Federal agencies’ management responsibilities for their financial statements include, among other things, preparing the financial statements in conformity with GAAP and establishing and maintaining internal controls over financial reporting. Auditors of these financial statements are required to plan and perform their audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. While restatements to previously issued financial statements can happen and may not be surprising given weaknesses in the financial reporting environment at many federal agencies, inherently, restatements raise questions about the reliability of other information in previously issued financial statements. In addition, frequent restatements to correct misstatements can undermine public trust and confidence in both the entity and all responsible parties. Adequate transparency and timely notification of restatements are essential to help preclude users of agencies’ financial statements and the related audit reports from inadvertently relying on inaccurate information and allow them to make more informed and relevant decisions. According to SFFAC No. 1, the primary intended users of federal agencies’ financial reports are citizens, the Congress, federal executives, and federal program managers. Each of these groups may use federal agencies’ financial statements to satisfy their specific needs. Citizens are interested in many aspects of the federal government, especially those federal programs that affect their well-being. The Congress uses the agencies’ financial statements to monitor and evaluate the efficiency and effectiveness of federal programs. Federal executives, such as central agency officials at OMB and the Department of the Treasury (Treasury), use the federal agencies’ financial statements to oversee government spending. Specifically, OMB assists the President in overseeing the preparation of the federal budget by formulating the President’s spending plans, evaluating the effectiveness of agency programs, assessing competing funding demands among agencies, and setting funding priorities. Treasury assists the President in managing the finances of the federal government and prepares the CFS, which is based on audited financial statements prepared by federal agencies. GAO uses the agencies’ financial statements and the work of their respective auditors during its annual audit of the CFS. Federal program managers also use agencies’ financial statements as a tool for managing their respective agencies’ operations within the limits of the spending authority granted by the Congress. The objectives of our review were to determine the transparency and timeliness of the restatement disclosures by the nine CFO Act agencies’ management and their respective auditors. For the nine agencies we reviewed, we interviewed the preparers and auditors of the agencies’ fiscal year 2003 financial statements, including staff from the agencies’ Offices of Inspector General (OIG), and we obtained and reviewed relevant audit documentation. Because the OIGs typically contracted with various independent public accountants (IPA) to audit the agencies’ financial statements, we expanded our contacts to include such IPAs. Our work was not designed to and we did not test the accuracy or appropriateness of the restatements. In addition, our review did not include restatements reported in fiscal year 2005 financial statements since such financial statements were issued during November 2005, one month after the completion of our fieldwork. With respect to the two key areas, we reviewed the nine agencies’ fiscal years 2004 and 2003 comparative financial statements and the related audit reports to determine, among other things, whether the appropriate columns of the agencies’ restated financial statements were labeled “Restated”; fiscal year 2003 ending balance agreed with the fiscal year 2004 beginning balance on the agencies’ Statement of Changes in Net Position, if restated; agencies’ restatement footnotes were properly labeled; agencies asserted in their MD&A that they had received a consecutive number of clean audit opinions, and if so, whether they disclosed that certain of their previously issued financial statements were subsequently restated to correct for a material misstatement; audit reports referred the reader to the agencies’ restatement footnote; agencies timely notified their auditors and users of their financial statements of the material misstatement and plans for correcting the misstatement in the financial statements; and auditors were aware of a material misstatement to previously issued financial statements prior to the beginning of the fourth quarter of the following fiscal year and whether the amount and effect were known, and if so, did the auditors advise the agencies’ management to reissue the financial statements. For this capping report, which is based on our review of the nine federal agencies that reported restatements in fiscal year 2004 financial statements, we considered certain accounting and auditing standards that were applicable to fiscal year 2004 federal financial reporting as well as accounting standards that were issued subsequent to fiscal year 2004. These standards consist of the Federal Accounting Standards Advisory Board’s (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 15, Management’s Discussions and Analysis; SFFAS No. 21, Reporting Corrections of Errors and Changes in Accounting Principles; FAS No. 16, Prior Period Adjustments; FAS No. 154, Accounting Changes and Error Corrections; and the AICPA’s Codification of Auditing Standards, AU section 110, Responsibilities and Functions of the Independent Auditor, AU section 420, Consistency of Application of Generally Accepted Accounting Principles, AU section 508, Reports on Audited Financial Statements, and AU section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report. We also considered the following OMB guidance: OMB Bulletins No. 06-03 and No. 01-02, Audit Requirements for Federal Financial Statements; OMB Bulletin No. 01-09, Form and Content of Agency Financial Statements; and OMB Circular No. A-136, Financial Reporting Requirements. We performed our detailed review and analysis of the fiscal year 2003 restatements reported in agencies’ fiscal year 2004 financial statements from December 2004 to October 2005. Between September 2005 and January 2006, we issued reports to five of the nine CFO Act agencies that had received unqualified audit opinions on, but subsequently restated in fiscal year 2004, their originally issued fiscal year 2003 financial statements. In conjunction with our fiscal year 2005 CFS audit, we identified continued restatements of previously issued agency financial statements and the need for additional guidance to agencies and their auditors governmentwide. Our work was performed in accordance with GAGAS. We requested comments on a draft of this report from the Director of OMB or his designee. OMB provided oral comments, which are discussed in the Agency Comments and Our Evaluation section of this report. During our review of the nine CFO Act agencies’ restatements reported in fiscal year 2004, we identified issues with the disclosures made by those agencies and their respective auditors regarding the restatements. The primary contributing factor for these disclosure issues was insufficient guidance available at the time to both the agencies’ management and their auditors for disclosing the restatements. Although the available guidance did not provide explicit details for disclosing restatements, we believe that information regarding restatements should be disclosed in a transparent and timely manner consistent with the qualitative characteristics of information in financial reports described in SFFAC No. 1. In our view, more detailed accounting and auditing guidance on how to satisfy the financial reporting characteristics in SFFAC No. 1 as it relates to the disclosure of restatements would have been helpful. Regardless, as discussed later in the report, several agencies included information in their restatement disclosures that improved the transparency of the restatement. Given the issues we identified in our review of restatements reported in fiscal year 2004 financial statements, we believe it would be appropriate to offer more explicit or detailed guidance for how agency management and their respective auditors should disclose restatements. Specifically, although SFFAS No. 21 required that the nature of an error in previously issued financial statements and the effect of its correction on relevant balances be disclosed, the standard did not provide a detailed explanation of the type of information that should be disclosed or what the nature of an error means. OMB Bulletin No. 01-09, which specifies the form and content for federal financial statements, also did not provide specific guidance on how an agency’s management should disclose restatement information in its financial statements. As for the auditor’s disclosure of the agency’s restatements in its audit report, AU section 561 only stated that the audit report usually should refer to the note to the financial statements that describes the restatement. Thus, if for no other reason than avoiding interpretation issues as to how much disclosure and in what form is appropriate, we believe that guidance to agency auditors should be enhanced to attain some added level of uniform treatment regarding the disclosure of restatements. We identified the following four issues related to the agencies’ reporting of the restatements. While guidance available during fiscal year 2004 did not expressly require agencies to label the columns of restated financial statements as “Restated,” seven of the nine agencies labeled their financial statements as such. Such labeling is a common practice in reporting restated financial statements. Two of the nine agencies did not label their financial statements as “Restated,” and as a result, users of such statements may be unaware that a restatement occurred. OMB Circular No. A-136 was revised during fiscal year 2005 to provide additional guidance for disclosing restatements; however, it does not require agencies to label their financial statements as “Restated.” In our view, revising OMB Circular No. A-136 to require agencies to label the columns of the restated financial statements as “Restated” would make the existence of restated financial statements more evident to the readers of the financial statements. We also found issues regarding certain agencies’ restated Statement of Changes in Net Position. Of the six agencies that restated their originally issued fiscal year 2003 Statements of Changes in Net Position to correct for material misstatements, two of the restatement presentations could be misinterpreted because the fiscal year 2004 beginning balances did not agree with the restated fiscal year 2003 ending balances.