These  material deficiencies contributed to our disclaimer of opinion on the CFS  and also constitute material weaknesses in internal control, which  contributed to our adverse opinion on internal control. This report provides the details of the additional weaknesses we  identified in our audit of the fiscal year 2003 and 2002 CFS and  recommendations to correct those weaknesses. Allocation Methodology for Certain Costs in the Statement of Net Cost

Statement of Federal Financial Accounting Standard (SFFAS) No. Statement of Changes in Cash Balance from Unified Budget and Other Activities

As part of our fiscal year 2003 audit of the Statement of Changes in Cash  Balance from Unified Budget and Other Activities (Statement of Changes in  Cash Balance), we found (1) material differences between the net outlay  records used by Treasury to prepare the Statement of Changes in Cash  Balance and the total net outlays reported in selected federal agencies’  audited Statements of Budgetary Resources (SBR); (2) that the Statement  of Changes in Cash Balance reported only the changes in the “operating”  cash of the U.S. government rather than all cash, as it is reported on the  U.S. government’s Balance Sheet; and (3) that the major program activities  of the U.S. government relating to direct and guaranteed loans extended to  the public were reported as a net amount on the Statement of Changes in  Cash Balance rather than disclosed as gross amounts for receipts and  disbursements of cash related to direct loans and loan guarantees. In  addition, SFFAS No. Directly Linking Audited Federal Agency Financial Statements to the CFS

As we have reported in the past, Treasury’s current process for compiling  the CFS did not directly link information from federal agencies’ audited  financial statements to amounts reported in the CFS, and therefore  Treasury could not fully ensure that the information in the CFS was  consistent with the underlying information in federal agencies’ audited  financial statements and other financial data. Prior Period Adjustments

According to SFFAS No. Changes in accounting  principles are not errors and have different reporting requirements. Conformity with U.S. Generally Accepted Accounting Principles

As we reported as part of our fiscal year 2002 audit, and found again during  our fiscal year 2003 audit, Treasury lacks an adequate process to ensure  that the financial statements, related notes, stewardship, and supplemental  information in the CFS are presented in conformity with GAAP. During our fiscal year 2003 audit, we found 4  disclosure areas involving an additional 11 specific disclosures that may  not have been in conformity with applicable standards. As a result of this  and certain other weaknesses we identified, we were unable to determine if  the missing information was material to the CFS. Recommendations for Executive Action. Treasury stated that our report identified issues  regarding certain federal financial reporting procedures and internal  controls and provided valuable advice and recommendations for  improvements. This report contains recommendations to you. Status of Treasury’s and OMB’s Progress in Addressing GAO Recommendations for Preparing the CFS

The Secretary of the Treasury should direct the Fiscal Assistant Secretary, in connection with  Treasury's current compilation process and the development of Treasury's new compilation  system and process, to segregate the duties of individuals who have the capability to enter,  change, and delete data within the Federal Agencies' Centralized Trial Balance System and the  Hyperion database and post adjustments to the consolidated financial statements (CFS). Open. Open. 2. 3. 4. 5. 6. 7.
Why GAO Did This Study

For the past 7 years, since the first audit of the consolidated financial statements of the U.S. government (CFS), certain material weaknesses in internal control and financial reporting have resulted in conditions that have prevented GAO from expressing an opinion on the CFS. Specifically, GAO has reported that the federal government did not have adequate systems, controls, and procedures to properly prepare the CFS. In October 2003, GAO reported on weaknesses identified during the fiscal year 2002 audit regarding financial reporting procedures and internal control over the process for preparing the CFS. The purpose of this report is to (1) discuss additional weaknesses identified during the fiscal year 2003 audit, (2) recommend improvements to address those weaknesses, and (3) provide the status of corrective actions to address the 129 open recommendations contained in the October 2003 report.

What GAO Found

Many of the weaknesses in internal control that have contributed to GAO's continuing disclaimers of opinion on the CFS were identified by agency financial statement auditors during their audits of federal agencies' financial statements and have been reported in detail with recommendations to agencies in separate reports. However, some of the weaknesses GAO reported were identified during GAO's tests of the Department of the Treasury's process for preparing the CFS. Such weaknesses impair the federal government's ability to ensure that the CFS is consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles. In addition to the compilation and reporting weaknesses that GAO reported in October 2003, GAO found additional weaknesses in the compilation and reporting process in the following seven areas during the fiscal year 2003 CFS audit: (1) allocation methodology for certain costs in the statement of net cost, (2) statement of changes in cash balance from unified budget and other activities, (3) reporting of criminal debt, (4) recording and disclosing contingencies, (5) directly linking audited federal agency financial statements to the CFS, (6) prior period adjustments, and (7) conformity with U.S. generally accepted accounting principles. GAO found that with respect to four required disclosure areas, information was either not included in the CFS or was not presented in conformity with U.S. generally accepted accounting principles. As a result of this and certain other weaknesses GAO identified, GAO was unable to determine if the missing information was material to the CFS. The four disclosure areas were (1) federal employee and veteran benefits payable, (2) environmental and disposal liabilities, (3) research and development, and (4) deferred maintenance. GAO's October 2003 report contained 129 recommendations. Of those recommendations, 118 remained open as of February 20, 2004, the end of GAO's fieldwork for the fiscal year 2003 CFS audit.