GAO

United States General Accounting Office

a

Testimony

Before the Subcommittee on Government Efficiency, 

Financial Management and Intergovernmental Relations, 

Committee on Government Reform, House of 

Representatives

For Release on Delivery 

Expected at 2:00 p.m.

Tuesday, May 14, 2002 

FINANCIAL 

MANAGEMENT 

Extending the Financial 

Statements Audit 

Requirement of the CFO 

Act to Additional Federal 

Agencies

Statement of Gary T. Engel

Director, Financial Management and Assurance

GAO-02-740T
Page 1 GAO-02-740T 

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to assist the Subcommittee in its 

consideration of H.R. 4685, a bill to amend title 31 of the United States 

Code to expand the number of federal agencies that are required to prepare 

audited financial statements. As currently proposed, the Chief Financial 

Officers (CFO) Act audit requirement1

 would be expanded to executive 

branch agencies that have budget authority of $25 million or more and are 

not already required to have financial statements audits.2

 Agencies subject 

to CFO Act audit requirements are also subject to the requirements of the 

Federal Financial Management Improvement Act of 1996 (FFMIA).3

 FFMIA 

builds on the CFO Act by emphasizing the need for agencies to have 

systems that can generate timely, accurate, and useful information with 

which to make informed decisions on an ongoing basis.

Our remarks today are based on work we did at the request of 

Representative Patrick J. Toomey, who has introduced H.R. 4685, on the 

views of 26 surveyed executive branch agencies not covered by the CFO 

Act on having audited financial statements4

 and on our past and ongoing 

audit work at various CFO Act agencies. 

We agree with the thrust of the proposed amendment in H.R. 4685 to 

expand the number of federal agencies that are required to prepare audited 

financial statements. Our longstanding position has been that the 

preparation and audit of financial statements increase accountability and 

transparency and are an important tool in the development of reliable, 

timely, and useful financial information for day-to-day management and 

oversight. Preparing audited financial statements also leads to 

improvements in internal control and financial management systems. The 

views expressed by the 26 selected agencies in our survey are generally 

1

The CFO Act of 1990, as expanded by the Government Management Reform Act of 1994, 

requires 24 major executive branch departments and agencies to prepare annual financial 

statements and have them audited (31 U.S.C. 3515).

2

The requirement would not apply to executive agencies already required by statute to have 

audited financial statements or to corporations, agencies, or instrumentalities subject to 

chapter 91 of title 31 of the United States Code.

3

31 U.S.C. 3512 note (2000).

4

U.S. General Accounting Office, Survey Results of Selected Non-CFO Act Agencies’ Views 

on Having Audited Financial Statements, GAO-02-281R (Washington, D.C.: Dec. 14, 2001).
Page 2 GAO-02-740T 

consistent with our views on the bill and generally support the position that 

agencies should have audited financial statements. For the existing CFO 

Act agencies, the preparation and audit of financial statements have been 

the primary catalyst for increasing the reliability of financial data, 

improving financial operations, and enhancing accountability.

Summary of Survey 

Results

The 26 non–CFO Act agencies we surveyed are generally independent 

agencies that have commissions or boards appointed by the President.5

 

The objectives of the survey were to determine the

• benefits achieved or anticipated by the surveyed agencies from 

preparing financial statements and having them audited;

• degree of effort or anticipated effort for the surveyed agencies to 

prepare financial statements and have them audited;

• factors, including budget authority, that should be considered in 

determining whether agencies should prepare financial statements and 

have them audited; and

• surveyed agencies’ views about whether, in general, agencies should 

have their financial statements audited.

As shown in table 1, 12 of the 26 surveyed agencies have had financial 

statements audits within the past 5 years, and 14 have not. (See app. I for 

information about the 26 surveyed agencies, including baseline and 

financial information.) 

5

We selected the 26 agencies by identifying 28 executive branch entities that (1) were not 

subject to the CFO Act, as amended, (2) had budget authority for fiscal year 1999 of at least 

$10 million, and (3) with one exception, were not required by law to have their financial 

statements audited. As agreed with the study’s requester, we did not include two of the 

entities—the Central Intelligence Agency Retirement Fund and the Executive Office of the 

President—in the scope of our survey, leaving 26 agencies for our survey.
Page 3 GAO-02-740T 

Table 1: Surveyed Agencies

a

The Defense Nuclear Facilities Safety Board has balance-sheet-only audits every 3 to 5 years, most 

recently for fiscal year 1997. It did not prepare fiscal year 2000 financial statements.

b

The International Trade Commission discontinued audits of its financial statements, effective for fiscal 

year 1999. It did not prepare fiscal year 2000 financial statements.

c

The U.S. Court of Appeals for Veterans Claims’ first audit was of its fiscal year 2000 financial 

statements.

d

The Equal Employment Opportunity Commission and the National Transportation Safety Board have 

indicated that they plan to have financial statements audits within the next 5 years.

e

The National Archives and Records Administration has annual financial statements audits of three 

trust and revolving funds.

Overall, the surveyed agencies reported that they either achieved 

significant benefits or would anticipate achieving such benefits from 

having audited financial statements. The level of effort to prepare financial 

statements and prepare for an audit of the statements varied significantly 

with the size and other characteristics of the agencies. In determining 

whether agencies should prepare financial statements and have them 

audited, respondents identified a number of factors that should be 

considered, including budget authority, key financial statement amounts, 

and the type of agency operations. For example, the surveyed agencies 

reported that the fiduciary responsibilities of the agency and the risks 

associated with the agency’s operations were the most important factors to 

Have had financial statements audits

Defense Nuclear Facilities Safety Board a

Farm Credit System Insurance Corporation

Federal Communications Commission

Federal Housing Finance Board

Federal Mediation and Conciliation Service

Federal Trade Commission

International Trade Commissionb

Office of Navajo and Hopi Indian Relocation

Railroad Retirement Board

U.S. Court of Appeals for Veterans Claims c

U.S. Holocaust Memorial Museum

U.S. Institute of Peace

Have not had financial statements audits

Commodity Futures Trading Commission

Consumer Product Safety Commission

Equal Employment Opportunity Commissiond

Federal Election Commission

Federal Labor Relations Authority

Institute of Museum and Library Services

Merit Systems Protection Board

National Archives and Records Administratione

National Endowment for the Arts

National Endowment for the Humanities

National Labor Relations Board

National Transportation Safety Boardd

Securities and Exchange Commission

Selective Service System
Page 4 GAO-02-740T 

consider. Twenty-one of the 26 surveyed agencies responded that federal 

agencies, in general, should have audited financial statements.

Achieved or Anticipated 

Benefits of Having Audited 

Financial Statements

The 12 surveyed agencies that have had their financial statements audited 

generally reported significant benefits from those audits. As shown in 

figure 1, the most significant benefits cited were enhancing accountability 

and identifying inefficiencies and weaknesses. Other significant benefits 

included improving internal control, enhancing the public’s perception of 

the agency, meeting statutory requirements, and monitoring assets and 

liabilities. The 14 surveyed agencies that have not had audited financial 

statements reported that they would anticipate benefits from such audits, 

but to a much lesser extent than the achieved benefits reported by the 12 

surveyed agencies that have had their financial statements audited.
Page 5 GAO-02-740T 

Figure 1: Average Ranking by Surveyed Agencies of Extent of Benefits Achieved or Anticipated from Financial Statements 

Audits 

Little or no

extent

Moderate

extent

Very great

 extent

Increase grant funding

Facilitate external funding

Identify actual costs or savings

Identify costs of providing government services

Improve financial management systems

Monitor budget status

Improve reliability of financial management information

Monitor assets, liabilities, and net position

Meet statutory requirements

Enhance perception of the agency

Improve internal control

Identify inefficiencies and weaknesses

Enhance accountability

Agencies that have had financial statements audits

Agencies that have not had financial statements audits

Achieved or anticipated benefits

Average ranking

Some

extent

Great

extent
Page 6 GAO-02-740T 

We asked the 12 audited agencies whether the benefits of their first audit 

and subsequent audits outweighed the costs and whether their audits were 

more or less beneficial than expected. As shown in figures 2 and 3, half of 

the 12 agencies responded that the benefits achieved outweighed the costs 

of the first audit, and about three-fourths of the agencies responded that 

the benefits achieved outweighed the costs of subsequent audits.

Figure 2: Benefits Achieved Versus Costs for First Audit for Surveyed Agencies That 

Have Had Financial Statements Audits

Note: None of the surveyed agencies that have had financial statements audits responded that the 

costs somewhat outweigh the benefits.

Benefits about equal to 

the costs

25%

Benefits somewhat 

outweigh the costs

8%

Benefits substantially 

outweigh the costs

42%

8% Not able to judge

Costs substantially 

outweigh the benefits

17%
Page 7 GAO-02-740T 

Figure 3: Benefits Achieved Versus Costs for Subsequent Audits for Surveyed 

Agencies That Have Had Financial Statements Audits

Note: None of the surveyed agencies that have had financial statements audits responded that the 

costs somewhat outweigh the benefits or that they were not able to judge. One of these 12 surveyed 

agencies is not included in this chart because fiscal year 2000 was the agency’s first financial 

statements audit.

Ten of the 12 agencies (83 percent) responded that their audits were more 

beneficial than or about as beneficial as they had expected.

Degree of Effort or 

Anticipated Effort to 

Prepare Financial 

Statements and Have Them 

Audited

For the 12 surveyed agencies that have had their financial statements 

audited, the reported level of effort to prepare financial statements and to 

prepare for an audit varied significantly with the size and other 

characteristics of the agencies. For example, the reported number of staff 

days to prepare for the first audit ranged from 50 to 750 days, and, as shown 

in table 2, the estimated fiscal year 2000 audit costs ranged from $11,000 to 

$350,000.

Benefits substantially 

outweigh the costs

55%

Benefits about equal 

to the costs 

9%

Benefits somewhat 

outweigh the costs

18% Costs substantially 

outweigh the benefits

18%
Page 8 GAO-02-740T 

Table 2: Reported Audit and Related Costs for Surveyed Agencies That Had Fiscal Year 2000 Financial Statements Audits

a

Budget authority data were obtained from the Fiscal Year 2002 President’s Budget. None of the 

surveyed agencies that have had financial statements audits had fiscal year 2000 budget authority 

between $150 million and $6 billion.

b

Two of the 12 surveyed agencies that have had financial statements audits, the International Trade 

Commission and the Defense Nuclear Facilities Safety Board, did not have financial statements audits 

for fiscal year 2000.

c

The surveyed agency that reported financial statements audit costs of $350,000 also reported related 

costs of $1,218,000 for consultants to assist the agency in preparing for the financial statements audit.

Frequently reported steps that these agencies had taken to prepare for their 

first and subsequent audits are (1) improving or replacing financial 

management systems, (2) hiring additional financial management 

personnel, (3) training financial management personnel, and 

(4) performing significant manual procedures (for first audits).

Factors to Consider in 

Determining Whether 

Agencies Should Have 

Financial Statements Audits

As figure 4 shows, the 26 surveyed agencies responded that the most 

important factors that should be considered in determining whether 

agencies should have audited financial statements are (1) whether the 

agency has fiduciary responsibilities and (2) risks associated with the 

agency’s operations. The surveyed agencies said that the amounts of an 

agency’s assets and liabilities are of equal importance to the amount of 

budget authority an agency has. Other important factors include whether 

the agency receives nongovernmental funding and the amounts of an 

agency’s revenues and expenses.

Estimated costs of financial statements 

audits performed by contractor or 

Office of Inspector General

Other estimated costs related to 

Range of budget financial statements audits

authoritya

Number

of

agencies

that had

fiscal year 

2000

financial 

statements

auditsb

Low High Average Low High Average

Less than $25 million 4 $11,000 $54,512 $29,525 $0 $9,300 $2,325

$25 million to $150

million

4 $26,000 $100,000 $54,000 $0 $15,000 $5,750

Greater than $6 billion 2 $220,000 $350,000c $285,000 $2,000 $1,218,000c $610,000
Page 9 GAO-02-740T 

Figure 4: Ranking of Importance by Surveyed Agencies of Factors to Consider in Determining Need for Financial Statements 

Audits

Of the 14 surveyed agencies that have not had their financial statements 

audited, 13 reported that the absence of a statutory requirement to do so 

was a reason they have not had such audits. Other reasons cited by 6 of the 

14 agencies include an insufficient number of financial management 

personnel and insufficient funding.

If an agency has an Office of Inspector General

If an agency has a CFO

Amount of expenses

Amount of revenue

Amount of budget authority

Amount of assets

Amount of liabilities

Receipt of nongovernmental funding

Fiduciary responsibilities

Risks associated with the agency's operations

Agencies that have had financial statements audits

Agencies that have not had financial statements audits

Factors to consider

Little or no 

extent

Some

extent

Moderate

extent

Great

extent

Very great

extent

Average ranking
Page 10 GAO-02-740T 

Surveyed Agencies’ General 

Views about Whether 

Agencies Should Have 

Financial Statements Audits

Twenty-one of the 26 surveyed agencies, including all 12 that have had their 

financial statements audited, reported that, in general, agencies should 

have their financial statements audited. The remaining 5 surveyed 

agencies, whose budget authority ranged from about $250,000 to about 

$325 million, expressed the opposite view.

Other Considerations Using a fixed-dollar threshold to determine which agencies should be 

subject to the audit requirement has the benefit of simplicity. Over time, 

however, entities could move above and below the threshold depending on 

annual changes in their budget authority. Also, through inflation, the 

number of entities that meet the dollar threshold would likely increase. 

One way to deal with this issue and still incorporate a dollar threshold is to 

provide the Office of Management and Budget (OMB), through the 

proposed legislation, the authority to add agencies that fall below or 

exclude agencies that meet the threshold based in part on the other factors 

identified in our survey. OMB could then be required to report to the 

Congress on the reasons for a change to any agency’s status with respect to 

the financial statements audit requirement.

The proposed legislation does not specifically provide for a phase-in period 

for an agency to implement the audit requirement, but it does provide that 

OMB may waive this requirement for the first 2 fiscal years beginning after 

the date of enactment. We support this waiver provision and would 

support making a similar waiver available to OMB for agencies that do not 

initially meet, but at a subsequent date do meet, the dollar audit threshold.

Conclusions In closing, I would like to reiterate our support for the thrust of H.R. 4685 to 

expand financial statements audit requirements beyond the current 24 CFO 

Act agencies. The importance of having financial statements audits goes 

far beyond obtaining an unqualified opinion. The preparation and audit of 

financial statements contribute to reliable, timely, and useful financial 

information, and such information is important in helping management 

ensure accountability, measure and control costs, and make timely and 

fully informed decisions. Preparing audited financial statements also leads 

to improvements in internal control and financial management systems. 

Hence, we view much of the effort involved in preparing financial 

statements and having them audited as an integral part of effective 

financial management. 
Page 11 GAO-02-740T 

Mr. Chairman, this concludes my statement. We welcome any questions 

that you or other members of the Subcommittee may have.

Contact If you have any questions about this testimony, please contact me at (202) 

512-3406. I can be reached by e-mail at engelg@gao.gov. Other key 

contributors to this testimony were Kent Bowden, Casey Keplinger, 

LaShawnda Wilson, and Esther Tepper. 
Page 12 GAO-02-740T 

Appendix I

Information on the 26 Surveyed Agencies ApendxiI

The following tables provide financial and other baseline information about 

the 26 surveyed agencies. The tables generally contain information 

provided by the agencies, which we did not independently verify.

Table 3: Fiscal Year 2000 Financial Data as Reported to Treasury by Surveyed Agencies That Have Had Financial Statements 

Audits

a

Fiscal year 2000 budget authority data were obtained from the Fiscal Year 2002 President’s Budget.

b

The amounts reported for Federal Housing Finance Board are from their audited financial statments 

and not from data reported to Treasury.

Note: All dollar amounts are in millions. The individual percentages do not total to 100 percent due to 

rounding. The percentages less than one are portrayed as zero in this chart.

Agency

Budget 

Authoritya Percent Total Assets Percent

Total 

Liabilities Percent

Total 

Revenue Percent

Total 

Expenses Percent

Railroad Retirement Board $9,183 56 $22,703.1 57 $3,977.6 29 $9,330.2 54 $8,678.5 47 

Federal Communications Commission 6,795 42 15,360.8 38 9,306.0 68 7,580.9 44 9,408.3 51 

Federal Trade Commission 126 1 227.3 1 218.4 2 126.8 1 143.7 1 

Farm Credit System Insurance Corporation 83 1 1,601.7 4 167.9 1 101.4 1 12.7 0 

International Trade Commission 44 0 6.7 0 5.4 0 46.0 0 46.3 0 

Federal Mediation and Conciliation Service 39 0 10.2 0 6.9 0 41.2 0 40.6 0 

U.S. Holocaust Memorial Museum 33 0 0.9 0 0.2 0 2.6 0 2.7 0 

Federal Housing Finance Boardb 19 0 6.6 0 3.8 0 19.1 0 18.9 0 

Defense Nuclear Facilities Safety Board 17 0 10.2 0 2.8 0 0.0 0 17.4 0 

U.S. Institute of Peace 13 0 0.8 0 0.7 0 0.0 0 12.9 0 

U.S. Court of Appeals for Veterans Claims 11 0 10.4 0 2.5 0 11.5 0 11.4 0 

Office of Navajo and Hopi Indian Relocation 8 0 11.0 0 2.0 0 14.1 0 14.1 0 

Total $16,371 100 $39,949.7 100 $13,694.2 100 $17,273.8 100 $18,407.5 100
Appendix I

Information on the 26 Surveyed Agencies

Page 13 GAO-02-740T 

Table 4: Fiscal Year 2000 Financial Data as Reported to Treasury by Surveyed Agencies That Have Not Had Financial Statements 

Audits

a

Fiscal year 2000 budget authority data were obtained from the Fiscal Year 2002 President’s Budget. 

b

National Transportation Safety Board did not report data for revenue and expenses to Treasury.

Note: All dollar amounts are in millions. The individual percentages do not total to 100 percent due to 

rounding. The percentages less than one are portrayed as zero in this chart.

Agency

Budget 

Authoritya Percent Total Assets Percent

Total 

Liabilities Percent

Total 

Revenue Percent

Total 

Expenses Percent

Securities and Exchange Commission $382 20 $2,790.0 71 $123.3 15 $3,638.7 74 $363.9 20 

National Archives and Records Administration 323 17 252.8 6 345.4 42 280.6 6 311.5 17 

Equal Employment Opportunity Commission 282 15 42.1 1 17.7 2 65.9 1 67.6 4 

National Labor Relations Board 205 11 47.7 1 49.8 6 8.8 0 213.4 11 

Institute of Museum and Library Services 190 10 225.5 6 0.3 0 187.0 4 187.2 10 

National Endowment for the Humanities 118 6 99.8 3 1.7 0 116.3 2 116.0 6 

National Endowment for the Arts 102 5 106.4 3 2.8 0 111.1 2 108.5 6 

National Transportation Safety Board 82 4 34.0 1 4.7 1 bb bb

Commodity Futures Trading Commission 63 3 261.2 7 251.6 30 312.6 6 310.9 17 

Consumer Product Safety Commission 52 3 19.1 0 14.9 2 57.0 1 58.1 3 

Federal Election Commission 38 2 11.5 0 3.4 0 41.1 1 41.5 2 

Merit System Protection Board 29 2 7.3 0 4.2 1 31.1 1 31.1 2 

Federal Labor Relations Authority 24 1 4.0 0 4.2 1 23.9 0 24.2 1 

Selective Service System 24 1 15.5 0 3.8 0 21.2 0 22.5 1 

Total $1,914 100 $3,916.9 100 $827.8 100 $4,895.3 100 $1,856.4 100
Appendix I

Information on the 26 Surveyed Agencies

Page 14 GAO-02-740T 

Table 5: Baseline Information as Reported by Surveyed Agencies That Have Had Financial Statements Audits

a

International Trade Commission discontinued audits of its financial statements, effective for fiscal year 

1999. It did not prepare fiscal year 2000 financial statements.

b

Defense Nuclear Facilities Safety Board has balance sheet only audits every 3 to 5 years, most 

recently for fiscal year 1997. It did not prepare fiscal year 2000 financial statements.

Notes: Fiscal year 2000 budget authority data were obtained from the Fiscal Year 2002 President’s 

Budget.

GAGAS (generally accepted government auditing standards) are public sector auditing standards; 

GAAS (generally accepted auditing standards) are private sector auditing standards.

Agency Fiscal year 2000 budget authority (in 

millions)

Fiscal year 2000 total full time 

equivalents

Number of officesCFO or equivalent?

Statutory Office of Inspector General?Audit in accordance with GAGAS or 

GAAS?

Buy/lease real estate

Provide insurance

Make loans or loan guaranteesMake grantsAssess fines and penalties

Provide services for a fee

Maintain retail operations

Other fiduciary/custodial functions

Railroad Retirement Board $9,183 1,154 60 Yes Yes GAGAS X XX X

Federal Communications Commission 6,795 1,950 4 Yes Yes GAGAS X X XX X

Federal Trade Commission 126 1,007 9 Yes Yes GAGAS XX X

Farm Credit System Insurance Corporation 83 10 1 Yes No GAGAS X X

International Trade Commission 44 354 1 Yes Yes GAGASa X XX

Federal Mediation and Conciliation Service 39 288 71 Yes No GAGAS X X

U.S. Holocaust Memorial Museum 33 458 5 Yes No GAAS X X

Federal Housing Finance Board 19 107 1 Yes Yes GAGAS X

Defense Nuclear Facilities Safety Board 17 96 7 Yes No GAASb

U.S. Institute of Peace 13 65 1 No No GAAS X

U.S. Court of Appeals for Veterans Claims 11 88 1 Yes No GAGAS XX X

Office of Navajo and Hopi Indian Relocation 8 60 3 Yes No GAAS

Total $16,371 5,637 164

Average $1,364 470 14

Agency Functions
Appendix I

Information on the 26 Surveyed Agencies

Page 15 GAO-02-740T 

Table 6: Baseline Information as Reported by Surveyed Agencies That Have Not Had Financial Statements Audits

a

Institute of Museum and Library Services, National Transportation Safety Board, and Selective 

Service System use the services of another agency’s Office of Inspector General.

b

Merit Systems Protection Board's General Counsel acts as its Inspector General for investigating 

fraud, waste, and abuse. The agency also uses the services of another agency's Office of Inspector 

General.

Note: Fiscal year 2000 budget authority data were obtained from the Fiscal Year 2002 President’s 

Budget.

Agency Fiscal year 2000 budget authority (in 

millions)

Fiscal year 2000 total full time 

equivalents

Number of officesCFO or equivalent?

Statutory Office of Inspector General?Fiscal year 2000 financial statements 

prepared?

Buy/lease real estateProvide insurance

Make loans or loan guaranteesMake grantsAssess fines and penalties

Provide services for a fee

Maintain retail operations

Other fiduciary/custodial functions

Securities and Exchange Commission $382 3,037 14 No Yes No X XX

National Archives and Records Administration 323 2,362 28 Yes Yes No X X XX

Equal Employment Opportunity Commission 282 2,924 52 Yes Yes No X X

National Labor Relations Board 205 1,976 52 Yes Yes No X

Institute of Museum and Library Services 190 45 1 Yes Noa No X

National Endowment for the Humanities 118 170 1 Yes Yes No X X

National Endowment for the Arts 102 155 1 Yes Yes No X X

National Transportation Safety Board 82 425 11 Yes Noa No X

Commodity Futures Trading Commission 63 546 6 Yes Yes No X XX

Consumer Product Safety Commission 52 480 43 Yes Yes No X X

Federal Election Commission 38 357 2 Yes Yes No X

Merit Systems Protection Board 29 234 11 Yes Nob No

Federal Labor Relations Authority 24 198 8 Yes Yes No X

Selective Service System 24 165 5 Yes Noa No

Total $1,914 13,074 235

Average $137 934 17

Agency Functions

(198115)