With respect to the two key areas, we  reviewed the nine agencies’ fiscal years 2004 and 2003 comparative  financial statements and the related audit reports to determine, among  other things, whether the appropriate columns of the agencies’ restated financial statements were  labeled “Restated”; fiscal year 2003 ending balance agreed with the fiscal year 2004  beginning balance on the agencies’ Statement of Changes in Net  Position, if restated; agencies’ restatement footnotes were properly labeled; agencies asserted in their MD&A that they had received a consecutive  number of clean audit opinions, and if so, whether they disclosed that  certain of their previously issued financial statements were  subsequently restated to correct for a material misstatement; audit reports referred the reader to the agencies’ restatement footnote; agencies timely notified their auditors and users of their financial  statements of the material misstatement and plans for correcting the  misstatement in the financial statements; and auditors were aware of a material misstatement to previously issued  financial statements prior to the beginning of the fourth quarter of the  following fiscal year and whether the amount and effect were known,  and if so, did the auditors advise the agencies’ management to reissue  the financial statements. 15, Management’s Discussions and Analysis; SFFAS No. A-136, Financial Reporting Requirements. Insufficient and Inconsistent Disclosure of Financial Statement Restatements by Certain Federal Agencies and Their Auditors

During our review of the nine CFO Act agencies’ restatements reported in  fiscal year 2004, we identified issues with the disclosures made by those  agencies and their respective auditors regarding the restatements. The  primary contributing factor for these disclosure issues was insufficient  guidance available at the time to both the agencies’ management and their  auditors for disclosing the restatements. Although the available guidance did not provide explicit details for  disclosing restatements, we believe that information regarding  restatements should be disclosed in a transparent and timely manner  consistent with the qualitative characteristics of information in financial  reports described in SFFAC No. 1. In our view, more detailed accounting  and auditing guidance on how to satisfy the financial reporting  characteristics in SFFAC No. 1 as it relates to the disclosure of  restatements would have been helpful. Revisions made to OMB Circular No. In our view, none of the nine agencies’ audit reports we reviewed  sufficiently disclosed all the essential information that would clearly  explain the restatement. Specifically, we found that seven of the nine audit reports did not provide a statement that the  previously issued audit report was withdrawn and replaced by the  opinion on the restated financial statements, three of the nine audit reports either did not disclose the restatement or  include a reference to the agency restatement footnote in the financial  statements, and none of the nine agencies provided a sufficient description of the  restatement (i.e., the nature and cause of the misstatement, year(s)  being restated, financial statements and line items impacted, specific  amount(s) of the material misstatement(s) and the related effects on  the previously issued financial statements, and actions management  took after discovering the misstatement) in the notes to their financial  statements and none of these agencies’ auditors compensated for this  by providing such information in their audit reports. 01-09, did  not provide explicit guidance for timely communication of a restatement  to users of financial statements. Conclusions

The issues we identified regarding the transparency and timeliness of  restatement disclosures primarily resulted from insufficient guidance  available during fiscal year 2004 to both the agencies’ management and  their respective auditors for disclosure of the restatements and the  timeliness of such disclosures. It will also be important that the  agencies’ financial statements and the related audit reports provide  sufficient detail so that the reader will be able to gain at least a basic  understanding of why the agencies needed to restate their previously  issued financial statements and the effects of such on the agencies’  previously issued financial statements. The revision of OMB Circular No. A-136 during fiscal year 2005 addressed many of our concerns regarding  the agencies’ disclosure of restatements; however, additional guidance is  still needed. In addition, OMB provided some technical comments, which  we have incorporated as appropriate. 06-03

GAO recommends that section 5.2 of OMB Bulletin No.
Why GAO Did This Study

GAO continues to have concerns about restatements to federal agencies' previously issued financial statements. During fiscal year 2005, at least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain of their fiscal year 2004 financial statements to correct misstatements. To study this trend, GAO reviewed the nature and causes of the restatements made by certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003 financial statements. Eleven CFO Act agencies had restatements for fiscal year 2003. Nine of those 11 received unqualified opinions on their originally issued fiscal year 2003 financial statements. GAO's view is that users of federal agencies' financial statements and the related audit reports need to be provided at least a basic understanding of why a restatement was necessary and its effect on the agencies' previously issued financial statements and related audit reports. This report communicates GAO's observations on the transparency and timeliness of the 9 federal agencies' and their auditors' restatement disclosures.

What GAO Found

The nine agencies GAO reviewed did not consistently communicate financial statement restatements. GAO found that all nine agencies could have greatly enhanced the adequacy, effectiveness, and timeliness of their restatement disclosures to users. Similar transparency issues existed with the associated audit reports regarding disclosure of all the essential information that would clearly explain the restatements. GAO highlighted the following issues as among the more prevalent issues to be addressed: 1) columns of the agencies' restated financial statements were not labeled as "Restated"; 2) agencies' restatement footnote disclosures lacked clarity or sufficient detail regarding the nature of the restatements and the effect on balances reported in previously issued financial statements; 3) restatement information was not sufficiently disclosed in the agencies' Management Discussion and Analysis; 4) audit reports did not disclose that the respective agencies had restated certain of their fiscal year 2003 financial statements; 5) audit reports did not provide a statement that the previously issued audit report was withdrawn and replaced by the opinion on the restated financial statements; and 6) material misstatements and potential material misstatements were not timely communicated by agencies to either their auditors or to the users of the financial statements. The primary contributing factor for the restatement disclosure issues that GAO identified was insufficient guidance available at the time to both the agencies' management and their respective auditors for disclosure of the restatements and the timeliness of such disclosures. GAO believes that information regarding restatements should be disclosed in a transparent and timely manner consistent with the qualitative characteristics of information in financial reports described in Statement of Federal Financial Accounting Concepts (SFFAC) No. 1. In GAO's view, more detailed accounting and auditing guidance on how to satisfy the financial reporting characteristics as outlined in SFFAC No. 1 as it relates to the disclosure of restatements would have been helpful. OMB revised Circular No. A-136, Financial Reporting Requirements, which provides additional guidance to federal agencies' management regarding disclosure of restatements to previously issued financial statements. Revisions made to OMB Circular No. A-136 address many of GAO's concerns regarding the agencies' disclosure of restatements. In addition, the proposed 2006 revision of generally accepted government auditing standards now includes a section on reporting on restatement of previously issued financial statements. In addition, on August 23, 2006, OMB issued Bulletin No. 06-03, which also provides some information regarding reporting on restatements. However, GAO believes that OMB needs to timely provide additional, though complementary, restatement guidance to both the agencies' management and their respective auditors.