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entitled 'Financial Audit: Process for Preparing the Consolidated 
Financial Statements of the U.S. Government Needs Improvement' which 
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Report to the Secretary of the Treasury and the Director of the Office 
of Management and Budget:

October 2003:

Financial Audit:

Process for Preparing the Consolidated Financial Statements of the U.S. 
Government Needs Improvement:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-45] GAO-04-45:

GAO Highlights:

Highlights of GAO-04-45, a report to the Secretary of the Treasury and 
the Director of the Office of Management and Budget 

Why GAO Did This Study:

For the past 6 years, since GAO began auditing the consolidated 
financial statements of the U.S. government (CFS), GAO has been unable 
to express an opinion on them because of material weaknesses in 
internal control and financial reporting. Contributing to GAO’s 
inability to express an opinion has been the federal government’s lack 
of adequate systems, controls, and procedures to properly prepare its 
consolidated financial statements. 

The purpose of this report is to discuss in greater detail weaknesses 
in financial reporting procedures and internal control over the 
process for preparing the CFS that GAO identified and to recommend 
improvements to address those weaknesses.

What GAO Found:

GAO found deficiencies in the compilation and reporting process in the 
following areas: 

* controls over the compilation process,

* unreconciled transactions affecting the change in net position,

* reconciliation of intragovernmental activity and balances,

* elimination of intragovernmental activity and balances,

* reconciliation of net operating costs and unified budget surplus (or 
deficit),

* statements of changes in cash balance from unified budget and other 
activities,

* defining and documenting of the reporting entity, and

* conformity with U.S. generally accepted accounting principles.

Another key deficiency in the compilation and reporting process for 
the CFS was the failure of the Department of the Treasury’s process 
for compiling the CFS to directly link information from federal 
agencies’ audited financial statements to amounts reported in the CFS 
(see figure below). Without this direct link, the information in the 
CFS may not be reliable. The lack of a direct link also affects the 
efficiency and effectiveness of the CFS audit. Treasury is designing a 
new compilation process that it expects to directly link this 
information beginning with the fiscal year 2004 CFS.

GAO identified three additional areas related to the compilation and 
reporting process for the CFS that warrant the attention of Treasury 
and the Office of Management and Budget: (1) management representation 
letters, (2) legal representation letters, and (3) information on 
treaties and other international agreements. 

What GAO Recommends:

GAO makes 44 recommendations to address weaknesses identified, 
including a recommendation that Treasury, in coordination with the 
Office of Management and Budget (OMB), design its new compilation 
process to directly link information from federal agencies’ audited 
financial statements to amounts reported in the CFS. GAO also makes 16 
recommendations that address CFS disclosures required by U.S. 
generally accepted accounting principles. Treasury and OMB stated that 
many of our recommendations will improve the usefulness and accuracy 
of the CFS, but disagreed with recommendations in two areas.

www.gao.gov/cgi-bin/getrpt?GAO-04-45.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Gary T. Engel at 
(202) 512-3406 or engelg@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Scope and Methodology: 

Directly Linking Audited Agency Financial Statements to the CFS: 

Controls over the Compilation Process: 

Unreconciled Transactions Affecting the Change in Net Position: 

Reconciliation of Intragovernmental Activity and Balances: 

Elimination of Intragovernmental Activity and Balances: 

Reconciliation of Net Operating Cost and Unified Budget Surplus (or 
Deficit): 

Statements of Changes in Cash Balance from Unified Budget and Other 
Activities: 

Defining the Reporting Entity: 

Conformity with U.S. Generally Accepted Accounting Principles: 

Other Weaknesses Identified: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Disclosure Issues: 

Loans Receivable and Loan Guarantee Liabilities: 

Inventories and Related Property: 

Property, Plant, and Equipment: 

Federal Employee and Veteran Benefits Payable: 

Environmental and Disposal Liabilities: 

Other Liabilities: 

Commitments and Contingencies: 

Collections and Refunds of Federal Revenue: 

Dedicated Collections: 

Indian Trust Funds: 

Social Insurance: 

Nonfederal Physical Property: 

Human Capital: 

Research and Development: 

Deferred Maintenance: 

Risk Assumed: 

Appendix II: Comments from Department of the Treasury and the Office of 
Management and Budget: 

GAO Comment: 

Figure:

Figure 1: Lack of Direct Link between Audited Agency Financial 
Statements and CFS: 

Letter October 30, 2003:

The Honorable John W. Snow 
The Secretary of the Treasury:

The Honorable Joshua B. Bolten 
Director, Office of Management and Budget:

In March 2003, we issued our disclaimer of opinion on the consolidated 
financial statements for the U.S. government (CFS) for the fiscal years 
ended September 30, 2002 and 2001. For the past 6 years, certain 
material weaknesses in internal control and in financial reporting 
resulted in conditions that prevented us from expressing an opinion on 
the CFS. Specifically, we have reported that the federal government did 
not have adequate systems, controls, and procedures to properly prepare 
its consolidated financial statements. Many of these weaknesses in 
internal control that contributed to our disclaimer of opinion were 
identified during the audit of federal agencies' financial statements 
by the agency financial statement auditors and reported in detail with 
recommendations to the agencies in separate reports. However, some of 
the internal control weaknesses were identified during our tests of the 
U.S. Department of the Treasury's (Treasury) process for preparing the 
CFS. Such weaknesses impaired the federal government's ability to fully 
ensure that the CFS is consistent with the underlying audited agency 
financial statements, properly balanced, and in conformity with U.S. 
generally accepted accounting principles. Consequently, these 
weaknesses also contributed to our inability to render an opinion on 
the CFS.

The purpose of this report is to discuss in greater detail weaknesses 
we identified during our fiscal year 2002 audit regarding financial 
reporting procedures and internal control over the process for 
preparing the CFS. We have discussed each of these weaknesses with your 
staff during this past audit, and some of the weaknesses have been 
communicated for a number of years.

Results in Brief:

The deficiencies in the compilation and reporting processes involve the 
following nine areas: (1) directly linking audited agency financial 
statements to the CFS, (2) controls over the compilation process, (3) 
unreconciled transactions affecting the change in net position, (4) 
reconciliation of intragovernmental activity and balances, (5) 
elimination of intragovernmental activity and balances, (6) 
reconciliation of net operating costs and unified budget surplus (or 
deficit), (7) statements of changes in cash balance from unified budget 
and other activities, (8) defining and documenting of the reporting 
entity, and (9) conformity with U.S. generally accepted accounting 
principles.

We also identified and discuss in this report certain issues related to 
(1) management representation letters, (2) legal representation 
letters, and (3) information on treaties and other international 
agreements that will require actions by Treasury and the Office of 
Management and Budget (OMB). Other issues related to these three areas 
need to be addressed by federal agencies and their auditors. We plan to 
separately communicate to agency Chief Financial Officers (CFO) and 
Inspectors General the details of our concerns regarding these issues.

This report includes 44 recommendations to address weaknesses we 
identified. It also includes recommendations related to 16 disclosures 
identified in appendix I that are required by U.S. generally accepted 
accounting principles. We are recommending that these 16 disclosures 
that are not included in the most recent CFS either be included or that 
the rationale for their exclusion be documented.

Treasury and OMB stated that many of our recommendations will improve 
the usefulness and accuracy of the CFS and that they have already 
incorporated many of them into their new system and processes that are 
being developed for preparing the fiscal year 2004 CFS. However, 
Treasury and OMB disagreed with our recommendations related to 
unreconciled transactions affecting net position and the Statement of 
Changes in Cash Balance from Unified Budget and Other Activities.

In response to their concerns and recognizing that there are various 
ways to correct an identified weakness, we modified our recommendation 
related to unreconciled transactions affecting net position to be less 
prescriptive as to the action to take, but retained the intent of our 
proposed recommendation. Treasury and OMB also disagreed with what they 
perceived as our recommendation to use agency data to prepare the 
Statement of Changes in Cash Balance from Unified Budget and Other 
Activities. They disagreed with that approach because they stated that 
it would be time consuming and costly, and they prefer to obtain the 
information from Treasury's central accounting system rather than from 
agencies' financial statements. This is not what we recommended. 
Instead, because we found unexplained material differences between 
Treasury's records and some agencies' financial statements, we 
recommended that Treasury collect certain information already reported 
in federal agencies' audited financial statements and develop 
procedures that ensure consistency of the significant line items on the 
Statement of Changes in Cash Balance from Unified Budget and Other 
Activities with the agency-reported information.

Scope and Methodology:

As part of our audit of the fiscal years 2002 and 2001 CFS, we 
evaluated Treasury's financial reporting procedures and related 
internal control. In our report, which is included in the fiscal year 
2002 Financial Report of the United States Government,[Footnote 1] we 
reported material deficiencies relating to Treasury's financial 
reporting procedures and internal control. These material deficiencies 
contributed to our disclaimer of opinion on the CFS and also constitute 
material weaknesses in internal control, which contributed to our 
adverse opinion on internal control. We performed sufficient audit work 
to provide the disclaimer of opinion and issued our audit report, dated 
March 20, 2003, in accordance with U.S. generally accepted government 
auditing standards. This report is based on the audit work we performed 
for the fiscal years 2002 and 2001 CFS.

We requested comments on a draft of this report from the Secretary of 
the Treasury and the Director of OMB or their designees. Treasury's and 
OMB's comments are reprinted in appendix II, discussed in the Agency 
Comments and Our Evaluation section of this report, and incorporated in 
the report as applicable.

Directly Linking Audited Agency Financial Statements to the CFS:

Treasury's current process for compiling the CFS does not directly link 
information from federal agencies' audited financial statements to 
amounts reported in the CFS, and therefore cannot fully ensure that the 
information in the CFS is consistent with the underlying information in 
federal agencies' audited financial statements and other financial data 
(see fig. 1). Treasury, as the preparer of the CFS, currently collects 
approximately 2,400 trial balances through the Federal Agencies' 
Centralized Trial Balance System (FACTS I) from federal agencies and 
information from the Treasury Central Accounting and Reporting System 
(STAR) to compile the financial statements.

Figure 1: Lack of Direct Link between Audited Agency Financial 
Statements and CFS:

[See PDF for image]

[End of figure]

The Federal Accounting Standards Advisory Board's (FASAB) 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 
agency reports and that it should tell users where to find information 
in other formats, both aggregated and disaggregated, such as individual 
agency reports, agency websites, and the President's Budget.

Without directly linking financial information from agencies' audited 
financial statements, the information in the CFS may not be reliable. 
The lack of direct linkage also affects the efficiency and 
effectiveness of the audit of the CFS. In addition, the reliability of 
certain information in Management's Discussion and Analysis, 
Stewardship Information, and Supplemental Information may be affected.

As Treasury is designing its new compilation process, which it expects 
to implement beginning with the fiscal year 2004 CFS, we recommend that 
the Secretary of the Treasury direct the Fiscal Assistant Secretary, 
working in coordination with the Controller of OMB's Office of Federal 
Financial Management, to:

* design the new compilation process to directly link information from 
federal agencies' audited financial statements to amounts reported in 
all the applicable CFS and related footnotes, and:

* consider the other applicable recommendations in this report when 
designing and implementing the new compilation process.

Controls over the Compilation Process:

We identified specific areas of internal control in Treasury's process 
for preparing the CFS that need to be strengthened. Internal control 
should provide, among other things, reasonable assurance that financial 
reporting is reliable. GAO's Standards for Internal Control in the 
Federal Government[Footnote 2] defines the minimum level of quality 
acceptable for internal control in the federal government and provides 
the standards against which internal control is to be evaluated. These 
standards state that internal controls should include, among other 
items, (1) segregation of duties, (2) appropriate documentation of 
transactions and internal control, and (3) reviews by management at the 
functional or activity level. We found many controls in place, but we 
identified three areas that need to be improved. Although Treasury is 
developing a new system and procedures for preparing the CFS, the need 
for adequate internal control remains important and needs to be 
considered during the development process.

Segregation of Duties:

Segregation of duties is the practice of dividing the steps in a 
critical function among different individuals in order to reduce the 
risk of error or fraud, thus preventing a single individual from having 
full control of a transaction or event. FACTS I and the Financial 
Management Service's Hyperion database are used to compile the CFS. We 
found that Treasury's systems administrators responsible for processing 
the FACTS I data have the capability to enter, change, and delete data 
within FACTS I and the Hyperion database without any supervisory 
review. They are also able to post adjustments to the CFS without 
formal approval. Lack of proper segregation of duties for critical 
functions leaves the CFS vulnerable to errors and could result in 
incomplete and inaccurate summarization of data within these financial 
statements.

Documentation of Transactions and Internal Control:

While Treasury has documented some portions of its process for 
compiling the CFS, it has not fully documented its policies and 
procedures for preparing the CFS report. Agency management is 
responsible for developing detailed policies, procedures, and practices 
to fit agency operations and ensuring that internal control is built 
into and is an integral part of operations. Although GAO's Standards 
for Internal Control in the Federal Government calls for clear 
documentation of policies and procedures, we found that Treasury has 
not fully implemented this key control activity. Without documented 
policies and procedures, staff could follow inconsistent standards and 
practices or not follow them at all. This potential for inconsistency 
increases the risk that errors in the compilation process could go 
undetected and could result in an incomplete and inaccurate 
summarization of data within the CFS, creating a financial report that 
is not an accurate representation of the financial position of the U.S. 
government.

Management Review:

We found that Treasury management did not review transactions within 
several key compilation processes. Transactions and other significant 
events should be authorized and executed only by persons acting within 
the scope of their authority. Appropriate reviews by management of key 
decisions and data are vital controls to ensure that only authorized 
actions occur. For example, Treasury's FACTS I system allows for master 
appropriation files, the files that list all federal agencies by 
appropriation code, to be updated by review accountants without 
supervisory approval. Also, there is no requirement for supervisory 
review of changes made to agency data as a result of issues identified 
during the "agency data analysis process" performed by Treasury. In 
some instances, supervisory reviews were required, but any reviews that 
may have been performed were not documented. For example, there was no 
documentation of supervisory review of changes to the Hyperion system 
software and chart of accounts used to compile the data for the CFS. 
Records of changes and reviews of the changes made to the templates 
used to create the CFS were also inadequate.

Inadequate supervisory review and inadequate documentation of changes 
and reviews could allow data that go into the CFS to be manipulated or 
changed without any supervisory control or review, resulting in the 
possibility that agency data could be changed or incorrectly compiled 
in the CFS.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, in connection with Treasury's current compilation 
process and the development of Treasury's new compilation system and 
process, to:

* segregate the duties of individuals who have the capability to enter, 
change, and delete data within FACTS I and the Hyperion database and 
post adjustments to the CFS;

* develop and fully document policies and procedures for the 
consolidated financial statement preparation process so that they are 
proper, complete, and consistently applied among staff members; and:

* require and document reviews by management of all procedures that 
result in data changes to the CFS.

Unreconciled Transactions Affecting the Change in Net Position:

The net position reported in the CFS is derived by subtracting 
liabilities from assets, rather than through balanced accounting 
entries. In other words, the CFS is "plugged" to make it balance. To 
make the fiscal year 2002 CFS balance, Treasury recorded a net $17.1 
billion decrease to net operating cost on the Statement of Operations 
and Changes in Net Position, which it labeled "Unreconciled 
Transactions Affecting the Change in Net Position." Treasury does not 
identify and quantify all components of this unreconciled activity.

Treasury attributes these net unreconciled transaction amounts to (1) 
improper recording of intragovernmental transactions by federal 
agencies, (2) transactions affecting assets and liabilities not being 
identified properly by federal agencies as prior period adjustments, 
and (3) timing differences and errors in reporting transactions. 
Treasury stated in its November 2001 report on its CFS improvement 
project[Footnote 3] that in order to properly reconcile net position, 
federal agencies would need to split net position between 
intragovernmental and public components, including ending balances and 
the year's activity. Currently, OMB requires federal agencies to 
identify intragovernmental assets and liabilities on their audited 
balance sheets but does not require the intragovernmental portion of 
net position to be identified. Without a process in place to identify 
and quantify all components of the activity in the net position line 
item, revenues, costs, assets, and liabilities may be misstated, 
thereby affecting the reliability of the CFS.

As Treasury is designing its new financial statement compilation 
process to begin with the fiscal year 2004 CFS, we recommend that the 
Secretary of the Treasury direct the Fiscal Assistant Secretary, 
working in coordination with the Controller of OMB's Office of Federal 
Financial Management, to:

* develop reconciliation procedures which will aid in understanding and 
controlling the net position balance as well as eliminate the plugs 
previously associated with compiling the CFS; and:

* use balanced accounting entries to account for the change in net 
position rather than simple subtraction of liabilities from assets.

Reconciliation of Intragovernmental Activity and Balances:

Federal agencies are unable to fully reconcile intragovernmental 
activity and balances. OMB and Treasury require CFO Act agencies to 
reconcile selected intragovernmental activity and balances with their 
"trading partners"[Footnote 4] and to report on the extent and results 
of intragovernmental activity and balances reconciliation efforts. The 
Inspectors General reviewed these reports and communicated the results 
of their reviews to OMB, Treasury, and us. A substantial number of the 
CFO Act agencies did not fully perform the required reconciliations for 
fiscal year 2002, citing reasons such as (1) failure of trading 
partners to provide needed data, (2) limitations and incompatibility of 
agency and trading partner systems, and (3) human resource issues. For 
fiscal year 2002, amounts reported for federal agency trading partners 
for certain intragovernmental accounts were significantly out of 
balance. A lack of standardization in transaction processing and a lack 
of sufficient communication between trading partners contribute 
significantly to federal agencies' inability to fully reconcile 
intragovernmental activity and balances. Without improvement in this 
area, Treasury cannot properly eliminate intragovernmental activity and 
balances and, as a result, assets, liabilities, revenue, and costs 
reported in the CFS may not be fairly stated.

Federal agencies are required to consistently and fully account for, 
reconcile, and report intragovernmental activity and balances across 
the federal government. To address certain issues that have contributed 
to the out-of-balance condition for intragovernmental activity and 
balances, OMB has established a set of standard business rules, OMB 
Memorandum M-03-01, Business Rules for Intragovernmental Transactions, 
for governmentwide transactions among trading partners; the memorandum 
requires quarterly reconciliations of intragovernmental activity and 
balances, beginning with fiscal year 2003. Treasury Financial Manual, 
section 4030, also requires reconciliation of intragovernmental 
activity and balances. Further, Treasury has begun a process to help 
federal agencies better perform their reconciliations, by providing 
each agency with detailed trading partner information. Also, Treasury 
is planning to require federal agencies, beginning with fiscal year 
2004, to report in Treasury's new closing package intragovernmental 
activity and balances by trading partner.

As OMB continues to make strides to address issues related to 
intragovernmental transactions, we recommend that the Director of the 
Office of Management and Budget direct the Controller of the Office of 
Federal Financial Management to:

* develop policies and procedures that document how OMB will enforce 
the business rules provided in OMB Memorandum M-03-01, Business Rules 
for Intragovernmental Transactions, and:

* require that significant differences noted between business partners 
be resolved and the resolution be documented.

We also recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with the Controller of the 
Office of Management and Budget, to implement the plan to require 
federal agencies to report in Treasury's new closing package, beginning 
with fiscal year 2004, intragovernmental activity and balances by 
trading partner and indicate amounts that have not been reconciled with 
trading partners and amounts, if any, that are in dispute.

Elimination of Intragovernmental Activity and Balances:

During our audits, we found the following:

* Intragovernmental activity and balances are "dropped" or "offset" in 
the preparation of the CFS rather than eliminated through balanced 
accounting entries.

* Certain intragovernmental activity and balances, primarily related to 
appropriations, are not being properly considered in the consolidation 
process.

* No reconciliation is performed for the change in intragovernmental 
assets and liabilities for the fiscal year, including the amount and 
nature of all changes in intragovernmental assets or liabilities not 
attributable to cost and revenue activity recognized during the fiscal 
year, such as differences due to purchases that are capitalized as 
inventory or equipment and revenue that is deferred.

Consolidated financial statements are intended to present the results 
of operations and financial position of the components that make up the 
reporting entity as if the entity were a single enterprise. Therefore, 
when preparing the CFS, intragovernmental activity and balances between 
federal agencies must be eliminated. As mentioned above, federal 
agencies' problems in handling their intragovernmental transactions 
impair Treasury's ability to properly eliminate these transactions, and 
significant differences in intragovernmental accounts have been 
identified. Without an effective process, intragovernmental activity 
and balances are not fully accounted for and eliminated in the process 
used to prepare the CFS. As a result, the federal government's ability 
to determine the impact of these differences on the amounts reported in 
the CFS is impaired and, consequently, the CFS may be misstated.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with OMB's Controller of 
the Office of Federal Financial Management, to:

* design procedures that will account for the difference in 
intragovernmental assets and liabilities throughout the compilation 
process by means of formal consolidating and elimination accounting 
entries;

* develop solutions for intragovernmental activity and balance issues 
relating to federal agencies' accounting, reconciling, and reporting in 
areas other than those OMB now requires be reconciled, primarily areas 
relating to appropriations; and:

* reconcile the change in intragovernmental assets and liabilities for 
the fiscal year, including the amount and nature of all changes in 
intragovernmental assets or liabilities not attributable to cost and 
revenue activity recognized during the fiscal year. Examples of these 
differences would include capitalized purchases such as inventory or 
equipment and deferred revenue.

Reconciliation of Net Operating Cost and Unified Budget Surplus (or 
Deficit):

Treasury did not have an adequate process to identify and report items 
needed to reconcile the U.S. government's fiscal year 2002 net 
operating cost of $364.9 billion to the fiscal year 2002 unified budget 
deficit, which was reported as $157.7 billion. The Reconciliation of 
Net Operating Cost and Unified Budget Surplus (or Deficit) (hereafter 
referred to as the reconciliation statement) is expected to explain 
certain differences that occur because the CFS are prepared on the 
accrual basis in accordance with U.S. generally accepted accounting 
principles. Under accrual accounting, transactions are reported when 
the event or transaction is recognizable under U.S. generally accepted 
accounting principles rather than when cash is received and paid. By 
contrast, federal budgetary reporting is, with certain exceptions, on 
the cash basis, in accordance with accepted budget concepts and 
policies. Statement of Federal Financial Accounting Standards (SFFAS) 
No. 24, Selected Standards for the Consolidated Financial Report of the 
United States Government, effective in fiscal year 2002, requires the 
reconciliation statement as part of the CFS.

In our audit of the reconciliation statement, we found that Treasury 
was unable to identify all the transactions needed to properly 
reconcile the statement. Treasury's process for compiling the 
reconciliation statement involved the use of two independent sources of 
information--FACTS data from federal agencies' general ledger systems 
for the net operating cost and most of the reconciliation statement 
items and Treasury's central accounting and reporting system (STAR) 
primarily for the unified budget surplus/deficit amounts. The 
reconciliation statement begins with the net operating cost amount 
reported in the Statement of Operations and Changes in Net Position 
(derived through FACTS data). As noted above, this amount includes a 
net $17.1 billion labeled as "unreconciled transactions," which was 
needed to balance the consolidated Balance Sheet. Because the net 
operating cost amount includes this plug, which does not correspond to 
any budget activity, the $17.1 billion should have been included as a 
reconciling item in the reconciliation statement, but it was not. In 
addition, a $1 billion "net amount of all other differences" (another 
plug) was also needed in the reconciliation statement to balance net 
operating cost to the unified budget deficit. Treasury was unable to 
adequately identify and explain the gross components of such amounts.

Treasury's process for preparing the reconciliation statement also did 
not ensure completeness of reporting or ascertain the consistency of 
all the amounts reported in the reconciliation statement with the 
related balance sheet line items, related notes, or federal agency 
financial statements. We performed an analysis to determine whether all 
applicable components reported in the other statements (and related 
note disclosures) included in the CFS were properly reflected in the 
reconciliation statement. We found about $21 billion of net changes in 
various line item account balances on the balance sheet that were not 
explained on either the reconciliation statement or the Statement of 
Changes in Cash Balance from Unified Budget Surplus and Other 
Activities. For example, the reconciliation statement reported 
depreciation expense ($20.5 billion) and total capitalized fixed assets 
($40.9 billion) as the components of the net change in property, plant, 
and equipment. Although these activities accounted for a net increase 
of $20.4 billion, the balance sheet reflected a smaller net increase, 
$18 billion; Treasury was unable to explain the remaining $2.4 billion 
of the net change. In addition, while we found that the source of the 
line item "principal repayments of precredit reform loans" that is 
reported on the reconciliation statement was from STAR, Treasury was 
unable to link this amount of $8.2 billion to any related agency 
financial statements or the consolidated Balance Sheet and related 
notes.

Lastly, Treasury did not establish a reporting materiality threshold 
for purposes of collecting and reporting information in the 
reconciliation statement. For example, some items were reported simply 
as a net "increase/decrease" without considering how material, both 
quantitatively and qualitatively, the gross changes were.[Footnote 5] 
We noted, for instance, that in the "components of the budget surplus 
(deficit) not part of net operation cost" section of the statement, 
there is a reconciling item titled "increase in inventory" rather than 
accounting for "purchases of inventory" as a "component of the budget 
surplus (deficit) not part of net operation cost" and separately 
reporting the "sales, use, or disposal of inventory" in the "components 
of net operating cost not part of the budget surplus (or deficit)." 
Treasury was unable to demonstrate whether material, informative 
amounts were netted, and pertinent information may therefore not be 
disclosed.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary to develop and implement a process that adequately 
identifies and reports items needed to reconcile its net operating cost 
and unified budget surplus (or deficit). Treasury should:

* report "net unreconciled differences" included in the net operating 
results line item as a separate reconciling activity in the 
reconciliation statement,

* develop policies and procedures to ensure completeness of reporting 
and document how all the applicable components reported in the other 
consolidated financial statements (and related note disclosures 
included in the CFS) were properly reflected in the reconciliation 
statement, and:

* establish reporting materiality thresholds for determining which 
agency financial statement activities to collect and report at the 
governmentwide level to assist in ensuring that the reconciliation 
statement is useful and conveys meaningful information.

In addition, if Treasury chooses to continue using information both 
from federal agencies' financial statements and from the STAR system, 
we recommend that Treasury:

* demonstrate how the amounts from STAR reconcile to federal agencies' 
financial statements and:

* identify and document the cause, if any significant differences are 
noted.

Statements of Changes in Cash Balance from Unified Budget and Other 
Activities:

Treasury was unable to demonstrate how significant amounts reported in 
the Statement of Changes in Cash Balance from Unified Budget and Other 
Activities were related to the underlying federal agencies' financial 
statements. The Statement of Changes in Cash Balance from Unified 
Budget and Other Activities is expected to explain how the annual 
unified budget surplus or deficit relates to the change in the U.S. 
government's operating cash. SFFAS No. 24, effective in fiscal year 
2002, requires the Statement of Changes in Cash Balance from Unified 
Budget and Other Activities as part of the CFS.

For fiscal year 2002, the Statement of Changes in Cash Balance from 
Unified Budget and Other Activities reported a unified budget deficit 
of $157.7 billion, derived as the difference between reported actual 
unified budget receipts of $1,853.3 billion and actual unified budget 
outlays of $2,011 billion. Both line items were material to this 
statement and were compiled from federal agencies' monthly reports to 
Treasury in the STAR system.

Treasury was unable to explain material differences, totaling $231 
billion (absolute) and $166 billion (net), between the actual unified 
budget net outlays reported on this statement and the outlays reported 
on selected individual federal agencies' audited Combined Statement of 
Budgetary Resources. For example, we found one federal agency that 
reported net outlays for fiscal year 2002 as $479 billion on its 
audited Combined Statement of Budgetary Resources, while Treasury's 
records showed $375 billion for fiscal year 2002 for this agency. This 
agency had received an unqualified auditor opinion on its financial 
statements.

OMB Bulletin 01-09, Form and Content of Agency Financial 
Statements,[Footnote 6] states that outlays in federal agencies' 
Combined Statement of Budgetary Resources should agree with the net 
outlays reported in the budget of the U.S. government. In addition, 
SFFAS No. 7, Accounting for Revenue and Other Financing Sources and 
Concepts for Reconciling Budgetary and Financial Accounting, requires 
explanation of any material differences between the information 
required to be disclosed (including outlays) and the amounts described 
as "actual" in the budget of the U.S. government. Treasury believes its 
records for net outlays are reliable and accurate; however, many 
federal agencies are reporting different net outlays and receiving 
clean opinions on their financial statements.

Treasury was unable to adequately explain the over $24 billion net 
difference between actual unified budget receipts of $1,853.3 billion 
and total operating revenue of $1,877.7 billion reported in the 
Statements of Operations and Changes in Net Position. While these 
amounts are not expected to equal (for example, operating revenues 
include accrued amounts, and budget receipts are reported on the cash 
basis), there is a relationship between operating revenues reported on 
the Statement of Operations and Changes in Net Position and unified 
budget receipts reported on the Statement of Changes in Cash Balance 
from Unified Budget and Other Activities. Therefore, the expectation is 
that differences between these amounts should be explainable.

Treasury was also not able to provide support for how the line items in 
the "other activities" section of this statement, totaling $13.5 
billion, related to either the underlying Balance Sheet or related 
notes accompanying the CFS.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with the Controller of 
OMB's Office of Federal Financial Management, to develop and implement 
a process to ensure that the Statement of Changes in Cash Balance from 
Unified Budget and Other Activities properly reflects the activities 
reported in federal agencies' audited financial statements. Treasury 
should:

* document the consistency of the significant line items on this 
statement to agencies' audited financial statements;

* request, through its closing package, that federal agencies provide 
the net outlays reported in their Combined Statement of Budgetary 
Resources and explanations for any significant differences between net 
outlay amounts reported in the Combined Statement of Budgetary 
Resources and the budget of the U.S. government;

* investigate the differences between net outlays reported in federal 
agencies' Combined Statement of Budgetary Resources and Treasury's 
records in the STAR system to ensure that the proper amounts are 
reported in the Statement of Changes in Cash Balance from Unified 
Budget and Other Activities;

* explain and document the differences between the operating revenue 
amount reported on the Statement of Operations and Changes in Net 
Position and unified budget receipts reported on the Statement of 
Changes in Cash Balance from Unified Budget and Other Activities; and:

* provide support for how the line items in the "other activities" 
section of this statement relate to either the underlying Balance Sheet 
or related notes accompanying the CFS.

Defining the Reporting Entity:

The CFS includes certain financial information for the executive, 
legislative, and judicial branches, to the extent that federal agencies 
within those branches have provided Treasury such information. However, 
there are undetermined amounts of assets, liabilities, and revenues 
that are not included, and the government did not provide evidence or 
disclose in the CFS that such financial information was immaterial.

Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, 
Entity and Display, provides guidance on defining reporting entities. 
Under SFFAC No. 2, a reporting entity for general purpose financial 
statements would "meet all of the following criteria: (1) there is a 
management responsible for controlling and deploying resources, 
producing outputs and outcomes, executing the budget or a portion 
thereof . . ., and held accountable for the entity's performance; (2) 
the entity's scope is such that its financial statements would provide 
a meaningful representation of operations and financial condition; and 
(3) there are likely to be users of the financial statements who are 
interested in and could use the information in the statements to help 
them make resource allocation and other decisions and hold the entity 
accountable for its deployment and use of resources." SFFAC No. 2 also 
calls for the notes to financial statements to provide disclosures that 
are necessary to make the financial statements more informative and not 
misleading, such as a brief description of the reporting entity. The 
statement also provides criteria for including components in a 
reporting entity. As examples of the application of such criteria, 
SFFAC No. 2 specifically discusses the Federal Reserve System and 
government-sponsored enterprises and the reasons for FASAB's conclusion 
that these entities would not be considered components of the U.S. 
government reporting entity.

In accordance with SFFAC No. 2, if the government could provide 
evidence that the financial information not included in the CFS is 
immaterial,[Footnote 7] then the CFS reporting entity could be 
described as the "U.S. government" and would conform materially to the 
criteria set forth in SFFAC No. 2. However, the fiscal year 2002 CFS 
reporting entity excluded certain entities without providing evidence 
or clearly explaining the reason.

An appendix to the CFS listed 13 entities that were excluded from the 
CFS reporting entity and specifically explained the reason for 
excluding one of those entities--the Federal Reserve System. However, 
the appendix did not explain the reason for excluding the other 
entities listed as excluded, such as government-sponsored enterprises 
and military exchanges. While exclusion of those entities may be 
appropriate, some users of the CFS may be confused if the reason for 
excluding entities is not clearly disclosed in the CFS.

We understand the inherent challenges in getting complete information 
for all three branches of the U.S. government. However, not including 
required information for all components included in a reporting entity 
or not clearly explaining the reason for excluding certain entities 
could mislead some users of the financial statements.

Without evidence of the amounts of information excluded and any related 
disclosures, in particular, evidence that what was excluded was 
immaterial to the CFS, we could not have ample assurance regarding the 
unknown amounts, and, under auditing standards, this issue could impede 
a future opinion on the CFS.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with the Controller of 
OMB's Office of Federal Financial Management to do the following:

* Perform an assessment to define the reporting entity, including its 
specific components, in conformity with the criteria issued by FASAB. 
Key decisions made in this assessment should be documented, including 
the reason for including or excluding components and the basis for 
concluding on any issue. Particular emphasis should be placed on 
demonstrating that any financial information that should be included, 
but is not included, is immaterial.

* Provide in the financial statements all the financial information 
relevant to the defined reporting entity, in all material respects. 
Such information would include, for example, the reporting entity's 
assets, liabilities, and revenues.

* Disclose in the financial statements all information that is 
necessary to inform users adequately about the reporting entity. Such 
disclosures should clearly describe the reporting entity and explain 
the reason for excluding any components that are not included in the 
defined reporting entity.

Conformity with U.S. Generally Accepted Accounting Principles:

Treasury lacks an adequate process to ensure that the financial 
statements, related notes, stewardship, and supplemental information in 
the CFS are presented in conformity with U.S. generally accepted 
accounting principles. SFFAS No. 24 states that FASAB standards apply 
to all federal agencies, including the U.S. government as a whole, 
unless provision is made for different accounting treatment in a 
current or subsequent standard.

Specifically, we found that Treasury did not (1) timely identify 
applicable generally accepted accounting principles requirements, (2) 
make timely modifications to agency data calls to obtain information 
needed, (3) assess, qualitatively and quantitatively, the materiality 
of omitted disclosures,[Footnote 8] or (4) document decisions reached 
with regard to omitted disclosures and the rationale for such 
decisions. We identified numerous disclosures that were not in 
conformity with applicable standards. These needed disclosures are 
described in appendix I. We did note that Treasury is requesting 
certain information in its planned closing package for fiscal year 2004 
that may address some of the needed disclosures.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary to establish a formal process that will allow the 
financial statements, related notes, stewardship, and supplemental 
information in the CFS to be presented in conformity with U.S. 
generally accepted accounting principles. The process should:

* timely identify generally accepted accounting principles 
requirements,

* make timely modifications to Treasury's closing package requirements 
to obtain information needed,

* assess, qualitatively and quantitatively, the impact of the omitted 
disclosures, and:

* document decisions reached and the rationale for such decisions.

With respect to the 16 required disclosures identified in appendix I 
that were not included in the CFS, we recommend that each of these 
disclosures be included in the CFS or the rationale for excluding any 
of them be documented.

Other Weaknesses Identified:

During our audit we found certain issues related to (1) management 
representation letters, (2) legal representation letters, and (3) 
information on major treaties and other international agreements that 
will require certain actions by Treasury and OMB. Other issues related 
to these same three areas will need to be addressed by federal agencies 
and their auditors to facilitate Treasury's and OMB's preparation of 
the CFS. We plan to separately communicate to agency Chief Financial 
Officers and Inspectors General the details of our concerns for such 
issues. We have summarized our findings below and are providing 
recommendations to help address the issues that require action by 
Treasury and OMB.

Management Representation Letters and the Related Summaries of 
Unadjusted Misstatements:

For each agency financial statement audit, generally accepted auditing 
standards require that agency auditors obtain written representations 
from agency management as part of the audit. In turn, Treasury and OMB 
are to receive all the required management representation letters and 
the related summaries of unadjusted misstatements from the federal 
agencies. This is important because generally accepted auditing 
standards require Treasury and OMB to provide us, as their auditor, a 
management representation letter for the CFS, and their letter depends 
on the information within agencies' management representation letters. 
However, we found that Treasury and OMB did not have policies or 
procedures to adequately review and analyze federal agencies' 
management representation letters.

In a management representation letter, management typically 
acknowledges its responsibility for its financial statements and its 
belief that the financial statements are presented in conformity with 
U.S. generally accepted accounting principles; the completeness of 
financial information in the statements; recognition, measurement, and 
disclosure; and subsequent events. Without performing an adequate 
review and analysis of federal agencies' management representations 
letters, Treasury and OMB management may not be fully informed of 
matters that may affect their representations made with respect to the 
audit of the CFS.

As part of our audit of the CFS, we received and reviewed 30 federal 
agencies' management representation letters.[Footnote 9] We found that 
(1) 2 letters had discrepancies between what the auditor found and what 
the agency represented in its management representation letter, (2) 8 
letters were not signed by the appropriate level of management, (3) 25 
letters did not disclose the materiality threshold used by management 
in determining items to be included in the letter, (4) 4 letters 
omitted certain representations that are ordinarily included, (5) 2 
letters did not include a schedule of unadjusted misstatements or 
affirm in their representation letter that there were no uncorrected 
misstatements, and (6) 15 schedules of unadjusted misstatements did not 
provide complete information about the misstatements that were 
identified. Only 1 of the 30 letters we reviewed had none of the 
deficiencies noted above.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with the Controller of 
OMB's Office of Federal Financial Management, to establish written 
policies and procedures for preparing the governmentwide management 
representation letter to help ensure that it is properly prepared and 
contains sufficient representations. Specifically, these policies and 
procedures should require:

* an analysis of the agency management representations to determine if 
discrepancies exist between what the agency auditor reported and the 
representations made by the agency, including the resolution of such 
discrepancies;

* a determination that the agency management representation letters 
have been signed by the highest-level agency officials that are 
responsible for and knowledgeable about the matters included in the 
agency management representation letters;

* an assessment of the materiality thresholds used by federal agencies 
in their respective management representation letters;

* an assessment of the impact, if any, of federal agencies' materiality 
thresholds on the management representations made at the governmentwide 
level;

* an evaluation and assessment of the omission of representations 
ordinarily included in agency management representation letters; and:

* an analysis and aggregation of the agencies' summary of unadjusted 
misstatements to determine the completeness of the summaries and to 
ascertain the materiality, both individually and in the aggregate, of 
such unadjusted misstatements to the CFS taken as a whole.

Legal Representation Letters and Related Management Schedules in 
Reporting Contingency Losses:

For each agency financial statement audit, generally accepted auditing 
standards require that agency auditors obtain written legal 
representations as part of the audit. Legal representation letters, 
along with related management schedules,[Footnote 10] are essential to 
properly reporting legal contingency losses in federal agencies' 
financial statements. Inadequate information in the legal 
representation letters could weaken the accuracy and reliability of 
federal agency financial statements and the CFS.

We reviewed 34 federal agencies' legal representations letters and 
related management schedules to assess the adequacy of the letters and 
related schedules.[Footnote 11] We found that the adequacy of some 
legal letters was questionable. For example, we found that 2 letters 
did not express an opinion of how the expected outcome of virtually all 
of the two agencies' cases would be resolved, and that 5 agencies did 
not provide the related management schedules.

In some cases, the lack of adequate information may have resulted from 
legal counsel's desire to protect the confidentiality of lawyer-client 
communications, the difficulty in predicting the outcome of potential 
and pending litigation with any assurance, and/or legal counsel's 
desire to avoid the possibility of prejudicing the outcome of the 
litigation to the client's detriment. While these are understandable 
reasons, without adequate legal contingency information, management of 
Treasury and OMB may not be fully informed of matters that may affect 
the legal representations made with respect to the audit of the CFS.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with the Controller of 
OMB's Office of Federal Financial Management, to help ensure that 
agencies provide:

* adequate information in their legal representation letters regarding 
the expected outcome of the cases and:

* related management schedules.

Information on Major Treaties and Other International Agreements:

The CFS note disclosures did not include any information on major 
treaties and other international agreements[Footnote 12] to which the 
federal government is a party. These treaties and other international 
agreements address various issues including, but not limited to, trade, 
commerce, security, and arms that may involve financial obligations or 
give rise to loss contingencies.

Treaties and other international agreements may lead to commitments or 
contingencies and therefore should be included in the CFS, in 
accordance with OMB Bulletin No. 01-09 and SFFAS No. 5, Accounting for 
Liabilities of the Federal Government, as amended by SFFAS No. 12, 
Recognition of Contingent Liabilities Arising from Litigation. The 
degree of certainty as to whether there will be a cost now or in the 
future, along with the ability to quantify it in advance, determines 
the appropriate accounting treatment.

Treaties and other international agreements were not included in the 
notes to the CFS because Treasury and the federal agencies had yet to 
perform the necessary work to determine the nature and magnitude of 
those in force as of September 30, 2002. The State Department publishes 
a document annually called Treaties in Force. The most recent edition 
of Treaties in Force, released in August 2002, lists treaties and other 
international agreements of the United States that were in force on 
January 1, 2002. However, according to State Department staff, this 
document is incomplete because federal agencies do not always provide 
complete information on treaties and international agreements when a 
request for data is made. Not having information on major treaties and 
other international agreements in the CFS resulted in incomplete 
disclosures of the possible exposure to loss or obligations of the U.S. 
government.

We recommend that the Secretary of the Treasury direct the Fiscal 
Assistant Secretary, working in coordination with the Controller of 
OMB's Office of Federal Financial Management, to establish written 
policies and procedures to help ensure that major treaty and other 
international agreement information is properly identified and reported 
in the CFS. Specifically, these policies and procedures should require 
that agencies:

* develop a detailed schedule of all major treaties and other 
international agreements that obligate the U.S. government to provide 
cash, goods, or services, or that create other financial arrangements 
that are contingent on the occurrence or nonoccurrence of future events 
(a starting point for compiling these data could be the State 
Department's Treaties in Force);

* classify all such scheduled major treaties and other international 
agreements as commitments or contingencies;

* disclose in the notes to the CFS amounts for major treaties and other 
international agreements that have a reasonably possible chance of 
resulting in a loss or claim as a contingency;

* disclose in the notes to the CFS amounts for major treaties and other 
international agreements that are classified as commitments and that 
may require measurable future financial obligations; and:

* take steps to prevent major treaties and other international 
agreements that are classified as remote from being recorded or 
disclosed as probable or reasonably possible in the CFS.

Agency Comments and Our Evaluation:

In written comments on a draft of this report, which are reprinted in 
appendix II, Treasury and OMB stated that our report identified many 
recommendations that will improve the usefulness and accuracy of the 
CFS and that they have already incorporated many of them into their new 
system and processes that are being developed for preparing the fiscal 
year 2004 CFS. However, Treasury and OMB disagreed with our 
recommendations related to unreconciled transactions affecting net 
position and the Statement of Changes in Cash Balance from Unified 
Budget and Other Activities. They also stated that they would consider 
the other recommendations in our report as they continue the design and 
implementation of the new process for preparing the CFS.

On the first matter, Treasury and OMB disagreed with our proposed 
recommendation that federal agencies submit to Treasury an analysis of 
their net position that separates intragovernmental and public 
transactions. The purpose of this recommendation was to help Treasury 
understand and control the U.S. government's net position, as well as 
to eliminate the plugs associated with compiling the CFS. In response 
to our draft report, Treasury and OMB stated that Treasury had decided 
not to require agencies to split net position between intragovernmental 
and public transactions as Treasury had originally planned and reported 
in its CFS Improvement Project Report because it was unable to develop 
a procedure that agencies could use to provide this split. In addition, 
Treasury and OMB stated that this split would not identify certain 
items known to affect the unreconciled net position transactions. 
However, because Treasury has not identified and quantified all the 
components of the unreconciled transactions, a procedure is still 
needed that will adequately reconcile net position and assist Treasury 
in identifying and eliminating the plugs needed to balance the CFS. Our 
proposed recommendation in the draft report that we provided for 
comment was one option for Treasury to resolve the uncertainties 
regarding the reliability of these data. We recognize there are other 
ways to gain these assurances. Therefore, we have modified our 
recommendation to recommend that Treasury develop reconciliation 
procedures to aid in understanding and controlling the net position 
balance.

Regarding the second matter, Treasury and OMB stated that we had 
suggested that federal agency data be used to prepare receipts and 
outlays used in the Statement of Changes in Cash Balance from Unified 
Budget and Other Activities. They stated that they disagree with this 
approach because it would be time-consuming and costly to gather such 
information. Treasury and OMB have stated that the Statement of Changes 
in Cash Balance from Unified Budget and Other Activities is prepared 
from information derived from Treasury's Central Accounting System 
rather than from agencies' financial statements.

We were not calling for Treasury to use federal agencies' financial 
statements to prepare the Statement of Changes in Cash Balance from 
Unified Budget and Other Activities. Instead, we recommended that 
Treasury collect certain information already reported in federal 
agencies' audited financial statements and develop procedures that 
ensure consistency of the significant line items on the Statement of 
Changes in Cash Balance from Unified Budget and Other Activities with 
the agency-reported information. As we stated in our report, Treasury 
has expressed the belief that the information it maintains in its 
system is materially reliable. However, federal agencies also believe 
their amounts are materially reliable and their auditors have rendered 
unqualified audit opinions on their financial statements. We found 
unexplained material differences between Treasury's records and some 
agencies' financial statements. We provided a schedule of these 
differences to Treasury and requested explanations for the material 
differences. As discussed in our report, Treasury was unable to explain 
material differences, totaling $231 billion (absolute) and $166 billion 
(net), between the actual unified budget net outlays reported on this 
statement and the net outlays reported on selected individual federal 
agencies' audited Combined Statement of Budgetary Resources.

As stated in our report, OMB Bulletin 01-09, Form and Content of Agency 
Financial Statements, states that outlays in federal agencies' Combined 
Statement of Budgetary Resources should agree with the net outlays 
reported in the budget of the U.S. government. In some cases, we found 
that net outlay amounts reported in federal agencies' audited financial 
statements differed from the amounts included in the CFS and budget of 
the U.S. government for these agencies. For example, Treasury did not 
provide us with an explanation of why its own audited Combined 
Statement of Budgetary Resources reported net outlays of $479 billion 
for fiscal year 2002, while the amount included in the CFS relating to 
net outlays for the Department of Treasury was only $375 billion for 
fiscal year 2002.

Ensuring that the significant line items on the Statement of Changes in 
Cash Balance from Unified Budget and Other Activities are consistent 
with agencies' audited financial statements is an important 
expectation. As stated in our report, SFFAS No. 7, Accounting for 
Revenue and Other Financing Sources and Concepts for Reconciling 
Budgetary and Financial Accounting, requires agencies to provide an 
explanation for any material differences between the information 
required to be disclosed (including outlays) in their financial 
statements and the amounts described as "actual" in the budget of the 
U.S. government. Also, many of the amounts reported in the Statement of 
Changes in Cash Balance from Unified Budget and Other Activities are 
intended to be the same as the amounts reported in the budget of the 
U.S. government. As such, we continue to believe that the process we 
proposed would be the most efficient manner for Treasury, as the 
preparer of the CFS, to obtain the necessary assurance on the 
significant amounts reported in the Statement of Changes in Cash 
Balance from Unified Budget and Other Activities.

Treasury and OMB also suggested that we not address the recommendations 
in our report related to management representation letter and legal 
representation letter issues to Treasury. Generally accepted auditing 
standards require Treasury and OMB to provide us, as their auditor, a 
management representation letter for the CFS, and their letter depends 
on the information within agencies' management representation letters. 
However, we found that Treasury and OMB did not have policies or 
procedures to adequately review and analyze federal agencies' 
management representation letters. As such, we continue to believe that 
both Treasury and OMB need to work together to address the 
recommendations we made in this area.

In regard to legal representation letters, we identified problems with 
certain agencies' letters that could weaken the accuracy and 
reliability of federal agencies' financial statements and the CFS. OMB, 
in its role of providing guidance to agencies and their auditors 
regarding agencywide financial statements, and Treasury, in its role as 
preparer of the CFS, both play an important part in ensuring that legal 
representation letters provide adequate information to enable the 
proper reporting of legal contingency losses in federal financial 
statements. As such, we continue to believe that both Treasury and OMB 
need to work together to address the recommendations we made in this 
area as well.

This report contains recommendations to you. The head of a federal 
agency is required by 31 U.S.C. 720 to submit a written statement on 
actions taken on these recommendations. You should submit your 
statement to the Senate Committee on Governmental Affairs and the House 
Committee on Government Reform within 60 days of the date of this 
letter. A written statement must also be sent to the House and Senate 
Committees on Appropriations with the agencies' first request for 
appropriations made more than 60 days after the date of the report.

:

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Governmental Affairs; the 
Subcommittee on Financial Management, the Budget, and International 
Security, Senate Committee on Governmental Affairs; the House Committee 
on Government Reform; and the Subcommittee on Government Efficiency and 
Financial Management, House Committee on Government Reform. In 
addition, we are sending copies to the Fiscal Assistant Secretary of 
the Treasury and OMB's Controller of the Office of Federal Financial 
Management. Copies will be made available to others upon request. This 
report is also available at no charge on GAO's Web site, at [Hyperlink, 
www.gao.gov] 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 Jeffrey C. 
Steinhoff, Managing Director, Financial Management and Assurance, on 
(202) 512-2600 or Gary T. Engel, Director, Financial Management and 
Assurance, on (202) 512-3406.


David M. Walker 
Comptroller General of the United States:

Signed by David M. Walker: 

[End of section]

Appendixes:

Appendix I: Disclosure Issues:

This enclosure includes 16 disclosures identified that are required by 
U.S. generally accepted accounting principles to either be included in 
the CFS or the rationale for their exclusion documented. However, they 
were neither included nor was their exclusion documented.

Loans Receivable and Loan Guarantee Liabilities:

The note disclosure for loans receivable and loan guarantee liabilities 
departed from the following disclosure requirements of Statements of 
Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for 
Inventory and Related Property, and SFFAS No. 18, Amendments to 
Accounting Standards for Direct Loans and Loan Guarantees.

SFFAS No. 3, paragraph 91, requires the reporting entity to disclose 
the following:

* valuation basis for foreclosed property;

* changes from the prior year's accounting methods, if any;

* restrictions on the use/disposal of property;

* balances by categories (i.e., pre-1992 and post-1991 foreclosed 
property);

* number of properties held and average holding period by type or 
category; and:

* number of properties for which foreclosure proceedings are in process 
at the end of the period for foreclosed assets acquired in full or 
partial settlement of a direct or guaranteed loan.

SFFAS No. 18, paragraph 9, states that credit programs should 
reestimate the subsidy cost allowance for outstanding direct loans and 
the liability for outstanding loan guarantees. There are two kinds of 
reestimates: (a) interest rate reestimates and (b) technical/default 
reestimates. Entities should measure and disclose each program's 
reestimates in these two components separately.

SFFAS No. 18, paragraph 10, requires the reporting entity to display in 
the notes to the financial statements a reconciliation between the 
beginning and ending balances of the subsidy cost allowance for 
outstanding direct loans and the liability for outstanding loan 
guarantees reported in the entity's balance sheet.

SFFAS No. 18, paragraph 11, requires disclosure of:

* the total amount of direct or guaranteed loans disbursed for the 
current reporting year and the preceding reporting year;

* the subsidy expense by components, recognized for the direct or 
guaranteed loans disbursed in those years; and:

* the subsidy reestimates by components for those years.

SFFAS No. 18, paragraph 11, also requires disclosure, at the program 
level, of the subsidy rates for the total subsidy cost and its 
components for the interest subsidy costs, default costs (net of 
recoveries), fees and other collections, and other costs estimated for 
direct loans and loan guarantees in the current year's budget for the 
current year's cohorts.

SFFAS No. 18, paragraph 11, further requires the reporting entity to 
disclose, discuss, and explain events and changes in economic 
conditions, other risk factors, legislation, credit policies, and 
subsidy estimation methodologies and assumptions that have had a 
significant and measurable effect on subsidy rates, subsidy expense, 
and subsidy reestimates.

Inventories and Related Property:

The note disclosure for inventories and related property departed from 
the following disclosure requirements of SFFAS No. 3, Accounting for 
Inventory and Related Property.

Inventory and Operating Materials and Supplies:

When inventory or operating materials and supplies are declared excess, 
obsolete, or unserviceable, SFFAS No. 3, paragraph 30, requires the 
difference between the carrying amount and the expected net realizable 
value to be recognized as a loss or gain and either separately reported 
or disclosed.

Paragraphs 35 and 50 require the following disclosures about inventory 
and operating materials and supplies:

* general composition;

* changes from the prior year's accounting methods, if any;

* restrictions on the sale of inventory and the use of operating 
materials and supplies; and:

* changes in the criteria for categorizing inventory and operating 
materials and supplies.

Stockpile Material:

Paragraph 56 requires the following disclosures about stockpile 
material:

* basis for valuing stockpile material, including valuation method and 
any cost flow assumptions;

* changes from the prior year's accounting methods, if any;

* restrictions on the use of stockpile material;

* balances in each category of stockpile material (i.e., stockpile 
material held and held for sale);

* criteria for grouping stockpile material held for sale; and:

* changes in criteria for categorizing stockpile material held for 
sale.

Paragraph 55 requires the disclosure of any difference between the 
carrying amount (i.e., purchase price or cost) of stockpile material 
held for sale and the estimated selling price of such assets.

Seized Material:

Paragraph 66 requires the following disclosures about seized property:

* valuation method;

* changes from the prior year's accounting methods, if any; and:

* analysis of change in seized property (including dollar value and 
number of seized properties) that are on hand at the beginning of the 
year, seized during the year, disposed of during the year, and on hand 
at the end of the year, as well as known liens or other claims against 
the property. This information should be presented by type of seizure 
and method of disposition when material.

Forfeited Property:

Paragraph 78 requires the following disclosures about forfeited 
property:

* valuation method;

* analysis of the changes in forfeited property by type and dollar 
amount that includes (1) number of forfeitures on hand at the beginning 
of the year, (2) additions, (3) disposals and method of disposition, 
and (4) end-of-year balances;

* restriction on the use of disposition of the property; and:

* if available, an estimate of the value of property to be distributed 
to other federal, state, and local agencies in future reporting 
periods.

Goods Held under Price Support and Stabilization Programs:

Paragraph 98 requires that if a contingent loss is not recognized 
because it is less than probable or it is not reasonably measurable, 
then disclosure of the contingency shall be made if it is at least 
reasonably possible that a loss may occur.

Paragraph 109 requires the following disclosures for goods held under 
price support and stabilization programs:

* basis for valuing commodities, including valuation method and cost 
flow assumptions;

* changes from the prior year's accounting methods;

* restrictions on the use, disposal, or sale of commodities; and:

* analysis of the change in dollar amount and volume of commodities, 
including those (1) on hand at the beginning of the year, (2) acquired 
during the year, (3) disposed of during the year by method of 
disposition, (4) on hand at the end of the year, (5) on hand at year-
end and estimated to be donated or transferred during the coming 
period, and (6) received as a result of surrender of collateral related 
to nonrecourse loans outstanding. The analysis should also show the 
dollar value and volume of purchase agreement commitments.

Property, Plant, and Equipment:

The note disclosure for property, plant, and equipment (PP&E) departed 
from the following disclosure requirements of SFFAS No. 6, Accounting 
for Property, Plant, and Equipment; SFFAS No. 10, Accounting for 
Internal Use Software; and SFFAS No. 16, Amendments to Accounting for 
Property, Plant, and Equipment:

SFFAS No. 6, paragraph 45, states that the following disclosures should 
be included:

* the estimated useful lives for each major class;

* capitalization thresholds, including any changes in thresholds during 
the period; and:

* restrictions on the use or convertibility of general PP&E.

SFFAS No. 10, paragraph 35, requires the following disclosures for 
internal use software:

* the cost, associated amortization, and book value;

* the estimated useful life for each major class of software; and:

* the method of amortization.

SFFAS No. 16, paragraph 9, requires an appropriate PP&E note disclosure 
to explain that "physical quantity" information for the multiuse 
heritage assets is included in supplemental stewardship reporting for 
heritage assets.

Federal Employee and Veteran Benefits Payable:

The note disclosure for federal employee and veteran benefits payable 
was not complete and properly reported because the liability for 
military pensions and the note disclosure related to the "change in 
actuarial accrued pension liability and components of related expenses" 
for the military retirement fund do not agree with information 
presented in the Department of Defense's (DOD) financial statements. 
The note disclosure included in the CFS does not include a line for the 
valuation of plan amendments that occurred during the year. DOD 
correctly reported plan amendments separately in its financial 
statements; however, the mechanism was not available through FACTS 
submission for DOD to report plan amendments separately to the 
Department of the Treasury.

Environmental and Disposal Liabilities:

The note disclosure for environmental and disposal liabilities departed 
from the requirements of SFFAS No. 6 in two instances. The note 
disclosure on environmental liabilities was not complete and properly 
reported primarily because DOD was unable to fully implement elements 
of U.S. generally accepted accounting principles and OMB guidance. 
Specifically, the disclosures should do the following:

* Estimate and recognize cleanup costs associated with general PP&E at 
the time the PP&E is placed in service. In addition, a liability should 
be recognized for the portion of the estimated total cleanup cost that 
is attributable to that portion of the physical capacity used or that 
portion of the estimated useful life that has passed since the general 
PP&E was placed in service. As Treasury indicated in its note 
disclosures, DOD was unable to fully implement these two elements of 
U.S. generally accepted accounting principles. However, the note 
disclosure did not explain how these limitations prevented DOD from 
properly estimating its environmental liability. Linking the 
environmental liability to weaknesses in the DOD property, plant, and 
equipment systems would have made the CFS more useful to the reader.

* Include material changes in total estimated cleanup costs due to 
changes in laws, technology, or plans. When preparing the CFS, Treasury 
should consider whether the reader would be interested in understanding 
why the liability changed and include the explanation in the note 
disclosure.

Other Liabilities:

The note disclosure for other liabilities departed from the following 
disclosure requirements for capital leases and life insurance 
liabilities:

Capital Leases:

Financial Accounting Standards Board, Statement of Financial Accounting 
Standards (SFAS) No. 13, Accounting for Leases, paragraph 16, requires 
the following disclosures on capital leases:

* future minimum lease payments as of the date of the latest balance 
sheet presented, in the aggregate and for each of the 5 succeeding 
fiscal years, with separate deductions from the total for the amount 
representing executory costs, including any profit thereon, included in 
the minimum lease payments, and for the amount of the imputed interest 
necessary to reduce the net minimum lease payments to present value;

* a summary of assets under capital lease by major asset category and 
the related total accumulated amortization; and:

* a general description of the lessee's leasing arrangements, including 
but not limited to (1) the basis on which contingent rental payments 
are determined, (2) the existence and terms of renewal or purchase 
options and escalation clauses, and (3) restrictions imposed by lease 
agreements, such as those concerning dividends, additional debt, and 
further leasing.

Life Insurance Liabilities:

The note disclosure for other liabilities departed from the following 
disclosure requirements of SFFAS No. 5, Accounting for Liabilities of 
the Federal Government, with respect to life insurance liabilities:

* Paragraph 117 states that all federal reporting entities with whole 
life insurance programs should follow the standards as prescribed in 
the private sector standards when reporting the liability for future 
policy benefits. The applicable private sector standards are SFAS No. 
60, Accounting and Reporting by Insurance Enterprises; SFAS No. 97, 
Accounting and Reporting by Insurance Enterprises for Certain Long-
Duration Contracts and for Realized Gains and Losses from the Sale of 
Investments; and SFAS No. 120, Accounting and Reporting by Mutual Life 
Insurance Enterprises and by Insurance Enterprises for Certain Long-
Duration Participating Contracts; and American Institute of Certified 
Public Accountants Statement of Position 95-1, Accounting for Certain 
Insurance Activities of Mutual Life Insurance Enterprises.

* SFFAS No. 5, paragraph 121, requires that all components of the 
liability for future policy benefits (i.e., the net-level premium 
reserve for death and endowment policies and the liability for terminal 
dividends) should be separately disclosed in a footnote with a 
description of each amount and an explanation of its projected use and 
any other potential uses (e.g., reducing premiums, determining and 
declaring dividends available, or reducing federal support in the form 
of appropriations related to administrative cost or subsidies).

Commitments and Contingencies:

Certain disclosed information on major commitments and contingencies in 
the notes to the CFS was inconsistent with disclosed information in 
individual agencies' financial statements. Examples of such 
inconsistencies are as follows:

* Treasury did not disclose $114 billion in the notes to the CFS for 
war risk insurance. DOT provided temporary war risk insurance to U.S. 
air carriers whose coverage was canceled following the terrorist 
attacks on September 11, 2001. DOT disclosed $114 billion of war risk 
insurance in its notes to the financial statements, but Treasury did 
not disclose similar information in the notes to the CFS. Also, this 
information was included by DOT in the Treasury FACTS database. The 
risk of loss involving this type of insurance is unknown, but another 
terrorist attack against the United States could result in major 
claims.

* Treasury improperly disclosed $4.5 billion in unadjudicated claims 
for Commerce in the notes to the CFS. In its financial statements, 
Commerce disclosed that the exact amount of these claims against the 
U.S. government is unknown and the range of loss, which may exceed $4.5 
billion as of September 30, 2002, cannot be estimated. Because Commerce 
had disclosed that it could not estimate the loss from unadjudicated 
claims, which was proper, Treasury should not have disclosed an amount 
in the notes to the CFS. Disclosing information in the CFS that is 
inconsistent with information in an agency's financial statements may 
confuse users of the CFS or lead them to reach a wrong conclusion.

Treasury did not disclose sufficient information regarding the nature 
of certain major commitments and contingencies in the notes to the CFS. 
For example, Treasury did not clearly disclose in the notes to the CFS 
information regarding a possible capital investment requirement of TVA. 
The Environmental Protection Agency (EPA) had taken judicial and 
administrative actions against TVA that could require TVA to invest an 
estimated $3 billion to purchase equipment in order to comply with the 
Clean Air Act and conform to EPA's pollution control requirements. TVA 
is challenging this action. Treasury disclosed this $3 billion in the 
notes as an "administrative order against TVA" without providing the 
additional detail that the order represents a capital investment for 
compliance with the Clean Air Act and pollution control. The lack of 
such a detailed discussion about what the contingency represents could 
be misleading to readers of the CFS.

Collections and Refunds of Federal Revenue:

The disclosure for collections and refunds of federal revenue departed 
from the following disclosure requirements of FASAB's SFFAS No. 7, 
Concepts for Reconciling Budgetary and Financial Accounting:

* Paragraph 64, among other things, requires collecting entities to 
disclose the basis of accounting when the application of the general 
rule results in a modified cash basis of accounting. The CFS 
incorrectly states that the nonexchange revenues are reported on a 
modified cash basis of accounting when actually they are reported on a 
cash basis.

* Paragraph 69.2 requires collecting entities to provide in the other 
accompanying information any relevant estimates of the annual tax gap 
that become available as a result of federal government surveys or 
studies. The tax gap is defined as taxes or duties due from 
noncompliant taxpayers or importers. Amounts reported should be 
specifically defined (e.g., whether the tax gap includes or excludes 
estimates of taxes due on illegally earned revenue). Appropriate 
explanations of the limited reliability of the estimates also should be 
provided. Cross-references should be made to portions of the tax gap 
due from identified noncompliance assessments and preassessment work in 
process.

Dedicated Collections:

The note disclosure for dedicated collections departed from the 
disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue 
and Other Financing Sources, paragraph 85, by not including the 
following:

* condensed information about assets and liabilities showing 
investments in Treasury securities, other assets, liabilities due and 
payable to beneficiaries, other liabilities, and fund balance;

* condensed information on net cost and changes to fund balance, 
showing revenues by type (exchange/nonexchange), program expenses, 
other expenses, other financing sources, and other changes in fund 
balance; and:

* any revenues, other financing sources, or costs attributable to the 
fund under accounting standards but not legally allowable as credits or 
charges to the fund.

Indian Trust Funds:

The note disclosure for Indian trust funds departed from the following 
disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue 
and Other Financing Sources, paragraph 85, by not including the 
following:

* a description of each fund's purpose, how the administrative entity 
accounts for and reports the fund, and its authority to use those 
collections;

* the sources of revenue or other financing for the period and an 
explanation of the extent to which they are inflows of resources to the 
government or the result of intragovernmental flows;

* condensed information about assets and liabilities showing 
investments in Treasury securities, other assets, liabilities due and 
payable to beneficiaries, and other liabilities;

* condensed information on net cost and changes to fund balance, 
showing revenues by type (exchange/nonexchange), program expenses, 
other expenses, other financing sources, and other changes in fund 
balance; and:

* any revenues, other financing sources, or costs attributable to the 
fund under accounting standards, but not legally allowable as credits 
or charges to the fund.

Social Insurance:

The disclosure for social insurance departed from the following 
requirements of SFFAS No. 17, Accounting for Social Insurance:

* Paragraph 31 requires the program descriptions for Hospital Insurance 
and Supplementary Medical Insurance and an explanation of trends 
revealed in Chart 11: Estimated Railroad Retirement Income (Excluding 
Interest) and Expenditures 2002-2076.

* Paragraph 24 requires a description of statutory or other material 
changes, and the implications thereof, affecting the Medicare and 
Unemployment Insurance programs after the current fiscal year.

* Paragraph 25 requires the significant assumptions used in making 
estimates and projections regarding the Black Lung and Unemployment 
Insurance programs.

* Paragraph 32(1)(b) requires the total cash inflow from all sources, 
less net interest on intragovernmental borrowing and lending and the 
total cash outflow to be shown in nominal dollars for the Hospital 
Insurance program.

* Paragraph 32(1)(a) requires the narrative to accompany the cash flow 
data for Unemployment Insurance. This narrative should include the 
identification of any year or years during the projection period when 
cash outflow exceeds cash inflow, without interest, on 
intragovernmental borrowing or lending. In addition, the presentation 
should include an explanation of material crossover points, if any, 
where cash outflow exceeds cash inflow and the possible reasons for 
this.

* Paragraphs 27(3)(h) and 27(3)(j) require the estimates of the fund 
balances at the respective valuation dates of the social insurance 
programs (except Unemployment Insurance) to be included for each of the 
4 preceding years. Only 1 year is shown.

* Paragraph 32(4) requires individual program sensitivity analyses for 
projection period cash flow in present value dollars and annual cash 
flow in nominal dollars. The CFS includes only present value 
sensitivity analyses for Social Security and Hospital Insurance. 
Paragraph 32(4) states that, at a minimum, the summary should present 
Social Security, Hospital Insurance, and Supplementary Medical 
Insurance separately.

* Paragraph 27(4)(a) requires the individual program sensitivity 
analyses for Social Security and Hospital Insurance to include an 
analysis of assumptions regarding net immigration.

* Paragraph 27(4)(a) requires the individual program sensitivity 
analysis for Hospital Insurance to include an analysis of death rates.

* The actuarial present value information for the Railroad Retirement 
Board should not include financial interchange income 
(intragovernmental income from Social Security).

Nonfederal Physical Property:

The information included in Stewardship Information for nonfederal 
physical property departed from the following disclosure requirements 
of SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87:

* The annual investment, including a description of federally owned 
physical property transferred to state and local governments, must be 
disclosed. This information should be provided for the year ended on 
the balance sheet date as well as for each of the 4 preceding years. If 
data for additional years would provide a better indication of 
investment, reporting of the additional years' data is encouraged. 
Reporting should be at a meaningful category or level.

* A description of major programs involving federal investments in 
nonfederal physical property, including a description of programs or 
policies under which noncash assets are transferred to state and local 
governments, is to be provided.

Human Capital:

The information in stewardship information for human capital departed 
from the disclosure requirements of SFFAS No. 8, Supplementary 
Stewardship Reporting, paragraph 94, by not including the following:

* a narrative description and the full cost of the investment in human 
capital for the year being reported on as well as the preceding 4 years 
(if full cost data are not available, outlay data can be reported);

* the full cost or outlay data for investments in human capital at a 
meaningful category or level (e.g., by major program, agency, or 
department); and:

* a narrative description of major education and training programs 
considered federal investments in human capital.

Research and Development:

The information in stewardship information for research and development 
departed from the disclosure requirements of SFFAS No. 8, Supplementary 
Stewardship Reporting, paragraph 94, by not including the following:

* The annual investment[Footnote 13] made in the year ended on the 
balance sheet date as well as in each of the 4 years preceding that 
year must be reported. If data for additional years would provide a 
better indication of investment, reporting of the additional years' 
data is encouraged. In those unusual instances when entities have no 
historical data, only current reporting year data need be reported. 
Reporting must be at a meaningful category or level--for example, a 
major program or department.

* A narrative description of major research and development programs is 
to be included.

Deferred Maintenance:

The required supplemental information for deferred maintenance departed 
from the following disclosure requirements of SFFAS No. 6, Accounting 
for Property, Plant, and Equipment, paragraphs 83 and 84:

* Method of measuring deferred maintenance for each major class of PP&E 
should be included.

* If the condition assessment survey method of measuring deferred 
maintenance is used, the following should be presented for each major 
class of PP&E: (1) description of requirements or standards for 
acceptable operating condition, (2) any changes in the condition 
requirements or standards, and (3) asset condition and a range estimate 
of the dollar amount of maintenance needed to return the asset to its 
acceptable operating condition.

* If the total life-cycle cost method is used, the following should be 
presented for each major class of PP&E: (1) the original date of the 
maintenance forecast and an explanation for any changes to the 
forecast, (2) prior year balance of the cumulative deferred maintenance 
amount, (3) the dollar amount of maintenance that was defined by the 
professionals who designed, built, or managed the PP&E as required 
maintenance for the reporting period, (4) the dollar amount of 
maintenance actually performed during the period, (5) the difference 
between the forecast and actual maintenance, (6) any adjustments to the 
scheduled amounts deemed necessary by the managers of the PP&E, and (7) 
the ending cumulative balance for the reporting period for each major 
class of asset experiencing deferred maintenance.

* If management elects to disclose critical and noncritical amounts, 
the disclosure is to include management's definition of these 
categories.

Risk Assumed:

The note disclosure for stewardship responsibilities departed from 
disclosure requirements of SFFAS No. 5, paragraph 106, related to the 
risk assumed for federal insurance and guarantee programs. Risk assumed 
information is important for all federal insurance and guarantee 
programs (except social insurance, life insurance, and loan guarantee 
programs) and is generally measured by the present value of unpaid 
expected losses net of associated premiums, based on the risk inherent 
in the insurance or guarantee coverage in force. Paragraph 106 states 
that when financial information pursuant to FASB's standards on federal 
insurance and guarantee programs conducted by government corporations 
is incorporated in general purpose financial reports of a larger 
federal reporting entity, the entity should report as required 
supplementary information[Footnote 14] what amounts and periodic change 
in those amounts would be reported under the "risk assumed" approach.

[End of section]

Appendix II: Comments from Department of the Treasury and the Office of 
Management and Budget:

Jeffrey C. Steinhoff:

Managing Director, Financial Management and Assurance 
U.S. General Accounting Office:

Washington, D.C. 20548:

Dear Mr. Steinhoff:

We appreciate the opportunity to comment on the draft management report 
based on your FY2002 audit of the Financial Report of the United States 
Government (Financial Report). We reviewed this draft along with the 
associated attachments that will be included in your Financial Audit 
Report, Process for Preparing the Consolidated Financial Statements for 
the U.S. Government Needs Improvement. The report identified many 
recommendations that will improve the usefulness and accuracy of the 
Financial Report. We are already incorporating many of them into our 
new system and processes that are being developed for preparing the 
FY04 Financial Report. We will consider the other recommendations as we 
continue the design and implementation of the new compilation process.

There are two significant recommendations in your report with which we 
disagree.

Net Position. Treasury has decided not to include in the new 
compilation process the procedure that would require agencies to split 
their net position between Federal and Non-federal. This process was 
originally recommended as part of the Consolidated Financial Statement 
Improvement project. However, we were unable to develop a procedure 
that agencies could use to provide this split. In addition the net 
position split would not identify errors due to unreported 
miscellaneous receipts, buy/sell transactions, transfers-in and out, 
different basis of accounting, unbilled receivables, or other 
interagency transactions known to impact the unreconciled net position 
transactions.

Statements of Changes in Cash Balance from Unified Budget and Other 
Activities. This statement includes information derived from Treasury's 
Central Accounting System rather than from agency data (i.e., the 
Statement of Budgetary Resources (SBR)). You have suggested that agency 
data be used to prepare receipts and outlays used in our report. While 
we agree that management controls over amounts reported by agencies in 
the SBRs should be strengthened, we do not agree that the SBR data 
should be used to prepare our report or rises to an audit opinion issue 
for the government-wide report. Treasury maintains the data used to 
compute outlays and receipts used in the President's budget. This same 
information is also required by the accounting standard SFFAS 25(5). 
Therefore, it would not be appropriate to develop a time consuming and 
costly methodology to gather the SBR data for financial reporting 
purposes.

We would also request that the recommendations in your report that are 
directed to Treasury for action related to (1) management 
representation letters be directed to the Office of Management and 
Budget (OMB) and (2) legal representation letters be directed to OMB 
and the Department of Justice.

We requested that GAO provide a Management Letter because we believe it 
will be very helpful in identifying and addressing the audit findings. 
This process would be even more helpful to Treasury and OMB in 
subsequent years if the Management Letter is furnished in a time frame 
shortly after GAO completes its audit work, or within thirty days, so 
there will be opportunities to make changes before the fiscal year 
ends.

We look forward to continuing to work through these issues with you in 
our mutual effort to improve the Government's financial reporting. We 
will be scheduling a meeting with your staff to discuss other technical 
matters associated with your report.

Sincerely,

Linda M. Springer: 

Controller: 
Office of Management and Budget: 	

Donald V. Hammond:
Fiscal Assistant Secretary:
Treasury Department:

Signed by Linda M. Springer and Donald V. Hammond: 

GAO Comment:

Treasury and OMB did not schedule a meeting or provide us with any 
technical comments on this report.

[End of section]

(198203):

FOOTNOTES

[1] The fiscal year 2002 Financial Report of the United States 
Government was issued by the Department of the Treasury on March 31, 
2003, and is available through GAO's Web site at www.gao.gov and 
Treasury's web site at www.fms.treas.gov/fr/index.html.

[2] U.S. General Accounting Office, Internal Control: Standards for 
Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 
(Washington, D.C.: November 1999).

[3] U.S. Department of the Treasury, Consolidated Financial Report 
Improvement Project: Recommendations to the Consolidation Process 
(Washington D.C.: Nov. 15, 2001).

[4] Trading partners are U.S. government agencies, departments, or 
other components included in the CFS that do business with each other.

[5] An item's omission or error is considered material if the 
surrounding circumstances make it probable that the judgment of a 
reasonable person relying on the information would have been changed or 
influenced by the inclusion or correction of the item.

[6] Office of Management and Budget, Form and Content of Agency 
Financial Statements, OMB-01-09 (Washington, D.C.: Sept. 25, 2001). 
This bulletin is OMB's official guidance for the form and content of 
federal agencies' financial statements.

[7] To assess the materiality of any issue, the indicative criteria 
discussed in SFFAC No. 2 state that (1) the materiality of the entities 
and their relationship with one another should be considered, (2) 
materiality should not be measured solely in dollars, and (3) potential 
embarrassment to any of the entities' stakeholders should also be 
considered. Thus, a bias toward expansiveness and comprehensiveness 
would be justified, particularly if it could contribute to maintenance 
of fiscal control.

[8] See footnote 5.

[9] We requested 24 federal agency management representation letters. 
We received an additional 6 letters that we also included in our 
review.

[10] Office of Management and Budget, Audit Requirements for Federal 
Financial Statements, OMB-01-02 (Washington, D.C.: Oct. 16, 2000), 
requires agency chief financial officers to prepare a management 
schedule that documents how the information obtained in the legal 
counsel's response was considered in preparing the financial 
statements.

[11] We requested 24 federal agency legal representation letters. We 
received an additional 10 letters that we also included in our review.

[12] The term treaty in its technical usage in the United States 
denotes international agreements made by the President with the advice 
and consent of the Senate in accordance with Article II, section 2, of 
the Constitution of the United States. In addition to such treaties, 
authorized representatives of the federal government may, pursuant to 
existing law or treaties, enter into other international agreements 
that are governed by international law. The entering into and record 
keeping of such international agreements by federal agencies are 
governed by the Case-Zablocki Act, 1 U.S.C. section 112b, and 
implementing State Department regulations, 22 C.F.R. Part 181 (2002).

[13] As defined in this standard, "annual investment" includes more 
than the annual expenditure reported by character class for budget 
execution. Full cost shall be measured and accounted for in accordance 
with SFFAS No. 4, Managerial Cost Accounting Standards for the Federal 
Government.

[14] In July 2003, SFFAS No. 25 reclassified "risk assumed" from 
Required Supplementary Stewardship Information to Required 
Supplementary Information.

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