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United States Government Accountability Office: 
GAO: 

Testimony before the Subcommittee on Government Organization, 
Efficiency and Financial Management, Committee on Oversight and 
Government Reform, House of Representatives: 

For Release on Delivery: 
Expected at 9:30 a.m. EST:
Friday, March 9, 2011: 

Fiscal Year 2010 U.S. Government Financial Statements: 

Federal Government Continues to Face Financial Management and Long-
Term Fiscal Challenges: 

Statement of Gene L. Dodaro: 
Comptroller General of the United States: 

GAO-11-363T: 

GAO Highlights: 

Highlights of GAO-11-363T, a testimony before the Subcommittee on 
Government Organization, Efficiency and Financial Management, 
Committee on Oversight and Government Reform, House of Representatives. 

Why GAO Did This Study: 

GAO annually audits the consolidated financial statements of the U.S. 
government. Congress and the President need reliable, useful, and 
timely financial and performance information to make sound decisions 
and conduct effective oversight of federal government programs and 
policies. 

Over the years, certain material weaknesses in internal control over 
financial reporting have prevented GAO from expressing an opinion on 
the accrual-based consolidated financial statements. Unless these 
weaknesses are adequately addressed, they will, among other things, 
continue to (1) hamper the federal government’s ability to reliably 
report a significant portion of its assets, liabilities, costs, and 
other related information; and (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. 

This testimony presents the results of GAO’s audit for fiscal year 
2010 and discusses certain of the federal government’s significant 
long-term fiscal challenges. 

What GAO Found: 

Three major impediments continued to prevent GAO from rendering an 
opinion on the federal government's accrual-based consolidated 
financial statements: (1) serious financial management problems at the 
Department of Defense, (2) federal entities’ inability to adequately 
account for and reconcile intragovernmental activity and balances, and 
(3) the federal government’s ineffective process for preparing the 
consolidated financial statements. In addition to the material 
weaknesses underlying these major impediments, GAO noted material 
weaknesses involving billions of dollars in improper payments, 
information security, and tax collection activities. With regard to 
the Statement of Social Insurance (SOSI), GAO was unable to, and did 
not, express an opinion on the 2010 SOSI because of significant 
uncertainties discussed by management in the consolidated financial 
statements, primarily related to the achievement of projected 
reductions in Medicare cost growth reflected in the 2010 SOSI. GAO 
was, however, able to render unqualified opinions on the 2009, 2008, 
and 2007 SOSIs. 

Since the enactment of key financial management reforms in the 1990s, 
the federal government has made significant progress in improving 
financial management activities and practices. For fiscal year 2010, 
20 of 24 Chief Financial Officers (CFO) Act agencies were able to 
attain unqualified audit opinions on their accrual-based financial 
statements within an accelerated reporting timeframe, up from 6 CFO 
Act agencies for fiscal year 1996. Also, accounting and financial 
reporting standards have continued to evolve to provide greater 
transparency and accountability over the federal government’s 
operations, financial condition, and fiscal outlook. Further, the 
preparation and audit of financial statements has identified numerous 
deficiencies, leading to actions to strengthen controls and systems. 

Much work remains, however, to improve federal financial management. 
For example, it is essential that the Department of Defense, the 
Department of the Treasury, and the Office of Management and Budget, 
along with other federal entities, address the major impediments 
discussed above. Also, it is important for the individual federal 
departments and agencies to remain committed to maintain the progress 
that has been achieved in obtaining positive audit results and to 
build upon that progress to make needed improvements. 

The 2010 Financial Report of the United States Government (Financial 
Report) introduces the first sustainability statement required under 
new financial reporting standards, which presents comprehensive long-
term fiscal projections for the U.S. government. Such reporting 
provides a much needed perspective on the federal government’s long-
term fiscal position and outlook. The Financial Report, like the 
latest Congressional Budget Office long-term budget outlook and GAO 
simulations, shows that the federal government is on an unsustainable 
long-term fiscal path. 

What GAO Recommends: 

Over the years, GAO has made numerous recommendations directed at 
improving federal financial management. The federal government has 
generally taken or plans to take actions to address our 
recommendations. 

[End of section] 

United States Government Accountability Office: 
GAO: 

Mr. Chairman, Ranking Member Towns and Other Members of the 
Subcommittee: 

I appreciate the opportunity to be here today to discuss our report on 
the U.S. government's consolidated financial statements for fiscal 
years 2010 and 2009. Given the federal government's fiscal challenges, 
there is a significant need for transparency and for the Congress, the 
administration, and federal managers to have reliable, useful, and 
timely financial and performance information. Even though significant 
progress has been made since the enactment of key financial management 
reforms in the 1990s, our report on the U.S. government's consolidated 
financial statements illustrates that much work remains to improve 
federal financial management. Consequently, financial management needs 
to be a top priority of this administration and the new Congress. I 
would like to commend you, Mr. Chairman, and this Subcommittee, for 
continuing the annual tradition of oversight hearings on this 
important subject. Your involvement is critical to assuring continued 
progress. 

Our testimony today discusses the following major issues relating to 
the consolidated financial statements for fiscal years 2010 and 2009: 
(1) the results of our audit, including continued major impediments to 
an opinion on the accrual-based consolidated financial statements 
[Footnote 1] and certain significant uncertainties that resulted in us 
being unable to render an opinion on the 2010 Statement of Social 
Insurance;[Footnote 2] (2) the effects of the recent economic 
recession and the federal government's actions to stabilize financial 
markets and promote economic recovery on the federal government's 
financial condition; and (3) challenges posed by the federal 
government's long-term fiscal outlook. We performed sufficient audit 
work to provide our report on the consolidated financial statements, 
internal control, and compliance with selected provisions of laws and 
regulations. We considered the limitations on the scope of our work in 
forming our conclusions. Our audit was conducted in accordance with 
U.S. generally accepted government auditing standards. 

Both the consolidated financial statements and our related audit 
report are included in the fiscal year 2010 Financial Report of the 
United States Government (Financial Report). Our audit report would 
not be possible without the commitment and professionalism of 
inspectors general throughout the federal government who are 
responsible for annually auditing the financial statements of 
individual federal agencies. The Financial Report was issued by the 
Department of the Treasury (Treasury) on December 21, 2010.[Footnote 
3] This report is available through GAO's Internet site, at 
[hyperlink, http://www.gao.gov/financial/fy2010financialreport.html] 
and Treasury's Internet site, at [hyperlink, 
http://www.fms.treas.gov/fr/index.html]. 

Results of Our Audit of the U.S. Government's Consolidated Financial 
Statements for Fiscal Years 2010 and 2009: 

Since the enactment of key financial management reforms in the 1990s, 
the federal government has made significant progress in improving 
financial management activities and practices. For fiscal year 2010, 
20 of 24 Chief Financial Officers (CFO) Act agencies were able to 
attain unqualified audit opinions[Footnote 4] on their accrual-based 
financial statements within an accelerated reporting timeframe, up 
from 6 CFO Act agencies for fiscal year 1996. Also, accounting and 
financial reporting standards have continued to evolve to provide 
greater transparency and accountability over the federal government's 
operations, financial condition, and fiscal outlook. Further, the 
preparation and audit of financial statements has identified numerous 
deficiencies, leading to actions to strengthen controls and systems. 
It is important for the individual federal departments and agencies to 
remain committed to maintain the progress that has been achieved in 
obtaining positive audit results and to build upon that progress to 
make needed improvements. 

Although this progress is commendable, the federal government was 
unable to demonstrate the reliability of significant portions of the 
U.S. government's accrual-based consolidated financial statements for 
fiscal years 2010 and 2009, principally resulting from limitations 
related to certain material weaknesses in internal control over 
financial reporting and other limitations on the scope of our work. As 
a result, we were unable to provide an opinion on such statements. 
Further, significant uncertainties (discussed in Note 26 to the 
consolidated financial statements), primarily related to the 
achievement of projected reductions in Medicare cost growth reflected 
in the 2010 Statement of Social Insurance, prevented us from 
expressing an opinion on that statement. We were, however, able to 
render unqualified opinions on the 2009, 2008, and 2007 Statements of 
Social Insurance.[Footnote 5] Given the importance of social insurance 
programs like Medicare and Social Security to the federal government's 
long-term fiscal outlook, the Statement of Social Insurance is 
critical to understanding the federal government's financial condition 
and fiscal sustainability. 

The federal government did not maintain adequate systems or have 
sufficient, reliable evidence to support certain material information 
reported in the U.S. government's accrual-based consolidated financial 
statements. The underlying material weaknesses in internal control, 
[Footnote 6] which generally have existed for years,contributed to our 
disclaimer of opinion on the U.S. government's accrual-based 
consolidated financial statements for the fiscal years ended 2010 and 
2009.[Footnote 7] Those material weaknesses relate to the federal 
government's inability to: 

* satisfactorily determine that property, plant, and equipment and 
inventories and related property, primarily held by the Department of 
Defense (DOD), were properly reported in the accrual-based 
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 reported total net cost of 
operations, most notably related to DOD, and adequately reconcile 
disbursement activity at certain federal entities; 

* adequately account for and reconcile intragovernmental activity and 
balances between federal entities; 

* ensure that the federal government's accrual-based consolidated 
financial statements were (1) consistent with the underlying audited 
entities' financial statements, (2) properly balanced, and (3) in 
conformity with U.S. generally accepted accounting principles (GAAP); 
and: 

* identify and either resolve or explain material differences between 
(1) certain components of the budget deficit reported in Treasury's 
records that are used to prepare the Reconciliation of Net Operating 
Cost and Unified Budget Deficit, the Statement of Changes in Cash 
Balance from Unified Budget and Other Activities, and the Fiscal 
Projections for the U.S. Government (included in the Supplemental 
Information section of the Financial Report) and (2) related amounts 
reported in federal entities' financial statements and underlying 
financial information and records. 

These material weaknesses 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 efficient and 
effective manner. 

In addition to the material weaknesses that contributed to our 
disclaimer of opinion on the accrual-based consolidated financial 
statements, we found the following three other material weaknesses in 
internal control.[Footnote 8] These other material weaknesses were the 
federal government's inability to: 

* determine the full extent to which improper payments occur and 
reasonably assure that appropriate actions are taken to reduce 
improper payments,[Footnote 9] 

* identify and resolve information security control deficiencies and 
manage information security risks on an ongoing basis, and: 

* effectively manage its tax collection activities. 

Also, many of the CFO Act agencies continue to struggle with financial 
systems that are not integrated and do not meet the needs of 
management for reliable, useful, and timely financial information. 
Often, agencies expend major time, effort, and resources to develop 
financial information that their systems should be able to provide on 
a daily or recurring basis. 

Addressing Impediments to an Opinion on the Accrual-Based Consolidated 
Financial Statements: 

Three major impediments continued to prevent us from rendering an 
opinion on the U.S. government's accrual-based consolidated financial 
statements: (1) serious financial management problems at DOD that have 
prevented DOD's financial statements from being auditable, (2) the 
federal government's inability to adequately account for and reconcile 
intragovernmental activity and balances between federal entities, and 
(3) the federal government's ineffective process for preparing the 
consolidated financial statements. Additional impediments, such as 
certain entities' fiscal year 2010 financial statements that, as of 
the date of our audit report, received disclaimers of opinion or were 
not audited, also contributed to our inability to render an opinion on 
the U.S. government's accrual-based consolidated financial statements. 
Extensive efforts by DOD and other entity officials and cooperative 
efforts between entity chief financial officers, Treasury officials, 
and Office of Management and Budget (OMB) officials will be needed to 
resolve these obstacles to achieving an opinion on the U.S. 
government's accrual-based consolidated financial statements. 

Improving Financial Management at DOD: 

Given DOD's size and complexity, the resolution of its serious 
financial management problems is essential to achieving an opinion on 
the U.S. government's consolidated financial statements. Reported 
weaknesses in DOD's financial management and other business operations 
adversely affect the reliability of DOD's financial data; the economy, 
efficiency, and effectiveness of its operations; and its ability to 
produce auditable financial statements. Several DOD business 
practices, including financial management, continue to be included on 
GAO's list of high-risk programs designated as vulnerable to waste, 
fraud, abuse, and mismanagement[Footnote 10] or in need of 
transformation. 

To transform its business operations, DOD management must have 
reliable financial information. Without it, DOD is severely hampered 
in its ability to make sound budgetary and programmatic decisions, 
monitor trends, make adjustments to improve performance, reduce 
operating costs, or maximize the use of resources. 

DOD continues to take steps toward resolving the department's long- 
standing financial management weaknesses. The department's Financial 
Improvement and Audit Readiness (FIAR) Plan, which defines DOD's 
strategy and methodology for improving financial management operations 
and controls, has continued to evolve and mature. DOD's Comptroller 
has established two priority focus areas--first, strengthening 
processes, controls, and systems that produce budgetary information 
and support the department's Statements of Budgetary Resources; and 
second, improving the accuracy and reliability of management 
information pertaining to mission-critical assets, including military 
equipment and real property, and validating improvement through 
existence and completeness testing. In 2010, DOD revised its FIAR 
strategy, governance framework, and methodology to support the DOD 
Comptroller's direction and priorities. 

We are supportive of this initiative and believe that a focused and 
consistent approach may increase DOD's ability to demonstrate 
incremental progress toward auditability in the short term. Budgetary 
and asset-accountability information is widely used by DOD managers at 
all levels. As such, its reliability is vital to daily operations and 
management. In this regard, the U.S. Marine Corps (USMC) recently 
underwent an audit of its fiscal year 2010 Statement of Budgetary 
Resources (SBR). Although the auditors were unable to express an 
opinion on the USMC SBR, DOD indicated that the lessons learned from 
the audit will be applied to the fiscal year 2011 USMC SBR audit 
currently underway and shared with the other DOD components to assist 
them in their audit readiness efforts. 

A key element of DOD's strategy is successful implementation of 
Enterprise Resource Planning (ERP) systems. However, inadequate 
requirements management, inadequate systems testing, ineffective 
oversight over business system investments, and other challenges have 
hindered the department's efforts to implement these systems on 
schedule and within budget. Effective and sustained leadership and 
oversight of the department's ERP implementation will be important to 
ensure that these important initiatives result in the integrated 
capabilities needed to transform the department's financial management 
and related business operations. 

The Ike Skelton National Defense Authorization Act for Fiscal Year 
2011 (NDAA)[Footnote 11] lists actions that DOD is required to take 
and include in its FIAR Plan. The NDAA requires the DOD Comptroller 
to, among other things, 

* establish interim milestones for achieving audit readiness of DOD's 
financial statements consistent with the requirements of section 1003 
of the National Defense Authorization Act for Fiscal Year 2010, 
[Footnote 12] which requires DOD's financial statements to be 
validated as audit ready no later than September 30, 2017. The interim 
milestones shall include, for each military department and for the 
defense agencies and defense field activities, interim milestones for 
(1) achieving audit readiness for each major element of the Statement 
of Budgetary Resources, and (2) addressing the existence and 
completeness of each major category of assets, including military 
equipment, real property, and operating material and supplies; and: 

* examine the costs and benefits of alternative approaches to the 
valuation of DOD assets, select a valuation approach, and begin to 
prepare a business case analysis supporting the selected approach. 

Important to the success of DOD's current priorities and the FIAR 
program are high-quality, detailed plans, and effective implementation 
at all levels. Long-term, to achieve financial statement auditability 
and improve financial management information, it will be important 
that DOD establish sound strategic planning and effective 
implementation across the department, and at all levels, with efforts 
that can be sustained through leadership transitions. 

We are encouraged by continuing congressional oversight of DOD's 
business transformation and financial management improvement efforts 
and the commitment of DOD's leaders to implementing sustained 
improvements in the department's ability to produce reliable, useful, 
and timely information for decision making and reporting. We will 
continue to monitor DOD's progress in addressing its financial 
management weaknesses and transforming its business operations. 

Reconciling Intragovernmental Activity and Balances: 

Federal entities are unable to adequately account for and reconcile 
intragovernmental activity and balances. For both fiscal years 2010 
and 2009, amounts reported by federal entity trading partners for 
certain intragovernmental accounts were not in agreement by 
significant amounts. Although OMB and Treasury require the CFOs of 35 
significant federal entities to reconcile, on a quarterly basis, 
selected intragovernmental activity and balances with their trading 
partners, a substantial number of the entities did not adequately 
perform those reconciliations for fiscal years 2010 and 2009. As a 
result of these circumstances, the federal government's ability to 
determine the impact of the unreconciled differences between trading 
partners on the amounts reported in the accrual-based consolidated 
financial statements is significantly impaired. 

GAO has identified and reported on numerous intragovernmental 
activities and balances issues and has made several recommendations to 
Treasury and OMB to address those issues. Treasury and OMB have 
generally taken or plan to take actions to address these 
recommendations. Treasury continues to take steps to help resolve 
material differences in intragovernmental activity and balances. For 
example, during fiscal year 2010, Treasury established additional 
focus groups, consisting of Treasury and agency personnel, to begin 
identifying and resolving certain reported material differences. 
Resolving the intragovernmental transactions problem remains a 
difficult challenge and will require a strong commitment by federal 
entities to fully implement guidance regarding business rules for 
intragovernmental transactions issued by OMB and Treasury as well as 
continued strong leadership by OMB and Treasury.[Footnote 13] 

Preparing the Consolidated Financial Statements: 

While further progress was demonstrated in fiscal year 2010, 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 GAAP.[Footnote 14] For 
example, 

* Treasury's process did not ensure that the information in certain of 
the accrual-based consolidated financial statements was fully 
consistent with the underlying information in 35 significant federal 
entities' audited financial statements and other financial data. 

* To make the fiscal years 2010 and 2009 consolidated financial 
statements balance, Treasury recorded net increases of $0.8 billion 
and $17.4 billion, respectively, to net operating cost on the 
Statement of Operations and Changes in Net Position, which it labeled 
"Unmatched transactions and balances."[Footnote 15] Treasury recorded 
an additional net $3.8 billion and $8 billion of unmatched 
transactions in the Statement of Net Cost for fiscal years 2010 and 
2009, respectively. Treasury is unable to fully identify and quantify 
all components of these unreconciled activities. 

* Treasury's reporting of certain financial information required by 
GAAP continues to be impaired, and will remain so until federal 
entities, such as DOD, can provide Treasury with complete and reliable 
information required to be reported in the consolidated financial 
statements. 

A detailed discussion of additional control deficiencies regarding the 
process for preparing the consolidated financial statements can be 
found on pages 240 through 243 of the Financial Report. 

During fiscal year 2010, Treasury, in coordination with OMB, continued 
implementing corrective action plans and made progress in addressing 
certain internal control deficiencies we have previously reported 
regarding the process for preparing the consolidated financial 
statements. Resolving some of these internal control deficiencies will 
be a difficult challenge and will require a strong commitment from 
Treasury and OMB as they continue to execute and implement their 
corrective action plans. 

Addressing Other Impediments: 

While not as significant as the major impediments noted above, 
financial management problems at the Department of Homeland Security 
(DHS) and the Department of Labor (Labor) also contributed to the 
disclaimer of opinion on the federal government's accrual-based 
consolidated financial statements for fiscal year 2010. About $28 
billion, or about 1 percent, of the federal government's reported 
total assets as of September 30, 2010, and approximately $235 billion, 
or about 5 percent, of the federal government's reported net cost for 
fiscal year 2010 relate to these two agencies. The auditors for DHS 
and Labor reported that they were unable to provide opinions on the 
financial statements because they were not able to obtain sufficient 
evidential support for certain amounts presented in financial 
statements. For example, 

* only selected DHS financial statements were subjected to audit, and 
the auditors stated that DHS was unable to provide sufficient evidence 
to support certain financial statements balances at the Coast Guard 
and Transportation Security Administration; and: 

* auditors for Labor reported that the department was unable to 
provide sufficient support for certain accounts in Labor's fiscal year 
2010 financial statements. 

The auditors for DHS and Labor made recommendations to address control 
deficiencies at the agencies, and management for these agencies 
generally expressed commitment to resolve the deficiencies. It will be 
important that management at each of these agencies remain committed 
to addressing noted control deficiencies and improving financial 
reporting. 

Significant Uncertainties Result in Disclaimer of Opinion on 2010 
Statement of Social Insurance: 

Because of significant uncertainties (as discussed in Note 26 to the 
consolidated financial statements), primarily related to the 
achievement of projected reductions in Medicare cost growth reflected 
in the 2010 Statement of Social Insurance, we were unable to, and we 
did not, express an opinion on the 2010 Statement of Social Insurance. 
[Footnote 16] The Statement of Social Insurance presents the actuarial 
present value of the federal government's estimated future revenue to 
be received from or on behalf of participants and estimated future 
expenditures to be paid to or on behalf of participants, based on 
benefit formulas in current law and using a projection period 
sufficient to illustrate the long-term sustainability of the social 
insurance programs.[Footnote 17] 

The significant uncertainties, discussed in further detail in Note 26 
to the consolidated financial statements, include: 

* Medicare projections in the 2010 Statement of Social Insurance were 
based on full implementation of the provisions of the Patient 
Protection and Affordable Care Act (PPACA),[Footnote 18] including a 
significant decrease in projected Medicare costs from the 2009 
Statement of Social Insurance related to (1) reductions in physician 
payment rates totaling 30 percent over the next 3 years and (2) 
productivity improvements for most other categories of Medicare 
providers. However, there are significant uncertainties concerning the 
achievement of these projected decreases in Medicare costs. 

* Management has noted that actual future costs for Medicare are 
likely to exceed those shown by the current-law projections presented 
in the 2010 Statement of Social Insurance due to the likelihood of 
modifications to the scheduled reductions.[Footnote 19] The extent to 
which actual future costs exceed the projected current-law amounts due 
to changes to the physician payments and productivity adjustments 
depends on both the specific changes that might be legislated and on 
whether legislation would include other provisions to help offset such 
costs. 

* Management has developed an illustrative alternative projection 
intended to provide additional context regarding the long-term 
sustainability of the Medicare program and to illustrate the 
uncertainties in the Statement of Social Insurance projections. The 
present value of future estimated expenditures in excess of future 
estimated revenue for Medicare, included in the illustrative 
alternative projection, exceeds the $22.8 trillion estimate in the 
2010 Statement of Social Insurance by $12.4 trillion. 

Effects of the Recent Economic Recession and Stabilization Efforts on 
the Federal Government's Financial Condition: 

The recent economic recession and the federal government's actions to 
stabilize financial markets and promote economic recovery continued to 
significantly affect the federal government's financial condition. 

In December 2007, the United States entered what has turned out to be 
its deepest recession since the end of World War II. Gross domestic 
product (GDP) fell 4.1 percent from the beginning of the recession 
through the second quarter of 2009, which marked the recession's end. 
Since the end of the recession, GDP has grown slowly and unemployment 
remains at a high level. 

As of September 30, 2010, the federal government's actions to 
stabilize the financial markets and to promote economic recovery 
resulted in assets of over $400 billion, which is net of about $75 
billion in valuation losses. In addition, the federal government 
reported incurring significant liabilities and related net cost 
resulting from these actions. Although the federal government has 
received positive returns from investments in certain large financial 
institutions, it continues to report significant costs overall related 
to these actions. Because the valuation of the related assets and 
liabilities is based on assumptions and estimates that are inherently 
subject to substantial uncertainty arising from the uniqueness of 
certain transactions and the likelihood of future changes in general 
economic, regulatory, and market conditions, actual results may be 
materially different from the reported amounts. 

Actions taken to stabilize financial markets--including aid to the 
automotive industry--increased borrowing and added to federal debt 
held by the public. The revenue decreases and spending increases 
enacted in the American Recovery and Reinvestment Act of 2009 also 
added to borrowing and federal debt held by the public. Federal debt 
held by the public increased from 40 percent of GDP as of September 
30, 2008, to 62 percent as of September 30, 2010. The economic 
downturn and the nature and magnitude of the actions taken to 
stabilize the financial markets and to promote economic recovery will 
continue to shape the federal government's near-term budget and debt 
outlook. While deficits are projected to decrease as federal support 
for states and the financial sector winds down and the economy 
recovers, the increased debt and related interest costs will remain. 

The ultimate cost of the federal government's actions to stabilize the 
financial markets and promote economic recovery will not be known for 
some time as these uncertainties are resolved and further federal 
government actions are taken in fiscal year 2011 and later. Looking 
ahead, it will be important for the federal government to continue to 
determine the most expeditious manner in which to bring closure to its 
financial stabilization initiatives while optimizing its investment 
returns. 

Long-Term Fiscal: 

The 2010 Financial Report includes the first sustainability statement 
required under new financial reporting standards.[Footnote 20] This 
statement presents comprehensive long-term fiscal projections for the 
U.S. government, expanding on similar information presented in recent 
years’financial reports and consistent with the fiscal simulations 
that GAO has published since 1992. This enhanced reporting will 
hopefully increase public awareness and understanding of the long-term 
fiscal outlook: both its overall size and the major drivers of that 
outlook. Information on the imbalance between revenues and spending 
currently built into the structure of the budget can help stimulate 
public and policy debates and help policymakers make more informed 
decisions about the overall sustainability of government finances. 

For more than a decade, GAO has been running fiscal simulations to 
tell more about this longer-term story. The Congressional Budget 
Office (CBO) has also published long-term simulations for many years. 

The federal government faced large and growing structural deficits—and 
hence rising debt—before the instability in financial markets and the 
economic downturn. Under the projections included in the Financial 
Report and under the most recent CBO and GAO simulations using a range 
of assumptions, these structural deficits—driven on the spending side 
primarily by rising health care costs and known demographic trends—
lead to continuing increases in federal debt held by the public as a 
share of GDP, which is unsustainable. 

Closing Comments: 

In closing, even though progress has been made in improving federal 
financial management activities and practices, much work remains given 
the federal government’s long-term fiscal challenges and the need for 
the new Congress, the administration, and federal managers to have 
reliable, useful, and timely financial and performance information to 
effectively meet these challenges. 

The recent economic recession and the federal government’s actions to 
stabilize financial markets and promote economic recovery continued to 
significantly affect the federal government’s financial condition. The 
accrual-based consolidated financial statements for fiscal year 2010 
include, as they did for fiscal year 2009, substantial assets and 
liabilities resulting from these actions. The valuation of certain 
assets and liabilities is based on assumptions and estimates that are 
inherently subject to substantial uncertainty arising from the 
uniqueness of certain transactions and the likelihood of future 
changes in general economic, regulatory, and market conditions. As 
such, there will be differences between the estimated values as of 
September 30, 2010, and the actual results, and such differences may 
be material. These differences will also affect the ultimate cost of 
the federal government’s market stabilization and economic recovery 
actions. Going forward, a great amount of attention will need to 
continue to be devoted to ensuring (1) that sufficient internal 
controls and transparency are established and maintained for all 
financial stabilization and economic recovery initiatives; and (2) 
that all related financial transactions are reported on time, 
accurately, and completely. 

Further, sound decisions on the current and future direction of all 
vital federal government programs and policies are more difficult 
without reliable, useful, and timely financial and performance 
information. In this regard, for DOD, the challenges are many. We are 
encouraged by DOD’s efforts toward addressing its long-standing 
financial management weaknesses and its efforts to achieve 
auditability. Consistent and diligent top management oversight toward 
achieving financial management capabilities, including audit 
readiness, will be critical going forward. Moreover, the civilian CFO 
Act agencies must continue to strive toward routinely producing not 
only annual financial statements that can pass the scrutiny of a 
financial audit, but also quarterly financial statements and other 
meaningful financial and performance data to help guide decision 
makers on a day-to-day basis. Federal entities’ improvement of 
financial management systems will be essential to achieve this goal. 

Moreover, of utmost concern are the federal government’s long-term 
fiscal challenges that result from large and growing structural 
deficits that are driven on the spending side primarily by rising 
health care costs and known demographic trends. This unsustainable 
path must be addressed soon by policymakers. 

Finally, I want to emphasize the value of sustained congressional 
interest in these issues, as demonstrated by this Subcommittee’s 
leadership. It will be key that, going forward, the appropriations, 
budget, authorizing, and oversight committees hold the top leadership 
of federal entities accountable for resolving the remaining problems 
and that they support improvement efforts. 

Mr. Chairman and Ranking Member Towns, this concludes my prepared 
statement. I would be pleased to respond to any questions that you or 
other members of the Subcommittee may have at this time. 

GAO Contacts and Acknowledgments: 

For further information regarding this testimony, please contact 
Jeanette M. Franzel, Managing Director, or Gary T. Engel, Director, 
Financial Management and Assurance, at (202) 512-2600. Key 
contributions to this testimony were also made by staff on the 
Consolidated Financial Statement audit team. 

[End of section] 

Appendix I: Fiscal Year 2010 Audit Results: 

Table 1: Chief Financial Officers (CFO) Act Agencies: Fiscal Year 2010 
Audit Results and Principal Auditors: 

CFO Act agency: Agency for International Development; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: Office of Inspector General (OIG). 

CFO Act agency: Agriculture; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: OIG. 

CFO Act agency: Commerce; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Defense; 
Opinion rendered by agency auditor: Disclaimer; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: OIG. 

CFO Act agency: Education; 
Opinion rendered by agency auditor: Unqualified; 
?Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: Ernst & Young LLP. 

CFO Act agency: Energy; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Environmental Protection Agency; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: OIG. 

CFO Act agency: General Services Administration; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Health and Human Services; 
Opinion rendered by agency auditor: [B]; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: Ernst & Young LLP. 

CFO Act agency: Homeland Security; 
Opinion rendered by agency auditor: [C]; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Housing and Urban Development; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: OIG. 

CFO Act agency: Interior; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Justice; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Labor; 
Opinion rendered by agency auditor: Disclaimer; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agency: National Aeronautics and Space Administration; 
Opinion rendered by agency auditor: [D]; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: Ernst & Young LLP. 

CFO Act agency: National Science Foundation; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: Clifton Gunderson LLP. 

CFO Act agency: Nuclear Regulatory Commission; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: Urbach Kahn & Werlin LLP. 

CFO Act agency: Office of Personnel Management; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Small Business Administration; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Social Security Administration; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: Grant Thornton LLP. 

CFO Act agency: State; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: Kearney & Company. 

CFO Act agency: Transportation; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Empty]; 
Principal auditor: Clifton Gunderson LLP. 

CFO Act agency: Treasury; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: KPMG LLP. 

CFO Act agency: Veterans Affairs; 
Opinion rendered by agency auditor: Unqualified; 
Agencies’ auditors reported material weaknesses or noncompliance[A]: 
[Check]; 
Principal auditor: Clifton Gunderson LLP. 

Source: GAO. 

[A] Reported noncompliance with applicable laws and regulations and/or 
substantial noncompliance with one or more of the Federal Financial 
Management Improvement Act requirements. 

[B] The auditors expressed an unqualified opinion on the Department 
of Health and Human Services’ fiscal year 2010 financial statements 
except for the 2010 Statement of Social Insurance. The auditors 
were unable to render an opinion on that financial statement. 

[C] For fiscal year 2010, only the Consolidated Balance Sheet and the 
related Statement of Custodial Activity of the Department of Homeland 
Security were subject to audit; the auditors were unable to express an 
opinion on these two financial statements. 

[D] The auditors of the National Aeronautics and Space Administration’
s fiscal year 2010 financial statements issued a qualified opinion 
because of the affect of certain matters related to property, plant, 
and equipment and operating materials and supplies balances. 

[End of table] 

[End of section] 

Footnotes: 

[1] The consolidated financial statements other than the Statement of 
Social Insurance are referred to as the accrual-based consolidated 
financial statements. Most revenues reported in these financial 
statements are recorded on a modified cash basis. 

[2] We rendered unqualified opinions on the 2009, 2008, and 2007 
Statements of Social Insurance. 

[3] Also, see GAO, Understanding the Primary Components of the Annual 
Financial Report of the United States Government, [hyperlink, 
http://www.gao.gov/products/GAO-05-958SP] (Washington, D.C.: September 
2005). In September 2009, we issued an update to this guide to reflect 
recent changes to the federal accounting standards and resulting 
changes to the Financial Report; see [hyperlink, 
http://www.gao.gov/products/GAO-09-946SP] (Washington, D.C.: September 
2009). 

[4] See appendix I for the fiscal year 2010 audit results for the 24 
CFO Act agencies. 

[5] We disclaimed an opinion on the fiscal year 2006 consolidated 
financial statements, including the Statement of Social Insurance. 
Social insurance programs included in the Statement of Social 
Insurance are Social Security, Medicare, Railroad Retirement, and 
Black Lung. 

[6] A material weakness is a deficiency, or combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity’s financial 
statements will not be prevented, or detected and corrected, on a 
timely basis. A deficiency in internal control exists when the design 
or operation of a control does not allow management or employees, in 
the normal course of performing their assigned functions, to prevent, 
or detect and correct, misstatements on a timely basis. 

[7] A more detailed description of the material weaknesses that 
contributed to our disclaimer of opinion, including the primary 
effects of these material weaknesses on the accrual-based consolidated 
financial statements and on the management of federal government 
operations, can be found on pages 238 through 244 of the Financial 
Report. 

[8] A more detailed discussion of these weaknesses, including the 
primary effects of the material weaknesses on the accrual-based 
consolidated financial statements and on the management of federal 
government operations, can be found on pages 245 through 248 of the 
Financial Report. 

[9] Federal entities reported estimates of improper payment amounts 
that totaled $125.4 billion for fiscal year 2010, which represented 
about 5.5 percent of $2.3 trillion of reported outlays for the related 
programs. 

[10] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January 
2009). 

[11] Pub. L. No. 111-383, Div. A, Tit. VIII, § 881, 124 Stat. 4137, 
4306 (Jan. 7, 2011). 

[12] Pub. L. No. 111-84, Div. A, Tit. X, § 1003, 123 Stat. 2190, 2439-
2441 (Oct. 28, 2009). 

[13] On November 8, 2010, Treasury issued the Treasury Financial 
Manual (TFM) Bulletin No. 2011-04, Intragovernmental Business Rules, 
which rescinded and supersedes TFM Bulletin No. 2007-03, 
Intragovernmental Business Rules (October 31, 2007). This guidance is 
effective for fiscal year 2011 and has updated the previous guidance 
to include, among other things, a new Intragovernmental Dispute 
Resolution Request Form to be certified by federal entity CFOs and 
disputes to be resolved by Treasury’s Deputy Assistant Secretary—-
Accounting Policy, Office of Fiscal Assistant Secretary. 

[14] Most of the issues we identified in fiscal year 2010 existed in 
fiscal year 2009, and many have existed for a number of years. Most 
recently, in July 2010, we reported the issues we identified to 
Treasury and OMB and provided recommendations for corrective action in 
GAO, Management Report: Improvements Needed in Controls over the 
Preparation of the U.S. Consolidated Financial Statements, GAO-10-757 
(Washington, D.C.: July 30, 2010). 

[15] Although Treasury was unable to determine how much of the 
unmatched transactions and balances, if any, relate to net operating 
cost, it reported this amount as a component of net operating cost in 
the consolidated financial statements. 

[16] About $22.8 trillion, or 74 percent, of the federal government’s 
reported total present value of future expenditures in excess of 
future revenue for 2010 relate to the Department of Health and Human 
Services’ 2010 Statement of Social Insurance, which received a 
disclaimer of opinion. 

[17] The projection period used for the Social Security, Medicare, and 
Railroad Retirement social insurance programs is 75 years. For the 
Black Lung program, the projections are through 2040. 

[18] Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 
124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and 
Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 
1029 (Mar. 30, 2010). 

[19] Subsequent to the date of our report, the Medicare and Medicaid 
Extenders Act of 2010, Pub. L. No. 111-309, § 101 overrode the 
scheduled reductions in physician payments through December 2011 and 
reduced non-Medicare outlays by limiting a health insurance tax credit. 

[20] Under such standards, the new statement will be audited beginning 
in fiscal year 2013. 

[End of section] 

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