Financial Audit:

Restatements to the Department of State's Fiscal Year 2003 Financial Statements

GAO-05-814R: Published: Sep 20, 2005. Publicly Released: Sep 20, 2005.

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The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate and readers of the restated financial statements understand that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Nine of the 11 agencies that had restatements for fiscal year 2003 received unqualified opinions on their originally issued fiscal year 2003 financial statements. The auditors for 6 of these 9 agencies issued unqualified opinions on the restated financial statements, replacing the previous unqualified opinions on the respective agencies' original fiscal year 2003 financial statements. The auditors for 2 of these 9 withdrew their unqualified opinions on the fiscal year 2003 financial statements and issued other than unqualified opinions on the respective agencies' restated fiscal year 2003 financial statements because they could not determine whether there were any additional misstatements and the effect of any such misstatements on the restated fiscal year 2003 financial statements. For the remaining agency, the principal auditor of the agency's fiscal year 2004 financial statements was not the principal auditor of the agency's fiscal year 2003 financial statements, and an audit opinion on the agency's restated fiscal year 2003 financial statements was not issued. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding State's fiscal year 2003 restatements. We reviewed four key areas with respect to the restatements of State's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatements, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatements during the audit of the agency's fiscal year 2003 financial statements.

Failure to properly record journal voucher entries for two large transactions that together accounted for most of a $927 million error and inadequate management review of these journal vouchers to detect the improper entries led to the material error that necessitated State's restatements of certain of its fiscal year 2003 financial statements. We determined that State's auditor did not detect the errors because the fiscal year 2003 audit tests performed by the auditor were not designed to detect journal voucher entry errors for the affected accounts. In addition, the title of State's note disclosure of the restatements could be misinterpreted. We are making a recommendation to State's Acting CFO to address the issues we identified with respect to the journal voucher errors that necessitated the fiscal year 2003 restatements. We are also making a recommendation to State's Inspector General to work with the contracted independent public accountant (IPA) to ensure that audit tests to detect any similar journal voucher errors in the future are implemented. In commenting on a draft of this report, State's Acting CFO stated that his office agrees with our recommendation for management to evaluate whether State's new journal voucher review procedures are effective and that State is currently reviewing the effectiveness of these procedures. State's Inspector General concurred with our recommendation and stated that his office will work with the IPA to implement audit steps in conformance with the Financial Audit Manual (FAM) to test journal vouchers in the Bureau of International Organizations unfunded and funded liabilities accounts. We also received technical comments from State's Acting CFO and Inspector General, which we have incorporated as appropriate.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, State reviewed the effectiveness of its procedures and concluded that the procedures employed to review the Bureau of International Organizations journal vouchers are now in place and operating effectively. By implementing sufficient controls over State's IO journal voucher transactions, State has improved its controls over financial reporting.

    Recommendation: State's Acting CFO should determine whether the new journal voucher review procedures established to ensure adequate review of Bureau of International Organizations journal voucher transactions are being fully and effectively implemented.

    Agency Affected: Department of State

  2. Status: Closed - Implemented

    Comments: In response to our recommendation, State's IG informed us that subsequent to our review, State's OIG worked with the IPA to develop audit steps to test State's journal vouchers. The IG further stated that during the department's fiscal year 2005 financial statements audit, the IPA obtained and examined all of State's IO journal vouchers. By taking these actions, State's IG has improved its ability to detect the type of errors that caused the restatements and our ability to use the audit work in this area on future audits of the CFS.

    Recommendation: State's Inspector General should work with State's IPA to ensure that audit tests in conformance with the FAM to test journal vouchers in the Bureau of International Organizations unfunded and funded liabilities accounts are fully and effectively implemented.

    Agency Affected: Department of State

 

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