Accounting & Tax

GAO Cites Material Weaknesses

Several material weaknesses kept the federal government from maintaining effective internal controls over financial reporting. Also, deficit still ...
Stephen TaubMarch 3, 2006

Officials at the U.S. Government Accountability Office (GAO) said that for the ninth straight year it is unable to provide an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated and conform with generally accepted accounting principles (GAAP). The GAO cites material weaknesses in internal controls and selected accounting and financial reporting practices as the reason for the qualified opinion.

In a March 1 report on fiscal year 2005 government financial statements, the agency cited three major impediments to rendering an opinion on the financial statements: serious financial management problems at the Department of Defense; the federal government’s inability to adequately account for, and reconcile, intragovernmental activity and balances among federal agencies; and the federal government’s ineffective process for preparing the consolidated financial statements.

In its report, the GAO also stated that as of the end of the September 30, 2005, fiscal year, several material weaknesses kept the federal government from maintaining effective internal control over financial reporting and compliance with laws and regulations. The agency also expressed concerns about the identification of misstatements in federal agencies’ prior-year financial statements. “Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties,” said the report.

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The report stressed that material internal-control weaknesses serve to increase the risk that additional errors may occur or be missed by agency management and auditors, thereby resulting in further restatements. Despite these accounting-related issues, the GAO asserted that even more troubling is the federal government’s overall financial condition and long-term fiscal imbalance.

It noted that while the 2005 fiscal-year budget deficit was lower than it was in 2004, it was still very high, especially given the impending retirement of the “baby boom” generation and rising health-care costs. The report pointed out that the cost to operate the federal government surged 23 percent — to $760 billion — in fiscal year 2005, from $616 billion the prior year. Gross debt was approximately $8 trillion.

This figure excludes such items as the gap between the present value of future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities, commitments, and contingencies that the federal government has pledged to support. If those items are included, the federal government’s fiscal exposures exceed $46 trillion, which works out to nearly four times gross domestic product in fiscal year 2005, up from about $20 trillion, or two times GDP in 2000.