	Highlights of Major Issues Related to the U.S. Government’s Consolidated Financial Statements for Fiscal Years 2008 and 2007

As has been the case for the previous 11 fiscal years, the federal  government did not maintain adequate systems or have sufficient, reliable  evidence to support certain material information reported in the U.S.  government’s accrual basis consolidated financial statements. In summary, the material weaknesses that contributed to our disclaimer of opinion on  the accrual basis consolidated financial statements were the federal government’s  inability to:    satisfactorily determine that property, plant, and equipment and inventories and  related property, primarily held by the DOD, were properly reported in the accrual  basis 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;    adequately account for and reconcile intragovernmental activity and balances    ensure that the federal government’s accrual basis consolidated financial  statements were (1) consistent with the underlying audited agency financial  statements, (2) properly balanced, and (3) in conformity with generally accepted  accounting principles (GAAP); and  identify and either resolve or explain material differences that exist 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 agencies’ financial statements and  underlying financial information and records. In addition to the material weaknesses that contributed to our disclaimer  of opinion, which are discussed above, we found three other material  weaknesses in internal control as of September 30, 2008. Addressing Major Impediments to an Opinion on the Accrual Basis Consolidated Financial Statements

Three major impediments to our ability to render an opinion on the U.S.  government’s accrual basis consolidated financial statements continued to  be: (1) serious financial management problems at DOD, (2) the federal  government’s inability to adequately account for and reconcile  intragovernmental activity and balances between federal agencies, and   (3) the federal government’s ineffective process for preparing the  consolidated financial statements. A-127,  Financial Management Systems, which redefines federal financial  management systems requirements. Such  challenges will require utmost attention to ensure (1) that sufficient  internal controls and transparency are established and maintained for all  stabilization and recovery initiatives; (2) that all related financial  transactions are reported on time, accurately, and completely; and   (3) these initiatives are effectively and efficiently financed. While policymakers have been  understandably focused on dealing with these financial market and  economic growth challenges, attention also needs to be given to the long- term challenges of addressing the federal government’s large and growing  structural deficits and debt. 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. However,  it is appropriate to consider the need for further revisions to the current  federal financial reporting model, which could affect both consolidated  and agency reporting. While the current reporting model recognizes some  of the unique needs of the federal government, a broad reconsideration of  the federal financial reporting model could address the following types of  questions:    Do traditional financial statements convey information transparently? What kind of information is most relevant and useful for a sovereign  nation? Ultimately, the goal of such a  reevaluation would be reporting enhancements that can help the Congress  deliberate on strategies to address the federal government’s challenges,  including its long-term fiscal challenge. However, the federal government still  has a long way to go before realizing strong federal financial management. The nature and magnitude of actions the federal government has taken to  stabilize the financial markets and promote economic recovery have  created new challenges involving accountability, financial reporting, and  debt management. Given the federal government’s current financial condition and the  nation’s serious long-term fiscal challenge, the need for the Congress and  federal policymakers and management to have reliable, useful, and timely  financial and performance information is greater than ever. Sound  decisions on the current and future direction of vital federal government  programs and policies are more difficult without such information.
Why GAO Did This Study

GAO annually audits the consolidated financial statements of the U.S. government (CFS). The 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. Except for the 2008 and 2007 Statements of Social Insurance, GAO has been unable to provide assurance on the reliability of the CFS due primarily to inadequate systems and lack of sufficient, reliable evidence to support certain material information in the CFS. Unless these weaknesses are adequately addressed, they will, among other things, (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 2008 and discusses federal financial management challenges and the long-term fiscal outloo

What GAO Found

For the second consecutive year, GAO rendered an unqualified opinion on the Statement of Social Insurance; however, three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual basis consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition, as of September 30, 2008, the federal government did not maintain effective internal controls over financial reporting and compliance with significant laws and regulations due to numerous material weaknesses. Moreover, financial management system problems continue to hinder federal agency accountability. The federal government still has a long way to go, but over the years, progress has been made in improving federal financial management. For example, audit results for many federal agencies have improved; federal financial system requirements have been developed; and accounting and reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. In addition, the federal government issued a summary financial report which is intended to make the information in the Financial Report of the U.S. Government more understandable and accessible to a broader audience. The federal government's response to the financial markets crisis and economic downturn has created new federal accountability, financial reporting, and debt management challenges. Such challenges will require utmost attention to ensure (1) that sufficient internal controls and transparency are established and maintained for all market stabilization and economic recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. Moreover, while policymakers are currently understandably focused on efforts directed toward market stabilization and economic growth, once stability in financial markets and the economic downturn are addressed, attention will have to be turned with the same level of intensity to the serious longer-term challenges of addressing the federal government's large and growing structural deficits and debt. Finally, the federal government should consider the need for further revisions to the current federal financial reporting model to recognize its unique needs. A broad reconsideration of issues, such as the kind of information that may be relevant and useful for a sovereign nation, could lead to reporting enhancements that might help provide the Congress and the President with more useful financial information to deliberate and monitor strategies to address the nation's long-term fiscal challenges.