Auditing

GAO to IRS: Get Control of Yourself

The tax regulator's lax internal controls have federal auditors worried about whether future IRS financial reports can be trusted.
Sarah JohnsonNovember 12, 2008

The taxman is lucky he’s not a public-company CFO who must sign off on internal controls every year or risk federal prosecution.

For years, the Internal Revenue Service has had poor internal controls over financial reporting, and this past fiscal year was no exception, according to the most recent audit report by the U.S. Government Accountability Office.

The GAO gives the IRS some credit, citing the agency for “making significant strides” in dealing with its financial management problems, for example, by improving some controls over unpaid-tax collections. But the GAO auditors still have doubts about the its “future ability to determine whether IRS’s financial statements are fairly stated.”

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The GAO attributes much of the IRS’s control failing to a lack of safeguards for data. Nearly half the 147 outstanding recommendations made by the GAO relating to fixes for the IRS’s problems in recent years relate to material weaknesses in information security. Moreover, the GAO worries that modernization of the IRS’s accounting systems will actually make it harder for the GAO to audit the agency in the future. The GAO has been working around the IRS’s control failures by making comparisons between automated systems and hard-copy records — which the GAO predicts it won’t be able to do someday.

The IRS “did not provide reasonable assurance that losses, misstatements, and noncompliance with laws and regulations material in relation to the financial statements would be prevented or detected on a timely basis,” wrote the GAO, which, despite the IRS’s problems, still gave the agency an unqualified opinion for its fiscal-year 2007 and 2008 financial statements.

In a letter responding to the GAO report, Douglas Shulman, IRS commissioner, noted that the recent audit reflected new improvements in its ability to manage its finances and produce reliable financial statements. “We have a solid management team dedicated to promoting the highest standards of financial management, and we continue to increase the focus on information security and internal controls while improving financial reporting,” he wrote.