Annual financial report cites incomplete audits at three departments

Defense, State and Homeland Security have a ways to go toward auditability, says GAO.

The government's overall finances cannot be evaluated properly "because of widespread material internal control weaknesses, significant uncertainties and other limitations" on agency audit statements, the Government Accountability Office said recently.

Just as it has for the past 15 years, GAO's audit of the fiscal 2011 consolidated financial statements of 24 major agencies stated that it could not prepare an overall opinion. The annual "Financial Report of the United States Government" released in late December 2011 by the Treasury Department cited, "serious financial management problems at the Department of Defense that made its financial statements unsuitable" as well as "the federal government's inability to adequately account for and reconcile intergovernmental activity and balances between federal agencies." It called the government's overall process for preparing consolidated financial statements ineffective.

In addition to slapping the Pentagon with a "disclaimer" for its long-standing struggles with auditability, GAO assigned the undesirable "qualified" rating to the Homeland Security and State departments. Homeland Security was commended, however, for earning a qualified opinion solely on its Balance Sheet and Statement of Custodial Activity for the first time since 2003. State also earned a split verdict, receiving an unqualified opinion but only on its Statement of Budgetary Resources and Consolidated Statement of Net Cost.

GAO was unable to render an opinion on the 2011 Statement of Social Insurance and the 2011 Statement of Changes in Social Insurance Amounts because of "significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth."

Auditors also cited "material weaknesses" involving an estimated $115.3 billion in improper payments, information security governmentwide and tax collection.

"The comprehensive fiscal projections presented in the 2011 Financial Report show that -- absent policy changes -- the federal government continues to face an unsustainable long-term fiscal path," Comptroller General Gene Dodaro said in a statement. "While the Budget Control Act of 2011 improved the outlook, it did not fundamentally change the longer term path over the next few decades. Dealing with the federal government's longer term fiscal challenges will require sustained attention and difficult decisions. These fiscal challenges further highlight the need for the Congress, the [Obama] administration and federal managers to have reliable and complete financial and performance information both for individual federal entities and for the federal government as a whole."

The annual report, intended to document funds already spent as well as those committed, is prepared by Treasury and the Office of Management and Budget and audited by GAO. It dates back to mid-1970s, when it was first produced by a private sector accounting firm. Its format was adjusted in the early 1990s to reflect new government accounting and performance practices.

In addition to discussions of agency-specific issues, the report contains macroeconomic data, noting, for example, that the ratio of federal debt to gross domestic product has risen from 40 percent in 2008 to almost 68 percent in 2011.

Its release by Treasury allows the incumbent administration to cast budget issues in terms that advance its priorities. Treasury Secretary Timothy Geithner introduced it by saying, "our actual and projected deficits are too high, swollen by tax cuts and spending decisions of the previous decade, exacerbated by the economic crisis, and, over the longer run, enlarged by the aging of the population and the rising cost of health care." Geithner reviewed recent progress in deficit reduction and gave a nod to the projections that the Affordable Health Care law will cut health care costs over the next two decades. And he added that the plan for automatic spending cuts under current law and "the scheduled expiration of the tax cuts enacted in 2001 and 2003 provide a strong incentive for agreement on further reforms by the end of 2012."

Days after the report's release, New York investment firm executive Bryan R. Lawrence took to the op-ed pages of The Washington Post to sound an alarm about its projections of the cost to the government to fulfill promises for spending on Social Security and Medicaid. In a piece headlined "The Dirty Secret in Uncle Sam's Friday Trash Dump," he characterized Treasury and GAO as seeking to bury bad news by releasing the report on the day before the Christmas holidays.

A GAO spokesman said the report's timing was determined by Treasury, which declined to comment.