Those material weaknesses relate to  the federal government’s inability to  satisfactorily determine that property, plant, and equipment and  inventories and related property, primarily held by the Department of  Defense (DOD), were properly reported in the accrual-based  consolidated financial statements;  reasonably estimate or adequately support amounts reported for  certain liabilities, such as environmental and disposal liabilities, or  determine whether commitments and contingencies were complete  and properly reported;  support significant portions of the reported total net cost of operations,  most notably related to DOD, and adequately reconcile disbursement  activity at certain federal entities; adequately account for and reconcile intragovernmental activity and  balances between federal entities; ensure that the federal government’s accrual-based consolidated  financial statements were (1) consistent with the underlying audited  entities’ financial statements, (2) properly balanced, and (3) in  conformity with U.S. generally accepted accounting principles  (GAAP); and  identify and either resolve or explain material differences between (1)  certain components of the budget deficit reported in Treasury’s  records that are used to prepare the Reconciliation of Net Operating  Cost and Unified Budget Deficit, the Statement of Changes in Cash  Balance from Unified Budget and Other Activities, and the Fiscal  Projections for the U.S. government (included in the Supplemental  Information section of the Financial Report) and (2) related amounts  reported in federal entities’ financial statements and underlying  financial information and records. These material weaknesses 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. Addressing Impediments to an Opinion on the Accrual-Based Consolidated Financial Statements

Three long-standing major impediments continued to prevent us from  expressing an opinion on the U.S. government’s accrual-based  consolidated financial statements: (1) serious financial management  problems at DOD that have prevented DOD’s financial statements from  being auditable, (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. The most recent update of the plan  also emphasizes the importance of leadership, including senior leaders  and field commanders, to achieving DOD’s goals, and it links  accountability to performance appraisals. With respect to budgetary  information, in October 2011, the Secretary of Defense directed the DOD  Comptroller to provide him with a plan to achieve audit readiness for the  Statement of Budgetary Resources (SBR) by the end of 2014. We recommended  actions for improving the development, implementation, documentation,  and oversight of DOD’s financial management improvement efforts. Treasury has taken or plans to  take actions to address these recommendations. During fiscal year 2011,  Treasury furthered its commitment to resolve differences in  intragovernmental activity and balances, which included several short-  and long-term initiatives. Resolving the intragovernmental transactions problem remains a difficult  challenge and will require a strong and sustained commitment by federal  entities, as well as continued strong leadership by Treasury and OMB. Significant Uncertainties Result in Disclaimers of Opinion on the 2011 and 2010 Statements of Social Insurance as well as on the 2011 Statement of Changes in Social Insurance Amounts

Significant uncertainties, primarily related to the achievement of projected  reductions in Medicare cost growth reflected in the 2011 and 2010  Statements of Social Insurance, prevented us from expressing opinions  on the 2011 and 2010 Statements of Social Insurance, as well as on the  2011 Statement of Changes in Social Insurance Amounts.Statement of Social Insurance presents the actuarial present value of the  federal government’s estimated future revenue to be received from or on  behalf of participants and estimated future expenditures to be paid to or  on behalf of participants, based on benefit formulas in current law and   The  using a projection period sufficient to illustrate the long-term sustainability  of the social insurance programs. Such  reporting provides a much needed perspective on the federal  government’s long-term fiscal position and outlook. Both the Financial Report  and GAO’s simulations assume these reductions occur, and that the  savings as a share of GDP continue beyond the decade. Addressing the long-term fiscal imbalance is made  more difficult by the need to balance achieving the goals of sustaining  economic growth in the near term, while producing a plan to change the  federal government’s long-term fiscal path. We are encouraged by DOD’s efforts toward addressing its long- standing financial management weaknesses and its efforts to achieve  auditability.
Why GAO Did This Study

GAO annually audits the consolidated financial statements of the U.S. government. The Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies.
However, over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal governments ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal governments ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities.
This testimony presents the results of GAOs audit for fiscal year 2011 and discusses certain of the federal governments significant long-term fiscal challenges.

What GAO Found

Three long-standing major impediments continued to prevent GAO from expressing an opinion on the federal governments accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DODs financial statements from being audited, (2) federal entities inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal governments ineffective process for preparing the consolidated financial statements. GAO also reported material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. Also, GAO was prevented from expressing opinions on the 2011 and 2010 Statements of Social Insurance and the 2011 Statement of Changes in Social Insurance Amounts because of significant uncertainties primarily related to the achievement of projected reductions in Medicare cost growth reflected in the statements.
GAO is encouraged by the commitment of DOD leaders to improving DODs financial management and achieving auditiability and by the congressional attention being given to this important matter. The Congress set statutory deadlines for DOD auditability, convened a congressional panel to focus on the issue, and held several hearings on DOD financial management. The Secretary of Defense accelerated the timeline for DOD auditability, setting a 2014 deadline for audit readiness of the Statement of Budgetary Resources, and DOD has issued a plan for meeting that date, which GAO is in the process of reviewing. The plan emphasizes the importance of leadership, including senior leaders and field commanders, to achieving DODs goals, and it links accountability to performance appraisals. To meet their financial management and auditability goals, DOD and its components will need to overcome significant challenges, including implementation of its financial improvement plan, deployment of supporting automated systems, and assessment and resolution of gaps in workforce skills.
The Department of the Treasury (Treasury) furthered its commitment to resolve unreconciled differences between federal entities regarding intragovernmental activity and balances, which included several short- and long-term initiatives. In addition, Treasury, in coordination with the Office of Management and Budget (OMB), implemented corrective actions during 2011 to address certain deficiencies regarding the preparation of the consolidated financial statements. Fully addressing the numerous issues in these areas will require a strong and sustained commitment by federal entities and leadership by Treasury and OMB.
The 2011 Financial Report of the United States Government included comprehensive long-term fiscal projections for the U.S. government, which provides a much needed perspective on the federal governments long-term fiscal position and outlook. These, like GAOs simulations, include the savings provided by the Budget Control Act of 2011. While assuming that the savings as a share of gross domestic product continue beyond the decade leads to an improvement in the long-term fiscal path, it does not make the path sustainable. Addressing the long-term fiscal imbalance is made more difficult by the need to balance achieving the goals of sustaining economic growth in the near term, while producing a plan to change the federal governments long-term fiscal path.

What GAO Recommends

Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address GAOs recommendations.