Summary

The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. An issue meriting concern and close scrutiny that emerged during our fiscal year 2004 CFS audit was the growing number of Chief Financial Officers (CFO) Act agencies that restated certain of their financial statements for fiscal year 2003 to correct errors. Errors in financial statements can result from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. Frequent restatements to correct errors can undermine public trust and confidence in both the entity and all responsible parties. Further, when restatements do occur, it is important that financial statements clearly communicate, and readers of the restated financial statements understand, that the financial statements originally issued by management in the previous year and the opinion thereon should no longer be relied on and instead the restated financial statements and related auditor's opinion should be used. Because of the varying nature and circumstances surrounding the restatements, we are issuing a number of separate reports on the matter. This report communicates our observations regarding GSA's fiscal year 2003 restatement. Going forward, we hope that the lessons learned from the fiscal year 2003 restatement, together with our recommendations, will help GSA and its auditor avoid the need for restatements to GSA's future financial statements. We reviewed four key areas with respect to the restatement of GSA's fiscal year 2003 financial statements: (1) the nature and cause of the errors that necessitated the restatement, including planned corrective actions by the agency and its auditors; (2) the timing of communicating the material misstatement to users of the financial statements; (3) the extent of transparency exhibited in disclosing the nature and impact of the material misstatement in the financial statements and the reissued auditor's report; and (4) audit issues that contributed to the failure to detect the errors that necessitated the restatement during the audit of the agency's fiscal year 2003 financial statements.

Improperly transferring costs related to one major construction project out of the Construction in Process (CIP) account and into the Buildings account led to the material misstatement that necessitated the restatement of two separate and distinct line items on GSA's originally issued fiscal year 2003 Balance Sheet. Specifically, at fiscal year 2003 year end, GSA recorded an adjusting journal entry to transfer about $952 million of construction costs from the CIP account to the Buildings account. This amount was derived based on a statistical sample of construction projects included in GSA's unadjusted year-end balance for the CIP account. The largest project included in GSA's statistical sample was a multiphase project totaling about $68.6 million, which was incorrectly classified as substantially complete at that time. This incorrect classification, when projected to the population of CIP projects, was the basis for about $921 million of the $952 million, or over 96 percent, of the estimated costs transferred at year end. GSA's auditor did not detect the error because its fiscal year 2003 audit tests were not adequately designed to test the validity of GSA's transfers of construction costs between the two accounts. Although the journal entry used to record the transfer between the accounts involved a material amount and GSA's contracted independent public accountant (IPA) had reported a reportable condition relating to CIP transfers in its previous two years audit reports, in our view, the IPA did not adequately understand the significant components underlying this journal entry. As a result, the IPA randomly selected 10 projects from GSA's statistical sample of 99 projects and did not review the above noted project that GSA had incorrectly classified. Further, in our view, the title of GSA's note disclosure of the restatement could be misinterpreted.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Implemented" or "Not implemented" based on our follow up work.

Recommendations for Executive Action