Given the importance of social insurance  programs like Medicare and Social Security to the federal government’s  long-term fiscal outlook, the Statement of Social Insurance is critical to  understanding the federal government’s financial condition and fiscal  sustainability. 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 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  certain components of the budget deficit reported in Treasury’s  records, which are used to prepare the Reconciliation of Net Operating  Cost and Unified Budget Deficit and Statement of Changes in Cash  Balance from Unified Budget and Other Activities, and related  amounts reported in federal entities’ financial statements and  underlying financial information and records. The material weaknesses discussed in our audit report 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 major impediments continued to prevent us from rendering 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. Consequently, the ultimate cost of the federal  government’s actions and their effect on the federal government’s financial  condition will not be known for some time. Looking ahead, the federal government will need to determine the most  expeditious manner in which to bring closure to its financial stabilization  initiatives while optimizing its investment returns. In addition to managing  these actions, problems in the nation’s financial sector have exposed  serious weaknesses in the current U.S. financial regulatory system, which,  if not effectively addressed, may cause the system to fail to prevent similar  or even worse crises in the future. Consequently, meaningful financial regulatory reform is of utmost  concern. As table 1 shows,  many of the pressures highlighted in GAO’s simulations, including health  care cost growth and the aging population, have already begun to affect  the federal budget—in some cases sooner than previously estimated—and  the pressures only grow in the coming decade. For example, Social  Security cash surpluses have previously served to reduce the unified  budget deficit; however, the Congressional Budget Office (CBO) recently  estimated that due to current economic conditions the program will run  small temporary cash deficits for the next 4 years and then, similar to the  Trustees’ estimates, run persistent cash deficits beginning in 2016. The  fluctuation and eventual disappearance of the Social Security cash surplus  will put additional pressure on the rest of the federal budget. Since GAO’s long-term fiscal simulations include projections of revenue  and expenditures for all federal programs, they present a comprehensive  analysis of the sustainability of the federal government’s long-term fiscal  outlook. It is not only the federal government that faces a long-term fiscal  challenge. The recession and the federal government’s  unprecedented actions intended to stabilize the financial markets and to  promote economic recovery have significantly affected the federal  government’s financial condition, especially with regard to certain of its  investments and increases in its liabilities and net operating cost. Further, sound decisions on the current and future direction of all vital  federal government programs and policies are more difficult without  reliable, useful, and timely financial and performance information. Moreover, of utmost concern are the federal government’s long-term fiscal  challenges that result from large and growing structural deficits that are  driven on the spending side primarily by rising health care costs and  known demographic trends.
Why GAO Did This Study

GAO annually audits the consolidated financial statements of the U.S. government (CFS). 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. The federal government began preparing the CFS 13 years ago. 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 government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (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. This testimony presents the results of GAO's audit of the CFS for fiscal year 2009 and discusses certain of the federal government's significant near- and long-term fiscal challenges.

What GAO Found

For the third consecutive year, GAO rendered an unqualified opinion on the Statement of Social Insurance (SOSI). Given the importance of social insurance programs like Medicare and Social Security to the federal government's long-term fiscal outlook, the SOSI is critical to understanding the federal government's financial condition and fiscal sustainability. Three major impediments continued to prevent GAO from rendering an opinion on the federal government's consolidated financial statements other than the SOSI: (1) serious financial management problems at the Department of Defense, (2) federal entities' inability to adequately account for and reconcile intragovernmental activity and balances, and (3) an ineffective process for preparing the consolidated financial statements. In addition to the material weaknesses underlying these major impediments, GAO noted material weaknesses involving improper payments estimated to be at least $98 billion for fiscal year 2009, information security, and tax collection activities. The recession and the federal government's unprecedented actions intended to stabilize the financial markets and to promote economic recovery have significantly affected the federal government's financial condition. The resulting substantial investments and increases in liabilities, net operating cost, the unified budget deficit, and debt held by the public are reported in the U.S. government's consolidated financial statements for fiscal year 2009. The ultimate cost of these actions and their impact on the federal government's financial condition will not be known for some time in part because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently uncertain. Looking ahead, the federal government will need to determine the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. In addition, problems in the nation's financial sector have exposed serious weaknesses in the current U.S. financial regulatory system. If those weaknesses are not adequately addressed, we could see similar or even worse crises in the future. Consequently, meaningful financial regulatory reform is of utmost concern. The federal government faces a long-term fiscal challenge resulting from large and growing structural deficits that are driven on the spending side primarily by rising health care costs and known demographic trends. GAO prepares long-term fiscal simulations that include projections of revenue and expenditures for all federal programs. As a result, these simulations present a comprehensive analysis of the sustainability of the federal government's long-term fiscal outlook. Many of the pressures highlighted in GAO's simulations, including health care cost growth and the aging population, have already begun to affect the federal budget--in some cases sooner than previously estimated--and the pressures only grow in the coming decade. For example, Social Security cash surpluses have previously served to reduce the unified budget deficit; however, the Congressional Budget Office recently estimated that due to current economic conditions the program will run small temporary cash deficits for the next 4 years and then, similar to the Trustees' estimates, run persistent cash deficits beginning in 2016. The fluctuation and eventual disappearance of the Social Security cash surplus will put additional pressure on the rest of the federal budget.