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Management Report: Improvements Needed in Controls over the Processes Used to Prepare the U.S. Consolidated Financial Statements

GAO-14-543 Published: Jun 19, 2014. Publicly Released: Jun 19, 2014.
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Highlights

What GAO Found

During its audit of the fiscal year 2013 consolidated financial statements of the U.S. government (CFS), GAO identified control deficiencies in the Department of the Treasury's (Treasury) and the Office of Management and Budget's (OMB) processes used to prepare the CFS. These control deficiencies contributed to material weaknesses in internal control over the federal government's ability to

adequately account for and reconcile intragovernmental activity and balances between federal entities;

ensure that the federal government's accrual-based consolidated financial statements were (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in conformity with U.S. generally accepted accounting principles; and

ensure the consistency of (1) information used by Treasury to compute the budget deficit reported in the consolidated financial statements, (2) Treasury's records of cash transactions, and (3) information reported in federal entity financial statements and underlying financial information and records.

Specifically, for fiscal year 2013, GAO found that

Treasury's and OMB's corrective action plans are not adequate to reasonably assure that internal control deficiencies involving the processes used to prepare the CFS are efficiently and effectively addressed,

Treasury does not have procedures to sufficiently document management's conclusions and the basis for such conclusions regarding the accounting policies for the CFS, and

Treasury does not have adequate procedures for verifying staff's preparation of the narrative within the notes to the CFS to reasonably assure that the narrative is accurate and supported by the underlying financial information of the significant component entities.

GAO also updated the description of the control deficiencies related to the long-standing material weakness regarding the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal entities. GAO closed 6 recommendations from prior GAO reports and made 4 new recommendations that are better aligned with the remaining internal control deficiencies in this area. In addition, GAO found that various other control deficiencies identified in previous years' audits with respect to the processes used to prepare the CFS continued to exist. Specifically, 24 of the 37 recommendations from GAO's prior reports regarding control deficiencies in the processes used to prepare the CFS remained open as of February 19, 2014, the date of GAO's report on its audit of the fiscal year 2013 CFS. GAO will continue to monitor the status of corrective actions taken to address the 7 new recommendations as well as the 24 open recommendations from prior years as part of its fiscal year 2014 CFS audit.

Why GAO Did This Study

Treasury, in coordination with OMB, prepares the Financial Report of the United States Government , which contains the CFS. Since GAO's first audit of the fiscal year 1997 CFS, certain material weaknesses and other limitations on the scope of its work have prevented GAO from expressing an opinion on the accrual-based CFS. As part of the fiscal year 2013 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 the control deficiencies GAO identified related to the processes used to prepare the CFS, (2) recommend improvements, and (3) provide the status of corrective actions taken by Treasury and OMB to address GAO's prior recommendations relating to the processes used to prepare the CFS that remained open at the end of the fiscal year 2012 audit.

Recommendations

GAO is making seven new recommendations—five to both Treasury and OMB and two to Treasury—to address the control deficiencies identified by GAO during the fiscal year 2013 CFS audit. In commenting on GAO's draft, Treasury and OMB generally concurred with GAO's recommendations.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Treasury
Priority Rec.
To efficiently and effectively address internal control deficiencies involving the processes used to prepare the CFS, the Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to include all key elements recommended by the Implementation Guide and fully consider the interrelationships between deficiencies in the corrective action plans.
Closed – Implemented
As of the completion of our fiscal year 2016 consolidated financial statements (CFS) audit, this recommendation was closed. Treasury and OMB developed a significantly more robust remediation plan in fiscal year 2015. In fiscal year 2016, the plan was enhanced to highlight key milestones and identify outcome measures to help track and maintain progress.
Department of the Treasury The Secretary of the Treasury should direct the Fiscal Assistant Secretary to develop and implement procedures to sufficiently document management's conclusions and the basis of such conclusions regarding the accounting policies for the CFS.
Closed – Implemented
As of the completion of our fiscal year 2014 consolidated financial statements audit, this recommendation was closed. Treasury developed and implemented procedures to sufficiently document management's conclusions and the basis of such conclusions regarding the accounting policies for the CFS.
Department of the Treasury The Secretary of the Treasury should direct the Fiscal Assistant Secretary to improve and implement Treasury's procedures for verifying that staff's preparation of the narrative within the notes to the CFS is accurate and supported by the underlying financial information of the significant component entities.
Closed – Implemented
As of the completion of our fiscal year 2014 consolidated financial statements audit, this recommendation was closed. Treasury updated its standard operating procedure to include specific steps to verify the applicable note narrative, including a review by subject matter accountants of narrative wording "line by line" as well as documented references from each line to the agencies' annual financial reports. Treasury effectively implemented the procedures in fiscal year 2014.
Department of the Treasury
Priority Rec.
The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to continue to build on the procedures in place to effectively identify systemic root causes of intragovernmental differences and monitor how federal entities are addressing the root causes.
Closed – Implemented
As of the completion of our fiscal year 2016 consolidated financial statements audit, this recommendation was closed. Treasury required federal entities to provide corrective action plans (CAPs) to identify and resolve the associated root causes of recurring differences, and monitored the entities' implementation of the CAPs.
Department of the Treasury
Priority Rec.
The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to expand the scorecard process to include intragovernmental activity and balances that are currently not covered by the process or demonstrate that such information is immaterial to the CFS.
Closed – Implemented
As of the completion of our fiscal year 2016 consolidated financial statements (CFS) audit, this recommendation was closed. Treasury demonstrated that the intragovernmental activity and balances not covered by the scorecard process is immaterial to the CFS.
Department of the Treasury
Priority Rec.
The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to establish and implement policies and procedures for accounting for and reporting all significant General Fund activity and balances, obtaining assurance on the reliability of the amounts, and reconciling the activity and balances between the General Fund and federal entities.
Open
As of the completion of our fiscal year 2022 audit of the consolidated financial statements of the U.S. government (CFS), this recommendation remained open. Treasury continued to make progress such as by establishing procedures to (1) obtain and review support for material accrual balances provided by federal entities for inclusion in the General Fund's general ledger and (2) review federal entity audited financial statements and conduct data calls for unrecorded activity to include in the General Fund's general ledger. In addition, Treasury has been working with federal entities to ensure proper usage of newly established transaction codes. However, intragovernmental differences remain and further improvements are needed to account for and report all significant General Fund activity and balances, including obtaining audit assurance and reconciling with federal entity trading partners.
Department of the Treasury
Priority Rec.
The Secretary of the Treasury should direct the Fiscal Assistant Secretary, working in coordination with the Controller of OMB, to establish a formalized process to require the performance of additional audit procedures specifically focused on intragovernmental activity and balances between federal entities to provide increased audit assurance over the reliability of such information.
Open
As of the completion of our fiscal year 2022 audit of the consolidated financial statements of the U.S. government (CFS), this recommendation remained open. Treasury added steps to its remediation plan and included a goal of completing corrective actions by fiscal year 2025. For example, Treasury added questions to the CFO Representation Form effective in fiscal year 2023. Though the remediation plan has been improved, we continued to note that amounts reported by federal entity trading partners to Treasury were not in agreement by significant amounts. A formalized process requiring that auditors perform additional audit procedures focused on intragovernmental activity and balances would help to address these unreconciled transactions.

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Accounting proceduresAccounting standardsBudget deficitFederal agenciesFinancial managementFinancial recordsFinancial statement auditsFinancial statementsInternal controlsReporting requirements