Auditing

Feds’ Financials Flunk, Again

The GAO is once more unable to issue an audit opinion on the 2007 financial results for the United States.
Marie LeoneDecember 17, 2007

The Government Accountability Office was prevented from rendering an audit opinion of the federal government’s financial results, citing “serious” material weaknesses affecting the nation’s financial systems, fundamental recordkeeping, and financial reporting. The 2007 Financial Report of the United States was released by the Treasury Department on Monday morning, just hours before Comptroller General David M. Walker, who heads up the GAO, spoke to reporters about the audit at a National Press Club luncheon.

“If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up,” said Walker. He also noted this was the 11th year in row that GAO was unable to express an opinion on the consolidated financial results submitted by the Treasury Department.

In his speech, Walker blamed most of the problems on three factors: serious financial management problems at the Department of Defense, the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and the government’s ineffective process for preparing the consolidated financial statements.

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Walker did point to one bright spot, however. GAO gave an unqualified opinion on the Statement of Social Insurance, which includes the financial reports for the Social Security, Medicare, Railroad Retirement, and Black Lung programs. The clean audit of these programs is important because the statement covers some of the largest balance sheets in the federal government, accounting for “tens of trillions of present-value dollars” related to future insurance expenditures. “One of the reasons we could issue an unqualified opinion is because the Department of Defense has nothing to do with the Statement of Social Insurance,” declared Walker.

Most of the other 24 departments and agencies reviewed by GAO auditors also received unqualified opinions. However, DOD’s budget is so large, comprising 23 percent ($690 billion) of the government’s total net costs, that its problematic audit is a significant setback. DOD, along with the Department of Homeland Security (DHS), the State Department, and the National Aeronautics and Space Administration received audits with disclaimers. That means that auditors were unable to render an opinion because of significant accounting-related problems. Alternatively, a qualified opinion is issued by auditors when they have concerns, but feel comfortable releasing the financial results if the problems are annotated.

Five agencies, DHS, DOD, NASA, the Department of Transportation, and the Environmental Protection Agency had to restate their fiscal 2006 financial results.

Walker pointed out that from a short-term perspective the federal deficits have declined for three straight years. But he emphasized that the nation is still running large deficits on an operating basis, which is calculated by subtracting the Social Security surplus from the bottom line.

He explained that the federal government continues to spend the entire Social Security surplus on various government operating expenses and replaces the cash with government bonds held in so-called government trust funds. “Our current deficit and debt levels are not unduly troubling as a percentage of our national economy,” he told the Press Club. He calculated that the federal government’s exposure totaled about $53 trillion as of September 30, 2007, up more than $2 trillion from the year before.

Further, Walker called for “greater transparency and accountability over the government’s operations, financial condition, and fiscal outlook.” To that end, he said GAO is working with the Treasury Department and Office of Management and Budget to produce “the first ever” summary annual report for the federal government. The document, which is slated to be released in mid January 2008, will be more concise and user friendly than the “voluminous” annual report issued today, said Walker.

The news from the Treasury Department was rosier. Treasury Secretary Henry Paulson chose to focus on the $2.6 trillion in “record-breaking revenues” that flowed into federal coffers, and a 39 percent decline in net operating costs. The revenue increase is a 7.6 percent improvement over last year.

The 2007 annual report also noted that the total number of material weaknesses cited by GAO declined from 41 to 39 this year, the fourth straight year the statistic dropped.

Nevertheless, messy accounting seems to plague the federal government. In November, the U.S. Office of Management and Budget released its report on the 24 agencies required under the CFO Act of 1990 to produce annual, auditable financial statements. That report noted that 19 of the agencies received clean audit opinions on their fiscal 2007 audits, a slight improvement over last year’s tally of 18.

Also in November, GAO announced that the Securities and Exchange Commission had a material weakness in its internal controls over financial reporting, while Internal Revenue Service was cited for having “serious” internal controls and financial management problems.