First, I would like to spend a few minutes discussing our nation’s worsening financial condition and long-range fiscal outlook. Last week, I spoke on this issue at the National Press Club as part of the Outlook 2005 Conference, which was attended by government, corporate, and nonprofit executives from around the country. I have attached a copy of my remarks at that conference to my testimony today as appendix III. While we are unable to express an opinion on the U.S. government’s consolidated financial statements, several key items deserve emphasis in order to put the information contained in the financial statements and the Management’s Discussion and Analysis section of the Financial Report of the United States Government into context. First, the federal government reported a $412.3 billion unified budget deficit and a $568 billion on-budget deficit in fiscal year 2004, representing approximately 3.6 percent and 4.9 percent of gross domestic product (GDP), respectively. Second, the U.S. government’s reported liabilities, commitments, and other obligations grew by over $13 trillion in fiscal year 2004, primarily due to the enactment of the new Medicare prescription drug benefit, and now surpass $43 trillion, representing close to four times current GDP. In March 2004, the Trustees of the Social Security and Medicare trust funds issued their respective 2004 annual reports on the current and projected status of these two programs. Once again, the trustees’ reports confirmed that both the Social Security and Medicare programs are unsustainable in their present form. The trustees also noted that Medicare’s financial difficulties are much more severe than those confronting Social Security. Furthermore, the new prescription drug benefit has significantly increased the federal government’s commitments associated with the Medicare program. Specifically, in their 2004 report, the trustees estimated the present value cost to the federal government of this new benefit over the next 75 years to be $8.1 trillion as of January 1, 2004. The trustees reiterated the message contained in their previous reports that action to address the financial difficulties facing Social Security and Medicare should be taken in a timely manner and that the sooner these financial challenges are addressed, the more varied and less disruptive the solutions can be. The federal government’s gross debt as of September 2004 was about $7.4 trillion, or about $25,000 for every man, woman, and child in the country. But that number excludes such items as the gap between promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities, commitments, and contingencies that the federal government has pledged to support. If these items are factored in, the current dollar burden for every American rises to about $145,000 per person, or about $350,000 per full-time worker. Current financial reporting does not clearly and transparently show the wide range of responsibilities, programs, and activities that may either obligate the federal government to future spending or create an expectation for such spending. Thus, it provides an unrealistic and even misleading picture of the federal government’s overall performance, financial condition, and future fiscal outlook. Few federal agencies adequately show the results they are getting with the taxpayer dollars they spend. In addition, too many significant federal government revenues—as well as commitments and obligations such as those associated with Social Security and Medicare—are not adequately and consistently disclosed in the federal government’s consolidated financial statements and budget, and current federal financial reporting standards do not require such disclosure. The Federal Accounting Standards Advisory Board recently completed a project on accounting and reporting of earmarked funds, which include the Social Security and Medicare trust funds, and has a project underway to consider recognition, measurement, and display of social insurance obligations. Figure 1 shows some selected fiscal exposures. The spectrum of these exposures ranges from explicit liabilities shown on the consolidated financial statements to implicit promises embedded in current policy or public expectations. These liabilities, commitments, and promises have created a fiscal imbalance that will put unprecedented strains on the nation’s future spending and tax policies. Although economic growth can help, the projected fiscal gap is now so large that the federal government will not be able to simply grow its way out of the problem. Tough choices by the President and the Congress are inevitable. GAO’s fiscal policy simulations illustrate that the fiscal policies in place today—absent substantive entitlement reform or unprecedented changes in tax and/or spending policies—will result in large, escalating, and persistent deficits that are economically unsustainable over the long term. Assuming that discretionary spending grows with inflation and all existing tax cuts are allowed to expire when scheduled under current law, spending for Social Security and health care programs would grow to consume over three-quarters of federal revenue by 2040. Moreover, if all expiring tax provisions are extended and discretionary spending keeps pace with the economy, by 2040 total federal revenues may be adequate to pay little more than interest on the federal debt. Without reform, known demographic trends, rising health care costs, and projected growth in federal spending for Social Security, Medicare, and Medicaid will result in massive fiscal pressures that, if not effectively addressed, could cripple the economy, threaten our national security, and adversely affect the quality of life of Americans in the future. The President and the Congress face the challenge of sorting out the many claims on the federal budget without the budget enforcement mechanisms or fiscal benchmarks that guided the federal government through the years of deficit reduction into a brief period of federal surpluses. While a number of steps will be necessary to address this challenge, as outlined in my February 2, 2005, remarks at the Press Club, truth and transparency in federal government financial reporting and budgeting are essential elements of any attempt to address the nation’s long-term fiscal challenges. Further, Congress needs to have access to the long-term cost of selected spending and tax proposals before they enact related laws. The fiscal risks just mentioned can be managed only if they are properly accounted for and publicly disclosed, including the many existing commitments facing the federal government. In addition, new budget control mechanisms will be required, along with effective approaches to successfully engage in a fundamental review, reassessment, and reprioritization of the base of federal government programs and policies. In this regard, we should not assume that all defense and homeland security expenditures are both necessary and prudent. Furthermore, the use of across-the-board adjustments to address the spending imbalance serves to avoid making the necessary difficult choices, is inequitable, and simply will not get the job done. An emerging issue during fiscal year 2004 that merits concern and close scrutiny was the growing number of CFO Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. As shown in appendix II, at least 11 of the 23 CFO Act agencies fell into this category as compared with at least 5 CFO Act agencies that had restatements covering their fiscal year 2002 financial statements in fiscal year 2003. At least 3 CFO Act agencies had restatements in both years. For example, in fiscal year 2003, one agency misstated certain of its fiscal year 2002 financial statements by about $1 billion. The following year, this same agency restated certain of its fiscal year 2003 financial statements by over $5 billion. Nonetheless, for both years, the agency received unqualified audit opinions on its financial statements. Nine of the 11 agencies having restatements for fiscal year 2003 had received unqualified opinions on their originally issued fiscal year 2003 financial statements. Seven of the nine auditors issued unqualified opinions on the restated financial statements, which in substance replace the auditors’ opinions on their respective agencies’ original fiscal year 2003 financial statements. For two of these nine, the auditors not only withdrew their unqualified opinion on the fiscal year 2003 financial statements but also issued other than unqualified opinions on their respective agencies’ restated fiscal year 2003 financial statements because they could not determine whether there were any additional misstatements and the effect that such could have on the restated fiscal year 2003 financial statements. The material internal control weaknesses discussed in this testimony increase the risk that additional misstatements may occur and not be identified on a timely basis by management or the auditors, resulting in further restatements. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. According to Statement of Federal Financial Accounting Standards (SFFAS) No. 21, Reporting Corrections of Errors and Changes in Accounting Principles, prior period financial statements presented should only be restated for corrections of errors that caused such statements to be materially misstated. Errors in financial statements result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. The restatements to CFO Act agencies’ fiscal year 2003 financial statements ranged from correcting two line items on one agency’s balance sheet to numerous line items on several of another agency’s financial statements. The amounts of the agencies’ restatements ranged from several million dollars to over $91 billion. As part of our fiscal year 2004 audit, we reviewed certain federal agencies’ fiscal year 2003 Statement of Budgetary Resources (SBR) for consistency of (1) certain information reported in the SBR with related information reported in the agencies’ other financial statements and notes and (2) the offsetting receipts and net outlays reported in the SBR with published governmentwide reports. We found significant inconsistencies in these areas, which we brought to the attention of these agencies and their auditors prior to completion of their fiscal year fiscal year 2004 audits. For example, we notified a federal agency that the net outlays reported in its fiscal year 2003 SBR were overstated by about $91 billion due to certain offsetting receipts that were not reported in the SBR as offsets to outlays, as required by OMB guidance. In fiscal year 2004, this agency’s fiscal year 2003 SBR was restated, reducing its previously reported net outlays from $596 billion to $505 billion.