1). Without directly linking financial information from agencies’ audited  financial statements, the information in the CFS may not be reliable. The  lack of direct linkage also affects the efficiency and effectiveness of the  audit of the CFS. As Treasury is designing its new compilation process, which it expects to  implement beginning with the fiscal year 2004 CFS, we recommend that the  Secretary of the Treasury direct the Fiscal Assistant Secretary, working in  coordination with the Controller of OMB’s Office of Federal Financial  Management, to design the new compilation process to directly link information from  federal agencies’ audited financial statements to amounts reported in all  the applicable CFS and related footnotes, and consider the other applicable recommendations in this report when  designing and implementing the new compilation process. Controls over the Compilation Process

We identified specific areas of internal control in Treasury’s process for  preparing the CFS that need to be strengthened. Documentation of Transactions and Internal Control

While Treasury has documented some portions of its process for compiling  the CFS, it has not fully documented its policies and procedures for  preparing the CFS report. Reconciliation of Intragovernmental Activity and Balances

Federal agencies are unable to fully reconcile intragovernmental activity  and balances. The Reconciliation of Net Operating Cost  and Unified Budget Surplus (or Deficit) (hereafter referred to as the  reconciliation statement) is expected to explain certain differences that  occur because the CFS are prepared on the accrual basis in accordance  with U.S. generally accepted accounting principles. Treasury should document the consistency of the significant line items on this statement  to agencies’ audited financial statements; request, through its closing package, that federal agencies provide the  net outlays reported in their Combined Statement of Budgetary  Resources and explanations for any significant differences between net  outlay amounts reported in the Combined Statement of Budgetary  Resources and the budget of the U.S. government;  investigate the differences between net outlays reported in federal  agencies’ Combined Statement of Budgetary Resources and Treasury’s  records in the STAR system to ensure that the proper amounts are  reported in the Statement of Changes in Cash Balance from Unified  Budget and Other Activities; explain and document the differences between the operating revenue  amount reported on the Statement of Operations and Changes in Net  Position and unified budget receipts reported on the Statement of  Changes in Cash Balance from Unified Budget and Other Activities; and provide support for how the line items in the “other activities” section of  this statement relate to either the underlying Balance Sheet or related  notes accompanying the CFS. 2. Other Weaknesses Identified

During our audit we found certain issues related to (1) management  representation letters, (2) legal representation letters, and (3) information  on major treaties and other international agreements that will require  certain actions by Treasury and OMB.
Why GAO Did This Study

For the past 6 years, since GAO began auditing the consolidated financial statements of the U.S. government (CFS), GAO has been unable to express an opinion on them because of material weaknesses in internal control and financial reporting. Contributing to GAO's inability to express an opinion has been the federal government's lack of adequate systems, controls, and procedures to properly prepare its consolidated financial statements. The purpose of this report is to discuss in greater detail weaknesses in financial reporting procedures and internal control over the process for preparing the CFS that GAO identified and to recommend improvements to address those weaknesses.

What GAO Found

GAO found deficiencies in the compilation and reporting process in the following areas: (1) controls over the compilation process, (2) unreconciled transactions affecting the change in net position, (3) reconciliation of intragovernmental activity and balances, (4) elimination of intragovernmental activity and balances, (5) reconciliation of net operating costs and unified budget surplus (or deficit), (6) statements of changes in cash balance from unified budget and other activities, (7) defining and documenting of the reporting entity, and (8) conformity with U.S. generally accepted accounting principles. Another key deficiency in the compilation and reporting process for the CFS was the failure of the Department of the Treasury's process for compiling the CFS to directly link information from federal agencies' audited financial statements to amounts reported in the CFS. Without this direct link, the information in the CFS may not be reliable. The lack of a direct link also affects the efficiency and effectiveness of the CFS audit. Treasury is designing a new compilation process that it expects to directly link this information beginning with the fiscal year 2004 CFS. GAO identified three additional areas related to the compilation and reporting process for the CFS that warrant the attention of Treasury and the Office of Management and Budget (OMB): (1) management representation letters, (2) legal representation letters, and (3) information on treaties and other international agreements.