All About Agency Financial Statement Auditing

Every year, GAO audits selected agencies’ financial statements and the consolidated financial statements of the federal government. We’ve discussed the results of our federal government audit on the WatchBlog before, but we wanted to provide more context on the agency-level audits we perform, and on financial statement auditing in general. Taxpayers can view agency financial statements and the audits of those statements as a snapshot of an agency’s financial performance and use of federal funds. This is similar to the way an investor can analyze a company’s annual report.

Agency Financial Statements

Executive branch agencies prepare annual financial statements as required by law. These statements must be reviewed by an independent auditor. GAO is the independent auditor for the following:

• Federal Deposit Insurance Corporation’s (FDIC) financial statements;
• Consumer Financial Protection Bureau’s financial statements;
• Federal Housing Finance Agency’s financial statements;
• Treasury’s Office of Financial Stability’s financial statements related to the Troubled Asset Relief Program;
• Treasury’s Bureau of the Fiscal Service’s financial statements related to the Schedule of Federal Debt;
• Treasury’s Internal Revenue Service’s (IRS) financial statements; and
• Securities and Exchange Commission’s (SEC) financial statements.

Financial Statement Audit Results

Financial statement audits provide an independent, methodical look at whether an agency:

1. presented its financial statement information fairly and in accordance with U.S. generally accepted accounting principles,
2. maintained effective internal control over its financial reporting, and
3. complied with applicable laws, regulations, contracts, and grant agreements.

Auditors provide an opinion on the extent to which the agency presented its financial information fairly, and provide a status report on the agency’s internal financial reporting controls and compliance.

Errors in financial statements that would lead someone to the wrong conclusion about an agency’s financial condition are “material” misstatements. For example, if an agency states that it had significantly more assets than it actually possessed. Errors that have a widespread effect on an agency’s financial statements are “pervasive” misstatements. For example, if an agency did not monitor or keep records of cash balances, revenue, or a recent purchase of laptop computers (property and equipment account), this would lead to misstatements in all of those accounts.

There are 4 possible audit outcomes based on the materiality and pervasiveness of any misstatements:

1. Unmodified Opinion – The auditor concluded that the financial statements are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles.
2. Modified Opinion – The auditor found either (1) material—but not pervasive—misstatements, or (2) insufficient evidence on which to base an opinion, and concluded that undetected misstatements could be material, but not pervasive.
3. Adverse Opinion – The auditor concluded that misstatements are material and pervasive.
4. Disclaimer of Opinion – The auditor could not obtain sufficient evidence on which to base an opinion, and concluded that undetected misstatements could be material and pervasive.

How Are Agencies Doing?

We have completed nearly all of our fiscal year 2014 agency financial statement audits. We gave all agencies unmodified opinions on their financial statements; however, we found that some agencies must improve internal controls over their financial reporting. When we find such issues, we may bring them to the attention of agency management. Some examples of our management reports include those we did for:

• IRS,
• SEC, and
• Bureau of the Fiscal Service’s Schedule of Federal Debt.

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