	Background

Federal financial reporting—defined here as the process of recording retrospective executive department-level financial and performance information—may provide both a snapshot of the government's financial health at a given moment in time, as well as an accounting of its financial performance over a given time frame. Each report presents a distinct array of financial information intended to permit various stakeholders—Congress, the President, agency heads, program managers, and citizens—to evaluate the federal government's performance relative to the collection and disbursement of public money. Congress, in particular, may utilize the information in federal financial reports for policy formulation and planning, programmatic decision making, and exercising oversight authority ( Figure 1 ). The Current Statutory Framework for Federal Financial Reporting

During the past two decades, Congress has further developed federal financial reporting through enactment of three statutes: (1) the Chief Financial Officers Act of 1990 (CFO Act), the Government Management Reform Act of 1994 (GMRA), and (3) the Accountability of Tax Dollars Act of 2002 (ATDA). More specifically, the CFO Act
established the Office of Federal Financial Management (OFFM) within OMB and designated a CFO in each executive department and major executive agency (subsequently known as CFO agencies); requires each CFO agency to prepare and audit annual financial statements for each revolving fund and trust fund and for accounts that performed substantial commercial functions; directed 10 agencies, including the Department of Agriculture, the General Services Administration, and the Department of the Army, to prepare audited financial statements for all of their agency accounts; and requires the director of the OMB to produce an annual financial management status report and a government-wide, five-year financial management plan. Accountability of Tax Dollars Act of 2002

To build upon this improvement, Congress enacted ATDA, which
further expanded the CFO Act's reporting requirements to cover all executive branch agencies to prepare and submit audited financial statements to OMB and the Congress; and permits OMB to exempt a non-CFO agency from this requirement if "the total amount of budget authority available to the agency for the fiscal year does not exceed $25,000,000; and ... the Director determines that requiring an annual audited financial statement for the agency with respect to the fiscal year is not warranted due to the absence of risks associated with the agency's operations, the agency's demonstrated performance, or other factors that the Director considers relevant." Further improvements have built on these initial results, with demonstrable progress across numerous financial management indicators, including timeliness, consistency, and auditability. In FY2012, 21 of 24 CFO agencies received unqualified audit opinions on their annual financial statements. In addition, federal financial statements may not provide readily understandable information to their multiple stakeholders. Unqualified overall audit opinions can obscure material weaknesses that underlie systematic financial management issues. In addition, two agencies—the Department of Homeland Security (DHS) and the Department of Defense (DOD)—have never received unqualified audit opinions, which signifies the persistence of financial problems at these agencies. Government-Wide Financial Reporting Issues

Government-wide, the U.S. consolidated financial statements have received a disclaimer of opinion every year since they were first required under GMRA. GAO was unable to express an opinion on the FY2012 U.S. consolidated financial statements due to material weaknesses in internal control over financial reporting and other limitations on the scope of its work. Recent Legislation

Congress has recently considered legislation relating to audits of federal financial statements. In the 113 th Congress, Representative Barbara Lee has introduced legislation ( H.R. 559 ) that would require a 5% reduction in a federal agency's discretionary budgetary authority for failure to produce an annual financial statement or failure to receive either an unqualified or qualified audit opinion on its annual financial statement. The 112 th Congress considered similar legislation, as well as legislation on audited annual financial statements at DOD and DHS, specifically. S. 3487 would have mandated auditable financial statements by DOD for its FY2017 statements. The legislation also would have required DOD to provide a complete and validated statement of budgetary resources by FY2014. In the 113 th Congress, Representative Lee introduced the Audit the Pentagon Act of 2013 ( H.R. 559 ). It was referred to the Committee on Oversight and Government Reform and the Committee on Armed Services. DHS Audit Requirement Target Act

Congress also considered legislation to address problems at the Department of Homeland Security in the 112 th Congress. The DART Act directs DHS to obtain an unqualified audit opinion beginning with its FY2013 annual financial statements. The DART Act of 2012 (126 Stat. 1591) was signed into law on December 20, 2012.
Federal financial reporting—defined here as the process of recording retrospective executive department-level financial and performance information—can provide both a snapshot of the government's financial health at a given moment in time, as well as an accounting of its financial performance over a particular time frame. Federal financial reports may help the federal government demonstrate accountability, provide information for policy formulation and planning, and be used to evaluate governmental performance. Multiple reports are required by law, and all are intended to permit users—Congress, the President, agency heads, program managers, and citizens—to see how the government raises, handles, and expends public money. Congress, in particular, may find the information in federal financial reports useful for oversight.
The Budget and Accounting Procedures Act of 1950 was the first statute to require executive agencies to provide reports and information on their financial condition to the Secretary of the Treasury. The Chief Financial Officers Act of 1990 (CFO Act) mandates the preparation of audited annual financial statements for certain funds and accounts from a number of executive branch agencies, with 10 agencies selected to provide audited annual financial statements for all agency accounts. The latter provision was expanded to every agency covered under the CFO Act (commonly referred to as CFO agencies) in the Government Management Reform Act of 1994 (GMRA) and to every executive agency in the Accountability of Tax Dollars Act of 2002 (ATDA). In addition, the CFO Act requires the director of the Office of Management and Budget (OMB) to furnish an annual financial management status report and a government-wide five-year financial management plan, and GMRA requires the Secretary of the Treasury to provide government-wide annual consolidated financial statements to be audited by the Government Accountability Office (GAO).
GAO has documented improvements to federal financial reporting since the enactment of the CFO Act. Demonstrable progress has been in evidence across numerous financial management indicators, including timeliness, consistency, and auditability. In FY2012, 21 of 24 CFO agencies received unqualified (clean) audit opinions on their annual financial statements, which means that their statements were free of material misstatements and accord with Generally Accepted Accounting Principles (GAAP). Challenges have persisted, though, both within agencies and government-wide.
Unqualified overall audit opinions can obscure material weaknesses that underlie systematic financial management issues. In addition, two agencies—the Department of Homeland Security (DHS) and the Department of Defense (DOD)—have never received unqualified audit opinions, which signifies the persistence of financial problems at these agencies. Government-wide, the U.S. consolidated financial statements have received a disclaimer of opinion every year since they were first required under GMRA. GAO was unable to express an opinion on the FY2012 U.S. consolidated financial statements due to material weaknesses in internal control over financial reporting and other limitations on the scope of its work. Finally, federal financial statements may not provide readily understandable information to their multiple stakeholders.
Congress has recently considered legislation relating to audits of federal financial statements. In the 113th Congress, Representative Lee has introduced legislation (H.R. 559) that would require a 5% reduction in a federal agency's discretionary budgetary authority for failure to produce an annual financial statement or failure to receive either an unqualified or qualified audit opinion on its annual financial statement. H.R. 559 was referred to the Committee on Oversight and Government Reform and the Committee on Armed Services. The 112th Congress considered similar legislation, as well as legislation on audited annual financial statements at DOD and DHS, specifically.
In the 112th Congress, Senator Coburn introduced the Audit the Pentagon Act, which would have mandated auditable financial statements by DOD for its FY2017 statements. The legislation also would have required DOD to provide a complete and validated statement of budgetary resources by FY2014. Congress also considered legislation to address problems at the Department of Homeland Security in the 112th Congress. The DHS Audit Requirement Target Act of 2012 (DART, 126 Stat. 1591) was signed into law on December 20, 2012. The DART Act directs DHS to obtain an unqualified audit opinion beginning with its FY2013 annual financial statements.
This report will be updated to reflect significant developments.