management of federal government operations.

Sustainability Financial Statements

Significant uncertainties (discussed in Note 22 to the consolidated financial statements), which 

primarily relate to the achievement of projected reductions in Medicare cost growth, affect the 

sustainability financial statements. In addition, the material weakness related to the 

Reconciliations of Net Operating Cost and Budget Deficit and the Statements of Changes in 

Cash Balance from Budget and Other Activities, discussed above, hampers the federal 

government’s ability to demonstrate the reliability of historical budget information used for 

certain key inputs to the 2017 and 2016 Statements of Long-Term Fiscal Projections. As a result 

of these significant uncertainties and this material weakness, readers are cautioned that 

amounts reported in the 2017 and 2016 Statements of Long-Term Fiscal Projections; the 2017, 

2016, 2015, 2014, and 2013 Statements of Social Insurance; the 2017 and 2016 Statements of 

Changes in Social Insurance Amounts; and the related notes to these financial statements may 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 222 

not fairly present, in all material respects, the sustainability information for those years in 

accordance with U.S. generally accepted accounting principles.

For 2017 and 2016, these significant uncertainties primarily relate to the following.

x Medicare projections in the 2017 and 2016 Statements of Long-Term Fiscal Projections and 

the 2017, 2016, and 2015 Statements of Social Insurance were based on benefit formulas 

under current law and included a significant reduction in Medicare payment rate updates for 

productivity improvements for most categories of Medicare providers,11 based on full 

implementation of the provisions of the Patient Protection and Affordable Care Act, as 

amended (ACA),12 and physician payment updates specified by the Medicare Access and 

CHIP Reauthorization Act of 2015 (MACRA).13

x Management has noted that actual future costs for Medicare are likely to exceed those 

shown by the current law projections presented in the 2017, 2016, and 2015 Statements of 

Social Insurance due, for example, to the likelihood of modifications to the scheduled 

reductions in Medicare payment rate updates for productivity adjustments relating to most 

categories of Medicare providers and to the specified physician payment updates. The 

extent to which actual future costs exceed the current law amounts due to changes to the 

scheduled reductions in Medicare payment rate updates for productivity adjustments and to 

specified physician payment updates depends on both the specific changes that might be

enacted and whether enacted legislation would include further provisions to help offset such 

costs. Consequently, there are significant uncertainties concerning the achievement of these 

projected reductions in Medicare payment rate updates.

x Management has developed an illustrative alternative projection intended to provide 

additional context regarding the long-term sustainability of the Medicare program and to 

illustrate the uncertainties in the Statement of Social Insurance projections. The present 

value of future estimated expenditures in excess of future estimated revenue for Medicare, 

included in the illustrative alternative projection in Note 22, exceeds the $33.5 trillion 

estimate in the 2017 Statement of Social Insurance by $12.0 trillion. 

x Management noted that these significant uncertainties about projected reductions in health 

care cost growth also affect the projected Medicare and Medicaid costs reported in the 2017 

and 2016 Statements of Long-Term Fiscal Projections.

11Under the Patient Protection and Affordable Care Act’s productivity adjustment provisions, productivity

improvements are expected to result in lower overall Medicare spending due to smaller annual increases in the 

Medicare payment rates paid to many health care providers. This is often referred to as a reduction in Medicare 

payment rate updates. The health care provider categories affected include, but are not limited to, inpatient/outpatient 

hospital services, skilled nursing facilities, home health care, ambulance, ambulatory surgical centers, durable 

medical equipment, and prosthetics.

12ACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education 

Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). In this report, references to the ACA 

include any amendments made by the Health Care and Education Reconciliation Act of 2010.

13MACRA, Pub. L. No. 114-10, title I, § 101, 129 Stat. 87, 89 (Apr. 16, 2015). MACRA included many provisions that 

affect Medicare, including the repeal of the sustainable growth rate formula for calculating annual updates to 

Medicare reimbursement payment rates to physicians and certain nonphysician medical providers and established an 

alternative set of annual updates.
223 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

The 2014 and 2013 Statements of Social Insurance were affected by significant uncertainties, 

primarily related to the achievement of projected reductions in Medicare payment rate updates 

for productivity improvements. The 2013 Statement of Social Insurance was also affected by 

uncertainties related to projected reductions in Medicare payment rates for physician services. 

Specifically, the Medicare projections in the 2013 Statement of Social Insurance were based on 

benefit formulas in current law and included significant reductions in Medicare payment rates for 

productivity improvements and physician services. 

The 2014 Statement of Social Insurance reflected a change from the assumption regarding 

scheduled reductions in Medicare payment rates for physician services that was used in the 

2013 Statement of Social Insurance. Specifically, the 2014 Statement of Social Insurance 

reflected a projected baseline that assumed that the physician payment rate reductions would 

not occur and that physician payment rates would annually increase at a rate equal to the 

average sustainable growth rate override that occurred over the 10-year period ending on 

March 31, 2015. For 2014 and 2013, management noted that actual future costs for Medicare 

were likely to exceed those shown by the current law projections presented in the 2014 and 

2013 Statements of Social Insurance due, for example, to the likelihood of modifications to the 

scheduled reductions in Medicare payment rates for productivity adjustments. 

Projections of Medicare costs are sensitive to assumptions about future decisions by 

policymakers and about the behavioral responses of consumers, employers, and health care 

providers as policy, incentives, and the health care sector change over time. Such secondary 

impacts are not fully reflected in the sustainability financial statements but could be expected to 

influence the excess cost growth rate used in the projections.14 Key drivers of uncertainty about 

the excess cost growth rate include the future development and deployment of medical 

technology, the evolution of personal income, and the cost and availability of insurance, as well 

as federal policy changes, such as the implementation of the ACA. The Required 

Supplementary Information section of the 2017 Financial Report includes unaudited information 

concerning how changes in various assumptions would change the present value of future 

estimated expenditures in excess of future estimated revenue. As discussed in that section, the 

projections are very sensitive to changes in the health care cost growth assumption.

As discussed in Notes 22 and 23 to the financial statements, the sustainability financial 

statements are based on management’s assumptions. These sustainability financial statements 

present the present value of the U.S. government’s estimated future receipts and future 

spending using a projection period sufficient to illustrate long-term sustainability.15 The 

sustainability financial statements are intended to aid users in assessing whether future 

resources will likely be sufficient to sustain public services and to meet obligations as they come 

due. The Statements of Social Insurance and Changes in Social Insurance Amounts are based 

on income and benefit formulas in current law (except for the 2014 Medicare projections, which 

use the projected baseline) and assume that scheduled benefits will continue after any related 

trust funds are exhausted. The Statements of Long-Term Fiscal Projections are based on the 

continuation of current policy and also assume that scheduled benefits will continue after any 

related trust funds are exhausted. The sustainability financial statements are not forecasts or 

predictions.

14The excess cost growth rate is the increase in health care spending per person relative to the growth of GDP per 

person after removing the effects of demographic changes on health care spending.

15The projection period used for the Social Security, Medicare, and Railroad Retirement social insurance programs is 

75 years. Beginning in fiscal year 2017, the Black Lung program has a rolling 25-year projection period. For fiscal 

years 2013 through 2016, the Black Lung program projection period was through September 30, 2040.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 224 

In preparing the sustainability financial statements, management considers and selects 

assumptions and data that it believes provide a reasonable basis to illustrate whether current 

policy or law is sustainable. Assumptions underlying such sustainability information do not 

consider changes in policy or all potential future events that could affect future receipts, future 

spending, and sustainability, such as, for example, implementation of policy changes to avoid 

trust fund exhaustion or unsustainable debt levels.

As discussed in the unaudited Required Supplementary Information section of the 2017

Financial Report, the Social Security and Medicare Hospital Insurance (Part A) trust funds are, 

based on achievement of the cost reductions discussed above, projected to be exhausted in 

2034 and 2029, respectively, at which time they would be unable to pay the full amount of 

scheduled future benefits.16 For Social Security, future revenues were projected to be sufficient 

to pay 77 percent of scheduled benefits in 2034, the year of projected trust funds (combined) 

exhaustion, and decreasing to 73 percent of scheduled benefits in 2091. For Medicare Hospital 

Insurance (Part A), future revenues were projected to be sufficient to pay 88 percent of 

scheduled benefits in 2029, the year of projected trust fund exhaustion, declining to 81 percent 

by 2041, and then gradually increasing to 88 percent of scheduled benefits again in 2091.

Because of the large number of factors that affect the sustainability financial statements and the 

fact that future events and circumstances cannot be estimated with certainty, even if current 

policy is continued, there will be differences between the estimates in the sustainability financial 

statements and the actual results, and those differences may be material.

Other Limitations on the Scope of Our Work

For fiscal years 2017 and 2016, there were other limitations on the scope of our work, in 

addition to the material weaknesses and significant uncertainties noted above, that contributed 

to our disclaimers of opinion on the consolidated financial statements. Such limitations primarily 

relate to our ability to obtain adequate representations from management. Treasury and OMB 

depend on representations from certain federal entities to provide their representations to us 

regarding the U.S. government’s consolidated financial statements. Treasury and OMB were 

unable to provide us with adequate representations regarding the U.S. government’s accrualbased consolidated financial statements for fiscal years 2017 and 2016, primarily because of 

insufficient or no representations provided to them by certain federal entities, including DOD.

Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements 

Because of the significance of the related matters described in the Basis for Disclaimer of 

Opinion paragraphs above, we were not able to obtain sufficient appropriate audit evidence to 

provide a basis for an audit opinion on the accrual-based consolidated financial statements. 

Accordingly, we do not express an opinion on the accrual-based consolidated financial 

statements as of and for the fiscal years ended September 30, 2017, and 2016.

16The combined Social Security trust funds consist of the Federal Old-Age and Survivors Insurance trust fund and the 

Federal Disability Insurance trust fund, whose assets are projected to be exhausted in 2035 and 2028, respectively.
225 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Sustainability Financial Statements

Because of the significance of the related matters described in the Basis for Disclaimer of 

Opinion paragraphs above, we were not able to obtain sufficient appropriate audit evidence to 

provide a basis for an audit opinion on the Statements of Long-Term Fiscal Projections for 2017 

and 2016; the Statements of Social Insurance for 2017, 2016, 2015, 2014, and 2013; and the 

Statements of Changes in Social Insurance Amounts for 2017 and 2016. Accordingly, we do not 

express an opinion on these sustainability financial statements.

Emphasis of Matters

The following key items deserve emphasis in order to put the information contained in the 

consolidated financial statements and the Management’s Discussion and Analysis section of the 

2017 Financial Report into context. However, our disclaimers of opinion noted above are not 

modified with respect to these matters.

Equity Investments Related to the Federal Government’s Actions to Stabilize 

Financial Markets and to Promote Economic Recovery 

In 2008, during the financial crisis, the federal government placed the Federal National 

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 

(Freddie Mac) under conservatorship and entered into preferred stock purchase agreements 

with these government-sponsored enterprises (GSE) to help ensure their financial stability. The 

agreements with the GSEs could affect the federal government’s financial position. As of 

September 30, 2017, the federal government continued to report about $93 billion of 

investments in the GSEs, which is net of about $102 billion in valuation losses. 

In valuing these equity investments, management considered and selected assumptions and 

data that it believed provided a reasonable basis for the estimated values reported in the 

accrual-based consolidated financial statements. However, as discussed in Note 1 to the 

consolidated financial statements, there are many factors affecting these assumptions and 

estimates that are inherently subject to substantial uncertainty arising from the uniqueness of 

the transactions and the likelihood of future changes in general economic, regulatory, and 

market conditions. As such, there will be differences between the estimated values as of 

September 30, 2017, and the actual results, and such differences may be material. Also, as 

discussed in Note 1 to the consolidated financial statements, the financial statements do not 

include the assets, liabilities, or results of operations of entities in which Treasury holds either a 

direct, indirect, or beneficial equity interest. Treasury and OMB have determined that none of 

the entities meet the criteria for a federal entity.17

Long-Term Fiscal Challenges

The 2017 Statement of Long-Term Fiscal Projections and related information in Note 23 and in 

the unaudited Required Supplementary Information section of the 2017 Financial Report show 

that absent policy changes, the federal government continues to face an unsustainable long17For additional information on the criteria used to determine which federal entities are included in the reporting entity 

for the consolidated financial statements, as well as the reasons for not including certain entities, such as Fannie Mae 

and Freddie Mac, see app. A of the 2017 Financial Report.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 226 

term fiscal path.18 For the 2017 projections, debt-to-gross domestic product (GDP) at the end of 

the 75-year projection period was higher than in the 2016 and 2015 projections. The budget 

deficit increased for the second consecutive year in fiscal year 2017. Although the budget deficit 

projections in the 2017 Financial Report show a slight improvement in the near term with the 

budget deficit below current levels for the next 5 years, it increases beginning in 2023. Over the 

long term, the imbalance between spending and revenue that is built into current law and policy 

is projected to lead to continued growth of the deficit and debt held by the public as a share of 

GDP. This situation—in which debt grows faster than GDP—means the current federal fiscal 

path is unsustainable.

Under these projections, spending for the major health and retirement programs are projected to 

increase more rapidly than GDP in the coming decades due to an aging population and 

projected continued increases in health care costs. The projections for Social Security and 

Medicare are based on the same assumptions underlying the information presented in the 

Statement of Social Insurance and assume that the provisions enacted in the ACA designed to 

slow the growth of Medicare costs are sustained and remain effective throughout the projection 

period.19 They also reflect the effects of MACRA, which, among other things, revised the 

methodology for determining physician payment rates. If, however, the Medicare cost 

containment measures and physician payment rate methodology are not sustained over the 

long term—concerns expressed by the Trustees of the Medicare trust funds, the Centers for 

Medicare & Medicaid Services’ Chief Actuary, the Congressional Budget Office (CBO), and 

others—spending on federal health care programs will grow more rapidly than assumed in the 

projections. 

GAO and CBO prepare long-term federal fiscal simulations, which also continue to show debt 

held by the public rising as a share of GDP in the long term.20 GAO, CBO, and the 2017 

Statement of Long-Term Fiscal Projections all project that debt held by the public as a share of 

GDP will surpass its historical high (106 percent in 1946) within the next 14 to 22 years. The 

Tax Cuts and Jobs Act will hold important implications for this timeframe. All of these long-term 

projections each use somewhat different assumptions, but their results are the same; absent 

policy changes, the federal government’s fiscal path is unsustainable. 

At the end of fiscal year 2017, debt held by the public reached about 76 percent of GDP, far 

above the post-World War II (since 1946) average of 45 percent. Debt held by the public at 

these high levels could limit the federal government’s flexibility to address emerging issues and 

unforeseen challenges, such as another economic downturn or large-scale disaster. These 

18The 2017 Statement of Long-Term Fiscal Projections is based on current policy as of September 30, 2017. 

Therefore, the 2017 projections, related footnotes, and Required Supplementary Information do not reflect the effects 

of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, enacted on December 22, 2017, or any other 

legislation enacted after September 30, 2017 that changes policy that was in effect as of the end of the fiscal year. 

Management notes that next year’s 2018 Statement of Long-Term Fiscal Projections in the Financial Report will 

incorporate the effects of such legislation enacted after September 30, 2017, based on an updated economic forecast 

and other economic developments.

19ACA, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education 

Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010).

20Similar to the 2017 Statement of Long-Term Fiscal Projections, GAO and CBO simulations also do not reflect the 

effects of the Tax Cuts and Jobs Act or other legislation enacted after September 30, 2017. For more information on 

GAO’s simulations, see GAO, The Nation’s Fiscal Health: Action is Needed to Address the Federal Government’s 

Fiscal Future, GAO-17-237SP (Washington, D.C.: Jan. 17, 2017). For more information on CBO’s simulations, see 

Congressional Budget Office, The 2017 Long-Term Budget Outlook (Washington, D.C.: March 2017). 
227 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

unforeseen events, also known as fiscal risks or fiscal exposures, place additional pressure on 

the federal budget. They are responsibilities, programs, and activities that may legally commit or 

create expectations for future federal spending based on current policy, past practices, or other 

factors.21 A more complete understanding of them can help policymakers anticipate changes in 

future spending and can enhance oversight of federal resources.

Other Matters

Required Supplementary Information and Required Supplementary Stewardship 

Information

U.S. generally accepted accounting principles issued by the Federal Accounting Standards 

Advisory Board (FASAB) require that RSI and RSSI be presented in the 2017 Financial Report

to supplement the financial statements. Although RSI and RSSI are not a part of the financial 

statements, FASAB considers this information to be an essential part of financial reporting for 

placing the financial statements in appropriate operational, economic, or historical context. We 

were unable to apply certain limited procedures to the RSI and RSSI in accordance with U.S. 

generally accepted government auditing standards because of the material weaknesses and 

other scope limitations discussed in this audit report. We did not audit and do not express an 

opinion or provide any assurance on the RSI or RSSI. 

Other Information

Other information included in the 2017 Financial Report contains a wide range of information, 

some of which is not directly related to the consolidated financial statements. This information is 

presented for purposes of additional analysis and is not a required part of the consolidated 

financial statements, RSI, or RSSI. We read the other information included with the consolidated 

financial statements in order to identify material inconsistencies, if any, with the consolidated 

financial statements. We did not audit and do not express an opinion or provide any assurance 

on the other information in the 2017 Financial Report.

Readers are cautioned that the material weaknesses, significant uncertainties, and other scope 

limitations discussed in this audit report may affect the reliability of certain information contained 

in the RSI, RSSI, and other information that is taken from the same data sources as the accrualbased consolidated financial statements and the sustainability financial statements.

CFO Act Agency Financial Management Systems

The federal government’s ability to efficiently and effectively manage and oversee its day-to-day 

operations and programs relies heavily on the ability of entity financial management systems to 

produce complete, reliable, timely, and consistent financial information for use by executive 

branch agencies and Congress.22 The Federal Financial Management Improvement Act of 1996 

(FFMIA) was designed to lead to system improvements that would result in CFO Act agency 

managers routinely having access to reliable, useful, and timely financial-related information 

with which to measure performance and increase accountability throughout the year. 

21GAO-17-237SP.

22The Federal Financial Management Improvement Act of 1996, which is reprinted in 31 U.S.C. § 3512 note, defines 

“financial management systems” to include the financial systems and the financial portions of mixed systems 

necessary to support financial management, including automated and manual processes, procedures, controls, data, 

hardware, software, and support personnel dedicated to the operation and maintenance of system functions.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 228 

The 24 CFO Act agencies are responsible for implementing and maintaining financial 

management systems that substantially comply with the requirements of FFMIA. FFMIA 

requires auditors, as part of the 24 CFO Act agencies’ financial statement audits, to report 

whether those agencies’ financial management systems substantially comply with (1) federal 

financial management systems requirements, (2) applicable federal accounting standards, and 

(3) the federal government’s U.S. Standard General Ledger at the transaction level. 

For fiscal year 2017, auditors at 10 of 23 CFO Act agencies reported that the agencies’ financial 

management systems did not substantially comply with one or more of the three FFMIA 

requirements.23 For fiscal year 2016, auditors at 11 of the 24 CFO Act agencies reported that 

the agencies’ financial management systems did not substantially comply with one or more of 

the three FFMIA requirements. Agency management at the 24 CFO Act agencies also annually 

report on FFMIA compliance. For fiscal year 2017, agency management at 8 of 23 CFO Act 

agencies reported that their agencies’ financial management systems did not substantially 

comply with one or more of the three FFMIA requirements. For fiscal year 2016, agency 

management at 9 of the 24 CFO Act agencies reported that their agencies’ financial 

management systems did not substantially comply with one or more of the three FFMIA 

requirements. Based on agency financial reports, differences in the assessments of substantial 

compliance between the auditors and agency management reflect differences in management’s 

and auditors’ views regarding the impact of reported deficiencies on agencies’ financial 

management systems. 

Long-standing financial management systems weaknesses at several large CFO Act agencies, 

along with the size and complexity of the federal government, continue to present a formidable 

management challenge in providing accountability to the nation’s taxpayers and have 

contributed significantly to certain of the material weaknesses and other limitations discussed in 

this audit report.

Report on Internal Control over Financial Reporting

Management’s Responsibility

Management of the federal government is responsible for (1) maintaining effective internal 

control over financial reporting, including the design, implementation, and maintenance of 

internal control relevant to the preparation and fair presentation of financial statements that are 

free from material misstatement, whether due to fraud or error, and (2) evaluating the 

effectiveness of internal control over financial reporting, based on criteria established under the 

Federal Managers’ Financial Integrity Act (FMFIA).24

23As of the issue date of this audit report, the audited financial statements were not issued for one of the CFO Act 

agencies—the Department of Energy.

2431 U.S.C. § 3512 (c), (d) (commonly referred to as FMFIA). This act requires executive agency heads to evaluate 

and report annually to the President and Congress on the adequacy of their internal control and accounting systems 

and on actions to correct significant problems. 
229 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Auditor’s Responsibility

The purpose of an audit of financial statements is to express an opinion on the financial 

statements. An audit of financial statements includes considering internal control over financial 

reporting to design audit procedures that are appropriate in the circumstances, but not for the 

purpose of expressing an opinion on the effectiveness of internal control over financial reporting. 

Accordingly, we do not express an opinion on the effectiveness of internal control over financial 

reporting. We did not consider all internal controls relevant to operating objectives as broadly 

established under FMFIA, such as those controls relevant to preparing performance information 

and ensuring efficient operations. 

Our responsibility is to report any material weaknesses or significant deficiencies in internal 

control over financial reporting for fiscal year 2017 that come to our attention as a result of our 

audit.25 Based on the scope of our work and the effects of the other limitations on the scope of 

our audit noted throughout this audit report, our internal control work was not designed to, and 

would not necessarily, identify all deficiencies in internal control, including those that might be 

material weaknesses or significant deficiencies. Therefore, additional material weaknesses or 

significant deficiencies may exist that were not identified. Our work was performed in 

accordance with U.S. generally accepted government auditing standards.

Definitions and Inherent Limitations of Internal Control over Financial Reporting

An entity’s internal control over financial reporting is a process effected by those charged with 

governance, management, and other personnel, the objectives of which are to provide 

reasonable assurance that (1) transactions are properly recorded, processed, and summarized 

to permit the preparation of financial statements in accordance with U.S. generally accepted 

accounting principles, and assets are safeguarded against loss from unauthorized acquisition, 

use, or disposition, and (2) transactions are executed in accordance with provisions of 

applicable laws (including those governing the use of budget authority), regulations, contracts, 

and grant agreements, noncompliance with which could have a material effect on the financial 

statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or 

detect and correct, misstatements due to fraud or error.

Material Weaknesses Resulted in Ineffective Internal Control over Financial Reporting 

The material weaknesses discussed in this audit report resulted in ineffective internal control 

over financial reporting. Consequently, the federal government’s internal control did not provide 

reasonable assurance that a material misstatement of the consolidated financial statements 

would be prevented, or detected and corrected, on a timely basis. 

In addition to the material weaknesses that contributed to our disclaimers of opinion on the 

accrual-based consolidated financial statements and the sustainability financial statements, 

which were discussed previously, we found the following three other material weaknesses in 

internal control. These other material weaknesses were the federal government’s inability to 

25A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting 

that is less severe than a material weakness, yet important enough to merit attention by those charged with 

governance. 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 230 

x determine the full extent to which improper payments occur and reasonably assure that 

appropriate actions are taken to reduce them, 

x identify and resolve information security control deficiencies and manage information 

security risks on an ongoing basis, and

x effectively manage its tax collection activities.

These material weaknesses are discussed in more detail in appendix III, including the primary 

effects of the material weaknesses on the accompanying accrual-based consolidated financial 

statements and on the management of federal government operations.

We also found two significant deficiencies in the federal government’s internal control related to 

implementing effective internal controls at certain federal entities for the following areas:

x loans receivable and loan guarantee liabilities and

x federal grants management.

These significant deficiencies are discussed in more detail in appendix IV.

Further, individual federal entity financial statement audit reports identified additional control 

deficiencies that were reported by the entities’ auditors as either material weaknesses or 

significant deficiencies at the individual entity level. We do not consider these additional 

deficiencies to represent material weaknesses or significant deficiencies with respect to the U.S. 

government’s consolidated financial statements.

Intended Purpose of Report on Internal Control over Financial Reporting

The purpose of this report on internal control over financial reporting is solely to describe the 

scope of our consideration of internal control over financial reporting, and the results of our 

procedures, and not to provide an opinion on the effectiveness of internal control over financial 

reporting. This report on internal control over financial reporting is an integral part of an audit 

performed in accordance with U.S. generally accepted government auditing standards. 

Accordingly, this report on internal control over financial reporting is not suitable for any other 

purpose.

Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

Management’s Responsibility

Management of the federal government is responsible for the federal government’s compliance 

with laws, regulations, contracts, and grant agreements. 

Auditor’s Responsibility

An audit of federal financial statements includes testing compliance with selected provisions of 

applicable laws, regulations, contracts, and grant agreements that have a direct effect on the 

determination of material amounts and disclosures in the consolidated financial statements, and 

performing certain other limited procedures. Accordingly, we did not test the federal 
231 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

government’s compliance with all laws, regulations, contracts, and grant agreements. Due to the 

limitations discussed below and the scope of our procedures, noncompliance may occur and not 

be detected by these tests. 

Our objective was not to provide an opinion on the federal government’s compliance with laws, 

regulations, contracts, and grant agreements. Accordingly, we do not express such an opinion. 

Our work was performed in accordance with U.S. generally accepted government auditing 

standards.

Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements

Our work to test compliance with selected provisions of applicable laws, regulations, contracts, 

and grant agreements was limited by certain of the material weaknesses and other scope 

limitations discussed in this audit report. U.S. generally accepted government auditing 

standards and OMB guidance require auditors to report on entities’ compliance with selected 

provisions of applicable laws, regulations, contracts, and grant agreements. Certain component 

entity audit reports contain instances of noncompliance. None of these instances were deemed 

to be reportable noncompliance with regard to the accompanying U.S. government’s 

consolidated financial statements.

Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant 

Agreements

The purpose of this report on compliance with laws, regulations, contracts, and grant 

agreements is solely to describe the scope of our testing of compliance with selected provisions 

of applicable laws, regulations, contracts, and grant agreements, and the results of that testing, 

and not to provide an opinion on compliance. This report on compliance with laws, regulations, 

contracts, and grant agreements is an integral part of an audit performed in accordance with 

U.S. generally accepted government auditing standards in considering compliance. Accordingly, 

this report on compliance with laws, regulations, contracts, and grant agreements is not suitable 

for any other purpose.

Agency Comments

We provided a draft of this audit report to Treasury and OMB officials, who provided technical 

comments that we have incorporated as appropriate. Treasury and OMB officials expressed 

their continuing commitment to addressing the problems this report outlines. 

Robert F. Dacey

Chief Accountant

U.S. Government Accountability Office

February 7, 2018
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 232 

Appendix I

Objectives, Scope, and Methodology

Our objectives were to audit the consolidated financial statements consisting of the (1) accrualbased consolidated financial statements as of and for the fiscal years ended September 30, 

2017, and 2016, and (2) sustainability financial statements, which consist of the 2017 and 2016 

Statements of Long-Term Fiscal Projections; the 2017, 2016, 2015, 2014, and 2013 Statements 

of Social Insurance; and the 2017 and 2016 Statements of Changes in Social Insurance 

Amounts. Our objectives also included reporting on internal control over financial reporting and 

on compliance with selected provisions of applicable laws, regulations, contracts, and grant 

agreements. 

The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government 

Management Reform Act of 1994 (GMRA), requires the inspectors general of the 24 CFO Act 

agencies to be responsible for annual audits of agency-wide financial statements prepared by 

these agencies.26 GMRA requires GAO to be responsible for the audit of the U.S. government’s 

consolidated financial statements,27 and the Accountability of Tax Dollars Act of 2002 (ATDA) 

requires most other executive branch entities to annually prepare financial statements and have 

them audited.28 The Office of Management and Budget and the Department of the Treasury 

(Treasury) have identified 39 federal entities that are significant to the U.S. government’s fiscal 

year 2017 consolidated financial statements, including the 24 CFO Act agencies.29 We consider 

these 39 entities to be significant component entities for purposes of our audit of the 

consolidated financial statements. Our work was performed in coordination and cooperation with 

the inspectors general and independent public accountants for these significant component 

entities to achieve our respective audit objectives. Our audit approach regarding the accrualbased consolidated financial statements primarily focused on determining the current status of 

the material weaknesses that contributed to our disclaimer of opinion on the accrual-based 

consolidated financial statements and the other material weaknesses affecting internal control 

that we reported in our report on the consolidated financial statements for fiscal year 2016.30 We 

also separately audited the financial statements of certain component entities, and parts of a 

significant component entity, including the following.

x We audited and expressed an unmodified opinion on the Internal Revenue Service’s (IRS) 

financial statements as of and for the fiscal years ended September 30, 2017, and 2016.31 In 

fiscal years 2017 and 2016, IRS collected about $3.4 trillion and $3.3 trillion, respectively, in 

tax payments each year and paid about $437 billion and $426 billion, respectively, in 

refunds to taxpayers. For fiscal year 2017, we continued to report a material weakness in 

2631 U.S.C. § 3521(e). GMRA authorized the Office of Management and Budget to designate agency components 

that also would receive financial statement audits. See 31 U.S.C. § 3515(c).

27GMRA, Pub. L. No. 103-356, § 405(c), 108 Stat. 3410, 3416-17 (Oct. 13, 1994), codified at 31 U.S.C. § 331(e)(2). 

28ATDA, Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002), codified at 31 U.S.C. § 3515.

29See Treasury Financial Manual, vol. I, pt. 2, ch. 4700, for a listing of the 39 entities.

30GAO, Financial Audit: Fiscal Years 2016 and 2015 Consolidated Financial Statements of the U.S. Government,

GAO-17-283R (Washington, D.C.: Jan. 12, 2017). 

31GAO, Financial Audit: IRS’s Fiscal Years 2017 and 2016 Financial Statements, GAO-18-165 (Washington, D.C.: 

Nov. 9, 2017). 
233 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

internal control over unpaid assessments that resulted in ineffective internal control over 

financial reporting. In addition, we continued to report a significant deficiency in IRS’s 

internal control over financial reporting systems. We also reported that we found no 

reportable noncompliance for fiscal year 2017 with provisions of applicable laws, 

regulations, contracts, and grant agreements we tested. 

x We audited and expressed an unmodified opinion on the Schedules of Federal Debt 

managed by Treasury’s Bureau of the Fiscal Service (Fiscal Service) for the fiscal years 

ended September 30, 2017, and 2016.32 For these 2 fiscal years, the schedules reported 

(1) approximately $14.7 trillion (2017) and $14.2 trillion (2016) of federal debt held by the 

public,33 (2) about $5.6 trillion (2017) and $5.4 trillion (2016) of intragovernmental debt 

holdings,34 and (3) about $296 billion (2017) and $273 billion (2016) of interest on federal 

debt held by the public. We also reported that although internal controls could be improved, 

Fiscal Service maintained, in all material respects, effective internal control over financial 

reporting relevant to the Schedule of Federal Debt as of September 30, 2017. In addition, 

we reported that we found no reportable noncompliance for fiscal year 2017 with provisions 

of applicable laws, regulations, contracts, and grant agreements we tested related to the 

Schedule of Federal Debt.

x We audited and expressed unmodified opinions on the U.S. Securities and Exchange 

Commission’s (SEC) and its Investor Protection Fund’s (IPF) financial statements as of and 

for the fiscal years ended September 30, 2017, and 2016.35 We also reported that SEC 

maintained, in all material respects, effective internal control over financial reporting for both 

the entity as a whole and IPF as of September 30, 2017. In addition, we reported that we 

found no reportable noncompliance for either SEC or IPF for fiscal year 2017 with provisions 

of applicable laws, regulations, contracts, and grant agreements we tested. 

x We audited and expressed an unmodified opinion on the Federal Housing Finance Agency’s 

(FHFA) financial statements as of and for the fiscal years ended September 30, 2017, and 

2016.36 We also reported that FHFA maintained, in all material respects, effective internal 

control over financial reporting as of September 30, 2017. In addition, we reported that we 

found no reportable noncompliance for fiscal year 2017 with provisions of applicable laws, 

regulations, contracts, and grant agreements we tested.

32GAO, Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2017 and 2016 Schedules of Federal Debt, GAO18-134 (Washington, D.C.: Nov. 9, 2017). 

33Debt held by the public on the Schedules of Federal Debt represents federal debt issued by Treasury and held by 

investors outside of the federal government, including individuals, corporations, state or local governments, the 

Federal Reserve, and foreign governments.

34Intragovernmental debt holdings represent federal debt owed by Treasury to federal government accounts, primarily 

federal trust funds, such as Social Security and Medicare. 

35GAO, Financial Audit: Securities and Exchange Commission’s Fiscal Years 2017 and 2016 Financial Statements,

GAO-18-186R (Washington, D.C.: Nov. 15, 2017).

36GAO, Financial Audit: Federal Housing Finance Agency’s Fiscal Years 2017 and 2016 Financial Statements, GAO18-166R (Washington, D.C.: Nov. 15, 2017). 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 234 

x We audited and expressed an unmodified opinion on the Office of Financial Stability’s (OFS) 

financial statements for the Troubled Asset Relief Program (TARP) as of and for the fiscal 

years ended September 30, 2017, and 2016.37 We also reported that OFS maintained, in all 

material respects, effective internal control over financial reporting for TARP as of 

September 30, 2017. In addition, we reported that we found no reportable noncompliance 

for fiscal year 2017 with provisions of applicable laws, regulations, contracts, and grant 

agreements we tested.

x We audited and expressed an unmodified opinion on the Bureau of Consumer Financial 

Protection’s (CFPB) financial statements as of and for the fiscal years ended September 30, 

2017, and 2016.38 We also reported that CFPB maintained, in all material respects, effective 

internal control over financial reporting as of September 30, 2017. In addition, we reported 

that we found no reportable noncompliance for fiscal year 2017 with provisions of applicable 

laws, regulations, contracts, and grant agreements we tested. 

In addition, we considered the CFO Act agencies’ and certain other federal entities’ fiscal years 

2017 and 2016 financial statements and the related auditors’ reports prepared by the inspectors 

general or contracted independent public accountants. Financial statements and audit reports 

for these entities provide information about the entities’ operations. Each entity audit report also 

contains details regarding any identified material weaknesses or significant deficiencies and 

related recommendations for the respective entity. We did not audit, and we do not express an 

opinion on, any of these individual federal entity financial statements. 

We considered the Department of Defense’s (DOD) assertion in the DOD Agency Financial 

Report for Fiscal Year 2017 regarding DOD’s ineffective internal controls over financial reporting 

and noncompliant financial management systems. In addition, in the DOD Inspector General’s 

fiscal year 2017 report on internal control over financial reporting, the Inspector General cited 

material weaknesses in several areas, including (1) property, plant, and equipment; 

(2) inventory and operating material and supplies; (3) environmental liabilities; 

(4) intragovernmental eliminations; and (5) material amounts of unsupported accounting entries 

needed to prepare DOD’s annual consolidated financial statements. 

Our audit approach for the 2017 and 2016 Statements of Long-Term Fiscal Projections focused 

primarily on assuring that the information relating to the Statements of Social Insurance is 

properly reflected therein and testing the methodology used as well as evaluating key 

assumptions. We also evaluated whether the internal control deficiencies concerning the 

accrual-based consolidated financial statements affected certain key inputs used in generating 

the projections.

Because of the significance of the amounts presented in the Statements of Social Insurance 

and Statements of Changes in Social Insurance Amounts related to the Social Security 

Administration (SSA) and the Department of Health and Human Services (HHS), our audit 

approach regarding these statements focused primarily on these two agencies. For each federal 

entity preparing a Statement of Social Insurance and Statement of Changes in Social Insurance 

37GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2017 and 2016 

Financial Statements, GAO-18-170R (Washington, D.C.: Nov. 9, 2017).

38GAO, Financial Audit: Bureau of Consumer Financial Protection’s Fiscal Years 2017 and 2016 Financial 

Statements, GAO-18-185R (Washington, D.C.: Nov. 15, 2017).
235 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Amounts,39 we considered the entity’s 2017, 2016, 2015, 2014, and 2013 Statements of Social 

Insurance and the 2017 and 2016 Statements of Changes in Social Insurance Amounts, as well 

as the related auditor’s reports prepared by the inspectors general or contracted independent 

public accountants. 

We performed sufficient audit work to provide our reports on (1) the consolidated financial 

statements; (2) internal control over financial reporting; and (3) compliance with selected 

provisions of applicable laws, regulations, contracts, and grant agreements. We considered the 

limitations on the scope of our work regarding the accrual-based consolidated financial 

statements and the sustainability financial statements in forming our conclusions. Our work was 

performed in accordance with U.S. generally accepted government auditing standards. 

39These entities are SSA, HHS, the Railroad Retirement Board, and the Department of Labor.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 236 

Appendix II

Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual-Based 

Consolidated Financial Statements

The continuing material weaknesses discussed below contributed to our disclaimer of opinion 

on the federal government’s accrual-based consolidated financial statements.40 The federal 

government did not maintain adequate systems or have sufficient appropriate evidence to 

support information reported in the accompanying accrual-based consolidated financial 

statements, as described below. 

Property, Plant, and Equipment and Inventories and Related Property 

The federal government could not satisfactorily determine that property, plant, and equipment 

(PP&E) and inventories and related property were properly reported in the accrual-based 

consolidated financial statements. Most of the PP&E and inventories and related property are 

the responsibility of the Department of Defense (DOD). As in past years, DOD did not maintain 

adequate systems or have sufficient records to provide reliable information on these assets. 

Certain other entities’ auditors reported continued deficiencies in internal control procedures and 

processes related to PP&E. 

Deficiencies in internal control over such assets could affect the federal government’s ability to 

fully know the assets it owns, including their location and condition, and its ability to effectively 

(1) safeguard assets from physical deterioration, theft, or loss; (2) account for acquisitions and 

disposals of such assets and reliably report asset balances; (3) ensure that 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 

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 any related 

to treaties and other international agreements entered into to further the federal government’s 

interests, were complete and properly reported. 

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, deficiencies in internal 

control supporting the process for estimating environmental and disposal liabilities could result 

in improperly stated liabilities, as well as adversely affect the federal government’s ability to 

determine priorities for cleanup and disposal activities and to appropriately consider future 

budgetary resources needed to carry out these activities. In addition, to the extent disclosures of 

40The material weakness related to the Reconciliations of Budget Deficit to Net Operating Cost and Changes in Cash 

Balance also contributed to our disclaimer on the 2017 and 2016 Statements of Long-Term Fiscal Projections.
237 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

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 

Reported net costs were affected by the previously discussed material weaknesses in reporting 

assets and liabilities; material weaknesses in financial statement preparation, as discussed 

below; and the lack of adequate disbursement reconciliations at certain federal entities. As a 

result, the federal government was unable to support significant portions of the reported total net 

cost of operations, most notably those related to DOD. 

With respect to disbursements, auditors of DOD and certain other federal entities reported 

continued control deficiencies in reconciling disbursement activity. For fiscal years 2017 and 

2016, inadequate reconciliations of disbursement activity included (1) unreconciled differences 

between federal entities’ and the Department of the Treasury’s (Treasury) records of 

disbursements and (2) unsupported federal entity adjustments, which could also affect the

balance sheet.

Unreliable 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 or 

authorized. If disbursements are improperly recorded, this could result in misstatements in the 

financial statements and in certain data provided by federal entities for inclusion in The Budget 

of the United States Government (President’s Budget) concerning obligations and outlays. 

Accounting for and Reconciliation of Intragovernmental Activity and Balances 

Significant progress has been made over the past few years; however, the federal government 

continues to be unable to adequately account for and reconcile intragovernmental activity and 

balances between federal entities. Federal entities are responsible for properly accounting for 

and reporting their intragovernmental activity and balances in their entity financial statements. 

When preparing the consolidated financial statements, intragovernmental activity and balances 

between federal entities should be in agreement and must be subtracted out, or eliminated, from 

the financial statements. If the two federal entities engaged in an intragovernmental transaction 

do not both record the same intragovernmental transaction in the same year and for the same 

amount, the intragovernmental transactions will not be in agreement, resulting in errors (i.e., 

differences or unmatched amounts) in the consolidated financial statements. The Office of 

Management and Budget (OMB) and Treasury require the chief financial officers (CFO) of the 

significant component entities to reconcile, on a quarterly basis, selected intragovernmental 

activity and balances with their trading partners and resolve identified differences. In addition, 

these entities are required to report to Treasury, their respective inspectors general, and GAO 

on the extent and results of intragovernmental activity and balance reconciliation efforts as of 

the end of the fiscal year.

Treasury has continued to actively work with significant federal component entities to resolve 

intragovernmental differences through its quarterly scorecard process.41 This process highlights 

differences requiring the entities’ attention, identifies differences that need to be resolved

41For each quarter, Treasury produces a scorecard for each significant entity that reports various aspects of the 

entity’s intragovernmental differences with its trading partners, including the composition of the differences by trading 

partner and category. Entities are expected to resolve, with their respective trading partners, the differences identified 

in their scorecards.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 238 

through a formal dispute resolution process,42 and reinforces the entities’ responsibilities to 

resolve intragovernmental differences. 

In fiscal year 2017, Treasury created and distributed to its management executives quarterly 

summaries that reported (1) year-to-year progress in resolving intragovernmental differences 

and (2) known issues surrounding them, thereby improving its overall monitoring of 

intragovernmental differences. In addition, Treasury continued to improve its procedures for 

identifying and monitoring systemic root causes of intragovernmental differences and related 

corrective action plans to address the root causes. As a result of these and other actions, a 

significant number of intragovernmental differences were identified and resolved. While 

progress was made, we continued to note that amounts reported by federal entity trading 

partners to Treasury were not in agreement by material amounts. Reasons for the differences 

cited by several CFOs included differing accounting methodologies, accounting errors, and 

timing differences. In addition, in the DOD Inspector General’s fiscal year 2017 report on 

internal control over financial reporting, the Inspector General reported that DOD, which 

contributes significantly to the unresolved amounts, could not accurately identify its 

intragovernmental transactions by customer and was unable to reconcile most of its 

intragovernmental transactions, which resulted in adjustments that cannot be fully supported.

Further, a significant portion of intragovernmental differences are related to unresolved 

transactions between the General Fund of the U.S. Government (General Fund)43 and federal 

entity trading partners related to appropriations and other intragovernmental transactions, which 

amount to hundreds of billions of dollars. Treasury established more specific guidance regarding 

General Fund activity and balances and issued this guidance for federal entities to follow in 

reporting their financial data. Treasury also continues to develop and refine its policies and 

procedures over accounting for and reporting all significant General Fund activity and balances 

and reconciling the activity and balances between the General Fund and its trading partners. 

However, the ability to effectively reconcile General Fund transactions is hampered because 

General Fund activity and balances have not yet been audited. Treasury will prepare and GAO 

will audit the fiscal year 2018 Schedules of the General Fund.

As a result of the above-noted circumstances, the federal government’s ability to determine the 

impact of these unresolved differences on the amounts reported in the accrual-based 

consolidated financial statements is significantly impaired. Resolving the intragovernmental 

transactions problem remains a difficult challenge and will require a strong and sustained 

commitment by federal entities to timely resolve differences with their trading partners, as well 

as continued strong leadership by Treasury and OMB.

Preparation of Consolidated Financial Statements

Treasury, in coordination with OMB, has implemented several corrective actions during the past 

few years related to the preparation of the consolidated financial statements. Corrective actions 

included implementing new systems for compiling the consolidated financial statements, 

improving guidance for collecting data from component entities, and implementing new or 

42When an entity and its respective trading partner cannot resolve an intragovernmental difference, the entity must 

request Treasury to resolve the dispute. Treasury will review the dispute and issue a decision on how to resolve the 

difference, which the entities must follow.

43The General Fund is a component of Treasury’s central accounting function. It is a stand-alone reporting entity that 

comprises the activities fundamental to funding the federal government (e.g., issued budget authority, cash activity, 

and debt financing activities).
239 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

enhanced procedures to address certain internal control deficiencies detailed in our previously 

issued management report.44 However, the federal government’s systems, controls, and 

procedures were not adequate to reasonably assure that the consolidated financial statements 

are consistent with the underlying audited entity financial statements, properly balanced, and in 

accordance with U.S. generally accepted accounting principles (U.S. GAAP). During our fiscal 

year 2017 audit, we found the following.

x For fiscal year 2017, auditors reported internal control deficiencies at several component 

entities regarding entities’ financial reporting processes that could affect information in those 

entities’ closing packages.45 To reasonably assure consistency of underlying entity 

information and financial data with the U.S. government’s consolidated financial statements, 

entity auditors are required to separately audit and report on the financial information that 

the significant component entities send to Treasury through closing packages.46 As in past 

years, Treasury had to record significant adjustments to correct errors found in federal 

entities’ audited closing package information. As with the last several years, these errors 

primarily related to intragovernmental activity and balances and totaled tens of billions of 

dollars. In addition, Treasury does not have a sufficient process for working with federal 

entities to reduce or resolve the need for such significant adjustments. 

x While progress has been made, Treasury is unable to properly balance the accrual-based 

consolidated financial statements due to its inability to fully eliminate intragovernmental 

activity and balances. To make the fiscal years 2017 and 2016 consolidated financial 

statements balance, Treasury recorded net decreases of $2.6 billion and $8.1 billion,47

respectively, to net operating cost on the Statements of Operations and Changes in Net 

Position, which were identified as “Unmatched transactions and balances.”48 Treasury 

recorded an additional net $2.0 billion and $0.5 billion of unmatched transactions in the 

Statement of Net Cost for fiscal years 2017 and 2016, respectively. The material weakness 

in the federal government’s ability to account for and reconcile intragovernmental activity 

and balances, discussed above, significantly contributes to this issue.

44Most of the issues we identified in fiscal year 2017 existed in fiscal year 2016, and many have existed for a number 

of years. Most recently, in July 2017, we reported the issues we identified to Treasury and OMB and provided 

recommendations for corrective action. See GAO, Management Report: Improvements Needed in Controls over the 

Processes Used to Prepare the U.S. Consolidated Financial Statements, GAO-17-524 (Washington, D.C.: July 12, 

2017). 

45The closing package methodology links federal component entities’ audited consolidated department-level financial 

statements to certain line items, note disclosures, and other information on the U.S. government’s consolidated 

financial statements.

46There are 39 significant component entities, including the General Fund; however, the General Fund did not submit 

a closing package in fiscal year 2017.

47The amount of unmatched transactions and balances for fiscal year 2016 was previously reported as $11.7 billion in 

the Fiscal Year 2016 Financial Report of the United States Government. The fiscal year 2016 accrual-based 

consolidated financial statements were restated in fiscal year 2017. See Note 1.V. Restatements, in the Fiscal Year 

2017 Financial Report of the United States Government.

48Although Treasury was unable to determine how much of the unmatched transactions and balances relates to net 

operating cost, it reported this amount as a component of net operating cost in the accompanying consolidated 

financial statements. 
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 240 

x Over the past several years, Treasury has taken significant actions to assist in ensuring that 

financial information is reported or disclosed in the consolidated financial statements in 

accordance with U.S. GAAP. For example, Treasury has developed and implemented U.S. 

GAAP compliance operating procedures and checklists. However, Treasury’s reporting of 

certain financial information required by U.S. GAAP continues to be impaired. Due to certain 

control deficiencies noted in this audit report—for example, commitments and contingencies 

related to treaties and other international agreements—Treasury is precluded from 

determining if additional disclosure in the consolidated financial statements is required by 

U.S. GAAP, and we are precluded from determining whether the omitted information is 

material. Further, Treasury’s ability to report information in accordance with U.S. GAAP will 

also remain impaired until federal entities, such as DOD, can provide Treasury with 

complete and reliable information required to be reported in the consolidated financial 

statements.

x In fiscal year 2017, Treasury continued to make progress with corrective actions intended to 

resolve internal control deficiencies in the processes used to prepare the consolidated 

financial statements. For example, Treasury issued guidance in the Treasury Financial 

Manual requiring component entities to report or disclose criminal debt information in 

conformity with U.S. GAAP in their financial statements and have such information subjected 

to audit. During its preparation of the consolidated financial statements, Treasury verified 

that component entities followed such guidance. However, other internal control deficiencies 

existed in the processes used to prepare the consolidated financial statements.

Until these internal control deficiencies have been fully addressed, the federal government’s 

ability to reasonably assure that the consolidated financial statements are consistent with the 

underlying audited federal component entities’ financial statements, properly balanced, and in 

accordance with U.S. GAAP will be impaired. In recent years, Treasury has continued to 

improve its systems and processes for preparing the consolidated financial statements. It is 

important that Treasury (1) continues to improve its systems and (2) remains committed to 

maintaining the progress that has been made in this area and building on that progress to make 

needed improvements to fully address the magnitude of the financial reporting challenges it 

faces. Resolving the remaining internal control deficiencies continues to be a difficult challenge 

and will require a strong and sustained commitment from Treasury, OMB, and federal entities.

Reconciliations of Budget Deficit to Net Operating Cost and Changes in Cash Balance 

Treasury has been consistently improving its process for preparing the (1) Reconciliation of Net 

Operating Cost and Budget Deficit and (2) Statement of Changes in Cash Balance from Budget 

and Other Activities (Reconciliation Statements). For example, during fiscal year 2017, Treasury 

continued to refine its process to help ensure that reconciling items reported on the 

Reconciliation Statements are consistent with entity financial information that is processed 

through Treasury’s records. However, the federal government has not established and 

implemented effective processes and procedures for (1) identifying and reporting all items 

needed to prepare the Reconciliation Statements and (2) reasonably assuring that the 

information in these statements was fully consistent with the underlying information in the 

significant component entities’ audited financial statements and other financial data. Until 

Treasury develops and fully implements an effective process for reasonably assuring 

completeness and consistency of the information in the statements and is able to fully reconcile 

this information, the effect on the U.S. government’s consolidated financial statements will 

continue to be unknown.
241 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

The Reconciliation Statements report budget deficits for fiscal years 2017 and 2016 of about 

$666 billion and $587 billion, respectively.49 The budget deficit is calculated by subtracting 

actual budget outlays (outlays) from actual budget receipts (receipts). Also, such outlays and 

receipts are key inputs to the Statements of Long-Term Fiscal Projections. Treasury and OMB 

continue to lack an effective process for reasonably assuring the consistency of the information 

among (1) information that Treasury uses to compute the budget deficit reported in the 

consolidated financial statements, (2) Treasury’s records of cash transactions processed 

through its central accounting function, and (3) information reported in federal entity financial 

statements and underlying entity financial information and records. Over the past few years, 

Treasury has made progress by developing and implementing procedures to reconcile outlays 

and receipts between Treasury’s records used to compute the budget deficit reported in the 

consolidated financial statements and underlying federal entity financial information and 

records. For example, in fiscal year 2017, Treasury began developing procedures related to 

leveraging agency Budget and Accrual Reconciliations to be required by Statement of Federal 

Financial Accounting Standards (SFFAS) 7: Accounting for Revenue and Other Financing 

Sources and Concepts for Reconciling Budgetary and Financial Accounting, as amended.50

These reconciliations will assist Treasury in verifying that the amounts presented in the 

Reconciliations of Net Operating Cost and Budget Deficit Statement are consistent with 

underlying audited financial data. Also, as noted above, Treasury will prepare and GAO will 

audit the fiscal year 2018 Schedules of the General Fund, which include key elements reported 

in the Statement of Changes in Cash Balance from Budget and Other Activities.

In fiscal year 2017, we again noted that several entities’ auditors reported internal control 

deficiencies related to monitoring, accounting, and reporting of budgetary transactions. These 

control deficiencies could affect the reporting and calculation of the net outlay amounts in the 

entities’ Statements of Budgetary Resources. In addition, such deficiencies may also affect the 

entities’ ability to report reliable budgetary information to Treasury and OMB and may affect the 

budget deficit reported in the accrual-based consolidated financial statements. Treasury also 

reports the budget deficit in its Combined Statement of Receipts, Outlays, and Balances and in 

other federal government publications.51

49The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement and the 

President’s Budget.

50SFFAS 7, as amended by SFFAS 53: Budget and Accrual Reconciliation, is effective for reporting periods beginning 

after Sept. 30, 2018, and early adoption is permitted.

51Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget results and cash-related 

assets and liabilities of the federal government with supporting details. According to Treasury, this report is the 

recognized official publication of receipts and outlays of the federal government based on entity reporting.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 242 

Appendix III

Other Material Weaknesses

Material weaknesses in internal control discussed in this audit report resulted in ineffective 

controls over financial reporting. In addition to the material weaknesses discussed in appendix II 

that contributed primarily to our disclaimer of opinion on the accrual-based consolidated 

financial statements, we found the following three other material weaknesses in internal control. 

Improper Payments 

The federal government is unable to determine the full extent to which improper payments occur 

and reasonably assure that appropriate actions are taken to reduce them. Reducing improper 

payments is critical to safeguarding federal funds.52 The Improper Payments Information Act of 

2002 (IPIA), as amended by the Improper Payments Elimination and Recovery Act of 2010 

(IPERA) and the Improper Payments Elimination and Recovery Improvement Act of 2012 

(IPERIA),53 requires federal executive branch entities to (1) review all programs and activities, 

(2) identify those that may be susceptible to significant improper payments, (3) estimate the 

annual amount of improper payments for those programs and activities identified as risk 

susceptible, (4) implement actions to reduce improper payments and set reduction targets with 

respect to the risk-susceptible programs and activities, and (5) report on the results of 

addressing the foregoing requirements. 

Federal entity improper payment estimates totaled about $141 billion for fiscal year 2017, based 

on improper payment estimates reported by federal program or activity.54 The government-wide 

total of reported estimated improper payments, among programs and activities that reported 

estimates, decreased by over $3 billion from the prior year estimate of about $144 billion. 

Agencies reported decreases in estimated improper payments for several programs and 

activities, which contributed to the decrease in the government-wide total and helped to offset 

52Under the Improper Payments Information Act of 2002, as amended, an improper payment is statutorily defined as 

any payment that should not have been made or that was made in an incorrect amount (including overpayments and 

underpayments) under statutory, contractual, administrative, or other legally applicable requirements. It includes any 

payment to an ineligible recipient, any payment for an ineligible good or service, any duplicate payment, any payment 

for a good or service not received (except for such payments where authorized by law), and any payment that does 

not account for credit for applicable discounts. Office of Management and Budget guidance also provides that when 

an agency's review is unable to discern whether a payment was proper as a result of insufficient or lack of 

documentation, this payment must also be considered an improper payment.

53IPIA, Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), as amended by IPERA, Pub. L. No. 111-204, 124 Stat. 

2224 (July 22, 2010), and IPERIA, Pub. L. No. 112-248, 126 Stat. 2390 (Jan. 10, 2013), and reprinted in 31 U.S.C. § 

3321 note. 

54The Fiscal Year 2017 Financial Report of the United States Government did not include a government-wide 

improper payment estimate or error rate. Since fiscal year 2003, a government-wide estimate and error rate had been 

reported in Financial Reports based on the programs and activities that reported estimates. 
243 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

increases for certain other programs and activities.55 For example, the Department of Health 

and Human Services (HHS) reported a decrease in estimated improper payments for Medicare 

Fee-for-Service driven by a decrease in improper payments for home health and inpatient 

rehabilitation facility claims. It is important to note that pursuant to the Office of Management 

and Budget (OMB) implementing guidance, reported improper payment estimates include 

overpayments, underpayments, and payments for which adequate documentation was not 

found, and may also be based on payment data and sampling drawn from periods that do not 

coincide with the fiscal year for which the estimates are reported.

The specific programs and activities included in the government-wide total of reported improper 

payment estimates may change from year to year. Nine federal entities did not report fiscal year 

2017 estimated improper payment amounts for 27 risk-susceptible programs and activities, 

including the Department of Agriculture’s (USDA) Supplemental Nutrition Assistance Program 

(SNAP), HHS’s Temporary Assistance for Needy Families (TANF), and 14 programs and 

activities that received funding under the Disaster Relief Appropriations Act, 2013 (DRAA).56

Further, various inspectors general reported deficiencies related to compliance with the criteria 

listed in IPERA for fiscal year 2016 at their respective federal entities,57 including risksusceptible programs and activities that did not report improper payment estimates, estimation 

methodologies that may not produce reliable estimates, and risk assessments that may not 

55For fiscal year 2017, agencies reported decreases in total estimated improper payments in excess of $1 billion for 

four programs and increases in total estimated improper payments in excess of $1 billion for two programs. The four 

programs with decreases in excess of $1 billion were the Department of Health and Human Services’ (HHS) 

Medicare Fee-for-Service, HHS’s Medicare Advantage (Part C), HHS’s Medicare Prescription Drug (Part D), and the 

Social Security Administration’s Old-Age, Survivors, and Disability Insurance. The two programs with increases in 

excess of $1 billion were the Department of Veterans Affairs’ (VA) Community Care and VA’s Prosthetics. In addition, 

the Department of Housing and Urban Development (HUD) ceased reporting an estimate for certain of its Rental 

Housing Assistance Programs in fiscal year 2017, contributing to a decrease in excess of $1 billion to the 

government-wide total.

56Pub. L. No. 113-2, div. A, 127 Stat. 4 (Jan. 29, 2013). Section 904(b) of DRAA deemed all programs and activities 

receiving appropriations under the act as susceptible to significant improper payments, subjecting such programs and 

activities to improper payment estimation and reporting requirements under IPIA, as amended. The 27 programs and 

activities included 13 non-DRAA programs and activities and 14 DRAA programs and activities. The 13 non-DRAA 

programs and activities were (1) USDA’s SNAP, (2) USDA's Child and Adult Care Food Program, (3) HHS's TANF, 

(4) HHS's Advance Premium Tax Credit, (5) HHS's Cost-Sharing Reduction, (6) HUD’s Office of Housing Rental 

Housing Assistance Programs, (7) HUD's HOME Investment Partnership, (8) HUD's Community Development Block 

Grant, (9) HUD’s Single Family Claims, (10) HUD’s Ginnie Mae Contractor Payments, (11) Department of the 

Treasury's (Treasury) Advance Child Tax Credit, (12) Treasury’s Additional Opportunity Tax Credit, and 

(13) Treasury’s Premium Tax Credit.

57IPERA established a requirement for entity inspectors general to report annually on entities’ compliance with criteria 

listed in section 3 of IPERA. The six criteria are that the entity has (1) published an annual financial statement and 

accompanying materials in the form and content that OMB requires for the most recent fiscal year and posted that 

report on the entity website; (2) conducted a risk assessment for each specific program or activity that conforms with 

IPIA, as amended; (3) published estimates of improper payments for all programs and activities identified as 

susceptible to significant improper payments under the entity’s risk assessment; (4) published corrective action plans 

for programs and activities assessed to be at risk for significant improper payments; (5) published and met annual 

reduction targets for all programs and activities assessed to be at risk for significant improper payments; and 

(6) reported a gross improper payment rate of less than 10 percent for each program and activity for which an 

improper payment estimate was obtained and published. The most recent inspector general reports on compliance 

with the criteria listed in IPERA were issued in 2017 for fiscal year 2016. Pursuant to the OMB implementing 

guidance in OMB Memorandum M-15-02, appendix C to OMB Circular No. A-123, Requirements for Effective 

Estimation and Remediation of Improper Payments (Oct. 20, 2014), inspector general reports are due within 180 

days of publication of the performance and accountability reports or agency financial reports. Therefore, inspector 

general reports on fiscal year 2017 compliance with the criteria listed in IPERA are generally expected to be issued 

by May 2018.
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 244 

accurately assess the risk of improper payment. For example, the Department of Defense 

(DOD) Inspector General reported that DOD did not ensure that all required payments were 

included in certain programs’ improper payment estimates, and as a result, DOD published 

unreliable estimates of improper payments for fiscal year 2016.58

For fiscal year 2017, federal entities reported estimated improper payment rates of 10 percent 

or greater for 17 risk-susceptible programs and activities,59 accounting for about 50 percent of 

the government-wide total of reported estimated improper payments.60 Under IPERA, an entity 

that is determined by its inspector general to not be in compliance with the criteria listed in 

IPERA, such as reporting an improper payment rate of 10 percent or greater for any risksusceptible program or activity, must submit a plan to Congress describing the actions that the 

entity will take to come into compliance. 

Further, entity auditors continued to report internal control deficiencies over financial reporting in 

their fiscal year 2017 financial statement audit reports, such as financial system limitations and 

information system control weaknesses. Such deficiencies could significantly increase the risk 

that improper payments may occur and not be detected promptly. 

The President’s fiscal years 2017 and 2018 budgets included program integrity proposals at 

multiple agencies aimed at reducing improper payments. Also, efforts continue to implement 

requirements established by IPERIA, which was enacted in January 2013, to intensify efforts to 

identify, prevent, and recover payment error, waste, fraud, and abuse in federal spending. 

Among other things, IPERIA established a statutory Do Not Pay initiative, requiring entities to 

review prepayment and preaward procedures and ensure a thorough review of available 

databases to determine program or award eligibility before the release of any federal funds. 

IPERIA also directs OMB to annually identify a list of high-priority federal programs for greater 

levels of oversight and review and requires each entity responsible for administering one of 

these high-priority programs to annually submit a program report to its inspector general and 

make a report copy available to the public. 

Until the federal government has implemented effective processes to determine the full extent to 

which improper payments occur and has taken appropriate actions across entities and 

programs to effectively reduce improper payments, it will not have reasonable assurance that 

the use of federal funds is adequately safeguarded. 

58Department of Defense, Office of Inspector General, The DoD Did Not Comply with the Improper Payment 

Elimination and Recovery Act in FY 2016, Report No. DODIG-2017-078 (Alexandria, Va.: May 8, 2017).

59The improper payment rate reflects the estimated improper payments as a percentage of total outlays.

60The 17 programs and activities that reported estimated improper payment rates of 10 percent or greater for fiscal 

year 2017 were (1) VA's Community Care; (2) VA's Purchased Long-Term Services and Supports; (3) VA’s 

Prosthetics; (4) VA’s Beneficiary Travel; (5) VA’s Communications, Utilities, and Other Rent; (6) VA’s Supplies and 

Materials; (7) VA’s Medical Care Contracts and Agreements; (8) Treasury’s Earned Income Tax Credit; (9) USDA’s 

School Breakfast; (10) USDA’s National School Lunch; (11) the Federal Communications Commission’s Universal 

Service Fund Lifeline; (12) the Corporation for National and Community Service’s (CNCS) Foster Grandparent; 

(13) CNCS’s Senior Companion; (14) CNCS’s AmeriCorps; (15) the Small Business Administration’s Disaster Loan 

Disbursements; (16) the Department of Labor’s Unemployment Insurance; and (17) HHS’s Medicaid programs.
245 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Information Security 

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

1997. During our fiscal year 2017 audit, we found that serious and widespread information 

security control deficiencies continued 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.61

Specifically, control deficiencies were identified related to (1) security management; (2) access 

to computer resources (data, equipment, and facilities); (3) changes to and configuration of 

information system resources; (4) segregation of incompatible duties; and (5) contingency 

planning. 

Such information security control deficiencies unnecessarily increase the risk that data recorded 

in or transmitted by federal financial management systems are not reliable and available. A 

primary reason for these deficiencies is that federal entities generally have not yet fully 

institutionalized comprehensive security management programs, which are critical to identifying 

information security control deficiencies, resolving information security problems, and managing 

information security risks on an ongoing basis. 

Although significant challenges remain, the federal government has continued to take actions 

for improving information security. For example, in May 2017, the President issued an executive 

order on strengthening the cybersecurity of federal networks and critical infrastructure.62 Among 

other things, the order intends to hold executive agency heads accountable for managing 

agency-wide cybersecurity risk. In addition, it requires each executive agency to use the 

National Institute of Standards and Technology’s Cybersecurity Framework to manage 

cybersecurity risk.63 Nevertheless, GAO and other auditors continued to identify information 

security control deficiencies at federal entities. Until entities identify and resolve these 

deficiencies and effectively manage information security risks on an ongoing basis, federal data 

and systems, including financial information, will remain at risk. 

Tax Collection Activities

During fiscal year 2017, a material weakness continued to affect the federal government's ability 

to effectively manage its tax collection activities. While the Department of the Treasury’s Internal 

Revenue Service (IRS) made necessary and appropriate adjustments to its financial 

statements, IRS’s underlying records did not always reflect the correct amount of taxes owed by 

the public to the federal government due to financial system limitations and other control 

deficiencies that led to errors in taxpayers’ accounts. Such errors place undue burden on 

taxpayers who either have already paid taxes owed or owe significantly lower amounts than 

recorded. 

61Eighteen of the 24 agencies covered by the Chief Financial Officers Act of 1990 reported information security as a 

significant deficiency or material weakness for fiscal year 2017.

62Executive Office of the President, Strengthening the Cybersecurity of Federal Networks and Critical Infrastructure,

Exec. Order No. 13,800 of May 11, 2017, 82 Fed. Reg. 22,391 (Washington, D.C.: May 16, 2017).

63National Institute of Standards and Technology, Framework for Improving Critical Infrastructure Cybersecurity, Draft 

Version 1.1 (Gaithersburg, Md.: Jan. 10, 2017).
 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT 246 

Collectively, these deficiencies indicate that internal controls were not effective in (1) ensuring 

that reported amounts of taxes receivable and other unpaid assessments were accurate on an 

ongoing basis and could be relied upon by management as a tool to aid in making and 

supporting resource allocation decisions and (2) supporting timely and reliable financial 

statements, accompanying notes, and required supplementary information and other 

information without extensive supplemental procedures and adjustments.
247 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR’S REPORT

Appendix IV

Significant Deficiencies

In addition to the material weaknesses discussed in appendixes II and III, we found two 

significant deficiencies in the federal government’s internal control related to implementing 

effective internal controls at certain federal entities, as described below. 

Loans Receivable and Loan Guarantee Liabilities

Internal control deficiencies were identified at certain significant component entities accounting 

for the majority of the reported balances for loans receivable and loan guarantee liabilities.64

The deficiencies primarily involved credit subsidy estimation and internal control over such 

estimation. The issues and complexities associated with estimating the costs of lending and 

other loan-related financing activities significantly increase the risk that misstatements in agency 

and government-wide financial statements could occur and go undetected. Further, these 

control deficiencies can adversely affect the federal 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.

Federal Grants Management

In fiscal year 2017, several federal entities’ auditors continued to identify internal control 

deficiencies related to grants management.65 Reported deficiencies primarily related to 

monitoring of grant activities, accounting for formula grants, and estimating grant accruals.66

These internal control deficiencies could adversely affect the federal government’s ability to 

provide reliable financial statements as well as reasonable assurance that grants are awarded 

properly, recipients are eligible, and federal grant funds are used as intended. 

64Key significant component entities contributing to the significant deficiency for Loans Receivable and Loan 

Guarantee Liabilities include the Departments of Education, Transportation, Housing and Urban Development, and 

Veterans Affairs; the Export-Import Bank of the United States; and the Small Business Administration.

65Key significant component entities contributing to the significant deficiency for Federal Grants Management include 

the Departments of Homeland Security, Housing and Urban Development, and Health and Human Services.

66Formula grants are awarded to all eligible grantees based on a statutory allocation formula, which may be based on 

a number of variables, including population, poverty rate in a given area, or tax effort. The grants are typically 

awarded to states, which often pass funds through to eligible local government agencies and nonprofit organizations.