GOVERNMENT ACCOUNTABILITY OFFICE REPORT

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Comptroller General
of the United States
United States Government Accountability Office
Washington, DC 20548

The President
The President of the Senate
The Speaker of the House of Representatives
The Secretary of the Treasury, in coordination with the Director of the Office of
Management and Budget (OMB), is required annually to submit financial statements for
the U.S. government to the President and the Congress. GAO is required to audit these
statements.1 This is our report on the accompanying U.S. government’s consolidated
financial statements for the fiscal years ended September 30, 2006 and 2005,2 and our
associated reports on internal control and compliance with significant laws and
regulations.
The federal government is responsible for (1) preparing annual consolidated financial
statements in conformity with U.S. generally accepted accounting principles (GAAP);
(2) establishing, maintaining, and assessing internal control to provide reasonable
assurance that the control objectives of the Federal Managers’ Financial Integrity Act
(FMFIA) 3 are met; and (3) complying with significant laws and regulations. Also, the 24
Chief Financial Officers (CFO) Act agencies are responsible for implementing and
maintaining financial management systems that substantially comply with Federal
Financial Management Improvement Act of 1996 (FFMIA)4 requirements. Our objective
was to audit the consolidated financial statements for the fiscal years ended September
30, 2006 and 2005. Appendix I discusses the scope and methodology of our work.

1

The Government Management Reform Act of 1994 has required such reporting, covering the executive
branch of government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. 331(e).
The federal government has elected to include certain financial information on the legislative and judicial
branches in the consolidated financial statements as well.
2
The consolidated financial statements for the fiscal years ended September 30, 2006 and 2005 consist of
the Statements of Net Cost, Statements of Operations and Changes in Net Position, Reconciliations of Net
Operating Cost and Unified Budget Deficit, Statements of Changes in Cash Balance from Unified Budget
and Other Activities, Balance Sheets, and as of January 1, 2006, the Statement of Social Insurance,
including the related notes to these financial statements.
3
31 U.S.C. 3512 (c), (d) (commonly referred to as FMFIA). This act requires executive agency heads to
evaluate and report annually to the President and the Congress on the adequacy of their internal control and
accounting systems and on actions to correct significant problems.
4
31 U.S.C. 3512 note (Federal Financial Management Improvement Act).

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A significant number of material weaknesses5 related to financial systems, fundamental
recordkeeping and financial reporting, and incomplete documentation continued to (1)
hamper the federal government’s ability to reliably report a significant portion of its
assets, liabilities, costs, and other related information; (2) affect the federal government’s
ability to reliably measure the full cost as well as the financial and nonfinancial
performance of certain programs and activities; (3) impair the federal government’s
ability to adequately safeguard significant assets and properly record various transactions;
and (4) hinder the federal government from having reliable financial information to
operate in an economical, efficient, and effective manner. We found the following:
•

Certain material weaknesses in financial reporting and other limitations on the scope
of our work resulted in conditions that continued to prevent us from expressing an
opinion on the accompanying consolidated financial statements for the fiscal years
ended September 30, 2006 and 2005.6

•

The federal government did not maintain effective internal control over financial
reporting (including safeguarding assets) and compliance with significant laws and
regulations as of September 30, 2006.

•

Our work to test compliance with selected provisions of significant laws and
regulations in fiscal year 2006 was limited by the material weaknesses and scope
limitations discussed in this report.

DISCLAIMER OF OPINION ON THE CONSOLIDATED FINANCIAL
STATEMENTS
Because of the federal government’s inability to demonstrate the reliability of significant
portions of the U.S. government’s accompanying consolidated financial statements for
fiscal years 2006 and 2005, principally resulting from certain material weaknesses, and
other limitations on the scope of our work, described in this report, we are unable to, and
we do not, express an opinion on such financial statements.
As a result of these limitations, readers are cautioned that amounts reported in the
consolidated financial statements and related notes may not be reliable. These material
weaknesses and other scope limitations also affect the reliability of certain information
contained in the accompanying Management’s Discussion and Analysis and other
financial management information—including information used to manage the
government day to day and budget information reported by federal agencies—that is
taken from the same data sources as the consolidated financial statements.

5

A material weakness is a condition that precludes the entity’s internal control from providing reasonable
assurance that misstatements, losses, or noncompliance material in relation to the financial statements or to
stewardship information would be prevented or detected on a timely basis.
6
We previously reported that certain material weaknesses prevented us from expressing an opinion on the
consolidated financial statements of the U.S. government for fiscal years 1997 through 2005.

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We have not audited and do not express an opinion on the Management’s Discussion and
Analysis, Stewardship Information, Supplemental Information, or other information
included in the accompanying fiscal year 2006 Financial Report of the United States
Government (Financial Report).
In fiscal year 2006, the federal government adopted the following new federal accounting
standards, as discussed in the notes:
•

accounting for and reporting of earmarked funds7 (Notes 1 and 20),

•

reporting heritage assets and stewardship land8 (Notes 1, 24, and 25),

•

changes in disclosure of certain information in the consolidated financial
statements9 (Note 1), and

•

presentation of the Statement of Social Insurance (SOSI) as a basic financial
statement10 (Notes 1 and 23).

The SOSI presents the actuarial present value of the federal government’s estimated
future revenue to be received from or on behalf of the participants and estimated future
expenditures to be paid to or on behalf of participants, using a projection period sufficient
to illustrate the long-term sustainability of the social insurance programs. In preparing the
SOSI, management considers and selects assumptions and data that it believes provide a
reasonable basis for the assertions in the statement. However, because of the large
number of factors that affect the SOSI and the fact that such assumptions are inherently
subject to substantial uncertainty (arising from the likelihood of future changes in general
economic, regulatory, and market conditions, as well as other more specific future events,
significant uncertainties, and contingencies), there will be differences between the
estimates in the SOSI and the actual results, and those differences may be material.
In addition to the inherent uncertainty that underlies the expenditure projections prepared
for all parts of Medicare, the Supplementary Medical Insurance (SMI) Part D projections
have an added uncertainty in that they were prepared using very little program experience
upon which to base the estimates and the SMI Part B projections assume significant
reductions in physician payments, as required under current law, which may or may not
occur. The Congress has overridden scheduled reductions in physician payments for each
of the last 4 years and recently passed legislation to override scheduled reductions for
7

Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting
Standards (SFFAS) 27, Identifying and Reporting Earmarked Funds (Washington, D.C.: Dec. 28, 2004).
8
SFFAS 29, Heritage Assets and Stewardship Land (Washington, D.C.: June 7, 2005).
9
SFFAS 32, Consolidated Financial Report of the United States Government Requirements: Implementing
Statement of Federal Financial Accounting Concepts 4 “Intended Audience and Qualitative
Characteristics for the Consolidated Financial Report of the United States Government” (Washington,
D.C.: Sept. 28, 2006).
10
SFFAS 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services
Assessment (July 2003), and SFFAS 26, Presentation of Significant Assumptions for the Statement of Social
Insurance: Amending SFFAS 25 (Washington, D.C.: Oct. 29, 2004).

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2007.11 It is not possible to anticipate what other actions the Congress might take, either
in the near or long-term, to alter the scheduled reductions in physician payments. If
scheduled reductions continue to be overridden in the future, actual SMI Part B
expenditures could be materially more than the amounts presented in the SOSI.
Significant Matters of Emphasis
Before discussing the material weaknesses that contributed to our disclaimer of opinion
and the additional limitations on the scope of our work we identified, two significant
matters require emphasis—the nation’s fiscal imbalance and restatements to the fiscal
year 2005 consolidated financial statements.
The Nation’s Fiscal Imbalance
While we are unable to express an opinion on the U.S. government’s consolidated
financial statements, the following key items deserve emphasis in order to put the
information contained in the financial statements and the Management’s Discussion and
Analysis section of the 2006 Financial Report of the United States Government into
context. Despite improvement in both the fiscal year 2006 reported net operating cost and
the cash-based budget deficit, the U.S. government’s total reported liabilities, net social
insurance commitments, and other fiscal exposures continue to grow and now total
approximately $50 trillion, representing approximately four times the Nation’s total
output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal
year 2000. As this long-term fiscal imbalance continues to grow, the retirement of the
“baby boom” generation is closer to becoming a reality with the first wave of boomers
eligible for early retirement under Social Security in 2008. Given these and other factors,
it seems clear that the nation’s current fiscal path is unsustainable and that tough choices
by the President and the Congress are necessary in order to address the nation’s large and
growing long-term fiscal imbalance.
Restatements to the Consolidated Financial Statements
As discussed in Notes 4, 6, 17, and 26, the federal government restated certain of its
fiscal year 2005 consolidated financial statements to correct errors. Restatements relating
to property, plant, and equipment resulted from misstatements by the Department of
Defense, which had received a disclaimer on its originally issued as well as its restated
fiscal year 2005 financial statements. Certain other restatements that were made to the
consolidated financial statements related to errors that occurred during the preparation of
the fiscal year 2005 Reconciliation of Net Operating Cost and Unified Budget Deficit.
Because of the material weaknesses over property, plant, and equipment and over the
preparation of the consolidated financial statements discussed in this report, the restated
amounts may not be reliable.

11

The Tax Relief and Health Care Act of 2006, H.R. 6111, 109th Cong. As of December 12, 2006, the
President had not signed the legislation.

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Limitations on the Scope of Our Work
For fiscal years 2006 and 2005, there were limitations on the scope of our work in
addition to the material weaknesses that contributed to our disclaimer of opinion. First,
Treasury and OMB depend on certain federal agencies’ representations to provide their
representations to us regarding the U.S. government’s consolidated financial statements.
Treasury and OMB were unable to provide us with adequate representations regarding
the U.S. government’s consolidated financial statements primarily because of insufficient
representations provided to them by two CFO Act agencies. Second, Treasury was unable
to provide the final consolidated financial statements and supporting documentation in
time for us to complete all of our planned auditing procedures related to the compilation
of these financial statements.
Material Weaknesses Contributing to Our Disclaimer of Opinion
The federal government did not maintain adequate systems or have sufficient, reliable
evidence to support certain material information reported in the accompanying
consolidated financial statements, as briefly described below. The underlying material
weaknesses in internal control, which generally have existed for years, contributed to our
disclaimer of opinion. Appendix II describes the material weaknesses in more detail and
highlights the primary effects of these material weaknesses on the accompanying
consolidated financial statements and on the management of federal government
operations. The material weaknesses that contributed to our disclaimer of opinion were
the federal government’s inability to:
•

satisfactorily determine that property, plant, and equipment and inventories and
related property, primarily held by DOD, were properly reported in the consolidated
financial statements;

•

reasonably estimate or adequately support amounts reported for certain liabilities,
such as environmental and disposal liabilities, or determine whether commitments
and contingencies were complete and properly reported;

•

support significant portions of the total net cost of operations, most notably related to
DOD, and adequately reconcile disbursement activity at certain agencies;

•

adequately account for and reconcile intragovernmental activity and balances
between federal agencies;

•

ensure that the federal government’s consolidated financial statements were
(1) consistent with the underlying audited agency financial statements, (2) balanced,
and (3) in conformity with GAAP; and

•

identify and either resolve or explain material differences that exist between certain
components of the budget deficit reported in Treasury’s records, used to prepare the
Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of

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Changes in Cash Balance from Unified Budget and Other Activities, and related
amounts reported in federal agencies’ financial statements and underlying financial
information and records.
Due to the material weaknesses and the additional limitations on the scope of our work
discussed above, there may also be additional issues that could affect the consolidated
financial statements that have not been identified.
ADVERSE OPINION ON INTERNAL CONTROL
Because of the effects of the material weaknesses discussed in this report, in our opinion,
the federal government did not maintain effective internal control as of September 30,
2006, to meet the following objectives: (1) transactions are properly recorded, processed,
and summarized to permit the preparation of the financial statements and stewardship
information in conformity with GAAP, and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition; and (2) transactions are executed in
accordance with laws governing the use of budget authority and with other significant
laws and regulations that could have a direct and material effect on the financial
statements and stewardship information. Consequently, the federal government’s internal
control did not provide reasonable assurance that misstatements, losses, or
noncompliance material in relation to the financial statements or to stewardship
information would be prevented or detected on a timely basis. Our adverse opinion on
internal control over financial reporting and compliance is based upon the criteria
established under FMFIA.
In addition to the material weaknesses that contributed to our disclaimer of opinion,
which were discussed above, we found the following four other material weaknesses in
internal control as of September 30, 2006. These weaknesses are discussed in more detail
in Appendix III, including the primary effects of the material weaknesses on the
accompanying consolidated financial statements and on the management of federal
government operations. These other material weaknesses were the federal government’s
inability to:
•

implement effective credit reform estimation and related financial reporting
processes;

•

determine the full extent to which improper payments exist;

•

identify and resolve information security control weaknesses and manage information
security risks on an ongoing basis; and

•

effectively manage its tax collection activities.

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Individual federal agency financial statement audit reports identify additional reportable
conditions12 in internal control, some of which were reported by agency auditors as being
material weaknesses at the individual agency level. These additional reportable
conditions do not represent material weaknesses at the governmentwide level. Also, due
to the issues noted throughout this report, additional material weaknesses may exist that
have not been reported.
COMPLIANCE WITH SIGNIFICANT LAWS AND REGULATIONS
Our work to test compliance with selected provisions of significant laws and regulations
related to financial reporting was limited by the material weaknesses and scope
limitations discussed in this report. U.S. generally accepted government auditing
standards and OMB guidance require auditors to report on the agency’s compliance with
significant laws and regulations. Certain individual agency audit reports contain instances
of noncompliance. None of these instances were material to the accompanying
consolidated financial statements.
We caution that other noncompliance may have occurred and not been detected. Further,
the results of our limited procedures may not be sufficient for other purposes. Our
objective was not to, and we do not, express an opinion on compliance with significant
laws and regulations.
AGENCY FINANCIAL MANAGEMENT SYSTEMS
To achieve the financial management improvements envisioned by the CFO Act, FFMIA,
and the President’s Management Agenda, federal agencies need to modernize their
financial management systems to generate reliable, useful, and timely financial and
performance information throughout the year and at year-end. As discussed throughout
this report, serious financial management weaknesses have contributed significantly to
our inability to determine the reliability of the consolidated financial statements. In this
regard, for fiscal year 2006, auditors for the majority of the CFO Act agencies reported
material weaknesses or other reportable conditions in internal control over financial
reporting. The size and complexity of the federal government and the long-standing
nature of its financial management systems weaknesses continue to present a formidable
management challenge in providing accountability to the nation’s taxpayers.
FFMIA requires auditors, as part of the CFO Act agencies’ financial statement audits, to
report whether agencies’ financial management systems substantially comply with
(1) federal financial management systems requirements, (2) applicable federal accounting
standards, and (3) the federal government’s Standard General Ledger at the transaction
level. For fiscal year 2006, auditors for 17 of the 24 CFO Act agencies reported that the
agencies’ financial management systems did not substantially comply with one or more
12

Reportable conditions are matters coming to our attention that, in our judgment, should be communicated
because they represent significant deficiencies in the design or operation of internal control that could
adversely affect the federal government’s ability to meet the internal control objectives described in this
report.

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of these three FFMIA requirements. As a result, the financial management systems at the
majority of federal agencies are still unable to routinely produce reliable, useful, and
timely financial information, and the federal government’s capacity to manage with
timely and objective data is limited, thereby hampering its ability to effectively
administer and oversee its major programs.
OMB CIRCULAR NO. A-123, Management’s Responsibility for Internal Control
OMB revised OMB Circular No. A-123, Management’s Responsibility for Internal
Control, which GAO has supported.13 In fiscal year 2006, agencies began to implement
the more rigorous requirements of the revised OMB Circular No. A-123, which include
management identification, assessment, testing, correction, and documentation of internal
controls over financial reporting for each account or group of accounts, as well as an
annual assurance statement from the agency head as to whether internal control over
financial reporting is effective.
OMB recognized that due to the complexity of some agencies, implementation of these
new requirements may span more than 1 year. Accordingly, certain agencies have
adopted multi-year implementation plans. OMB stated that it will continue to work with
the Chief Financial Officers Council to identify potential areas for additional guidance
and share agencies’ best practices. It will be important that OMB monitor and oversee
federal agencies’ implementation of these new requirements.
----We provided a draft of this report to Treasury and OMB officials, who provided technical
comments, which have been incorporated as appropriate. Treasury and OMB officials
expressed their continuing commitment to address the problems this report outlines.

David M. Walker
Comptroller General
of the United States

December 1, 2006

13

See GAO, Financial Management: Effective Internal Control Is Key to Accountability, GAO-05-321T
(Washington, D.C.: Feb. 16, 2005).

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APPENDIX I
Objectives, Scope, and Methodology
The Government Management Reform Act of 1994 expanded the requirements of the
Chief Financial Officers (CFO) Act by making the inspectors general of 24 major federal
agencies14 responsible for annual audits of agencywide financial statements prepared by
these agencies and GAO responsible for the audit of the U.S. government’s consolidated
financial statements. The Accountability of Tax Dollars (ATD) Act of 200215 requires
most other executive branch agencies to prepare and have audited annual financial
statements. The Office of Management and Budget (OMB) and the Department of the
Treasury (Treasury) have identified 35 agencies16 that are significant to the
U.S. government’s consolidated financial statements. Our work was performed in
coordination and cooperation with the inspectors general and independent public
accountants for these 35 agencies to achieve our joint audit objectives. Our audit
approach focused primarily on determining the current status of the material weaknesses
that contributed to our disclaimer of opinion and the other material weaknesses affecting
internal control that we had previously reported in our report on the consolidated
financial statements for fiscal year 2005.17 Our work included separately auditing the
following significant federal agency components:
•

We audited and expressed an unqualified opinion on the Internal Revenue Service’s
(IRS) fiscal years 2006 and 2005 financial statements. In fiscal years 2006 and 2005,
IRS collected about $2.5 trillion and $2.3 trillion, respectively, in tax payments and
paid about $277 billion and $267 billion, respectively, in refunds to taxpayers.18 In
fiscal year 2006, we continued to report material internal control weaknesses, which
resulted in ineffective internal control. Our tests of compliance with selected
provisions of significant laws and regulations disclosed one area of noncompliance.
We also found that IRS’s financial management systems did not substantially comply
with the requirements of the Federal Financial Management Improvement Act of
1996.

•

We audited and expressed an unqualified opinion on the Schedules of Federal Debt
managed by Treasury’s Bureau of the Public Debt (BPD) for the fiscal years ended
September 30, 2006 and 2005.19 The schedules reported for these 2 fiscal years

14

31 U.S.C. 901(b), 3521(e). The 1994 act authorized the Office of Management and Budget to designate
agency components that also would receive a financial statement audit. 31 U.S.C. 3515(c); see footnote 1.
15
Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002); see 31 U.S.C. 3515.
16
See Treasury Financial Manual, volume I, part 2, chapter 4700, for a listing of the 35 agencies.
17
For our report on the U.S. government’s consolidated financial statements for fiscal year 2005, see U.S.
Department of the Treasury, 2005 Financial Report of the United States Government (Washington, D.C.
Dec. 2005), pp. 135-154, which can be found on GAO’s Internet site at www.gao.gov.
18
GAO, Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements, GAO-07-136
(Washington, D.C.: Nov. 9, 2006).
19
GAO, Financial Audit: Bureau of the Public Debt’s Fiscal Years 2006 and 2005 Schedules of Federal
Debt, GAO-07-127 (Washington, D.C.: Nov. 7, 2006).

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(1) approximately $4.8 trillion (2006) and $4.6 trillion (2005) of federal debt held by
the public;20 (2) about $3.7 trillion (2006) and $3.3 trillion (2005) of
intragovernmental debt holdings;21 and (3) about $222 billion (2006) and $181 billion
(2005) of interest on federal debt held by the public. We reported that as of
September 30, 2006, BPD had effective internal control over financial reporting and
compliance with significant laws and regulations relevant to the Schedule of Federal
Debt. Further, we reported that there was no reportable noncompliance in fiscal year
2006 with selected provisions of significant laws we tested.
•

We audited and expressed unqualified opinions on the December 31, 2005 and 2004,
financial statements of the funds administered by the Federal Deposit Insurance
Corporation (FDIC), including the Bank Insurance Fund, the Savings Association
Insurance Fund, and the FSLIC Resolution Fund.22 We reported that as of December
31, 2005, FDIC had effective internal control over financial reporting and compliance
with significant laws and regulations. In addition, we performed certain procedures
and tests of internal control over certain material balances of the funds administered
by FDIC as of September 30, 2006.

•

We audited and expressed unqualified opinions on the fiscal years 2006 and 2005
financial statements of the United States Securities and Exchange Commission
(SEC).23 In fiscal year 2006, we reported that SEC had effective controls over
financial reporting and compliance with significant laws and regulations. Further, we
reported that there was no reportable noncompliance with selected provisions of
significant laws and regulations we tested.

We considered the CFO Act agencies’ and certain other federal agencies’ fiscal years
2006 and 2005 financial statements and the related auditors’ reports prepared by the
inspectors general or contracted independent public accountants. Financial statements and
audit reports for these agencies provide information about the operations of each of these
entities. We did not audit, and we do not express an opinion on, any of these individual
federal agency financial statements.
We considered the Department of Defense’s (DOD) assertion that DOD management
prepared and submitted pursuant to the provisions of the National Defense Authorization
Act for Fiscal Year 2002.24 In accordance with section 1008 of this act, DOD reported
that its fiscal year 2006 financial statements were not completely reliable. DOD cited
deficiencies in several areas affecting its financial statements, including, among others,
20

The public holding federal debt is comprised of individuals, corporations, state and local governments,
the Federal Reserve Banks, and foreign governments and central banks.
21
Intragovernmental debt holdings represent federal debt issued by Treasury and held by certain federal
government accounts such as the Social Security and Medicare trust funds.
22
GAO, Financial Audit: Federal Deposit Insurance Corporation Funds’ 2005 and 2004 Financial
Statements, GAO-06-146 (Washington, D.C.: March 2, 2006).
23
GAO, Financial Audit: Securities and Exchange Commission’s Financial Statements for Fiscal Years
2006 and 2005, GAO-07-134 (Washington, D.C.: Nov. 15, 2006).
24
Pub. L. No. 107-107, §1008, 115 Stat. 1012, 1204 (Dec. 28, 2001).

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(1) property, plant, and equipment; (2) inventory and operating material and supplies;
(3) environmental liabilities; (4) intragovernmental eliminations; and (5) disbursement
activity. DOD also acknowledges that it makes material amounts of unsupported
accounting entries.
We performed sufficient audit work to provide this report on the consolidated financial
statements, internal control, and the results of our assessment of compliance with selected
provisions of significant laws and regulations. We considered the limitations on the scope
of our work in forming our conclusions. Our work was performed in accordance with
U.S. generally accepted government auditing standards.

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APPENDIX II
Material Weaknesses Contributing to Our Disclaimer of Opinion
The continuing material weaknesses discussed below contributed to our disclaimer of
opinion on the federal government’s consolidated financial statements. The federal
government did not maintain adequate systems or have sufficient, reliable evidence to
support information reported in the accompanying consolidated financial statements, as
described below.
Property, Plant, and Equipment and Inventories and Related Property
The federal government could not satisfactorily determine that property, plant, and
equipment (PP&E) and inventories and related property were properly reported in the
consolidated financial statements. Most of the PP&E and inventories and related property
are the responsibility of the Department of Defense (DOD). As in past years, DOD did
not maintain adequate systems or have sufficient records to provide reliable information
on these assets. Other agencies, most notably the National Aeronautics and Space
Administration, reported continued weaknesses in internal control procedures and
processes related to PP&E.
Without reliable asset information, the federal government does not fully know the assets
it owns and their location and condition and cannot effectively (1) safeguard assets from
physical deterioration, theft, or loss; (2) account for acquisitions and disposals of such
assets; (3) ensure that the assets are available for use when needed; (4) prevent
unnecessary storage and maintenance costs or purchase of assets already on hand; and
(5) determine the full costs of programs that use these assets.
Liabilities and Commitments and Contingencies
The federal government could not reasonably estimate or adequately support amounts
reported for certain liabilities. For example, DOD was not able to estimate with assurance
key components of its environmental and disposal liabilities. In addition, DOD could not
support a significant amount of its estimated military postretirement health benefits
liabilities included in federal employee and veteran benefits payable. These unsupported
amounts related to the cost of direct health care provided by DOD-managed military
treatment facilities. Further, the federal government could not determine whether
commitments and contingencies, including those related to treaties and other international
agreements entered into to further the U.S. government’s interests, were complete and
properly reported.
Problems in accounting for liabilities affect the determination of the full cost of the
federal government’s current operations and the extent of its liabilities. Also, improperly
stated environmental and disposal liabilities and weak internal control supporting the
process for their estimation affect the federal government’s ability to determine priorities
for cleanup and disposal activities and to appropriately consider future budgetary

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resources needed to carry out these activities. In addition, when disclosures of
commitments and contingencies are incomplete or incorrect, reliable information is not
available about the extent of the federal government’s obligations.
Cost of Government Operations and Disbursement Activity
The previously discussed material weaknesses in reporting assets and liabilities, material
weaknesses in financial statement preparation, as discussed below, and the lack of
adequate disbursement reconciliations at certain federal agencies affect reported net
costs. As a result, the federal government was unable to support significant portions of
the total net cost of operations, most notably related to DOD.
With respect to disbursements, DOD and certain other federal agencies reported
continued weaknesses in reconciling disbursement activity. For fiscal years 2006 and
2005, there was unreconciled disbursement activity, including unreconciled differences
between federal agencies’ and the Department of the Treasury’s records of disbursements
and unsupported federal agency adjustments, totaling billions of dollars, which could also
affect the balance sheet.
Unreliable cost information affects the federal government’s ability to control and reduce
costs, assess performance, evaluate programs, and set fees to recover costs where
required. Improperly recorded disbursements could result in misstatements in the
financial statements and in certain data provided by federal agencies for inclusion in The
Budget of the United States (hereafter referred to as “the President’s budget”) concerning
obligations and outlays.
Accounting for and Reconciliation of Intragovernmental Activity and Balances
Federal agencies are unable to adequately account for and reconcile intragovernmental
activity and balances. The Office of Management and Budget (OMB) and Treasury
require the chief financial officers (CFO) of 35 executive departments and agencies to
reconcile, on a quarterly basis, selected intragovernmental activity and balances with
their trading partners. In addition, these agencies are required to report to Treasury, the
agency’s inspector general, and GAO on the extent and results of intragovernmental
activity and balances reconciliation efforts as of the end of the fiscal year.
A substantial number of the agencies did not adequately perform the required
reconciliations for fiscal years 2006 and 2005. For these fiscal years, based on trading
partner information provided in the Governmentwide Financial Report System (GFRS),
Treasury produced a “Material Difference Report” for each agency showing amounts for
certain intragovernmental activity and balances that significantly differed from those of
its corresponding trading partners as of the end of the fiscal year. After analysis of the
“Material Difference Reports” for fiscal year 2006, we noted that a significant number of
CFOs were unable to adequately explain the differences with their trading partners or did
not provide adequate documentation to support responses on the CFO Representations.
For both fiscal years 2006 and 2005, amounts reported by federal agency trading partners

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for certain intragovernmental accounts were significantly out of balance. In addition, for
fiscal year 2006, about 31 percent of the significant agencies identified by Treasury and
OMB did not perform the required audit procedures on their intragovernmental trading
partner data included in the footnotes to their closing packages.25 As a result of the above,
the federal government’s ability to determine the impact of these differences on the
amounts reported in the consolidated financial statements is significantly impaired.
OMB recently issued Memorandum No. M-07-03, Business Rules for Intragovernmental
Transactions (November 13, 2006), which has also been incorporated in the Treasury
Financial Manual.26 The OMB memorandum added criteria for resolving
intragovernmental disputes and major differences between trading partners for certain
intragovernmental transactions by creating the Chief Financial Officers Council’s
Intragovernmental Dispute Resolution Committee.27 Resolving the intragovernmental
transactions problem remains a difficult challenge and will require a strong commitment
by federal agencies to fully implement the recently issued business rules and continued
strong leadership by OMB.
Preparation of Consolidated Financial Statements
While further progress was demonstrated in fiscal year 2006, the federal government
continued to have inadequate systems, controls, and procedures to ensure that the
consolidated financial statements are consistent with the underlying audited agency
financial statements, balanced, and in conformity with U.S. generally accepted
accounting principles (GAAP). In addition, as discussed in our scope limitation section of
this report, Treasury could not provide the final fiscal year 2006 consolidated financial
statements and supporting documentation in time for us to complete all of our planned
auditing procedures. During our fiscal year 2006 audit, we found the following:28
•

25

Treasury showed progress by demonstrating that amounts in the Statement of Social
Insurance were consistent with the underlying federal agencies’ audited financial
statements and that the Balance Sheet and the Statement of Net Cost were consistent
with federal agencies’ financial statements prior to eliminating intragovernmental
activity and balances. However, Treasury’s process for compiling the consolidated
financial statements did not ensure that the information in the remaining three

GFRS uses a closing package methodology that has been developed to capture each federal agency's
information and link the agencies' audited financial statements to the governmentwide consolidated
financial statements.
26
Treasury Financial Manual, Bulletin No. 2007-03, Intragovernmental Business Rules.
27
The U.S. Chief Financial Officers Council is an organization of the CFOs and Deputy CFOs of the largest
federal agencies and senior officials of the Office of Management and Budget and the Department of the
Treasury who work collaboratively to improve financial management in the U.S. Government.
28
Most of the issues we identified in fiscal year 2006 existed in fiscal year 2005, and many have existed for
a number of years. In April 2006, we reported in greater detail on the issues we identified in GAO,
Financial Audit: Significant Internal Control Weaknesses Remain in Preparing the Consolidated Financial
Statements of the U.S. Government, GAO-06-415 (Washington, D.C.: April 21, 2006). This report includes
numerous recommendations to Treasury and OMB.

GOVERNMENT ACCOUNTABILITY OFFICE REPORT

principal financial statements and notes were fully consistent with the underlying
information in federal agencies’ audited financial statements and other financial data.
•

To make the fiscal years 2006 and 2005 consolidated financial statements balance,
Treasury recorded net decreases of $11 billion and $4.1 billion, respectively, to net
operating cost on the Statement of Operations and Changes in Net Position, which it
labeled “Other - Unmatched transactions and balances.”29 An additional net $10.4
billion and $3.2 billion of unmatched transactions were recorded in the Statement of
Net Cost for fiscal years 2006 and 2005, respectively. Treasury is unable to fully
identify and quantify all components of these unreconciled activities.

•

The federal government did not have an adequate process to fully identify and report
items needed to reconcile the operating results, which for fiscal year 2006 showed a
net operating cost of $449.5 billion, to the budget results, which for the same period
showed a unified budget deficit of $247.7 billion.

•

Treasury’s elimination of certain intragovernmental activity and balances continues to
be impaired by the federal agencies’ problems in handling their intragovernmental
transactions. As previously discussed, amounts reported for federal agency trading
partners for certain intragovernmental accounts were significantly out of balance.
This resulted in the need for unsupported intragovernmental elimination entries by
Treasury in order to force the Statements of Operations and Changes in Net Position
into balance. In addition, differences in other intragovernmental accounts, primarily
related to transactions with the General Fund, have not been reconciled, still remain
unresolved, and total hundreds of billions of dollars. Therefore, the federal
government continues to be unable to determine the impact of unreconciled
intragovernmental activity and balances on the consolidated financial statements.

•

We have consistently reported that certain financial information required by GAAP
was not disclosed in the consolidated financial statements. In 2006, the Federal
Accounting Standards Advisory Board issued a new standard that eliminated or
lessened the disclosure requirements for the consolidated financial statements related
to certain information that Treasury had not been reporting.30 There continued,
though, to be other disclosures required by GAAP that are not disclosed in the
consolidated financial statements. Treasury has plans to address certain of the omitted
disclosures in future years’ consolidated financial statements. Because of certain of
the material weaknesses noted in this report, we were unable to determine if the
omitted information was material to the consolidated financial statements.

29

Although Treasury was unable to determine how much of the unmatched transactions and balances, if
any, relate to operations, it reported this amount as a component of net operating cost in the accompanying
consolidated financial statements.
30
SFFAS No. 32, Consolidated Financial Report of the United States Government Requirements:
Implementing Statement of Federal Financial Accounting Concepts 4 “Intended Audience and Qualitative
Characteristics for the Consolidated Financial Report of the United States Government” (Washington,
D.C.: Sept. 28, 2006).

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164

•

Treasury continued to make progress in addressing certain other internal control
weaknesses in Treasury’s process for preparing the consolidated financial statements.
However, internal control weaknesses continued to exist involving a lack of
(1) appropriate documentation of certain policies and procedures for preparing the
consolidated financial statements, (2) adequate supporting documentation for certain
adjustments made to the consolidated financial statements, and (3) effective
management reviews.

•

The consolidated financial statements include financial information for the executive,
legislative, and judicial branches, to the extent that federal agencies within those
branches have provided Treasury such information. However, as we have reported in
past years, there continue to be undetermined amounts of assets, liabilities, costs, and
revenues that are not included, and the federal government did not provide evidence
or disclose in the consolidated financial statements that the excluded financial
information was immaterial.

•

As in previous years, Treasury did not have adequate systems and personnel to
address the magnitude of the fiscal year 2006 financial reporting challenges it faced,
such as (1) GFRS undergoing further development31 and not yet being fully
operational, and (2) weaknesses in Treasury’s process for preparing the consolidated
financial statements noted above. We found that personnel at Treasury’s Financial
Management Service had excessive workloads that required an extraordinary amount
of effort and dedication to compile the consolidated financial statements; however,
there were not enough personnel with specialized financial reporting experience to
help ensure reliable financial reporting by the reporting date.

•

During fiscal year 2006, Treasury, in coordination with OMB, developed and began
implementing corrective action plans and milestones for short-term and long range
solutions for certain internal control weaknesses we have previously reported
regarding the process for preparing the consolidated financial statements. Resolving
some of these internal control weaknesses will be a difficult challenge and will
require a strong commitment from Treasury and OMB as they execute and implement
their corrective action plans.

Outlays and Receipts—Components of the Budget Deficit
Both the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement
of Changes in Cash Balance from Unified Budget and Other Activities report the budget
deficit for fiscal years 2006 and 2005 of $247.7 billion and $318.6 billion, respectively.32

31

See GAO, Financial Management Systems: Lack of Disciplined Processes Puts Effective Implementation
of Treasury's Governmentwide Financial Report System at Risk, GAO-06-413 (Washington, D.C.: April
21, 2006).
32
The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement
and the President's Budget.

GOVERNMENT ACCOUNTABILITY OFFICE REPORT

The budget deficit is calculated by subtracting actual budget outlays (outlays) from actual
budget receipts (receipts).
For several years, we have been reporting material unreconciled differences between the
total net outlays reported in selected federal agencies’ Statement of Budgetary Resources
(SBR) and Treasury’s central accounting records used to compute the budget deficit33
reported in the consolidated financial statements. OMB and Treasury have been working
with federal agencies to reduce these material unreconciled differences. Such efforts have
resulted in significantly reducing the net outlay differences in fiscal year 2006. However,
billions of dollars of differences still exist in this and other components of the deficit
because the federal government does not have effective processes and procedures for
identifying, resolving, and explaining material differences in the components of the
deficit between Treasury’s central accounting records and information reported in agency
financial statements and underlying agency financial information and records. Until these
differences are timely reconciled by the federal government, their effect on the U.S.
government’s consolidated financial statements will be unknown.
In fiscal year 2006, we again noted that several agencies’ auditors reported internal
control weaknesses (1) affecting the agencies’ SBRs, and (2) relating to monitoring,
accounting, and reporting of budgetary transactions. These weaknesses could affect the
reporting and calculation of the net outlay amounts in the agencies’ SBRs. In addition,
such weaknesses also affect the agencies’ ability to report reliable budgetary information
to Treasury and OMB and may affect the unified budget outlays reported by Treasury in
its Combined Statement of Receipts, Outlays, and Balances,34 and certain amounts
reported in the President’s Budget.

33

See GAO's audit report on its audit of the federal government's fiscal year 2005 financial statements that
was incorporated in the 2005 Financial Report of the U.S. Government published by Treasury. Also, see
GAO, Financial Audit: Process for Preparing the Consolidated Financial Statements of the U.S.
Government Needs Improvement, GAO-04-45 (Washington, D.C.: Oct. 30, 2003).
34
Treasury’s Combined Statement of Receipts, Outlays, and Balances presents budget results and cash
related assets and liabilities of the federal government with supporting details. Treasury represents this
report as the recognized official publication of receipts and outlays of the federal government based on
agency reporting.

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166

APPENDIX III
Other Material Weaknesses
The federal government did not maintain effective internal control over financial
reporting (including safeguarding assets) and compliance with significant laws and
regulations as of September 30, 2006. In addition to the material weaknesses discussed in
Appendix II that contributed to our disclaimer of opinion, we found the following four
other material weaknesses in internal control.
Loans Receivable and Loan Guarantee Liabilities
Federal agencies accounting for the majority of the reported balances for direct loans and
loan guarantee liabilities continue to have internal control weaknesses related to their
credit reform estimation and related financial reporting processes. While progress in
addressing these long-standing weaknesses was reported by federal credit agencies, these
issues and the complexities associated with estimating the costs of lending activities
significantly increase the risk that material misstatements in agency and governmentwide
financial statements could occur and go undetected. Further, these weaknesses continue
to adversely affect the federal government’s ability to support annual budget requests for
these programs, make future budgetary decisions, manage program costs, and measure
the performance of lending activities.
Improper Payments
Under the leadership of OMB, agencies have continued to make progress in addressing
improper payments. Improvements, though, are still needed to fully address the
requirements of the Improper Payments Information Act of 2002 (IPIA).35 Major
challenges remain in meeting the goals of the act and ultimately better ensuring the
integrity of payments.36 The IPIA requires federal agencies to review all programs and
activities, identify those that may be susceptible to significant improper payments, 37
estimate and report the annual amount of improper payments for those programs, and
implement actions to cost-effectively reduce improper payments. In addition, OMB has
established a program-specific initiative under the President’s Management Agenda for
15 federal agencies to hold federal agency managers accountable for meeting the goals of
IPIA and to ensure that the necessary attention and resources are dedicated to meeting the
IPIA requirements.
35

Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
See GAO, Improper Payments: Incomplete Reporting under the Improper Payments Information Act
Masks the Extent of the Problem, GAO-07-254T (Washington, D.C.: Dec. 5, 2006).
37
IPIA defines improper payments as any payment that should not have been made or that was made in an
incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative,
or other legally applicable requirements. It includes any payment to an ineligible recipient, any payment for
an ineligible service, any duplicate payment, payments for services not received, and any payment that does
not account for credit for applicable discounts. OMB’s guidance defines significant improper payments as
those in any particular program that exceed both 2.5 percent of program payments and $10 million
annually.
36

GOVERNMENT ACCOUNTABILITY OFFICE REPORT

For fiscal year 2006, federal agencies’ estimates of improper payments, based on
available information, totaled about $42 billion, a net increase of about $4 billion, or an
11 percent increase from the prior year improper payment estimate of $38 billion.38 This
increase was primarily attributable to 10 newly reported programs with improper
payment estimates totaling about $2.3 billion and certain federal agencies reporting an
increase in estimates for programs that had previously reported.
We found that some agencies have not annually reviewed all programs and activities,
have not estimated improper payments for all risk-susceptible programs, or have not
estimated improper payments for all components of risk-susceptible programs. For
example, we noted that in fiscal year 2006, improper payment estimates were not made
for 9 risk-susceptible federal programs, including Medicaid with total program outlays of
about $183 billion for fiscal year 2006. Further, we noted some agencies reported
noncompliance issues and major management challenges related to IPIA implementation,
including the methodologies used to estimate improper payments, adequacy of agency
documentation, management oversight, and contract management.
Information Security
Although progress has been made, serious and widespread information security control
weaknesses continue to place federal assets at risk of inadvertent or deliberate misuse,
financial information at risk of unauthorized modification or destruction, sensitive
information at risk of inappropriate disclosure, and critical operations at risk of
disruption. GAO has reported information security as a high-risk area across government
since February 1997. Such information security control weaknesses could result in
compromising the reliability and availability of data that are recorded in or transmitted by
federal financial management systems. A primary reason for these weaknesses is that
federal agencies have not yet fully institutionalized comprehensive security management
programs, which are critical to identifying information security control weaknesses,
resolving information security problems, and managing information security risks on an
ongoing basis. The Congress has shown continuing interest in addressing these risks, as
evidenced by hearings on the implementation of the Federal Information Security
Management Act of 200239 and information security. In addition, the administration has
taken important actions to improve information security, such as requiring agencies in
OMB Memorandum M-06-1640 to perform specific actions to protect certain personally
identifiable information and issuing extensive guidance on information security.

38

In their fiscal year 2006 Performance and Accountability Reports (PARs), selected federal agencies
updated their fiscal year 2005 improper payment estimates to reflect changes since issuance of their fiscal
year 2005 PARs. These updates increased the governmentwide improper payment estimate for fiscal year
2005 from $38 billion to $39 billion.
39
Title III of the E-Government Act of 2002, Pub. L. No. 107-347, 116 Stat. 2899, 2946 (Dec. 17, 2002).
40
OMB Memorandum No. M-06-16, Protection of Sensitive Agency Information (June 23, 2006).

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168

Tax Collection Activities
Material internal control weaknesses and systems deficiencies continue to affect the
federal government’s ability to effectively manage its tax collection activities,41 an issue
that has been reported in our financial statement audit reports for the past 9 years. Due to
errors and delays in recording taxpayer information, payments, and other activities,
taxpayers were not always credited for payments made on their taxes owed, which could
result in undue taxpayer burden. In addition, the federal government did not always
follow up on potential unreported or underreported taxes and did not always pursue
collection efforts against taxpayers owing taxes to the federal government.
Weaknesses in controls over tax collection activities continue to affect the federal
government’s ability to efficiently and effectively account for and collect revenue.
Additionally, weaknesses in financial reporting of revenues affect the federal
government’s ability to make informed decisions about collection efforts. As a result, the
federal government is vulnerable to loss of tax revenue and exposed to potentially
billions of dollars in losses due to inappropriate refund disbursements.

(198411)

41

GAO, Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial Statements, GAO-07-136
(Washington, D.C.: Nov. 9, 2006).