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

Letter

Scope and Methodology

As part of our audit of the fiscal years 2016 and 2015 CFS, we considered the federal government’s financial reporting procedures and related internal control. Also, we determined the status of corrective actions Treasury and OMB have taken to address open recommendations relating to their processes to prepare the CFS, detailed in our previous reports, that remained open at the beginning of our fiscal year 2016 audit. A full discussion of our scope and methodology is included in our January 2017 report on our audit of the fiscal years 2016 and 2015 CFS. We have communicated each of the control deficiencies discussed in this report to your staff. We performed our audit in accordance with U.S. generally accepted government auditing standards. We believe that our audit provides a reasonable basis for our findings and recommendations in this report.

Control Deficiencies Identified during Our Fiscal Year 2016 Audit

During our audit of the fiscal year 2016 CFS, we identified three new internal control deficiencies in Treasury’s processes used to prepare the CFS. Specifically, we found that (1) Treasury did not have sufficient procedures and metrics for monitoring the federal government’s year-to- year progress in resolving intragovernmental differences at the federal entity level, (2) Treasury did not have a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS, and (3) three of Treasury and OMB’s corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS.

Monitoring Intragovernmental Differences

During our fiscal year 2016 CFS audit, we found that the federal government continued to be unable to adequately account for and reconcile intragovernmental activity and balances between federal entities. Treasury has taken significant action over the past few years to address control deficiencies in this area, including actions to improve reporting of intragovernmental differences to federal entities and to work actively with federal entities to encourage resolution of reported differences. However, Treasury did not have sufficient procedures and metrics for monitoring the federal government’s year-to-year progress in resolving intragovernmental differences at the federal entity level.

When preparing the CFS, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the CFS. Federal entities are responsible for properly accounting for and reporting their intragovernmental activity and balances in their entity financial statements and for effectively implementing related internal controls. This includes reconciling and resolving intragovernmental differences at the transaction level with their trading partners.

To support this process, Treasury has established procedures for identifying whether intragovernmental activity and balances reported to Treasury by federal entities are properly reconciled and balanced. For example, Treasury calculates intragovernmental differences by reciprocal category and trading partner for each federal entity. Through these calculations, Treasury has identified certain recurring issues, such as significant differences related to specific entities, reciprocal categories, and trading partners. Treasury provides quarterly scorecards to the individual federal entities that are significant to the CFS to highlight intragovernmental differences requiring these entities’ attention. Treasury also prepares a quarterly government-wide scorecard to communicate the total differences on a government-wide basis. The government-wide scorecard also identifies the 10 largest federal entity contributors to the total government-wide difference.

While Treasury’s scorecard process and other initiatives focus on identifying and communicating differences to federal entities, they do not include procedures for monitoring the federal government’s year-to-year progress in resolving intragovernmental differences at the federal entity level. For example, the entity-level scorecards do not include metrics that could be used to gauge the federal government’s year-to-year progress in resolving intragovernmental differences at the entity level by reciprocal category and trading partner. Although Treasury produces a government- wide scorecard, the chart included on the scorecard shows changes in the total intragovernmental differences for recent quarters but does not identify increases or decreases at the individual entity level by reciprocal category and trading partner. While the total of intragovernmental differences has declined in recent years as a result of the scorecard process and other Treasury initiatives, we continued to note that amounts reported by federal entities were not in agreement by hundreds of billions of dollars for fiscal year 2016.

Standards for Internal Control in the Federal Government states that management should (1) design control activities to achieve objectives and respond to risks, such as establishing and reviewing performance measures and indicators, and (2) implement control activities, such as documenting responsibilities through policies and procedures. The standard also states that management should establish and operate monitoring activities to monitor the internal control system and evaluate the results and should remediate any identified internal control deficiencies on a timely basis.

Without adequate procedures and metrics for effectively monitoring federal government progress in resolving intragovernmental differences at the entity level, Treasury cannot effectively identify areas where specific federal entities need further improvement and attention from year to year to resolve intragovernmental differences that result in errors in the CFS.

Recommendation for Executive Action

We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement procedures and metrics for monitoring the federal government’s year-to-year progress in resolving intragovernmental differences for significant federal entities at the reciprocal category and trading partner levels.

Adjustments to Federal Entity Financial Information Submitted for the CFS

During our fiscal year 2016 CFS audit, we found that Treasury continued to record significant adjustments to data reported by federal entities for inclusion in the CFS. Treasury collects financial statement information from federal entities through its Governmentwide Treasury Account Symbol Adjusted Trial Balance System and Governmentwide Financial Report System. Auditors for entities significant to the CFS are responsible for providing opinions on these entities’ closing package submissions to Treasury. Once federal entities have submitted data for inclusion in the CFS, Treasury performs procedures to determine the consistency of the submitted data to (1) federal entity audited financial statements and (2) government-wide financial reporting standards. Treasury also performs procedures to determine if adjustments are needed to resolve certain unreconciled differences in intragovernmental activity and balances. Through these processes, Treasury identified the need for tens of billions of dollars of adjustments to federal entity- submitted data and recorded these adjustments to the CFS. Treasury identified many of the adjustments needed as recurring because they related to the same line items and federal entities as in prior years. The adjustments were necessary often because of inaccurate or incomplete information that federal entities submitted for the CFS. Though Treasury had procedures for identifying adjustments needed to data that federal entities submitted at fiscal year-end as well as procedures for reviewing recurring intragovernmental adjustments, Treasury did not have a sufficient process for reviewing recurring non-intragovernmental adjustments. Specifically, Treasury did not have a process to work with federal entities to correctly report non-intragovernmental information in federal entities’ closing packages prior to submission to Treasury, thereby reducing or resolving the need for Treasury to make significant adjustments to federal entity data. For adjustments related to intragovernmental differences, we found that Treasury’s procedures did include steps for reviewing recurring intragovernmental adjustments and for working with federal entities to reduce or resolve the need for these intragovernmental adjustments.

Statement of Federal Financial Accounting Concepts No. 4, Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government, states that the consolidated financial report should be a general purpose report that is aggregated from federal entity reports. The Treasury Financial Manual (TFM) provides guidance on how federal entities are to provide their financial data to Treasury for consolidation. In accordance with the TFM, significant component entities are required to submit their financial data to Treasury using a closing package. A significant component entity’s chief financial officer must certify the accuracy of the data in the closing package and have it audited. Because the closing package process requires that significant component entities verify and validate the information in their closing packages compared with their audited department-level financial statements and receive audit opinions, Treasury is provided a level of assurance that it is compiling the CFS with reliable financial information. In addition, OMB Bulletin 15-02, Audit Requirements for Federal Financial Statements, establishes requirements for audits of federal financial statements, including audits of the closing packages. Also, Standards for Internal Control in the Federal Government states that management should design and implement control activities, such as procedures to help ensure that financial information is completely and accurately reported.

Without a sufficient process aimed at reducing or resolving the need for significant adjustments to federal entity data submitted for the CFS, Treasury is unable to reasonably assure that it has reliable financial information for all federal entities, which is needed to achieve auditability of the CFS.

Recommendation for Executive Action

We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary to develop and implement a sufficient process for working with federal entities to reduce or resolve the need for significant adjustments to federal entity data submitted for the CFS.

Corrective Action Plans for Certain Areas

Three of Treasury and OMB’s corrective action plans did not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. Corrective action plans are the mechanism whereby management presents the actions the entity will take to resolve identified internal control deficiencies. Treasury, in coordination with OMB, compiled a collection of corrective action plans in a remediation plan focused on resolving material weaknesses related to the processes used to prepare the CFS. The corrective action plans contained in the remediation plan—which are intended to address control deficiencies related to (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliations of Net Operating Cost and Unified Budget Deficit and Statements of Changes in Cash Balance from Unified Budget and Other Activities (Reconciliation Statements)—did not include sufficient information to demonstrate that the plans, if properly implemented, will effectively resolve such deficiencies.

Treaties and International Agreements

Treasury and OMB did not include sufficient information in their corrective action plan to help ensure that major treaty and international agreement information is properly identified and reported in the CFS. We found that the corrective actions included steps and milestones for meeting with the Department of State, a key entity with respect to treaties and international agreements, but did not include specific actions and outcomes planned to analyze all treaties and international agreements to obtain reasonable assurance whether they are appropriately recognized and disclosed in the CFS. As a result of not having specific actions to analyze all treaties and international agreements, any treaties and international agreements that had been omitted from entity reporting would not be identified. Not having procedures for reasonably assuring that information on major treaties and other international agreements is reported in the CFS could result in incomplete recognition and disclosure of probable and reasonably possible losses of the U.S. government.

Additional Audit Procedures for Intragovernmental Activity and Balances

Treasury and OMB’s corrective action plan to make intragovernmental scorecards available directly to federal entity auditors was not sufficient to address the control deficiency related to not having a formalized process to require the performance of additional audit procedures focused on intragovernmental activity and balances. Billions of dollars of unreconciled intragovernmental differences continued to be reported in the fiscal year 2016 CFS based on the financial data submitted in federal entities’ audited closing packages. Although making the scorecard information available to auditors is helpful, that action in and of itself does not establish a process requiring federal entity auditors to perform additional audit procedures specifically focused on intragovernmental activity and balances. A formalized process to require the performance of additional audit procedures would provide increased audit assurance over the reliability of the intragovernmental information and help address the significant unreconciled transactions at the government-wide level.

Reconciliation Statements

Treasury and OMB’s corrective action plans related to the Reconciliation Statements did not clearly demonstrate how, once implemented, the corrective actions will remediate the related control deficiencies. For example, the corrective actions did not include sufficient information to explain how they would achieve Treasury’s objectives to (1) identify and report all necessary items in the Reconciliation Statements and (2) reasonably assure that the amounts are consistent with underlying audited financial data. Also, some outcome measures did not describe what and how progress related to specific actions taken would be measured. Not including sufficient information on actions and outcomes in the corrective action plan impairs management’s ability to assess the progress made toward resolution.

Guidance for Corrective Action Plans

The Chief Financial Officers Council’s Implementation Guide for OMB Circular A-123, Management’s Responsibility for Internal Control – Appendix A, Internal Control over Financial Reporting (Implementation Guide) includes guidance for preparing well-defined corrective action plans. According to the Implementation Guide, key elements necessary for well-defined corrective action plans include 1. descriptions of the deficiency and the planned corrective actions in sufficient detail to facilitate a common understanding of the deficiency and the steps that must be performed to resolve it; 2. interim targeted milestones and completion dates, including subordinate indicators, statistics, or metrics used to gauge resolution progress; and 3. planned validation activities and outcome measures used for assessing the effectiveness of the corrective actions taken.

Also, Standards for Internal Control in the Federal Government states that management should (1) remediate identified internal control deficiencies on a timely basis and (2) design control activities to achieve objectives and respond to risks. In addition, OMB Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, requires management to develop corrective action plans for material weaknesses and periodically assess and report on the progress of those plans. The Implementation Guide is widely viewed as a “best practices” methodology for executing the requirements of Appendix A of OMB Circular No. A-123. Corrective actions need to be designed and implemented effectively to allow timely remediation of the deficiencies. An effective corrective action plan facilitates accountability, monitoring, and communication and helps ensure that entity personnel responsible for completing the planned corrective actions and monitoring progress toward resolution have the information and resources they need to do so.

Without well-defined, sufficiently descriptive corrective action plans in these three areas, it will be difficult for Treasury and OMB to reasonably assure that corrective action plans will effectively remediate the internal control deficiencies and monitor progress toward resolution.

Recommendation for Executive Action

We recommend that the Secretary of the Treasury direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to improve corrective action plans for (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliation Statements so that they include sufficient information to address the control deficiencies in these areas effectively.

Status of Recommendations from Prior Reports

At the beginning of our fiscal year 2016 audit, 24 recommendations from our prior reports regarding control deficiencies in the processes used to prepare the CFS were open. Treasury implemented corrective actions during fiscal year 2016 that resolved certain of the control deficiencies addressed by our recommendations. For 7 recommendations, the corrective actions resolved the related control deficiencies, and we closed the recommendations. We also closed 1 additional recommendation, related to corrective action plans, by making a new recommendation that is better aligned with the remaining internal control deficiency in this area. While progress was made, 16 recommendations from our prior reports remained open as of January 4, 2017, the date of our report on the audit of the fiscal year 2016 CFS. Consequently, a total of 19 recommendations need to be addressed—16 remaining from prior reports and the 3 new recommendations we are making in this report.

Appendix I summarizes the status as of January 4, 2017, of the 24 open recommendations from our prior years’ reports according to Treasury and OMB as well as our own assessment and additional comments, where appropriate. Various efforts are under way to address these recommendations. We will continue to monitor Treasury’s and OMB’s progress in addressing our recommendations as part of our fiscal year 2017 CFS audit.

Agency Comments and Our Evaluation

Treasury Comments

In written comments, reprinted in appendix II, Treasury stated that it appreciates our perspective and will continue to focus its efforts on cost- beneficial solutions to sufficiently resolve the material conditions that preclude having an opinion rendered on the CFS. Although in its comments Treasury neither agreed nor disagreed with our recommendations, Treasury provided information on actions that it plans to take to address two of the recommendations and stated with regard to the third recommendation that its current corrective action plans were effective.

For our first two recommendations related to monitoring intragovernmental differences and reducing significant adjustments to federal entity data submitted for the CFS, Treasury stated that it will continue to (1) evolve its processes as necessary to ensure that appropriate and effective metrics are deployed to measure and monitor agency performance and (2) work with agencies to facilitate improvement of processes, minimizing the need for Treasury adjustments to agency reporting.

For our third recommendation aimed at improving corrective action plans for (1) treaties and international agreements, (2) additional audit procedures for intragovernmental activity and balances, and (3) the Reconciliation Statements, Treasury stated that its current remediation plan, including its various corrective action plans, is comprehensive, appropriate, and effective, with robust ongoing monitoring processes in place. Treasury also stated that corrective actions aimed at increasing the quality of intragovernmental data are proving effective and that it does not support encumbering agencies with the cost and burden associated with requiring additional audit procedures. In addition, Treasury stated that it will continue to collaborate with OMB and federal entities on existing corrective actions. However, we continue to believe that the corrective action plans in these three areas do not include sufficient information to effectively address related control deficiencies involving processes used to prepare the CFS. For example, as discussed in our report, Treasury and OMB did not have specific actions in their corrective action plan to analyze all treaties and international agreements to help ensure that major treaty and international agreement information is properly identified and reported in the CFS. Further, we believe that a formalized process for Treasury to require the performance of additional audit procedures focused on intragovernmental activity and balances would provide increased audit assurance over the reliability of intragovernmental information and help address the hundreds of billions of dollars of unreconciled intragovernmental differences at the government-wide level.

Treasury also described various actions taken and planned to address long-standing material weaknesses, including improvements in accounting for and reporting on the General Fund of the U.S. Government activity and balances, strengthening internal controls in the preparation of the CFS, and validating material completeness of budgetary information included in the Financial Report of the United States Government. Treasury also indicated that it plans to work with GAO as it fulfills its commitment to improving federal financial reporting.

OMB Comments

OMB staff in the Office of Federal Financial Management stated in an e-mail that OMB generally agreed with the findings in the report and with Treasury’s written response to the draft. The e-mail noted that the current administration is committed to continuing to work with Treasury and federal agencies to achieve sound financial management across the federal government.

We are sending copies of this report to interested congressional committees, the Fiscal Assistant Secretary of the Treasury, and the Controller of the Office of Management and Budget’s Office of Federal Financial Management. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

We acknowledge and appreciate the cooperation and assistance provided by Treasury and OMB during our audit. If you or your staff have any questions or wish to discuss this report, please contact me at (202) 512-3406 or simpsondb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report include Carolyn M. Voltz (Assistant Director), Latasha L. Freeman, Maria M. Morton, Sean R. Willey, and J. Mark Yoder.

Appendix I: Status of Treasury’s and OMB’s Progress in Addressing GAO’s Prior Year Recommendations for Preparing the CFS

Table 1 shows the status of GAO’s prior year recommendations for preparing the CFS. The abbreviations used are defined in the legend at the end of the table.

Appendix II: Comments from the Department of the Treasury