Fiscal Year 2010 U.S. Government Financial Statements: Federal Government Continues to Face Financial Management and Long-Term Fiscal Challenges
Published: 2011-03-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO annually audits the consolidated financial statements of the U.S. government. Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies. Over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities. This testimony presents the results of GAO's audit for fiscal year 2010 and discusses certain of the federal government's significant long-term fiscal challenges.
section_title: What GAO Found
paragraphs: Three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) federal entities' inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition to the material weaknesses underlying these major impediments, GAO noted material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. With regard to the Statement of Social Insurance (SOSI), GAO was unable to, and did not, express an opinion on the 2010 SOSI because of significant uncertainties discussed by management in the consolidated financial statements, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 SOSI. GAO was, however, able to render unqualified opinions on the 2009, 2008, and 2007 SOSIs. Since the enactment of key financial management reforms in the 1990s, the federal government has made significant progress in improving financial management activities and practices. For fiscal year 2010, 20 of 24 Chief Financial Officers (CFO) Act agencies were able to attain unqualified audit opinions on their accrual-based financial statements within an accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal year 1996. Also, accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. Further, the preparation and audit of financial statements has identified numerous deficiencies, leading to actions to strengthen controls and systems. Much work remains, however, to improve federal financial management. For example, it is essential that the Department of Defense, the Department of the Treasury, and the Office of Management and Budget, along with other federal entities, address the major impediments discussed above. Also, it is important for the individual federal departments and agencies to remain committed to maintain the progress that has been achieved in obtaining positive audit results and to build upon that progress to make needed improvements. The 2010 Financial Report of the United States Government (Financial Report) introduces the first sustainability statement required under a new financial reporting standard, which presents comprehensive long-term fiscal projections for the U.S. government. Such reporting provides a much needed perspective on the federal government's long-term fiscal position and outlook. The Financial Report, like the latest Congressional Budget Office long-term budget outlook and GAO simulations, shows that the federal government is on an unsustainable long-term fiscal path.
section_title: What GAO Recommends
paragraphs: Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address our recommendations.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss our report on the  U.S. government’s consolidated financial statements for fiscal years 2010  and 2009. Given the federal government’s fiscal challenges, there is a  significant need for transparency and for the Congress, the administration,  and federal managers to have reliable, useful, and timely financial and  performance information. Even though significant progress has been made  since the enactment of key financial management reforms in the 1990s, our  report on the U.S. government’s consolidated financial statements  illustrates that much work remains to improve federal financial  management. Consequently, financial management needs to be a top  priority of this administration and the new Congress. I would like to  commend you, Mr. Chairman, and this Subcommittee, for continuing the  annual tradition of oversight hearings on this important subject. Your  involvement is critical to assuring continued progress.
Our testimony today discusses the following major issues relating to the  consolidated financial statements for fiscal years 2010 and 2009: (1) the  results of our audit, including continued major impediments to an opinion  on the accrual-based consolidated financial statements and certain  significant uncertainties that resulted in us being unable to render an  opinion on the 2010 Statement of Social Insurance; (2) the effects of the  recent economic recession and the federal government’s actions to  stabilize financial markets and promote economic recovery on the federal  government’s financial condition; and (3) challenges posed by the federal  government’s long-term fiscal outlook. We performed sufficient audit work  to provide our report on the consolidated financial statements, internal  control, and compliance with selected provisions of laws and regulations.  We considered the limitations on the scope of our work in forming our  conclusions. Our audit was conducted in accordance with U.S. generally  accepted government auditing standards.
Both the consolidated financial statements and our related audit report are  included in the fiscal year 2010 Financial Report of the United States  Government (Financial Report). Our audit report would not be possible  without the commitment and professionalism of inspectors general  throughout the federal government who are responsible for annually  auditing the financial statements of individual federal agencies. The  Financial Report was issued by the Department of the Treasury  (Treasury) on December 21, 2010. This report is available through GAO’s  Internet site, at http://www.gao.gov/financial/fy2010financialreport.html  and Treasury’s Internet site, at http://www.fms.treas.gov/fr/index.html.
subsections: section_title: Results of Our Audit of the U.S. Government’s Consolidated Financial Statements for Fiscal Years 2010 and 2009
paragraphs: Since the enactment of key financial management reforms in the 1990s, the  federal government has made significant progress in improving financial  management activities and practices. For fiscal year 2010, 20 of 24 Chief  Financial Officers (CFO) Act agencies were able to attain unqualified audit  opinions on their accrual-based financial statements within an  accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal  year 1996. Also, accounting and financial reporting standards have  continued to evolve to provide greater transparency and accountability  over the federal government’s operations, financial condition, and fiscal  outlook. Further, the preparation and audit of financial statements has  identified numerous deficiencies, leading to actions to strengthen controls  and systems. It is important for the individual federal departments and  agencies to remain committed to maintain the progress that has been  achieved in obtaining positive audit results and to build upon that progress  to make needed improvements.
Although this progress is commendable, the federal government was  unable to demonstrate the reliability of significant portions of the U.S.  government’s accrual-based consolidated financial statements for fiscal  years 2010 and 2009, principally resulting from limitations related to  certain material weaknesses in internal control over financial reporting  and other limitations on the scope of our work. As a result, we were  unable to provide an opinion on such statements. Further, significant  uncertainties (discussed in Note 26 to the consolidated financial  statements), primarily related to the achievement of projected reductions  in Medicare cost growth reflected in the 2010 Statement of Social  Insurance, prevented us from expressing an opinion on that statement. We  were, however, able to render unqualified opinions on the 2009, 2008, and  2007 Statements of Social Insurance. Given the importance of social  insurance programs like Medicare and Social Security to the federal  government’s long-term fiscal outlook, the Statement of Social Insurance  is critical to understanding the federal government’s financial condition  and fiscal sustainability.
The federal government did not maintain adequate systems or have  sufficient, reliable evidence to support certain material information  reported in the U.S. government’s accrual-based consolidated financial  statements. The underlying material weaknesses in internal control,  which generally have existed for years, contributed to our disclaimer of  opinion on the U.S. government’s accrual-based consolidated financial  statements for the fiscal years ended 2010 and 2009. Those material  weaknesses relate to the federal government’s inability to  satisfactorily determine that property, plant, and equipment and  inventories and related property, primarily held by the Department of  Defense (DOD), were properly reported in the accrual-based  consolidated financial statements;   reasonably estimate or adequately support amounts reported for  certain liabilities, such as environmental and disposal liabilities, or  determine whether commitments and contingencies were complete  and properly reported;   support significant portions of the reported total net cost of  operations, most notably related to DOD, and adequately reconcile  disbursement activity at certain federal entities;  adequately account for and reconcile intragovernmental activity and  balances between federal entities;   ensure that the federal government’s accrual-based consolidated  financial statements were (1) consistent with the underlying audited  entities’ financial statements, (2) properly balanced, and (3) in  conformity with U.S. generally accepted accounting principles  (GAAP); and   identify and either resolve or explain material differences between (1)  certain components of the budget deficit reported in Treasury’s  records that are used to prepare the Reconciliation of Net Operating  Cost and Unified Budget Deficit, the Statement of Changes in Cash  Balance from Unified Budget and Other Activities, and the Fiscal  Projections for the U.S. Government (included in the Supplemental  Information section of the Financial Report) and (2) related amounts  reported in federal entities’ financial statements and underlying  financial information and records.
These material weaknesses continued to (1) hamper the federal  government’s ability to reliably report a significant portion of its assets,  liabilities, costs, and other related information; (2) affect the federal  government’s ability to reliably measure the full cost as well as the  financial and nonfinancial performance of certain programs and activities;  (3) impair the federal government’s ability to adequately safeguard  significant assets and properly record various transactions; and (4) hinder  the federal government from having reliable financial information to  operate in an efficient and effective manner.
In addition to the material weaknesses that contributed to our disclaimer  of opinion on the accrual-based consolidated financial statements, we  found the following three other material weaknesses in internal control.
These other material weaknesses were the federal government’s inability  to   determine the full extent to which improper payments occur and  reasonably assure that appropriate actions are taken to reduce  improper payments,  identify and resolve information security control deficiencies and  manage information security risks on an ongoing basis, and  effectively manage its tax collection activities.
Also, many of the CFO Act agencies continue to struggle with financial  systems that are not integrated and do not meet the needs of management  for reliable, useful, and timely financial information. Often, agencies  expend major time, effort, and resources to develop financial information  that their systems should be able to provide on a daily or recurring basis.
subsections: section_title: Addressing Impediments to an Opinion on the Accrual-Based Consolidated Financial Statements
paragraphs: Three major impediments continued to prevent us from rendering an  opinion on the U.S. government’s accrual-based consolidated financial  statements: (1) serious financial management problems at DOD that have  prevented DOD’s financial statements from being auditable, (2) the federal  government’s inability to adequately account for and reconcile  intragovernmental activity and balances between federal entities, and   (3) the federal government’s ineffective process for preparing the  consolidated financial statements. Additional impediments, such as certain  entities’ fiscal year 2010 financial statements that, as of the date of our  audit report, received disclaimers of opinion or were not audited, also  contributed to our inability to render an opinion on the U.S. government’s  accrual-based consolidated financial statements. Extensive efforts by DOD  and other entity officials and cooperative efforts between entity chief  financial officers, Treasury officials, and Office of Management and  Budget (OMB) officials will be needed to resolve these obstacles to  achieving an opinion on the U.S. government’s accrual-based consolidated  financial statements.
subsections: section_title: Improving Financial Management at DOD
paragraphs: Given DOD’s size and complexity, the resolution of its serious financial  management problems is essential to achieving an opinion on the U.S.  government’s consolidated financial statements. Reported weaknesses in  DOD’s financial management and other business operations adversely  affect the reliability of DOD’s financial data; the economy, efficiency, and  effectiveness of its operations; and its ability to produce auditable  financial statements. Several DOD business practices, including financial  management, continue to be included on GAO’s list of high-risk programs  designated as vulnerable to waste, fraud, abuse, and mismanagement or  in need of transformation.
To transform its business operations, DOD management must have  reliable financial information. Without it, DOD is severely hampered in its  ability to make sound budgetary and programmatic decisions, monitor  trends, make adjustments to improve performance, reduce operating  costs, or maximize the use of resources.
DOD continues to take steps toward resolving the department’s long- standing financial management weaknesses. The department’s Financial  Improvement and Audit Readiness (FIAR) Plan, which defines DOD’s  strategy and methodology for improving financial management operations  and controls, has continued to evolve and mature. DOD’s Comptroller has  established two priority focus areas—first, strengthening processes,  controls, and systems that produce budgetary information and support the  department’s Statements of Budgetary Resources; and second, improving  the accuracy and reliability of management information pertaining to  mission-critical assets, including military equipment and real property, and  validating improvement through existence and completeness testing. In  2010, DOD revised its FIAR strategy, governance framework, and  methodology to support the DOD Comptroller’s direction and priorities.
We are supportive of this initiative and believe that a focused and  consistent approach may increase DOD’s ability to demonstrate  incremental progress toward auditability in the short term. Budgetary and  asset-accountability information is widely used by DOD managers at all  levels. As such, its reliability is vital to daily operations and management.  In this regard, the U.S. Marine Corps (USMC) recently underwent an audit  of its fiscal year 2010 Statement of Budgetary Resources (SBR). Although  the auditors were unable to express an opinion on the USMC SBR, DOD  indicated that the lessons learned from the audit will be applied to the  fiscal year 2011 USMC SBR audit currently underway and shared with the  other DOD components to assist them in their audit readiness efforts.
A key element of DOD’s strategy is successful implementation of  Enterprise Resource Planning (ERP) systems. However, inadequate  requirements management, inadequate systems testing, ineffective  oversight over business system investments, and other challenges have  hindered the department’s efforts to implement these systems on schedule  and within budget. Effective and sustained leadership and oversight of the  department’s ERP implementation will be important to ensure that these  important initiatives result in the integrated capabilities needed to  transform the department’s financial management and related business  operations. which requires DOD’s financial statements to be validated as audit  ready no later than September 30, 2017. The interim milestones shall  include, for each military department and for the defense agencies and  defense field activities, interim milestones for (1) achieving audit  readiness for each major element of the Statement of Budgetary  Resources, and (2) addressing the existence and completeness of each  major category of assets, including military equipment, real property,  and operating material and supplies; and  examine the costs and benefits of alternative approaches to the  valuation of DOD assets, select a valuation approach, and begin to  prepare a business case analysis supporting the selected approach.
Important to the success of DOD’s current priorities and the FIAR  program are high-quality, detailed plans, and effective implementation at  all levels. Long-term, to achieve financial statement auditability and  improve financial management information, it will be important that DOD  establish sound strategic planning and effective implementation across the  department, and at all levels, with efforts that can be sustained through  leadership transitions.
We are encouraged by continuing congressional oversight of DOD’s  business transformation and financial management improvement efforts  and the commitment of DOD’s leaders to implementing sustained  improvements in the department’s ability to produce reliable, useful, and  timely information for decision making and reporting. We will continue to  monitor DOD’s progress in addressing its financial management  weaknesses and transforming its business operations.
section_title: Reconciling Intragovernmental Activity and Balances
paragraphs: Federal entities are unable to adequately account for and reconcile  intragovernmental activity and balances. For both fiscal years 2010 and  2009, amounts reported by federal entity trading partners for certain  intragovernmental accounts were not in agreement by significant amounts.  Although OMB and Treasury require the CFOs of 35 significant federal  entities to reconcile, on a quarterly basis, selected intragovernmental  activity and balances with their trading partners, a substantial number of  the entities did not adequately perform those reconciliations for fiscal  years 2010 and 2009. As a result of these circumstances, the federal  government’s ability to determine the impact of the unreconciled  differences between trading partners on the amounts reported in the  accrual-based consolidated financial statements is significantly impaired.
GAO has identified and reported on numerous intragovernmental activities  and balances issues and has made several recommendations to Treasury  and OMB to address those issues. Treasury and OMB have generally taken  or plan to take actions to address these recommendations. Treasury  continues to take steps to help resolve material differences in  intragovernmental activity and balances. For example, during fiscal year  2010, Treasury established additional focus groups, consisting of Treasury  and agency personnel, to begin identifying and resolving certain reported  material differences. Resolving the intragovernmental transactions  problem remains a difficult challenge and will require a strong  commitment by federal entities to fully implement guidance regarding  business rules for intragovernmental transactions issued by OMB and  Treasury as well as continued strong leadership by OMB and Treasury.
section_title: Preparing the Consolidated Financial Statements
paragraphs: While further progress was demonstrated in fiscal year 2010, the federal  government continued to have inadequate systems, controls, and  procedures to ensure that the consolidated financial statements are  consistent with the underlying audited entity financial statements,  properly balanced, and in conformity with GAAP. For example,    Treasury’s process did not ensure that the information in certain of the  accrual-based consolidated financial statements was fully consistent  with the underlying information in 35 significant federal entities’  audited financial statements and other financial data.
To make the fiscal years 2010 and 2009 consolidated financial  statements balance, Treasury recorded net increases of $0.8 billion and  $17.4 billion, respectively, to net operating cost on the Statement of  Operations and Changes in Net Position, which it labeled “Unmatched  transactions and balances.” Treasury recorded an additional net $3.8  billion and $8 billion of unmatched transactions in the Statement of  Net Cost for fiscal years 2010 and 2009, respectively. Treasury is  unable to fully identify and quantify all components of these  unreconciled activities.
Treasury’s reporting of certain financial information required by GAAP  continues to be impaired, and will remain so until federal entities, such  as DOD, can provide Treasury with complete and reliable information  required to be reported in the consolidated financial statements.
A detailed discussion of additional control deficiencies regarding the  process for preparing the consolidated financial statements can be found  on pages 240 through 243 of the Financial Report.
During fiscal year 2010, Treasury, in coordination with OMB, continued  implementing corrective action plans and made progress in addressing  certain internal control deficiencies we have previously reported regarding  the process for preparing the consolidated financial statements. Resolving  some of these internal control deficiencies will be a difficult challenge and  will require a strong commitment from Treasury and OMB as they  continue to execute and implement their corrective action plans.
section_title: Addressing Other Impediments
paragraphs: While not as significant as the major impediments noted above, financial  management problems at the Department of Homeland Security (DHS)  and the Department of Labor (Labor) also contributed to the disclaimer of  opinion on the federal government’s accrual-based consolidated financial  statements for fiscal year 2010. About $28 billion, or about 1 percent, of  the federal government’s reported total assets as of September 30, 2010,  and approximately $235 billion, or about 5 percent, of the federal  government’s reported net cost for fiscal year 2010 relate to these two  agencies. The auditors for DHS and Labor reported that they were unable  to provide opinions on the financial statements because they were not able  to obtain sufficient evidential support for certain amounts presented in  financial statements. For example,   only selected DHS financial statements were subjected to audit, and  the auditors stated that DHS was unable to provide sufficient evidence  to support certain financial statements balances at the Coast Guard  and Transportation Security Administration; and  auditors for Labor reported that the department was unable to provide  sufficient support for certain accounts in Labor’s fiscal year 2010  financial statements.
The auditors for DHS and Labor made recommendations to address  control deficiencies at the agencies, and management for these agencies  generally expressed commitment to resolve the deficiencies. It will be  important that management at each of these agencies remain committed to  addressing noted control deficiencies and improving financial reporting.
section_title: Significant Uncertainties Result in Disclaimer of Opinion on 2010 Statement of Social Insurance
paragraphs: Because of significant uncertainties (as discussed in Note 26 to the  consolidated financial statements), primarily related to the achievement of  projected reductions in Medicare cost growth reflected in the 2010  Statement of Social Insurance, we were unable to, and we did not, express  an opinion on the 2010 Statement of Social Insurance. The Statement of  Social Insurance presents the actuarial present value of the federal  government’s estimated future revenue to be received from or on behalf of  participants and estimated future expenditures to be paid to or on behalf  of participants, based on benefit formulas in current law and using a  projection period sufficient to illustrate the long-term sustainability of the  social insurance programs.
The significant uncertainties, discussed in further detail in Note 26 to the  consolidated financial statements, include:   Medicare projections in the 2010 Statement of Social Insurance were  based on full implementation of the provisions of the Patient  Protection and Affordable Care Act (PPACA), including a significant  decrease in projected Medicare costs from the 2009 Statement of  Social Insurance related to (1) reductions in physician payment rates  totaling 30 percent over the next 3 years and (2) productivity  improvements for most other categories of Medicare providers.  However, there are significant uncertainties concerning the  achievement of these projected decreases in Medicare costs.    Management has noted that actual future costs for Medicare are likely  to exceed those shown by the current-law projections presented in the  2010 Statement of Social Insurance due to the likelihood of  modifications to the scheduled reductions. The extent to which  actual future costs exceed the projected current-law amounts due to  changes to the physician payments and productivity adjustments  depends on both the specific changes that might be legislated and on  whether legislation would include other provisions to help offset such  costs.    Management has developed an illustrative alternative projection intended to provide additional context regarding the long-te rm  sustainability of the Medicare program and to illustrate the  uncertainties in the Statement of Social Insurance projections. The  present value of future estimated expenditures in excess of future  estimated revenue for Medicare, included in the illustrative alternative  projection, exceeds the $22.8 trillion estimate in the 2010 Statement of  Social Insurance by $12.4 trillion.
section_title: Effects of the Recent ion Economic Recess and Stabilization Efforts on the F Government’s Financial Condition
paragraphs: The recent economic recession and the federal government’s actions to  stabilize financial markets and promote economic recovery contin significantly affect the federal government’s financial condition.
In December 2007, the United States entered what has turned out to be its deepest recession since the end of World War II. Gross domestic produ ct  (GDP) fell 4.1 percent from the beginning of the recession through the  second quarter of 2009, which marked the recession’s end. Since the end  of the reces sion, GDP has grown slowly and unemployment remains at a  high level.
As of September 30, 2010, the federal government’s actions to stabilize the  financial markets and to promote economic recovery resulted in assets of  over $400 billion, which is net of about $75 billion in valuation losses. In  addition, the federal government reported incurring significant liabilities  and related net cost resulting from these actions. Although the federal  government has received positive returns from investments in certain  large financial institutions, it continues to report significant costs overall  related to these actions. Because the valuation of the related assets and  liabilities is based on assumptions and estimates that are inherently  subject to substantial uncertainty arising from the uniqueness of certain  transactions and the likelihood of future changes in general economic,  regulatory, and market conditions, actual results may be materially  different from the reported amounts.
Actions taken to stabilize financial markets—including aid to the  automotive industry—increased borrowing and added to federal debt hel by the public. The revenue decreases and spending increases enacted  in  the American Recovery and Reinvestment Act of 2009 also added to  borrowing and federal debt held by the public. Federal debt held by the  public increased from 40 percent of GDP as of September 30, 2008, to 62  d  percent as of September 30, 2010. The economic downturn and the  nature and magnitude of the actions taken to stabilize the financial  markets and to promote economic recovery will continue to shape federal government’s near-term budget and debt outlook. While defic its  are projected to decrease as federal support for states and the financial  sector winds down and the economy recovers, the increased debt and  related interest costs will remain.
The ultimate cost of the federal government’s actions to stabilize the  financial markets and promote economic recovery will not be known for  some time as these uncertainties are resolved and further federal  government actions are taken in fiscal year 2011 and later. Looking ahead,  it will be important for the federal government to continue to determine  the most expeditious manner in which to bring closure to its financial  stabilization initiatives while optimizing its investment returns.
section_title: Long-Term Fiscal Challenges
paragraphs: The 2010 Financial Report includes the first sustainability statement  required under new financial reporting standards.  This statement  presents comprehensive long-term fiscal projections for the U.S.  government, expanding on similar information presented in recent years’  financial reports and consistent with the fiscal simulations that GAO has  published since 1992. This enhanced reporting will hopefully increase  public awareness and understanding of the long-term fiscal outlook: both  its overall size and the major drivers of that outlook. Information on the  imbalance between revenues and spending currently built into the  structure of the budget can help stimulate public and policy debates and  help policymakers make more informed decisions about the overall  sustainability of government finances.
For more than a decade, GAO has been running fiscal simulations to tell  more about this longer-term story. The Congressional Budget Office (CBO)  has also published long-term simulations for many years.
The federal government faced large and growing structural deficits—and  hence rising debt—before the instability in financial markets and the  economic downturn. Under the projections included in the Financial  Report and under the most recent CBO and GAO simulations using a range  of assumptions, these structural deficits—driven on the spending side  primarily by rising health care costs and known demographic trends—lead  to continuing increases in federal debt held by the public as a share of  GDP, which is unsustainable.
section_title: Closing Comments
paragraphs: In closing, even though progress has been made in improving federal  financial management activities and practices, much work remains given  the federal government’s long-term fiscal challenges and the need for the  new Congress, the administration, and federal managers to have reliable,  useful, and timely financial and performance information to effectively  meet these challenges.
The recent economic recession and the federal government’s actions to  stabilize financial markets and promote economic recovery continued to  significantly affect the federal government’s financial condition. The  accrual-based consolidated financial statements for fiscal year 2010  include, as they did for fiscal year 2009, substantial assets and liabilities  resulting from these actions. The valuation of certain assets and liabilities  is based on assumptions and estimates that are inherently subject to  substantial uncertainty arising from the uniqueness of certain transactions  and the likelihood of future changes in general economic, regulatory, and  market conditions. As such, there will be differences between the  estimated values as of September 30, 2010, and the actual results, and such  differences may be material. These differences will also affect the ultimate  cost of the federal government’s market stabilization and economic  recovery actions. Going forward, a great amount of attention will need to  continue to be devoted to ensuring (1) that sufficient internal controls and  transparency are established and maintained for all financial stabilization  and economic recovery initiatives; and (2) that all related financial  transactions are reported on time, accurately, and completely.
Further, sound decisions on the current and future direction of all vital  federal government programs and policies are more difficult without  reliable, useful, and timely financial and performance information. In this  regard, for DOD, the challenges are many. We are encouraged by DOD’s  efforts toward addressing its long-standing financial management  weaknesses and its efforts to achieve auditability. Consistent and diligent  top management oversight toward achieving financial management  capabilities, including audit readiness, will be critical going forward.  Moreover, the civilian CFO Act agencies must continue to strive toward  routinely producing not only annual financial statements that can pass the  scrutiny of a financial audit, but also quarterly financial statements and  other meaningful financial and performance data to help guide decision  makers on a day-to-day basis. Federal entities’ improvement of financial  management systems will be essential to achieve this goal.
Moreover, of utmost concern are the federal government’s long-term fiscal  challenges that result from large and growing structural deficits that are  driven on the spending side primarily by rising health care costs and  known demographic trends. This unsustainable path must be addressed  soon by policymakers.
Finally, I want to emphasize the value of sustained congressional interest  in these issues, as demonstrated by this Subcommittee’s leadership. It will  be key that, going forward, the appropriations, budget, authorizing, and  oversight committees hold the top leadership of federal entities  accountable for resolving the remaining problems and that they support  improvement efforts.
Mr. Chairman and Ranking Member Towns, this concludes my prepared  statement. I would be pleased to respond to any questions that you or  other members of the Subcommittee may have at this time.
section_title: GAO Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Jeanette  M. Franzel, Managing Director, or Gary T. Engel, Director, Financial  Management and Assurance, at (202) 512-2600. Key contributions to this  testimony were also made by staff on the Consolidated Financial  Statement audit team.