Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Improvement
Published: 2003-10-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: For the past 6 years, since GAO began auditing the consolidated financial statements of the U.S. government (CFS), GAO has been unable to express an opinion on them because of material weaknesses in internal control and financial reporting. Contributing to GAO's inability to express an opinion has been the federal government's lack of adequate systems, controls, and procedures to properly prepare its consolidated financial statements. The purpose of this report is to discuss in greater detail weaknesses in financial reporting procedures and internal control over the process for preparing the CFS that GAO identified and to recommend improvements to address those weaknesses.
section_title: What GAO Found
paragraphs: GAO found deficiencies in the compilation and reporting process in the following areas: (1) controls over the compilation process, (2) unreconciled transactions affecting the change in net position, (3) reconciliation of intragovernmental activity and balances, (4) elimination of intragovernmental activity and balances, (5) reconciliation of net operating costs and unified budget surplus (or deficit), (6) statements of changes in cash balance from unified budget and other activities, (7) defining and documenting of the reporting entity, and (8) conformity with U.S. generally accepted accounting principles. Another key deficiency in the compilation and reporting process for the CFS was the failure of the Department of the Treasury's process for compiling the CFS to directly link information from federal agencies' audited financial statements to amounts reported in the CFS. Without this direct link, the information in the CFS may not be reliable. The lack of a direct link also affects the efficiency and effectiveness of the CFS audit. Treasury is designing a new compilation process that it expects to directly link this information beginning with the fiscal year 2004 CFS. GAO identified three additional areas related to the compilation and reporting process for the CFS that warrant the attention of Treasury and the Office of Management and Budget (OMB): (1) management representation letters, (2) legal representation letters, and (3) information on treaties and other international agreements.

section_title: Letter
paragraphs: In March 2003, we issued our disclaimer of opinion on the consolidated  financial statements for the U.S. government (CFS) for the fiscal years  ended September 30, 2002 and 2001.  For the past 6 years, certain material  weaknesses in internal control and in financial reporting resulted in conditions that prevented us from expressing an opinion on the CFS.  Specifically, we have reported that the federal government did not have  adequate systems, controls, and procedures to properly prepare its  consolidated financial statements.  Many of these weaknesses in internal  control that contributed to our disclaimer of opinion were identified during  the audit of federal agencies’ financial statements by the agency financial  statement auditors and reported in detail with recommendations to the  agencies in separate reports.  However, some of the internal control  weaknesses were identified during our tests of the U.S. Department of the  Treasury’s (Treasury) process for preparing the CFS.  Such weaknesses impaired the federal government’s ability to fully ensure that the CFS is  consistent with the underlying audited agency financial statements,  properly balanced, and in conformity with U.S. generally accepted  accounting principles.  Consequently, these weaknesses also contributed to  our inability to render an opinion on the CFS.
The purpose of this report is to discuss in greater detail weaknesses we  identified during our fiscal year 2002 audit regarding financial reporting  procedures and internal control over the process for preparing the CFS.  We have discussed each of these weaknesses with your staff during this past audit, and some of the weaknesses have been communicated for a  number of years.
subsections: section_title: Scope and Methodology
paragraphs: As part of our audit of the fiscal years 2002 and 2001 CFS, we evaluated  Treasury’s financial reporting procedures and related internal control.  In  our report, which is included in the fiscal year 2002 Financial Report of the  United States Government,we reported material deficiencies relating to  Treasury’s financial reporting procedures and internal control.  These  material deficiencies contributed to our disclaimer of opinion on the CFS  and also constitute material weaknesses in internal control, which  contributed to our adverse opinion on internal control.  We performed  sufficient audit work to provide the disclaimer of opinion and issued our  audit report, dated March 20, 2003, in accordance with U.S. generally  accepted government auditing standards.  This report is based on the audit  work we performed for the fiscal years 2002 and 2001 CFS.
We requested comments on a draft of this report from the Secretary of the  Treasury and the Director of OMB or their designees.  Treasury’s and OMB’s  comments are reprinted in appendix II, discussed in the Agency Comments  and Our Evaluation section of this report, and incorporated in the report as  applicable.
section_title: Directly Linking Audited Agency Financial Statements to the CFS
paragraphs: Treasury’s current process for compiling the CFS does not directly link  information from federal agencies’ audited financial statements to amounts  reported in the CFS, and therefore cannot fully ensure that the information  in the CFS is consistent with the underlying information in federal  agencies’ audited financial statements and other financial data (see fig. 1).  Treasury, as the preparer of the CFS, currently collects approximately 2,400  trial balances through the Federal Agencies’ Centralized Trial Balance  System (FACTS I) from federal agencies and information from the Treasury  Central Accounting and Reporting System (STAR) to compile the financial  statements.
The Federal Accounting Standards Advisory Board’s (FASAB) 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 agency reports  and that it should tell users where to find information in other formats,  both aggregated and disaggregated, such as individual agency reports,  agency websites, and the President’s Budget.
Without directly linking financial information from agencies’ audited  financial statements, the information in the CFS may not be reliable.  The  lack of direct linkage also affects the efficiency and effectiveness of the  audit of the CFS.  In addition, the reliability of certain information in  Management’s Discussion and Analysis, Stewardship Information, and  Supplemental Information may be affected.
As Treasury is designing its new compilation process, which it expects to  implement beginning with the fiscal year 2004 CFS, we recommend that the  Secretary of the Treasury direct the Fiscal Assistant Secretary, working in  coordination with the Controller of OMB’s Office of Federal Financial  Management, to design the new compilation process to directly link information from  federal agencies’ audited financial statements to amounts reported in all  the applicable CFS and related footnotes, and consider the other applicable recommendations in this report when  designing and implementing the new compilation process.
section_title: Controls over the Compilation Process
paragraphs: We identified specific areas of internal control in Treasury’s process for  preparing the CFS that need to be strengthened.  Internal control should  provide, among other things, reasonable assurance that financial reporting  is reliable.  GAO’s Standards for Internal Control in the Federal  Governmentdefines the minimum level of quality acceptable for internal  control in the federal government and provides the standards against which  internal control is to be evaluated.  These standards state that internal  controls should include, among other items, (1) segregation of duties,  (2) appropriate documentation of transactions and internal control, and  (3) reviews by management at the functional or activity level.  We found  many controls in place, but we identified three areas that need to be  improved.  Although Treasury is developing a new system and procedures  for preparing the CFS, the need for adequate internal control remains  important and needs to be considered during the development process.
subsections: section_title: Segregation of Duties
paragraphs: Segregation of duties is the practice of dividing the steps in a critical  function among different individuals in order to reduce the risk of error or  fraud, thus preventing a single individual from having full control of a  transaction or event.  FACTS I and the Financial Management Service’s  Hyperion database are used to compile the CFS. We found that Treasury’s  systems administrators responsible for processing the FACTS I data have  the capability to enter, change, and delete data within FACTS I and the  Hyperion database without any supervisory review.  They are also able to  post adjustments to the CFS without formal approval.  Lack of proper  segregation of duties for critical functions leaves the CFS vulnerable to  errors and could result in incomplete and inaccurate summarization of data  within these financial statements.
section_title: Documentation of Transactions and Internal Control
paragraphs: While Treasury has documented some portions of its process for compiling  the CFS, it has not fully documented its policies and procedures for  preparing the CFS report.  Agency management is responsible for  developing detailed policies, procedures, and practices to fit agency  operations and ensuring that internal control is built into and is an integral  part of operations.  Although GAO’s Standards for Internal Control in the  Federal Government calls for clear documentation of policies and  procedures, we found that Treasury has not fully implemented this key  control activity.  Without documented policies and procedures, staff could  follow inconsistent standards and practices or not follow them at all.  This  potential for inconsistency increases the risk that errors in the compilation  process could go undetected and could result in an incomplete and  inaccurate summarization of data within the CFS, creating a financial  report that is not an accurate representation of the financial position of the  U.S. government.
section_title: Management Review
paragraphs: We found that Treasury management did not review transactions within  several key compilation processes.  Transactions and other significant  events should be authorized and executed only by persons acting within  the scope of their authority. Appropriate reviews by management of key  decisions and data are vital controls to ensure that only authorized actions  occur.  For example, Treasury’s FACTS I system allows for master  appropriation files, the files that list all federal agencies by appropriation  code, to be updated by review accountants without supervisory approval.  Also, there is no requirement for supervisory review of changes made to  agency data as a result of issues identified during the “agency data analysis  process” performed by Treasury.  In some instances, supervisory reviews  were required, but any reviews that may have been performed were not  documented.  For example, there was no documentation of supervisory  review of changes to the Hyperion system software and chart of accounts  used to compile the data for the CFS.  Records of changes and reviews of  the changes made to the templates used to create the CFS were also  inadequate.
Inadequate supervisory review and inadequate documentation of changes  and reviews could allow data that go into the CFS to be manipulated or  changed without any supervisory control or review, resulting in the  possibility that agency data could be changed or incorrectly compiled in  the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, in connection with Treasury’s current compilation  process and the development of Treasury’s new compilation system and  process, to segregate the duties of individuals who have the capability to enter,  change, and delete data within FACTS I and the Hyperion database and  post adjustments to the CFS; develop and fully document policies and procedures for the  consolidated financial statement preparation process so that they are  proper, complete, and consistently applied among staff members; and require and document reviews by management of all procedures that  result in data changes to the CFS.
section_title: Unreconciled Transactions Affecting the Change in Net Position
paragraphs: The net position reported in the CFS is derived by subtracting liabilities  from assets, rather than through balanced accounting entries.  In other  words, the CFS is “plugged” to make it balance.  To make the fiscal year  2002 CFS balance, Treasury recorded a net $17.1 billion decrease to net  operating cost on the Statement of Operations and Changes in Net Position,  which it labeled “Unreconciled Transactions Affecting the Change in Net  Position.”  Treasury does not identify and quantify all components of this  unreconciled activity.
Treasury attributes these net unreconciled transaction amounts to  (1) improper recording of intragovernmental transactions by federal  agencies, (2) transactions affecting assets and liabilities not being  identified properly by federal agencies as prior period adjustments, and  (3) timing differences and errors in reporting transactions.  Treasury stated  in its November 2001 report on its CFS improvement project that in order  to properly reconcile net position, federal agencies would need to split net  position between intragovernmental and public components, including  ending balances and the year’s activity.  Currently, OMB requires federal  agencies to identify intragovernmental assets and liabilities on their  audited balance sheets but does not require the intragovernmental portion  of net position to be identified.  Without a process in place to identify and  quantify all components of the activity in the net position line item,  revenues, costs, assets, and liabilities may be misstated, thereby affecting  the reliability of the CFS.
As Treasury is designing its new financial statement compilation process to  begin with the fiscal year 2004 CFS, we recommend that the Secretary of  the Treasury direct the Fiscal Assistant Secretary, working in coordination  with the Controller of OMB’s Office of Federal Financial Management, to develop reconciliation procedures which will aid in understanding and  controlling the net position balance as well as eliminate the plugs  previously associated with compiling the CFS; and use balanced accounting entries to account for the change in net  position rather than simple subtraction of liabilities from assets.
section_title: Reconciliation of Intragovernmental Activity and Balances
paragraphs: Federal agencies are unable to fully reconcile intragovernmental activity  and balances.  OMB and Treasury require CFO Act agencies to reconcile  selected intragovernmental activity and balances with their “trading  partners”and to report on the extent and results of intragovernmental  activity and balances reconciliation efforts.  The Inspectors General  reviewed these reports and communicated the results of their reviews to  OMB, Treasury, and us.  A substantial number of the CFO Act agencies did  not fully perform the required reconciliations for fiscal year 2002, citing  reasons such as  (1) failure of trading partners to provide needed data,  (2) limitations and incompatibility of agency and trading partner systems,  and (3) human resource issues.  For fiscal year 2002, amounts reported for  federal agency trading partners for certain intragovernmental accounts  were significantly out of balance.  A lack of standardization in transaction  processing and a lack of sufficient communication between trading  partners contribute significantly to federal agencies’ inability to fully  reconcile intragovernmental activity and balances.  Without improvement  in this area, Treasury cannot properly eliminate intragovernmental activity  and balances and, as a result, assets, liabilities, revenue, and costs reported  in the CFS may not be fairly stated.
Federal agencies are required to consistently and fully account for,  reconcile, and report intragovernmental activity and balances across the  federal government.  To address certain issues that have contributed to the  out-of-balance condition for intragovernmental activity and balances, OMB  has established a set of standard business rules, OMB Memorandum  M-03-01, Business Rules for Intragovernmental Transactions, for  governmentwide transactions among trading partners; the memorandum  requires quarterly reconciliations of intragovernmental activity and  balances, beginning with fiscal year 2003.  Treasury Financial Manual,  section 4030, also requires reconciliation of intragovernmental activity and  balances.  Further, Treasury has begun a process to help federal agencies  better perform their reconciliations, by providing each agency with  detailed trading partner information.  Also, Treasury is planning to require  federal agencies, beginning with fiscal year 2004, to report in Treasury’s  new closing package intragovernmental activity and balances by trading  partner.
As OMB continues to make strides to address issues related to  intragovernmental transactions, we recommend that the Director of the  Office of Management and Budget direct the Controller of the Office of  Federal Financial Management to develop policies and procedures that document how OMB will enforce  the business rules provided in OMB Memorandum M-03-01, Business  Rules for Intragovernmental Transactions, and require that significant differences noted between business partners be  resolved and the resolution be documented.
We also recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of the  Office of Management and Budget, to implement the plan to require federal  agencies to report in Treasury’s new closing package, beginning with fiscal  year 2004, intragovernmental activity and balances by trading partner and  indicate amounts that have not been reconciled with trading partners and  amounts, if any, that are in dispute.
section_title: Elimination of Intragovernmental Activity and Balances
paragraphs: During our audits, we found the following:
Intragovernmental activity and balances are “dropped” or “offset” in the  preparation of the CFS rather than eliminated through balanced  accounting entries.
Certain intragovernmental activity and balances, primarily related to  appropriations, are not being properly considered in the consolidation  process.
No reconciliation is performed for the change in intragovernmental  assets and liabilities for the fiscal year, including the amount and nature  of all changes in intragovernmental assets or liabilities not attributable  to cost and revenue activity recognized during the fiscal year, such as  differences due to purchases that are capitalized as inventory or  equipment and revenue that is deferred.
Consolidated financial statements are intended to present the results of  operations and financial position of the components that make up the  reporting entity as if the entity were a single enterprise.  Therefore, when  preparing the CFS, intragovernmental activity and balances between  federal agencies must be eliminated.  As mentioned above, federal  agencies’ problems in handling their intragovernmental transactions impair  Treasury’s ability to properly eliminate these transactions, and significant  differences in intragovernmental accounts have been identified.  Without  an effective process, intragovernmental activity and balances are not fully  accounted for and eliminated in the process used to prepare the CFS.  As a  result, the federal government’s ability to determine the impact of these  differences on the amounts reported in the CFS is impaired and,  consequently, the CFS may be misstated.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with OMB’s Controller of the  Office of Federal Financial Management, to design procedures that will account for the difference in  intragovernmental assets and liabilities throughout the compilation  process by means of formal consolidating and elimination accounting  entries; develop solutions for intragovernmental activity and balance issues  relating to federal agencies’ accounting, reconciling, and reporting in  areas other than those OMB now requires be reconciled, primarily areas  relating to appropriations; and reconcile the change in intragovernmental assets and liabilities for the  fiscal year, including the amount and nature of all changes in  intragovernmental assets or liabilities not attributable to cost and  revenue activity recognized during the fiscal year.  Examples of these  differences would include capitalized purchases such as inventory or  equipment and deferred revenue.
section_title: Reconciliation of Net Operating Cost and Unified Budget Surplus (or Deficit)
paragraphs: Treasury did not have an adequate process to identify and report items  needed to reconcile the U.S. government’s fiscal year 2002 net operating  cost of $364.9 billion to the fiscal year 2002 unified budget deficit, which  was reported as $157.7 billion.  The Reconciliation of Net Operating Cost  and Unified Budget Surplus (or Deficit) (hereafter referred to as the  reconciliation statement) is expected to explain certain differences that  occur because the CFS are prepared on the accrual basis in accordance  with U.S. generally accepted accounting principles.  Under accrual  accounting, transactions are reported when the event or transaction is  recognizable under U.S. generally accepted accounting principles rather  than when cash is received and paid.  By contrast, federal budgetary  reporting is, with certain exceptions, on the cash basis, in accordance with  accepted budget concepts and policies.  Statement of Federal Financial  Accounting Standards (SFFAS) No. 24, Selected Standards for the  Consolidated Financial Report of the United States Government, effective  in fiscal year 2002, requires the reconciliation statement as part of the CFS.
In our audit of the reconciliation statement, we found that Treasury was  unable to identify all the transactions needed to properly reconcile the  statement. Treasury’s process for compiling the reconciliation statement  involved the use of two independent sources of information—FACTS data  from federal agencies’ general ledger systems for the net operating cost and  most of the reconciliation statement items and Treasury’s central  accounting and reporting system (STAR) primarily for the unified budget  surplus/deficit amounts.  The reconciliation statement begins with the net  operating cost amount reported in the Statement of Operations and  Changes in Net Position (derived through FACTS data).  As noted above,  this amount includes a net $17.1 billion labeled as “unreconciled  transactions,” which was needed to balance the consolidated Balance  Sheet.  Because the net operating cost amount includes this plug, which  does not correspond to any budget activity, the $17.1 billion should have  been included as a reconciling item in the reconciliation statement, but it  was not.  In addition, a $1 billion “net amount of all other differences”  (another plug) was also needed in the reconciliation statement to balance  net operating cost to the unified budget deficit.  Treasury was unable to  adequately identify and explain the gross components of such amounts.
Treasury’s process for preparing the reconciliation statement also did not  ensure completeness of reporting or ascertain the consistency of all the  amounts reported in the reconciliation statement with the related balance  sheet line items, related notes, or federal agency financial statements. We  performed an analysis to determine whether all applicable components  reported in the other statements (and related note disclosures) included in  the CFS were properly reflected in the reconciliation statement.  We found  about $21 billion of net changes in various line item account balances on  the balance sheet that were not explained on either the reconciliation  statement or the Statement of Changes in Cash Balance from Unified  Budget Surplus and Other Activities.  For example, the reconciliation  statement reported depreciation expense ($20.5 billion) and total  capitalized fixed assets ($40.9 billion) as the components of the net change  in property, plant, and equipment.  Although these activities accounted for  a net increase of $20.4 billion, the balance sheet reflected a smaller net  increase, $18 billion; Treasury was unable to explain the remaining  $2.4 billion of the net change.  In addition, while we found that the source  of the line item “principal repayments of precredit reform loans” that is  reported on the reconciliation statement was from STAR, Treasury was  unable to link this amount of $8.2 billion to any related agency financial  statements or the consolidated Balance Sheet and related notes.
Lastly, Treasury did not establish a reporting materiality threshold for  purposes of collecting and reporting information in the reconciliation  statement.  For example, some items were reported simply as a net  “increase/decrease” without considering how material, both quantitatively  and qualitatively, the gross changes were. We noted, for instance, that in  the “components of the budget surplus (deficit) not part of net operation  cost” section of the statement, there is a reconciling item titled “increase in  inventory” rather than accounting for “purchases of inventory” as a  “component of the budget surplus (deficit) not part of net operation cost”  and separately reporting the “sales, use, or disposal of inventory” in the  “components of net operating cost not part of the budget surplus (or  deficit).”  Treasury was unable to demonstrate whether material,  informative amounts were netted, and pertinent information may therefore  not be disclosed.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to develop and implement a process that adequately  identifies and reports items needed to reconcile its net operating cost and  unified budget surplus (or deficit).  Treasury should report “net unreconciled differences” included in the net operating  results line item as a separate reconciling activity in the reconciliation  statement, develop policies and procedures to ensure completeness of reporting  and document how all the applicable components reported in the other  consolidated financial statements (and related note disclosures  included in the CFS) were properly reflected in the reconciliation  statement, and establish reporting materiality thresholds for determining which agency  financial statement activities to collect and report at the  governmentwide level to assist in ensuring that the reconciliation  statement is useful and conveys meaningful information.
In addition, if Treasury chooses to continue using information both from  federal agencies’ financial statements and from the STAR system, we  recommend that Treasury demonstrate how the amounts from STAR reconcile to federal agencies’  identify and document the cause, if any significant differences are  noted.
section_title: Statements of Changes in Cash Balance from Unified Budget and Other Activities
paragraphs: Treasury was unable to demonstrate how significant amounts reported in  the Statement of Changes in Cash Balance from Unified Budget and Other  Activities were related to the underlying federal agencies’ financial  statements.  The Statement of Changes in Cash Balance from Unified  Budget and Other Activities is expected to explain how the annual unified  budget surplus or deficit relates to the change in the U.S. government’s  operating cash.  SFFAS No. 24, effective in fiscal year 2002, requires the  Statement of Changes in Cash Balance from Unified Budget and Other  Activities as part of the CFS.
For fiscal year 2002, the Statement of Changes in Cash Balance from  Unified Budget and Other Activities reported a unified budget deficit of  $157.7 billion, derived as the difference between reported actual unified  budget receipts of $1,853.3 billion and actual unified budget outlays of  $2,011 billion.  Both line items were material to this statement and were  compiled from federal agencies’ monthly reports to Treasury in the STAR  system.
Treasury was unable to explain material differences, totaling $231 billion  (absolute) and $166 billion (net), between the actual unified budget net  outlays reported on this statement and the outlays reported on selected  individual federal agencies’ audited Combined Statement of Budgetary  Resources.  For example, we found one federal agency that reported net  outlays for fiscal year 2002 as $479 billion on its audited Combined  Statement of Budgetary Resources, while Treasury’s records showed $375  billion for fiscal year 2002 for this agency.  This agency had received an  unqualified auditor opinion on its financial statements.
OMB Bulletin 01-09, Form and Content of Agency Financial Statements, states that outlays in federal agencies’ Combined Statement of Budgetary  Resources should agree with the net outlays reported in the budget of the  U.S. government.  In addition, SFFAS No. 7, Accounting for Revenue and  Other Financing Sources and Concepts for Reconciling Budgetary and  Financial Accounting, requires explanation of any material differences  between the information required to be disclosed (including outlays) and  the amounts described as “actual” in the budget of the U.S. government.
Treasury believes its records for net outlays are reliable and accurate;  however, many federal agencies are reporting different net outlays and  receiving clean opinions on their financial statements.
Treasury was unable to adequately explain the over $24 billion net  difference between actual unified budget receipts of $1,853.3 billion and  total operating revenue of $1,877.7 billion reported in the Statements of  Operations and Changes in Net Position.  While these amounts are not  expected to equal (for example, operating revenues include accrued  amounts, and budget receipts are reported on the cash basis), there is a  relationship between operating revenues reported on the Statement of  Operations and Changes in Net Position and unified budget receipts  reported on the Statement of Changes in Cash Balance from Unified Budget  and Other Activities.  Therefore, the expectation is that differences  between these amounts should be explainable.
Treasury was also not able to provide support for how the line items in the  “other activities” section of this statement, totaling $13.5 billion, related to  either the underlying Balance Sheet or related notes accompanying the  CFS.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of OMB’s  Office of Federal Financial Management, to develop and implement a  process to ensure that the Statement of Changes in Cash Balance from  Unified Budget and Other Activities properly reflects the activities reported  in federal agencies’ audited financial statements.  Treasury should document the consistency of the significant line items on this statement  to agencies’ audited financial statements; request, through its closing package, that federal agencies provide the  net outlays reported in their Combined Statement of Budgetary  Resources and explanations for any significant differences between net  outlay amounts reported in the Combined Statement of Budgetary  Resources and the budget of the U.S. government;  investigate the differences between net outlays reported in federal  agencies’ Combined Statement of Budgetary Resources and Treasury’s  records in the STAR system to ensure that the proper amounts are  reported in the Statement of Changes in Cash Balance from Unified  Budget and Other Activities; explain and document the differences between the operating revenue  amount reported on the Statement of Operations and Changes in Net  Position and unified budget receipts reported on the Statement of  Changes in Cash Balance from Unified Budget and Other Activities; and provide support for how the line items in the “other activities” section of  this statement relate to either the underlying Balance Sheet or related  notes accompanying the CFS.
section_title: Defining the Reporting Entity
paragraphs: The CFS includes certain financial information for the executive,  legislative, and judicial branches, to the extent that federal agencies within  those branches have provided Treasury such information.  However, there  are undetermined amounts of assets, liabilities, and revenues that are not  included, and the government did not provide evidence or disclose in the  CFS that such financial information was immaterial.
Statement of Federal Financial Accounting Concepts (SFFAC) No. 2,  Entity and Display, provides guidance on defining reporting entities.  Under SFFAC No. 2, a reporting entity for general purpose financial  statements would “meet all of the following criteria: (1) there is a  management responsible for controlling and deploying resources,  producing outputs and outcomes, executing the budget or a portion thereof  . . ., and held accountable for the entity’s performance; (2) the entity’s scope  is such that its financial statements would provide a meaningful  representation of operations and financial condition; and (3) there are  likely to be users of the financial statements who are interested in and  could use the information in the statements to help them make resource  allocation and other decisions and hold the entity accountable for its  deployment and use of resources.”  SFFAC No. 2 also calls for the notes to  financial statements to provide disclosures that are necessary to make the  financial statements more informative and not misleading, such as a brief  description of the reporting entity.  The statement also provides criteria for  including components in a reporting entity. As examples of the application  of such criteria, SFFAC No. 2 specifically discusses the Federal Reserve  System and government-sponsored enterprises and the reasons for  FASAB’s conclusion that these entities would not be considered  components of the U.S. government reporting entity.
In accordance with SFFAC No. 2, if the government could provide evidence  that the financial information not included in the CFS is immaterial, then  the CFS reporting entity could be described as the “U.S. government” and  would conform materially to the criteria set forth in SFFAC No. 2.  However, the fiscal year 2002 CFS reporting entity excluded certain entities  without providing evidence or clearly explaining the reason.
An appendix to the CFS listed 13 entities that were excluded from the CFS  reporting entity and specifically explained the reason for excluding one of  those entities—the Federal Reserve System.  However, the appendix did  not explain the reason for excluding the other entities listed as excluded,  such as government-sponsored enterprises and military exchanges. While  exclusion of those entities may be appropriate, some users of the CFS may  be confused if the reason for excluding entities is not clearly disclosed in  the CFS.
We understand the inherent challenges in getting complete information for  all three branches of the U.S. government.  However, not including required  information for all components included in a reporting entity or not clearly  explaining the reason for excluding certain entities could mislead some  users of the financial statements.
Without evidence of the amounts of information excluded and any related  disclosures, in particular, evidence that what was excluded was immaterial  to the CFS, we could not have ample assurance regarding the unknown  amounts, and, under auditing standards, this issue could impede a future  opinion on the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of OMB’s  Office of Federal Financial Management to do the following:
Perform an assessment to define the reporting entity, including its  specific components, in conformity with the criteria issued by FASAB.  Key decisions made in this assessment should be documented, including  the reason for including or excluding components and the basis for  concluding on any issue. Particular emphasis should be placed on  demonstrating that any financial information that should be included,  but is not included, is immaterial.
Provide in the financial statements all the financial information relevant  to the defined reporting entity, in all material respects. Such information  would include, for example, the reporting entity’s assets, liabilities, and  revenues.
Disclose in the financial statements all information that is necessary to  inform users adequately about the reporting entity. Such disclosures  should clearly describe the reporting entity and explain the reason for  excluding any components that are not included in the defined reporting  entity.
section_title: Conformity with U.S. Generally Accepted Accounting Principles
paragraphs: Treasury lacks an adequate process to ensure that the financial statements,  related notes, stewardship, and supplemental information in the CFS are  presented in conformity with U.S. generally accepted accounting  principles.  SFFAS No. 24 states that FASAB standards apply to all federal  agencies, including the U.S. government as a whole, unless provision is  made for different accounting treatment in a current or subsequent  standard.
Specifically, we found that Treasury did not (1) timely identify applicable  generally accepted accounting principles requirements, (2) make timely  modifications to agency data calls to obtain information needed, (3) assess,  qualitatively and quantitatively, the materiality of omitted disclosures, or  (4) document decisions reached with regard to omitted disclosures and the  rationale for such decisions.  We identified numerous disclosures that were  not in conformity with applicable standards.  These needed disclosures are  described in appendix I. We did note that Treasury is requesting certain  information in its planned closing package for fiscal year 2004 that may  address some of the needed disclosures.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary to establish a formal process that will allow the  financial statements, related notes, stewardship, and supplemental  information in the CFS to be presented in conformity with U.S. generally  accepted accounting principles.  The process should timely identify generally accepted accounting principles requirements, make timely modifications to Treasury’s closing package requirements  to obtain information needed, assess, qualitatively and quantitatively, the impact of the omitted document decisions reached and the rationale for such decisions.
With respect to the 16 required disclosures identified in appendix I that  were not included in the CFS, we recommend that each of these  disclosures be included in the CFS or the rationale for excluding any of  them be documented.
section_title: Other Weaknesses Identified
paragraphs: During our audit we found certain issues related to (1) management  representation letters, (2) legal representation letters, and (3) information  on major treaties and other international agreements that will require  certain actions by Treasury and OMB. Other issues related to these same  three areas will need to be addressed by federal agencies and their auditors  to facilitate Treasury’s and OMB’s preparation of the CFS.  We plan to  separately communicate to agency Chief Financial Officers and Inspectors  General the details of our concerns for such issues.  We have summarized  our findings below and are providing recommendations to help address the  issues that require action by Treasury and OMB.
subsections: section_title: Management Representation Letters and the Related Summaries of Unadjusted Misstatements
paragraphs: For each agency financial statement audit, generally accepted auditing  standards require that agency auditors obtain written representations from  agency management as part of the audit.  In turn, Treasury and OMB are to  receive all the required management representation letters and the related  summaries of unadjusted misstatements from the federal agencies.  This is  important because generally accepted auditing standards require Treasury  and OMB to provide us, as their auditor, a management representation  letter for the CFS, and their letter depends on the information within  agencies’ management representation letters.  However, we found that  Treasury and OMB did not have policies or procedures to adequately  review and analyze federal agencies’ management representation letters.
In a management representation letter, management typically  acknowledges its responsibility for its financial statements and its belief  that the financial statements are presented in conformity with U.S.  generally accepted accounting principles; the completeness of financial  information in the statements; recognition, measurement, and disclosure;  and subsequent events.  Without performing an adequate review and  analysis of federal agencies’ management representations letters, Treasury  and OMB management may not be fully informed of matters that may affect  their representations made with respect to the audit of the CFS.
As part of our audit of the CFS, we received and reviewed 30 federal  agencies’ management representation letters. We found that (1) 2 letters  had discrepancies between what the auditor found and what the agency  represented in its management representation letter, (2) 8 letters were not  signed by the appropriate level of management, (3) 25 letters did not  disclose the materiality threshold used by management in determining  items to be included in the letter, (4) 4 letters omitted certain  representations that are ordinarily included, (5) 2 letters did not include a  schedule of unadjusted misstatements or affirm in their representation  letter that there were no uncorrected misstatements, and (6) 15 schedules  of unadjusted misstatements did not provide complete information about  the misstatements that were identified.  Only 1 of the 30 letters we  reviewed had none of the deficiencies noted above.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of OMB’s  Office of Federal Financial Management, to establish written policies and  procedures for preparing the governmentwide management representation  letter to help ensure that it is properly prepared and contains sufficient  representations. Specifically, these policies and procedures should require an analysis of the agency management representations to determine if  discrepancies exist between what the agency auditor reported and the  representations made by the agency, including the resolution of such  discrepancies; a determination that the agency management representation letters  have been signed by the highest-level agency officials that are  responsible for and knowledgeable about the matters included in the  agency management representation letters; an assessment of the materiality thresholds used by federal agencies in  their respective management representation letters; an assessment of the impact, if any, of federal agencies’ materiality  thresholds on the management representations made at the  governmentwide level; an evaluation and assessment of the omission of representations  ordinarily included in agency management representation letters; and an analysis and aggregation of the agencies’ summary of unadjusted  misstatements to determine the completeness of the summaries and to  ascertain the materiality, both individually and in the aggregate, of such  unadjusted misstatements to the CFS taken as a whole.
section_title: Legal Representation Letters and Related Management Schedules in Reporting Contingency Losses
paragraphs: For each agency financial statement audit, generally accepted auditing  standards require that agency auditors obtain written legal representations  as part of the audit.  Legal representation letters, along with related  management schedules, are essential to properly reporting legal  contingency losses in federal agencies’ financial statements.  Inadequate  information in the legal representation letters could weaken the accuracy  and reliability of federal agency financial statements and the CFS.
We reviewed 34 federal agencies’ legal representations letters and related  management schedules to assess the adequacy of the letters and related  schedules. We found that the adequacy of some legal letters was  questionable.  For example, we found that 2 letters did not express an  opinion of how the expected outcome of virtually all of the two agencies’  cases would be resolved, and that 5 agencies did not provide the related  management schedules.
In some cases, the lack of adequate information may have resulted from  legal counsel’s desire to protect the confidentiality of lawyer-client  communications, the difficulty in predicting the outcome of potential and  pending litigation with any assurance, and/or legal counsel’s desire to avoid  the possibility of prejudicing the outcome of the litigation to the client’s  detriment. While these are understandable reasons, without adequate legal  contingency information, management of Treasury and OMB may not be  fully informed of matters that may affect the legal representations made  with respect to the audit of the CFS.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of OMB’s  Office of Federal Financial Management, to help ensure that agencies  provide adequate information in their legal representation letters regarding the  expected outcome of the cases and related management schedules.
section_title: Information on Major Treaties and Other International Agreements
paragraphs: The CFS note disclosures did not include any information on major treaties  and other international agreements to which the federal government is a  party.  These treaties and other international agreements address various  issues including, but not limited to, trade, commerce, security, and arms  that may involve financial obligations or give rise to loss contingencies.
Treaties and other international agreements may lead to commitments or  contingencies and therefore should be included in the CFS, in accordance  with OMB Bulletin No. 01-09 and SFFAS No. 5, Accounting for Liabilities  of the Federal Government, as amended by SFFAS No. 12, Recognition of  Contingent Liabilities Arising from Litigation.  The degree of certainty  as to whether there will be a cost now or in the future, along with the ability  to quantify it in advance, determines the appropriate accounting treatment.
Treaties and other international agreements were not included in the notes  to the CFS because Treasury and the federal agencies had yet to perform  the necessary work to determine the nature and magnitude of those in  force as of September 30, 2002. The State Department publishes a  document annually called Treaties in Force.  The most recent edition of  Treaties in Force, released in August 2002, lists treaties and other  international agreements of the United States that were in force on January  1, 2002.  However, according to State Department staff, this document is  incomplete because federal agencies do not always provide complete  information on treaties and international agreements when a request for  data is made.  Not having information on major treaties and other  international agreements in the CFS resulted in incomplete disclosures of  the possible exposure to loss or obligations of the U.S. government.
We recommend that the Secretary of the Treasury direct the Fiscal  Assistant Secretary, working in coordination with the Controller of OMB’s  Office of Federal Financial Management, to establish written policies and  procedures to help ensure that major treaty and other international  agreement information is properly identified and reported in the CFS.  Specifically, these policies and procedures should require that agencies develop a detailed schedule of all major treaties and other international  agreements that obligate the U.S. government to provide cash, goods, or  services, or that create other financial arrangements that are contingent  on the occurrence or nonoccurrence of future events (a starting point  for compiling these data could be the State Department’s Treaties in  Force); classify all such scheduled major treaties and other international  agreements as commitments or contingencies; disclose in the notes to the CFS amounts for major treaties and other  international agreements that have a reasonably possible chance of  resulting in a loss or claim as a contingency; disclose in the notes to the CFS amounts for major treaties and other  international agreements that are classified as commitments and that  may require measurable future financial obligations; and take steps to prevent major treaties and other international agreements  that are classified as remote from being recorded or disclosed as  probable or reasonably possible in the CFS.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, which are reprinted in  appendix II, Treasury and OMB stated that our report identified many  recommendations that will improve the usefulness and accuracy of the CFS  and that they have already incorporated many of them into their new  system and processes that are being developed for preparing the fiscal year  2004 CFS.  However, Treasury and OMB disagreed with our  recommendations related to unreconciled transactions affecting net  position and the Statement of Changes in Cash Balance from Unified  Budget and Other Activities.  They also stated that they would consider the  other recommendations in our report as they continue the design and  implementation of the new process for preparing the CFS.
On the first matter, Treasury and OMB disagreed with our proposed  recommendation that federal agencies submit to Treasury an analysis of  their net position that separates intragovernmental and public transactions.  The purpose of this recommendation was to help Treasury understand and  control the U.S. government’s net position, as well as to eliminate the plugs  associated with compiling the CFS.  In response to our draft report,  Treasury and OMB stated that Treasury had decided not to require agencies  to split net position between intragovernmental and public transactions as  Treasury had originally planned and reported in its CFS Improvement  Project Report because it was unable to develop a procedure that agencies  could use to provide this split.  In addition, Treasury and OMB stated that  this split would not identify certain items known to affect the unreconciled  net position transactions.  However, because Treasury has not identified  and quantified all the components of the unreconciled transactions, a  procedure is still needed that will adequately reconcile net position and  assist Treasury in identifying and eliminating the plugs needed to balance  the CFS.  Our proposed recommendation in the draft report that we  provided for comment was one option for Treasury to resolve the  uncertainties regarding the reliability of these data. We recognize there are  other ways to gain these assurances.  Therefore, we have modified our  recommendation to recommend that Treasury develop reconciliation  procedures to aid in understanding and controlling the net position  balance.
Regarding the second matter, Treasury and OMB stated that we had  suggested that federal agency data be used to prepare receipts and outlays  used in the Statement of Changes in Cash Balance from Unified Budget and  Other Activities.  They stated that they disagree with this approach because  it would be time-consuming and costly to gather such information.  Treasury and OMB have stated that the Statement of Changes in Cash  Balance from Unified Budget and Other Activities is prepared from  information derived from Treasury’s Central Accounting System rather  than from agencies’ financial statements.
We were not calling for Treasury to use federal agencies’ financial  statements to prepare the Statement of Changes in Cash Balance from  Unified Budget and Other Activities.  Instead, we recommended that  Treasury collect certain information already reported in federal agencies’  audited financial statements and develop procedures that ensure  consistency of the significant line items on the Statement of Changes in  Cash Balance from Unified Budget and Other Activities with the agency- reported information.  As we stated in our report, Treasury has expressed  the belief that the information it maintains in its system is materially  reliable.  However, federal agencies also believe their amounts are  materially reliable and their auditors have rendered unqualified audit  opinions on their financial statements.  We found unexplained material  differences between Treasury’s records and some agencies’ financial  statements.  We provided a schedule of these differences to Treasury and  requested explanations for the material differences.  As discussed in our  report, Treasury was unable to explain material differences, totaling $231  billion (absolute) and $166 billion (net), between the actual unified budget  net outlays reported on this statement and the net outlays reported on  selected individual federal agencies’ audited Combined Statement of  Budgetary Resources.
As stated in our report, OMB Bulletin 01-09, Form and Content of Agency  Financial Statements, states that outlays in federal agencies’ Combined  Statement of Budgetary Resources should agree with the net outlays  reported in the budget of the U.S. government.  In some cases, we found  that net outlay amounts reported in federal agencies’ audited financial  statements differed from the amounts included in the CFS and budget of  the U.S. government for these agencies.  For example, Treasury did not  provide us with an explanation of why its own audited Combined  Statement of Budgetary Resources reported net outlays of $479 billion for  fiscal year 2002, while the amount included in the CFS relating to net  outlays for the Department of Treasury was only $375 billion for fiscal year  2002.
Ensuring that the significant line items on the Statement of Changes in  Cash Balance from Unified Budget and Other Activities are consistent with  agencies’ audited financial statements is an important expectation. As  stated in our report, SFFAS No. 7, Accounting for Revenue and Other  Financing Sources and Concepts for Reconciling Budgetary and  Financial Accounting, requires agencies to provide an explanation for any  material differences between the information required to be disclosed  (including outlays) in their financial statements and the amounts described  as “actual” in the budget of the U.S. government. Also, many of the amounts  reported in the Statement of Changes in Cash Balance from Unified Budget  and Other Activities are intended to be the same as the amounts reported in  the budget of the U.S. government. As such, we continue to believe that the  process we proposed would be the most efficient manner for Treasury, as  the preparer of the CFS, to obtain the necessary assurance on the  significant amounts reported in the Statement of Changes in Cash Balance  from Unified Budget and Other Activities.
Treasury and OMB also suggested that we not address the  recommendations in our report related to management representation  letter and legal representation letter issues to Treasury.  Generally accepted  auditing standards require Treasury and OMB to provide us, as their  auditor, a management representation letter for the CFS, and their letter  depends on the information within agencies’ management representation  letters.  However, we found that Treasury and OMB did not have policies or  procedures to adequately review and analyze federal agencies’  management representation letters.  As such, we continue to believe that  both Treasury and OMB need to work together to address the  recommendations we made in this area.
In regard to legal representation letters, we identified problems with  certain agencies’ letters that could weaken the accuracy and reliability of  federal agencies’ financial statements and the CFS.  OMB, in its role of  providing guidance to agencies and their auditors regarding agencywide  financial statements, and Treasury, in its role as preparer of the CFS, both  play an important part in ensuring that legal representation letters provide  adequate information to enable the proper reporting of legal contingency  losses in federal financial statements.  As such, we continue to believe that  both Treasury and OMB need to work together to address the  recommendations we made in this area as well.
This report contains recommendations to you.  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 Governmental Affairs and the House  Committee on Government Reform within 60 days of the date of this letter.  A written statement must also be sent to the House and Senate Committees  on Appropriations with the agencies’ 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 Governmental Affairs; the  Subcommittee on Financial Management, the Budget, and International  Security, Senate Committee on Governmental Affairs; the House  Committee on Government Reform; and the Subcommittee on Government  Efficiency and Financial Management, House Committee on Government  Reform. In addition, we are sending copies to the Fiscal Assistant Secretary  of the Treasury and OMB’s Controller of the Office of Federal Financial  Management. Copies will be made available to others upon request.  This  report is also available at no charge on GAO’s Web site, at 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 Jeffrey C. Steinhoff,  Managing Director, Financial Management and Assurance, on (202) 512- 2600 or Gary T. Engel, Director, Financial Management and Assurance, on  (202) 512-3406.
section_title: Disclosure Issues
paragraphs: This enclosure includes 16 disclosures identified that are required by U.S.  generally accepted accounting principles to either be included in the CFS  or the rationale for their exclusion documented.  However, they were  neither included nor was their exclusion documented.
subsections: section_title: Loans Receivable and Loan Guarantee Liabilities
paragraphs: The note disclosure for loans receivable and loan guarantee liabilities  departed from the following disclosure requirements of Statements of  Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for  Inventory and Related Property, and SFFAS No. 18, Amendments to  Accounting Standards for Direct Loans and Loan Guarantees.
SFFAS No. 3, paragraph 91, requires the reporting entity to disclose the  following: valuation basis for foreclosed property; changes from the prior year’s accounting methods, if any; restrictions on the use/disposal of property; balances by categories (i.e., pre-1992 and post-1991 foreclosed number of properties held and average holding period by type or number of properties for which foreclosure proceedings are in process  at the end of the period for foreclosed assets acquired in full or partial  settlement of a direct or guaranteed loan.
SFFAS No. 18, paragraph 9, states that credit programs should reestimate  the subsidy cost allowance for outstanding direct loans and the liability for  outstanding loan guarantees.  There are two kinds of reestimates:  (a)  interest rate reestimates and (b) technical/default reestimates.  Entities  should measure and disclose each program’s reestimates in these two  components separately.
SFFAS No. 18, paragraph 10, requires the reporting entity to display in the  notes to the financial statements a reconciliation between the beginning  and ending balances of the subsidy cost allowance for outstanding direct  loans and the liability for outstanding loan guarantees reported in the  entity’s balance sheet.
SFFAS No. 18, paragraph 11, requires disclosure of the total amount of direct or guaranteed loans disbursed for the current  reporting year and the preceding reporting year; the subsidy expense by components, recognized for the direct or  guaranteed loans disbursed in those years; and the subsidy reestimates by components for those years.
SFFAS No. 18, paragraph 11, also requires disclosure, at the program level,  of the subsidy rates for the total subsidy cost and its components for the  interest subsidy costs, default costs (net of recoveries), fees and other  collections, and other costs estimated for direct loans and loan guarantees  in the current year’s budget for the current year’s cohorts.
SFFAS No. 18, paragraph 11, further requires the reporting entity to  disclose, discuss, and explain events and changes in economic conditions,  other risk factors, legislation, credit policies, and subsidy estimation  methodologies and assumptions that have had a significant and measurable  effect on subsidy rates, subsidy expense, and subsidy reestimates.
section_title: Inventories and Related Property
paragraphs: The note disclosure for inventories and related property departed from the  following disclosure requirements of SFFAS No. 3, Accounting for Inventory and Related Property.
subsections: section_title: Inventory and Operating Materials and Supplies
paragraphs: When inventory or operating materials and supplies are declared excess,  obsolete, or unserviceable, SFFAS No. 3, paragraph 30, requires the  difference between the carrying amount and the expected net realizable  value to be recognized as a loss or gain and either separately reported or  disclosed.
Paragraphs 35 and 50 require the following disclosures about inventory and  operating materials and supplies: general composition; changes from the prior year’s accounting methods, if any; restrictions on the sale of inventory and the use of operating materials changes in the criteria for categorizing inventory and operating  materials and supplies.
section_title: Stockpile Material
paragraphs: Paragraph 56 requires the following disclosures about stockpile material: basis for valuing stockpile material, including valuation method and any changes from the prior year’s accounting methods, if any; restrictions on the use of stockpile material; balances in each category of stockpile material (i.e., stockpile material  held and held for sale); criteria for grouping stockpile material held for sale; and changes in criteria for categorizing stockpile material held for sale.
Paragraph 55 requires the disclosure of any difference between the  carrying amount (i.e., purchase price or cost) of stockpile material held for  sale and the estimated selling price of such assets.
section_title: Seized Material
paragraphs: Paragraph 66 requires the following disclosures about seized property: changes from the prior year’s accounting methods, if any; and analysis of change in seized property (including dollar value and number  of seized properties) that are on hand at the beginning of the year, seized  during the year, disposed of during the year, and on hand at the end of  the year, as well as known liens or other claims against the property.  This information should be presented by type of seizure and method of  disposition when material.
section_title: Forfeited Property
paragraphs: Paragraph 78 requires the following disclosures about forfeited property: analysis of the changes in forfeited property by type and dollar amount  that includes (1) number of forfeitures on hand at the beginning of the  year, (2) additions, (3) disposals and method of disposition, and (4) end- of-year balances; restriction on the use of disposition of the property; and  if available, an estimate of the value of property to be distributed to  other federal, state, and local agencies in future reporting periods.
section_title: Goods Held under Price Support and Stabilization Programs
paragraphs: Paragraph 98 requires that if a contingent loss is not recognized because it  is less than probable or it is not reasonably measurable, then disclosure of  the contingency shall be made if it is at least reasonably possible that a loss  may occur.
Paragraph 109 requires the following disclosures for goods held under  price support and stabilization programs: basis for valuing commodities, including valuation method and cost flow changes from the prior year’s accounting methods; restrictions on the use, disposal, or sale of commodities; and analysis of the change in dollar amount and volume of commodities,  including those (1) on hand at the beginning of the year, (2) acquired  during the year, (3) disposed of during the year by method of  disposition, (4) on hand at the end of the year, (5) on hand at year-end  and estimated to be donated or transferred during the coming period,  and (6) received as a result of surrender of collateral related to  nonrecourse loans outstanding.  The analysis should also show the  dollar value and volume of purchase agreement commitments.
section_title: Property, Plant, and Equipment
paragraphs: The note disclosure for property, plant, and equipment (PP&E) departed  from the following disclosure requirements of SFFAS No. 6, Accounting for  Property, Plant, and Equipment; SFFAS No. 10, Accounting for Internal  Use Software; and SFFAS No. 16, Amendments to Accounting for  Property, Plant, and Equipment:  SFFAS No. 6, paragraph 45, states that the following disclosures should be  included: the estimated useful lives for each major class; capitalization thresholds, including any changes in thresholds during the restrictions on the use or convertibility of general PP&E.
SFFAS No. 10, paragraph 35, requires the following disclosures for internal  use software: the cost, associated amortization, and book value; the estimated useful life for each major class of software; and the method of amortization.
SFFAS No. 16, paragraph 9, requires an appropriate PP&E note disclosure  to explain that “physical quantity” information for the multiuse heritage  assets is included in supplemental stewardship reporting for heritage  assets.
section_title: Federal Employee and Veteran Benefits Payable
paragraphs: The note disclosure for federal employee and veteran benefits payable was  not complete and properly reported because the liability for military  pensions and the note disclosure related to the “change in actuarial  accrued pension liability and components of related expenses” for the  military retirement fund do not agree with information presented in the  Department of Defense’s (DOD) financial statements.  The note disclosure  included in the CFS does not include a line for the valuation of plan  amendments that occurred during the year.  DOD correctly reported plan  amendments separately in its financial statements; however, the  mechanism was not available through FACTS submission for DOD to  report plan amendments separately to the Department of the Treasury.
section_title: Environmental and Disposal Liabilities
paragraphs: The note disclosure for environmental and disposal liabilities departed  from the requirements of SFFAS No. 6 in two instances.  The note  disclosure on environmental liabilities was not complete and properly  reported primarily because DOD was unable to fully implement elements of  U.S. generally accepted accounting principles and OMB guidance.  Specifically, the disclosures should do the following:
Estimate and recognize cleanup costs associated with general PP&E at  the time the PP&E is placed in service.  In addition, a liability should be  recognized for the portion of the estimated total cleanup cost that is  attributable to that portion of the physical capacity used or that portion  of the estimated useful life that has passed since the general PP&E was  placed in service.  As Treasury indicated in its note disclosures, DOD  was unable to fully implement these two elements of U.S. generally  accepted accounting principles.  However, the note disclosure did not  explain how these limitations prevented DOD from properly estimating  its environmental liability.  Linking the environmental liability to  weaknesses in the DOD property, plant, and equipment systems would  have made the CFS more useful to the reader.
Include material changes in total estimated cleanup costs due to  changes in laws, technology, or plans.  When preparing the CFS,  Treasury should consider whether the reader would be interested in  understanding why the liability changed and include the explanation in  the note disclosure.
section_title: Other Liabilities
subsections: section_title: Capital Leases
paragraphs: Financial Accounting Standards Board, Statement of Financial Accounting  Standards (SFAS) No. 13, Accounting for Leases, paragraph 16, requires  the following disclosures on capital leases: future minimum lease payments as of the date of the latest balance  sheet presented, in the aggregate and for each of the 5 succeeding fiscal  years, with separate deductions from the total for the amount  representing executory costs, including any profit thereon, included in  the minimum lease payments, and for the amount of the imputed  interest necessary to reduce the net minimum lease payments to present  value; a summary of assets under capital lease by major asset category and the  related total accumulated amortization; and a general description of the lessee’s leasing arrangements, including but  not limited to (1) the basis on which contingent rental payments are  determined, (2) the existence and terms of renewal or purchase options  and escalation clauses, and (3) restrictions imposed by lease  agreements, such as those concerning dividends, additional debt, and  further leasing.
section_title: Life Insurance Liabilities
paragraphs: The note disclosure for other liabilities departed from the following  disclosure requirements of SFFAS No. 5, Accounting for Liabilities of the  Federal Government, with respect to life insurance liabilities:
Paragraph 117 states that all federal reporting entities with whole life  insurance programs should follow the standards as prescribed in the  private sector standards when reporting the liability for future policy  benefits.  The applicable private sector standards are SFAS No. 60,  Accounting and Reporting by Insurance Enterprises; SFAS No. 97,  Accounting and Reporting by Insurance Enterprises for Certain Long- Duration Contracts and for Realized Gains and Losses from the Sale  of Investments; and SFAS No. 120, Accounting and Reporting by  Mutual Life Insurance Enterprises and by Insurance Enterprises for  Certain Long-Duration Participating Contracts; and American  Institute of Certified Public Accountants Statement of Position 95-1,  Accounting for Certain Insurance Activities of Mutual Life Insurance  Enterprises.
SFFAS No. 5, paragraph 121, requires that all components of the liability  for future policy benefits (i.e., the net-level premium reserve for death  and endowment policies and the liability for terminal dividends) should  be separately disclosed in a footnote with a description of each amount  and an explanation of its projected use and any other potential uses  (e.g., reducing premiums, determining and declaring dividends  available, or reducing federal support in the form of appropriations  related to administrative cost or subsidies).
section_title: Commitments and Contingencies
paragraphs: Certain disclosed information on major commitments and contingencies in  the notes to the CFS was inconsistent with disclosed information in  individual agencies’ financial statements. Examples of such inconsistencies  are as follows:
Treasury did not disclose $114 billion in the notes to the CFS for war  risk insurance.  DOT provided temporary war risk insurance to U.S. air  carriers whose coverage was canceled following the terrorist attacks on  September 11, 2001.  DOT disclosed $114 billion of war risk insurance in  its notes to the financial statements, but Treasury did not disclose  similar information in the notes to the CFS.  Also, this information was  included by DOT in the Treasury FACTS database.  The risk of loss  involving this type of insurance is unknown, but another terrorist attack  against the United States could result in major claims.
Treasury improperly disclosed $4.5 billion in unadjudicated claims for  Commerce in the notes to the CFS.  In its financial statements,  Commerce disclosed that the exact amount of these claims against the  U.S. government is unknown and the range of loss, which may exceed  $4.5 billion as of September 30, 2002, cannot be estimated.  Because  Commerce had disclosed that it could not estimate the loss from  unadjudicated claims, which was proper, Treasury should not have  disclosed an amount in the notes to the CFS.  Disclosing information in  the CFS that is inconsistent with information in an agency’s financial  statements may confuse users of the CFS or lead them to reach a wrong  conclusion.
Treasury did not disclose sufficient information regarding the nature of  certain major commitments and contingencies in the notes to the CFS.  For  example, Treasury did not clearly disclose in the notes to the CFS  information regarding a possible capital investment requirement of TVA.  The Environmental Protection Agency (EPA) had taken judicial and  administrative actions against TVA that could require TVA to invest an  estimated $3 billion to purchase equipment in order to comply with the  Clean Air Act and conform to EPA’s pollution control requirements.  TVA is  challenging this action.  Treasury disclosed this $3 billion in the notes as an  “administrative order against TVA” without providing the additional detail  that the order represents a capital investment for compliance with the  Clean Air Act and pollution control.  The lack of such a detailed discussion  about what the contingency represents could be misleading to readers of  the CFS.
section_title: Collections and Refunds of Federal Revenue
paragraphs: The disclosure for collections and refunds of federal revenue departed  from the following disclosure requirements of FASAB’s SFFAS No. 7,  Concepts for Reconciling Budgetary and Financial Accounting:
Paragraph 64, among other things, requires collecting entities to  disclose the basis of accounting when the application of the general rule  results in a modified cash basis of accounting.  The CFS incorrectly  states that the nonexchange revenues are reported on a modified cash  basis of accounting when actually they are reported on a cash basis.
Paragraph 69.2 requires collecting entities to provide in the other  accompanying information any relevant estimates of the annual tax gap  that become available as a result of federal government surveys or  studies.  The tax gap is defined as taxes or duties due from  noncompliant taxpayers or importers.  Amounts reported should be  specifically defined (e.g., whether the tax gap includes or excludes  estimates of taxes due on illegally earned revenue).  Appropriate  explanations of the limited reliability of the estimates also should be  provided.  Cross-references should be made to portions of the tax gap  due from identified noncompliance assessments and preassessment  work in process.
section_title: Dedicated Collections
paragraphs: The note disclosure for dedicated collections departed from the disclosure  requirements of SFFAS No. 7, Part I, Accounting for Revenue and Other  Financing Sources, paragraph 85, by not including the following: condensed information about assets and liabilities showing investments  in Treasury securities, other assets, liabilities due and payable to  beneficiaries, other liabilities, and fund balance; condensed information on net cost and changes to fund balance,  showing revenues by type (exchange/nonexchange), program expenses,  other expenses, other financing sources, and other changes in fund  balance; and any revenues, other financing sources, or costs attributable to the fund  under accounting standards but not legally allowable as credits or  charges to the fund.
section_title: Indian Trust Funds
paragraphs: The note disclosure for Indian trust funds departed from the following  disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue  and Other Financing Sources, paragraph 85, by not including the  following: a description of each fund’s purpose, how the administrative entity  accounts for and reports the fund, and its authority to use those  collections; the sources of revenue or other financing for the period and an  explanation of the extent to which they are inflows of resources to the  government or the result of intragovernmental flows; condensed information about assets and liabilities showing investments  in Treasury securities, other assets, liabilities due and payable to  beneficiaries, and other liabilities; condensed information on net cost and changes to fund balance,  showing revenues by type (exchange/nonexchange), program expenses,  other expenses, other financing sources, and other changes in fund  balance; and any revenues, other financing sources, or costs attributable to the fund  under accounting standards, but not legally allowable as credits or  charges to the fund.
section_title: Social Insurance
paragraphs: The disclosure for social insurance departed from the following  requirements of SFFAS No. 17, Accounting for Social Insurance:
Paragraph 31 requires the program descriptions for Hospital Insurance  and Supplementary Medical Insurance and an explanation of trends  revealed in Chart 11: Estimated Railroad Retirement Income (Excluding  Interest) and Expenditures 2002-2076.
Paragraph 24 requires a description of statutory or other material  changes, and the implications thereof, affecting the Medicare and  Unemployment Insurance programs after the current fiscal year.
Paragraph 25 requires the significant assumptions used in making  estimates and projections regarding the Black Lung and Unemployment  Insurance programs.
Paragraph 32(1)(b) requires the total cash inflow from all sources, less  net interest on intragovernmental borrowing and lending and the total  cash outflow to be shown in nominal dollars for the Hospital Insurance  program.
Paragraph 32(1)(a) requires the narrative to accompany the cash flow  data for Unemployment Insurance.  This narrative should include the  identification of any year or years during the projection period when  cash outflow exceeds cash inflow, without interest, on  intragovernmental borrowing or lending.  In addition, the presentation  should include an explanation of material crossover points, if any,  where cash outflow exceeds cash inflow and the possible reasons for  this.
Paragraphs 27(3)(h) and 27(3)(j) require the estimates of the fund  balances at the respective valuation dates of the social insurance  programs (except Unemployment Insurance) to be included for each of  the 4 preceding years.  Only 1 year is shown.
Paragraph 32(4) requires individual program sensitivity analyses for  projection period cash flow in present value dollars and annual cash  flow in nominal dollars.  The CFS includes only present value sensitivity  analyses for Social Security and Hospital Insurance.  Paragraph 32(4)  states that, at a minimum, the summary should present Social Security,  Hospital Insurance, and Supplementary Medical Insurance separately.
Paragraph 27(4)(a) requires the individual program sensitivity analyses  for Social Security and Hospital Insurance to include an analysis of  assumptions regarding net immigration.
Paragraph 27(4)(a) requires the individual program sensitivity analysis  for Hospital Insurance to include an analysis of death rates.
The actuarial present value information for the Railroad Retirement  Board should not include financial interchange income  (intragovernmental income from Social Security).
section_title: Nonfederal Physical Property
paragraphs: The information included in Stewardship Information for nonfederal  physical property departed from the following disclosure requirements of  SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87:
The annual investment, including a description of federally owned  physical property transferred to state and local governments, must be  disclosed.  This information should be provided for the year ended on  the balance sheet date as well as for each of the 4 preceding years.  If  data for additional years would provide a better indication of  investment, reporting of the additional years’ data is encouraged.  Reporting should be at a meaningful category or level.
A description of major programs involving federal investments in  nonfederal physical property, including a description of programs or  policies under which noncash assets are transferred to state and local  governments, is to be provided.
section_title: Human Capital
paragraphs: The information in stewardship information for human capital departed  from the disclosure requirements of SFFAS No. 8, Supplementary  Stewardship Reporting, paragraph 94, by not including the following: a narrative description and the full cost of the investment in human  capital for the year being reported on as well as the preceding 4 years (if  full cost data are not available, outlay data can be reported); the full cost or outlay data for investments in human capital at a  meaningful category or level (e.g., by major program, agency, or  department); and a narrative description of major education and training programs  considered federal investments in human capital.
section_title: Research and Development
paragraphs: The information in stewardship information for research and development  departed from the disclosure requirements of SFFAS No. 8, Supplementary  Stewardship Reporting, paragraph 94, by not including the following:
The annual investment made in the year ended on the balance sheet  date as well as in each of the 4 years preceding that year must be  reported.  If data for additional years would provide a better indication  of investment, reporting of the additional years’ data is encouraged.  In  those unusual instances when entities have no historical data, only  current reporting year data need be reported.  Reporting must be at a  meaningful category or level—for example, a major program or  department.
A narrative description of major research and development programs is  to be included.
Deferred Maintenance 	 The required supplemental information for deferred maintenance departed  from the following disclosure requirements of SFFAS No. 6, Accounting for  Property, Plant, and Equipment, paragraphs 83 and 84:
Method of measuring deferred maintenance for each major class of  PP&E should be included.
If the condition assessment survey method of measuring deferred  maintenance is used, the following should be presented for each major  class of PP&E:  (1) description of requirements or standards for  acceptable operating condition, (2) any changes in the condition  requirements or standards, and (3) asset condition and a range estimate  of the dollar amount of maintenance needed to return the asset to its  acceptable operating condition.
If the total life-cycle cost method is used, the following should be  presented for each major class of PP&E:  (1) the original date of the  maintenance forecast and an explanation for any changes to the  forecast, (2) prior year balance of the cumulative deferred maintenance  amount, (3) the dollar amount of maintenance that was defined by the  professionals who designed, built, or managed the PP&E as required  maintenance for the reporting period, (4) the dollar amount of  maintenance actually performed during the period, (5) the difference  between the forecast and actual maintenance, (6) any adjustments to  the scheduled amounts deemed necessary by the managers of the PP&E,  and (7) the ending cumulative balance for the reporting period for each  major class of asset experiencing deferred maintenance.
If management elects to disclose critical and noncritical amounts, the  disclosure is to include management’s definition of these categories.
section_title: Risk Assumed
paragraphs: The note disclosure for stewardship responsibilities departed from  disclosure requirements of SFFAS No. 5, paragraph 106, related to the risk  assumed for federal insurance and guarantee programs.  Risk assumed  information is important for all federal insurance and guarantee programs  (except social insurance, life insurance, and loan guarantee programs) and  is generally measured by the present value of unpaid expected losses net of  associated premiums, based on the risk inherent in the insurance or  guarantee coverage in force.  Paragraph 106 states that when financial  information pursuant to FASB’s standards on federal insurance and  guarantee programs conducted by government corporations is  incorporated in general purpose financial reports of a larger federal  reporting entity, the entity should report as required supplementary  information what amounts and periodic change in those amounts would  be reported under the “risk assumed” approach.
section_title: Comments from Department of the Treasury and the Office of Management and Budget
subsections: section_title: GAO Comment
paragraphs: Treasury and OMB did not schedule a meeting or provide us with any  technical comments on this report.
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section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs