Latest Grade for Government Financials? F-plus

GAO notes some gains in fixing the processes for financial-statement preparation, but sees "continuing and new deficiencies" in such areas as use o...
Kate PlourdJune 19, 2008

A new Government Accountability Office report on material weaknesses in federal-agency internal controls notes such persistent deficiencies as failure to use proper accounting standards, although the GAO acknowledges some improvement since the last in a series of criticisms the watchdog group has issued on government reporting.

The report, titled “Material Weaknesses in Internal Control over the Processes Used to Prepare the Consolidated Financial Statements of the U.S. Government,” highlighted control deficiencies corrected and uncorrected since a GAO report on the subject issued last July. Deficiencies such as poor documentation and the inability to assess the effectiveness of internal controls are among those that have yet to be resolved, according to the latest study. It adds 10 new recommendations that the agencies may use to improve their process for consolidating.

For example, the GAO finds that the Department of the Treasury failed to maintain adequate control over federal employees’ use of spreadsheets and databases, in which audited financial information is entered in preparation for compiling the consolidated financial statements. Certain spreadsheets were not protected from inadvertent changes or didn’t track changes made to the data, for example, and many of the column headings in the database were not properly labeled.

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The GAO report recommends that Treasury Secretary Henry Paulson direct the fiscal assistant secretary to establish proper internal controls over data entered in spreadsheets, noting that spreadsheet vendors themselves “provide guidance on maintaining and protecting spreadsheet integrity.”

In addition, the accountability office finds that billions of dollars of unreconciled differences still exist between budget summaries produced by select federal agencies and those reported in Treasury’s central accounting records. While the Office of Management and Budget is currently looking into how to reconcile the differences, the GAO says, the agency needs to develop a formal process and procedure for identifying and resolving such discrepancies.

The report notes “continuing and new control deficiencies during its audit” of fiscal 2007 financial statements. And it says that the deficiencies “contribute to material weaknesses in internal control” that relate to reconciling intragovernmental activity and balances between federal agencies [and] ensuring statements are consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles….” The deficiencies also inhibit agencies from identifying and resolving or explaining “material differences that exist between certain components of the budget deficit,” as reported in Treasury records.

Material weaknesses in the government’s internal controls and accounting practices are hardly new developments. For the past 11 years the deficiencies have prevented the GAO from issuing an opinion on the government’s consolidated financial statements.

The latest report outlines details of the material weakness it identified in the past year’s financial statement audits and recommends improvements, while noting steps that the two federal departments have taken to correct some of the 81 recommendations GAO detailed in last summer’s report.

Some GAO recommendations:

• Redesign the financial statement preparation procedure to adequately and timely document how it assesses relevant, useful and material information reported by other federal agencies.

• Consider using relevant accounting standards other than those recommended by the Federal Accounting Standards Advisory Board, which circulates accounting principles for federal government reporting entities.

• Develop a standard operating procedure for CFS preparation that is consistently applied by all staff members.

• Give other federal agencies proper instructions on how to reconcile or report discrepancies between their records and Treasury’s central accounting records.

• Establish internal controls to protect spreadsheets used to compile financial statements from being inadvertently changed.

OMB and Treasury both agreed with the new findings and recommendations. In a letter to the GAO’s director of financial management and assurance, Gary Engel, Treasury noted that in fiscal year 2007 it had resolved 35 of the 81 outstanding recommendations from the GAO’s previous report, and has improved financial-statement internal controls and helped make the statements “more meaningful and usable to its readers.”

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