What's the difference between Enron and the United States government?
Enron could be audited.
According to a Government Accountability Office report issued by U.S. Comptroller General David M. Walker, "As in the seven previous fiscal years, certain material weaknesses in internal control and in selected accounting and financial reporting practices resulted in conditions that continued to prevent us from being able to provide the Congress and American citizens an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated in conformity with U.S. generally accepted accounting principles."
Congress and American citizens may be comforted to know that the federal government has never had its consolidated financial statements audited, yet it has been chugging along for 228 years without a financial disaster.
But could that go on forever?
Walker is not confident that federal fiscal health will continue in the absence of an unqualified audit. In a Dec. 14, 2004, GAO report, he warned that, "Until the problems discussed in our audit are adequately addressed, they will continue to present a number of adverse implications for the federal government and taxpayers."
Walker's report described a "large and growing long-term fiscal imbalance" driven by demographic trends, rising health care costs, new defense commitments, and a downward trend in revenue as a share of gross domestic product.
He calculated the federal government's gross debt as of September 2004 at about $7.4 trillion, or about $25,000 for every man, woman and child in the country. If the gap between promised and funded Social Security and Medicare benefits and other unfunded commitments is included, the per capita gross debt rises to $145,000, or about $350,000 per full-time worker.
The unified budget deficit for 2004 was $412.3 billion. The on-budget deficit was $568 billion, about 3.6 and 4.9 percent of gross domestic product, respectively. The report noted that a significant portion of these deficits was unrelated to ongoing military conflicts and homeland security costs.
The Government Management Reform Act of 1994 required that the Office of Management and Budget submit annual financial statements to the president and the Congress. The first was to appear in 1997. But as of Nov. 15, 2004, the accelerated reporting date for federal agencies, the OMB had not produced a set of statements that would allow an unqualified opinion on a consolidated statement.
The GAO report said that material weaknesses, fundamental record-keeping and financial reporting, and incomplete documentation had hampered the government's ability to report on assets, liabilities and costs, to measure the cost of financial and non-financial performance, to safeguard assets and record transactions, and to operate in an economical, efficient and effective manner.
The report also warned that the federal government has not maintained effective internal controls over financial reporting (including safeguarding assets).
"If a corporation had such a long record of material weakness in its reporting, its stock price would tank," Walker told Accounting Today. "We don't have stock ... but we do have plenty of debt ... . Our financial condition is worse than advertised. We face large, growing structural deficits that we're not going to grow our way out of, and we need to start making some tough decisions soon in order to get back on the right path."
Walker also issued a warning: "We need to resolve these problems before something bad happens."
One step forward ...
The situation has improved over the last few years, though it's still several years from allowing an unqualified audit of a consolidated statement.
"We have made progress in financial management, and it is important to note that the current administration's man agement agenda has financial management as one of the top priorities," Walker said. "Progress has been made in many areas of financial management, but with regard to these material weaknesses, in many cases they are long-standing problems that will end up taking the concerted action of a variety of people over a sustained period of time to be able to effectively address them."
Walker noted that the high rate of personnel turnover in government aggravates the difficulty of sustaining long-term progress.
Twenty-two of 23 agencies that had to meet the reporting requirements of the Chief Financial Officer Act of 1990 were able to file financial statements by the accelerated due date last year. Eighteen of them attained unqualified audit opinions. However, in fiscal year 2004, 10 of the 23 had to restate their 2003 statements, up from only four in fiscal year 2003. Two had restatements in both years.
The Government Management Reform Act of 1994 expanded the requirements of the CFO Act, by making the inspectors general of 24 major federal agencies responsible for annual audits of agency-wide financial statements. The GAO's work was performed in coordination with the inspectors general and independent public accountants.
Walker pointed out that the biggest challenge the country has with regard to financial management in the federal government continues to be the Department of Defense.
"The DoD gets an A-plus on fighting and winning armed conflicts; we're No. 1 in the world - nobody's even close," Walker said. "But the DoD gets a D on economy, efficiency, transparency and accountability ... and that's graded on a curve. While they've made some progress on financial management, they have a long way to go. And until they get their act together, we're not only going to continue wasting a lot of money, but we're also not going to be able to express an opinion on the consolidated financial statement of the U.S. government."
Walker said that the problem at the DoD is more than the reporting process. "They don't have the controls," he said. "They have thousands of legacy systems that are not integrated. Their problems are much more fundamental than the reporting systems, though reporting systems are a problem, too."
Former undersecretary of defense Dov Zakheim, now a vice president with consultancy Booz, Allen & Hamilton, explained some of the problems at the DoD: "You basically have a situation where the culture has been, for many decades, 'Hey, look, our job is to fight wars. We do it well. Getting financial statements right is a secondary matter.' Therefore, until the beginning of the first Bush administration, there was a de-emphasis on the importance of this. The notion of back-office operations generally assumes less importance in the culture. There's also never been a resolution of the question of whether the individual services are truly independent subsidiaries, or whether the office of secretary is truly in control and not merely a holding company. To the extent that the services see themselves as essentially separate entities, they're not going to assign priority to getting their numbers in order to satisfy the center, the office of the secretary."
Zakheim said that the solution would be more personnel and more money, "both of which right now are at a premium."
He did agree, however, that the problem needs to be solved. "I think that when you're talking about $500 billion budgets, the ordinary person in the streets wants to understand not just that the budget has been approved, but how the money has been spent. Also, because of the disproportionate amount of money in the DoD budget, the government can't get a clean audit until the DoD does."
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