	Results of Our Audit of the U.S. Government’s Consolidated Financial Statements for Fiscal Years 2010 and 2009

Since the enactment of key financial management reforms in the 1990s, the  federal government has made significant progress in improving financial  management activities and practices. For fiscal year 2010, 20 of 24 Chief  Financial Officers (CFO) Act agencies were able to attain unqualified audit  opinions on their accrual-based financial statements within an  accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal  year 1996. Also, accounting and financial reporting standards have  continued to evolve to provide greater transparency and accountability  over the federal government’s operations, financial condition, and fiscal  outlook. Further, the preparation and audit of financial statements has  identified numerous deficiencies, leading to actions to strengthen controls  and systems. It is important for the individual federal departments and  agencies to remain committed to maintain the progress that has been  achieved in obtaining positive audit results and to build upon that progress  to make needed improvements. We  were, however, able to render unqualified opinions on the 2009, 2008, and  2007 Statements of Social Insurance. 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 reported 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 (1)  certain components of the budget deficit reported in Treasury’s  records that are used to prepare the Reconciliation of Net Operating  Cost and Unified Budget Deficit, the Statement of Changes in Cash  Balance from Unified Budget and Other Activities, and the Fiscal  Projections for the U.S. Government (included in the Supplemental  Information section of the Financial Report) and (2) related amounts  reported in federal entities’ financial statements and underlying  financial information and records. These material weaknesses 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. Treasury and OMB have generally taken  or plan to take actions to address these recommendations. Significant Uncertainties Result in Disclaimer of Opinion on 2010 Statement of Social Insurance

Because of significant uncertainties (as discussed in Note 26 to the  consolidated financial statements), primarily related to the achievement of  projected reductions in Medicare cost growth reflected in the 2010  Statement of Social Insurance, we were unable to, and we did not, express  an opinion on the 2010 Statement of Social Insurance. Long-Term Fiscal Challenges

The 2010 Financial Report includes the first sustainability statement  required under new financial reporting standards. The Congressional Budget Office (CBO)  has also published long-term simulations for many years. 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.
Why GAO Did This Study

GAO annually audits the consolidated financial statements of the U.S. government. 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. 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 for fiscal year 2010 and discusses certain of the federal government's significant long-term fiscal challenges.

What GAO Found

Three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual-based consolidated financial statements: (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) the federal government's ineffective process for preparing the consolidated financial statements. In addition to the material weaknesses underlying these major impediments, GAO noted material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. With regard to the Statement of Social Insurance (SOSI), GAO was unable to, and did not, express an opinion on the 2010 SOSI because of significant uncertainties discussed by management in the consolidated financial statements, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 SOSI. GAO was, however, able to render unqualified opinions on the 2009, 2008, and 2007 SOSIs. Since the enactment of key financial management reforms in the 1990s, the federal government has made significant progress in improving financial management activities and practices. For fiscal year 2010, 20 of 24 Chief Financial Officers (CFO) Act agencies were able to attain unqualified audit opinions on their accrual-based financial statements within an accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal year 1996. Also, accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. Further, the preparation and audit of financial statements has identified numerous deficiencies, leading to actions to strengthen controls and systems. Much work remains, however, to improve federal financial management. For example, it is essential that the Department of Defense, the Department of the Treasury, and the Office of Management and Budget, along with other federal entities, address the major impediments discussed above. Also, it is important for the individual federal departments and agencies to remain committed to maintain the progress that has been achieved in obtaining positive audit results and to build upon that progress to make needed improvements. The 2010 Financial Report of the United States Government (Financial Report) introduces the first sustainability statement required under a new financial reporting standard, which presents comprehensive long-term fiscal projections for the U.S. government. Such reporting provides a much needed perspective on the federal government's long-term fiscal position and outlook. The Financial Report, like the latest Congressional Budget Office long-term budget outlook and GAO simulations, shows that the federal government is on an unsustainable long-term fiscal path.

What GAO Recommends

Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address our recommendations.