2010   Financial Report of the United States Government

Government Accountability Office Auditor's Report

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, is required to annually submit financial statements for the U.S. government to the President and the Congress. GAO is required to audit these statements.1 This is (1) our report on the accompanying U.S. government's accrual-based consolidated financial statements for the fiscal years ended September 30, 2010 and 2009, and the 2010, 2009, 2008, 2007, and 2006 Statements of Social Insurance, and (2) our associated reports on internal control over financial reporting and on compliance with selected provisions of laws and regulations. As used in this report, accrual-based financial statements refer to all of the consolidated financial statements and notes, except for those related to the Statement of Social Insurance.2

Management of 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 evaluating 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 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 the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA).4 Appendix I discusses the objective, scope, and methodology of our work.

In summary, we found the following:

Significant Matters of Emphasis

Before discussing our conclusions on the 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 2010 Financial Report of the United States Government (2010 Financial Report) into context.

The Federal Government's Actions to Stabilize Financial Markets and to Promote Economic Recovery

The accrual-based consolidated financial statements for fiscal year 2010 include, as they did for fiscal year 2009, substantial assets and liabilities resulting from the federal government's actions to stabilize financial markets and to promote economic recovery. Although the federal government has received positive returns from investments in certain large financial institutions, it continues to report significant costs related to these actions. Key actions that the federal government has taken to stabilize financial markets and to promote economic recovery are discussed in the Management's Discussion and Analysis section of the 2010 Financial Report and certain Notes to the consolidated financial statements.

The ultimate cost of all of the federal government's market stabilization and economic recovery actions and the effect of such actions on its financial condition will not be known for some time. 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 (e.g., the Troubled Asset Relief Program (TARP) equity investments,9 investments in the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), and mortgage-backed securities guaranteed by them),10 which is net of about $75 billion in valuation losses. In addition, the federal government reported incurring significant liabilities as of September 30, 2010 (e.g., about $360 billion related to estimated future payments to Fannie Mae and Freddie Mac) and related net cost resulting from these actions. In valuing these assets and liabilities, management considered and selected assumptions and data that it believed provided a reasonable basis for the estimated values reported in the accrual-based consolidated financial statements. However, as discussed in Note 1 to the consolidated financial statements, there are many factors affecting these 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 actions.

Long-Term Fiscal Challenges

While the economy is still fragile and in need of careful attention, there is wide agreement on the need to look not only at the near-term but also at steps that begin to change the long-term fiscal path as soon as possible without slowing the economy. As discussed in the 2010 Financial Report, the federal government is on an unsustainable long-term fiscal path driven on the spending side primarily by rising health care costs and known demographic trends. Under new financial reporting standards, this 2010 Financial Report includes comprehensive long-term fiscal projections for the U.S. government, expanding on similar information presented in recent years' financial reports. The projections show that the present value of projected non-interest spending exceeds receipts by about $16.3 trillion over the next 75-year period.11 The projections relating to Social Security and Medicare are based on the same assumptions underlying the information presented in the Statement of Social Insurance and assume reductions in Medicare cost growth. GAO also prepares long-term simulations for all federal government programs. Under GAO's Alternative simulation,12 absent policy change, by 2020 roughly 92 cents of every dollar of federal revenue would be spent on net interest costs, Social Security, Medicare, and Medicaid; and debt held by the public as a share of gross domestic product (GDP) would by 2020 exceed the historical high reached in the aftermath of World War II.13 The federal government faces increasing pressures, yet a shrinking window of opportunity, for making policy changes regarding these challenges.

In February 2010, the President established the bipartisan National Commission on Fiscal Responsibility and Reform to identify policies to change this fiscal path and stabilize the debt-to-GDP ratio. The Commission's report was issued on December 1, 2010.14 Other policy groups have also developed proposals to deal with the federal government's long-term fiscal challenge.

Equity Interests in Certain Financial Organizations and Commercial Entities

As discussed in Note 1 to the consolidated financial statements, such financial statements do not include the assets, liabilities, or results of operations of any financial organizations or commercial entities in which Treasury holds either a direct, indirect, or beneficial equity interest. Treasury and the Office of Management and Budget (OMB) have determined that none of these entities meet the criteria for a federal entity. The investments in and any liabilities to such entities, however, are valued and reported on the Balance Sheet.

Disclaimer of Opinion on the Accrual-Based Consolidated Financial Statements

Because of the federal government's inability to demonstrate the reliability of significant portions of the U.S. government's accompanying 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, we are unable to, and we do not, express an opinion on such accrual-based consolidated financial statements. As a result of these limitations, readers are cautioned that amounts reported in the accrual-based consolidated financial statements and related notes may not be reliable.

The federal government did not maintain adequate systems or have sufficient, reliable evidence to support certain material information reported in the accompanying accrual-based consolidated financial statements. The underlying material weaknesses in internal control, which generally have existed for years, contributed to our disclaimer of opinion on the accrual-based consolidated financial statements. The material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial statements were the federal government's inability to

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. Due to the material weaknesses and other limitations on the scope of our work discussed above, there may also be additional issues that could affect the accrual-based consolidated financial statements that were not identified. Appendix II describes these material weaknesses in more detail and highlights the primary effects of these material weaknesses on the accompanying accrual-based consolidated financial statements and on the management of federal government operations.

Disclaimer of Opinion on the Statement of Social Insurance for 2010 and Unqualified Opinions for 2009, 2008, and 2007

Because of 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, we were unable to obtain sufficient evidence to support the amounts presented in the 2010 Statement of Social Insurance. Consequently, we are unable to, and we do not, express an opinion on the 2010 Statement of Social Insurance. 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.15

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

As a result, readers are cautioned that amounts reported in the 2010 Statement of Social Insurance and related Notes may not fairly present, in all material respects, the financial condition of the federal government's social insurance programs, in conformity with GAAP. The uncertainties related to the 2010 Statement of Social Insurance also affect the projected Medicare and Medicaid costs reported in the Fiscal Projections for the U.S. government, which is presented in Supplemental Information and is summarized in Management's Discussion and Analysis and other accompanying information.

In addition, the Supplemental Information section of the 2010 Financial Report includes unaudited information concerning how changes in various assumptions would change the present value of future estimated expenditures in excess of future estimated revenue. As discussed in that section, Medicare projections are very sensitive to changes in the health care cost growth assumption.

In our opinion, the Statements of Social Insurance for 2009, 2008, and 2007 present fairly, in all material respects, the financial condition of the federal government's social insurance programs, in conformity with GAAP. We have not audited and do not express an opinion on the 2006 Statement of Social Insurance.

In preparing the Statements of Social Insurance, 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 Statement of Social Insurance 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, such as legislative changes (e.g., changes in benefits or provider payments), other significant uncertainties, and contingencies there will be differences between the estimates in the Statement of Social Insurance 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 Part D projections have an added uncertainty in that they were prepared using very little program experience upon which to base the estimates.

The scheduled future benefits presented in the Statement of Social Insurance are based on benefit formulas in current law. However, consistent with the respective annual Trustees Reports, the Social Security and Medicare programs are not sustainable under current financing arrangements. Also, the law concerning these programs can be changed at any time by the Congress. In fact, payment of Social Security and Medicare Hospital Insurance (Part A) benefits are limited by law to the balances in the respective trust funds. Consequently, future scheduled benefits are limited to future revenues plus existing trust fund assets. As discussed in the Supplemental Information section of the 2010 Financial Report, the Social Security and Medicare Hospital Insurance (Part A) trust funds are, based on achievement of the cost reductions discussed above, projected to be exhausted in 2037 and 2029, respectively, at which time they will be unable to pay the full amount of scheduled future benefits. For Social Security, projected future revenues as of January 1, 2010 would be sufficient to pay 78 percent of scheduled benefits in 2037, the year of trust fund exhaustion, and decreasing to 75 percent of scheduled benefits in 2084. Similarly, for Medicare Hospital Insurance (Part A), projected future revenues as of January 1, 2010 would be sufficient to pay 85 percent of scheduled benefits in 2029, the year of trust fund exhaustion, declining to 77 percent in 2050 and then increasing to 89 percent of scheduled benefits in 2084.

Other Limitations on the Scope of Our Work

For fiscal years 2010 and 2009, there were limitations on the scope of our work in addition to the material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial statements. Treasury and OMB depend on representations from certain federal entities 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 accrual-based consolidated financial statements for fiscal years 2010 and 2009 primarily because of insufficient representations provided to them by certain agencies. In addition, the federal government was unable to provide us with adequate legal representations regarding the U.S. government's accrual-based consolidated financial statements for fiscal year 2009.

Other Matters

In fiscal year 2010, the federal government adopted several new federal accounting standards, including those for (1) reporting pensions, other retirement benefits, and other post-employment benefits [Statement of Federal Financial Accounting Standards (SFFAS) No. 33], as discussed in Notes 1, 15, and 21 to the consolidated financial statements; and (2) reporting comprehensive long-term fiscal projections for the U.S. government [SFFAS No. 36], as discussed in Note 1 to the consolidated financial statements and Supplemental Information.

Also, as discussed in Notes 1 and 24 to the consolidated financial statements, the fiscal year 2009 Statements of Changes in Cash Balance from Unified Budget and Other Activities and the fiscal year 2009 Statement of Operations and Changes in Net Position were restated to correct certain balances. In addition, certain information in Note 23 to the consolidated financial statements was restated. Last year, we disclaimed an opinion on the fiscal year 2009 accrual-based consolidated financial statements due to certain material weaknesses and limitations on the scope of our work, including the material weakness related to the preparation of the consolidated financial statements. Given the material weaknesses and scope limitations discussed in this report, additional restatements may occur in the future.

Material Weaknesses Resulted in Ineffective Internal Control Over Financial Reporting

The material weaknesses discussed in this report resulted in ineffective internal control over financial reporting. Consequently, the federal government's internal control did not provide reasonable assurance that misstatements, losses, or noncompliance material in relation to the consolidated financial statements would be prevented or detected and corrected on a timely basis. The federal government is responsible for establishing and maintaining effective internal control over financial reporting and evaluating its effectiveness. Internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of the financial statements 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 laws and regulations that could have a direct and material effect on the financial statements.

In planning and performing our audit, we considered internal control over financial reporting. We did not consider all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We do not express an opinion on the effectiveness of internal control over financial reporting because the purpose of our work was to determine our procedures for auditing the financial statements, not to express an opinion on internal control. Based on the scope of our work and the effects of the other limitations on the scope of our audit noted throughout this report, our internal control work would not necessarily identify all deficiencies in internal control, including those that might be material weaknesses or significant deficiencies.18

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

These material weaknesses are discussed in more detail in appendix III, including the primary effects of the material weaknesses on the accompanying accrual-based consolidated financial statements and on the management of federal government operations.

We also found two significant deficiencies in internal control that involve the following areas:

These significant deficiencies are discussed in more detail in appendix IV.

Further, individual federal entity financial statement audit reports identified additional control deficiencies that were reported by the entity's auditors as either material weaknesses or significant deficiencies at the individual entity level. We do not consider these additional deficiencies to represent material weaknesses or significant deficiencies with respect to the consolidated financial statements.

Compliance With Laws and Regulations

Our work to test compliance with selected provisions of laws and regulations that have a direct and material effect on the consolidated financial statements was limited by the material weaknesses and other scope limitations discussed in this report. U.S. generally accepted government auditing standards and OMB guidance require auditors to report on entities' compliance with selected provisions of laws and regulations. Certain individual entity audit reports contain instances of noncompliance. None of these instances were deemed to be reportable noncompliance with regard 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 laws and regulations.

Other Information Included in the Financial Report

Management's Discussion and Analysis, Stewardship Information, Supplemental Information, and other accompanying information, including the Citizen's Guide, included in the 2010 Financial Report contain a wide range of information, some of which is not directly related to the consolidated financial statements. We did not audit and we do not express an opinion on this information. However, we compared the information that directly related to the Statements of Social Insurance for consistency with the 2009, 2008, and 2007 Statements of Social Insurance and discussed the methods of measurement and presentation of such information with Treasury officials. Based on this limited work, we found no material inconsistencies with such Statements of Social Insurance or GAAP.

Readers are cautioned that the material weaknesses and scope limitations discussed in this audit report, including those related to our disclaimer of opinion on the 2010 Statement of Social Insurance, affect the reliability of certain information contained in the Management's Discussion and Analysis, Stewardship Information, Supplemental Information, and other accompanying information that is taken from the same data sources as the accrual-based consolidated financial statements and the 2010 Statement of Social Insurance.

CFO Act Agency Financial Management Systems

The federal government's ability to efficiently and effectively manage and oversee its day-to-day operations and programs relies heavily on the ability of entity financial management systems19 to produce complete, reliable, timely, and consistent financial information for use by executive branch agencies and the Congress. FFMIA was designed to lead to system improvements that would result in CFO Act agency managers routinely having access to reliable, useful, and timely financial-related information to measure performance and increase accountability throughout the year. FFMIA requires auditors, as part of the 24 CFO Act agencies' financial statement audits, to report whether those 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 (SGL) at the transaction level. For fiscal years 2010 and 2009, auditors for 10 of the 24 CFO Act agencies reported that the agencies' financial management systems did not substantially comply with one or more of the three FFMIA requirements. Agency management at the 24 CFO Act agencies also annually report on FFMIA compliance. Agency management at 7 CFO Act agencies reported that their agencies' systems were not in substantial compliance with one or more of the three FFMIA requirements for fiscal years 2010 and 2009. The differences in the assessments of substantial compliance between the auditors and agency management reflected differences in views between management and the auditors on the impact reported deficiencies had on agency's financial management systems. Long-standing financial management systems weaknesses at several large CFO Act agencies, along with the size and complexity of the federal government, continue to present a formidable management challenge in providing accountability to the nation's taxpayers and have contributed significantly to our inability to determine the reliability of the accrual-based consolidated financial statements.

_ _ _ _ _

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.

Robert F. Dacey
Chief Accountant
U.S. Government Accountability Office

December 13, 2010

Footnotes

1The 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. (Back to Content)

2The accrual-based consolidated financial statements for the fiscal years ended September 30, 2010 and 2009 consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash basis. The 2010, 2009, 2008, 2007, and 2006 Statements of Social Insurance, including the related notes, are also included in the consolidated financial statements. The Statements of Social Insurance do not interrelate to the accrual-based consolidated financial statements. (Back to Content)

331 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. (Back to Content)

431 U.S.C. 3512 note (Federal Financial Management Improvement Act). (Back to Content)

5A 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. (Back to Content)

6Three major impediments continued to prevent us from rendering an opinion on the accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (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. In addition, the financial statements of the Department of Homeland Security for fiscal years 2010 and 2009 and the Department of Labor for fiscal year 2010 were not auditable or not subjected to audit by agency auditors. Further, some of the financial statements of the National Aeronautics and Space Administration for fiscal year 2010 were not fully auditable and for fiscal year 2009 all were not auditable. (Back to Content)

7We 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 2006 and on the accrual-based consolidated financial statements of the U.S. government for fiscal years 2007 through 2009. (Back to Content)

8The valuation date is January 1 for all social insurance programs except the Black Lung program, which has a valuation date of September 30. (Back to Content)

9TARP was established by the Department of the Treasury (Treasury) under authority provided in the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 110-343). The Act requires the U.S. Comptroller General to audit TARP's financial statements as well as report every 60 days on a variety of areas associated with oversight of TARP. For the TARP financial statement audits and the 60-day reports, see GAO's Web Site at www.gao.gov. (Back to Content)

10The Housing and Economic Recovery Act of 2008 (Pub. L. No. 110-289) authorized Treasury to purchase, until December 31, 2009, any amount of Fannie Mae or Freddie Mac securities, whether debt or equity. (Back to Content)

11On an open group basis (current and future participants). (Back to Content)

12GAO, The Federal Government's Long-Term Fiscal Outlook: Fall 2010 Update, GAO-11-201SP (Washington, D.C.: November 2010). (Back to Content)

13GAO's Alternative simulation incorporates Congressional Budget Office and Centers for Medicare & Medicaid Services alternative projections for health care cost growth, which assume certain cost controls are not maintained over the long term and physician payments are not reduced as specified under current law. Also in this simulation, all tax provisions are extended to 2020 and the alternative minimum tax (AMT) exemption amount is indexed to inflation through 2020; revenues are then brought back to the 40-year historical average as a share of GDP; and discretionary spending grows with GDP during the entire period'keeping it just below the 40-year historical average as a share of GDP. (Back to Content)

14The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, National Commission on Fiscal Responsibility and Reform (Washington, D.C.: Dec. 1, 2010). (Back to Content)

15The 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. (Back to Content)

16Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). (Back to Content)

17As of the date of our report, legislation was awaiting the President's signature that would override the scheduled reductions in physician payments through December 31, 2011 and reduce non-Medicare outlays by limiting a health insurance tax credit. See H.R. 4994, 111th Cong. ยง 101 (2010). (Back to Content)

18A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. (Back to Content)

19The term financial management systems includes the financial systems and the financial portions of mixed systems necessary to support financial management, including automated and manual processes, procedures, controls, data, hardware, software, and support personnel dedicated to the operation and maintenance of system functions. (Back to Content)


Last Updated:  December 08, 2011