While we are unable to express an opinion on the U.S. government’s  consolidated financial statements, several key items deserve emphasis in  order to put the information contained in the financial statements and the  Management’s Discussion and Analysis section of the Financial Report of  the United States Government into context. First, the federal government reported a $412.3 billion unified budget  deficit and a $568 billion on-budget deficit in fiscal year 2004, representing  approximately 3.6 percent and 4.9 percent of gross domestic product  (GDP), respectively. Second, the U.S. government’s reported liabilities,  commitments, and other obligations grew by over $13 trillion in fiscal year  2004, primarily due to the enactment of the new Medicare prescription drug  benefit, and now surpass $43 trillion, representing close to four times  current GDP. Potential Impact of Restatements on Agencies’ Financial Statements

An emerging issue during fiscal year 2004 that merits concern and close  scrutiny was the growing number of CFO Act agencies that restated certain  of their financial statements for fiscal year 2003 to correct errors. The material internal control weaknesses discussed in this testimony  increase the risk that additional misstatements may occur and not be  identified on a timely basis by management or the auditors, resulting in  further restatements. Frequent restatements to correct errors can  undermine public trust and confidence in both the entity and all  responsible parties. The material  deficiencies we identified 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 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; adequately account for and reconcile intragovernmental activity and  balances between federal agencies; and resolve material differences that exist between the total net outlays  reported in federal agencies’ SBRs and the records used by Treasury to  prepare the Statements of Changes in Cash Balance. Addressing Major Impediments to an Opinion on Consolidated Financial Statements

For the past 8 fiscal years, the federal government has been required to  prepare, and have its consolidated financial statements audited. There are three primary  ongoing reasons why the consolidated financial statements remained  unauditable for fiscal year 2004: (1) serious financial management  problems at DOD, (2) the federal government’s ineffective process for  preparing the consolidated financial statements, and (3) the federal  government’s inability to adequately account for and reconcile  intragovernmental activity and balances between federal agencies. Closing Comments

The U.S. government is the largest, most complex and most diverse entity  on earth today. Its services and programs—homeland security, national  defense, Social Security, health care, mail delivery, and food inspection, to  name just a few—directly affect the well-being of almost every American. Clearly, tough choices will be required to address the resulting  structural imbalance. Sound decisions on the current results and future direction of vital federal  programs and policies are made more difficult without timely, reliable, and  useful financial and performance information. Proper accounting and  financial reporting practices are essential in the public sector. Until the  problems discussed in our audit report are adequately addressed, they will  continue to present a number of adverse implications for the federal  government and the taxpayers, which are outlined in our report. GAO’s long-term budget simulations paint a  chilling picture. Problems in accounting for liabilities affect the determination of the full  cost of the federal government’s current operations and the extent of its  liabilities. Other Material Weaknesses

The federal government did not maintain effective internal control over  financial reporting (including safeguarding assets) and compliance with  laws and regulations as of September 30, 2004. In addition to the material  deficiencies discussed in appendix IV, we found the following four other  material weaknesses in internal control. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

GAO is required by law to annually audit the consolidated financial statements of the U.S. government. Proper accounting and reporting practices are essential in the public sector. The U.S. government is the largest, most complex, and most diverse entity on earth today. Its services--homeland security, national defense, Social Security, health care, mail delivery, and food inspection, to name a few--directly affect the well-being of almost every American. Sound decisions on the current results and future direction of vital federal government programs and policies are made more difficult without timely, reliable, and useful financial and performance 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; (3) impair the federal government's ability to adequately safeguard significant assets and properly record various transactions; and (4) prevent the federal government from having reliable financial information to operate in an economical, efficient, and effective manner.

What GAO Found

The federal government completed its consolidated financial statements on December 15, 2004. This is just 76 days after the end of the fiscal year--a record for timeliness. However, as in the previous 7 fiscal years, 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 citizens 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 continue to be (1) serious financial management problems at the Department of Defense, (2) the federal government's ineffective process for preparing the consolidated financial statements, and (3) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies. Further, in our opinion, the federal government did not maintain effective internal control over financial reporting and compliance due to numerous material weaknesses. While GAO was unable to express an opinion on the consolidated financial statements of the U.S. government, several key items deserve emphasis in order to put the information contained in the financial statements and Management's Discussion and Analysis in perspective. First, the federal government reported a $412.3 billion unified budget deficit and a $568 billion on-budget deficit in fiscal year 2004, representing approximately 3.6 percent and 4.9 percent of gross domestic product (GDP), respectively. Second, the U.S. government's reported liabilities, commitments, and other obligations grew by over $13 trillion in fiscal year 2004, primarily due to enactment of the new Medicare prescription drug benefit, and now surpass $43 trillion, representing close to four times current GDP. In addition, while the size of the nation's long-term fiscal imbalance grew significantly during the fiscal year, the retirement of the "baby boom" generation is closer to becoming a reality. Given these and other factors, it seems clear that the nation's current fiscal path is unsustainable and that tough choices by the President and the Congress will be necessary in order to address the nation's large and growing fiscal imbalance. An emerging issue during fiscal year 2004 that merits concern and close scrutiny was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. 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 management or the auditors, resulting in further restatements.