Management Report:

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

GAO-12-529: Published: Jun 27, 2012. Publicly Released: Jun 27, 2012.

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What GAO Found

During its audit of the fiscal year 2011 consolidated financial statements of the U.S. government (CFS), GAO identified new and continuing control deficiencies in the Department of the Treasury’s (Treasury) and the Office of Management and Budget’s (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control over the federal government’s ability to

  • adequately account for and reconcile intragovernmental activity and balances between federal entities;
  • ensure that the federal government’s accrual-based consolidated financial statements were consistent with the underlying audited entities’ financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and
  • identify and either resolve or explain material differences between (1) components of the budget deficit that are used to prepare certain information in the CFS and (2) related amounts reported in federal entities’ financial statements and underlying financial information and records.

GAO identified new control deficiencies involving the need to

  • develop or revise and implement written procedures for appropriate Treasury and OMB officials to (1) review and approve the drafts of the Financial Report of the United States Government (Financial Report) before they are provided to GAO and (2) better ensure that key federal entity personnel are actively involved in the process for preparing and reviewing the Financial Report;
  • enhance procedures for timely review, approval, and use of the CFS disclosure checklist;
  • develop procedures for pursuing indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with applicable accounting standards;
  • enhance Treasury’s intragovernmental data validation process; and
  • enhance procedures for timely identifying, notifying, and obtaining closing packages from federal entities as they first become significant to the Financial Report.

In addition, GAO found that various other control deficiencies identified in previous years’ audits with respect to the CFS preparation continued to exist. Specifically, of the 50 open recommendations from GAO’s prior reports regarding control deficiencies in the CFS preparation process,12 were closed and 38 remained open as of December 12, 2011, the date of GAO’s report on its audit of the fiscal year 2011 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations as well as the 38 open recommendations from prior years as part of its fiscal year 2012 CFS audit.

Why GAO Did This Study

Treasury, in coordination with OMB, is primarily responsible for preparing the Financial Report, which contains the CFS. Since GAO’s first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of GAO’s work have prevented GAO from expressing an opinion on the CFS, exclusive of the Statement of Social Insurance (SOSI). Also, GAO was unable to express opinions on the 2011 and 2010 SOSI and the 2011 Statement of Changes in Social Insurance Amounts because of significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth, reflected in these statements.

As part of the fiscal year 2011 CFS audit, GAO identified material weaknesses and other control deficiencies in the processes used to prepare the CFS. The purpose of this report is to (1) provide details on new control deficiencies GAO identified related to the preparation of the CFS, (2) recommend improvements, and (3) provide the status of corrective actions taken to address GAO’s prior recommendations in this area that remained open at the end of the fiscal year 2010 audit.

What GAO Recommends

GAO is making 10 recommendations —9 to Treasury and 1 to OMB—to address new control deficiencies. In commenting on GAO’s draft report, Treasury and OMB generally concurred with GAO’s findings.

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

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2013 CFS audit, this recommendation was closed. OMB developed and implemented written procedures specifying the steps for reviewing and approving the drafts of the Financial Report.

    Recommendation: The Acting Director of OMB should direct the Controller of OMB to develop and implement written procedures specifying the steps required for effectively reviewing and approving the drafts of the Financial Report before they are provided to GAO, to include clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in OMB's Office of Federal Financial Management, including the Controller of OMB.

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

  2. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. During fiscal year 2012, we found that Treasury revised and implemented its procedures related to preparing and reviewing the drafts of the Financial Report before they are provided to GAO, including clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in the Office of the Fiscal Assistant Secretary, including the Fiscal Assistant Secretary.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary to revise and implement Treasury's procedures related to preparing and reviewing the drafts of the Financial Report before they are provided to GAO, to include clear delineation of the review and approval roles and responsibilities of designated appropriate higher-level officials in the Office of the Fiscal Assistant Secretary, including the Fiscal Assistant Secretary.

    Agency Affected: Department of the Treasury

  3. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. Treasury has involved key federal entity personnel with technical expertise during the interim and year end review and preparation of the Financial Report. According to Treasury officials, as Treasury increases the key topics for the third quarter analysis in fiscal year 2014, the key federal entity personnel and the Treasury employees will work collaboratively from third quarter analysis until the Financial Report publication on these key topics. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to develop and implement procedures to provide for the active involvement of key federal entity personnel with technical expertise in relatively new areas and more complex areas in the preparation and review process of the Financial Report.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. We found that in fiscal year 2012, Treasury established a mechanism to ensure that Treasury's CFS disclosure checklist is reviewed and approved by the date in Treasury's policies and procedures.

    Recommendation: To help to provide reasonable assurance that the information reported in the CFS is complete, accurate, and in conformity with generally accepted accounting principles (GAAP), the Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish a mechanism to ensure that Treasury's CFS disclosure checklist is reviewed and approved by the date in Treasury's policies and procedures.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2013 CFS audit, this recommendation was closed. Treasury prepared the CFS disclosure checklist for the generation of the format draft of the CFS and ensured that all necessary updates were made to the checklist.

    Recommendation: To help to provide reasonable assurance that the information reported in the CFS is complete, accurate, and in conformity with generally accepted accounting principles (GAAP), the Secretary of the Treasury should direct the Fiscal Assistant Secretary to revise the standard operating procedure (SOP) to include requirements for using the CFS disclosure checklist to prepare the format draft of the CFS and to update the CFS disclosure checklist as necessary when subsequent drafts of the CFS are prepared.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. We found that during fiscal year 2012, Treasury enhanced the Data Analysis SOP to include required steps for pursuing instances where information provided to Treasury contained indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with GAAP, particularly with respect to any recent changes in GAAP.

    Recommendation: To help to provide reasonable assurance that financial information is properly reported in the CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the SOP entitled 'Data Analysis" to include required steps for pursuing any instances where the information provided to Treasury contains indications that financial information provided by federal entities for inclusion in the CFS may not be in conformity with GAAP, particularly with respect to any recent changes in GAAP.

    Agency Affected: Department of the Treasury

  7. Status: Closed - Implemented

    Comments: As of the completion of our fiscal year 2012 CFS audit, this recommendation was closed. In fiscal year 2012, Treasury enhanced the IRAS validation procedures to include specific steps for testing intragovernmental data of the administrator's assigned entity.

    Recommendation: To help to provide reasonable assurance that appropriate controls are in place to reduce the risk of errors in IRAS reports, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to enhance the IRAS validation procedures, at a minimum, to include specific steps for testing intragovernmental data of the administrator's assigned entity.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: Treasury has made significant progress in addressing internal control deficiencies related to intragovernmental activity and balances, including replacing IRAS with a new system that improves the data collection and functionality needs for this area. The remaining internal control deficiencies in this area were included in new recommendations for corrective action in GAO-14-543 under the section "Intragovernmental Activity and Balances".

    Recommendation: To help to provide reasonable assurance that appropriate controls are in place to reduce the risk of errors in IRAS reports, the Secretary of the Treasury should direct the Fiscal Assistant Secretary to establish a mechanism for ensuring that all steps in the required validation process are completed, documented, and reviewed prior to the distribution of Intragovernmental Reporting and Analysis System (IRAS) reports.

    Agency Affected: Department of the Treasury

  9. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. According to Treasury officials, Treasury will implement a new approach in fiscal year 2014 for identifying new entities that become significant to the Financial Report during the fiscal year. This approach will include an analysis performed using data from the Central Accounting Reporting system (CARS), Governmentwide Treasury Account Symbol Adjusted Trial Balance System (GTAS), and Governmentwide Financial Report System (GFRS) throughout the fiscal year. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: To help to provide reasonable assurance that Treasury timely receives the audited closing package from those federal entities that are newly identified as being significant to the Financial Report, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled 'Significant Federal Entities Identification" to include procedures for identifying any entities that become significant to the Financial Report during the fiscal year but were not identified as significant in the prior fiscal year.

    Agency Affected: Department of the Treasury

  10. Status: Open

    Comments: As of the completion of our fiscal year 2013 CFS audit, Treasury agreed that this recommendation remained open. According to Treasury officials, Treasury will update the SOP entitled "Significant Federal Entities Identification" to include procedures to obtain audited closing packages from newly identified significant entities as determined in the approach being taken to address recommendation No. 11-09. Treasury will also provide timely written notification to such entities. We will follow-up on progress made by the Treasury as part of our fiscal year 2014 CFS audit.

    Recommendation: To help to provide reasonable assurance that Treasury timely receives the audited closing package from those federal entities that are newly identified as being significant to the Financial Report, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to enhance the SOP entitled 'Significant Federal Entities Identification" to include procedures for obtaining audited closing packages from newly identified significant entities in the year they become significant, including timely written notification to newly identified significant entities.

    Agency Affected: Department of the Treasury

 

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