Management Report: Improvements Needed in Controls over the Processes Used to Prepare the U.S. Consolidated Financial Statements
Published: 2017-07-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Treasury, in coordination with OMB, prepares the Financial Report of the United States Government , which contains the CFS. Since GAO's first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of its work have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. As part of the fiscal year 2016 CFS audit, GAO identified material weaknesses and other control deficiencies in the processes used to prepare the CFS. The purpose of this report is to provide (1) details on new control deficiencies GAO identified related to the processes used to prepare the CFS, along with related recommendations, and (2) the status of corrective actions Treasury and OMB have taken to address GAO's prior recommendations relating to the processes used to prepare the CFS that remained open at the beginning of the fiscal year 2016 audit.
section_title: What GAO Found
paragraphs: During its audit of the fiscal year 2016 consolidated financial statements of the U.S. government (CFS), GAO identified control deficiencies in the Department of the Treasury's (Treasury) and the Office of Management and Budget's (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control that involve the federal government's inability to
adequately account for and reconcile intragovernmental activity and balances between federal entities;
reasonably assure that the consolidated financial statements are (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in accordance with U.S. generally accepted accounting principles; and
reasonably assure that the information in the (1) Reconciliations of Net Operating Cost and Unified Budget Deficit and (2) Statements of Changes in Cash Balance from Unified Budget and Other Activities is complete and consistent with the underlying information in the audited entities' financial statements and other financial data.
During its audit of the fiscal year 2016 CFS, GAO identified three new internal control deficiencies.
Treasury did not have sufficient procedures and metrics for monitoring the federal government's year-to-year progress in resolving intragovernmental differences at the federal entity level.
Treasury did not have a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS.
Three of Treasury and OMB's corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS.
In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the processes used to prepare the CFS were resolved or continued to exist. For 7 of the 24 recommendations from GAO's prior reports regarding control deficiencies in the processes used to prepare the CFS, Treasury implemented corrective actions during fiscal year 2016 that resolved the related control deficiencies, and as a result, these recommendations were closed. GAO closed 1 additional recommendation that related to corrective action plans, by making a new recommendation that is better aligned with the remaining internal control deficiency in this area. While progress was made, 16 of the 24 recommendations remained open as of January 4, 2017, the date of GAO's report on its audit of the fiscal year 2016 CFS. GAO will continue to monitor the status of corrective actions taken to address the 3 new recommendations made in this report as well as the 16 open recommendations from prior years as part of its fiscal year 2017 CFS audit.
section_title: What GAO Recommends
paragraphs: GAO is making three new recommendations—two to Treasury and one to both Treasury and OMB—to address the control deficiencies identified during the fiscal year 2016 CFS audit. In commenting on GAO's draft report, although Treasury neither agreed nor disagreed with GAO's recommendations, Treasury provided information on actions that it plans to take to address two recommendations, but stated that its current corrective action plans were effective for the third recommendation. GAO continues to believe that actions for this recommendation are needed as discussed in the report. OMB generally agreed with the findings in the report.

section_title: Letter
paragraphs: In our January 2017 report on the results of our audit of the consolidated  financial statements of the U.S. government (CFS) as of and for the fiscal  years ended September 30, 2016, and 2015, we disclaimed an opinion  on the CFS. Since GAO’s first audit of the CFS, for fiscal year 1997,  certain material weaknesses in internal control over 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-based consolidated financial statements. These include material  weaknesses that relate to the federal government’s processes used to  prepare the CFS.
Such material weaknesses involve the federal government’s inability to adequately account for and reconcile intragovernmental activity and  balances between federal entities;  reasonably assure that the consolidated financial statements are   (1) consistent with the underlying audited entities’ financial  statements, (2) properly balanced, and (3) in accordance with U.S.  generally accepted accounting principles; and  reasonably assure that the information in the (1) Reconciliations of  Net Operating Cost and Unified Budget Deficit and (2) Statements of  Changes in Cash Balance from Unified Budget and Other Activities is  complete and consistent with the underlying information in the audited  entities’ financial statements and other financial data.
The Department of the Treasury (Treasury), in coordination with the  Office of Management and Budget (OMB), prepares the CFS on behalf of  the federal government. Several of the material weaknesses in internal  control over financial reporting that have contributed to our continuing  disclaimers of opinion on the federal government’s accrual-based  consolidated financial statements were reported in detail along with  related recommendations made by other auditors in their audit reports on  individual federal entities’ financial statements.
The purpose of this report is to provide (1) detailed information on three  new control deficiencies identified during our fiscal year 2016 audit that  relate to the processes used by Treasury to prepare the CFS, along with  related recommendations, and (2) the status of corrective actions  Treasury and OMB have taken to address the 24 recommendations  relating to the processes used to prepare the CFS, detailed in our  previous reports, that remained open at the beginning of our fiscal year  2016 audit. Appendix I provides a summary of the status of actions taken  as of January 4, 2017, the date of our report on the audit of the fiscal year  2016 CFS, to address the open recommendations from our previous  reports.
subsections: section_title: Scope and Methodology
paragraphs: As part of our audit of the fiscal years 2016 and 2015 CFS, we  considered the federal government’s financial reporting procedures and  related internal control. Also, we determined the status of corrective  actions Treasury and OMB have taken to address open  recommendations relating to their processes to prepare the CFS, detailed  in our previous reports, that remained open at the beginning of our fiscal  year 2016 audit. A full discussion of our scope and methodology is  included in our January 2017 report on our audit of the fiscal years 2016  and 2015 CFS. We have communicated each of the control deficiencies  discussed in this report to your staff. We performed our audit in  accordance with U.S. generally accepted government auditing standards.  We believe that our audit provides a reasonable basis for our findings and  recommendations in this report.
section_title: Control Deficiencies Identified during Our Fiscal Year 2016 Audit
paragraphs: During our audit of the fiscal year 2016 CFS, we identified three new  internal control deficiencies in Treasury’s processes used to prepare the  CFS. Specifically, we found that (1) Treasury did not have sufficient  procedures and metrics for monitoring the federal government’s year-to- year progress in resolving intragovernmental differences at the federal  entity level, (2) Treasury did not have a sufficient process for working with  federal entities to reduce or resolve the need for significant adjustments  to federal entity data submitted for the CFS, and (3) three of Treasury and  OMB’s corrective action plans did not include sufficient information to  effectively address related control deficiencies involving processes used  to prepare the CFS.
subsections: section_title: Monitoring Intragovernmental Differences
paragraphs: During our fiscal year 2016 CFS audit, we found that the federal  government continued to be unable to adequately account for and  reconcile intragovernmental activity and balances between federal  entities. Treasury has taken significant action over the past few years to  address control deficiencies in this area, including actions to improve  reporting of intragovernmental differences to federal entities and to work  actively with federal entities to encourage resolution of reported  differences. However, Treasury did not have sufficient procedures and  metrics for monitoring the federal government’s year-to-year progress in  resolving intragovernmental differences at the federal entity level.
When preparing the CFS, intragovernmental activity and balances  between federal entities should be in agreement and must be subtracted  out, or eliminated. If the two federal entities engaged in an  intragovernmental transaction do not both record the same  intragovernmental transaction in the same year and for the same amount,  the intragovernmental transactions will not be in agreement, resulting in  errors in the CFS. Federal entities are responsible for properly accounting  for and reporting their intragovernmental activity and balances in their  entity financial statements and for effectively implementing related  internal controls. This includes reconciling and resolving  intragovernmental differences at the transaction level with their trading  partners.
To support this process, Treasury has established procedures for  identifying whether intragovernmental activity and balances reported to  Treasury by federal entities are properly reconciled and balanced. For  example, Treasury calculates intragovernmental differences by reciprocal  category and trading partner for each federal entity. Through these  calculations, Treasury has identified certain recurring issues, such as  significant differences related to specific entities, reciprocal categories,  and trading partners. Treasury provides quarterly scorecards to the  individual federal entities that are significant to the CFS to highlight  intragovernmental differences requiring these entities’ attention.  Treasury also prepares a quarterly government-wide scorecard to  communicate the total differences on a government-wide basis. The  government-wide scorecard also identifies the 10 largest federal entity  contributors to the total government-wide difference.
While Treasury’s scorecard process and other initiatives focus on  identifying and communicating differences to federal entities, they do not  include procedures for monitoring the federal government’s year-to-year  progress in resolving intragovernmental differences at the federal entity  level. For example, the entity-level scorecards do not include metrics that  could be used to gauge the federal government’s year-to-year progress in  resolving intragovernmental differences at the entity level by reciprocal  category and trading partner. Although Treasury produces a government- wide scorecard, the chart included on the scorecard shows changes in  the total intragovernmental differences for recent quarters but does not  identify increases or decreases at the individual entity level by reciprocal  category and trading partner. While the total of intragovernmental  differences has declined in recent years as a result of the scorecard  process and other Treasury initiatives, we continued to note that amounts  reported by federal entities were not in agreement by hundreds of billions  of dollars for fiscal year 2016.
Standards for Internal Control in the Federal Government states that  management should (1) design control activities to achieve objectives and  respond to risks, such as establishing and reviewing performance  measures and indicators, and (2) implement control activities, such as  documenting responsibilities through policies and procedures. The  standard also states that management should establish and operate  monitoring activities to monitor the internal control system and evaluate  the results and should remediate any identified internal control  deficiencies on a timely basis.
Without adequate procedures and metrics for effectively monitoring  federal government progress in resolving intragovernmental differences at  the entity level, Treasury cannot effectively identify areas where specific  federal entities need further improvement and attention from year to year  to resolve intragovernmental differences that result in errors in the CFS.
subsections: section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to develop and implement procedures and metrics for  monitoring the federal government’s year-to-year progress in resolving  intragovernmental differences for significant federal entities at the  reciprocal category and trading partner levels.
section_title: Adjustments to Federal Entity Financial Information Submitted for the CFS
paragraphs: During our fiscal year 2016 CFS audit, we found that Treasury continued  to record significant adjustments to data reported by federal entities for  inclusion in the CFS. Treasury collects financial statement information  from federal entities through its Governmentwide Treasury Account  Symbol Adjusted Trial Balance System and Governmentwide Financial  Report System. Auditors for entities significant to the CFS are  responsible for providing opinions on these entities’ closing package  submissions to Treasury. Once federal entities have submitted data for  inclusion in the CFS, Treasury performs procedures to determine the  consistency of the submitted data to (1) federal entity audited financial  statements and (2) government-wide financial reporting standards.  Treasury also performs procedures to determine if adjustments are  needed to resolve certain unreconciled differences in intragovernmental  activity and balances. Through these processes, Treasury identified the  need for tens of billions of dollars of adjustments to federal entity- submitted data and recorded these adjustments to the CFS. Treasury  identified many of the adjustments needed as recurring because they  related to the same line items and federal entities as in prior years. The  adjustments were necessary often because of inaccurate or incomplete  information that federal entities submitted for the CFS. Though Treasury  had procedures for identifying adjustments needed to data that federal  entities submitted at fiscal year-end as well as procedures for reviewing  recurring intragovernmental adjustments, Treasury did not have a  sufficient process for reviewing recurring non-intragovernmental  adjustments. Specifically, Treasury did not have a process to work with  federal entities to correctly report non-intragovernmental information in  federal entities’ closing packages prior to submission to Treasury, thereby  reducing or resolving the need for Treasury to make significant  adjustments to federal entity data. For adjustments related to  intragovernmental differences, we found that Treasury’s procedures did  include steps for reviewing recurring intragovernmental adjustments and  for working with federal entities to reduce or resolve the need for these  intragovernmental adjustments.
Statement of Federal Financial Accounting Concepts No. 4, Intended  Audience and Qualitative Characteristics for the Consolidated Financial  Report of the United States Government, states that the consolidated  financial report should be a general purpose report that is aggregated  from federal entity reports. The Treasury Financial Manual (TFM)  provides guidance on how federal entities are to provide their financial  data to Treasury for consolidation. In accordance with the TFM,  significant component entities are required to submit their financial data to  Treasury using a closing package. A significant component entity’s chief  financial officer must certify the accuracy of the data in the closing  package and have it audited. Because the closing package process  requires that significant component entities verify and validate the  information in their closing packages compared with their audited  department-level financial statements and receive audit opinions,  Treasury is provided a level of assurance that it is compiling the CFS with  reliable financial information. In addition, OMB Bulletin 15-02, Audit  Requirements for Federal Financial Statements, establishes requirements  for audits of federal financial statements, including audits of the closing  packages. Also, Standards for Internal Control in the Federal  Government states that management should design and implement  control activities, such as procedures to help ensure that financial  information is completely and accurately reported.
Without a sufficient process aimed at reducing or resolving the need for  significant adjustments to federal entity data submitted for the CFS,  Treasury is unable to reasonably assure that it has reliable financial  information for all federal entities, which is needed to achieve auditability  of the CFS.
subsections: section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to develop and implement a sufficient process for  working with federal entities to reduce or resolve the need for significant  adjustments to federal entity data submitted for the CFS.
section_title: Corrective Action Plans for Certain Areas
paragraphs: Three of Treasury and OMB’s corrective action plans did not include  sufficient information to effectively address related control deficiencies  involving processes used to prepare the CFS. Corrective action plans are  the mechanism whereby management presents the actions the entity will  take to resolve identified internal control deficiencies. Treasury, in  coordination with OMB, compiled a collection of corrective action plans in  a remediation plan focused on resolving material weaknesses related to  the processes used to prepare the CFS. The corrective action plans  contained in the remediation plan—which are intended to address control  deficiencies related to (1) treaties and international agreements,   (2) additional audit procedures for intragovernmental activity and  balances, and (3) the Reconciliations of Net Operating Cost and Unified  Budget Deficit and Statements of Changes in Cash Balance from Unified  Budget and Other Activities (Reconciliation Statements)—did not include  sufficient information to demonstrate that the plans, if properly  implemented, will effectively resolve such deficiencies.
subsections: section_title: Treaties and International Agreements
paragraphs: Treasury and OMB did not include sufficient information in their corrective  action plan to help ensure that major treaty and international agreement  information is properly identified and reported in the CFS. We found that  the corrective actions included steps and milestones for meeting with the  Department of State, a key entity with respect to treaties and international  agreements, but did not include specific actions and outcomes planned to  analyze all treaties and international agreements to obtain reasonable  assurance whether they are appropriately recognized and disclosed in the  CFS. As a result of not having specific actions to analyze all treaties and  international agreements, any treaties and international agreements that  had been omitted from entity reporting would not be identified. Not having  procedures for reasonably assuring that information on major treaties and  other international agreements is reported in the CFS could result in  incomplete recognition and disclosure of probable and reasonably  possible losses of the U.S. government.
section_title: Additional Audit Procedures for Intragovernmental Activity and Balances
paragraphs: Treasury and OMB’s corrective action plan to make intragovernmental  scorecards available directly to federal entity auditors was not sufficient to  address the control deficiency related to not having a formalized process  to require the performance of additional audit procedures focused on  intragovernmental activity and balances. Billions of dollars of unreconciled  intragovernmental differences continued to be reported in the fiscal year  2016 CFS based on the financial data submitted in federal entities’  audited closing packages. Although making the scorecard information  available to auditors is helpful, that action in and of itself does not  establish a process requiring federal entity auditors to perform additional  audit procedures specifically focused on intragovernmental activity and  balances. A formalized process to require the performance of additional  audit procedures would provide increased audit assurance over the  reliability of the intragovernmental information and help address the  significant unreconciled transactions at the government-wide level.
section_title: Reconciliation Statements
paragraphs: Treasury and OMB’s corrective action plans related to the Reconciliation  Statements did not clearly demonstrate how, once implemented, the  corrective actions will remediate the related control deficiencies. For  example, the corrective actions did not include sufficient information to  explain how they would achieve Treasury’s objectives to (1) identify and  report all necessary items in the Reconciliation Statements and   (2) reasonably assure that the amounts are consistent with underlying  audited financial data. Also, some outcome measures did not describe  what and how progress related to specific actions taken would be  measured. Not including sufficient information on actions and outcomes in  the corrective action plan impairs management’s ability to assess the  progress made toward resolution.
section_title: Guidance for Corrective Action Plans
paragraphs: The Chief Financial Officers Council’s Implementation Guide for OMB  Circular A-123, Management’s Responsibility for Internal Control –  Appendix A, Internal Control over Financial Reporting (Implementation  Guide) includes guidance for preparing well-defined corrective action  plans. According to the Implementation Guide, key elements necessary  for well-defined corrective action plans include  1.  descriptions of the deficiency and the planned corrective actions in  sufficient detail to facilitate a common understanding of the deficiency  and the steps that must be performed to resolve it;  2.  interim targeted milestones and completion dates, including  subordinate indicators, statistics, or metrics used to gauge resolution  progress; and  3.  planned validation activities and outcome measures used for  assessing the effectiveness of the corrective actions taken.
Also, Standards for Internal Control in the Federal Government states that  management should (1) remediate identified internal control deficiencies  on a timely basis and (2) design control activities to achieve objectives  and respond to risks. In addition, OMB Circular No. A-123, Management’s  Responsibility for Enterprise Risk Management and Internal Control,  requires management to develop corrective action plans for material  weaknesses and periodically assess and report on the progress of those  plans. The Implementation Guide is widely viewed as a “best practices”  methodology for executing the requirements of Appendix A of OMB  Circular No. A-123. Corrective actions need to be designed and  implemented effectively to allow timely remediation of the deficiencies. An  effective corrective action plan facilitates accountability, monitoring, and  communication and helps ensure that entity personnel responsible for  completing the planned corrective actions and monitoring progress  toward resolution have the information and resources they need to do so.
Without well-defined, sufficiently descriptive corrective action plans in  these three areas, it will be difficult for Treasury and OMB to reasonably  assure that corrective action plans will effectively remediate the internal  control deficiencies and monitor progress toward resolution.
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,  to improve corrective action plans for (1) treaties and international  agreements, (2) additional audit procedures for intragovernmental activity  and balances, and (3) the Reconciliation Statements so that they include  sufficient information to address the control deficiencies in these areas  effectively.
section_title: Status of Recommendations from Prior Reports
paragraphs: At the beginning of our fiscal year 2016 audit, 24 recommendations from  our prior reports regarding control deficiencies in the processes used to  prepare the CFS were open. Treasury implemented corrective actions  during fiscal year 2016 that resolved certain of the control deficiencies  addressed by our recommendations. For 7 recommendations, the  corrective actions resolved the related control deficiencies, and we closed  the recommendations. We also closed 1 additional recommendation,  related to corrective action plans, by making a new recommendation that  is better aligned with the remaining internal control deficiency in this area.  While progress was made, 16 recommendations from our prior reports  remained open as of January 4, 2017, the date of our report on the audit  of the fiscal year 2016 CFS. Consequently, a total of 19  recommendations need to be addressed—16 remaining from prior reports  and the 3 new recommendations we are making in this report.
Appendix I summarizes the status as of January 4, 2017, of the 24 open  recommendations from our prior years’ reports according to Treasury and  OMB as well as our own assessment and additional comments, where  appropriate. Various efforts are under way to address these  recommendations. We will continue to monitor Treasury’s and OMB’s  progress in addressing our recommendations as part of our fiscal year  2017 CFS audit.
section_title: Agency Comments and Our Evaluation
subsections: section_title: Treasury Comments
paragraphs: In written comments, reprinted in appendix II, Treasury stated that it  appreciates our perspective and will continue to focus its efforts on cost- beneficial solutions to sufficiently resolve the material conditions that  preclude having an opinion rendered on the CFS. Although in its  comments Treasury neither agreed nor disagreed with our  recommendations, Treasury provided information on actions that it plans  to take to address two of the recommendations and stated with regard to  the third recommendation that its current corrective action plans were  effective.
For our first two recommendations related to monitoring  intragovernmental differences and reducing significant adjustments to  federal entity data submitted for the CFS, Treasury stated that it will  continue to (1) evolve its processes as necessary to ensure that  appropriate and effective metrics are deployed to measure and monitor  agency performance and (2) work with agencies to facilitate improvement  of processes, minimizing the need for Treasury adjustments to agency  reporting.
For our third recommendation aimed at improving corrective action plans  for (1) treaties and international agreements, (2) additional audit  procedures for intragovernmental activity and balances, and (3) the  Reconciliation Statements, Treasury stated that its current remediation  plan, including its various corrective action plans, is comprehensive,  appropriate, and effective, with robust ongoing monitoring processes in  place. Treasury also stated that corrective actions aimed at increasing the  quality of intragovernmental data are proving effective and that it does not  support encumbering agencies with the cost and burden associated with  requiring additional audit procedures. In addition, Treasury stated that it  will continue to collaborate with OMB and federal entities on existing  corrective actions. However, we continue to believe that the corrective  action plans in these three areas do not include sufficient information to  effectively address related control deficiencies involving processes used  to prepare the CFS. For example, as discussed in our report, Treasury  and OMB did not have specific actions in their corrective action plan to  analyze all treaties and international agreements to help ensure that  major treaty and international agreement information is properly identified  and reported in the CFS. Further, we believe that a formalized process for  Treasury to require the performance of additional audit procedures  focused on intragovernmental activity and balances would provide  increased audit assurance over the reliability of intragovernmental  information and help address the hundreds of billions of dollars of  unreconciled intragovernmental differences at the government-wide level.
Treasury also described various actions taken and planned to address  long-standing material weaknesses, including improvements in  accounting for and reporting on the General Fund of the U.S.  Government activity and balances, strengthening internal controls in the  preparation of the CFS, and validating material completeness of  budgetary information included in the Financial Report of the United  States Government. Treasury also indicated that it plans to work with  GAO as it fulfills its commitment to improving federal financial reporting.
section_title: OMB Comments
paragraphs: OMB staff in the Office of Federal Financial Management stated in an   e-mail that OMB generally agreed with the findings in the report and with  Treasury’s written response to the draft. The e-mail noted that the current  administration is committed to continuing to work with Treasury and  federal agencies to achieve sound financial management across the  federal government.
We are sending copies of this report to interested congressional  committees, the Fiscal Assistant Secretary of the Treasury, and the  Controller of the Office of Management and Budget’s Office of Federal  Financial Management. In addition, the report is available at no charge on  the GAO website 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 at (202)  512-3406 or simpsondb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff members who made major contributions to this  report include Carolyn M. Voltz (Assistant Director), Latasha L. Freeman,  Maria M. Morton, Sean R. Willey, and J. Mark Yoder.
section_title: Appendix I: Status of Treasury’s and OMB’s Progress in Addressing GAO’s Prior Year Recommendations for Preparing the CFS
paragraphs: Table 1 shows the status of GAO’s prior year recommendations for  preparing the CFS. The abbreviations used are defined in the legend at  the end of the table.
section_title: Appendix II: Comments from the Department of the Treasury