Clean government audit remains elusive

Financial management problems at the Pentagon continue to prevent the federal government from earning a passing audit.

The government's fiscal 2003 audit looks much like the previous year's: all but three of the 23 agencies covered under the 1990 Chief Financial Officers Act earned clean audits. But, as in fiscal 2001 and 2002, "serious financial problems" at the Defense Department held the rest of the government back, said Comptroller General David Walker in a Feb. 27 letter to President Bush and Congress.

The Pentagon received a disclaimer, or failing mark, for fiscal 2003. GAO will not be able to grant the government a passing mark until Defense cleans up its books, Walker warned.

"Overhauling Defense's financial management operations represents a challenge that goes far beyond financial accounting to the very fiber of Defense's range of business operations, management information systems and culture," Walker said in his letter. "Defense's financial management problems are pervasive, complex, long-standing and deeply rooted in virtually all business operations throughout the department."

If Defense could manage to move up one notch and earn a "qualified" opinion-the level below a clean opinion-the government would have a shot at passing its next audit, said Don Hammond, the Treasury Department's fiscal assistant secretary. Defense has made significant progress at managing the finances of its health care and retirement systems, he said.

GAO and Treasury Department officials did not expect to see much change or improvement in the government's fiscal 2003 audit, Hammond noted. Treasury is still working on a system that aims to help the government better prepare consolidated statements starting in fiscal 2004, he explained. The system will link agencies' audited financial statements to the government's consolidated statements.

A failure to prepare consolidated financial statements properly contributed to the government's failing mark. The government also failed to account for billions of dollars in transactions among agencies, according to GAO.

These problems could take several years to correct. Hammond said that he would love to see the government earn a qualified audit opinion next year, but is not getting his hopes up too much. Agencies will face a variety of challenges in fiscal 2004, including a much earlier deadline for submitting financial statements.

The Office of Management and Budget is gradually moving audit deadlines closer to Sept. 30, which marks the end of each fiscal year. OMB moved the cutoff date up about a month in fiscal 2002 and 2003, asking CFO Act agencies to submit audited financial statements by Feb. 1 rather than Feb. 27. For fiscal 2004, the deadline will take another leap back, with statements due by Nov. 15, just 45 days after the close of the fiscal year.

All 23 CFO Act agencies met the Feb. 1 deadline for handing in fiscal 2003 paperwork, Hammond said. The Environmental Protection Agency and Education Department completed their statements by Nov. 15, 2003, to test out the revised deadlines. Those agencies have benefited from the earlier submissions, he said. They were able to detect financial management problems and address the issues up front, rather than letting them linger.

The Homeland Security Department submitted financial materials this year for the first time. Notably, the department handed in statements by Feb. 13, 2004 and received a qualified opinion on one, Hammond said. The department is not covered under the CFO Act and therefore did not need to meet the Feb. 1 deadline.

In general, the government has much to gain from earlier deadlines, according to Hammond. By asking agencies to close books in November, the administration can analyze audit materials in time for the release of the president's annual budget request at the beginning of February. Financial management information is helpful in efforts to assess agency or program-level performance. These assessments are playing an increasingly significant role in the budget process.

Agencies may have to rush to meet the deadlines for fiscal 2004, and the quality of financial statements may decline as a result. But Hammond is willing to accept the trade-off: "I'd rather hit the [earlier] deadline than get a clean opinion."

The federal government has flunked audits seven straight years, but has seen major improvements over the past several years. In fiscal 2002, 21 of the 24 CFO Act agencies received clean opinions on their financial statements, and in fiscal 2001, 18 of the 24 earned clean opinions. There are now only 23 CFO Act agencies because the Federal Emergency Management Agency, one of the original 24, has joined the Homeland Security Department. Of those agencies, three -- Defense, the Small Business Administration and NASA -- received disclaimers, meaning their financial books are not reliable.

NASA's failing mark represents a step backwards from fiscal 2002, when the agency received a clean opinion. On the flip side, the Agency for International Development improved in fiscal 2003, moving from a qualified opinion to a clean mark.