Financial Audit: U.S. Government's Fiscal Years 2014 and 2013 Consolidated Financial Statements

What GAO Found

To operate as effectively and efficiently as possible and to make difficult decisions to address the federal government’s fiscal challenges, Congress, the administration, and federal managers must have ready access to reliable and complete financial and performance information—both for individual federal entities and for the federal government as a whole. Further, when fully and effectively implemented, the Digital Accountability and Transparency Act of 2014 (DATA Act) will help promote transparency to the public and address ongoing government management challenges by enhancing the quality and expanding the availability of federal spending data. Having better data also will help federal entities make fully informed decisions about how federal resources should be allocated, and provide federal entities and the audit community with additional data analytic tools for detecting and preventing improper payments and fraudulent spending. Overall, significant progress has been made since the enactment of key federal financial management reforms in the 1990s; however, GAO’s report on the U.S. government’s consolidated financial statements underscores that much work remains to improve federal financial management, and these improvements are urgently needed.

GAO found the following:

• Certain material weaknesses in internal control over financial reporting and other limitations on the scope of its work resulted in conditions that prevented GAO from expressing an opinion on the accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 2013. About 32 percent of the federal government’s reported total assets as of September 30, 2014, and approximately 19 percent of the federal government’s reported net cost for fiscal year 2014 relate to three Chief Financial Officers Act agencies that as of the date of GAO’s audit report, either received disclaimers of opinion on their fiscal year 2014 financial statements or had not issued their audited fiscal year 2014 financial statements.
• Significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance, prevented GAO from expressing an opinion on those statements as well as on the 2014 and 2013 Statements of Changes in Social Insurance Amounts. About $28.5 trillion, or 68.0 percent, of the reported total present value of future expenditures in excess of future revenue presented in the 2014 Statement of Social Insurance relates to Medicare programs reported in the Department of Health and Human Services’ 2014 Statement of Social Insurance, which received a disclaimer of opinion.
• Material weaknesses resulted in ineffective internal control over financial reporting for fiscal year 2014.
• Material weaknesses and other scope limitations discussed in the audit report limited GAO’s tests of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements for fiscal year 2014.

Three major impediments prevented GAO from rendering an opinion on the federal government’s accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (DOD), (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities, and (3) the federal government’s ineffective process for preparing the consolidated financial statements. Efforts are under way to resolve these issues, but strong and sustained commitment by DOD and other federal entities as well as continued leadership by the Department of the Treasury (Treasury) and the Office of Management and Budget (OMB) are necessary to implement needed improvements.

Material weaknesses, including those underlying these three major impediments, continued to (1) hamper the federal government’s ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government’s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government’s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an efficient and effective manner.

In addition to the three major impediments, GAO identified other material weaknesses. These are the federal government’s inability to (1) determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them, (2) identify and resolve information security control deficiencies and manage information security risks on an ongoing basis, and (3) effectively manage its tax collection activities.

While the near-term outlook has improved, the comprehensive long-term fiscal projections presented in the unaudited Required Supplementary Information section of the Fiscal Year 2014 Financial Report of the United States Government show that absent policy changes, the federal government continues to face an unsustainable long-term fiscal path.

In commenting on a draft of this report, Treasury and OMB officials expressed their continuing commitment to address the problems this report outlines.

Why GAO Did This Study

The Secretary of the Treasury, in coordination with the Director of OMB, is required to annually submit audited financial statements for the U.S. government to the President and Congress. GAO is required to audit these statements. The Government Management Reform Act of 1994 has required such reporting, covering the executive branch of government, beginning with financial statements prepared for fiscal year 1997. Treasury and OMB have elected to include certain financial information on the legislative and judicial branches in the consolidated financial statements as well.

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