Government fails second annual financial audit

The federal government failed the second annual audit of its financial statements, the General Accounting Office reported Wednesday.

The government's poor financial statements show that federal agencies cannot accurately measure the full cost and financial performance of their programs, nor do federal managers have financial data to support day-to-day operations, Comptroller General David Walker said.

"Significant financial systems weaknesses, problems with fundamental record-keeping and financial reporting, incomplete documentation and weak internal controls, including computer controls, continue to prevent the government from accurately reporting a significant portion of its assets, liabilities and costs," Walker testified before the House Government Reform Subcommittee on Government Management, Information and Technology.

Subcommittee Chairman Stephen Horn, R-Calif., issued grades to each of the government's 24 largest agencies. Only NASA and the National Science Foundation received A's, because they received completely clean opinions on their statements. Horn slapped six agencies with D's because of various weaknesses in their financial statements and gave five agencies F's because their statements were unauditable. Seven additional agencies also received F's because they were unable to submit financial statements by the March 1 deadline, even though fiscal year 1998 ended last September. (See chart below.)

G. Edward DeSeve, deputy director of management at the Office of Management and Budget, said changes to federal accounting standards this year slowed some agencies down, but predicted that five of the seven missing financial statements would result in clean opinions.

DeSeve said 13 of the 24 agencies will have clean opinions this year, up from 11 last year. The Clinton administration has set a goal of having 20 agencies get clean opinions next year and 23 the year after that. The Defense Department, which has the most work to do to meet the requirements of a financial audit, does not expect to get a clean opinion until 2003.

Governmentwide, a major challenge is accounting for transactions between agencies. For example, the IRS pays the Government Printing Office for printing, the Department of Veterans Affairs may purchase furniture from the Justice Department's Federal Prison Industries, Inc., and the Health Care Financing Administration pays the Social Security Administration to collect registration information for Medicare recipients.

Most of those payments go through the Treasury, which is not adequately accounting for such transactions, this year's audit revealed. Assistant Treasury Secretary Donald Hammond said the department is working on improving its accounting for intra-governmental transactions.

Rep. Tom Davis, R-Va., said one of the reasons the government may be having difficulty is because Uncle Sam does not pay its professionals, including financial managers, enough money. Davis suggested that better federal compensation could help address some of the longstanding management problems the government faces.

GAO's Walker concurred. "Only when the right employees are on board and provided the training, tools, structure, incentives and accountability to work effectively is organizational success possible," he said.

Rep. Horn's Financial Management Status Report