March 2013
»
The GAO's Annual Audit of the U.S....
The Chief Financial Officer and Federal Financial Reform Act of 1990 and the Government Management Reform Act of 1994 aimed to implement government financial management reform in the United States. One of the resulting mandates was a requirement for an annual audit by the U.S. Comptroller General, beginning in 1997. But 16 years after the government began preparing audited financial statements pursuant to these laws, the Government Accountability Office (GAO) remains unable to render an opinion on the federal government's 2012 consolidated financial statements because of “widespread material internal control weaknesses, significant uncertainties, and other limitations” (http://www.gao.gov/press/financial_report_2013jan17.htm).
The GAO cited three main obstacles to rendering an audit opinion: “(1) serious financial management problems at DOD [Department of Defense] that have prevented its financial statements from being auditable, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements” (2012 Financial Report of the U.S. Government, GAO, Jan. 17, 2013, http://www.gao.gov/assets/660/651357.pdf). The report acknowledged that “significant progress” had been made in federal financial management over the years, but it also noted that much improvement is still needed.
Controls and Uncertainties
The DOD and the Department of Homeland Security (DHS) are the primary culprits in this area, according to the GAO report. Approximately 34% of the federal government's assets and 21% of its costs apply to the DOD, which received a disclaimer of opinion on its consolidated financial statements; it is currently focusing its efforts on improving controls related to asset accountability and budgetary information. The DHS was given a qualified opinion based on its “inability to provide sufficient evidence to support certain components of property, plant, and equipment” (GAO 2013). In other words, taxpayers cannot be sure of what these agencies own or the true costs and benefits of their activities.
The DOD hopes to achieve an unqualified audit opinion by 2017 through its newly created Financial Improvement and Audit Readiness Directorate. But don't bet on this outcome; in October 2011, the DOD hoped to be audit-ready by fiscal year 2014. Even less reassuring, the GAO report indicates that efforts to resolve material differences in intragovernmental balances remain ongoing.
In the 2012 Statement of Social Insurance, issued by the Financial Management Service of the U.S. Department of the Treasury, more than 70% of the reported present value of future expenditures over future revenues was related to Medicare. Doubts surrounding whether projected cost growth reductions could be achieved in the Medicare program contributed to the GAO's inability to express an opinion on the Department of Health and Human Services' financial statements.
In addition, the federal government's actions to mitigate the effects of the most recent economic recession significantly impacted its financial position and have left many unresolved questions. For example, certain assets and liabilities reported on the government's consolidated financial statements include the following questionable amounts:
$109 billion of investments in the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and $9 billion in liabilities to these entities; note disclosures to the financial statements also project a maximum remaining commitment of about $282 billion to Fannie Mae and Freddie Mac
Troubled Asset Relief Program (TARP) loans and equity investments of $40 billion (about half related to the auto industry)
A $34 billion excess of Pension Benefit Guaranty Corporation (PBGC) liabilities over assets.
Other risks in the GAO report are the deteriorating financial conditions at the U.S. Postal Service and Federal Housing Administration, as well as the potential negative impact that interest rate fluctuations may have on certain investments currently reported on the Federal Reserve's balance sheet, including mortgage-backed securities.
Long-Term Fiscal Challenges
The overall long-term fiscal projection in the GAO's report offered no surprises. It repeated what has already been known for some time—the structural imbalance between spending and revenue is unsustainable. This problem goes far beyond financial statements that can't be audited; that four-letter word (D-E-B-T) might be the undoing of our democracy.
As this issue of The CPA Journal went to press, no agreement had yet been reached between our nation's leaders with regard to an increase in the federal debt limit or compromises to avoid the sequestration cuts.
As always, I welcome your comments.
The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.