2012   Financial Report of the United States Government

U.S. Government Accountability Office Independent Auditor's Report


Material Weaknesses Contributing to Our Disclaimer of Opinion on the Accrual-based Consolidated Financial Statements

The continuing material weaknesses discussed below contributed to our disclaimer of opinion on the federal government’s accrual-based consolidated financial statements. The federal government did not maintain adequate systems or have sufficient, reliable evidence to support information reported in the accompanying accrual-based 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 accrual-based 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. Certain other entities reported continued deficiencies in internal control procedures and processes related to PP&E.

Deficiencies in internal control over such assets could affect the federal government’s ability to fully know the assets it owns, including their location and condition, and its ability to effectively (1) safeguard assets from physical deterioration, theft, or loss; (2) account for acquisitions and disposals of such assets and reliably report asset balances; (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 any related to treaties and other international agreements entered into to further the federal 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, deficiencies in internal control supporting the process for estimating environmental and disposal liabilities could result in improperly stated liabilities as well as adversely affect the federal government’s ability to determine priorities for cleanup and disposal activities and to appropriately consider future budgetary resources needed to carry out these activities. In addition, to the extent 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

Reported net costs were affected by 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 entities. As a result, the federal government was unable to support significant portions of the reported total net cost of operations, most notably those related to DOD.

With respect to disbursements, DOD and certain other federal entities reported continued material weaknesses and significant deficiencies in reconciling disbursement activity. For fiscal years 2012 and 2011, unreconciled disbursement activity, including unreconciled differences between federal entities’ and the Department of the Treasury’s (Treasury) records of disbursements and unsupported federal entity adjustments, totaled 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 or authorized. If disbursements are improperly recorded, this could result in misstatements in the financial statements and in certain data provided by federal entities for inclusion in The Budget of the United States Government (President’s Budget) concerning obligations and outlays.

Accounting for and Reconciliation of Intragovernmental Activity and Balances

Although progress has been made, federal entities continue to be unable to adequately account for and reconcile intragovernmental activity and balances. The federal government’s progress varies by category.38 The Office of Management and Budget (OMB) and Treasury require the chief financial officers (CFO) of 35 significant entities to reconcile, on a quarterly basis, selected intragovernmental activity and balances with their trading partners. In addition, these entities are required to report to Treasury, their respective inspectors general, and GAO on the extent and results of intragovernmental activity and balance-reconciliation efforts as of the end of the fiscal year.

As in prior years, a substantial number of the entities did not adequately perform the required year-end reconciliations for fiscal year 2012. Based on trading partner information provided to Treasury in the 35 significant entities’ closing packages, Treasury provided a Material Differences Report to each entity showing amounts for certain intragovernmental activity and balances that significantly differed from those of the entity’s corresponding trading partners as of the end of the fiscal year. Entities are required to complete their Material Differences Report, including providing explanations of the reasons for certain differences. Based on our review of completed Material Differences Report for fiscal year 2012, we continue to note that amounts reported by federal entity trading partners for certain intragovernmental accounts were not in agreement by significant amounts. We noted that several CFOs cited differing accounting methodologies, accounting errors, and timing differences for unreconciled amounts reported in their Material Differences Report. Some CFOs indicated that they did not know the reason for the differences. In addition, some CFOs confirmed the balance or activity, but differences continued to exist.

Further, there continue to be hundreds of billions of dollars of unreconciled differences between the General Fund of the U.S. Government and federal entity trading partners related to appropriations and other intragovernmental transactions. The ability to reconcile such transactions is hampered because only some of the General Fund of the U.S. Government is reported in Treasury’s department-level financial statements. As a result of these circumstances, the federal government’s ability to determine the impact of these differences on the amounts reported in the accrual-based consolidated financial statements is significantly impaired.

During fiscal year 2012, Treasury expanded its ongoing efforts to help resolve and eliminate material differences in intragovernmental activity and balances. These efforts included developing and implementing a formalized resolution plan and related corrective actions intended to address long-standing intragovernmental challenges. As part of its plan, Treasury monitors entities’ reconciliation efforts and compliance with Treasury Financial Manual guidance. For example, Treasury began a pilot program with 14 entities that included providing them with quarterly metrics/scorecards highlighting differences requiring attention. In fiscal year 2013, Treasury plans to expand the distribution of the quarterly metrics/scorecards to include all 35 significant entities. Further, Treasury is in the process of establishing separate reporting for the General Fund, which includes intragovernmental transactions. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong and sustained commitment by federal entities to timely resolve differences with their trading partners, as well as continued strong leadership by OMB and Treasury.

Preparation of Consolidated Financial Statements

While Treasury, in coordination with OMB, implemented corrective actions during fiscal year 2012 to address certain internal control deficiencies detailed in our previously issued report, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles (U.S. GAAP). During our fiscal year 2012 audit, we found the following.39

Until these internal control deficiencies have been fully addressed, the federal government’s ability to ensure that the consolidated financial statements are consistent with the underlying audited federal entities’ financial statements, properly balanced, and in conformity with U.S. GAAP will be impaired. Resolving these internal control deficiencies remains a difficult challenge and will require a strong and sustained commitment from Treasury and OMB as they continue to execute and implement their corrective action plans.

Components of the Budget Deficit

Both the Reconciliation of Net Operating Cost and Unified Budget Deficit and the Statement of Changes in Cash Balance from Unified Budget and Other Activities report a unified budget deficit for fiscal years 2012 and 2011 of about $1.1 trillion and $1.3 trillion, respectively.42 The budget deficit is calculated by subtracting actual budget outlays (outlays) from actual budget receipts (receipts). Also, the Fiscal Projections for the U.S. Government included in the unaudited Required Supplementary Information section of the 2012 Financial Report use such outlays and receipts.

For several years, we have been reporting significant unreconciled differences between the total net outlays reported in selected federal entities’ Statements of Budgetary Resources (SBR) and Treasury’s central accounting records used to compute the budget deficit reported in the consolidated financial statements. Unreconciled net outlays of about $55 billion and $31 billion existed for fiscal years 2012 and 2011, respectively. OMB and Treasury have recognized that it will take a coordinated effort to establish effective processes and procedures for identifying, resolving, and explaining material differences in this and other components of the deficit between Treasury’s central accounting records and information reported in entity financial statements and underlying entity financial information and records. Until these types of differences are reconciled in a timely manner by the federal government, their effect on the U.S. government’s consolidated financial statements will continue to be unknown. In fiscal year 2012, Treasury began to develop a methodology for reconciling operating revenue to budget receipts on a government-wide basis. In addition, an external organization performed a broad review of the government-wide financial report preparation process and provided several recommendations for improvements, including some related to reconciling components of the budget deficit. Treasury stated that it will consider these recommendations in developing its methodology.

In fiscal year 2012, we again noted that several entities’ auditors reported internal control deficiencies (1) affecting the entities’ SBRs and (2) related to monitoring, accounting, and reporting of budgetary transactions. These control deficiencies could affect the reporting and calculation of the net outlay amounts in the entities’ SBRs. In addition, such deficiencies may also affect the entities’ ability to report reliable budgetary information to Treasury and OMB and may affect the unified budget deficit reported in the accrual-based consolidated financial statements. The unified budget deficit is also reported by Treasury in its Combined Statement of Receipts, Outlays, and Balances,43 and in other federal government publications.


38Treasury has grouped intragovernmental activities and balances into five broad categories.(Back to Content)

39Most of the issues we identified in fiscal year 2012 existed in fiscal year 2011, and many have existed for a number of years. Most recently, in June 2012, we reported the issues we identified to Treasury and OMB and provided recommendations for corrective action. See GAO, Management Report: Improvements Needed in Controls over the Preparation of the U.S. Consolidated Financial Statements, GAO-12-529 (Washington, D.C.: June 27, 2012). (Back to Content)

40The closing package methodology links federal entities’ audited consolidated department-level financial statements to certain of the U.S. government’s consolidated financial statements. (Back to Content)

41Although Treasury was unable to determine how much of the unmatched transactions and balances, if any, relates to net operating cost, it reported this amount as a component of net operating cost in the accompanying consolidated financial statements. (Back to Content)

42The budget deficit, receipts, and outlays amounts are reported in Treasury's Monthly Treasury Statement and the President’s Budget. (Back to Content)

43Treasury’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 entity reporting. (Back to Content)

Last Updated:  February 27, 2013