Financial Audit: Restated Financial Statements: Agencies' Management and Auditor Disclosures of Causes and Effects and Timely Communication to Users
Published: 2006-10-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO continues to have concerns about restatements to federal agencies' previously issued financial statements. During fiscal year 2005, at least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain of their fiscal year 2004 financial statements to correct misstatements. To study this trend, GAO reviewed the nature and causes of the restatements made by certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003 financial statements. Eleven CFO Act agencies had restatements for fiscal year 2003. Nine of those 11 received unqualified opinions on their originally issued fiscal year 2003 financial statements. GAO's view is that users of federal agencies' financial statements and the related audit reports need to be provided at least a basic understanding of why a restatement was necessary and its effect on the agencies' previously issued financial statements and related audit reports. This report communicates GAO's observations on the transparency and timeliness of the 9 federal agencies' and their auditors' restatement disclosures.
section_title: What GAO Found
paragraphs: The nine agencies GAO reviewed did not consistently communicate financial statement restatements. GAO found that all nine agencies could have greatly enhanced the adequacy, effectiveness, and timeliness of their restatement disclosures to users. Similar transparency issues existed with the associated audit reports regarding disclosure of all the essential information that would clearly explain the restatements. GAO highlighted the following issues as among the more prevalent issues to be addressed: 1) columns of the agencies' restated financial statements were not labeled as "Restated"; 2) agencies' restatement footnote disclosures lacked clarity or sufficient detail regarding the nature of the restatements and the effect on balances reported in previously issued financial statements; 3) restatement information was not sufficiently disclosed in the agencies' Management Discussion and Analysis; 4) audit reports did not disclose that the respective agencies had restated certain of their fiscal year 2003 financial statements; 5) audit reports did not provide a statement that the previously issued audit report was withdrawn and replaced by the opinion on the restated financial statements; and 6) material misstatements and potential material misstatements were not timely communicated by agencies to either their auditors or to the users of the financial statements. The primary contributing factor for the restatement disclosure issues that GAO identified was insufficient guidance available at the time to both the agencies' management and their respective auditors for disclosure of the restatements and the timeliness of such disclosures. GAO believes that information regarding restatements should be disclosed in a transparent and timely manner consistent with the qualitative characteristics of information in financial reports described in Statement of Federal Financial Accounting Concepts (SFFAC) No. 1. In GAO's view, more detailed accounting and auditing guidance on how to satisfy the financial reporting characteristics as outlined in SFFAC No. 1 as it relates to the disclosure of restatements would have been helpful. OMB revised Circular No. A-136, Financial Reporting Requirements, which provides additional guidance to federal agencies' management regarding disclosure of restatements to previously issued financial statements. Revisions made to OMB Circular No. A-136 address many of GAO's concerns regarding the agencies' disclosure of restatements. In addition, the proposed 2006 revision of generally accepted government auditing standards now includes a section on reporting on restatement of previously issued financial statements. In addition, on August 23, 2006, OMB issued Bulletin No. 06-03, which also provides some information regarding reporting on restatements. However, GAO believes that OMB needs to timely provide additional, though complementary, restatement guidance to both the agencies' management and their respective auditors.

section_title: Letter
paragraphs: We continue to have concerns about restatements to federal agencies’  previously issued financial statements. During fiscal year 2005, at least 7 of  the 24 Chief Financial Officers (CFO) Act agencies restated certain of their  fiscal year 2004 financial statements to correct misstatements. To study  this trend, we reviewed the nature and causes of the restatements made by  certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003  financial statements. Our audit of the consolidated financial statements of  the U.S. government (CFS) for fiscal years 2004 and 2003 showed that 11  CFO Act agencies had restated one or more of their fiscal year 2003  financial statements to correct misstatements. Nine of the 11 agencies had  received an unqualified audit opinion on their originally issued financial  statements. Because of the significant increase in the number of  restatements identified during our fiscal year 2004 audit, we initiated a  review of the nature and causes of these 9 federal agencies’ restatements.
Accounting principles attribute errors in recognition, measurement,  presentation, or disclosure in previously issued financial statements to   (1) mathematical mistakes, (2) mistakes in the application of generally  accepted accounting principles (GAAP), or (3) oversight or misuse of facts  when the financial statements were prepared. Restatements occur when  an entity, either voluntarily or prompted by its auditors or regulators,  revises previously issued financial statements. Accounting standards state  that financial statements should only be restated for the correction of  errors that would have caused any statements to be materially misstated.  Therefore, restatements should not occur if misstatements in previously  issued financial statements are not material. Such standards further state  that the restated financial statements should disclose the nature of the  misstatement and effect of its correction on relevant balances. The Office  of Management and Budget (OMB) has issued guidance to federal  agencies’ management regarding disclosure of restatements to previously  issued financial statements. Generally accepted government auditing  standards (GAGAS) discuss the auditors’ responsibilities when they  become aware of information affecting previously issued financial  statements, including corrections of material misstatements. GAGAS  stress the importance of timely communication of restatements to users  relying or likely to rely on the previously issued financial statements. The  proposed 2006 revision of GAGAS includes an additional section on  reporting on restatement of previously issued financial statements. In  addition, on August 23, 2006, OMB issued Bulletin No. 06-03, which also  provides some information regarding reporting on restatements.
We believe that federal agencies’ financial statements and the related audit  reports should provide users with at least a basic understanding of why a  restatement was necessary and the effect of the restatement on the  agencies’ previously issued financial statements and related audit reports.  In keeping with full transparency, when restatements occur, restated  financial statements should clearly communicate that the financial  statements previously issued by management and the opinion thereon  should no longer be relied on and instead the restated financial statements  and the related auditor’s opinion should be used. In addition, timely  communication of restatements is critical to prevent users of federal  agencies’ financial statements and the related audit reports from  inadvertently relying on inaccurate information.
Restatements are not unique to the federal government. Over the past  several years, we have seen a number of corporate scandals as well as  restatements by public companies. In response, the Congress enacted the  Sarbanes-Oxley Act in 2002 to strengthen corporate governance and  improve transparency and accountability to help ensure the accuracy and  integrity of the financial reporting system in the private sector to protect  investors. In addition, in May 2005, the Financial Accounting Standards  Board’s (FASB) Statement of Financial Accounting Standards (FAS) No.  154, Accounting Changes and Error Corrections, was issued. FAS   No. 154 requires nongovernmental entities to disclose that their previously  issued financial statements have been restated, a description of the nature  of the error, the effect of the correction on each financial statement line  item, and the cumulative effect of change in the statement of financial  position. Further, the Securities and Exchange Commission (SEC) now  requires companies to disclose restatements in the Form 8-K. Specifically,  under the Form 8-K requirements, if a company is advised by its auditor  that disclosure should be made to prevent future reliance on a previously  issued audit report or completed interim review related to previously  issued financial statements, the company should disclose (1) the date on  which it was so advised or notified, (2) the financial statements that  should no longer be relied upon, (3) a brief description of the information  provided by the auditor, and (4) a statement of whether the audit  committee or the board of directors discussed with the auditor the matters  disclosed in the filing.
America’s taxpayers deserve no less in terms of transparency,  accountability, disclosure, and notification from federal agencies. Between  September 2005 and January 2006, we issued reports covering five of the  nine CFO Act agencies that had received unqualified audit opinions on, but  subsequently restated, their originally issued fiscal year 2003 financial  statements. We reported that these restatements generally resulted from  (1) lack of effective internal controls over the processing and reporting of  certain transactions and (2) failure of the auditors to design and/or  perform adequate audit procedures to detect such misstatements. During  our fieldwork, December 2004 through October 2005, our review of these  nine agencies also focused on the following two key areas: (1) the extent  of transparency exhibited in disclosing the nature and cause of the  misstatement and its impact on the financial statements and the reissued  or updated audit report and (2) the timing of communicating the material  misstatement to users of the financial statements. This capping report,  which summarizes the results of our review of the nine agencies, provides  our overall observations on their transparency and timeliness, and  includes governmentwide recommendations based on our work at these  agencies.
subsections: section_title: Background
paragraphs: Federal agencies’ management responsibilities for their financial  statements include, among other things, preparing the financial statements  in conformity with GAAP and establishing and maintaining internal  controls over financial reporting. Auditors of these financial statements  are required to plan and perform their audits to obtain reasonable  assurance about whether the financial statements are free of material  misstatement. While restatements to previously issued financial  statements can happen and may not be surprising given weaknesses in the  financial reporting environment at many federal agencies, inherently,  restatements raise questions about the reliability of other information in  previously issued financial statements. In addition, frequent restatements  to correct misstatements can undermine public trust and confidence in  both the entity and all responsible parties. Adequate transparency and  timely notification of restatements are essential to help preclude users of  agencies’ financial statements and the related audit reports from  inadvertently relying on inaccurate information and allow them to make  more informed and relevant decisions.
According to SFFAC No. 1, the primary intended users of federal agencies’  financial reports are citizens, the Congress, federal executives, and federal  program managers. Each of these groups may use federal agencies’  financial statements to satisfy their specific needs. Citizens are interested  in many aspects of the federal government, especially those federal  programs that affect their well-being. The Congress uses the agencies’  financial statements to monitor and evaluate the efficiency and  effectiveness of federal programs. Federal executives, such as central  agency officials at OMB and the Department of the Treasury (Treasury),  use the federal agencies’ financial statements to oversee government  spending. Specifically, OMB assists the President in overseeing the  preparation of the federal budget by formulating the President’s spending  plans, evaluating the effectiveness of agency programs, assessing  competing funding demands among agencies, and setting funding  priorities. Treasury assists the President in managing the finances of the  federal government and prepares the CFS, which is based on audited  financial statements prepared by federal agencies. GAO uses the agencies’  financial statements and the work of their respective auditors during its  annual audit of the CFS. Federal program managers also use agencies’  financial statements as a tool for managing their respective agencies’  operations within the limits of the spending authority granted by the  Congress.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of our review were to determine the transparency and  timeliness of the restatement disclosures by the nine CFO Act agencies’  management and their respective auditors. For the nine agencies we  reviewed, we interviewed the preparers and auditors of the agencies’ fiscal  year 2003 financial statements, including staff from the agencies’ Offices of  Inspector General (OIG), and we obtained and reviewed relevant audit  documentation. Because the OIGs typically contracted with various  independent public accountants (IPA) to audit the agencies’ financial  statements, we expanded our contacts to include such IPAs. Our work was  not designed to and we did not test the accuracy or appropriateness of the  restatements. In addition, our review did not include restatements  reported in fiscal year 2005 financial statements since such financial  statements were issued during November 2005, one month after the  completion of our fieldwork. With respect to the two key areas, we  reviewed the nine agencies’ fiscal years 2004 and 2003 comparative  financial statements and the related audit reports to determine, among  other things, whether the appropriate columns of the agencies’ restated financial statements were  labeled “Restated”; fiscal year 2003 ending balance agreed with the fiscal year 2004  beginning balance on the agencies’ Statement of Changes in Net  Position, if restated; agencies’ restatement footnotes were properly labeled; agencies asserted in their MD&A that they had received a consecutive  number of clean audit opinions, and if so, whether they disclosed that  certain of their previously issued financial statements were  subsequently restated to correct for a material misstatement; audit reports referred the reader to the agencies’ restatement footnote; agencies timely notified their auditors and users of their financial  statements of the material misstatement and plans for correcting the  misstatement in the financial statements; and auditors were aware of a material misstatement to previously issued  financial statements prior to the beginning of the fourth quarter of the  following fiscal year and whether the amount and effect were known,  and if so, did the auditors advise the agencies’ management to reissue  the financial statements.
For this capping report, which is based on our review of the nine federal  agencies that reported restatements in fiscal year 2004 financial  statements, we considered certain accounting and auditing standards that  were applicable to fiscal year 2004 federal financial reporting as well as  accounting standards that were issued subsequent to fiscal year 2004.  These standards consist of the Federal Accounting Standards Advisory  Board’s (FASAB) Statement of Federal Financial Accounting Standards  (SFFAS) No. 15, Management’s Discussions and Analysis; SFFAS No. 21,  Reporting Corrections of Errors and Changes in Accounting Principles;  FAS No. 16, Prior Period Adjustments; FAS No. 154, Accounting Changes  and Error Corrections; and the AICPA’s Codification of Auditing  Standards, AU section 110, Responsibilities and Functions of the  Independent Auditor, AU section 420, Consistency of Application of  Generally Accepted Accounting Principles, AU section 508, Reports on  Audited Financial Statements, and AU section 561, Subsequent Discovery  of Facts Existing at the Date of the Auditor’s Report. We also considered  the following OMB guidance: OMB Bulletins No. 06-03 and No. 01-02,  Audit Requirements for Federal Financial Statements; OMB Bulletin No.  01-09, Form and Content of Agency Financial Statements; and OMB  Circular No. A-136, Financial Reporting Requirements.
We performed our detailed review and analysis of the fiscal year 2003  restatements reported in agencies’ fiscal year 2004 financial statements  from December 2004 to October 2005. Between September 2005 and  January 2006, we issued reports to five of the nine CFO Act agencies that  had received unqualified audit opinions on, but subsequently restated in  fiscal year 2004, their originally issued fiscal year 2003 financial  statements. In conjunction with our fiscal year 2005 CFS audit, we  identified continued restatements of previously issued agency financial  statements and the need for additional guidance to agencies and their  auditors governmentwide. Our work was performed in accordance with  GAGAS.
We requested comments on a draft of this report from the Director of OMB  or his designee. OMB provided oral comments, which are discussed in the  Agency Comments and Our Evaluation section of this report.
section_title: Insufficient and Inconsistent Disclosure of Financial Statement Restatements by Certain Federal Agencies and Their Auditors
paragraphs: During our review of the nine CFO Act agencies’ restatements reported in  fiscal year 2004, we identified issues with the disclosures made by those  agencies and their respective auditors regarding the restatements. The  primary contributing factor for these disclosure issues was insufficient  guidance available at the time to both the agencies’ management and their  auditors for disclosing the restatements.
Although the available guidance did not provide explicit details for  disclosing restatements, we believe that information regarding  restatements should be disclosed in a transparent and timely manner  consistent with the qualitative characteristics of information in financial  reports described in SFFAC No. 1. In our view, more detailed accounting  and auditing guidance on how to satisfy the financial reporting  characteristics in SFFAC No. 1 as it relates to the disclosure of  restatements would have been helpful. Regardless, as discussed later in  the report, several agencies included information in their restatement  disclosures that improved the transparency of the restatement.
Given the issues we identified in our review of restatements reported in  fiscal year 2004 financial statements, we believe it would be appropriate to  offer more explicit or detailed guidance for how agency management and  their respective auditors should disclose restatements. Specifically,  although SFFAS No. 21 required that the nature of an error in previously  issued financial statements and the effect of its correction on relevant  balances be disclosed, the standard did not provide a detailed explanation  of the type of information that should be disclosed or what the nature of  an error means. OMB Bulletin No. 01-09, which specifies the form and  content for federal financial statements, also did not provide specific  guidance on how an agency’s management should disclose restatement  information in its financial statements. As for the auditor’s disclosure of  the agency’s restatements in its audit report, AU section 561 only stated  that the audit report usually should refer to the note to the financial  statements that describes the restatement. Thus, if for no other reason  than avoiding interpretation issues as to how much disclosure and in what  form is appropriate, we believe that guidance to agency auditors should be  enhanced to attain some added level of uniform treatment regarding the  disclosure of restatements.
subsections: section_title: Issues Regarding Agencies’ Restatement Disclosures
paragraphs: We identified the following four issues related to the agencies’ reporting of  the restatements.
subsections: section_title: Labeling of Restated Financial Statements
paragraphs: While guidance available during fiscal year 2004 did not expressly require  agencies to label the columns of restated financial statements as  “Restated,” seven of the nine agencies labeled their financial statements as  such. Such labeling is a common practice in reporting restated financial  statements. Two of the nine agencies did not label their financial  statements as “Restated,” and as a result, users of such statements may be  unaware that a restatement occurred.
OMB Circular No. A-136 was revised during fiscal year 2005 to provide  additional guidance for disclosing restatements; however, it does not  require agencies to label their financial statements as “Restated.” In our  view, revising OMB Circular No. A-136 to require agencies to label the  columns of the restated financial statements as “Restated” would make the  existence of restated financial statements more evident to the readers of  the financial statements.
section_title: Restatements to Certain Agencies’ Statement of Changes in Net Position
paragraphs: We also found issues regarding certain agencies’ restated Statement of  Changes in Net Position. Of the six agencies that restated their originally  issued fiscal year 2003 Statements of Changes in Net Position to correct  for material misstatements, two of the restatement presentations could be  misinterpreted because the fiscal year 2004 beginning balances did not  agree with the restated fiscal year 2003 ending balances. Instead of  carrying forward the restated fiscal year 2003 ending balance to the fiscal  year 2004 beginning balance, these two agencies made prior period  adjustments to the fiscal year 2004 beginning balances to reflect the  restated fiscal year 2003 ending balances. We believe that a clearer  presentation on the agencies’ fiscal years 2004 and 2003 comparative  Statement of Changes in Net Position would have been to carry forward  the restated fiscal year 2003 ending balances and present them as the fiscal  year 2004 beginning balances instead of presenting prior period  adjustments in the fiscal year 2004 column.
Although authoritative guidance available during fiscal year 2004 did not  expressly prohibit agencies from reflecting prior year restatements as  adjustments to the current year’s beginning balances on the Statement of  Changes in Net Position, we found that the other four agencies’ restated  fiscal year 2003 ending balances agreed with the fiscal year 2004 beginning  balances on their Statement of Changes in Net Position. The current  version of OMB Circular No. A-136 includes guidance from SFFAS No. 21,  which states that the adjustment should be made to the beginning balance  of cumulative results of operations, in the Statement of Changes in Net  Position for the earliest period presented. In our view, OMB Circular   No. A-136 would be enhanced if it explicitly stated that the current year  unadjusted beginning balances on the Statement of Changes in Net  Position are to agree with the restated ending balances on the prior year’s  statement (i.e., that adjustments are to be made only to the prior year and  carried forward as restated).
section_title: Agencies’ Restatement Footnotes
paragraphs: In our view, all nine of the agencies’ restatement footnotes lacked  sufficient clarity or sufficient detail regarding the restatements in at least  one of the following two areas: (1) the title of the footnote or (2) the  content of the footnote.
For five agencies, the title of the restatement footnote did not reflect the  existence of a restatement. Specifically, three agencies titled their  restatement footnotes as either “Prior Period Adjustments” or “Prior  Period Reclassification,” which could be misinterpreted since the changes  to the financial statements represented restatements because of material  misstatements rather than prior period adjustments or prior period  reclassifications. The other two agencies did not include separate  footnotes disclosing the restatement information. Instead, one agency  provided the restatement information under its “Significant Accounting  Policies” and the other included it under its “Statement of Changes in Net  Position” and its “Statement of Budgetary Resources” notes. The  remaining four agencies appropriately titled their restatement disclosures  by entitling their footnote “Restatement.”
With respect to restatement footnote content, five clearly explained the  misstatement and reason for the restatement while the other four agencies  did not. Accordingly, it was not clear if these four agencies’ misstatements  were attributed to errors in recognition, measurement, presentation, or  disclosure in financial statements resulting from mathematical mistakes,  mistakes in the application of GAAP, or oversight or misuse of facts that  existed at the time the financial statements were prepared. In addition,  one of the nine agencies did not disclose the specific year(s) being  restated, while two other agencies did not disclose all of the financial  statements impacted by the restatements.
Further, we also believe some additional language should be included in  related footnotes. Specifically, in our view, a sufficient restatement  footnote would also include (1) the specific amount(s) of the material  misstatement(s) and the related effect(s) on the previously issued  financial statement(s) (e.g., year(s) being restated and the specific  financial statement(s) affected and line items restated); (2) the overall  impact the restatement has on the current year financial statements (e.g.,  the change in overall net position, change in the audit opinion); and (3) a  discussion of the corrective actions taken by the agency’s management.
Although six agencies appropriately disclosed the amounts being restated,  the remaining three did not disclose the specific line items restated and  the related amounts. In addition, five agencies did not disclose the effect  of the restatement on the financial statements as a whole. Further, none of  the nine agencies’ restatement footnotes discussed the actions taken by  the agency’s management after discovering the misstatement, such as  measures taken to better prevent similar misstatements from occurring in  the future (e.g., improvements in internal controls).
Authoritative guidance available during fiscal year 2004 did not provide  explicit guidance to the agencies as to what information should be  included in the agencies’ footnotes or how the restatement note should be  titled. Revisions made to OMB Circular No. A-136 address a number of  these areas. Specifically, OMB Circular No. A-136 now requires agencies to  provide restatement information in a separate note entitled  “Restatements.” In addition, regarding content of the note, the revised  circular calls for the following information to be included in the note: the  nature of the error and the reason for the restatement, the year(s) being  restated, which financial statements are impacted, the amounts being  restated, and the effect of the restatement on the financial statements as a  whole (i.e., change in overall net position, change in audit opinion, etc.).  Further, per the revised OMB Circular No. A-136, agencies should discuss  the actions management took after discovering the error.
The additional requirements in OMB Circular No. A-136 address many of  our concerns with the transparency of the restatement footnote. We did,  though, identify three areas where OMB Circular No. A-136 could further  enhance transparency. The first is to clarify that when agencies disclose  the amounts being restated, it is important that they also disclose the  specific line items restated and the related amounts. In our view, this  additional information will allow the readers of the restated financial  statements to more clearly see how the restatement affected such  statements. The second is to define the meaning of the “nature” of an  error. The third is to explicitly state what type of information should be  provided when discussing the actions management took after discovering  the error.
section_title: Disclosure of Restatements in Agencies’ Management’s Discussion and Analysis
paragraphs: We also found that certain agencies’ presentation of restatements in their  MD&A could be misleading. Seven of the nine agencies we reviewed stated  in their fiscal year 2004 MD&A that they had achieved a consecutive  number of unqualified opinions on their respective financial statements.  However, six did not acknowledge that one or more of these financial  statements had been restated in the intervening years to correct for  material misstatements. We believe stating that there have been  consecutive years of unqualified audit opinions without the appropriate  context could be misleading to the reader of the financial statements. It  erroneously conveys an impression of consistent, accurate financial  reporting over a period of time, when in fact this was not the case because  subsequently, the financial statements and the opinion were found to be  incorrect.
According to SFFAS No. 15, Management’s Discussions and Analysis,  management should have great discretion regarding what to say in its  MD&A. At the same time, the standard also states that the pervasive  requirement is that the MD&A not be misleading. In our view, it is  misleading for an agency to state in its MD&A that it has received a  consecutive number of unqualified opinions on its financial statements  when one or more of its financial statements within that time frame were  subsequently restated. In our view, agencies having restated their financial  statements should either refrain from such claims or clearly disclose in  their MD&A which of the agency’s prior year financial statements, as  originally issued, were materially misstated and subsequently restated.  Although standards do not specifically state that agencies shall disclose  restatement information in their MD&A, we found that one of the seven  agencies did state that it had received a clean audit opinion for   7 consecutive years but appropriately disclosed that its fiscal year 2003  financial statements were restated to correct misstatements.
section_title: Issues Regarding Auditors’ Restatement Disclosures
paragraphs: During our review, we found issues regarding how agency auditors  disclosed the agencies’ restatements in their audit reports. According to  AU section 561, the restatement footnote in the agency’s financial  statements “usually should” be referred to in the audit report, but given the  latitude, such disclosure is not an across-the-board requirement. In any  report on financial statements, the auditor has the discretion to add a  separate paragraph to the audit report to emphasize a matter regarding the  financial statements. In our view, such matters include the effect of the  material misstatements on previously audited financial statements and the  accompanying audit report. Also, we believe that if the agency’s  restatement footnote does not provide a clear and adequate description of  the restatement, then the auditor should go beyond merely referencing the  restatement footnote and add a separate paragraph to the audit report that  provides additional details regarding the effects of the restatement and  should consider whether it is necessary to modify the audit opinion.
In our view, none of the nine agencies’ audit reports we reviewed  sufficiently disclosed all the essential information that would clearly  explain the restatement. Specifically, we found that seven of the nine audit reports did not provide a statement that the  previously issued audit report was withdrawn and replaced by the  opinion on the restated financial statements, three of the nine audit reports either did not disclose the restatement or  include a reference to the agency restatement footnote in the financial  statements, and none of the nine agencies provided a sufficient description of the  restatement (i.e., the nature and cause of the misstatement, year(s)  being restated, financial statements and line items impacted, specific  amount(s) of the material misstatement(s) and the related effects on  the previously issued financial statements, and actions management  took after discovering the misstatement) in the notes to their financial  statements and none of these agencies’ auditors compensated for this  by providing such information in their audit reports.
In our view, the auditor plays an important role in ensuring proper  disclosure of restatements. Accordingly, if any of the prior year financial  statements are restated and management did not already provide a  sufficient description of the restatement in the note(s) to the financial  statements, the audit report should include such information. In addition,  although none of the nine agencies’ auditors disclosed misstatements of  unknown amounts, we believe that if at the time of issuance of the audit  report, a material misstatement or potential material misstatement has  been identified in any of the prior years’ financial statements but the  specific amount of the misstatement and the related effects of such are not  yet known, it is important for the auditor to disclose the situation in its  audit report and modify its opinion or disclaim an opinion on the prior  year financial statements as appropriate.
section_title: Timely Communication of Material Misstatements to Users of Previously Issued Financial Statements
paragraphs: We also identified issues with the timeliness of management and auditor  communication regarding material misstatements affecting certain  agencies’ previously issued financial statements. We attributed these  issues to a combination of the lack of specific guidance at that time for  both agencies management and their respective auditors and the lack of  compliance with the related accounting and auditing standards that were  in effect during fiscal year 2004.
During fiscal year 2004, neither OMB Bulletin No. 01-09 nor SFFAS No. 21,  which apply primarily to agency management, provided specific guidance  on the timely investigation and reporting of a material misstatement or  potential material misstatement in a previously issued financial statement  following its discovery. The guidance available to auditors at that time was  AU section 561 and OMB Bulletin No. 01-02, which provided guidance to  the agencies’ auditors regarding the timely communication of restatements  for corrections of misstatements. While this audit guidance conveyed the  intent of timely communication, it did not provide much guidance for how  the agencies’ management or their respective auditors should timely  communicate such restatements.
OMB Bulletin No. 01-02 stated that there shall be open and timely  communication throughout the audit process between the agencies’  management and their auditors, which includes potential audit findings,  materially misstated or unsupported amounts in the financial statements,  and material weaknesses in internal control. The bulletin did not provide  guidance for what the auditor should communicate to management for  when and how an actual or potential restatement should be disclosed to  the users of the agency’s financial statements. With respect to the auditor’s  responsibilities for timely communication, AU section 561 states that  consideration should be given to, among other things, the “time elapsed”  since the erroneous financial statements were issued. According to AU  section 561, when the auditor has concluded that action should be taken to  prevent future reliance on the audit report, the auditor should advise the  auditee to make appropriate disclosure of the newly discovered facts and  their impact on the financial statements to persons who are known to be  currently relying or who are likely to rely on the financial statements and  the related auditor’s report. AU section 561 also states that if an auditor  determines that issuance of financial statements accompanied by the audit  report for a subsequent period is “imminent,” appropriate disclosures can  be made in such statements rather than by separately issuing the restated  financial statements. However, guidance available during fiscal year 2004,  AU section 561 and OMB Bulletin No. 01-02, did not define “time elapsed”  or “imminent.” In addition, existing standards and guidance do not provide  sufficient explicit or detailed guidance to management and auditors  regarding ensuring the timely disclosure of material misstatements  affecting previously issued financial statements.
subsections: section_title: Issues Regarding Timeliness of Management’s Communication of Misstatements to Auditors and Users
paragraphs: In our view, none of the agencies timely communicated that a potential  material misstatement had been identified to either their auditor or to the  users of the financial statements. Agency management is responsible for  reporting key information in a timely manner, including timely notification  of known material or potential material misstatements in previously issued  financial statements.
During fiscal year 2004, OMB Bulletin No. 01-02 called for communication  between the agencies’ management and their auditors, but it did not  provide details for disclosing restatements to users of agency financial  statements. In addition, as noted above, neither OMB Bulletin No. 01-09  nor SFFAS No. 21 provided specific guidance on the timely investigation  and reporting of a material misstatement or potential material  misstatement in a previously issued financial statement following its  discovery. Our review of the nine CFO Act agencies that restated certain  of their fiscal year 2003 financial statements found that three of these  agencies identified potential material misstatements prior to the beginning  of the fourth quarter of fiscal year 2004, and in our view, did not timely  communicate that a potential misstatement had been identified either to  their auditors or to the users of their financial statements. The remaining  six agencies identified potential material misstatements after the third  quarter of fiscal year 2004 but before that year’s comparative financial  statements were issued. These six agencies, in our view, also did not  timely communicate the potential material misstatements to the users of  their financial statements since they did not notify the users of the  potential material misstatement prior to the issuance of the restated fiscal  year 2003 financial statements during fiscal year 2004.
We believe that the current version of OMB Circular No. A-136, if properly  implemented, should address many of our concerns regarding agencies’  timely communication of restatements. For example, according to this  version of OMB Circular No. A-136, “management shall assume  responsibility for any false or misleading information in the financial  statements, or omissions that render information made in the financial  statements misleading. As such, as soon as possible after errors are  detected, management shall notify their auditors and inform their primary  users of their financial statements of the error and plans for correcting it  in the financial statements … it is imperative that management work with  their auditor as soon as the error is detected to assist the auditor in any  actions that need to be taken.”
These are important advances. We do, though, have some remaining  concerns regarding the adequacy of guidance to agencies relating to the  timely communication of material misstatements in previously issued  financial statements. Specifically, we believe it is important for  subsequently discovered material misstatements and potential material  misstatements be disclosed to OMB in the agencies’ quarterly financial  statements for the reporting period in which the misstatements were  discovered. In our view, agencies need to report on the misstatement  within a reasonable time period following the discovery of the  misstatement. In particular, if the specific amount of a material  misstatement and the related effect of such on the previously issued  financial statements are known and the issuance of the subsequent period  audited financial statements is not imminent, then we believe it is  important that the agencies promptly (1) reissue the most recently issued  fiscal year financial statements before issuing the current year’s financial  statements and (2) communicate the reissuance (a) in writing to the  Congress, OMB, Treasury, and GAO; and (b) to the public on the Internet  pages where the agencies’ audited financial statements that were affected  by the material misstatements were published. If a material misstatement  is identified when issuance of the subsequent period audited financial  statements is imminent, we believe it is important that the agencies   (1) issue restated financial statements as part of the current year’s  comparative financial statements and (2) communicate the restatement   (a) in writing to the Congress, OMB, Treasury, and GAO; and (b) to the  public on the same Internet page where the agencies’ audited financial  statements that were affected by the material misstatements were  published.
Further, in our view, if at any time an agency identifies a material  misstatement or potential material misstatement and the effects of it on  the financial statements are not known or cannot be determined without a  prolonged investigation, the agencies should timely notify persons that are  known to be relying or who are likely to rely on the previously issued  financial statements and the related audit report that the (1) previously  issued financial statements will or may be restated and therefore, (2) the  related audit report is no longer reliable. It is important that the agencies  include the Congress, OMB, Treasury, and GAO in any such notification  and notify the public by posting such notification on the same Internet  pages where the agencies’ previously issued financial statements that were  affected by the material or potential material misstatement were  published.
An example of how to appropriately convey this type of information is  State’s communication and disclosure of a potential material misstatement  in its fiscal year 2004 financial statements. Specifically, State identified a  potential material misstatement during the fourth quarter of fiscal year  2005 and, in our view, went beyond the then existing guidance and  appropriately disclosed the problem. Guidance available to agency  management at that time, SFFAS No. 21 and OMB Bulletin No. 01-09, did  not provide explicit guidance for timely communication of a restatement  to users of financial statements. State also complied with the revised OMB  Circular No. A-136, issued August 23, 2005, even though it was not  effective until the end of fiscal year 2005. Specifically, during September  2005, State’s CFO timely notified external parties, including GAO, to which  State’s fiscal year 2004 comparative financial statements were directly  distributed, not to rely on its fiscal year 2004 comparative financial  statements and the related audit report. The notification also stated that  State was committed to resolving this issue as quickly as possible. State  also notified the public of this issue in the form of a cautionary note on the  same Internet pages where the agency’s audited financial statements that  were affected by the material misstatement were published. State’s  cautionary note included a statement that such actions were necessary  because State recently became aware of a potential material misstatement  affecting the previously issued financial statements and the related audit  report. State noted that due to the need for a complete and thorough  analysis, the complexity of the matters involved, and the accelerated  financial reporting requirements, State was unable to satisfy the  independent auditors by November 15 as to the amount of the potential  material misstatement. As a result, the independent auditors issued a  qualified opinion on the fiscal year 2005 and 2004 financial statements.  State’s CFO also sent a subsequent letter to GAO on December 23, 2005, to  inform us that the independent auditors had satisfied themselves about the  amounts presented and the auditor updated its opinion on the fiscal year  2005 and 2004 financial statements from a qualified to an unqualified  opinion. State was fully transparent in its reports of the restatement in all  respects and showed how disclosing the restatement should be done. As  such, in our view, State’s actions serve as a model for full and timely  notification of a potential material misstatement found in a previously  issued financial statement when identified after the third quarter of the  current fiscal year and before the current year’s comparative financial  statements are issued.
section_title: Issues Regarding Timeliness of Certain Auditors’ Restatement Disclosures
paragraphs: Auditors play a critical role in helping to ensure that users of financial  statements are timely notified of material misstatements affecting  previously issued financial statements and restatement of such financial  statements.
AU section 561, guidance available during fiscal year 2004, requires that  auditors consider the “time elapsed” since the financial statements were  issued when a material misstatement is discovered. According to AU  section 561, if an auditor determines that issuance of financial statements  accompanied by the audit report for a subsequent period is “imminent,”  appropriate disclosures can be made in such statements rather than in  reissued statements. However, neither “time elapsed” nor “imminent” is  defined in AU section 561. We found that at least one of the auditors of the  three agencies that had discovered misstatements prior to the fourth  quarter of the current fiscal year did not advise its respective agency to  make such a disclosure because (1) in May 2004 the auditor did not think  that there were any users who would still be relying on the fiscal year 2003  financial statements and the related audit report and (2) the auditor  considered issuance of the fiscal years 2004 and 2003 comparative  financial statements to be imminent. We have concerns that, without  notification, anyone who may have been relying on the fiscal year 2003  financial statements would not have known for more than 5 months that  the agency’s originally issued financial statements, which received an  unqualified opinion, were materially misstated and should not be relied on.
In our view, existing auditing standards and guidance, including OMB  Bulletin No. 06-03, while conveying the need for appropriate notifications,  do not provide sufficient explicit or detailed guidance to auditors  regarding ensuring the timely disclosure of material misstatements  affecting previously issued financial statements. Our position is that when  a material misstatement or potential material misstatement affecting  previously issued financial statements and the related audit report is  identified, the auditor has a responsibility to advise the agency’s  management to timely notify users such as the Congress, OMB, Treasury,  and GAO in writing as well as the public and clearly disclose the situation  to them. If the agency’s management does not timely provide adequate  disclosure to the relevant users, the auditor has the responsibility to do so.
We believe that it is also important that the auditor advise the agency’s  management of its responsibility to determine the specific amount of the  material misstatement or potential material misstatement and the related  effects of such on the previously issued financial statements as soon as  reasonably possible. In those cases where the specific amount of the  material misstatement and the related effects of such on a previously  issued financial statement are known and issuance of the subsequent  period audited financial statements is not imminent, we believe that the  auditor would need to also advise the agency’s management to promptly  reissue the most recently issued fiscal year financial statements before  issuing the current fiscal year financial statements and to communicate  the reissuance to relevant users in writing as well as the public to clearly  disclose the situation to them. If the agency’s management does not  reissue the financial statements or communicate the reissuance as  required, our position is that the auditor has the responsibility to notify the  Congress, OMB, Treasury, and GAO in writing as well as any other users  known to be relying on the previously issued financial statements. If the  specific amount of the material misstatement and the related effects of  such on a previously issued financial statement are known and issuance of  the subsequent period audited financial statements is imminent, it is  important that the auditor advise the agency’s management to issue  restated financial statements as part of the current year comparative  financial statements and disclose restatements in the audit report. If the  specific amount of the misstatement and the related effect of such on a  previously issued financial statement remain unknown when the current  year financial statements are issued, it is necessary that the auditor  disclose such information when issuing the audit report and modify or  disclaim the opinion on the previously issued financial statements as  appropriate.
section_title: Conclusions
paragraphs: The issues we identified regarding the transparency and timeliness of  restatement disclosures primarily resulted from insufficient guidance  available during fiscal year 2004 to both the agencies’ management and  their respective auditors for disclosure of the restatements and the  timeliness of such disclosures. It will be important that those agencies  needing, in the future, to restate their prior year financial statements  ensure the adequacy of the disclosure and presentation of such  restatements as well as timely notifying users known to be relying on the  previously issued financial statements. It will also be important that the  agencies’ financial statements and the related audit reports provide  sufficient detail so that the reader will be able to gain at least a basic  understanding of why the agencies needed to restate their previously  issued financial statements and the effects of such on the agencies’  previously issued financial statements. The revision of OMB Circular No.  A-136 during fiscal year 2005 addressed many of our concerns regarding  the agencies’ disclosure of restatements; however, additional guidance is  still needed. In this regard, we are making recommendations for further  revisions to OMB Circular No. A-136 as well as OMB Bulletin No. 06-03. We  have provided our views, as outlined in appendix I, on how OMB guidance  could be further enhanced to ensure that future restatement disclosures  are uniform and more transparent.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Director of OMB direct the Controller of OMB’s  Office of Federal Financial Management to incorporate the restatement  guidance and requirements, as detailed in appendix I, into Circular No. A- 136 to assist OMB in addressing the issues we found with the agencies’  restatement disclosures and the timeliness of such disclosures. Appendix I  incorporates seven recommendations as specific changes to Circular No.  A-136 that focus on the timely disclosure by agency management of material misstatement(s)  or potential material misstatement(s) and the related effect(s) of such  in the previously issued financial statements and presentation and disclosure of restatements in the agencies’ MD&A and  financial statements and related footnotes.
We also recommend that the Director of OMB direct the Controller of  OMB’s Office of Federal Financial Management to incorporate the  restatement guidance and requirements, as detailed in appendix I, into  Bulletin No. 06-03 to assist OMB in addressing the issues we found with  auditors’ restatement disclosures and the timeliness of such disclosures. auditor’s timely disclosure of material misstatement(s) or potential  material misstatement(s) and the related effect(s) of such in the  previously issued financial statements and presentation and disclosure of restatements in the audit report.
section_title: Agency Comments and Our Evaluation
paragraphs: In oral comments on a draft of this report, OMB stated that it would take  our recommendations under advisement, but that there were no current  plans to update guidance that has been recently issued. OMB also noted  that any future plans to update guidance would carefully consider issues  already currently being addressed by the AICPA’s Codification of Auditing  Standards. In addition, OMB provided some technical comments, which  we have incorporated as appropriate.
As noted in this report, we found inconsistent communications and  insufficient disclosures of financial statement restatements by agency  management and their auditors. As such, we reiterate our concern that it is  critical for OMB to timely offer separate, though complementary, guidance  to agency management and to agency auditors that provides more explicit  and detailed guidance concerning their respective roles and  responsibilities when an actual or potential material misstatement is  identified in previously issued financial statements. Separate guidance is  important because agency management and agency auditors have different  roles and responsibilities. For example, management is responsible for  preparing the financial statements and adjusting them to correct any  material misstatements. The auditor is responsible for expressing or  disclaiming an opinion on the financial statements prepared by  management. The auditor has certain additional responsibilities should  management not properly respond to actual or potential material  misstatements.
This report contains recommendations to 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 Government Reform  within 60 days of the date of this report. A written statement also must 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  Minority Members of the Senate Committee on Homeland Security and  Governmental Affairs; the Subcommittee on Federal Financial  Management, Government Information, and International Security, Senate  Committee on Homeland Security and Governmental Affairs; the House  Committee on Government Reform; and the Subcommittee on  Government Management, Finance, and Accountability, House Committee  on Government Reform. In addition, we are sending copies to the  Secretary of the Treasury and the Fiscal Assistant Secretary of the  Treasury. 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 OMB and the nine CFO Act agencies’ management and their respective  auditors throughout our work. We look forward to continuing to work  with your office to help improve financial management in the federal  government. If you or your staff have any questions about the contents of  this report, please contact Gary T. Engel, Director, Financial Management  and Assurance, at (202) 512-3406 or by e-mail at engelg@gao.gov. Staff  acknowledgments are provided in appendix II.
section_title: Appendix I: Recommendations to OMB
paragraphs: As noted throughout this report, we believe that additional restatement  guidance is needed for both the agencies’ management and their  respective auditors. To facilitate in this process, we are providing the  following 11 requirements that, in our view, should be incorporated into  Office of Management and Budget (OMB) Circular No. A-136 and OMB  Bulletin No. 06-03.
subsections: section_title: Recommendations Regarding OMB Circular No. A-136
paragraphs: GAO recommends that the following requirement be added to sections  II.4.3.1, II.4.4.1, II.4.5.1, II.4.6.1, and II.4.7.1 of OMB Circular No. A-136,  Financial Reporting Requirements:  Agencies shall label restated financial statements as “Restated.”
GAO recommends that the “Management Actions Related to Corrections  of Errors” subsection of section II.4.5.5 of OMB Circular No. A-136,  Financial Reporting Requirements, be modified to read as follows:  If the agency’s management becomes aware of a material  misstatement(s) or potential material misstatement(s) affecting a  previously issued financial statement(s), then the agency’s  management, in coordination with their respective auditor, shall do the  following:  1.  Communicate the following information to those charged with  governance, oversight bodies, funding agencies, and others who  are relying or are likely to rely on the financial statement(s). This  includes communication (1) in writing to the Congress, OMB,  Treasury, and GAO; (2) to the public on the Internet pages where  the agency’s previously issued financial statements that were  affected by the material misstatement(s) or potential material  misstatement(s) are published; and (3) to OMB in the agency’s next  quarterly financial statements and in subsequent quarterly financial  statements until the specific amount(s) of the material  misstatement(s) and the related effect(s) of such on the previously  issued financial statement(s) are known and reported:  (a) the nature and cause(s) of the known or likely material  misstatement(s),  (b) the amount(s) of known or likely material misstatement(s) and  the related effect(s) on the previously issued financial  statement(s) (e.g., disclosure of the specific financial  statement(s) and line item(s) affected). If this information is  not known, then the disclosure includes information that is  known and a statement that management cannot determine the  amount(s) and the related effect(s) on the previously issued  financial statement(s) without further investigation, and  (c) a notice that (1) a previously issued financial statement(s) will  or may be restated and, therefore, (2) the related auditor’s  report is no longer reliable.  2.  Promptly determine the financial statement effects of the known or  potential material misstatement(s) on the previously issued  financial statement(s).  (a) If the specific amount(s) of the material misstatement(s) and  the related effect(s) of such on a previously issued financial  statement(s) are known and issuance of the subsequent period  audited financial statements is not imminent, then the agency’s  management shall promptly:  i. reissue the most recently issued fiscal year financial  statements before issuing the current fiscal year’s financial  statements;  ii.   communicate the reissuance to those charged with  governance, oversight bodies, funding agencies, and others  who are relying or are likely to rely on the financial  statement(s). This includes communication (a) in writing  to the Congress, OMB, Treasury, and GAO and (b) to the  public on the Internet pages where the agency’s previously  issued financial statements that were affected by the  material misstatement(s) are published; and  iii.  disclose the following information, at a minimum, in the  agency’s restatement footnotes:  1.  the nature and cause(s) of the misstatement(s) that led  to the need for restatement, and  2.  the specific amount(s) of the material misstatement(s)  and the related effect(s) on the previously issued  financial statement(s) (e.g., year(s) being restated,  specific financial statement(s) affected and line items  restated, actions the agency’s management took after  discovering the misstatement), and the impact on the  financial statements as a whole (e.g., change in overall  net position, change in the audit opinion).  (b) If the specific amount(s) of the material misstatement(s) and  the related effect(s) of such on a previously issued financial  statement(s) are known and issuance of the subsequent period  audited financial statements is imminent, then the agency’s  management shall:  i. issue restated financial statement(s) as part of the current  year’s comparative financial statements;  ii.  communicate the restatement to those charged with  governance, oversight bodies, funding agencies, and others  who are relying or are likely to rely on the financial  statement(s). This includes communication (a) in writing  to the Congress, OMB, Treasury, and GAO and (b) to the  public on the Internet pages where the agency’s previously  issued financial statements that were affected by the  material misstatement(s) are published; and  iii.  disclose the following information, at a minimum, in the  agency’s restatement footnote:  1.  the nature and cause(s) of the misstatement(s) that led  to the need for restatement, and  2.  the specific amount(s) of the material misstatement(s)  and the related effect(s) on the previously issued  financial statement(s) (e.g., year(s) being restated,  specific financial statement(s) affected and line items  restated, actions the agency’s management took after  discovering the misstatement), and the impact on the  financial statements as a whole (e.g., change in overall  net position, change in the audit opinion).  (c) If the specific amount(s) of the misstatement(s) and the related  effect(s) of such on a previously issued financial statement(s)  remain unknown when the current year’s financial statements  are issued, then the agency’s management shall follow section  II.4.5.5 (1) above and include the following, at a minimum, in its  restatement footnote:  i. a statement disclosing that a material misstatement(s) or  potential material misstatement(s) affects a previously  issued financial statement(s), but the specific amount(s)  of the misstatement(s) and the related effect(s) of such are  not known,  ii. the nature and cause(s) of the misstatement(s) or  potential misstatement(s),  iii.  an estimate of the magnitude of the misstatement(s) or  potential misstatement(s) and the related effect(s) of such  on a previously issued financial statement(s) (e.g.,  disclosure of the specific financial statement(s) and line  items affected) that are known and a statement that the  specific amount(s) and the related effect(s) of such cannot  be determined without further investigation, and  iv.  a statement disclosing that a restatement(s) to a  previously issued financial statement(s) will or may occur.
GAO also recommends that the following requirement be added to the  “Corrections of Errors” subsection of section II.4.5.5 of OMB Circular No.  A-136, Financial Reporting Requirements:  The Statement of Changes in Net Position’s current year’s unadjusted  beginning balances shall agree with the restated ending balances on  the agency’s prior year’s Statement of Changes in Net Position.
GAO recommends that section II.4.10.43, of OMB Circular No. A-136,  Financial Reporting Requirements, be revised to: clarify the definition of the “nature” of an error,  include an explanation that the disclosure of the “amounts being  restated” specifically refers to the disclosure of the specific line items  restated and the related amounts, and clarify how an agency should specifically further discuss the actions  management took after discovering the error.
GAO recommends that the following requirement be added to section  II.2.7 of OMB Circular No. A-136, Financial Reporting Requirements,  which discusses guidance for information included in the Management  Discussion and Analysis (MD&A):  Agency’s management shall disclose the existence of restatements in  its MD&A if the agency asserts in its MD&A that it received an  unqualified opinion on any previously issued financial statement and  that respective financial statement was subsequently restated.
section_title: Recommendations Regarding OMB Bulletin No. 06-03
paragraphs: GAO recommends that section 5.2 of OMB Bulletin No. 06-03, Audit  Requirements for Federal Financial Statements, be modified to read as  follows:  5.2  previously issued audited financial statement(s) may lead the auditor to  believe that the auditor’s report would or could reasonably have been  affected if the auditor had known of the misstatement(s) when the auditor  issued the auditor’s report. When this condition exists, the auditor shall  advise management to communicate the following information to those  charged with governance, oversight bodies, funding agencies, and others  who are relying or are likely to rely on the financial statement(s):  The nature or amount of known or likely misstatement(s) in the nature and cause(s) of the known or likely material  misstatement(s), the amount(s) of known or likely material misstatement(s) and the  related effect(s) on the previously issued financial statement(s) (e.g.,  disclosure of the specific financial statement(s) and line item(s)  affected). If this information is not known, then the disclosure includes  information that is known and a statement that management cannot  determine the amount(s) and the related effect(s) on the previously  issued financial statement(s) without further investigation, and a notice that (1) a previously issued financial statement(s) will or may  be restated and, therefore, (2) the related auditor’s report is no longer  reliable.
This includes communication (1) in writing to the Congress, OMB,  Treasury, and GAO; (2) to the public on the Internet pages where the  agency’s previously issued financial statements that were affected by the  material misstatement(s) or potential material misstatement(s) are  published; and (3) to OMB in the agency’s next quarterly financial  statements and in subsequent quarterly financial statements until the  specific amount(s) of the material misstatement(s) and the related  effect(s) of such on the previously issued financial statement(s) are known  and reported.
GAO also recommends that the following requirements be added to  section 5 of OMB Bulletin No. 06-03, Audit Requirements for Federal  Financial Statements, as follows:  5.3  communication information about the known or potential material  misstatement(s) to report users, including those charged with governance,  oversight bodies, and funding agencies. When performing this review, the  auditor shall consider whether (1) management acted timely to determine  the financial statement effects of the potential material misstatement(s),  (2) management acted timely to communicate with appropriate parties,  and (3) management disclosed the nature and extent of the known or  likely material misstatement(s) on Internet pages where the agency’s  previously issued financial statements are published.
The auditor shall review the adequacy of management’s  5.4  auditor believes that management is unduly delaying its determination of  the effect(s) of the misstatement(s) on a previously issued financial  statement(s).
The auditor shall notify those charged with governance if the  5.5  management’s decision whether to issue restated financial statement(s).  Management may separately issue the restated financial statement(s) or  may present the restated financial statement(s) on a comparative basis  with those of a subsequent period. Ordinarily, the auditor would expect  management to issue restated financial statement(s) as soon as  practicable. However, it may not be necessary for management to  separately issue the restated financial statement(s) and the auditor’s  report when issuance of the subsequent period audited financial  statements is imminent.
The auditor shall evaluate the timeliness and appropriateness of  5.6   potential misstatement(s) affecting a previously issued financial  statement(s), then the auditor shall advise the agency’s management to  determine the specific amount(s) of the material misstatement(s) or  potential material misstatement(s) and the related effect(s) of such on the  previously issued financial statement(s) as soon as reasonably possible.
If the auditor becomes aware of a material misstatement(s) or  5.7  related effect(s) of such on a previously issued financial statement(s) are  known and the issuance of the subsequent period audited financial  statements is not imminent, then the auditor shall advise the agency’s  management to promptly:  If the specific amount(s) of the material misstatement(s) and the reissue the most recently issued fiscal year financial statements before  issuing the current fiscal year’s financial statements; communicate the reissuance to those charged with governance,  oversight bodies, funding agencies, and others who are relying or are  likely to rely on the financial statement(s). This includes  communication (1) in writing to the Congress, OMB, Treasury, and  GAO and (2) to the public on the Internet pages where the agency’s  previously issued financial statements that were affected by the  material misstatement(s) are published; and disclose the following information, at a minimum, in the agency’s  restatement footnotes: (1) the nature and cause(s) of the  misstatement(s) that led to the need for restatement, and (2) the  specific amount(s) of the material misstatement(s) and the related  effect(s) on the previously issued financial statement(s) (e.g., year(s)  being restated, specific financial statement(s) affected and line items  restated, actions the agency’s management took after discovering the  misstatement), and the impact on the financial statements as a whole  (e.g., change in overall net position, change in the audit opinion).  5.8 If the specific amount(s) of the material misstatement(s) and the  related effect(s) of such on a previously issued financial statement(s) are  known and issuance of the subsequent period audited financial statements  is imminent, then the auditor shall disclose restatements in the auditor’s  report as listed in 7.7 and advise agency’s management to:  issue restated financial statement(s) as part of the current year’s  comparative financial statements; communicate the restatement to those charged with governance,  oversight bodies, funding agencies, and others who are relying or are  likely to rely on the financial statement(s). This includes  communication (a) in writing to the Congress, OMB, Treasury, and  GAO and (b) to the public on the Internet pages where the agency’s  previously issued financial statements that were affected by the  material misstatement(s) are published; and disclose the following information, at a minimum, in the agency’s  restatement footnote: (1) the nature and cause(s) of the  misstatement(s) that led to the need for restatement and (2) the  specific amount(s) of the material misstatement(s) and the related  effect(s) on the previously issued financial statement(s) (e.g., year(s)  being restated, specific financial statement(s) affected and line items  restated, actions the agency’s management took after discovering the  misstatement), and the impact on the financial statements as a whole  (e.g., change in overall net position, change in the audit opinion).  5.9 If the specific amount(s) of the misstatement(s) and the related  effect(s) of such on a previously issued financial statement(s) remain  unknown when the current year’s financial statements are issued, then the  auditor shall follow 7.8 when issuing the auditor’s report and advise the  agency’s management as required in 5.2.  5.10  bodies, and funding agencies when management (1) does not take the  necessary steps to promptly inform report users of the situation or   (2) does not restate with appropriate timeliness the financial statements in  circumstances when the auditor believes they need to be restated. The  auditor shall inform these parties that the auditor will take steps to  prevent future reliance on the auditor’s report. The steps taken will  depend on the facts and circumstances, including legal considerations.  This includes communication in writing to the Congress, OMB, Treasury,  and GAO as well as any other users known to be relying on the previously  issued financial statement(s).
The auditor shall notify those charged with governance, oversight  GAO recommends that section 7.7 of OMB Bulletin No. 06-03, Audit  Requirements for Federal Financial Statements, be modified to read as  follows:  7.7   When management restates a previously issued financial  statement(s), the auditor shall perform audit procedures sufficient to  reissue or update the auditor’s report on the restated financial  statement(s). The auditor shall fulfill these responsibilities whether the  restated financial statement(s) are separately issued or presented on a  comparative basis with those of a subsequent period. The auditor shall  include the following information in an explanatory paragraph in the  reissued or updated auditor’s report on the restated financial statement(s): a statement disclosing that a previously issued financial statement(s) a statement that the previously issued financial statement(s) was  materially misstated and that the previously issued auditor’s report  (including report date) is withdrawn and replaced by the auditor’s  report on the restated financial statement(s), a reference to the note(s) to the restated financial statement(s) that a description of the following if not already provided in the note(s) to  the financial statement(s): (1) the nature and cause(s) of the  misstatement(s) that led to the need for restatement and (2) the  specific amount(s) of the material misstatement(s) and the related  effect(s) on the previously issued financial statement(s) (e.g., year(s)  being restated and the specific financial statement(s) affected and line  items restated) and the impact on the financial statements as a whole  (e.g., change in overall net position, change in the audit opinion), and a discussion of any significant internal control deficiency that failed to  prevent or detect the misstatement and what action management has  taken about the deficiency.
GAO also recommends that the following requirements be added to  section 7 of OMB Bulletin No. 06-03, Audit Requirements for Federal  Financial Statements, as follows:  7.8   misstatement(s) or potential material misstatement(s) has been identified  in any of the previously issued financial statements and the specific  amount(s) of the misstatement(s) and the related effect(s) of such are not  known, then the auditor shall update the auditor’s report on the previously  issued financial statement(s) as appropriate. Furthermore, the auditor’s  report shall disclose, at a minimum, the following:  If at the time of issuance of the auditor’s report a material a statement disclosing that a material misstatement(s) or potential  material misstatement(s) affects a previously issued financial  statement(s) but the specific amount(s) of the misstatement(s) and the  related effect(s) of such are not known; a reference to note(s) to the financial statements that discusses the  restatement or potential restatement; a description of the following, if not already provided in the agency’s  note(s) to the financial statements: (1) the nature and cause(s) of the  misstatement(s) or potential misstatement(s), and (2) an estimate of  the magnitude of the misstatement(s) or potential misstatement(s) and  the related effect(s) of such on a previously issued financial  statement(s) (e.g., disclosure of the specific financial statement(s) and  line items affected) that are known and a statement that the specific  amount(s) and the related effect(s) of such cannot be determined  without further investigation; and a statement disclosing that a restatement(s) to a previously issued  financial statement(s) will or may occur.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
paragraphs: Gary T. Engel, (202) 512-3406.
subsections: section_title: Acknowledgments
paragraphs: Arthur W. Brouk, Alberto Garza, Michael D. Hansen, Malissa Livingston,  and Michelle Philpott made key contributions to this report.
section_title: Related GAO Products
paragraphs: Fiscal Year 2004 U.S. Government Financial Statements: Sustained  Improvement in Federal Financial Management Is Crucial to  Addressing Our Nation’s Future Fiscal Challenges. GAO-05-284T.  Washington, D.C.: February 9, 2005.
Financial Audit: Restatements to the Department of State’s Fiscal Year  2003 Financial Statements. GAO-05-814R. Washington, D.C.: September  20, 2005.
Financial Audit: Restatements to the Nuclear Regulatory Commission’s  Fiscal Year 2003 Financial Statements. GAO-06-30R. Washington, D.C.:  October 27, 2005.
Financial Audit: Restatement to the General Services Administration’s  Fiscal Year 2003 Financial Statements. GAO-06-70R. Washington, D.C.:  December 6, 2005.
Financial Audit: Restatements to the National Science Foundation’s  Fiscal Year 2003 Financial Statements. GAO-06-229R. Washington, D.C.:  December 22, 2005.
Financial Audit: Restatements to the Department of Agriculture’s Fiscal  Year 2003 Consolidated Financial Statements. GAO-06-254R.  Washington, D.C.: January 26, 2006.
Fiscal Year 2005 U.S. Government Financial Statements: Sustained  Improvement in Federal Financial Management is Crucial to  Addressing Our Nation’s Financial Condition and Long-term Fiscal  Imbalance. GAO-06-406T. Washington, D.C.: March 1, 2006.