	The Nation’s Fiscal Imbalance

The Financial Report of the United States Government provides useful  information on the government’s financial position at the end of the fiscal  year and changes that have occurred over the course of the year. The federal government’s gross debt in the U.S.  government’s consolidated financial statements was about $8 trillion as of  September 30, 2005. This number excludes such items as the current gap  between the present value of future promised and funded Social Security  and Medicare benefits, veterans’ health care, and a range of other  liabilities (e.g., federal employee and veteran benefits payable),  commitments, and contingencies that the federal government has pledged  to support. Including these items, the federal government’s fiscal  exposures now total more than $46 trillion, representing close to four  times gross domestic product (GDP) in fiscal year 2005 and up from about  $20 trillion or two times GDP in 2000. Rather, a  fundamental reexamination, reprioritization, and reengineering of major  spending programs, tax policies, and government priorities will be  important to recapture our fiscal flexibility and update our programs and  priorities to respond to emerging social, economic, and security changes. Ultimately, this will likely require a national discussion about what  Americans want from their government and how much they are willing to  pay for those things. We continue to have concerns about the identification of misstatements in  federal agencies’ prior year financial statements. Frequent restatements to correct errors can undermine public trust and  confidence in both the entity and all responsible parties. Material internal  control weaknesses discussed in our fiscal year 2005 audit report serve to  increase the risk that additional errors may occur and not be identified on  a timely basis by agency management or their auditors, resulting in further  restatements. These material deficiencies were 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 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 total net cost of operations, most  notably related to DOD, and adequately reconcile disbursement activity at  certain federal agencies;   adequately account for and reconcile intragovernmental activity and  balances between federal agencies;    ensure that the federal government’s consolidated financial statements  were consistent with the underlying audited agency financial statements,  balanced, and in conformity with GAAP; and  resolve material differences that exist between the total net outlays  reported in federal agencies’ Statements of Budgetary Resources and the  records used by Treasury to prepare the Statements of Changes in Cash  Balance from Unified Budget and Other Activities. Addressing Major Impediments to an Opinion on Consolidated Financial Statements

Three major impediments to our ability to render an opinion on the U.S.  government’s consolidated financial statements continued to be: (1)  serious financial management problems at DOD, (2) the federal  government’s inability to adequately account for and reconcile  intragovernmental activity and balances between federal agencies, and (3)  the federal government’s ineffective process for preparing the  consolidated financial statements. Closing Comments

In closing, given the federal government’s overall financial condition and  long-term fiscal imbalance, the need for the Congress and the President to  have timely, reliable, and useful financial and performance information is  greater than ever. Sound decisions on the current results and future  direction of vital federal government programs and policies are made  more difficult without such information. Until the problems discussed in  our audit report are adequately addressed, they will continue to have  adverse implications for the federal government and the taxpayers. Appendix II: Other Material Weaknesses

	Other Material Weaknesses

The federal government did not maintain effective internal control over  financial reporting (including safeguarding assets) and compliance with  significant laws and regulations as of September 30, 2005. Weaknesses in controls over tax collection activities continue to affect the  federal government’s ability to efficiently and effectively account for and  collect revenue.
Why GAO Did This Study

GAO is required by law to annually audit the consolidated financial statements of the U.S. government. The Congress and the President need to have timely, reliable, and useful financial and performance information. Sound decisions on the current results and future direction of vital federal government programs and policies are made more difficult without such information. Until the problems discussed in GAO's audit report on the U.S. government's consolidated financial statements are adequately addressed, they will continue to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other 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 economical, efficient, and effective manner.

What GAO Found

For the ninth consecutive year, certain material weaknesses in internal control and in selected accounting and financial reporting practices resulted in conditions that continued to prevent GAO from being able to provide the Congress and American people an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated in conformity with U.S. generally accepted accounting principles. Three major impediments to an opinion on the consolidated financial statements continued to be (1) serious financial management problems at the Department of Defense, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements. Further, in our opinion, as of September 30, 2005, the federal government did not maintain effective internal control over financial reporting and compliance with significant laws and regulations due to numerous material weaknesses. More troubling still is the federal government's overall financial condition and long-term fiscal imbalance. While the fiscal year 2005 budget deficit was lower than 2004, it was still very high, especially given the impending retirement of the "baby boom" generation and rising health care costs. Importantly, as reported in the fiscal year 2005 Financial Report of the United States Government, the federal government's accrual-based net operating cost--the cost to operate the federal government--increased to $760 billion in fiscal year 2005 from $616 billion in fiscal year 2004. This represents an increase of about $144 billion or 23 percent. The federal government's gross debt was about $8 trillion as of September 30, 2005. This number excludes such items as the gap between the present value of future promised and funded Social Security and Medicare benefits, veterans' health care, and a range of other liabilities, commitments, and contingencies that the federal government has pledged to support. Including these items, the federal government's fiscal exposures now total more than $46 trillion, representing close to four times gross domestic product (GDP) in fiscal year 2005 and up from about $20 trillion or two times GDP in 2000. Given these and other factors, a fundamental reexamination of major spending programs, tax policies, and government priorities will be important and necessary to put us on a prudent and sustainable fiscal path. This will likely require a national discussion about what Americans want from their government and how much they are willing to pay for those things. We continue to have concerns about the identification of misstatements in federal agencies' prior year financial statements. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. The material internal control weaknesses discussed in this testimony serve to increase the risk that additional errors may occur and not be identified on a timely basis by agency management or their auditors, resulting in further restatements.