Financial Audit: Material Weaknesses in Internal Control over the Processes Used to Prepare the Consolidated Financial Statements of the U.S. Government
Published: 2008-06-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: For the past 11 years, since GAO's first audit of the consolidated financial statements of the U.S. government (CFS), certain material weaknesses in internal control and in selected accounting and financial reporting practices have prevented GAO from expressing an opinion on the CFS. GAO has consistently reported that the U.S. government did not have adequate systems, controls, and procedures to properly prepare the CFS. GAO's December 2007 disclaimer of opinion on the fiscal year 2007 accrual basis consolidated financial statements included a discussion of continuing control deficiencies related to the preparation of the CFS. The purpose of this report is to (1) provide details of continuing material weaknesses, (2) recommend improvements, and (3) provide the status of corrective actions taken to address the 81 open recommendations related to the preparation of the CFS that GAO reported in July 2007.
section_title: What GAO Found
paragraphs: GAO identified continuing and new control deficiencies during its audit of the fiscal year 2007 CFS that relate to the federal government's processes used to prepare the CFS. These control deficiencies contribute to material weaknesses in internal control regarding the U.S. government's inability to (1) adequately account for and reconcile intragovernmental activity and balances between federal agencies; (2) ensure that the CFS was consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and (3) identify and either resolve or explain material differences that exist between certain components of the budget deficit reported in the Department of the Treasury's records, used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal agencies' financial statements and underlying financial information and records. The control deficiencies GAO identified during its tests of the processes used to prepare the fiscal year 2007 CFS involved the following areas: documenting a key standard operating procedure for preparing the CFS, reporting in conformity with U.S. generally accepted accounting principles, reconciling distributed offsetting receipts, maintaining adequate control over spreadsheets used in preparing the CFS, monitoring internal control over the processes used to prepare the CFS, using interim financial information in the CFS preparation process, and various other control deficiencies that were identified in previous years' audits but remained in fiscal year 2007. Of the 81 open recommendations GAO reported in July 2007 regarding the processes used to prepare the CFS, 35 were closed and 46 remained open as of December 10, 2007, the date of our report on our audit of the fiscal year 2007 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations and the new remaining balance of 56 open recommendations during its fiscal year 2008 audit of the CFS.

section_title: Letter
paragraphs: In our report dated December 10, 2007, we disclaimed an opinion on the  consolidated financial statements of the U.S. government (CFS) for the  fiscal years ended September 30, 2007 and 2006, except for the 2007  Statement of Social Insurance, which received an unqualified opinion. For  the past 11 years, certain material weaknesses in financial reporting and  other limitations on the scope of our work have resulted in conditions that  prevented us from expressing an opinion on the federal government’s  accrual basis consolidated financial statements. We have reported that the  federal government did not have adequate systems, controls, and  procedures for preparing the CFS. On behalf of the federal government,  the Department of the Treasury (Treasury), in coordination with the Office  of Management and Budget (OMB), prepares the CFS. Many of the  material weaknesses in internal control that have contributed to our  continuing disclaimers of opinion were identified by auditors during their  audits of federal agencies’ financial statements and were reported in detail  with recommendations to the agencies in separate reports. Additional  material weaknesses were identified during our tests of the federal  government’s processes used to prepare the CFS.
The purpose of this report is to (1) discuss the details of the material  weaknesses we identified during our audit of the fiscal year 2007 CFS  relating to internal control over the processes used to prepare the CFS,   (2) recommend improvements to address these weaknesses, and   (3) provide the status of corrective actions taken by Treasury and OMB to  address the 81 recommendations detailed in our previous reports (see app.  I). We have discussed each of the new control deficiencies identified  during our fiscal year 2007 audit with your staff and have incorporated  their comments as appropriate.
subsections: section_title: Scope and Methodology
paragraphs: As part of our audit of the fiscal years 2007 and 2006 CFS, we evaluated  the federal government’s financial reporting procedures and related  internal control, and we followed up on the status of corrective actions  taken by Treasury and OMB to address open recommendations relating to  the processes used to prepare the CFS that were in our previous reports.  In our audit report on the fiscal year 2007 CFS, which is included in the  fiscal year 2007 Financial Report of the United States Government, we  discussed the material weaknesses related to the federal government’s  processes used to prepare the CFS. These material weaknesses  contributed to our disclaimer of opinion on the accrual basis consolidated  financial statements and also contributed to our adverse opinion on  internal control. We performed sufficient audit procedures to provide the  disclaimer of opinion on the accrual basis consolidated financial  statements in accordance with U.S. generally accepted government  auditing standards. This report provides the details of the material  weaknesses we identified in performing our fiscal year 2007 audit  procedures related to the processes used to prepare the CFS and our  recommendations to correct these weaknesses, as well as the status of  corrective actions taken by Treasury and OMB to address  recommendations in our previous reports.
We requested comments on a draft of this report from the Director of OMB  and the Secretary of the Treasury or their designees. OMB provided oral  comments, which are described in the Agency Comments section of this  report. Treasury’s comments are reprinted in appendix II and are also  described in the Agency Comments section.
section_title: Standard Operating Procedures for Preparing the CFS
paragraphs: Over the past several years, Treasury has developed and documented  numerous standard operating procedures (SOP) for preparing the CFS,  which have substantially addressed GAO’s recommendation for Treasury  to develop and document policies and procedures for preparing the CFS.  However, one of Treasury’s SOPs entitled “Standard Operating Procedures  for Preparing the Financial Report of the U.S. Government” is incomplete.  For example, certain steps Treasury performs to prepare the CFS are not  documented in this SOP and, for the key practices that are documented,  the SOP is unclear as to who is responsible for performing the procedures.  In connection with its role as preparer of the CFS, Treasury management  is responsible for developing and documenting detailed policies,  procedures, and practices for preparing the CFS and ensuring that internal  control is built into and is an integral part of the related process. GAO’s  Standards for Internal Control in the Federal Government calls for clear  documentation of policies and procedures. Without adequately  documented policies and procedures, standards and practices may not be  consistently followed or followed at all. This potential for inconsistency  increases the risk that errors in the compilation process could go  undetected and could result in an incomplete and inaccurate  summarization of data within the CFS.
subsections: section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to enhance and fully document all practices referred to  in the SOP entitled “Standard Operating Procedures for Preparing the  Financial Report of the U.S. Government” to better ensure that practices  are proper, complete, and can be consistently applied by staff members.
section_title: Conformity with GAAP
paragraphs: For many years, we have reported that Treasury had not established a  formal process to ensure that the financial statements, related notes,  stewardship information and supplemental information in the CFS were  presented in conformity with GAAP. Over the past several years, Treasury  has developed a formal process that has significantly improved its ability  to timely identify GAAP requirements, modify its closing package  requirements to obtain information needed, assess the effect of omitted  disclosures, and document decisions reached and the rationale for such  decisions. However, there continue to be some instances where  disclosures are not presented in conformity with GAAP. A contributing  factor to the continued instances of nonconformity with GAAP is that the  process Treasury developed to compile the CFS does not include  adequately documenting its (1) timely assessment of the relevance,  usefulness, or materiality of information reported by the federal agencies  for use at the governmentwide level, (2) consideration of relevant  accounting standards other than those issued by FASAB, and (3) final  decisions regarding the inclusion or exclusion of federal agencies’  disclosure information in the existing notes to the CFS.
As part of the process Treasury developed, it created a checklist  containing FASAB requirements for use as a tool to help determine if  disclosures in the CFS are in conformity with GAAP. Due to the way the  checklist was designed, Treasury primarily used it as a planning tool to  ensure that it requested in the closing package the data that Treasury  would need from federal agencies to report in compliance with GAAP.  Although this is a useful and important first step, we found that Treasury’s  checklist was limited by its design and was not used by staff to help ensure  that the published CFS was in conformity with GAAP in all material  respects. As a result, the checklist did not adequately assist Treasury in  ensuring that all GAAP required disclosures were adequately disclosed in  the CFS or documenting why certain disclosures were excluded.
subsections: section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to enhance its checklist or design an alternative and  use it to adequately and timely document Treasury’s (1) assessment of the  relevance, usefulness, or materiality of information reported by the federal  agencies for use at the governmentwide level; (2) consideration of relevant  accounting standards other than those issued by FASAB; and (3) final  decisions regarding the inclusion or exclusion of federal agencies’  disclosure information in the existing notes to the CFS.
section_title: Reconciling Distributed Offsetting Receipts
paragraphs: The federal government reports a unified budget deficit  (budget deficit)  in the Reconciliation of Net Operating Cost and the Unified Budget Deficit  and in the Statement of Changes in Cash Balance from Unified Budget and  Other Activities. The budget deficit is calculated by subtracting actual  budget outlays from actual budget receipts. Budget outlays consist of  federal agencies’ outlay amounts, that is, gross outlays net of offsetting  collections and distributed offsetting receipts at the agency level, and  undistributed offsetting receipts at the governmentwide level. Federal  agencies also report net outlays in their SBRs. Both the net outlays as a  component of the budget deficit reported in the CFS and as reported in the  federal agencies’ SBRs should generally match the budget outlays reported  in the Budget of the United States Government.
For several years, we have reported material unreconciled differences  between the total net outlays reported in selected federal agencies’ SBRs  and Treasury’s central accounting records used to compute the budget  deficit reported in the CFS. OMB and Treasury have continued to work  with federal agencies to reduce these material unreconciled differences.  However, in fiscal year 2007, billions of dollars of unreconciled differences  still existed in this and other components of the budget deficit. One way  OMB has been working with federal agencies has been to require the  agencies, beginning with the first quarter in fiscal year 2007, to submit to  OMB an analysis and reconciliation, based on certain criteria, of any  material differences between the federal agency’s quarterly unaudited SBR  and the agency’s related quarterly Standard Form (SF) 133 Report on  Budget Execution and Budgetary Resources (SBR to SF 133  reconciliations). Agencies’ SF 133s are submitted to Treasury and serve as  the main source for the CFS budget reporting and reconciliation. Material  unreconciled differences remained at the end of fiscal year 2007 between  the agencies’ SBRs and their related SF 133s. OMB conducted further  analysis on the agencies’ quarterly SBR to SF 133 reconciliations and  determined that many of these differences related to the recording of  distributed offsetting receipts. Although distributed offsetting receipts are  included in the net outlay calculation in federal agencies’ SBRs, as well as  in the computation of the budget deficit in the CFS, they are not included  as part of the SF 133s, and as such are not being identified and addressed  by the agencies in the quarterly reconciliation process.
OMB is aware that the reporting of distributed offsetting receipts  contributes to many of the material differences in net outlays and is  currently determining how to reconcile distributed offsetting receipts  included in the net outlay calculation of federal agencies’ SBRs and the  amounts included in the computation of the budget deficit in the CFS.  Until the federal government has effective processes and procedures in  place for identifying and resolving material differences between the total  net outlays reported in federal agencies’ SBRs and the records used to  prepare the CFS, the actual extent of such differences and their effect on  the CFS will be unknown.
subsections: section_title: Recommendation for Executive Action
paragraphs: We recommend that the Director of OMB direct the Controller of OMB’s  Office of Federal Financial Management, in coordination with Treasury’s  Fiscal Assistant Secretary, to develop formal processes and procedures for  identifying and resolving any material differences in distributed offsetting  receipt amounts included in the net outlay calculation of federal agencies’  SBRs and the amounts included in the computation of the budget deficit in  the CFS.
section_title: Control over Spreadsheets Used to Prepare the CFS
paragraphs: Treasury developed the Governmentwide Financial Report System (GFRS)  to collect federal agencies’ audited financial statement information to  prepare the CFS. Federal agencies enter their audited financial  information into GFRS, and Treasury exports the data into a database and  then into various spreadsheets in order to compile the CFS. Treasury did  not maintain adequate control over the spreadsheets used to summarize  and array financial data for presentation in the CFS. Specifically,  Treasury’s processes and procedures for management and control of the  spreadsheets were largely undocumented. In addition, Treasury had not  established adequate controls to ensure that certain key spreadsheets  were (1) protected from inadvertent change and (2) documented to  facilitate detection and tracking of changes to key formulas and data.  Further, the column headings within many spreadsheets were either not  labeled or the labels were not aligned with the data contained in the  column. GAO’s Standards for Internal Control in the Federal Government  calls for controls to be in place to safeguard financial information and help  reduce the risk of errors, misuse, or unauthorized alteration. In addition,  vendor documentation also provides guidance on maintaining and  protecting spreadsheet integrity. OMB Circular No. A-127 requires that  appropriate internal control be applied to all financial management system  inputs, processing, and output. It also requires that financial management  systems and associated instructions for maintenance and use be clearly  documented in sufficient detail to permit an individual with appropriate  background knowledge to obtain a comprehensive understanding of the  entire operation of the system. Inadequate spreadsheet controls increase  Treasury’s risk that its financial reporting data will be inaccurate, and that  these inaccuracies will not be prevented or detected in a timely manner.
subsections: section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to establish effective internal control to ensure the  spreadsheets used to compile the CFS are (1) protected from inadvertent  change and (2) documented to facilitate detection and tracking of changes  to key formulas and data. Further, we recommend that columns within key  spreadsheets be labeled and properly aligned to reflect the data contained  within.
section_title: Monitoring Internal Control over the CFS Preparation Process
paragraphs: Treasury, in coordination with OMB, has not established processes for  monitoring and assessing the effectiveness of internal control over the  processes used to prepare the CFS. According to OMB Circular No. A-123,  management has a fundamental responsibility to develop and maintain  effective internal control. Effective internal control provides reasonable  assurance that significant weaknesses in the design or operation of  internal control, that could adversely affect the entity’s ability to meet its  objectives, would be prevented or detected in a timely manner. In  addition, periodic reviews, reconciliations, or comparisons of data should  be included as part of the regular assigned duties of personnel. Periodic  assessments should be integrated as part of management’s continuous  monitoring of internal control, which should be ingrained in the entity’s  operations. If an effective continuous monitoring program is in place, it  can leverage the resources needed to maintain effective internal controls  throughout the year. In addition, GAO’s Standards for Internal Control in  the Federal Government states that internal control is a major part of  managing an organization and should include monitoring. Without  effective monitoring and assessment of internal control, there is a risk that  errors in the compilation process could go undetected and could result in  an incomplete and inaccurate summarization of data within the CFS.
subsections: section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, in coordination with the Controller of OMB’s Office of  Federal Financial Management, to develop and implement effective  processes for monitoring and assessing the effectiveness of internal  control over the processes used to prepare the CFS.
section_title: Use of Interim Financial Information to Compile the CFS
paragraphs: As indicated in our most recent audit report on the CFS, and since fiscal  year 2003, there have been limitations on the scope of our work that  contribute to our disclaimer of opinion on the accrual basis consolidated  financial statements. Since fiscal year 2003, Treasury and OMB began  accelerating the time frame for preparation of the CFS. Consequently,  GAO in turn has accelerated the time frame to issue our reports on the  audits of the CFS.
For fiscal year 2007, we reported that Treasury was unable to provide the  final accrual basis consolidated financial statements and certain  supporting documentation in time for us to complete all of our planned  auditing procedures related to the compilation of these financial  statements. We also reported that personnel at Treasury’s Financial  Management Service had excessive workloads that required an  extraordinary amount of effort and dedication to compile the CFS and that  quarterly compilations were not performed at the governmentwide level.  This leads to almost all the compilation effort being performed during a  condensed time period at the end of the year.
Federal agencies are required to produce unaudited quarterly financial  statements and remit them to OMB; however, Treasury does not use  these quarterly financial statements or request any other interim financial  information that would enable it to perform some of the compilation effort  before the end of the year. For example, if a federal agency changed the  manner in which it was reporting certain information in its financial  statements, by obtaining and utilizing the agency’s quarterly financial  statements, Treasury would be aware of this change and could evaluate  any effect this might have on the CFS during the year rather than during  the condensed time period at the end of the year.
Until such time that interim financial information is obtained and utilized  in some capacity to assist Treasury in overcoming the existing resource  and time constraints, we believe that Treasury will continue to face  significant challenges in being able to provide accrual basis consolidated  financial statements and supporting documentation in time for us to  complete our planned auditing procedures.
subsections: section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of OMB’s  Office of Federal Financial Management, to develop and implement  alternative solutions to performing almost all of the compilation effort at  the end of the year, including obtaining and utilizing interim financial  information from federal agencies.
section_title: Agency Comments
subsections: section_title: OMB Comments
paragraphs: In oral comments on a draft of this report, OMB stated that it generally  agreed with the new findings and related recommendations in this report.
section_title: Treasury Comments
paragraphs: In written comments on a draft of this report, which are reprinted in  appendix II, Treasury stated that it agrees with the new findings and  related recommendations.
This report contains recommendations to the Secretary of the Treasury  and the Director of OMB. The head of a federal agency is required by   31 U.S.C. § 720 to submit a written statement on actions taken on these  recommendations. You should submit your statement to the Senate  Committee on Homeland Security and Governmental Affairs and the  House Committee on Oversight and Government Reform within 60 days of  the date of this report. A written statement must also be sent to the House  and Senate Committees on Appropriations with the agency’s first request  for appropriations made more than 60 days after the date of the report.
We are sending copies of this report to the Chairmen and Ranking  Members of the Senate Committee on Homeland Security and  Governmental Affairs; the Subcommittee on Federal Financial  Management, Government Information, Federal Services, and  International Security, Senate Committee on Homeland Security and  Governmental Affairs; the House Committee on Oversight and  Government Reform; and the Subcommittee on Government Management,  Organization, and Procurement, House Committee on Oversight and  Government Reform. In addition, we are sending copies to the Fiscal  Assistant Secretary of the Treasury, the Deputy Director for Management  of OMB, and the Acting Controller of OMB’s Office of Federal Financial  Management. Copies will be made available to others upon request. This  report is also available at no charge on GAO’s Web site at  http://www.gao.gov.
We acknowledge and appreciate the cooperation and assistance provided  by Treasury and OMB during our audit. If you or your staff have any  questions or wish to discuss this report, please contact me on (202) 512- 3406 or engelg@gao.gov. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Status of Treasury’s and OMB’s Progress in Addressing GAO’s Prior Year Recommendations for Preparing the CFS
paragraphs: This appendix includes recommendations that were open at the beginning  of our fiscal year 2007 audit from five of our previous reports:    Financial Audit: Process for Preparing the Consolidated Financial  Statements of the U.S. Government Needs Improvement, GAO-04-45  (Washington, D.C.: Oct. 30, 2003);   Financial Audit: Process for Preparing the Consolidated Financial  Statements of the U.S. Government Needs Further Improvement, GAO-04- 866 (Washington, D.C.: Sept. 10, 2004);   Financial Audit: Process for Preparing the Consolidated Financial  Statements of the U.S. Government Continues to Need Improvement,  GAO-05-407 (Washington, D.C.: May 4, 2005);   Financial Audit: Significant Internal Control Weaknesses Remain in  Preparing the Consolidated Financial Statements of the U.S.  Government, GAO-06-415 (Washington, D.C.: Apr. 21, 2006); and   Financial Audit: Significant Internal Control Weaknesses Remain in the  Preparation of the Consolidated Financial Statements of the U.S.  Government, GAO-07-805 (Washington, D.C.: July 23, 2007).
Recommendations that were closed in prior reports are not included in  this appendix. This appendix includes the status of the recommendations  according to the Department of the Treasury (Treasury) and the Office of  Management and Budget (OMB) as well as our own assessments.  Explanations are included in the status of recommendations per GAO  when Treasury and OMB disagreed with our recommendation or the status  of a recommendation.
Of the 81 recommendations relating to the processes used to prepare the  consolidated financial statements of the U.S. government (CFS) that are  listed in this appendix, 35 were closed and 46 remained open as of  December 10, 2007, the date of our report on the audit of the fiscal year  2007 CFS.
section_title: Appendix II: Comments from the Department of the Treasury
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the above contact, the following individuals made key  contributions to this report: Lynda Downing, Assistant Director; Mickie  Gray; David Hayes; Sharon Kittrell; Dragan Matic; Maria Morton; and Taya  Tasse.