oversight

Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S. Government Needs Improvement

Published by the Government Accountability Office on 2003-10-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to the Secretary of the Treasury
               and the Director of the Office of
               Management and Budget


October 2003
               FINANCIAL AUDIT
               Process for Preparing
               the Consolidated
               Financial Statements
               of the U.S.
               Government Needs
               Improvement




GAO-04-45

               a

                                                October 2003


                                                FINANCIAL AUDIT

                                                Process for Preparing the Consolidated
Highlights of GAO-04-45, a report to the        Financial Statements of the U.S.
Secretary of the Treasury and the Director
of the Office of Management and Budget          Government Needs Improvement



For the past 6 years, since GAO                 GAO found deficiencies in the compilation and reporting process in the
began auditing the consolidated                 following areas:
financial statements of the U.S.                • controls over the compilation process,
government (CFS), GAO has been
                                                • unreconciled transactions affecting the change in net position,
unable to express an opinion on
them because of material                        • reconciliation of intragovernmental activity and balances,
weaknesses in internal control and              • elimination of intragovernmental activity and balances,
financial reporting. Contributing to            • 	 reconciliation of net operating costs and unified budget surplus (or
GAO’s inability to express an                       deficit),
opinion has been the federal                    • 	 statements of changes in cash balance from unified budget and other
government’s lack of adequate                       activities,
systems, controls, and procedures
                                                • defining and documenting of the reporting entity, and
to properly prepare its
consolidated financial statements.              • conformity with U.S. generally accepted accounting principles.

The purpose of this report is to                Another key deficiency in the compilation and reporting process for the CFS
discuss in greater detail                       was the failure of the Department of the Treasury’s process for compiling
weaknesses in financial reporting               the CFS to directly link information from federal agencies’ audited financial
procedures and internal control                 statements to amounts reported in the CFS (see figure below). Without this
over the process for preparing the              direct link, the information in the CFS may not be reliable. The lack of a
CFS that GAO identified and to                  direct link also affects the efficiency and effectiveness of the CFS audit.
recommend improvements to                       Treasury is designing a new compilation process that it expects to directly
address those weaknesses.
                                                link this information beginning with the fiscal year 2004 CFS.

                                                GAO identified three additional areas related to the compilation and
GAO makes 44 recommendations                    reporting process for the CFS that warrant the attention of Treasury and the
to address weaknesses identified,               Office of Management and Budget: (1) management representation letters,
including a recommendation that                 (2) legal representation letters, and (3) information on treaties and other
Treasury, in coordination with the              international agreements.
Office of Management and Budget
(OMB), design its new compilation
                                                Lack of Direct Link between Audited Agency Financial Statements and the CFS
process to directly link information
from federal agencies’ audited
financial statements to amounts
reported in the CFS. GAO also
makes 16 recommendations that
address CFS disclosures required
by U.S. generally accepted
accounting principles. Treasury
and OMB stated that many of our
recommendations will improve the
usefulness and accuracy of the
CFS, but disagreed with
recommendations in two areas.
www.gao.gov/cgi-bin/getrpt?GAO-04-45.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gary T. Engel
at (202) 512-3406 or engelg@gao.gov.
Contents




Letter
                                                                                                    1
                            Results in Brief 
                                                             1
                            Scope and Methodology 
                                                        3
                            Directly Linking Audited Agency Financial Statements to the CFS 
              3
                            Controls over the Compilation Process 
                                        5
                            Unreconciled Transactions Affecting the Change in Net Position 
               7
                            Reconciliation of Intragovernmental Activity and Balances 
                    8
                            Elimination of Intragovernmental Activity and Balances
                       10
                            Reconciliation of Net Operating Cost and Unified Budget Surplus (or 

                               Deficit)                                                                   11
                                                                                                          

                            Statements of Changes in Cash Balance from Unified Budget and 

                               Other Activities 
                                                         14
                            Defining the Reporting Entity 
                                               16
                            Conformity with U.S. Generally Accepted Accounting Principles 
               18
                            Other Weaknesses Identified 
                                                 19
                            Agency Comments and Our Evaluation
                                           24


Appendixes
             Appendix I:
 Disclosure Issues                                                               28

                          Loans Receivable and Loan Guarantee Liabilities                                 28

                          Inventories and Related Property                                                29

                          Property, Plant, and Equipment                                                  32

                          Federal Employee and Veteran Benefits Payable                                   32

                          Environmental and Disposal Liabilities                                          33

                          Other Liabilities                                                               33

                          Commitments and Contingencies                                                   35

                          Collections and Refunds of Federal Revenue                                      36

                          Dedicated Collections                                                           36

                          Indian Trust Funds                                                              37

                          Social Insurance                                                                37

                          Nonfederal Physical Property                                                    39

                          Human Capital                                                                   39

                          Research and Development                                                        40

                          Deferred Maintenance                                                            40

                          Risk Assumed                                                                    41

             Appendix II:   Comments from Department of the Treasury and the Office 

                            of Management and Budget                                                      42

                            GAO Comment                                                                   44





                            Page i                      GAO-04-45 Process for Preparing CFS Needs Improvement
         Contents




Figure   Figure 1:	 Lack of Direct Link between Audited Agency Financial
                    Statements and CFS                                                              4




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         Page ii                          GAO-04-45 Process for Preparing CFS Needs Improvement
A

United States General Accounting Office
Washington, D.C. 20548



                                    October 30, 2003


                                    The Honorable John W. Snow

                                    The Secretary of the Treasury


                                    The Honorable Joshua B. Bolten

                                    Director, Office of Management and Budget


                                    In March 2003, we issued our disclaimer of opinion on the consolidated 

                                    financial statements for the U.S. government (CFS) for the fiscal years 

                                    ended September 30, 2002 and 2001. For the past 6 years, certain material 

                                    weaknesses in internal control and in financial reporting resulted in

                                    conditions that prevented us from expressing an opinion on the CFS. 

                                    Specifically, we have reported that the federal government did not have 

                                    adequate systems, controls, and procedures to properly prepare its 

                                    consolidated financial statements. Many of these weaknesses in internal 

                                    control that contributed to our disclaimer of opinion were identified during 

                                    the audit of federal agencies’ financial statements by the agency financial 

                                    statement auditors and reported in detail with recommendations to the 

                                    agencies in separate reports. However, some of the internal control 

                                    weaknesses were identified during our tests of the U.S. Department of the 

                                    Treasury’s (Treasury) process for preparing the CFS. Such weaknesses

                                    impaired the federal government’s ability to fully 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. Consequently, these weaknesses also contributed to 

                                    our inability to render an opinion on the CFS.


                                    The purpose of this report is to discuss in greater detail weaknesses we 

                                    identified during our fiscal year 2002 audit regarding financial reporting 

                                    procedures and internal control over the process for preparing the CFS. 

                                    We have discussed each of these weaknesses with your staff during this

                                    past audit, and some of the weaknesses have been communicated for a 

                                    number of years. 




Results in Brief	                   The deficiencies in the compilation and reporting processes involve the
                                    following nine areas: (1) directly linking audited agency financial
                                    statements to the CFS, (2) controls over the compilation process,
                                    (3) unreconciled transactions affecting the change in net position,
                                    (4) reconciliation of intragovernmental activity and balances,
                                    (5) elimination of intragovernmental activity and balances,



                                    Page 1                      GAO-04-45 Process for Preparing CFS Needs Improvement
(6) reconciliation of net operating costs and unified budget surplus (or
deficit), (7) statements of changes in cash balance from unified budget and
other activities, (8) defining and documenting of the reporting entity, and
(9) conformity with U.S. generally accepted accounting principles.

We also identified and discuss in this report certain issues related to
(1) management representation letters, (2) legal representation letters, and
(3) information on treaties and other international agreements that will
require actions by Treasury and the Office of Management and Budget
(OMB). Other issues related to these three areas need to be addressed by
federal agencies and their auditors. We plan to separately communicate to
agency Chief Financial Officers (CFO) and Inspectors General the details
of our concerns regarding these issues.

This report includes 44 recommendations to address weaknesses we
identified. It also includes recommendations related to 16 disclosures
identified in appendix I that are required by U.S. generally accepted
accounting principles. We are recommending that these 16 disclosures that
are not included in the most recent CFS either be included or that the
rationale for their exclusion be documented.

Treasury and OMB stated that many of our recommendations will improve
the usefulness and accuracy of the CFS and that they have already
incorporated many of them into their new system and processes that are
being developed for preparing the fiscal year 2004 CFS. However, Treasury
and OMB disagreed with our recommendations related to unreconciled
transactions affecting net position and the Statement of Changes in Cash
Balance from Unified Budget and Other Activities.

In response to their concerns and recognizing that there are various ways
to correct an identified weakness, we modified our recommendation
related to unreconciled transactions affecting net position to be less
prescriptive as to the action to take, but retained the intent of our proposed
recommendation. Treasury and OMB also disagreed with what they
perceived as our recommendation to use agency data to prepare the
Statement of Changes in Cash Balance from Unified Budget and Other
Activities. They disagreed with that approach because they stated that it
would be time consuming and costly, and they prefer to obtain the
information from Treasury’s central accounting system rather than from
agencies’ financial statements. This is not what we recommended.
Instead, because we found unexplained material differences between
Treasury’s records and some agencies’ financial statements, we



Page 2                       GAO-04-45 Process for Preparing CFS Needs Improvement
                       recommended that Treasury collect certain information already reported in
                       federal agencies’ audited financial statements and develop procedures that
                       ensure consistency of the significant line items on the Statement of
                       Changes in Cash Balance from Unified Budget and Other Activities with the
                       agency-reported information.



Scope and              As part of our audit of the fiscal years 2002 and 2001 CFS, we evaluated
                       Treasury’s financial reporting procedures and related internal control. In
Methodology            our report, which is included in the fiscal year 2002 Financial Report of the
                       United States Government,1 we reported material deficiencies relating to
                       Treasury’s financial reporting procedures and internal control. 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. We performed
                       sufficient audit work to provide the disclaimer of opinion and issued our
                       audit report, dated March 20, 2003, in accordance with U.S. generally
                       accepted government auditing standards. This report is based on the audit
                       work we performed for the fiscal years 2002 and 2001 CFS.

                       We requested comments on a draft of this report from the Secretary of the
                       Treasury and the Director of OMB or their designees. Treasury’s and OMB’s
                       comments are reprinted in appendix II, discussed in the Agency Comments
                       and Our Evaluation section of this report, and incorporated in the report as
                       applicable.



Directly Linking       Treasury’s current process for compiling the CFS does not directly link
                       information from federal agencies’ audited financial statements to amounts
Audited Agency         reported in the CFS, and therefore cannot fully ensure that the information
Financial Statements   in the CFS is consistent with the underlying information in federal
                       agencies’ audited financial statements and other financial data (see fig. 1).
to the CFS             Treasury, as the preparer of the CFS, currently collects approximately 2,400
                       trial balances through the Federal Agencies’ Centralized Trial Balance
                       System (FACTS I) from federal agencies and information from the Treasury



                       1
                        The fiscal year 2002 Financial Report of the United States Government was issued by the
                       Department of the Treasury on March 31, 2003, and is available through GAO’s Web site at
                       www.gao.gov and Treasury’s web site at www.fms.treas.gov/fr/index.html.




                       Page 3                          GAO-04-45 Process for Preparing CFS Needs Improvement
Central Accounting and Reporting System (STAR) to compile the financial
statements.



Figure 1: Lack of Direct Link between Audited Agency Financial Statements and
CFS




The Federal Accounting Standards Advisory Board’s (FASAB) Statement of
Federal Financial Accounting Concepts No. 4, Intended Audience and
Qualitative Characteristics for the Consolidated Financial Report of the
United States Government, states that the consolidated financial report
should be a general purpose report that is aggregated from agency reports
and that it should tell users where to find information in other formats,
both aggregated and disaggregated, such as individual agency reports,
agency websites, and the President’s Budget.

Without directly linking financial information from agencies’ audited
financial statements, the information in the CFS may not be reliable. The
lack of direct linkage also affects the efficiency and effectiveness of the
audit of the CFS. In addition, the reliability of certain information in
Management’s Discussion and Analysis, Stewardship Information, and
Supplemental Information may be affected.

As Treasury is designing its new compilation process, which it expects to
implement beginning with the fiscal year 2004 CFS, we recommend that the
Secretary of the Treasury direct the Fiscal Assistant Secretary, working in




Page 4                       GAO-04-45 Process for Preparing CFS Needs Improvement
                         coordination with the Controller of OMB’s Office of Federal Financial
                         Management, to

                         •	 design the new compilation process to directly link information from
                            federal agencies’ audited financial statements to amounts reported in all
                            the applicable CFS and related footnotes, and

                         •	 consider the other applicable recommendations in this report when
                            designing and implementing the new compilation process.



Controls over the        We identified specific areas of internal control in Treasury’s process for
                         preparing the CFS that need to be strengthened. Internal control should
Compilation Process      provide, among other things, reasonable assurance that financial reporting
                         is reliable. GAO’s Standards for Internal Control in the Federal
                         Government2 defines the minimum level of quality acceptable for internal
                         control in the federal government and provides the standards against which
                         internal control is to be evaluated. These standards state that internal
                         controls should include, among other items, (1) segregation of duties,
                         (2) appropriate documentation of transactions and internal control, and
                         (3) reviews by management at the functional or activity level. We found
                         many controls in place, but we identified three areas that need to be
                         improved. Although Treasury is developing a new system and procedures
                         for preparing the CFS, the need for adequate internal control remains
                         important and needs to be considered during the development process.



Segregation of Duties	   Segregation of duties is the practice of dividing the steps in a critical
                         function among different individuals in order to reduce the risk of error or
                         fraud, thus preventing a single individual from having full control of a
                         transaction or event. FACTS I and the Financial Management Service’s
                         Hyperion database are used to compile the CFS. We found that Treasury’s
                         systems administrators responsible for processing the FACTS I data have
                         the capability to enter, change, and delete data within FACTS I and the
                         Hyperion database without any supervisory review. They are also able to
                         post adjustments to the CFS without formal approval. Lack of proper
                         segregation of duties for critical functions leaves the CFS vulnerable to


                         2
                          U.S. General Accounting Office, Internal Control: Standards for Internal Control in the
                         Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).




                         Page 5                           GAO-04-45 Process for Preparing CFS Needs Improvement
                            errors and could result in incomplete and inaccurate summarization of data
                            within these financial statements.



Documentation of            While Treasury has documented some portions of its process for compiling
Transactions and Internal   the CFS, it has not fully documented its policies and procedures for
                            preparing the CFS report. Agency management is responsible for
Control                     developing detailed policies, procedures, and practices to fit agency
                            operations and ensuring that internal control is built into and is an integral
                            part of operations. Although GAO’s Standards for Internal Control in the
                            Federal Government calls for clear documentation of policies and
                            procedures, we found that Treasury has not fully implemented this key
                            control activity. Without documented policies and procedures, staff could
                            follow inconsistent standards and practices or not follow them at all. This
                            potential for inconsistency increases the risk that errors in the compilation
                            process could go undetected and could result in an incomplete and
                            inaccurate summarization of data within the CFS, creating a financial
                            report that is not an accurate representation of the financial position of the
                            U.S. government.



Management Review	          We found that Treasury management did not review transactions within
                            several key compilation processes. Transactions and other significant
                            events should be authorized and executed only by persons acting within
                            the scope of their authority. Appropriate reviews by management of key
                            decisions and data are vital controls to ensure that only authorized actions
                            occur. For example, Treasury’s FACTS I system allows for master
                            appropriation files, the files that list all federal agencies by appropriation
                            code, to be updated by review accountants without supervisory approval.
                            Also, there is no requirement for supervisory review of changes made to
                            agency data as a result of issues identified during the “agency data analysis
                            process” performed by Treasury. In some instances, supervisory reviews
                            were required, but any reviews that may have been performed were not
                            documented. For example, there was no documentation of supervisory
                            review of changes to the Hyperion system software and chart of accounts
                            used to compile the data for the CFS. Records of changes and reviews of
                            the changes made to the templates used to create the CFS were also
                            inadequate.

                            Inadequate supervisory review and inadequate documentation of changes
                            and reviews could allow data that go into the CFS to be manipulated or
                            changed without any supervisory control or review, resulting in the


                            Page 6                       GAO-04-45 Process for Preparing CFS Needs Improvement
                         possibility that agency data could be changed or incorrectly compiled in
                         the CFS.

                         We recommend that the Secretary of the Treasury 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 FACTS I and the Hyperion database and
                            post adjustments to the CFS;

                         •	 develop and fully document policies and procedures for the
                            consolidated financial statement preparation process so that they are
                            proper, complete, and consistently applied among staff members; and

                         •	 require and document reviews by management of all procedures that
                            result in data changes to the CFS.



Unreconciled             The net position reported in the CFS is derived by subtracting liabilities
                         from assets, rather than through balanced accounting entries. In other
Transactions Affecting   words, the CFS is “plugged” to make it balance. To make the fiscal year
the Change in Net        2002 CFS balance, Treasury recorded a net $17.1 billion decrease to net
                         operating cost on the Statement of Operations and Changes in Net Position,
Position                 which it labeled “Unreconciled Transactions Affecting the Change in Net
                         Position.” Treasury does not identify and quantify all components of this
                         unreconciled activity.

                         Treasury attributes these net unreconciled transaction amounts to
                         (1) improper recording of intragovernmental transactions by federal
                         agencies, (2) transactions affecting assets and liabilities not being
                         identified properly by federal agencies as prior period adjustments, and
                         (3) timing differences and errors in reporting transactions. Treasury stated
                         in its November 2001 report on its CFS improvement project3 that in order
                         to properly reconcile net position, federal agencies would need to split net
                         position between intragovernmental and public components, including
                         ending balances and the year’s activity. Currently, OMB requires federal

                         3
                          U.S. Department of the Treasury, Consolidated Financial Report Improvement Project:
                         Recommendations to the Consolidation Process (Washington D.C.: Nov. 15, 2001).




                         Page 7                          GAO-04-45 Process for Preparing CFS Needs Improvement
                        agencies to identify intragovernmental assets and liabilities on their
                        audited balance sheets but does not require the intragovernmental portion
                        of net position to be identified. Without a process in place to identify and
                        quantify all components of the activity in the net position line item,
                        revenues, costs, assets, and liabilities may be misstated, thereby affecting
                        the reliability of the CFS.

                        As Treasury is designing its new financial statement compilation process to
                        begin with the fiscal year 2004 CFS, we recommend that the Secretary of
                        the Treasury direct the Fiscal Assistant Secretary, working in coordination
                        with the Controller of OMB’s Office of Federal Financial Management, to

                        •	 develop reconciliation procedures which will aid in understanding and
                           controlling the net position balance as well as eliminate the plugs
                           previously associated with compiling the CFS; and

                        •	 use balanced accounting entries to account for the change in net
                           position rather than simple subtraction of liabilities from assets.



Reconciliation of       Federal agencies are unable to fully reconcile intragovernmental activity
                        and balances. OMB and Treasury require CFO Act agencies to reconcile
Intragovernmental       selected intragovernmental activity and balances with their “trading
Activity and Balances   partners”4 and to report on the extent and results of intragovernmental
                        activity and balances reconciliation efforts. The Inspectors General
                        reviewed these reports and communicated the results of their reviews to
                        OMB, Treasury, and us. A substantial number of the CFO Act agencies did
                        not fully perform the required reconciliations for fiscal year 2002, citing
                        reasons such as (1) failure of trading partners to provide needed data,
                        (2) limitations and incompatibility of agency and trading partner systems,
                        and (3) human resource issues. For fiscal year 2002, amounts reported for
                        federal agency trading partners for certain intragovernmental accounts
                        were significantly out of balance. A lack of standardization in transaction
                        processing and a lack of sufficient communication between trading
                        partners contribute significantly to federal agencies’ inability to fully
                        reconcile intragovernmental activity and balances. Without improvement
                        in this area, Treasury cannot properly eliminate intragovernmental activity


                        4
                         Trading partners are U.S. government agencies, departments, or other components
                        included in the CFS that do business with each other.




                        Page 8                          GAO-04-45 Process for Preparing CFS Needs Improvement
and balances and, as a result, assets, liabilities, revenue, and costs reported
in the CFS may not be fairly stated.

Federal agencies are required to consistently and fully account for,
reconcile, and report intragovernmental activity and balances across the
federal government. To address certain issues that have contributed to the
out-of-balance condition for intragovernmental activity and balances, OMB
has established a set of standard business rules, OMB Memorandum
M-03-01, Business Rules for Intragovernmental Transactions, for
governmentwide transactions among trading partners; the memorandum
requires quarterly reconciliations of intragovernmental activity and
balances, beginning with fiscal year 2003. Treasury Financial Manual,
section 4030, also requires reconciliation of intragovernmental activity and
balances. Further, Treasury has begun a process to help federal agencies
better perform their reconciliations, by providing each agency with
detailed trading partner information. Also, Treasury is planning to require
federal agencies, beginning with fiscal year 2004, to report in Treasury’s
new closing package intragovernmental activity and balances by trading
partner.

As OMB continues to make strides to address issues related to
intragovernmental transactions, we recommend that the Director of the
Office of Management and Budget direct the Controller of the Office of
Federal Financial Management to

•	 develop policies and procedures that document how OMB will enforce
   the business rules provided in OMB Memorandum M-03-01, Business
   Rules for Intragovernmental Transactions, and

•	 require that significant differences noted between business partners be
   resolved and the resolution be documented.

We also recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of the
Office of Management and Budget, to implement the plan to require federal
agencies to report in Treasury’s new closing package, beginning with fiscal
year 2004, intragovernmental activity and balances by trading partner and
indicate amounts that have not been reconciled with trading partners and
amounts, if any, that are in dispute.




Page 9                       GAO-04-45 Process for Preparing CFS Needs Improvement
Elimination of          During our audits, we found the following:

Intragovernmental       •	 Intragovernmental activity and balances are “dropped” or “offset” in the
Activity and Balances      preparation of the CFS rather than eliminated through balanced
                           accounting entries.

                        •	 Certain intragovernmental activity and balances, primarily related to
                           appropriations, are not being properly considered in the consolidation
                           process.

                        •	 No reconciliation is performed for the change in intragovernmental
                           assets and liabilities for the fiscal year, including the amount and nature
                           of all changes in intragovernmental assets or liabilities not attributable
                           to cost and revenue activity recognized during the fiscal year, such as
                           differences due to purchases that are capitalized as inventory or
                           equipment and revenue that is deferred.

                        Consolidated financial statements are intended to present the results of
                        operations and financial position of the components that make up the
                        reporting entity as if the entity were a single enterprise. Therefore, when
                        preparing the CFS, intragovernmental activity and balances between
                        federal agencies must be eliminated. As mentioned above, federal
                        agencies’ problems in handling their intragovernmental transactions impair
                        Treasury’s ability to properly eliminate these transactions, and significant
                        differences in intragovernmental accounts have been identified. Without
                        an effective process, intragovernmental activity and balances are not fully
                        accounted for and eliminated in the process used to prepare the CFS. As a
                        result, the federal government’s ability to determine the impact of these
                        differences on the amounts reported in the CFS is impaired and,
                        consequently, the CFS may be misstated.

                        We recommend that the Secretary of the Treasury direct the Fiscal
                        Assistant Secretary, working in coordination with OMB’s Controller of the
                        Office of Federal Financial Management, to

                        •	 design procedures that will account for the difference in
                           intragovernmental assets and liabilities throughout the compilation
                           process by means of formal consolidating and elimination accounting
                           entries;




                        Page 10                      GAO-04-45 Process for Preparing CFS Needs Improvement
                         •	 develop solutions for intragovernmental activity and balance issues
                            relating to federal agencies’ accounting, reconciling, and reporting in
                            areas other than those OMB now requires be reconciled, primarily areas
                            relating to appropriations; and

                         •	 reconcile the change in intragovernmental assets and liabilities for the
                            fiscal year, including the amount and nature of all changes in
                            intragovernmental assets or liabilities not attributable to cost and
                            revenue activity recognized during the fiscal year. Examples of these
                            differences would include capitalized purchases such as inventory or
                            equipment and deferred revenue.



Reconciliation of Net    Treasury did not have an adequate process to identify and report items
                         needed to reconcile the U.S. government’s fiscal year 2002 net operating
Operating Cost and       cost of $364.9 billion to the fiscal year 2002 unified budget deficit, which
Unified Budget Surplus   was reported as $157.7 billion. The Reconciliation of Net Operating Cost
                         and Unified Budget Surplus (or Deficit) (hereafter referred to as the
(or Deficit)             reconciliation statement) is expected to explain certain differences that
                         occur because the CFS are prepared on the accrual basis in accordance
                         with U.S. generally accepted accounting principles. Under accrual
                         accounting, transactions are reported when the event or transaction is
                         recognizable under U.S. generally accepted accounting principles rather
                         than when cash is received and paid. By contrast, federal budgetary
                         reporting is, with certain exceptions, on the cash basis, in accordance with
                         accepted budget concepts and policies. Statement of Federal Financial
                         Accounting Standards (SFFAS) No. 24, Selected Standards for the
                         Consolidated Financial Report of the United States Government, effective
                         in fiscal year 2002, requires the reconciliation statement as part of the CFS.

                         In our audit of the reconciliation statement, we found that Treasury was
                         unable to identify all the transactions needed to properly reconcile the
                         statement. Treasury’s process for compiling the reconciliation statement
                         involved the use of two independent sources of information—FACTS data
                         from federal agencies’ general ledger systems for the net operating cost and
                         most of the reconciliation statement items and Treasury’s central
                         accounting and reporting system (STAR) primarily for the unified budget
                         surplus/deficit amounts. The reconciliation statement begins with the net
                         operating cost amount reported in the Statement of Operations and
                         Changes in Net Position (derived through FACTS data). As noted above,
                         this amount includes a net $17.1 billion labeled as “unreconciled
                         transactions,” which was needed to balance the consolidated Balance



                         Page 11                      GAO-04-45 Process for Preparing CFS Needs Improvement
Sheet. Because the net operating cost amount includes this plug, which
does not correspond to any budget activity, the $17.1 billion should have
been included as a reconciling item in the reconciliation statement, but it
was not. In addition, a $1 billion “net amount of all other differences”
(another plug) was also needed in the reconciliation statement to balance
net operating cost to the unified budget deficit. Treasury was unable to
adequately identify and explain the gross components of such amounts.

Treasury’s process for preparing the reconciliation statement also did not
ensure completeness of reporting or ascertain the consistency of all the
amounts reported in the reconciliation statement with the related balance
sheet line items, related notes, or federal agency financial statements. We
performed an analysis to determine whether all applicable components
reported in the other statements (and related note disclosures) included in
the CFS were properly reflected in the reconciliation statement. We found
about $21 billion of net changes in various line item account balances on
the balance sheet that were not explained on either the reconciliation
statement or the Statement of Changes in Cash Balance from Unified
Budget Surplus and Other Activities. For example, the reconciliation
statement reported depreciation expense ($20.5 billion) and total
capitalized fixed assets ($40.9 billion) as the components of the net change
in property, plant, and equipment. Although these activities accounted for
a net increase of $20.4 billion, the balance sheet reflected a smaller net
increase, $18 billion; Treasury was unable to explain the remaining
$2.4 billion of the net change. In addition, while we found that the source
of the line item “principal repayments of precredit reform loans” that is
reported on the reconciliation statement was from STAR, Treasury was
unable to link this amount of $8.2 billion to any related agency financial
statements or the consolidated Balance Sheet and related notes.

Lastly, Treasury did not establish a reporting materiality threshold for
purposes of collecting and reporting information in the reconciliation
statement. For example, some items were reported simply as a net
“increase/decrease” without considering how material, both quantitatively
and qualitatively, the gross changes were.5 We noted, for instance, that in
the “components of the budget surplus (deficit) not part of net operation
cost” section of the statement, there is a reconciling item titled “increase in


5
 An item’s omission or error is considered material if the surrounding circumstances make it
probable that the judgment of a reasonable person relying on the information would have
been changed or influenced by the inclusion or correction of the item.




Page 12                           GAO-04-45 Process for Preparing CFS Needs Improvement
inventory” rather than accounting for “purchases of inventory” as a
“component of the budget surplus (deficit) not part of net operation cost”
and separately reporting the “sales, use, or disposal of inventory” in the
“components of net operating cost not part of the budget surplus (or
deficit).” Treasury was unable to demonstrate whether material,
informative amounts were netted, and pertinent information may therefore
not be disclosed.

We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary to develop and implement a process that adequately
identifies and reports items needed to reconcile its net operating cost and
unified budget surplus (or deficit). Treasury should

•	 report “net unreconciled differences” included in the net operating
   results line item as a separate reconciling activity in the reconciliation
   statement,

•	 develop policies and procedures to ensure completeness of reporting
   and document how all the applicable components reported in the other
   consolidated financial statements (and related note disclosures
   included in the CFS) were properly reflected in the reconciliation
   statement, and

•	 establish reporting materiality thresholds for determining which agency
   financial statement activities to collect and report at the
   governmentwide level to assist in ensuring that the reconciliation
   statement is useful and conveys meaningful information.

In addition, if Treasury chooses to continue using information both from
federal agencies’ financial statements and from the STAR system, we
recommend that Treasury

•	 demonstrate how the amounts from STAR reconcile to federal agencies’
   financial statements and

•	 identify and document the cause, if any significant differences are
   noted.




Page 13                      GAO-04-45 Process for Preparing CFS Needs Improvement
Statements of Changes   Treasury was unable to demonstrate how significant amounts reported in
                        the Statement of Changes in Cash Balance from Unified Budget and Other
in Cash Balance from    Activities were related to the underlying federal agencies’ financial
Unified Budget and      statements. The Statement of Changes in Cash Balance from Unified
                        Budget and Other Activities is expected to explain how the annual unified
Other Activities        budget surplus or deficit relates to the change in the U.S. government’s
                        operating cash. SFFAS No. 24, effective in fiscal year 2002, requires the
                        Statement of Changes in Cash Balance from Unified Budget and Other
                        Activities as part of the CFS.

                        For fiscal year 2002, the Statement of Changes in Cash Balance from
                        Unified Budget and Other Activities reported a unified budget deficit of
                        $157.7 billion, derived as the difference between reported actual unified
                        budget receipts of $1,853.3 billion and actual unified budget outlays of
                        $2,011 billion. Both line items were material to this statement and were
                        compiled from federal agencies’ monthly reports to Treasury in the STAR
                        system.

                        Treasury was unable to explain material differences, totaling $231 billion
                        (absolute) and $166 billion (net), between the actual unified budget net
                        outlays reported on this statement and the outlays reported on selected
                        individual federal agencies’ audited Combined Statement of Budgetary
                        Resources. For example, we found one federal agency that reported net
                        outlays for fiscal year 2002 as $479 billion on its audited Combined
                        Statement of Budgetary Resources, while Treasury’s records showed $375
                        billion for fiscal year 2002 for this agency. This agency had received an
                        unqualified auditor opinion on its financial statements.

                        OMB Bulletin 01-09, Form and Content of Agency Financial Statements,6
                        states that outlays in federal agencies’ Combined Statement of Budgetary
                        Resources should agree with the net outlays reported in the budget of the
                        U.S. government. In addition, SFFAS No. 7, Accounting for Revenue and
                        Other Financing Sources and Concepts for Reconciling Budgetary and
                        Financial Accounting, requires explanation of any material differences
                        between the information required to be disclosed (including outlays) and
                        the amounts described as “actual” in the budget of the U.S. government.


                        6
                         Office of Management and Budget, Form and Content of Agency Financial Statements,
                        OMB-01-09 (Washington, D.C.: Sept. 25, 2001). This bulletin is OMB’s official guidance for
                        the form and content of federal agencies’ financial statements.




                        Page 14                           GAO-04-45 Process for Preparing CFS Needs Improvement
Treasury believes its records for net outlays are reliable and accurate;
however, many federal agencies are reporting different net outlays and
receiving clean opinions on their financial statements.

Treasury was unable to adequately explain the over $24 billion net
difference between actual unified budget receipts of $1,853.3 billion and
total operating revenue of $1,877.7 billion reported in the Statements of
Operations and Changes in Net Position. While these amounts are not
expected to equal (for example, operating revenues include accrued
amounts, and budget receipts are reported on the cash basis), there is a
relationship between operating revenues reported on the Statement of
Operations and Changes in Net Position and unified budget receipts
reported on the Statement of Changes in Cash Balance from Unified Budget
and Other Activities. Therefore, the expectation is that differences
between these amounts should be explainable.

Treasury was also not able to provide support for how the line items in the
“other activities” section of this statement, totaling $13.5 billion, related to
either the underlying Balance Sheet or related notes accompanying the
CFS.

We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of OMB’s
Office of Federal Financial Management, to develop and implement a
process to ensure that the Statement of Changes in Cash Balance from
Unified Budget and Other Activities properly reflects the activities reported
in federal agencies’ audited financial statements. Treasury should

•	 document the consistency of the significant line items on this statement
   to agencies’ audited financial statements;

•	 request, through its closing package, that federal agencies provide the
   net outlays reported in their Combined Statement of Budgetary
   Resources and explanations for any significant differences between net
   outlay amounts reported in the Combined Statement of Budgetary
   Resources and the budget of the U.S. government;

•	 investigate the differences between net outlays reported in federal
   agencies’ Combined Statement of Budgetary Resources and Treasury’s
   records in the STAR system to ensure that the proper amounts are
   reported in the Statement of Changes in Cash Balance from Unified
   Budget and Other Activities;



Page 15                      GAO-04-45 Process for Preparing CFS Needs Improvement
                         •	 explain and document the differences between the operating revenue
                            amount reported on the Statement of Operations and Changes in Net
                            Position and unified budget receipts reported on the Statement of
                            Changes in Cash Balance from Unified Budget and Other Activities; and

                         •	 provide support for how the line items in the “other activities” section of
                            this statement relate to either the underlying Balance Sheet or related
                            notes accompanying the CFS.



Defining the Reporting   The CFS includes certain financial information for the executive,
                         legislative, and judicial branches, to the extent that federal agencies within
Entity                   those branches have provided Treasury such information. However, there
                         are undetermined amounts of assets, liabilities, and revenues that are not
                         included, and the government did not provide evidence or disclose in the
                         CFS that such financial information was immaterial.

                         Statement of Federal Financial Accounting Concepts (SFFAC) No. 2,
                         Entity and Display, provides guidance on defining reporting entities.
                         Under SFFAC No. 2, a reporting entity for general purpose financial
                         statements would “meet all of the following criteria: (1) there is a
                         management responsible for controlling and deploying resources,
                         producing outputs and outcomes, executing the budget or a portion thereof
                         . . ., and held accountable for the entity’s performance; (2) the entity’s scope
                         is such that its financial statements would provide a meaningful
                         representation of operations and financial condition; and (3) there are
                         likely to be users of the financial statements who are interested in and
                         could use the information in the statements to help them make resource
                         allocation and other decisions and hold the entity accountable for its
                         deployment and use of resources.” SFFAC No. 2 also calls for the notes to
                         financial statements to provide disclosures that are necessary to make the
                         financial statements more informative and not misleading, such as a brief
                         description of the reporting entity. The statement also provides criteria for
                         including components in a reporting entity. As examples of the application
                         of such criteria, SFFAC No. 2 specifically discusses the Federal Reserve
                         System and government-sponsored enterprises and the reasons for
                         FASAB’s conclusion that these entities would not be considered
                         components of the U.S. government reporting entity.




                         Page 16                      GAO-04-45 Process for Preparing CFS Needs Improvement
In accordance with SFFAC No. 2, if the government could provide evidence
that the financial information not included in the CFS is immaterial,7 then
the CFS reporting entity could be described as the “U.S. government” and
would conform materially to the criteria set forth in SFFAC No. 2.
However, the fiscal year 2002 CFS reporting entity excluded certain entities
without providing evidence or clearly explaining the reason.

An appendix to the CFS listed 13 entities that were excluded from the CFS
reporting entity and specifically explained the reason for excluding one of
those entities—the Federal Reserve System. However, the appendix did
not explain the reason for excluding the other entities listed as excluded,
such as government-sponsored enterprises and military exchanges. While
exclusion of those entities may be appropriate, some users of the CFS may
be confused if the reason for excluding entities is not clearly disclosed in
the CFS.

We understand the inherent challenges in getting complete information for
all three branches of the U.S. government. However, not including required
information for all components included in a reporting entity or not clearly
explaining the reason for excluding certain entities could mislead some
users of the financial statements.

Without evidence of the amounts of information excluded and any related
disclosures, in particular, evidence that what was excluded was immaterial
to the CFS, we could not have ample assurance regarding the unknown
amounts, and, under auditing standards, this issue could impede a future
opinion on the CFS.

We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of OMB’s
Office of Federal Financial Management to do the following:

•	 Perform an assessment to define the reporting entity, including its
   specific components, in conformity with the criteria issued by FASAB.
   Key decisions made in this assessment should be documented, including


7
 To assess the materiality of any issue, the indicative criteria discussed in SFFAC No. 2 state
that (1) the materiality of the entities and their relationship with one another should be
considered, (2) materiality should not be measured solely in dollars, and (3) potential
embarrassment to any of the entities' stakeholders should also be considered. Thus, a bias
toward expansiveness and comprehensiveness would be justified, particularly if it could
contribute to maintenance of fiscal control.




Page 17                            GAO-04-45 Process for Preparing CFS Needs Improvement
                            the reason for including or excluding components and the basis for
                            concluding on any issue. Particular emphasis should be placed on
                            demonstrating that any financial information that should be included,
                            but is not included, is immaterial.

                        •	 Provide in the financial statements all the financial information relevant
                           to the defined reporting entity, in all material respects. Such information
                           would include, for example, the reporting entity’s assets, liabilities, and
                           revenues.

                        •	 Disclose in the financial statements all information that is necessary to
                           inform users adequately about the reporting entity. Such disclosures
                           should clearly describe the reporting entity and explain the reason for
                           excluding any components that are not included in the defined reporting
                           entity.



Conformity with U.S.    Treasury lacks an adequate process to ensure that the financial statements,
                        related notes, stewardship, and supplemental information in the CFS are
Generally Accepted      presented in conformity with U.S. generally accepted accounting
Accounting Principles   principles. SFFAS No. 24 states that FASAB standards apply to all federal
                        agencies, including the U.S. government as a whole, unless provision is
                        made for different accounting treatment in a current or subsequent
                        standard.

                        Specifically, we found that Treasury did not (1) timely identify applicable
                        generally accepted accounting principles requirements, (2) make timely
                        modifications to agency data calls to obtain information needed, (3) assess,
                        qualitatively and quantitatively, the materiality of omitted disclosures,8 or
                        (4) document decisions reached with regard to omitted disclosures and the
                        rationale for such decisions. We identified numerous disclosures that were
                        not in conformity with applicable standards. These needed disclosures are
                        described in appendix I. We did note that Treasury is requesting certain
                        information in its planned closing package for fiscal year 2004 that may
                        address some of the needed disclosures.

                        We recommend that the Secretary of the Treasury direct the Fiscal
                        Assistant Secretary to establish a formal process that will allow the


                        8
                        See footnote 5.




                        Page 18                      GAO-04-45 Process for Preparing CFS Needs Improvement
                             financial statements, related notes, stewardship, and supplemental
                             information in the CFS to be presented in conformity with U.S. generally
                             accepted accounting principles. The process should

                             • timely identify generally accepted accounting principles requirements,

                             •	 make timely modifications to Treasury’s closing package requirements
                                to obtain information needed,

                             •	 assess, qualitatively and quantitatively, the impact of the omitted
                                disclosures, and

                             • document decisions reached and the rationale for such decisions.

                             With respect to the 16 required disclosures identified in appendix I that
                             were not included in the CFS, we recommend that each of these
                             disclosures be included in the CFS or the rationale for excluding any of
                             them be documented.



Other Weaknesses             During our audit we found certain issues related to (1) management
                             representation letters, (2) legal representation letters, and (3) information
Identified                   on major treaties and other international agreements that will require
                             certain actions by Treasury and OMB. Other issues related to these same
                             three areas will need to be addressed by federal agencies and their auditors
                             to facilitate Treasury’s and OMB’s preparation of the CFS. We plan to
                             separately communicate to agency Chief Financial Officers and Inspectors
                             General the details of our concerns for such issues. We have summarized
                             our findings below and are providing recommendations to help address the
                             issues that require action by Treasury and OMB.



Management                   For each agency financial statement audit, generally accepted auditing
Representation Letters and   standards require that agency auditors obtain written representations from
                             agency management as part of the audit. In turn, Treasury and OMB are to
the Related Summaries of
                             receive all the required management representation letters and the related
Unadjusted Misstatements     summaries of unadjusted misstatements from the federal agencies. This is
                             important because generally accepted auditing standards require Treasury
                             and OMB to provide us, as their auditor, a management representation
                             letter for the CFS, and their letter depends on the information within
                             agencies’ management representation letters. However, we found that



                             Page 19                     GAO-04-45 Process for Preparing CFS Needs Improvement
Treasury and OMB did not have policies or procedures to adequately
review and analyze federal agencies’ management representation letters.

In a management representation letter, management typically
acknowledges its responsibility for its financial statements and its belief
that the financial statements are presented in conformity with U.S.
generally accepted accounting principles; the completeness of financial
information in the statements; recognition, measurement, and disclosure;
and subsequent events. Without performing an adequate review and
analysis of federal agencies’ management representations letters, Treasury
and OMB management may not be fully informed of matters that may affect
their representations made with respect to the audit of the CFS.

As part of our audit of the CFS, we received and reviewed 30 federal
agencies’ management representation letters.9 We found that (1) 2 letters
had discrepancies between what the auditor found and what the agency
represented in its management representation letter, (2) 8 letters were not
signed by the appropriate level of management, (3) 25 letters did not
disclose the materiality threshold used by management in determining
items to be included in the letter, (4) 4 letters omitted certain
representations that are ordinarily included, (5) 2 letters did not include a
schedule of unadjusted misstatements or affirm in their representation
letter that there were no uncorrected misstatements, and (6) 15 schedules
of unadjusted misstatements did not provide complete information about
the misstatements that were identified. Only 1 of the 30 letters we
reviewed had none of the deficiencies noted above.

We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of OMB’s
Office of Federal Financial Management, to establish written policies and
procedures for preparing the governmentwide management representation
letter to help ensure that it is properly prepared and contains sufficient
representations. Specifically, these policies and procedures should require

•	 an analysis of the agency management representations to determine if
   discrepancies exist between what the agency auditor reported and the
   representations made by the agency, including the resolution of such
   discrepancies;


9
 We requested 24 federal agency management representation letters. We received an
additional 6 letters that we also included in our review.




Page 20                         GAO-04-45 Process for Preparing CFS Needs Improvement
                          •	 a determination that the agency management representation letters
                             have been signed by the highest-level agency officials that are
                             responsible for and knowledgeable about the matters included in the
                             agency management representation letters;

                          •	 an assessment of the materiality thresholds used by federal agencies in
                             their respective management representation letters;

                          •	 an assessment of the impact, if any, of federal agencies’ materiality
                             thresholds on the management representations made at the
                             governmentwide level;

                          •	 an evaluation and assessment of the omission of representations
                             ordinarily included in agency management representation letters; and

                          •	 an analysis and aggregation of the agencies’ summary of unadjusted
                             misstatements to determine the completeness of the summaries and to
                             ascertain the materiality, both individually and in the aggregate, of such
                             unadjusted misstatements to the CFS taken as a whole.



Legal Representation      For each agency financial statement audit, generally accepted auditing
Letters and Related       standards require that agency auditors obtain written legal representations
                          as part of the audit. Legal representation letters, along with related
Management Schedules in
                          management schedules,10 are essential to properly reporting legal
Reporting Contingency     contingency losses in federal agencies’ financial statements. Inadequate
Losses                    information in the legal representation letters could weaken the accuracy
                          and reliability of federal agency financial statements and the CFS.

                          We reviewed 34 federal agencies’ legal representations letters and related
                          management schedules to assess the adequacy of the letters and related
                          schedules.11 We found that the adequacy of some legal letters was
                          questionable. For example, we found that 2 letters did not express an
                          opinion of how the expected outcome of virtually all of the two agencies’


                          10
                           Office of Management and Budget, Audit Requirements for Federal Financial
                          Statements, OMB-01-02 (Washington, D.C.: Oct. 16, 2000), requires agency chief financial
                          officers to prepare a management schedule that documents how the information obtained in
                          the legal counsel’s response was considered in preparing the financial statements.
                          11
                            We requested 24 federal agency legal representation letters. We received an additional 10
                          letters that we also included in our review.




                          Page 21                           GAO-04-45 Process for Preparing CFS Needs Improvement
                           cases would be resolved, and that 5 agencies did not provide the related
                           management schedules.

                           In some cases, the lack of adequate information may have resulted from
                           legal counsel’s desire to protect the confidentiality of lawyer-client
                           communications, the difficulty in predicting the outcome of potential and
                           pending litigation with any assurance, and/or legal counsel’s desire to avoid
                           the possibility of prejudicing the outcome of the litigation to the client’s
                           detriment. While these are understandable reasons, without adequate legal
                           contingency information, management of Treasury and OMB may not be
                           fully informed of matters that may affect the legal representations made
                           with respect to the audit of the CFS.

                           We recommend that the Secretary of the Treasury direct the Fiscal
                           Assistant Secretary, working in coordination with the Controller of OMB’s
                           Office of Federal Financial Management, to help ensure that agencies
                           provide

                           •	 adequate information in their legal representation letters regarding the
                              expected outcome of the cases and

                           • related management schedules.



Information on Major       The CFS note disclosures did not include any information on major treaties
Treaties and Other         and other international agreements12 to which the federal government is a
                           party. These treaties and other international agreements address various
International Agreements
                           issues including, but not limited to, trade, commerce, security, and arms
                           that may involve financial obligations or give rise to loss contingencies.

                           Treaties and other international agreements may lead to commitments or
                           contingencies and therefore should be included in the CFS, in accordance
                           with OMB Bulletin No. 01-09 and SFFAS No. 5, Accounting for Liabilities


                           12
                              The term treaty in its technical usage in the United States denotes international
                           agreements made by the President with the advice and consent of the Senate in accordance
                           with Article II, section 2, of the Constitution of the United States. In addition to such
                           treaties, authorized representatives of the federal government may, pursuant to existing law
                           or treaties, enter into other international agreements that are governed by international law.
                           The entering into and record keeping of such international agreements by federal agencies
                           are governed by the Case-Zablocki Act, 1 U.S.C. section 112b, and implementing State
                           Department regulations, 22 C.F.R. Part 181 (2002).




                           Page 22                           GAO-04-45 Process for Preparing CFS Needs Improvement
of the Federal Government, as amended by SFFAS No. 12, Recognition of
Contingent Liabilities Arising from Litigation. The degree of certainty
as to whether there will be a cost now or in the future, along with the ability
to quantify it in advance, determines the appropriate accounting treatment.

Treaties and other international agreements were not included in the notes
to the CFS because Treasury and the federal agencies had yet to perform
the necessary work to determine the nature and magnitude of those in
force as of September 30, 2002. The State Department publishes a
document annually called Treaties in Force. The most recent edition of
Treaties in Force, released in August 2002, lists treaties and other
international agreements of the United States that were in force on January
1, 2002. However, according to State Department staff, this document is
incomplete because federal agencies do not always provide complete
information on treaties and international agreements when a request for
data is made. Not having information on major treaties and other
international agreements in the CFS resulted in incomplete disclosures of
the possible exposure to loss or obligations of the U.S. government.

We recommend that the Secretary of the Treasury direct the Fiscal
Assistant Secretary, working in coordination with the Controller of OMB’s
Office of Federal Financial Management, to establish written policies and
procedures to help ensure that major treaty and other international
agreement information is properly identified and reported in the CFS.
Specifically, these policies and procedures should require that agencies

•	 develop a detailed schedule of all major treaties and other international
   agreements that obligate the U.S. government to provide cash, goods, or
   services, or that create other financial arrangements that are contingent
   on the occurrence or nonoccurrence of future events (a starting point
   for compiling these data could be the State Department’s Treaties in
   Force);

•	 classify all such scheduled major treaties and other international
   agreements as commitments or contingencies;

•	 disclose in the notes to the CFS amounts for major treaties and other
   international agreements that have a reasonably possible chance of
   resulting in a loss or claim as a contingency;




Page 23                      GAO-04-45 Process for Preparing CFS Needs Improvement
                      •	 disclose in the notes to the CFS amounts for major treaties and other
                         international agreements that are classified as commitments and that
                         may require measurable future financial obligations; and

                      •	 take steps to prevent major treaties and other international agreements
                         that are classified as remote from being recorded or disclosed as
                         probable or reasonably possible in the CFS.



Agency Comments and   In written comments on a draft of this report, which are reprinted in
                      appendix II, Treasury and OMB stated that our report identified many
Our Evaluation        recommendations that will improve the usefulness and accuracy of the CFS
                      and that they have already incorporated many of them into their new
                      system and processes that are being developed for preparing the fiscal year
                      2004 CFS. However, Treasury and OMB disagreed with our
                      recommendations related to unreconciled transactions affecting net
                      position and the Statement of Changes in Cash Balance from Unified
                      Budget and Other Activities. They also stated that they would consider the
                      other recommendations in our report as they continue the design and
                      implementation of the new process for preparing the CFS.

                      On the first matter, Treasury and OMB disagreed with our proposed
                      recommendation that federal agencies submit to Treasury an analysis of
                      their net position that separates intragovernmental and public transactions.
                      The purpose of this recommendation was to help Treasury understand and
                      control the U.S. government’s net position, as well as to eliminate the plugs
                      associated with compiling the CFS. In response to our draft report,
                      Treasury and OMB stated that Treasury had decided not to require agencies
                      to split net position between intragovernmental and public transactions as
                      Treasury had originally planned and reported in its CFS Improvement
                      Project Report because it was unable to develop a procedure that agencies
                      could use to provide this split. In addition, Treasury and OMB stated that
                      this split would not identify certain items known to affect the unreconciled
                      net position transactions. However, because Treasury has not identified
                      and quantified all the components of the unreconciled transactions, a
                      procedure is still needed that will adequately reconcile net position and
                      assist Treasury in identifying and eliminating the plugs needed to balance
                      the CFS. Our proposed recommendation in the draft report that we
                      provided for comment was one option for Treasury to resolve the
                      uncertainties regarding the reliability of these data. We recognize there are
                      other ways to gain these assurances. Therefore, we have modified our
                      recommendation to recommend that Treasury develop reconciliation



                      Page 24                     GAO-04-45 Process for Preparing CFS Needs Improvement
procedures to aid in understanding and controlling the net position
balance.

Regarding the second matter, Treasury and OMB stated that we had
suggested that federal agency data be used to prepare receipts and outlays
used in the Statement of Changes in Cash Balance from Unified Budget and
Other Activities. They stated that they disagree with this approach because
it would be time-consuming and costly to gather such information.
Treasury and OMB have stated that the Statement of Changes in Cash
Balance from Unified Budget and Other Activities is prepared from
information derived from Treasury’s Central Accounting System rather
than from agencies’ financial statements.

We were not calling for Treasury to use federal agencies’ financial
statements to prepare the Statement of Changes in Cash Balance from
Unified Budget and Other Activities. Instead, we recommended that
Treasury collect certain information already reported in federal agencies’
audited financial statements and develop procedures that ensure
consistency of the significant line items on the Statement of Changes in
Cash Balance from Unified Budget and Other Activities with the agency-
reported information. As we stated in our report, Treasury has expressed
the belief that the information it maintains in its system is materially
reliable. However, federal agencies also believe their amounts are
materially reliable and their auditors have rendered unqualified audit
opinions on their financial statements. We found unexplained material
differences between Treasury’s records and some agencies’ financial
statements. We provided a schedule of these differences to Treasury and
requested explanations for the material differences. As discussed in our
report, Treasury was unable to explain material differences, totaling $231
billion (absolute) and $166 billion (net), between the actual unified budget
net outlays reported on this statement and the net outlays reported on
selected individual federal agencies’ audited Combined Statement of
Budgetary Resources.

As stated in our report, OMB Bulletin 01-09, Form and Content of Agency
Financial Statements, states that outlays in federal agencies’ Combined
Statement of Budgetary Resources should agree with the net outlays
reported in the budget of the U.S. government. In some cases, we found
that net outlay amounts reported in federal agencies’ audited financial
statements differed from the amounts included in the CFS and budget of
the U.S. government for these agencies. For example, Treasury did not
provide us with an explanation of why its own audited Combined



Page 25                     GAO-04-45 Process for Preparing CFS Needs Improvement
Statement of Budgetary Resources reported net outlays of $479 billion for
fiscal year 2002, while the amount included in the CFS relating to net
outlays for the Department of Treasury was only $375 billion for fiscal year
2002.

Ensuring that the significant line items on the Statement of Changes in
Cash Balance from Unified Budget and Other Activities are consistent with
agencies’ audited financial statements is an important expectation. As
stated in our report, SFFAS No. 7, Accounting for Revenue and Other
Financing Sources and Concepts for Reconciling Budgetary and
Financial Accounting, requires agencies to provide an explanation for any
material differences between the information required to be disclosed
(including outlays) in their financial statements and the amounts described
as “actual” in the budget of the U.S. government. Also, many of the amounts
reported in the Statement of Changes in Cash Balance from Unified Budget
and Other Activities are intended to be the same as the amounts reported in
the budget of the U.S. government. As such, we continue to believe that the
process we proposed would be the most efficient manner for Treasury, as
the preparer of the CFS, to obtain the necessary assurance on the
significant amounts reported in the Statement of Changes in Cash Balance
from Unified Budget and Other Activities.

Treasury and OMB also suggested that we not address the
recommendations in our report related to management representation
letter and legal representation letter issues to Treasury. Generally accepted
auditing standards require Treasury and OMB to provide us, as their
auditor, a management representation letter for the CFS, and their letter
depends on the information within agencies’ management representation
letters. However, we found that Treasury and OMB did not have policies or
procedures to adequately review and analyze federal agencies’
management representation letters. As such, we continue to believe that
both Treasury and OMB need to work together to address the
recommendations we made in this area.

In regard to legal representation letters, we identified problems with
certain agencies’ letters that could weaken the accuracy and reliability of
federal agencies’ financial statements and the CFS. OMB, in its role of
providing guidance to agencies and their auditors regarding agencywide
financial statements, and Treasury, in its role as preparer of the CFS, both
play an important part in ensuring that legal representation letters provide
adequate information to enable the proper reporting of legal contingency
losses in federal financial statements. As such, we continue to believe that



Page 26                     GAO-04-45 Process for Preparing CFS Needs Improvement
both Treasury and OMB need to work together to address the
recommendations we made in this area as well.

This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations. You should submit your
statement to the Senate Committee on Governmental Affairs and the House
Committee on Government Reform within 60 days of the date of this letter.
A written statement must also be sent to the House and Senate Committees
on Appropriations with the agencies’ first request for appropriations made
more than 60 days after the date of the report.


We are sending copies of this report to the Chairmen and Ranking Minority
Members of the Senate Committee on Governmental Affairs; the
Subcommittee on Financial Management, the Budget, and International
Security, Senate Committee on Governmental Affairs; the House
Committee on Government Reform; and the Subcommittee on Government
Efficiency and Financial Management, House Committee on Government
Reform. In addition, we are sending copies to the Fiscal Assistant Secretary
of the Treasury and OMB’s Controller of the Office of Federal Financial
Management. Copies will be made available to others upon request. This
report is also available at no charge on GAO’s Web site, at www.gao.gov.

We acknowledge and appreciate the cooperation and assistance provided
by Treasury and OMB during our audit. If you or your staff have any
questions or wish to discuss this report, please contact Jeffrey C. Steinhoff,
Managing Director, Financial Management and Assurance, on (202) 512-
2600 or Gary T. Engel, Director, Financial Management and Assurance, on
(202) 512-3406.




David M. Walker
Comptroller General
of the United States




Page 27                      GAO-04-45 Process for Preparing CFS Needs Improvement
Appendix I

Disclosure Issues



                       This enclosure includes 16 disclosures identified that are required by U.S.
                       generally accepted accounting principles to either be included in the CFS
                       or the rationale for their exclusion documented. However, they were
                       neither included nor was their exclusion documented.



Loans Receivable and   The note disclosure for loans receivable and loan guarantee liabilities
                       departed from the following disclosure requirements of Statements of
Loan Guarantee         Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for
Liabilities            Inventory and Related Property, and SFFAS No. 18, Amendments to
                       Accounting Standards for Direct Loans and Loan Guarantees.

                       SFFAS No. 3, paragraph 91, requires the reporting entity to disclose the
                       following:

                       • valuation basis for foreclosed property;

                       • changes from the prior year’s accounting methods, if any;

                       • restrictions on the use/disposal of property;

                       •	 balances by categories (i.e., pre-1992 and post-1991 foreclosed
                          property);

                       •	 number of properties held and average holding period by type or
                          category; and

                       •	 number of properties for which foreclosure proceedings are in process
                          at the end of the period for foreclosed assets acquired in full or partial
                          settlement of a direct or guaranteed loan.

                       SFFAS No. 18, paragraph 9, states that credit programs should reestimate
                       the subsidy cost allowance for outstanding direct loans and the liability for
                       outstanding loan guarantees. There are two kinds of reestimates: (a)
                       interest rate reestimates and (b) technical/default reestimates. Entities
                       should measure and disclose each program’s reestimates in these two
                       components separately.

                       SFFAS No. 18, paragraph 10, requires the reporting entity to display in the
                       notes to the financial statements a reconciliation between the beginning
                       and ending balances of the subsidy cost allowance for outstanding direct




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                          Disclosure Issues




                          loans and the liability for outstanding loan guarantees reported in the
                          entity’s balance sheet.

                          SFFAS No. 18, paragraph 11, requires disclosure of

                          •	 the total amount of direct or guaranteed loans disbursed for the current
                             reporting year and the preceding reporting year;

                          •	 the subsidy expense by components, recognized for the direct or
                             guaranteed loans disbursed in those years; and

                          • the subsidy reestimates by components for those years.

                          SFFAS No. 18, paragraph 11, also requires disclosure, at the program level,
                          of the subsidy rates for the total subsidy cost and its components for the
                          interest subsidy costs, default costs (net of recoveries), fees and other
                          collections, and other costs estimated for direct loans and loan guarantees
                          in the current year’s budget for the current year’s cohorts.

                          SFFAS No. 18, paragraph 11, further requires the reporting entity to
                          disclose, discuss, and explain events and changes in economic conditions,
                          other risk factors, legislation, credit policies, and subsidy estimation
                          methodologies and assumptions that have had a significant and measurable
                          effect on subsidy rates, subsidy expense, and subsidy reestimates.



Inventories and 	         The note disclosure for inventories and related property departed from the
                          following disclosure requirements of SFFAS No. 3, Accounting for
Related Property          Inventory and Related Property.



Inventory and Operating   When inventory or operating materials and supplies are declared excess,
Materials and Supplies    obsolete, or unserviceable, SFFAS No. 3, paragraph 30, requires the
                          difference between the carrying amount and the expected net realizable
                          value to be recognized as a loss or gain and either separately reported or
                          disclosed.

                          Paragraphs 35 and 50 require the following disclosures about inventory and
                          operating materials and supplies:

                          • general composition;



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                     Disclosure Issues




                     • changes from the prior year’s accounting methods, if any;

                     •	 restrictions on the sale of inventory and the use of operating materials
                        and supplies; and

                     •	 changes in the criteria for categorizing inventory and operating
                        materials and supplies.



Stockpile Material   Paragraph 56 requires the following disclosures about stockpile material:

                     •	 basis for valuing stockpile material, including valuation method and any
                        cost flow assumptions;

                     • changes from the prior year’s accounting methods, if any;

                     • restrictions on the use of stockpile material;

                     •	 balances in each category of stockpile material (i.e., stockpile material
                        held and held for sale);

                     • criteria for grouping stockpile material held for sale; and

                     • changes in criteria for categorizing stockpile material held for sale.

                     Paragraph 55 requires the disclosure of any difference between the
                     carrying amount (i.e., purchase price or cost) of stockpile material held for
                     sale and the estimated selling price of such assets.



Seized Material      Paragraph 66 requires the following disclosures about seized property:

                     • valuation method;

                     • changes from the prior year’s accounting methods, if any; and

                     •	 analysis of change in seized property (including dollar value and number
                        of seized properties) that are on hand at the beginning of the year, seized
                        during the year, disposed of during the year, and on hand at the end of
                        the year, as well as known liens or other claims against the property.
                        This information should be presented by type of seizure and method of
                        disposition when material.


                     Page 30                      GAO-04-45 Process for Preparing CFS Needs Improvement
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                            Disclosure Issues




Forfeited Property          Paragraph 78 requires the following disclosures about forfeited property:

                            • valuation method;

                            •	 analysis of the changes in forfeited property by type and dollar amount
                               that includes (1) number of forfeitures on hand at the beginning of the
                               year, (2) additions, (3) disposals and method of disposition, and (4) end-
                               of-year balances;

                            • restriction on the use of disposition of the property; and

                            •	 if available, an estimate of the value of property to be distributed to
                               other federal, state, and local agencies in future reporting periods.



Goods Held under Price      Paragraph 98 requires that if a contingent loss is not recognized because it
Support and Stabilization   is less than probable or it is not reasonably measurable, then disclosure of
                            the contingency shall be made if it is at least reasonably possible that a loss
Programs                    may occur.

                            Paragraph 109 requires the following disclosures for goods held under
                            price support and stabilization programs:

                            •	 basis for valuing commodities, including valuation method and cost flow
                               assumptions;

                            • changes from the prior year’s accounting methods;

                            • restrictions on the use, disposal, or sale of commodities; and

                            •	 analysis of the change in dollar amount and volume of commodities,
                               including those (1) on hand at the beginning of the year, (2) acquired
                               during the year, (3) disposed of during the year by method of
                               disposition, (4) on hand at the end of the year, (5) on hand at year-end
                               and estimated to be donated or transferred during the coming period,
                               and (6) received as a result of surrender of collateral related to
                               nonrecourse loans outstanding. The analysis should also show the
                               dollar value and volume of purchase agreement commitments.




                            Page 31                      GAO-04-45 Process for Preparing CFS Needs Improvement
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                       Disclosure Issues




Property, Plant, and   The note disclosure for property, plant, and equipment (PP&E) departed
                       from the following disclosure requirements of SFFAS No. 6, Accounting for
Equipment              Property, Plant, and Equipment; SFFAS No. 10, Accounting for Internal
                       Use Software; and SFFAS No. 16, Amendments to Accounting for
                       Property, Plant, and Equipment:

                       SFFAS No. 6, paragraph 45, states that the following disclosures should be
                       included:

                       • the estimated useful lives for each major class;

                       •	 capitalization thresholds, including any changes in thresholds during the
                          period; and

                       • restrictions on the use or convertibility of general PP&E.

                       SFFAS No. 10, paragraph 35, requires the following disclosures for internal
                       use software:

                       • the cost, associated amortization, and book value;

                       • the estimated useful life for each major class of software; and

                       • the method of amortization.

                       SFFAS No. 16, paragraph 9, requires an appropriate PP&E note disclosure
                       to explain that “physical quantity” information for the multiuse heritage
                       assets is included in supplemental stewardship reporting for heritage
                       assets.



Federal Employee and   The note disclosure for federal employee and veteran benefits payable was
                       not complete and properly reported because the liability for military
Veteran Benefits       pensions and the note disclosure related to the “change in actuarial
Payable                accrued pension liability and components of related expenses” for the
                       military retirement fund do not agree with information presented in the
                       Department of Defense’s (DOD) financial statements. The note disclosure
                       included in the CFS does not include a line for the valuation of plan
                       amendments that occurred during the year. DOD correctly reported plan
                       amendments separately in its financial statements; however, the




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                         Appendix I
                         Disclosure Issues




                         mechanism was not available through FACTS submission for DOD to
                         report plan amendments separately to the Department of the Treasury.



Environmental and 
      The note disclosure for environmental and disposal liabilities departed
                         from the requirements of SFFAS No. 6 in two instances. The note
Disposal Liabilities 
   disclosure on environmental liabilities was not complete and properly
                         reported primarily because DOD was unable to fully implement elements of
                         U.S. generally accepted accounting principles and OMB guidance.
                         Specifically, the disclosures should do the following:

                         •	 Estimate and recognize cleanup costs associated with general PP&E at
                            the time the PP&E is placed in service. In addition, a liability should be
                            recognized for the portion of the estimated total cleanup cost that is
                            attributable to that portion of the physical capacity used or that portion
                            of the estimated useful life that has passed since the general PP&E was
                            placed in service. As Treasury indicated in its note disclosures, DOD
                            was unable to fully implement these two elements of U.S. generally
                            accepted accounting principles. However, the note disclosure did not
                            explain how these limitations prevented DOD from properly estimating
                            its environmental liability. Linking the environmental liability to
                            weaknesses in the DOD property, plant, and equipment systems would
                            have made the CFS more useful to the reader.

                         •	 Include material changes in total estimated cleanup costs due to
                            changes in laws, technology, or plans. When preparing the CFS,
                            Treasury should consider whether the reader would be interested in
                            understanding why the liability changed and include the explanation in
                            the note disclosure.



Other Liabilities 	      The note disclosure for other liabilities departed from the following
                         disclosure requirements for capital leases and life insurance liabilities:



Capital Leases	          Financial Accounting Standards Board, Statement of Financial Accounting
                         Standards (SFAS) No. 13, Accounting for Leases, paragraph 16, requires
                         the following disclosures on capital leases:

                         •	 future minimum lease payments as of the date of the latest balance
                            sheet presented, in the aggregate and for each of the 5 succeeding fiscal



                         Page 33                      GAO-04-45 Process for Preparing CFS Needs Improvement
                              Appendix I
                              Disclosure Issues




                                 years, with separate deductions from the total for the amount
                                 representing executory costs, including any profit thereon, included in
                                 the minimum lease payments, and for the amount of the imputed
                                 interest necessary to reduce the net minimum lease payments to present
                                 value;

                              •	 a summary of assets under capital lease by major asset category and the
                                 related total accumulated amortization; and

                              •	 a general description of the lessee’s leasing arrangements, including but
                                 not limited to (1) the basis on which contingent rental payments are
                                 determined, (2) the existence and terms of renewal or purchase options
                                 and escalation clauses, and (3) restrictions imposed by lease
                                 agreements, such as those concerning dividends, additional debt, and
                                 further leasing.



Life Insurance Liabilities	   The note disclosure for other liabilities departed from the following
                              disclosure requirements of SFFAS No. 5, Accounting for Liabilities of the
                              Federal Government, with respect to life insurance liabilities:

                              •	 Paragraph 117 states that all federal reporting entities with whole life
                                 insurance programs should follow the standards as prescribed in the
                                 private sector standards when reporting the liability for future policy
                                 benefits. The applicable private sector standards are SFAS No. 60,
                                 Accounting and Reporting by Insurance Enterprises; SFAS No. 97,
                                 Accounting and Reporting by Insurance Enterprises for Certain Long-
                                 Duration Contracts and for Realized Gains and Losses from the Sale
                                 of Investments; and SFAS No. 120, Accounting and Reporting by
                                 Mutual Life Insurance Enterprises and by Insurance Enterprises for
                                 Certain Long-Duration Participating Contracts; and American
                                 Institute of Certified Public Accountants Statement of Position 95-1,
                                 Accounting for Certain Insurance Activities of Mutual Life Insurance
                                 Enterprises.

                              •	 SFFAS No. 5, paragraph 121, requires that all components of the liability
                                 for future policy benefits (i.e., the net-level premium reserve for death
                                 and endowment policies and the liability for terminal dividends) should
                                 be separately disclosed in a footnote with a description of each amount
                                 and an explanation of its projected use and any other potential uses
                                 (e.g., reducing premiums, determining and declaring dividends




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                  Disclosure Issues




                     available, or reducing federal support in the form of appropriations
                     related to administrative cost or subsidies).



Commitments and   Certain disclosed information on major commitments and contingencies in
                  the notes to the CFS was inconsistent with disclosed information in
Contingencies     individual agencies’ financial statements. Examples of such inconsistencies
                  are as follows:

                  •	 Treasury did not disclose $114 billion in the notes to the CFS for war
                     risk insurance. DOT provided temporary war risk insurance to U.S. air
                     carriers whose coverage was canceled following the terrorist attacks on
                     September 11, 2001. DOT disclosed $114 billion of war risk insurance in
                     its notes to the financial statements, but Treasury did not disclose
                     similar information in the notes to the CFS. Also, this information was
                     included by DOT in the Treasury FACTS database. The risk of loss
                     involving this type of insurance is unknown, but another terrorist attack
                     against the United States could result in major claims.

                  •	 Treasury improperly disclosed $4.5 billion in unadjudicated claims for
                     Commerce in the notes to the CFS. In its financial statements,
                     Commerce disclosed that the exact amount of these claims against the
                     U.S. government is unknown and the range of loss, which may exceed
                     $4.5 billion as of September 30, 2002, cannot be estimated. Because
                     Commerce had disclosed that it could not estimate the loss from
                     unadjudicated claims, which was proper, Treasury should not have
                     disclosed an amount in the notes to the CFS. Disclosing information in
                     the CFS that is inconsistent with information in an agency’s financial
                     statements may confuse users of the CFS or lead them to reach a wrong
                     conclusion.

                  Treasury did not disclose sufficient information regarding the nature of
                  certain major commitments and contingencies in the notes to the CFS. For
                  example, Treasury did not clearly disclose in the notes to the CFS
                  information regarding a possible capital investment requirement of TVA.
                  The Environmental Protection Agency (EPA) had taken judicial and
                  administrative actions against TVA that could require TVA to invest an
                  estimated $3 billion to purchase equipment in order to comply with the
                  Clean Air Act and conform to EPA’s pollution control requirements. TVA is
                  challenging this action. Treasury disclosed this $3 billion in the notes as an
                  “administrative order against TVA” without providing the additional detail
                  that the order represents a capital investment for compliance with the



                  Page 35                      GAO-04-45 Process for Preparing CFS Needs Improvement
                          Appendix I
                          Disclosure Issues




                          Clean Air Act and pollution control. The lack of such a detailed discussion
                          about what the contingency represents could be misleading to readers of
                          the CFS.



Collections and           The disclosure for collections and refunds of federal revenue departed
                          from the following disclosure requirements of FASAB’s SFFAS No. 7,
Refunds of Federal        Concepts for Reconciling Budgetary and Financial Accounting:
Revenue
                          •	 Paragraph 64, among other things, requires collecting entities to
                             disclose the basis of accounting when the application of the general rule
                             results in a modified cash basis of accounting. The CFS incorrectly
                             states that the nonexchange revenues are reported on a modified cash
                             basis of accounting when actually they are reported on a cash basis.

                          •	 Paragraph 69.2 requires collecting entities to provide in the other
                             accompanying information any relevant estimates of the annual tax gap
                             that become available as a result of federal government surveys or
                             studies. The tax gap is defined as taxes or duties due from
                             noncompliant taxpayers or importers. Amounts reported should be
                             specifically defined (e.g., whether the tax gap includes or excludes
                             estimates of taxes due on illegally earned revenue). Appropriate
                             explanations of the limited reliability of the estimates also should be
                             provided. Cross-references should be made to portions of the tax gap
                             due from identified noncompliance assessments and preassessment
                             work in process.



Dedicated Collections 	   The note disclosure for dedicated collections departed from the disclosure
                          requirements of SFFAS No. 7, Part I, Accounting for Revenue and Other
                          Financing Sources, paragraph 85, by not including the following:

                          •	 condensed information about assets and liabilities showing investments
                             in Treasury securities, other assets, liabilities due and payable to
                             beneficiaries, other liabilities, and fund balance;

                          •	 condensed information on net cost and changes to fund balance,
                             showing revenues by type (exchange/nonexchange), program expenses,
                             other expenses, other financing sources, and other changes in fund
                             balance; and




                          Page 36                     GAO-04-45 Process for Preparing CFS Needs Improvement
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                       Disclosure Issues




                       •	 any revenues, other financing sources, or costs attributable to the fund
                          under accounting standards but not legally allowable as credits or
                          charges to the fund.



Indian Trust Funds 	   The note disclosure for Indian trust funds departed from the following
                       disclosure requirements of SFFAS No. 7, Part I, Accounting for Revenue
                       and Other Financing Sources, paragraph 85, by not including the
                       following:

                       •	 a description of each fund’s purpose, how the administrative entity
                          accounts for and reports the fund, and its authority to use those
                          collections;

                       •	 the sources of revenue or other financing for the period and an
                          explanation of the extent to which they are inflows of resources to the
                          government or the result of intragovernmental flows;

                       •	 condensed information about assets and liabilities showing investments
                          in Treasury securities, other assets, liabilities due and payable to
                          beneficiaries, and other liabilities;

                       •	 condensed information on net cost and changes to fund balance,
                          showing revenues by type (exchange/nonexchange), program expenses,
                          other expenses, other financing sources, and other changes in fund
                          balance; and

                       •	 any revenues, other financing sources, or costs attributable to the fund
                          under accounting standards, but not legally allowable as credits or
                          charges to the fund.



Social Insurance 	     The disclosure for social insurance departed from the following
                       requirements of SFFAS No. 17, Accounting for Social Insurance:

                       •	 Paragraph 31 requires the program descriptions for Hospital Insurance
                          and Supplementary Medical Insurance and an explanation of trends
                          revealed in Chart 11: Estimated Railroad Retirement Income (Excluding
                          Interest) and Expenditures 2002-2076.




                       Page 37                     GAO-04-45 Process for Preparing CFS Needs Improvement
Appendix I
Disclosure Issues




•	 Paragraph 24 requires a description of statutory or other material
   changes, and the implications thereof, affecting the Medicare and
   Unemployment Insurance programs after the current fiscal year.

•	 Paragraph 25 requires the significant assumptions used in making
   estimates and projections regarding the Black Lung and Unemployment
   Insurance programs.

•	 Paragraph 32(1)(b) requires the total cash inflow from all sources, less
   net interest on intragovernmental borrowing and lending and the total
   cash outflow to be shown in nominal dollars for the Hospital Insurance
   program.

•	 Paragraph 32(1)(a) requires the narrative to accompany the cash flow
   data for Unemployment Insurance. This narrative should include the
   identification of any year or years during the projection period when
   cash outflow exceeds cash inflow, without interest, on
   intragovernmental borrowing or lending. In addition, the presentation
   should include an explanation of material crossover points, if any,
   where cash outflow exceeds cash inflow and the possible reasons for
   this.

•	 Paragraphs 27(3)(h) and 27(3)(j) require the estimates of the fund
   balances at the respective valuation dates of the social insurance
   programs (except Unemployment Insurance) to be included for each of
   the 4 preceding years. Only 1 year is shown.

•	 Paragraph 32(4) requires individual program sensitivity analyses for
   projection period cash flow in present value dollars and annual cash
   flow in nominal dollars. The CFS includes only present value sensitivity
   analyses for Social Security and Hospital Insurance. Paragraph 32(4)
   states that, at a minimum, the summary should present Social Security,
   Hospital Insurance, and Supplementary Medical Insurance separately.

•	 Paragraph 27(4)(a) requires the individual program sensitivity analyses
   for Social Security and Hospital Insurance to include an analysis of
   assumptions regarding net immigration.

•	 Paragraph 27(4)(a) requires the individual program sensitivity analysis
   for Hospital Insurance to include an analysis of death rates.




Page 38                     GAO-04-45 Process for Preparing CFS Needs Improvement
                      Appendix I
                      Disclosure Issues




                      •	 The actuarial present value information for the Railroad Retirement
                         Board should not include financial interchange income
                         (intragovernmental income from Social Security).



Nonfederal Physical   The information included in Stewardship Information for nonfederal
                      physical property departed from the following disclosure requirements of
Property              SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87:

                      •	 The annual investment, including a description of federally owned
                         physical property transferred to state and local governments, must be
                         disclosed. This information should be provided for the year ended on
                         the balance sheet date as well as for each of the 4 preceding years. If
                         data for additional years would provide a better indication of
                         investment, reporting of the additional years’ data is encouraged.
                         Reporting should be at a meaningful category or level.

                      •	 A description of major programs involving federal investments in
                         nonfederal physical property, including a description of programs or
                         policies under which noncash assets are transferred to state and local
                         governments, is to be provided.



Human Capital 	       The information in stewardship information for human capital departed
                      from the disclosure requirements of SFFAS No. 8, Supplementary
                      Stewardship Reporting, paragraph 94, by not including the following:

                      •	 a narrative description and the full cost of the investment in human
                         capital for the year being reported on as well as the preceding 4 years (if
                         full cost data are not available, outlay data can be reported);

                      •	 the full cost or outlay data for investments in human capital at a
                         meaningful category or level (e.g., by major program, agency, or
                         department); and

                      •	 a narrative description of major education and training programs
                         considered federal investments in human capital.




                      Page 39                      GAO-04-45 Process for Preparing CFS Needs Improvement
                         Appendix I
                         Disclosure Issues




Research and 
           The information in stewardship information for research and development
                         departed from the disclosure requirements of SFFAS No. 8, Supplementary
Development 
            Stewardship Reporting, paragraph 94, by not including the following:

                         •	 The annual investment1 made in the year ended on the balance sheet
                            date as well as in each of the 4 years preceding that year must be
                            reported. If data for additional years would provide a better indication
                            of investment, reporting of the additional years’ data is encouraged. In
                            those unusual instances when entities have no historical data, only
                            current reporting year data need be reported. Reporting must be at a
                            meaningful category or level—for example, a major program or
                            department.

                         •	 A narrative description of major research and development programs is
                            to be included.



Deferred Maintenance 	   The required supplemental information for deferred maintenance departed
                         from the following disclosure requirements of SFFAS No. 6, Accounting for
                         Property, Plant, and Equipment, paragraphs 83 and 84:

                         •	 Method of measuring deferred maintenance for each major class of
                            PP&E should be included.

                         •	 If the condition assessment survey method of measuring deferred
                            maintenance is used, the following should be presented for each major
                            class of PP&E: (1) description of requirements or standards for
                            acceptable operating condition, (2) any changes in the condition
                            requirements or standards, and (3) asset condition and a range estimate
                            of the dollar amount of maintenance needed to return the asset to its
                            acceptable operating condition.

                         •	 If the total life-cycle cost method is used, the following should be
                            presented for each major class of PP&E: (1) the original date of the
                            maintenance forecast and an explanation for any changes to the


                         1
                          As defined in this standard, “annual investment” includes more than the annual expenditure
                         reported by character class for budget execution. Full cost shall be measured and
                         accounted for in accordance with SFFAS No. 4, Managerial Cost Accounting Standards for
                         the Federal Government.




                         Page 40                          GAO-04-45 Process for Preparing CFS Needs Improvement
                 Appendix I
                 Disclosure Issues




                    forecast, (2) prior year balance of the cumulative deferred maintenance
                    amount, (3) the dollar amount of maintenance that was defined by the
                    professionals who designed, built, or managed the PP&E as required
                    maintenance for the reporting period, (4) the dollar amount of
                    maintenance actually performed during the period, (5) the difference
                    between the forecast and actual maintenance, (6) any adjustments to
                    the scheduled amounts deemed necessary by the managers of the PP&E,
                    and (7) the ending cumulative balance for the reporting period for each
                    major class of asset experiencing deferred maintenance.

                 •	 If management elects to disclose critical and noncritical amounts, the
                    disclosure is to include management’s definition of these categories.



Risk Assumed 	   The note disclosure for stewardship responsibilities departed from
                 disclosure requirements of SFFAS No. 5, paragraph 106, related to the risk
                 assumed for federal insurance and guarantee programs. Risk assumed
                 information is important for all federal insurance and guarantee programs
                 (except social insurance, life insurance, and loan guarantee programs) and
                 is generally measured by the present value of unpaid expected losses net of
                 associated premiums, based on the risk inherent in the insurance or
                 guarantee coverage in force. Paragraph 106 states that when financial
                 information pursuant to FASB’s standards on federal insurance and
                 guarantee programs conducted by government corporations is
                 incorporated in general purpose financial reports of a larger federal
                 reporting entity, the entity should report as required supplementary
                 information2 what amounts and periodic change in those amounts would
                 be reported under the “risk assumed” approach.




                 2
                  In July 2003, SFFAS No. 25 reclassified “risk assumed” from Required Supplementary
                 Stewardship Information to Required Supplementary Information.




                 Page 41                         GAO-04-45 Process for Preparing CFS Needs Improvement
Appendix II

Comments from Department of the Treasury
and the Office of Management and Budget

Note: GAO comments
supplementing those in
the report text appear
at the end of this
appendix.




                         Page 42   GAO-04-45 Process for Preparing CFS Needs Improvement
               Appendix II

               Comments from Department of the Treasury 

               and the Office of Management and Budget





See comment.




               Page 43                        GAO-04-45 Process for Preparing CFS Needs Improvement
               Appendix II

               Comments from Department of the Treasury 

               and the Office of Management and Budget





GAO Comment	   Treasury and OMB did not schedule a meeting or provide us with any
               technical comments on this report.




(198203)       Page 44                        GAO-04-45 Process for Preparing CFS Needs Improvement
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