Government flunks sixth straight financial audit

The federal government failed its sixth consecutive financial audit, even though 21 of the 24 major agencies received clean opinions on their fiscal 2002 financial statements.

As in fiscal 2001, financial management problems at the Defense Department kept the government from passing its annual audit. Defense made significant progress on consolidating more than 600 financial systems into a single system, but its weaknesses remain "pervasive, complex, long-standing and deeply rooted in virtually all business operations throughout the department," Comptroller General David Walker wrote in a March 31 letter to President Bush and Congress.

In addition, "security weaknesses are placing enormous amounts of federal government assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure and critical operations at risk of disruption," GAO reported. The watchdog office said agencies have made some progress on security, but have not yet institutionalized the comprehensive security management programs critical to protecting financial information.

The government also failed to account for billions of dollars in transactions among agencies and did not prepare consolidated financial statements properly, according to GAO. A new Treasury Department system aims to help agencies better prepare such statements starting in fiscal 2004. The system will link agencies' audited financial statements to the government's consolidated statements.

Despite the government's overall failure to achieve a clean opinion, many federal agencies made progress by modernizing and streamlining financial management systems as called for in the president's management agenda, according to GAO. For instance, GAO praised the Internal Revenue Service for moving out of the "high-risk" category by keeping tighter control of its budget and doing a better job accounting for its property and equipment.

In a record performance, all but three of the 24 agencies covered by the 1990 Chief Financial Officers Act received clean audits, up from 18 agencies in fiscal 2001 and fiscal 2000. The Agriculture Department earned a passing mark for the first time ever, thanks to improved financial management at the Forest Service and better accounting of property departmentwide.

Agencies also met an earlier deadline this year for submitting audits. They were required to submit their audited financial statements to the Office of Management and Budget by Feb. 1, to move the audit closer to the end of the fiscal year, instead of Feb. 27. In 2004, the deadline will move to mid-November, just 45 days after the fiscal year ends.

Only the Defense Department, Agency for International Development and Small Business Administration failed their audits in 2002. The Office of Management and Budget gave the Defense Department a disclaimer, or failing mark, while AID earned a qualified opinion, meaning portions of its financial statements were unreliable. SBA received a disclaimer because of weaknesses in its loan asset sales.