Management Report:

Improvements Needed in Controls over the Preparation of the U.S. Consolidated Financial Statements

GAO-13-540: Published: Jun 28, 2013. Publicly Released: Jun 28, 2013.

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Gary T. Engel
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What GAO Found

During its audit of the fiscal year 2012 consolidated financial statements of the U.S. government (CFS), GAO identified new and continuing control deficiencies in the Department of the Treasury's (Treasury) and the Office of Management and Budget's (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control over the federal government's ability to

  • 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; and
  • identify and either resolve or explain material differences between (1) components of the budget deficit that are used to prepare certain information in the CFS and (2) related amounts reported in federal entities' financial statements and underlying financial information and records.

Specifically, for fiscal year 2012, GAO found that Treasury's procedures were not effectively designed to

  • reasonably assure the timely submission of audited material line items for significant calendar year-end federal entities,
  • determine the effect of restatements and reclassifications submitted by significant federal entities on related line items and notes presented in the CFS, and
  • ensure that the budget statements included in the CFS were prepared in a reliable manner.

GAO also notified OMB of a reporting requirement in OMB Circular No. A-136, Financial Reporting Requirements, that may result in inconsistent and inaccurate reporting of compliance with the Federal Financial Management Improvement Act of 1996.

In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the CFS preparation continued to exist. Specifically, 31 of the 48 recommendations from GAO's prior reports regarding control deficiencies in the CFS preparation process remained open as of January 9, 2013, the date of GAO's report on its audit of the fiscal year 2012 CFS. GAO will continue to monitor the status of corrective actions taken to address the 6 new recommendations as well as the 31 open recommendations from prior years as part of its fiscal year 2013 CFS audit.

Why GAO Did This Study

Treasury, in coordination with OMB, prepares the Financial Report of the United States Government, which contains the CFS. Since GAO's first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of its work have prevented GAO from expressing an opinion on the CFS, exclusive of the Statements of Social Insurance (SOSI). Also, GAO was unable to express opinions on the 2012, 2011, and 2010 SOSI and 2012 and 2011 Statements of Changes in Social Insurance Amounts because of significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth, reflected in these statements. As part of the fiscal year 2012 CFS audit, GAO identified material weaknesses and other control deficiencies in the processes used to prepare the CFS. The purpose of this report is to (1) provide details on new control deficiencies GAO identified related to the preparation of the CFS, (2) recommend improvements, and (3) provide the status of corrective actions taken by Treasury and OMB to address GAO's prior recommendations relating to the preparation of the CFS that remained open at the end of the fiscal year 2011 audit.

What GAO Recommends

GAO is making six recommendations -- five to Treasury and one to OMB--to address the new control deficiencies identified by GAO during the fiscal year 2012 CFS audit. In commenting on GAO's draft, OMB and Treasury generally concurred on 5 of the 6 recommendations, and Treasury will consider implementation of the other recommendation.

For more information, contact Gary Engel at (202) 512-3406 or engelg@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury will implement a new approach in fiscal year 2014 for identifying new material line items for significant calendar year entities that become significant to the Financial Report during the fiscal year. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: To help provide reasonable assurance that Treasury timely receives audited information for the material line items as part of the closing package process for the significant calendar year-end entities, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled "Significant Federal Entities Identification" to include procedures for identifying any material line items for significant calendar year-end entities that become material to the CFS during the current fiscal year but were not identified as material in the analysis using prior year financial information.

    Agency Affected: Department of the Treasury

  2. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury will update the SOP entitled "Significant Federal Entities Identification" to include procedures to obtain audit assurance over the calendar year entities' line items as they become material. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: To help provide reasonable assurance that Treasury timely receives audited information for the material line items as part of the closing package process for the significant calendar year-end entities, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled "Significant Federal Entities Identification" to include procedures for obtaining audit assurance over such identified material line items in the year they become material.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2013 CFS audit, this recommendation was closed. Treasury updated the SOP entitled "Prior Period Adjustments" to include procedures for analyzing and assessing restatements and reclassifications of significant federal entities.

    Recommendation: To reasonably assure the comparability of the CFS between the current and prior fiscal year, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the SOP entitled "Prior Period Adjustments" to include procedures for analyzing and assessing the effects of significant federal entities' restatements and reclassifications on related line items and notes presented in the CFS.

    Agency Affected: Department of the Treasury

  4. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury has started to improve the documentation to show the consistency of budget statement information in the CFS with the federal entities' audited financial statements. Treasury will leverage the reconciliation information requested from and provided by the agencies in 2013 to improve the analysis in 2014 by supplementing that information with additional crosswalks and support to be provided by the agencies and verified by Treasury. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: To improve the reliability of the information presented in the CFS budget statements, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB's Office of Federal Financial Management, to establish and implement effective procedures for reporting amounts in the CFS budget statements that are fully consistent with the underlying information in significant federal entities' audited financial statements and other financial data.

    Agency Affected: Department of the Treasury

  5. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury will develop a crosswalk to ensure that all data is included in the preparation of the budget statements. The implementation of the budget deficit reconciliation in fiscal year 2013 will be leveraged as support for the financial statement lines on the budget statements. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: To improve the reliability of the information presented in the CFS budget statements, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB's Office of Federal Financial Management, to establish and implement effective procedures for identifying and reporting all items needed to prepare the CFS budget statements.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2013 CFS audit, this recommendaton was closed. OMB revised OMB Circular No. A-136 to remove the requirement for reporting "overall substantial compliance".

    Recommendation: To help assure the consistency and clarity of the Federal Financial Management Improvement Act (FFMIA) compliance reporting in CFO Act entities' annual financial reports or performance and accountability reports and the Management's Discussion and Analysis section of the Financial Report, the Director of OMB should ensure that OMB continues its efforts to remove the requirement for reporting "overall substantial compliance" from OMB Circular No. A-136, Financial Reporting Requirements.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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