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entitled 'Financial Audit: Process for Preparing the Consolidated 
Financial Statements of the U.S. Government Needs Further Improvement' 
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Report to the Secretary of the Treasury and the Director of the Office 
of Management and Budget: 

September 2004: 

Financial Audit: 

Process for Preparing the Consolidated Financial Statements of the U.S. 
Government Needs Further Improvement: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-866]: 

GAO Highlights: 

Highlights of GAO-04-866, a report to the Secretary of the Treasury and 
the Director of the Office of Management and Budget

Why GAO Did This Study: 

For the past 7 years, since the first audit of the consolidated 
financial statements of the U.S. government (CFS), certain material 
weaknesses in internal control and financial reporting have resulted 
in conditions that have prevented GAO from expressing an opinion on 
the CFS. Specifically, GAO has reported that the federal government did 
not have adequate systems, controls, and procedures to properly prepare 
the CFS. In October 2003, GAO reported on weaknesses identified during 
the fiscal year 2002 audit regarding financial reporting procedures and 
internal control over the process for preparing the CFS. The purpose of 
this report is to (1) discuss additional weaknesses identified during 
the fiscal year 2003 audit, (2) recommend improvements to address those 
weaknesses, and (3) provide the status of corrective actions to address 
the 129 recommendations contained in the October 2003 report.

What GAO Found: 

Many of the weaknesses in internal control that have contributed to 
GAO’s continuing disclaimers of opinion on the CFS were identified by 
agency financial statement auditors during their audits of federal 
agencies’ financial statements and have been reported in detail with 
recommendations to agencies in separate reports. However, some of the 
weaknesses we reported were identified during GAO’s tests of the 
Department of the Treasury’s process for preparing the CFS. Such 
weaknesses impair the federal government’s ability to ensure that the 
CFS is consistent with the underlying audited agency financial 
statements, properly balanced, and in conformity with U.S. generally 
accepted accounting principles. 

In addition to the compilation and reporting weaknesses that GAO 
reported in October 2003, GAO found additional weaknesses in the 
compilation and reporting process in the following seven areas during 
the fiscal year 2003 CFS audit: 

* allocation methodology for certain costs in the statement of net 
cost,
* statement of changes in cash balance from unified budget and other 
activities,
* reporting of criminal debt,
* recording and disclosing contingencies,
* directly linking audited federal agency financial statements to the 
CFS, 
* prior period adjustments, and
* conformity with U.S. generally accepted accounting principles.

GAO found that with respect to four required disclosure areas, 
information was either not included in the CFS or was not presented in 
conformity with U.S. generally accepted accounting principles. As a 
result of this and certain other weaknesses we identified, we were 
unable to determine if the missing information was material to the CFS. 
The four disclosure areas were (1) federal employee and veteran 
benefits payable, (2) environmental and disposal liabilities, (3) 
research and development, and (4) deferred maintenance.

GAO’s October 2003 report contained 129 recommendations. Of those 
recommendations, 118 remained open as of February 20, 2004, the end of 
GAO’s fieldwork for the fiscal year 2003 CFS audit.

What GAO Recommends: 

GAO is making 25 new recommendations to address weaknesses identified 
during the fiscal year 2003 CFS audit, including 11 recommendations 
related to four disclosure areas required under U.S. generally accepted 
accounting principles. Treasury and the Office of Management and Budget 
stated that they generally concur with the findings in the report, 
however Treasury disagrees with some recommendations in two areas.

www.gao.gov/cgi-bin/getrpt?GAO-04-866.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Gary T. Engel at (202) 
512-3406 or engelg@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Scope and Methodology: 

Allocation Methodology for Certain Costs in the Statement of Net Cost: 

Statement of Changes in Cash Balance from Unified Budget and Other 
Activities: 

Reporting of Criminal Debt: 

Recording and Disclosing Contingencies: 

Directly Linking Audited Federal Agency Financial Statements to the 
CFS: 

Prior Period Adjustments: 

Conformity with U.S. Generally Accepted Accounting Principles: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Disclosure Issues: 

Federal Employee and Veteran Benefits Payable: 

Environmental and Disposal Liabilities: 

Research and Development: 

Deferred Maintenance: 

Appendix II: Status of Treasury's and OMB's Progress in Addressing GAO 
Recommendations for Preparing the CFS: 

Appendix III: Comments from the Office of Management and Budget: 

Appendix IV: Comments from the Department of the Treasury: 

GAO Comments: 

Letter September 10, 2004: 

The Honorable John W. Snow: 
The Secretary of the Treasury: 

The Honorable Joshua B. Bolten:
Director, Office of Management and Budget: 

In February 2004, we issued our disclaimer of opinion on the 
consolidated financial statements of the U.S. government (CFS) for the 
fiscal years ended September 30, 2003 and 2002. For the past 7 years, 
certain material weaknesses in internal control and financial reporting 
resulted in conditions that prevented us from expressing an opinion on 
the CFS. Specifically, we have reported that the federal government did 
not have adequate systems, controls, and procedures to properly prepare 
its consolidated financial statements. Many of these weaknesses in 
internal control that contributed to our continuing disclaimers of 
opinion were identified by agency financial statement auditors during 
their audits of federal agencies' financial statements and were 
reported in detail with recommendations to the agencies in separate 
reports. However, some of the internal control weaknesses were 
identified during our tests of the Department of the Treasury's 
(Treasury) process for preparing the CFS. Such weaknesses impair the 
federal government's ability to ensure that the CFS is consistent with 
the underlying audited agency financial statements, properly balanced, 
and in conformity with U.S. generally accepted accounting principles 
(GAAP). Consequently, these weaknesses also contributed to our 
inability to render an opinion on the CFS.

In October 2003, we reported to you detailed weaknesses we identified 
during our fiscal year 2002 audit regarding financial reporting 
procedures and internal control over the process for preparing the 
CFS.[Footnote 1] The purpose of this report is to (1) discuss in 
greater detail additional weaknesses we identified during our fiscal 
year 2003 audit regarding financial reporting procedures and internal 
control over the process for preparing the CFS, (2) recommend 
improvements to address those weaknesses, and (3) provide the status of 
corrective actions to address the 129 recommendations contained in our 
October 2003 report and that are listed in appendix II. We have 
discussed each of the new weaknesses we identified during our fiscal 
year 2003 audit with your staff.

Results in Brief: 

In addition to the compilation and reporting processes weaknesses we 
reported in October 2003, we found more weaknesses in the compilation 
and reporting processes during our fiscal year 2003 audit, involving 
the following seven areas: (1) allocation methodology for certain costs 
in the statement of net cost, (2) statements of changes in cash balance 
from unified budget and other activities, (3) reporting of criminal 
debt, (4) recording and disclosing contingencies, (5) directly linking 
audited federal agency financial statements to the CFS, (6) prior 
period adjustments, and (7) conformity with GAAP.

This report includes 25 new recommendations to address weaknesses we 
identified, including 11 recommendations related to four required GAAP 
disclosure areas identified in appendix I. We are recommending that the 
required disclosures that are not included in the fiscal year 2003 CFS 
either be included in future years' CFS or that the specific rationale 
for their exclusion be documented. Appendix II of this report reflects 
the status of actions taken as of February 20, 2004, the end of our 
fieldwork, on our fiscal year 2003 CFS audit, to address the 
recommendations from our October 2003 report. Of the 129 
recommendations contained in our October 2003 report, 118 are still 
open.

The Office of Management and Budget (OMB) stated that it generally 
concurred with the findings in the report and would work with Treasury 
and other executive departments and agencies to address these findings. 
Treasury stated that our report identified issues regarding certain 
federal financial reporting procedures and internal controls and 
provided valuable advice and recommendations for improvements. It also 
stated that many of the concerns we raised are in critical areas where 
federal financial reporting can be improved. While Treasury stated that 
it generally agreed with our concerns on most of the major issues, in 
some cases it disagreed with either our finding or our recommended 
approach to addressing the problem. We continue to believe that our 
findings and recommendations are sound. Treasury's disagreements 
involve two areas of weaknesses we identified and reported on as part 
of our fiscal year 2003 audit and are discussed in this report (1) 
Statements of Changes in Cash Balance from Unified Budget and Other 
Activities, and (2) Treasury's allocation methodology for certain costs 
in the Statement of Net Cost. In addition, Treasury disagreed with 
certain matters involving three areas we identified and reported on as 
part of our fiscal year 2002[Footnote 2] audit (1) unreconciled 
transactions affecting the change in net position, (2) Reconciliation 
of Net Operating Cost and Unified Budget Surplus/Deficit, and (3) 
management representation letters.

Scope and Methodology: 

As part of our audit of the fiscal years 2003 and 2002 CFS, we 
evaluated Treasury's financial reporting procedures and related 
internal control. In our report, which is included in the fiscal year 
2003 Financial Report of the United States Government,[Footnote 3] we 
reported material deficiencies relating to Treasury's financial 
reporting procedures and internal control. These material deficiencies 
contributed to our disclaimer of opinion on the CFS and also constitute 
material weaknesses in internal control, which contributed to our 
adverse opinion on internal control. We performed our work in 
accordance with U.S. generally accepted government auditing standards. 
This report provides the details of the additional weaknesses we 
identified in our audit of the fiscal year 2003 and 2002 CFS and 
recommendations to correct those weaknesses.

We requested comments on a draft of this report from the Director of 
OMB and the Secretary of the Treasury or their designees. OMB's and 
Treasury's comments are reprinted in appendix III and IV, respectively, 
and discussed in the Agency Comments and Our Evaluation section of this 
report. Treasury also provided an attachment to its written comments 
that we did not reprint in appendix IV. This attachment was a detailed 
reconciliation spreadsheet that was an expanded version of the 
information we had already taken into account in our review of the 
fiscal year 2003 reconciliation statement.

Allocation Methodology for Certain Costs in the Statement of Net Cost: 

Statement of Federal Financial Accounting Standard (SFFAS) No. 4, 
Managerial Cost Accounting Standards and Concepts, states that a 
fundamental element of managerial cost accounting for the federal 
government is the use of appropriate costing methodologies to 
accumulate and assign costs to outputs. The standard further states 
that costs should be allocated on a reasonable and consistent basis. 
Without consistently applying an allocation methodology, the net cost 
amounts by federal agency, as shown on the Statement of Net Cost, may 
be misstated.

The Statement of Net Cost is intended to present the net cost of the 
U.S. government's operations. These costs are presented in the 
statement by individual federal agencies rather than by significant 
federal government program. The reported net cost amounts by federal 
agency include an allocated portion of the Office of Personnel 
Management (OPM) costs. This allocation is made to reflect the fair 
share of the cost of the functions performed by OPM that benefit other 
federal agencies, most notably, pension payments to federal retirees. 
As the basis for allocating OPM costs to each federal agency, 
Treasury's written procedures call for the use of full-time equivalents 
(FTE). Those FTEs are published in the Analytical Perspectives, Budget 
of the United States Government, fiscal year 2005.

During our fiscal year 2003 audit, we found that the FTEs used for 
allocating OPM costs to some of the federal agencies listed in the 
Statement of Net Cost did not always agree with the respective 
agencies' FTEs in the Analytical Perspectives, Budget of the United 
States Government, fiscal year 2005. In addition, we found that there 
was no review of the underlying support used to compile the Statement 
of Net Cost by Treasury management to ensure that OPM costs were 
allocated accurately. Treasury was not able to explain the differences 
we identified. We also found that Treasury's written procedures for 
allocating OPM costs on the Statement of Net Cost were not updated to 
reflect the changes Treasury made to its allocation methodology during 
fiscal year 2003.

We also found that Treasury made errors in allocating OPM costs to the 
Department of Homeland Security (DHS). Most of the errors occurred 
because Treasury allocated a full year of OPM costs to DHS, even though 
DHS did not begin operations until March 2003. DHS was originally 
allocated 5.3 percent of OPM costs and after we notified Treasury of 
the errors we identified, DHS was correctly allocated 2.6 percent.

Recommendations for Executive Action. We recommend that the Secretary 
of the Treasury direct the Fiscal Assistant Secretary to: 

* ensure that, if FTEs are used as part of Treasury's methodology for 
allocating OPM costs, the FTEs used for the agencies listed on the 
Statement of Net Cost agree with the FTEs listed in the Analytical 
Perspectives, Budget of the United States Government as currently 
stated in Treasury's methodology;

* document any changes to the stated methodology for allocating OPM 
costs and the rationale for these changes; and: 

* require reviews by Treasury management of the accuracy of the 
allocated OPM costs.

Statement of Changes in Cash Balance from Unified Budget and Other 
Activities: 

As part of our fiscal year 2003 audit of the Statement of Changes in 
Cash Balance from Unified Budget and Other Activities (Statement of 
Changes in Cash Balance), we found (1) material differences between the 
net outlay records used by Treasury to prepare the Statement of Changes 
in Cash Balance and the total net outlays reported in selected federal 
agencies' audited Statements of Budgetary Resources (SBR);[Footnote 4] 
(2) that the Statement of Changes in Cash Balance reported only the 
changes in the "operating" cash of the U.S. government rather than all 
cash, as it is reported on the U.S. government's Balance Sheet; and (3) 
that the major program activities of the U.S. government relating to 
direct and guaranteed loans extended to the public were reported as a 
net amount on the Statement of Changes in Cash Balance rather than 
disclosed as gross amounts for receipts and disbursements of cash 
related to direct loans and loan guarantees.

Net Outlays: 

OMB Bulletin 01-09, Form and Content of Agency Financial 
Statements,[Footnote 5] states that outlays in federal agencies' SBRs 
should agree with each agency's net outlays reported in the budget of 
the U.S. government. In addition, SFFAS No. 7, Accounting for Revenue 
and Other Financing Sources and Concepts for Reconciling Budgetary and 
Financial Accounting, requires explanation of any material differences 
between the information required to be disclosed (including net 
outlays) and the amounts described as "actual" in the budget of the 
U.S. government.

As part of our fiscal year 2003 audit of the Statement of Changes in 
Cash Balance, we found material differences between the net outlay 
records used by Treasury to prepare the Statement of Changes in Cash 
Balance and the total net outlays reported in selected federal 
agencies' audited SBRs. These differences totaled about $140 billion 
and $186 billion for fiscal years 2003 and 2002, respectively.[Footnote 
6]

Two agencies--Treasury and the Department of Health and Human Services 
(HHS)--accounted for about 83 percent and 75 percent of the differences 
identified in fiscal years 2003 and 2002, respectively. We found that 
the major cause of the differences for the two agencies was the 
treatment of offsetting receipts.[Footnote 7] Some offsetting receipts 
for these two agencies had not been included in the agencies' SBRs, 
which would have reduced the agencies' net outlays and made the amounts 
more consistent with Treasury records used to prepare the Statement of 
Changes in Cash Balance.[Footnote 8] We found that Treasury publishes 
offsetting receipts by agency or department monthly, including fiscal 
year-to-date information in the Monthly Treasury Statement. 
Nevertheless, material differences between the two agencies' and 
Treasury's records remained at the end of the fiscal year.[Footnote 9] 
For example, we found that HHS reported net outlays for fiscal year 
2003 as $596 billion on its audited SBR, while the records that 
Treasury used to prepare the fiscal year 2003 Statement of Changes in 
Cash Balance showed net outlays of $505 billion for HHS.

Until the differences between the total net outlays reported in the 
federal agencies' SBRs and the records used to prepare the Statement of 
Changes in Cash Balance are reconciled, the effect of these differences 
on the CFS will be unknown. OMB has stated that it plans to work with 
the agencies to address this issue.

Recommendations for Executive Action. We recommend that the Director of 
OMB direct the Controller of OMB, in coordination with Treasury's 
Fiscal Assistant Secretary, to work with the federal agencies so that 
the differences between net outlays the agencies report in their SBRs 
and the net outlay records Treasury uses to prepare the Statement of 
Changes in Cash Balance are reconciled.

In addition, we recommend that the Secretary of the Treasury direct the 
Fiscal Assistant Secretary to determine and address the effects that 
any of the differences between net outlays the agencies report in their 
SBRs and Treasury's net outlay records may have on the CFS.

Reporting the Change in Cash: 

The Statement of Changes in Cash Balance reported only the changes in 
the "operating" cash of the U.S. government of $35 billion rather than 
the changes in all cash reported on the U.S. government's Balance Sheet 
of $62.2 billion, as of September 30, 2003. We also found that the 
total operating cash amount reported in the Statement of Changes in 
Cash Balance did not link to the underlying agencies' operating cash 
reported in their financial statements. For example, Treasury reported 
$51 billion of operating cash in Treasury's own fiscal year 2003 
audited financial statements. This amount, by itself, exceeded the $35 
billion operating cash balance reported in the Statement of Changes in 
Cash Balance.

SFFAS No. 1, Accounting for Selected Assets and Liabilities, defines 
nonentity cash as cash that a federal entity collects and holds on 
behalf of the U.S. government or other entities. In some circumstances, 
the entity deposits the cash in its accounts in a fiduciary capacity 
for Treasury or other entities. Several provisions of SFFAS No. 24, 
Selected Standards for the Consolidated Financial Report of the United 
States Government, require the Statement of Changes in Cash Balance to 
explain changes in the U.S. government's cash balance.

Recommendation for Executive Action. We recommend that the Secretary of 
the Treasury direct the Fiscal Assistant Secretary to develop a process 
that will allow full reporting of the changes in cash balance of the 
U.S. government. Specifically, the process should provide for reporting 
on the change in cash reported on the consolidated Balance Sheet, which 
should be linked to cash balances reported in federal agencies' audited 
financial statements.

Net Direct and Guaranteed Loans: 

We found that the major program activities of the U.S. government 
relating to direct and guaranteed loans extended to the public were 
reported as a net amount on the Statement of Changes in Cash Balance 
rather than disclosed as gross amounts for receipts and disbursements 
of cash related to direct loans and loan guarantees.

In this regard, the illustrative financial statement for the Statement 
of Changes in Cash Balance provided in SFFAS No. 24, while not 
prescriptive, shows gross reporting of direct loans and guarantees 
activities. In addition, gross reporting is consistent with the 
reporting advocated in Financial Accounting Standards Board[Footnote 
10] Statement No. 95, Statement of Cash Flows.

Treasury does not have a process for obtaining receipt and disbursement 
amounts for direct and guaranteed loans. As a result, the Statement of 
Changes in Cash Balance does not show the magnitude of these major 
government loan programs. Net reporting of direct and guaranteed loan 
program activity does not disclose how much cash the government 
disbursed to promote the nation's welfare by making these loans 
available to the general population or how much in related repayments 
the government received. For example, in fiscal year 2003, the 
Statement of Changes in Cash Balance reported a net $1.2 billion of 
direct loan activity, while the Department of Education alone disbursed 
approximately $18 billion in direct loans to eligible borrowers and 
received approximately $15 billion in loan repayments.

Recommendation for Executive Action. We recommend that the Secretary of 
the Treasury direct the Fiscal Assistant Secretary to report gross 
amounts for receipts and disbursements of cash related to direct loans 
and loan guarantees.

Reporting of Criminal Debt: 

We found that the CFS did not report criminal debt, as determined 
through the U.S. Courts, in accordance with GAAP. SFFAS No. 1, 
Accounting for Selected Assets and Liabilities, and SFFAS No. 7, 
Accounting for Revenue and Other Financing Sources and Concepts for 
Reconciling Budgetary and Financial Accounting, require that a 
receivable and related revenue be recognized once amounts due to the 
U.S. government are assessed. Further, these standards require that an 
allowance for uncollectible accounts be used to reduce the gross amount 
of the receivable and revenue to its net realizable value. Also, in 
accordance with OMB Circular No. A-129, Policies for Federal Credit 
Programs and Non-Tax Receivables, agencies are to (1) service and 
collect debts in a manner that best protects the value of the U.S. 
government's assets and (2) provide accounting and management 
information for effective stewardship, including resources entrusted to 
the U.S. government (e.g., for nonfederal and federal restitution).

Criminal debt consists primarily of fines and restitution[Footnote 11] 
related to a wide range of criminal activities, including domestic and 
international terrorism, drug trafficking, firearms activities, and 
white-collar fraud. The U.S. Courts assess these debts, and the 
Department of Justice's (Justice) U.S. Attorneys' Offices throughout 
the country are charged with enforcing collection. Although Justice and 
the U.S. Courts develop unaudited annual statistical data for 
informational purposes,[Footnote 12] neither entity is accounting for 
any of these criminal debts as receivables, disclosing the debts in 
financial statements, or having the information subject to audit. The 
U.S. Courts, which serve as the assessor, depositor, and disburser of 
most of the funds collected, are not required to prepare financial 
statements or disclose criminal debt information. In addition, Justice, 
which enforces criminal debt collection, prepares audited financial 
statements but does not record or disclose receivables for criminal 
debt. Therefore, criminal debt outstanding is not being reported to 
Treasury for inclusion in the CFS. Financial statement reporting of 
criminal debt would increase oversight of the debt collection process 
because amounts would be subject to audit. Such audits would include 
assessments of internal control and compliance with applicable laws and 
regulations related to the criminal debt collection process.

In our recently issued report on criminal debt,[Footnote 13] we 
reemphasized the need for Justice, the Administrative Office of the 
U.S. Courts, OMB, and Treasury to form a joint task force to develop a 
strategic plan that addresses managing, accounting for, and reporting 
criminal debt.[Footnote 14] We stated that the strategy should include 
(1) determining an approach for assessing the collectibility of 
outstanding criminal debt amounts so that a meaningful allowance for 
uncollectible criminal debts can be reported and used for measuring 
debt collection performance and (2) having OMB work with Justice and 
certain other executive branch agencies to ensure that these entities 
report and/or disclose relevant criminal debt information in their 
financial statements and subject such information to audit. As of the 
completion of our fieldwork, the task force had not yet been 
established and, therefore, a strategic plan had not been developed.

Recommendations for Executive Action. In the interim, until the joint 
task force is established and a strategic plan is developed, we 
recommend that the Director of OMB direct the Controller of OMB, in 
coordination with the Fiscal Assistant Secretary of the Treasury, to 
work with Justice and certain other executive branch agencies to ensure 
that these agencies report or disclose relevant criminal debt 
information in conformity with GAAP in their financial statements and 
have such information subjected to audit.

In addition, we recommend that the Secretary of the Treasury direct the 
Fiscal Assistant Secretary to include relevant criminal debt 
information in the CFS or document the specific rationale for excluding 
such information.

Recording and Disclosing Contingencies: 

As we have reported in previous years' audits, the U.S. government has 
not been able to determine whether loss contingencies were complete and 
properly reported in the CFS. Part of the problem is that Treasury has 
not requested all relevant information for loss contingencies required 
under the accounting standards from all applicable federal agencies. 
For fiscal year 2003, Treasury's primary means of compiling information 
for the CFS was through its system called Federal Agencies' Centralized 
Trial Balance System (FACTS). Under FACTS, federal agencies were 
instructed to enter information for legal contingencies that are 
assessed as both "reasonably possible" and "estimable." Treasury does 
not specifically request other information for loss contingencies that 
is required by accounting standards, such as loss contingencies 
assessed (1) to be probable, (2) as reasonably possible with estimated 
loss ranges, or (3) as uncertain.

For example, one federal agency provided Treasury with information 
regarding a legal claim amount of $1.7 billion for which the agency's 
lawyers were unable to provide an assessment of the likelihood of an 
unfavorable outcome. Because FACTS does not allow for narrative 
descriptions of amounts provided to Treasury and only classifies loss 
contingencies as reasonably possible and estimable, the agency was 
unable to properly report to Treasury that the assessment of the 
likelihood of an unfavorable outcome was uncertain. Consequently, 
Treasury incorrectly considered this amount as reasonably possible and 
estimable and therefore overstated its estimated possible losses for 
legal contingencies in the CFS by this federal agency's claimant amount 
of $1.7 billion. We notified Treasury of this error and a correction 
was made in the final version of the CFS.

SFFAS No. 5, Accounting for Liabilities of the Federal Government, as 
amended by SFFAS No. 12, Recognition of Contingent Liabilities Arising 
from Litigation: An Amendment of SFFAS No. 5, contains accounting and 
reporting standards for loss contingencies, including those arising 
from litigation, claims, and assessments. A contingency is defined as 
an existing condition, situation, or set of circumstances involving 
uncertainty as to possible gain or loss to an entity. The uncertainty 
will ultimately be resolved when one or more future events occur or 
fail to occur. When a loss contingency exists, the likelihood that the 
future event or events will confirm the loss or impairment of an asset 
or the incurrence of a liability can range from probable to remote.

SFFAS Nos. 5 and 12 use the terms probable, reasonably possible, and 
remote to identify three areas within the range of potential loss, as 
follows: 

* Probable. For contingencies, the future event or events are more 
likely than not to occur. In addition, for contingencies related to 
pending or threatened litigation and unasserted claims, the future 
confirming event or events are those likely to occur.

* Reasonably possible. The chance of the future confirming event or 
events occurring is more than remote but less than probable.

* Remote. The chance of the future event or events occurring is slight.

Under SFFAS Nos. 5 and 12, a liability and the related cost for an 
estimated loss from a loss contingency should be recognized (accrued by 
a charge to income) when (1) a past event or exchange transaction has 
occurred, (2) a future outflow or other sacrifice of resources is 
probable, and (3) the future outflow or sacrifice of resources is 
measurable.

Disclosure of the nature of an accrued liability for loss 
contingencies, including the amount accrued, may be necessary for the 
financial statements not to be misleading. For example, if the amount 
recognized is large or unusual, disclosure should be considered. 
However, if no accrual is made for a loss because one or more of the 
conditions in SFFAS No. 12 are not met, disclosure of the contingency 
should be made when there is at least a reasonable possibility that a 
loss has been incurred. The disclosure should include the nature of the 
contingency and an estimate of the possible liability or range of 
possible liability, if estimable, or a statement that such an estimate 
cannot be made.

Recommendation for Executive Action. Because the limited information 
requested through Treasury's FACTS does not capture all the disclosure 
requirements under the accounting standards, the contingency note 
disclosure for the CFS may have been inaccurate and unreliable. For 
fiscal year 2004, Treasury is completing the design of and will be 
implementing a new system for compiling the CFS. We recommend that the 
Secretary of the Treasury direct the Fiscal Assistant Secretary to 
include in the new system a request for federal agencies to provide the 
following contingency loss information to assist Treasury in disclosing 
contingencies in the CFS in accordance with GAAP: 

* contingency losses assessed as probable and for which possible losses 
and estimated loss ranges are measurable,

* contingency losses assessed as probable and for which possible losses 
cannot be estimated,

* contingency losses assessed as reasonably possible and for which 
losses and estimated loss ranges are measurable,

* contingency losses assessed as reasonably possible and for which 
possible losses are not measurable, and: 

* the nature and extent of significant contingency losses for which the 
agency is unable to provide an assessment on the likelihood of an 
unfavorable outcome.

Directly Linking Audited Federal Agency Financial Statements to the 
CFS: 

As we have reported in the past, Treasury's current process for 
compiling the CFS did not directly link information from federal 
agencies' audited financial statements to amounts reported in the CFS, 
and therefore Treasury could not fully ensure that the information in 
the CFS was consistent with the underlying information in federal 
agencies' audited financial statements and other financial data. For 
fiscal year 2004 reporting, Treasury is planning a new process to 
compile the CFS. We reviewed Treasury's plans for the new process and 
found that there is a plan to link most of the agencies' audited 
financial statements to the consolidated financial statements through 
the use of a new closing package. Treasury will require each 
significant agency[Footnote 15] to prepare the closing package and to 
certify its accuracy.

However, we found that the planned closing package does not require 
federal agencies to directly link their audited financial statement 
notes to the closing package notes. Treasury plans to rely on note 
templates it designed that call for predefined information from the 
federal agencies. We found that these templates are too restrictive and 
that important information reported at the agency level may not be 
included in the CFS because it is not specifically called for in the 
closing package. The use of such predefined templates increases the 
risk that Treasury will continue to produce consolidated financial 
statements that are not in conformity with GAAP.

We also found that the planned closing package does not require the 
necessary information to compile all five of the required consolidated 
financial statements. For example, as noted earlier, we found that 
there were significant differences between the total net outlays 
reported in selected agencies' audited financial statements and the 
records Treasury uses to prepare its Statement of Changes in Cash 
Balance from Unified Budget and Other Activities. Because the planned 
closing package does not call for agencies to provide information to 
compile this statement that is consistent with underlying information 
in the agencies' audited financial statements, the risk of differences 
between the CFS and the underlying agency financial statements is 
increased. The lack of direct linkage also affects the efficiency and 
effectiveness of the audit of the CFS.

Statement of Federal Financial Accounting Concepts No. 4, Intended 
Audience and Qualitative Characteristics for the Consolidated Financial 
Report of the United States Government, states that the consolidated 
financial report should be a general purpose report that is aggregated 
from agency reports and that it should tell users where to find 
information in other formats, both aggregated and disaggregated, such 
as in individual agency reports, on agency Web sites, and in the 
President's Budget.

Recommendations for Executive Action. As Treasury is still designing 
its new compilation process, which it expects to implement beginning 
with the fiscal year 2004 CFS, we recommend that the Secretary of the 
Treasury direct the Fiscal Assistant Secretary, in coordination with 
the Controller of OMB, to modify Treasury's plans for the new closing 
package to: 

* require federal agencies to directly link their audited financial 
statement notes to the CFS notes and: 

* provide the necessary information to demonstrate that all of the five 
principal consolidated financial statements are consistent with the 
underlying information in federal agencies' audited financial 
statements and other financial data.

Prior Period Adjustments: 

According to SFFAS No. 21, Reporting Corrections of Errors and Changes 
in Accounting Principles, Amending SFFAS 7, Accounting for Revenue and 
Other Financing Sources, an entity should restate the prior year to 
report correction of errors that are material and should disclose the 
nature of the prior period adjustments. If errors are not material, 
they should be included in the current year results and not cited as 
prior period adjustments on the Statement of Operations and Changes in 
Net Position, and no disclosure is required. Also, according to SFFAS 
No. 21, an entity should adjust the beginning balance of cumulative 
results of operations for changes in accounting principles and disclose 
the nature of those changes.

Treasury did not fully comply with the requirements of SFFAS No. 21 in 
connection with certain identified errors relating to prior periods. 
Treasury did not restate the prior year to correct net errors of $2.6 
billion because it determined the errors to be immaterial, which was 
the correct accounting treatment. However, Treasury reported the $2.6 
billion amount as a prior period adjustment on the Statement of 
Operations and Changes in Net Position and adjusted the beginning 
balance of cumulative results of operations as would be required if 
these amounts were material. Therefore, Treasury was inconsistent when 
implementing the requirements of SFFAS No. 21.

Treasury also did not initially comply with the requirements of SFFAS 
No. 21 in connection with reporting a change in accounting principle. 
Treasury reported in several drafts of the CFS a change in accounting 
principle of $383 billion as an error relating to prior periods because 
Treasury did not specifically require federal agencies to separately 
identify changes in accounting principles. Instead, Treasury allowed 
federal agencies to report changes in accounting principles together 
with prior period adjustments, which made them difficult to 
differentiate. Changes in accounting principles are not errors and have 
different reporting requirements. We brought this to Treasury's 
attention and it corrected the mistake in the final version of the CFS.

Recommendations for Executive Action. We recommend that the Secretary 
of the Treasury direct the Fiscal Assistant Secretary to: 

* report prior period adjustments in accordance with SFFAS No. 21 by 
(1) restating the prior year for corrections of material errors and 
adjusting the beginning balance of cumulative results of operations and 
disclosing the nature of the errors in the notes to the CFS and (2) 
including corrections of immaterial errors in the current year and not 
citing them as prior period adjustments on the Statement of Changes in 
Net Position and not disclosing them in the notes to the CFS and: 

* include in Treasury's new closing package a process that will allow 
federal agencies to clearly distinguish between prior period 
adjustments and changes in accounting principles in accordance with 
SFFAS No. 21.

Conformity with U.S. Generally Accepted Accounting Principles: 

As we reported as part of our fiscal year 2002 audit, and found again 
during our fiscal year 2003 audit, Treasury lacks an adequate process 
to ensure that the financial statements, related notes, stewardship, 
and supplemental information in the CFS are presented in conformity 
with GAAP. SFFAS No. 24 states that the Federal Accounting Standards 
Advisory Board (FASAB) standards apply to all federal agencies, 
including the U.S. government as a whole, unless provision is made for 
different accounting treatment in a current or subsequent standard.

Specifically, we found that Treasury did not (1) timely identify 
applicable GAAP requirements; (2) make timely modifications to agency 
data calls to obtain information needed; (3) assess, qualitatively and 
quantitatively, the materiality of omitted disclosures;[Footnote 16] or 
(4) document decisions reached with regard to omitted disclosures and 
the rationale for such decisions. During our fiscal year 2002 audit, we 
identified 16 disclosure areas consisting of 86 specific disclosures 
that may not have been in conformity with applicable standards. During 
our fiscal year 2003 audit, we found 4 disclosure areas involving an 
additional 11 specific disclosures that may not have been in conformity 
with applicable standards. As a result of this and certain other 
weaknesses we identified, we were unable to determine if the missing 
information was material to the CFS. These additional required 
disclosures are described in appendix I. We did note that Treasury is 
requesting certain information in its planned closing package for 
fiscal year 2004 that may address some of the needed disclosures.

Recommendations for Executive Action. We reaffirm our recommendation 
that the Secretary of the Treasury direct the Fiscal Assistant 
Secretary to establish a formal process that will allow the financial 
statements, related notes, stewardship information, and supplemental 
information in the CFS to be presented in conformity with GAAP, in all 
material respects. The process should: 

* timely identify GAAP requirements;

* make timely modifications to Treasury's closing package requirements 
to obtain information needed;

* assess, qualitatively and quantitatively, the impact of any omitted 
disclosures; and: 

* document decisions reached and the rationale for such decisions.

With respect to the 11 required disclosures identified in appendix I 
for which information was either not included in the CFS or was 
presented in a way that did not meet GAAP standards, we recommend that 
each of these disclosures be included in the CFS or that the specific 
rationale for excluding any of them be documented.

Agency Comments and Our Evaluation: 

OMB and Treasury provided written comments on a draft of this report; 
these comments are reprinted in appendixes III and IV, respectively. 
OMB stated that it generally concurred with the findings in the report 
and would work with Treasury and other executive departments and 
agencies to address these findings. Treasury stated that our report 
identified issues regarding certain federal financial reporting 
procedures and internal controls and provided valuable advice and 
recommendations for improvements. It also stated that many of the 
concerns we raised are in critical areas where federal financial 
reporting can be improved. While Treasury stated that it generally 
agreed with our concerns on most of the major issues, in some cases it 
disagreed with either our finding or our recommended approach to 
addressing the problem. We continue to believe that our findings and 
recommendations are sound. Treasury's disagreements involve two areas 
of weaknesses we identified and reported on as part of our fiscal year 
2003 audit and are discussed in this report (1) Statement of Changes in 
Cash Balance from Unified Budget and Other Activities, and (2) 
Treasury's allocation methodology for certain costs in the Statement of 
Net Cost. In addition, Treasury disagreed with certain matters 
involving three areas we identified and reported on as part of our 
fiscal year 2002[Footnote 17] audit (1) unreconciled transactions 
affecting the change in net position, (2) Reconciliation of Net 
Operating Cost and Unified Budget Surplus/Deficit, and (3) management 
representation letters. We will address each of Treasury's points 
relating to these five areas, beginning with the two related to this 
report.

Statement of Changes in Cash Balance: 

Treasury expressed disagreement with certain issues we identified with 
the Statement of Changes in Cash Balance. Treasury disagreed with our 
position that it should determine and address the effects on the 
accuracy of the CFS of differences between net outlays the federal 
agencies report in their individual audited SBRs and Treasury's net 
outlay records used to prepare the Statement of Changes in Cash 
Balance. As stated in this report, OMB and GAAP require federal 
agencies to report net outlays in their SBRs. The Statement of Changes 
in Cash Balance also reports actual unified budget outlays. Both are 
intended to represent the same amount and be consistent with the 
information in the budget of the U.S. government. We found material 
differences between these amounts for selected federal agencies for 
fiscal year 2003. Until these types of significant differences are 
reconciled, the effect on the CFS will be unknown. OMB has stated that 
it has begun working with the federal agencies to address this issue 
and we continue to believe that Treasury, in coordination with OMB, 
should work with the federal agencies on this matter as well.

Treasury also stated that it believes it is not required to report both 
budget receipts and budget outlays in the Statement of Changes in Cash 
Balance but only the budget deficit or surplus, as required by SFFAS 
No. 24. We understand that SFFAS No. 24 calls for a financial statement 
that explains how the annual budget surplus or deficit relates to the 
change in the government's cash, and does not prescribe the individual 
reporting of budget receipts and outlays. However, the budget deficit 
or surplus is the simple calculation of netting the budget receipt and 
outlay amounts. Also, Treasury does not maintain "budget deficit or 
surplus" records; rather Treasury maintains separate budget receipt and 
outlay records and relies on these records to calculate the budget 
deficit or surplus. As such, regardless of whether Treasury continues 
to separately report budget receipts and budget outlays or elects to 
only report the budget deficit or surplus, Treasury and OMB will still 
need to determine the effects of the types of net outlay differences 
described above on the CFS.

While Treasury agreed that the illustrative statement for the Statement 
of Changes in Cash Balance provided in SFFAS No. 24 shows total cash 
and the gross amounts for receipts and disbursements of cash related to 
direct loans and loan guarantees, it stated that presentation of this 
amount of detail is not required. As such, Treasury states that, at 
this time, it will not report the gross amounts for receipts and 
disbursements of cash related to direct loans and loan guarantees as we 
recommend. As stated in this report, we recognize that the illustrative 
statement is not prescriptive. However, we also note that the gross 
reporting is consistent with the reporting encouraged in Financial 
Accounting Standards Board Statement No. 95, Statement of Cash Flows. 
We also stated in this report that net reporting of direct and 
guaranteed loan program activity does not disclose how much cash the 
government disbursed to promote the nation's welfare by making these 
loans available to the general population or how much in related 
repayments the government received. Therefore, we continue to believe 
that gross reporting of this information is more meaningful and useful 
to a reader of the CFS.

Allocation Methodology for Certain Costs in the Statement of Net Cost: 

In its comments on a draft of this report, Treasury implied that we 
disagreed with Treasury for amending its methodology for allocating OPM 
costs in the Statement of Net Cost to reflect a new law mandating fully 
funded pension cost recognition at the U.S. Postal Service (USPS). We 
did not take issue with Treasury modifying its methodology for the 
change, but rather that Treasury had not updated its written procedures 
to reflect the modification and had made errors in applying the 
methodology. Specifically, as stated in our report, we found that 
Treasury did not update its methodology in its written procedures for 
allocating OPM costs to reflect the change caused by the USPS pension 
cost recognition and DHS' partial year existence. Our review found that 
Treasury did modify its methodology for allocating OPM costs based on 
the changes caused by USPS; however, it was not documented in its 
standard operating procedures and the spreadsheet used to apply the 
methodology had several significant errors--none of which were 
identified by Treasury. One significant error was that the FTEs used by 
Treasury for some agencies did not agree with the respective agencies' 
FTEs in the Analytical Perspectives, Budget of the United States 
Government as prescribed by Treasury's methodology. As such, we 
continue to recommend that Treasury (1) ensure that, if FTEs are used 
as part of Treasury's methodology for allocating OPM costs, the FTEs 
used for the agencies listed on the Statement of Net Cost agree with 
the FTEs listed in the Analytical Perspectives, Budget of the United 
States Government as currently stated in Treasury's methodology; (2) 
document any changes to the stated methodology for allocating OPM costs 
and the rationale for these changes; and (3) require reviews by 
Treasury management of the accuracy of the allocated OPM costs.

Unreconciled Transactions Affecting the Change in Net Position: 

Treasury stated that it agreed that reconciling net position is a 
problem and that eliminations of intragovernmental activity and 
balances are not performed through balanced accounting entries but 
expressed concern that we are over emphasizing the elimination process. 
Treasury also stated that it agrees that increasing the granularity of 
the eliminations will help Treasury focus on where the problem exists 
as we reported as part of our fiscal year 2002 audit.[Footnote 18]

We are not unduly emphasizing the elimination process. Our focus is on 
Treasury to identify and quantify all components of the activity in the 
net position line item and reconcile the change in the U.S. 
government's net position from year to year. During our fiscal year 
2002 audit, we recommended that Treasury develop reconciliation 
procedures that will aid in understanding and controlling the net 
position balance, including the need to understand the components, 
including intragovernmental transactions, that are presently causing 
the net unreconciled transactions. These actions would allow the use of 
balanced accounting entries to account for the change in net position 
rather than simple subtraction of liabilities from assets and should 
narrow the amount of unexplained differences that comprise the net 
unreconciled transactions. Treasury added that it has a new process 
that will involve (1) use of reciprocal categories in performing 
eliminations and (2) a net position tracking methodology that will 
identify both the nature and source of the unreconciled transactions 
"plug" by financial area and by agency. We will evaluate this new 
process as part of the fiscal year 2004 audit.

Reconciliation of Net Operating Cost and Unified Budget Surplus/Deficit 
(Reconciliation Statement): 

Treasury stated that it does not agree with the recommendation in our 
report on the fiscal year 2002 audit[Footnote 19] that Treasury report 
"net unreconciled transactions" included in the net operating results 
line item as a separate reconciling activity in the Reconciliation 
Statement because it does not know whether it belongs in the statement. 
The Reconciliation Statement begins with the net operating cost amount 
reported in the Statement of Operations and Changes in Net Position. 
The fiscal year 2003 amount includes a net $24.5 billion labeled as 
"unreconciled transactions," which was needed to balance the 
consolidated financial statements. The Reconciliation Statement ends 
with the budget deficit amount, and is intended to show key reconciling 
items between the two amounts. For fiscal year 2003, Treasury included 
this $24.5 billion net unreconciled transactions balance as part of the 
net operating cost, which indicated that this amount is attributable to 
fiscal year 2003 activity. We maintain that the $24.5 billion should 
have been included as a reconciling item in the Reconciliation 
Statement because the fiscal year 2003 budget deficit, the amount being 
reconciled to, did not include this $24.5 billion amount.

While Treasury agreed that it could always improve its Reconciliation 
Statement, Treasury stated that it took exception to our finding that 
the amounts identified as changes in the balance sheet items are 
incorrect. We did not report such a finding. Instead, as part of the 
fiscal year 2002 audit, we reported that Treasury's process for 
preparing the Reconciliation Statement did not ensure completeness of 
reporting or ascertain the consistency of all the amounts reported in 
the Reconciliation Statement with the related balance sheet line items, 
related notes, or federal agencies' financial statements. We stated 
that we performed an analysis to determine whether all applicable 
components reported in the other statements (and related note 
disclosures) included in the CFS were properly reflected in the 
Reconciliation Statement. For the fiscal year 2002 audit, we found 
about $21 billion of net changes in various line item account balances 
on the balance sheet between fiscal year 2002 and 2001 that were not 
explained on either the Reconciliation Statement or the Statement of 
Changes in Cash Balance. For example, the Reconciliation Statement 
reported annual depreciation expense ($20.5 billion) and total 
capitalized fixed assets ($40.9 billion) as the components of the net 
change in property, plant, and equipment from fiscal year 2001. 
Although these activities accounted for a net increase of $20.4 
billion, the balance sheet reflected a smaller net increase, $18 
billion; Treasury was unable to explain the remaining $2.4 billion of 
the net change.

Treasury stated that our preference for more detail flow information in 
the statements is not something that it plans to do. We did not state 
this as a preference. Instead, as part of our fiscal year 2002 audit, 
we reported that Treasury did not establish a reporting materiality 
threshold for purposes of collecting and reporting information in the 
Reconciliation Statement. For example, some items were reported simply 
as a net "increase/decrease" without considering how material, both 
quantitatively and qualitatively, the gross changes were. Treasury was 
unable to demonstrate whether material, informative amounts were 
netted, and pertinent information may therefore not be disclosed.

Management Representation Letters: 

Treasury disagreed with several of the statements related to management 
representation letters that we made in our report on the fiscal year 
2002 audit.[Footnote 20] Based on Treasury's comments, it appears that 
it misunderstood our primary point which is that without performing an 
adequate review and analysis of federal agencies' management 
representation letters, Treasury and OMB management may not be fully 
informed of matters that may affect their representations made with 
respect to the audit of the CFS.

For each agency financial statement audit, generally accepted 
government auditing standards require that agency auditors obtain 
written representations from agency management as part of the audit. In 
turn, Treasury and OMB are to receive all the required management 
representation letters and the related summaries of unadjusted 
misstatements from the federal agencies. This is important because 
generally accepted government auditing standards require Treasury and 
OMB to provide us, as their auditor, a management representation letter 
for the CFS. To prepare their representations on the CFS, Treasury and 
OMB rely on the information within agencies' management representation 
letters. However, we found that Treasury and OMB did not have policies 
or procedures to adequately review and analyze federal agencies' 
management representation letters.

This report contains recommendations to you. The head of a federal 
agency is required by 31 U.S.C. 720 to submit a written statement on 
actions taken on these recommendations. You should submit your 
statement to the Senate Committee on Governmental Affairs and the House 
Committee on Government Reform within 60 days of the date of this 
report. A written statement must also be sent to the House and Senate 
Committees on Appropriations with the agency's first request for 
appropriations made more than 60 days after the date of the report.

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Governmental Affairs; the 
Subcommittee on Financial Management, the Budget, and International 
Security, Senate Committee on Governmental Affairs; the House Committee 
on Government Reform; and the Subcommittee on Government Efficiency and 
Financial Management, House Committee on Government Reform. In 
addition, we are sending copies to the Fiscal Assistant Secretary of 
the Treasury and the Controller of OMB. Copies will be made available 
to others upon request. This report is also available at no charge on 
GAO's Web site at [Hyperlink, http://www.gao.gov].

We acknowledge and appreciate the cooperation and assistance provided 
by Treasury and OMB during our audit. If you or your staff have any 
questions or wish to discuss this report, please contact Jeffrey C. 
Steinhoff, Managing Director, Financial Management and Assurance, on 
(202) 512-2600 or Gary T. Engel, Director, Financial Management and 
Assurance, on (202) 512-3406.

Signed by: 

David M. Walker: 
Comptroller General of the United States: 

[End of section]

Appendixes: 

Appendix I: Disclosure Issues: 

U.S. generally accepted accounting principles (GAAP) require the 11 
disclosures described below to be included in the consolidated 
financial statements (CFS) or, if they are excluded, that the specific 
rationale for their exclusion be documented. However, the Department of 
the Treasury (Treasury) neither included nor documented the exclusion 
of these disclosures.

Federal Employee and Veteran Benefits Payable: 

The note disclosure for federal employee and veteran benefits payable 
departed from the following disclosure requirements of Statements of 
Federal Financial Accounting Standards (SFFAS) No. 5, Accounting for 
Liabilities of the Federal Government.

SFFAS No. 5, paragraph 65, states that actuarial assumptions should be 
on the basis of the actual experience of the covered group, to the 
extent that credible experience data are available, but should 
emphasize expected long-term future trends rather than give undue 
weight to recent experience. However, the fiscal year 2003 military 
rates of inflation and projected salary increases included in the CFS 
were the actual fiscal year 2003 rates disclosed in the Department of 
Defense's audited financial statements rather than the long-term rates.

For other retirement benefits, SFFAS No. 5, paragraph 83, states that 
the entity should disclose the assumptions used. However, assumptions 
were not shown for the liability for veterans' compensation and burial 
benefits.

According to SFFAS No. 5, paragraph 72, the entity should report a 
pension expense for the net of the following components: normal costs; 
interest on the pension liability during the period; prior (and past) 
service cost from plan amendments (or the initiation of a new plan) 
during the period, if any; and actuarial gains and losses during the 
period, if any. The individual components should be disclosed. However, 
the CFS did not disclose prior service costs from plan amendments as a 
separate component.

According to SFFAS No. 5, paragraph 88, the entity should report an 
other retirement benefits expense for the net of the following 
components: normal cost; interest on the other retirement benefits 
liability during the period; prior (and past) service costs from plan 
amendments (or the initiation of a new plan) during the period, if any; 
any gains or losses due to a change in the medical inflation rate 
assumption; and other actuarial gains or losses during the period, if 
any. The individual components should be disclosed. However, the CFS 
did not disclose any gains or losses due to a change in the medical 
inflation rate assumption for health benefits as a separate component.

Environmental and Disposal Liabilities: 

The CFS note disclosure for environmental and disposal liabilities 
departed from the requirements of paragraphs 108, 109, and 111 of SFFAS 
No. 6, Accounting for Property, Plant, and Equipment, in the following 
ways: 

* The CFS does not disclose the method for assigning estimated total 
cleanup costs to current operating periods (i.e., physical capacity 
versus passage of time).

* For cleanup costs associated with general property, plant, and 
equipment (PP&E), the CFS does not disclose the unrecognized portion of 
estimated total cleanup costs.

* The CFS does not describe the nature of estimates and the disclosure 
of information regarding possible changes to the estimates resulting 
from inflation, deflation, technology, or applicable laws and 
regulations.

In addition, Treasury should consider whether the reader would be 
interested in understanding why the environmental and disposal 
liabilities amount significantly changed during the year and include 
the explanation for the change in the note disclosure.

Research and Development: 

The information in stewardship information for research and development 
departed from the disclosure requirements of SFFAS No. 8, Supplementary 
Stewardship Reporting, paragraph 99, in the following ways: 

* Information on the program outcomes (i.e., program outcome data or 
output data) for the investments in research and development are not 
properly reported. Outcome data are expected to consist typically of a 
narrative discussion of the major results achieved by the program along 
the lines of basic research, applied research, and development--as 
defined in the standard. If outcome data are not available (for 
example, the agency has not agreed on outcome measures for the program, 
the agency is unable to collect reliable outcome data, or the outcomes 
will not occur for several years), the outputs that best provide 
indications of the intended program outcomes shall be used to justify 
continued treatment of expenses as investments until outcome data are 
available.

* The CFS does not include a narrative description of the major results 
achieved through the investments in basic research, applied research, 
and development.

Deferred Maintenance: 

The required supplemental information for deferred maintenance departed 
from the disclosure requirements of SFFAS No. 6, Accounting for 
Property, Plant, and Equipment, paragraph 83, by not disclosing the 
identification of each major class of asset (i.e., building and 
structures, furniture and fixtures, equipment, vehicles, and land) for 
which maintenance has been deferred.

[End of section]

Appendix II: Status of Treasury's and OMB's Progress in Addressing GAO 
Recommendations for Preparing the CFS: 

No. 1;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in connection with Treasury's current compilation 
process and the development of Treasury's new compilation system and 
process, to segregate the duties of individuals who have the capability 
to enter, change, and delete data within the Federal Agencies' 
Centralized Trial Balance System and the Hyperion database and post 
adjustments to the consolidated financial statements (CFS);
Status: Open.

No. 2;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in connection with Treasury's current compilation 
process and the development of Treasury's new compilation system and 
process, to develop and fully document policies and procedures for the 
CFS preparation process so that they are proper, complete, and 
consistently applied by staff members;
Status: Open.

No. 3;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in connection with Treasury's current compilation 
process and the development of Treasury's new compilation system and 
process, to require and document reviews by management of all 
procedures that result in data changes to the CFS;
Status: Closed;

Management reviews were implemented in fiscal year 2003 under the 
current compilation environment;

GAO will review management reviews in the new compilation environment.

No. 4;
Recommendation: As Treasury is designing its new financial statement 
compilation process to begin with the fiscal year 2004 CFS, the 
Secretary of the Treasury should direct the Fiscal Assistant Secretary, 
in coordination with the Controller of the Office of Management and 
Budget (OMB), to develop reconciliation procedures that will aid in 
understanding and controlling the net position balance as well as 
eliminate the plugs previously associated with compiling the CFS;
Status: Open.

No. 5;
Recommendation: As Treasury is designing its new financial statement 
compilation process to begin with the fiscal year 2004 CFS, the 
Secretary of the Treasury should direct the Fiscal Assistant Secretary, 
in coordination with the Controller of OMB, to use balanced accounting 
entries to account for the change in net position rather than simple 
subtraction of liabilities from assets;
Status: Open.

No. 6;
Recommendation: As OMB continues to make strides to address issues 
related to intragovernmental transactions, the Director of OMB should 
direct the Controller of OMB to develop policies and procedures that 
document how OMB will enforce the business rules provided in OMB 
Memorandum M-03-01, Business Rules for Intragovernmental Transactions;
Status: Open.

No. 7;
Recommendation: As OMB continues to make strides to address issues 
related to intragovernmental transactions, the Director of OMB should 
direct the Controller of OMB to require that significant differences 
noted between business partners be resolved and the resolution be 
documented;
Status: Open.

No. 8;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
implement the plan to require federal agencies to report in Treasury's 
new closing package, beginning with fiscal year 2004, intragovernmental 
activity and balances by trading partner and to indicate amounts that 
have not been reconciled with trading partners and amounts, if any, 
that are in dispute;
Status: Open.

No. 9;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
design procedures that will account for the difference in 
intragovernmental assets and liabilities throughout the compilation 
process by means of formal consolidating and elimination accounting 
entries;
Status: Open.

No. 10;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
develop solutions for intragovernmental activity and balance issues 
relating to federal agencies' accounting, reconciling, and reporting in 
areas other than those OMB now requires be reconciled, primarily areas 
relating to appropriations;
Status: Open.

No. 11;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
reconcile the change in intragovernmental assets and liabilities for 
the fiscal year, including the amount and nature of all changes in 
intragovernmental assets or liabilities not attributable to cost and 
revenue activity recognized during the fiscal year. Examples of these 
differences would include capitalized purchases, such as inventory or 
equipment, and deferred revenue;
Status: Open.

No. 12;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to develop and implement a process that adequately 
identifies and reports items needed to reconcile net operating cost and 
unified budget surplus (or deficit). Treasury should report "net 
unreconciled differences" included in the net operating results line 
item as a separate reconciling activity in the reconciliation 
statement;
Status: Open.

No. 13;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to develop and implement a process that adequately 
identifies and reports items needed to reconcile net operating cost and 
unified budget surplus (or deficit). Treasury should develop policies 
and procedures to ensure completeness of reporting and document how all 
the applicable components reported in the other consolidated financial 
statements (and related note disclosures included in the CFS) were 
properly reflected in the reconciliation statement;
Status: Open.

No. 14;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to develop and implement a process that adequately 
identifies and reports items needed to reconcile net operating cost and 
unified budget surplus (or deficit). Treasury should establish 
reporting materiality thresholds for determining which agency financial 
statement activities to collect and report at the governmentwide level 
to assist in ensuring that the reconciliation statement is useful and 
conveys meaningful information;
Status: Open.

No. 15;
Recommendation: If Treasury chooses to continue using information from 
both federal agencies' financial statements and the Central Accounting 
and Reporting System (STAR), Treasury should demonstrate how the 
amounts from STAR reconcile to federal agencies' financial statements;
Status: Open.

No. 16;
Recommendation: If Treasury chooses to continue using information from 
both federal agencies' financial statements and from STAR, Treasury 
should identify and document the cause of any significant differences, 
if any are noted;
Status: Open.

No. 17;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
develop and implement a process to ensure that the Statement of Changes 
in Cash Balance from Unified Budget and Other Activities properly 
reflects the activities reported in federal agencies' audited financial 
statements. Treasury should document the consistency of the significant 
line items on this statement to agencies' audited financial statements;
Status: Open.

No. 18;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
develop and implement a process to ensure that the Statement of Changes 
in Cash Balance from Unified Budget and Other Activities properly 
reflects the activities reported in federal agencies' audited financial 
statements. Treasury should request, through its closing package, that 
federal agencies provide the net outlays reported in their Combined 
Statement of Budgetary Resources and explanations for any significant 
differences between net outlay amounts reported in the Combined 
Statement of Budgetary Resources and the budget of the U.S. government;
Status: Open.

No. 19;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
develop and implement a process to ensure that the Statement of Changes 
in Cash Balance from Unified Budget and Other Activities properly 
reflects the activities reported in federal agencies' audited financial 
statements. Treasury should investigate the differences between net 
outlays reported in federal agencies' Combined Statement of Budgetary 
Resources and Treasury's records in STAR to ensure that the proper 
amounts are reported in the Statement of Changes in Cash Balance from 
Unified Budget and Other Activities;
Status: Open.

No. 20;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
develop and implement a process to ensure that the Statement of Changes 
in Cash Balance from Unified Budget and Other Activities properly 
reflects the activities reported in federal agencies' audited financial 
statements. Treasury should explain and document the differences 
between the operating revenue amount reported on the Statement of 
Operations and Changes in Net Position and unified budget receipts 
reported on the Statement of Changes in Cash Balance from Unified 
Budget and Other Activities;
Status: Open.

No. 21;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
develop and implement a process to ensure that the Statement of Changes 
in Cash Balance from Unified Budget and Other Activities properly 
reflects the activities reported in federal agencies' audited financial 
statements. Treasury should provide support for how the line items in 
the "other activities" section of this statement relate to either the 
underlying Balance Sheet or related notes accompanying the CFS;
Status: Open.

No. 22;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
perform an assessment to define the reporting entity, including its 
specific components, in conformity with the criteria issued by the 
Federal Accounting Standards Advisory Board. Key decisions made in this 
assessment should be documented, including the reason for including or 
excluding components and the basis for concluding on any issue. 
Particular emphasis should be placed on demonstrating that any 
financial information that should be included, but is not included, is 
immaterial;
Status: Open.

No. 23;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
provide in the financial statements all the financial information 
relevant to the defined reporting entity, in all material respects. 
Such information would include, for example, the reporting entity's 
assets, liabilities, and revenues;
Status: Open.

No. 24;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
disclose in the financial statements all information that is necessary 
to inform users adequately about the reporting entity. Such disclosures 
should clearly describe the reporting entity and explain the reason for 
excluding any components that are not included in the defined reporting 
entity;
Status: Open.

No. 25;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to establish a formal process that will allow the 
financial statements, related notes, and stewardship and supplemental 
information in the CFS to be presented in conformity with U.S. 
generally accepted accounting principles (GAAP). The process should 
timely identify GAAP requirements;
Status: Open.

No. 26;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to establish a formal process that will allow the 
financial statements, related notes, and stewardship and supplemental 
information in the CFS to be presented in conformity with GAAP. The 
process should make timely modifications to Treasury's closing package 
requirements to obtain information needed;
Status: Open.

No. 27;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to establish a formal process that will allow the 
financial statements, related notes, and stewardship and supplemental 
information in the CFS to be presented in conformity with GAAP. The 
process should assess, qualitatively and quantitatively, the impact of 
the omitted disclosures;
Status: Open.

No. 28;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary to establish a formal process that will allow the 
financial statements, related notes, and stewardship and supplemental 
information in the CFS to be presented in conformity with GAAP. The 
process should document decisions reached and the rationale for such 
decisions;
Status: Open.

No. 29;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures for preparing the 
governmentwide management representation letter to help ensure that it 
is properly prepared and contains sufficient representations. 
Specifically, these policies and procedures should require an analysis 
of the agency management representations to determine if discrepancies 
exist between what the agency auditor reported and the representations 
made by the agency, including the resolution of such discrepancies;
Status: Open.

No. 30;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures for preparing the 
governmentwide management representation letter to help ensure that it 
is properly prepared and contains sufficient representations. 
Specifically, these policies and procedures should require a 
determination that the agency management representation letters have 
been signed by the highest-level agency officials who are responsible 
for and knowledgeable about the matters included in the agency 
management representation letters;
Status: Open.

No. 31;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures for preparing the 
governmentwide management representation letter to help ensure that it 
is properly prepared and contains sufficient representations. 
Specifically, these policies and procedures should require an 
assessment of the materiality thresholds used by federal agencies in 
their respective management representation letters;
Status: Open.

No. 32;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures for preparing the 
governmentwide management representation letter to help ensure that it 
is properly prepared and contains sufficient representations. 
Specifically, these policies and procedures should require an 
assessment of the impact, if any, of federal agencies' materiality 
thresholds on the management representations made at the governmentwide 
level;
Status: Open.

No. 33;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures for preparing the 
governmentwide management representation letter to help ensure that it 
is properly prepared and contains sufficient representations. 
Specifically, these policies and procedures should require an 
evaluation and assessment of the omission of representations ordinarily 
included in agency management representation letters;
Status: Open.

No. 34;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures for preparing the 
governmentwide management representation letter to help ensure that it 
is properly prepared and contains sufficient representations. 
Specifically, these policies and procedures should require an analysis 
and aggregation of the agencies' summary of unadjusted misstatements to 
determine the completeness of the summaries and to ascertain the 
materiality, both individually and in the aggregate, of such unadjusted 
misstatements to the CFS taken as a whole;
Status: Open.

No. 35;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
help ensure that agencies provide adequate information in their legal 
representation letters regarding the expected outcome of the cases;
Status: Open.

No. 36;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
help ensure that agencies provide related management schedules;
Status: Open.

No. 37;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures to help ensure that major 
treaty and other international agreement information is properly 
identified and reported in the CFS. Specifically, these policies and 
procedures should require that agencies develop a detailed schedule of 
all major treaties and other international agreements that obligate the 
U.S. government to provide cash, goods, or services, or that create 
other financial arrangements that are contingent on the occurrence or 
nonoccurrence of future events (a starting point for compiling these 
data could be the State Department's Treaties in Force);
Status: Open.

No. 38;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures to help ensure that major 
treaty and other international agreement information is properly 
identified and reported in the CFS. Specifically, these policies and 
procedures should require that agencies classify all such scheduled 
major treaties and other international agreements as commitments or 
contingencies;
Status: Open.

No. 39;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures to help ensure that major 
treaty and other international agreement information is properly 
identified and reported in the CFS. Specifically, these policies and 
procedures should require that agencies disclose in the notes to the 
CFS amounts for major treaties and other international agreements that 
have a reasonably possible chance of resulting in a loss or claim as a 
contingency;
Status: Open.

No. 40;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures to help ensure that major 
treaty and other international agreement information is properly 
identified and reported in the CFS. Specifically, these policies and 
procedures should require that agencies disclose in the notes to the 
CFS amounts for major treaties and other international agreements that 
are classified as commitments and that may require measurable future 
financial obligations;
Status: Open.

No. 41;
Recommendation: The Secretary of the Treasury should direct the Fiscal 
Assistant Secretary, in coordination with the Controller of OMB, to 
establish written policies and procedures to help ensure that major 
treaty and other international agreement information is properly 
identified and reported in the CFS. Specifically, these policies and 
procedures should require that agencies take steps to prevent major 
treaties and other international agreements that are classified as 
remote from being recorded or disclosed as probable or reasonably 
possible in the CFS;
Status: Open.

No. 42;
Recommendation: As Treasury is designing its new compilation process, 
which it expects to implement beginning with the fiscal year 2004 CFS, 
the Secretary of the Treasury should direct the Fiscal Assistant 
Secretary, in coordination with the Controller of OMB, to design the 
new compilation process to directly link information from federal 
agencies' audited financial statements to amounts reported in all the 
applicable CFS and related footnotes;
Status: Open.

No. 43;
Recommendation: As Treasury is designing its new compilation process, 
which it expects to implement beginning with the fiscal year 2004 CFS, 
the Secretary of the Treasury should direct the Fiscal Assistant 
Secretary, in coordination with the Controller of OMB, to consider the 
other applicable recommendations in this report when designing and 
implementing the new compilation process;
Status: Open.

No. 44;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of Statement of 
Federal Financial Accounting Standards (SFFAS) No. 3, Accounting for 
Inventory and Related Property, paragraph 91, which requires the 
reporting entity to disclose the valuation basis for foreclosed 
property;
Status: Open.

No. 45;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 91, which 
requires the reporting entity to disclose the changes from the prior 
year's accounting methods, if any;
Status: Open.

No. 46;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 91, which 
requires the reporting entity to disclose the restrictions on the use/ 
disposal of property;
Status: Open.

No. 47;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 91, which 
requires the reporting entity to disclose the balances by categories 
(i.e., pre-1992 and post-1991 foreclosed property);
Status: Open.

No. 48;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 91, which 
requires the reporting entity to disclose the number of properties held 
and average holding period by type or category;
Status: Open.

No. 49;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 91, which 
requires the reporting entity to disclose the number of properties for 
which foreclosure proceedings are in process at the end of the period 
for foreclosed assets acquired in full or partial settlement of a 
direct or guaranteed loan;
Status: Open.

No. 50;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 9, which requires credit programs to reestimate 
the subsidy cost allowance for outstanding direct loans and the 
liability for outstanding loan guarantees. There are two kinds of 
reestimates: (1) interest rate reestimates and (2) technical/default 
reestimates. Entities should measure and disclose each program's 
reestimates in these two components separately;
Status: Open.

No. 51;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 10, which requires the reporting entity to 
display in the notes to the financial statements a reconciliation 
between the beginning and ending balances of the subsidy cost allowance 
for outstanding direct loans and the liability for outstanding loan 
guarantees reported on the entity's balance sheet;
Status: Open.

No. 52;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 11, which requires disclosure of the total amount 
of direct or guaranteed loans disbursed for the current reporting year 
and the preceding reporting year;
Status: Open.

No. 53;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 11, which requires disclosure of the subsidy 
expense by components, recognized for the direct or guaranteed loans 
disbursed in the current reporting year and the preceding reporting 
year;
Status: Open.

No. 54;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 11, which requires disclosure of the subsidy 
reestimates by components for the current reporting year and the 
preceding reporting year;
Status: Open.

No. 55;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 11, which requires disclosure, at the program 
level, of the subsidy rates for the total subsidy cost and its 
components for the interest subsidy costs, default costs (net of 
recoveries), fees and other collections, and other costs estimated for 
direct loans and loan guarantees in the current year's budget for the 
current year's cohorts;
Status: Open.

No. 56;
Recommendation: The note disclosure for loans receivable and loan 
guarantee liabilities should meet the requirements of SFFAS No. 18, 
Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees, paragraph 11, which requires the reporting entity to 
disclose, discuss, and explain events and changes in economic 
conditions, other risk factors, legislation, credit policies, and 
subsidy estimation methodologies and assumptions that have had a 
significant and measurable effect on subsidy rates, subsidy expense, 
and subsidy reestimates;
Status: Open.

No. 57;
Recommendation: The note disclosure for inventories and operating 
materials and supplies should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 30, which 
requires the difference between the carrying amount and the expected 
net realizable value to be recognized as a loss or gain and either 
separately reported or disclosed when inventory or operating materials 
and supplies are declared excess, obsolete, or unserviceable;
Status: Open.

No. 58;
Recommendation: The note disclosure for inventories and operating 
materials and supplies should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraphs 35 and 50, 
that require disclosure of inventory and operating materials and 
supplies general composition;
Status: Open.

No. 59;
Recommendation: The note disclosure for inventories and operating 
materials and supplies should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraphs 35 and 50, 
that require disclosure of any changes from the prior year in 
accounting methods for inventory and operating materials and supplies;
Status: Open.

No. 60;
Recommendation: The note disclosure for inventories and operating 
materials and supplies should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraphs 35 and 50, 
which require the disclosure of any restrictions on the sale of 
inventory and the use of operating materials and supplies;
Status: Open.

No. 61;
Recommendation: The note disclosure for inventories and operating 
materials and supplies should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraphs 35 and 50, 
which require disclosure of any changes in the criteria for 
categorizing inventory and operating materials and supplies;
Status: Open.

No. 62;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 56, which requires disclosure of the basis for 
valuing stockpile material, including valuation method and any cost 
flow assumptions;
Status: Open.

No. 63;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 56, which requires disclosure of any changes from 
the prior year's accounting methods;
Status: Open.

No. 64;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 56, which requires disclosure of restrictions on 
the use of stockpile material;
Status: Open.

No. 65;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 56, which requires disclosure of the balances in 
each category of stockpile material (i.e., stockpile material held and 
held for sale);
Status: Open.

No. 66;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 56, which requires disclosure of the criteria for 
grouping stockpile material held for sale;
Status: Open.

No. 67;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 56, which requires disclosure of changes in 
criteria for categorizing stockpile material held for sale;
Status: Open.

No. 68;
Recommendation: The note disclosure for stockpile material should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 55, which requires disclosure of any difference 
between the carrying amount (i.e., purchase price or cost) of stockpile 
material held for sale and the estimated selling price of such assets;
Status: Open.

No. 69;
Recommendation: The note disclosure for seized material should meet the 
requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 66, which requires disclosure of the valuation 
method;
Status: Open.

No. 70;
Recommendation: The note disclosure for seized material should meet the 
requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 66, which requires disclosure of any changes from 
the prior year's accounting methods;
Status: Open.

No. 71;
Recommendation: The note disclosure for seized material should meet the 
requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 66, which requires disclosure of the analysis of 
change in seized property (including dollar value and number of seized 
properties) that are on hand at the beginning of the year, seized 
during the year, disposed of during the year, and on hand at the end of 
the year, as well as known liens or other claims against the property. 
This information should be presented by type of seizure and method of 
disposition, when material;
Status: Open.

No. 72;
Recommendation: The note disclosure for forfeited property should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 78, which requires disclosure of the valuation 
method;
Status: Open.

No. 73;
Recommendation: The note disclosure for forfeited property should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 78, which requires disclosure of the analysis of 
the changes in forfeited property by type and dollar amount that 
includes (1) number of forfeitures on hand at the beginning of the 
year, (2) additions, (3) disposals and method of disposition, and (4) 
end-of-year-balances;
Status: Open.

No. 74;
Recommendation: The note disclosure for forfeited property should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 78, which requires disclosure of any restriction on 
the use or disposition of the property;
Status: Open.

No. 75;
Recommendation: The note disclosure for forfeited property should meet 
the requirements of SFFAS No. 3, Accounting for Inventory and Related 
Property, paragraph 78, which requires disclosure, if available, of an 
estimate of the value of property to be distributed to other federal, 
state, and local agencies in future reporting periods;
Status: Open.

No. 76;
Recommendation: The note disclosure for goods held under price support 
and stabilization programs should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 98, which 
requires that if a contingent loss is not recognized because it is less 
than probable or it is not reasonably measurable, disclosure of the 
contingency shall be made if it is at least reasonably possible that a 
loss may occur;
Status: Open.

No. 77;
Recommendation: The note disclosure for goods held under price support 
and stabilization programs should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 109, which 
requires disclosure of the basis for valuing commodities, including 
valuation method and cost flow assumptions;
Status: Open.

No. 78;
Recommendation: The note disclosure for goods held under price support 
and stabilization programs should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 109, which 
requires disclosure of any changes from the prior year's accounting 
methods;
Status: Open.

No. 79;
Recommendation: The note disclosure for goods held under price support 
and stabilization programs should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 109, which 
requires disclosure of any restrictions on the use, disposal, or sale 
of commodities;
Status: Open.

No. 80;
Recommendation: The note disclosure for goods held under price support 
and stabilization programs should meet the requirements of SFFAS No. 3, 
Accounting for Inventory and Related Property, paragraph 109, which 
requires disclosure of the analysis of the change in dollar amount and 
volume of commodities, including those (1) on hand at the beginning of 
the year, (2) acquired during the year, (3) disposed of during the year 
listed by method of disposition, (4) on hand at the end of the year, 
(5) on hand at year-end and estimated to be donated or transferred 
during the coming period, and (6) received as a result of surrender of 
collateral related to nonrecourse loans outstanding. The analysis 
should also show the dollar value and volume of purchase agreement 
commitments;
Status: Open.

No. 81;
Recommendation: The note disclosure for property, plant, and equipment 
(PP&E) should meet the disclosure requirements of SFFAS No. 6, 
Accounting for Property, Plant, and Equipment, paragraph 45, which 
requires disclosure of the estimated useful lives for each major class 
of PP&E;
Status: Open.

No. 82;
Recommendation: The note disclosure for PP&E should meet the disclosure 
requirements of SFFAS No. 6, Accounting for Property, Plant, and 
Equipment, paragraph 45, which requires disclosure of capitalization 
thresholds, including any changes in thresholds during the period;
Status: Open.

No. 83;
Recommendation: The note disclosure for PP&E should meet the disclosure 
requirements of SFFAS No. 6, Accounting for Property, Plant, and 
Equipment, paragraph 45, which requires disclosure of restrictions on 
the use or convertibility of general PP&E;
Status: Open.

No. 84;
Recommendation: The note disclosure for PP&E should meet the disclosure 
requirements of SFFAS No. 10, Accounting for Internal Use Software, 
paragraph 35, which requires disclosure of the cost, associated 
amortization, and book value of internal use software;
Status: Closed;

Fiscal year 2003 CFS footnote for PP&E disclosed the cost, associated 
amortization, and book value of internal use software.

No. 85;
Recommendation: The note disclosure for PP&E should meet the disclosure 
requirements of SFFAS No. 10, Accounting for Internal Use Software, 
paragraph 35, which requires disclosure of the estimated useful life 
for each major class of software for internal use software;
Status: Open.

No. 86;
Recommendation: The note disclosure for PP&E should meet the disclosure 
requirements of SFFAS No. 10, Accounting for Internal Use Software, 
paragraph 35, which requires disclosure of the method of amortization 
for internal use software;
Status: Open.

No. 87;
Recommendation: The note disclosure for PP&E should meet the disclosure 
requirements of SFFAS No. 16, Amendments to Accounting for Property, 
Plant, and Equipment, paragraph 9, which requires an appropriate PP&E 
note disclosure to explain that "physical quantity" information for the 
multiuse heritage assets is included in supplemental stewardship 
reporting for heritage assets;
Status: Open.

No. 88;
Recommendation: The note disclosure for federal employee and veteran 
benefits payable should be completely and properly reported, 
specifically, that (1) it include a line for the valuation of plan 
amendments that occurred during the year and (2) the liability for 
military pensions and note disclosure related to the "change in 
actuarial accrued pension liability and components of related expenses" 
agree with the information presented in the Department of Defense's 
financial statements;
Status: Open.

No. 89;
Recommendation: The note disclosure for environmental and disposal 
liabilities should meet the requirements of SFFAS No. 6, Accounting for 
Property, Plant, and Equipment, that require (1) estimation and 
recognition of cleanup costs associated with general PP&E at the time 
the PP&E is placed in service and (2) recognition of a liability for 
the portion of the estimated total cleanup cost attributable to that 
portion of the physical capacity used or that portion of the estimated 
useful life that has passed since the general PP&E was placed in 
service;
Status: Open.

No. 90;
Recommendation: The note disclosure for environmental and disposal 
liabilities should meet the requirements of SFFAS No. 6, Accounting for 
Property, Plant, and Equipment, that require inclusion of material 
changes in total estimated cleanup costs due to changes in laws, 
technology, or plans;
Status: Open.

No. 91;
Recommendation: The note disclosure for capital leases should meet the 
requirements of Federal Accounting Standards Board (FASB), Statement of 
Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, 
paragraph 16, which requires future minimum lease payments as of the 
date of the latest balance sheet presented, in the aggregate and for 
each of the 5 succeeding fiscal years, with separate deductions from 
the total for the amount representing executory costs, including any 
profit thereon, included in the minimum lease payments, and for the 
amount of the imputed interest necessary to reduce the net minimum 
lease payments to present value;
Status: Open.

No. 92;
Recommendation: The note disclosure for capital leases should meet the 
requirements of FASB, SFAS No. 13, Accounting for Leases, paragraph 16, 
which requires a summary of assets under capital lease by major asset 
category and the related total accumulated amortization;
Status: Open.

No. 93;
Recommendation: The note disclosure for capital leases should meet the 
requirements of FASB, SFAS No. 13, Accounting for Leases, paragraph 16, 
which requires a general description of the lessee's leasing 
arrangements, including but not limited to (1) the basis on which 
contingent rental payments are determined, (2) the existence and terms 
of renewal or purchase options and escalation clauses, and (3) 
restrictions imposed by lease agreements, such as those concerning 
dividends, additional debt, and further leasing;
Status: Open.

No. 94;
Recommendation: The note disclosure for life insurance liabilities 
should meet the requirements of SFFAS No. 5, Accounting for Liabilities 
of the Federal Government, paragraph 117, which requires all federal 
reporting entities with whole life insurance programs to follow 
applicable standards as prescribed in the private sector standards when 
reporting the liability for future policy benefits: FASB SFAS No. 60, 
Accounting and Reporting by Insurance Enterprises;

SFAS No. 97, Accounting and Reporting by Insurance Enterprises for 
Certain Long-Duration Contracts and for Realized Gains and Losses from 
the Sale of Investments;

and SFAS No. 120, Accounting and Reporting by Mutual Life Insurance 
Enterprises and by Insurance Enterprises for Certain Long-Duration 
Participating Contracts;

and American Institute of Certified Public Accountants Statement of 
Position 95-1, Accounting for Certain Insurance Activities of Mutual 
Life Insurance Enterprises;
Status: Open.

No. 95;
Recommendation: The note disclosure for life insurance liabilities 
should meet the requirements of SFFAS No. 5, Accounting for Liabilities 
of the Federal Government, paragraph 5, which requires all components 
of the liability for future policy benefits (i.e., the net-level 
premium reserve for death and endowment policies and the liability for 
terminal dividends) to be separately disclosed in a footnote with a 
description of each amount and an explanation of its projected use and 
any other potential uses (e.g., reducing premiums, determining and 
declaring dividends available, and reducing federal support in the form 
of appropriations related to administrative cost or subsidies);
Status: Open.

No. 96;
Recommendation: The note disclosure on major commitments and 
contingencies be consistent with disclosed information in individual 
agencies' financial statements;
Status: Open.

No. 97;
Recommendation: The note disclosure on major commitments and 
contingencies disclose sufficient information (detailed discussion) 
regarding certain major commitments and contingencies;
Status: Open.

No. 98;
Recommendation: The note disclosure for collections and refunds of 
federal revenue should meet the requirements of SFFAS No. 7, Concepts 
for Reconciling Budgetary and Financial Accounting, paragraph 64, which 
requires, among other things, that collecting entities disclose the 
basis of accounting when the application of the general rule results in 
a modified cash basis of accounting;
Status: Closed;

The fiscal year 2003 CFS footnote for collections and refunds of 
federal revenue reflects that such information is accounted for using a 
modified cash basis of accounting.

No. 99;
Recommendation: The note disclosure for collections and refunds of 
federal revenue should meet the requirements of SFFAS No. 7, Concepts 
for Reconciling Budgetary and Financial Accounting, paragraph 69.2, 
which requires collecting entities to provide in the other accompanying 
information any relevant estimates of the annual tax gap that become 
available as a result of federal government surveys or studies;
Status: Open.

No. 100;
Recommendation: The note disclosure for dedicated collections should 
meet the requirements of SFFAS No. 7, Part I, Accounting for Revenue 
and Other Financing Sources, paragraph 85, which requires inclusion of 
condensed information about assets and liabilities showing investments 
in Treasury securities, other assets, liabilities due and payable to 
beneficiaries, other liabilities, and fund balance;
Status: Open.

No. 101;
Recommendation: The note disclosure for dedicated collections should 
meet the requirements of SFFAS No. 7, Part I, Accounting for Revenue 
and Other Financing Sources, paragraph 85, which requires inclusion of 
condensed information on net cost and changes to fund balance, showing 
revenues by type (exchange/nonexchange), program expenses, other 
expenses, other financing sources, and other changes in fund balance;
Status: Open.

No. 102;
Recommendation: The note disclosure for dedicated collections should 
meet the requirements of SFFAS No. 7, Part I, Accounting for Revenue 
and Other Financing Sources, paragraph 85, which requires inclusion of 
any revenues, other financing sources, or costs attributable to the 
fund under accounting standards but not legally allowable as credits or 
charges to the fund;
Status: Open.

No. 103;
Recommendation: The note disclosure for Indian trust funds should meet 
the requirements of SFFAS No. 7, Part I, Accounting for Revenue and 
Other Financing Sources, paragraph 85, which requires a description of 
each fund's purpose, how the administrative entity accounts for and 
reports the fund, and its authority to use those collections;
Status: Open.

No. 104;
Recommendation: The note disclosure for Indian trust funds should meet 
the requirements of SFFAS No. 7, Part I, Accounting for Revenue and 
Other Financing Sources, paragraph 85, which requires disclosure of the 
sources of revenue or other financing for the period and an explanation 
of the extent to which they are inflows of resources to the government 
or the result of intragovernmental flows;
Status: Open.

No. 105;
Recommendation: The note disclosure for Indian trust funds should meet 
the requirements of SFFAS No. 7, Part I, Accounting for Revenue and 
Other Financing Sources, paragraph 85, which requires condensed 
information about assets and liabilities showing investments in 
Treasury securities, other assets, liabilities due and payable to 
beneficiaries, and other liabilities;
Status: Open.

No. 106;
Recommendation: The note disclosure for Indian trust funds should meet 
the requirements of SFFAS No. 7, Part I, Accounting for Revenue and 
Other Financing Sources, paragraph 85, which requires condensed 
information on net cost and changes to fund balance, showing revenues 
by type (exchange/nonexchange), program expenses, other expenses, other 
financing sources, and other changes in fund balance;
Status: Open.

No. 107;
Recommendation: The note disclosure for Indian trust funds should meet 
the requirements of SFFAS No. 7, Part I, Accounting for Revenue and 
Other Financing Sources, paragraph 85, which requires disclosure of any 
revenues, other financing sources, or costs attributable to the fund 
under accounting standards, but not legally allowable as credits or 
charges to the fund;
Status: Open.

No. 108;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 31, which requires the program descriptions for Hospital 
Insurance and Supplementary Medical Insurance and an explanation of 
trends revealed in Chart 11: Estimated Railroad Retirement Income 
(Excluding Interest) and Expenditures 2002-2076;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 109;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 24, which requires a description of statutory or other 
material changes, and the implications thereof, affecting the Medicare 
and Unemployment Insurance programs after the current fiscal year, and 
the implications thereof;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 110;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 25, which requires the significant assumptions used in making 
estimates and projections regarding the Black Lung and Unemployment 
Insurance programs;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 111;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 32(1)(b), which requires the total cash inflow from all 
sources, less net interest on intragovernmental borrowing and lending, 
and the total cash outflow to be shown in nominal dollars for the 
Hospital Insurance program;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 112;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 32(1)(a), which requires the narrative to accompany the cash 
flow data for Unemployment Insurance. The narrative should include the 
identification of any year or years during the projection period when 
cash outflow exceeds cash inflow, without interest, on 
intragovernmental borrowing or lending, and the presentation should 
include an explanation of material crossover points, if any, where cash 
outflow exceeds cash inflow and the possible reasons for this;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 113;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraphs 27(3)(h) and 27(3)(j), which require the estimates of the 
fund balances at the respective valuation dates of the social insurance 
programs (except Unemployment Insurance) to be included for each of the 
4 preceding years. Only 1 year is shown;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 114;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 32(4), which requires individual program sensitivity analyses 
for projection period cash flow in present value dollars and annual 
cash flow in nominal dollars. The CFS includes only present value 
sensitivity analyses for Social Security and Hospital Insurance. 
Paragraph 32(4) states that, at a minimum, the summary should present 
Social Security, Hospital Insurance, and Supplementary Medical 
Insurance separately;
Status: Open.

No. 115;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 27(4)(a), which requires the individual program sensitivity 
analyses for Social Security and Hospital Insurance to include an 
analysis of assumptions regarding net immigration;
Status: Open.

No. 116;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, 
paragraph 27(4)(a), which requires the individual program sensitivity 
analysis for Hospital Insurance to include an analysis of death rates;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 117;
Recommendation: The note disclosure for social insurance should meet 
the requirements of SFFAS No. 17, Accounting for Social Insurance, by 
not including financial interchange income (intragovernmental income 
from Social Security) in the actuarial present value information for 
the Railroad Retirement Board;
Status: Closed;

The fiscal year 2003 social insurance disclosures in the CFS provided 
the disclosures required in this recommendation.

No. 118;
Recommendation: The note disclosure for nonfederal physical property 
included in Stewardship information should meet the requirements of 
SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87, which 
requires disclosure of the annual investment, including a description 
of federally owned physical property transferred to state and local 
governments. This information should be provided for the year ended on 
the balance sheet date as well as for each of the 4 preceding years. If 
data for additional years would provide a better indication of 
investment, reporting of the additional years' data is encouraged. 
Reporting should be at a meaningful category or level;
Status: Open.

No. 119;
Recommendation: The note disclosure for nonfederal physical property 
included in stewardship information should meet the requirements of 
SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 87, which 
requires a description of major programs involving federal investments 
in nonfederal physical property, including a description of programs or 
policies under which noncash assets are transferred to state and local 
governments;
Status: Open.

No. 120;
Recommendation: The note disclosure for human capital included in 
stewardship information should meet the requirements of SFFAS No. 8, 
Supplementary Stewardship Reporting, paragraph 94, which requires a 
narrative description and the full cost of the investment in human 
capital for the year being reported on as well as the preceding 4 years 
(if full cost data are not available, outlay data can be reported);
Status: Open.

No. 121;
Recommendation: The note disclosure for human capital included in 
stewardship information should meet the requirements of SFFAS No. 8, 
Supplementary Stewardship Reporting, paragraph 94, which requires the 
full cost or outlay data for investments in human capital at a 
meaningful category or level (e.g., by major program, agency, or 
department);
Status: Open.

No. 122;
Recommendation: The note disclosure for human capital included in 
stewardship information should meet the requirements of SFFAS No. 8, 
Supplementary Stewardship Reporting, paragraph 94, which requires a 
narrative description of major education and training programs 
considered federal investments in human capital;
Status: Open.

No. 123;
Recommendation: The note disclosure for research and development 
included in stewardship information should meet the requirements of 
SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 94, which 
requires reporting of the annual investment made in the year ended on 
the balance sheet date as well as in each of the 4 years preceding that 
year. (As defined in this standard, "annual investment" includes more 
than the annual expenditure reported by character class for budget 
execution. Full cost shall be measured and accounted for in accordance 
with SFFAS No. 4, Managerial Cost Accounting Standards for the Federal 
Government.) If data for additional years would provide a better 
indication of investment, reporting of the additional years' data is 
encouraged. In those unusual instances when entities have no historical 
data, only current reporting year data need be reported. Reporting must 
be at a meaningful category or level, for example, a major program or 
department;
Status: Open.

No. 124;
Recommendation: The note disclosure for research and development 
included in stewardship information should meet the requirements of 
SFFAS No. 8, Supplementary Stewardship Reporting, paragraph 94, which 
requires a narrative description of major research and development 
programs;
Status: Open.

No. 125;
Recommendation: The note disclosure for deferred maintenance should 
meet the requirements of SFFAS No. 6, Accounting for Property, Plant, 
and Equipment, paragraphs 83 and 84, which require inclusion of the 
method of measuring deferred maintenance for each major class of PP&E;
Status: Open.

No. 126;
Recommendation: The note disclosure for deferred maintenance should 
meet the requirements of SFFAS No. 6, Accounting for Property, Plant, 
and Equipment, paragraphs 83 and 84, which require that if the 
condition assessment survey method of measuring deferred maintenance is 
used, the following should be presented for each major class of PP&E: 
(1) description of requirements or standards for acceptable operating 
condition, (2) any changes in the condition requirements or standards, 
and (3) asset condition and a range estimate of the dollar amount of 
maintenance needed to return the asset to its acceptable operating 
condition;
Status: Open.

No. 127;
Recommendation: The note disclosure for deferred maintenance should 
meet the requirements of SFFAS No. 6, Accounting for Property, Plant, 
and Equipment, paragraphs 83 and 84, which require that if the total 
life-cycle cost method is used, the following should be presented for 
each major class of PP&E: (1) the original date of the maintenance 
forecast and an explanation for any changes to the forecast, (2) prior 
year balance of the cumulative deferred maintenance amount, (3) the 
dollar amount of maintenance that was defined by the professionals who 
designed, built, or managed the PP&E as required maintenance for the 
reporting period, (4) the dollar amount of maintenance actually 
performed during the period, (5) the difference between the forecast 
and actual maintenance, (6) any adjustments to the scheduled amounts 
deemed necessary by the managers of the PP&E and (7) the ending 
cumulative balance for the reporting period for each major class of 
asset experiencing deferred maintenance;
Status: Open.

No. 128;
Recommendation: The note disclosure for deferred maintenance should 
meet the requirements of SFFAS No. 6, Accounting for Property, Plant, 
and Equipment, paragraphs 83 and 84, which require that if management 
elects to disclose critical and noncritical amounts, the disclosure is 
to include management's definition of these categories;
Status: Open.

No. 129;
Recommendation: The note disclosure for stewardship responsibilities 
related to the risk assumed for federal insurance and guarantee 
programs should meet the requirements of SFFAS No. 5, Accounting for 
Liabilities of the Federal Government, paragraph 106, which requires 
that when financial information pursuant to FASB standards on federal 
insurance and guarantee programs conducted by government corporations 
is incorporated in general purpose financial reports of a larger 
federal reporting entity, the entity should report as required 
supplementary information what amounts and periodic change in those 
amounts would be reported under the "risk assumed" approach;
Status: Open.

Source: GAO.

Note: During the fiscal year 2003 CFS audit, Treasury and OMB did not 
provide GAO with an action plan for addressing these recommendations. 
In May 2004, Treasury provided GAO with a draft corrective action plan 
to address the recommendations made to both Treasury and OMB. We plan 
to evaluate the effectiveness of any corrective actions taken by 
Treasury and OMB during our fiscal year 2004 audit.The source report 
for recommendations contained in this appendix is 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-45], Process for 
Preparing the CFS Needs Improvement, October 2003.

[End of table]

[End of section]

Appendix III: Comments from the Office of Management and Budget: 

EXECUTIVE OFFICE OF THE PRESIDENT: 
OFFICE OF MANAGEMENT AND BUDGET: 
WASHINGTON, D.C. 20503:

THE CONTROLLER:

Mr. Jeffrey C. Steinhoff:
Managing Director, Financial Management Assurance: 
Government Accountability Office:
Washington, DC 20548:

Thank you for the opportunity to comment on the draft of your report 
"Process for Preparing the Consolidated Financial Statements of the 
U.S. Government Needs Further Improvement" before it is finalized and 
issued. We understand that the Department of the Treasury (Treasury) 
will be providing more detailed comments under a separate cover.

We appreciate your recommendations to improve the process for preparing 
the Financial Report of the United States Government and have worked 
closely with the Government Accountability Office and Treasury to 
implement the new Closing Package.

We generally concur with the findings in your report and will work with 
Treasury and other Executive departments and agencies to address these 
findings.

If you have any questions, please contact David M. Zavada, Chief, 
Financial Standards and Grants Branch, Office of Federal Financial 
Management at (202) 395-3993.

Sincerely,

Signed by: 

Linda M. Springer: 
Controller: 

[End of section]

Appendix IV: Comments from the Department of the Treasury: 

DEPARTMENT OF THE TREASURY 
WASHINGTON, D.C.
ASSISTANT SECRETARY:

July 23, 2004:

Mr. Jeffrey C. Steinhoff:

Managing Director, Financial Management and Assurance: 
Government Accountability Office:
Washington, DC 20548:

RE: GAO FY 2003 Financial Audit Management Letter:

Process for Preparing the Consolidated Financial Statements of the US 
Government Needs Further Improvement (GAO-04-866):

Dear Mr. Steinhoff:

We received GAO's draft financial audit letter (management letter) on 
the FY 2003 Financial Report of the U.S. Government (Process for 
Preparing the Consolidated Financial Statements of the US Government 
Needs Further Improvement, GAO-04-866) and are pleased to provide our 
comments. This response also addresses at greater length some FY 2002 
management letter concerns which are still listed as open in Appendix 
11 of this report.

We appreciate your recommendations for improving the preparation of 
this government-wide report. GAO's audit report clearly pointed out 
issues regarding certain federal financial reporting procedures and 
internal controls and offered valuable advice and recommendations for 
improvements. Many of the concerns GAO raised are in critical areas 
where federal financial reporting can be improved. We have already been 
addressing many of these recommendations through procedural changes and 
revised policies and guidance to the agencies whose financial 
information comprises the report. While we generally agree with GAO's 
concerns on most major issues, in some cases, we disagree on either the 
finding or the approach to addressing the problem. We discuss these 
specific items below.

1. Unreconciled transactions affecting the change in net position. We 
agree with GAO that net position is a problem and that the eliminations 
are not performed through balanced accounting entries. We do have some 
concerns with your emphasis on the elimination process. Mathematically 
the plug is the same no matter how the eliminations are performed. The 
focus on the elimination process clouds the problem. The fundamental 
issue here is that agency net position balances do not add forward from 
one year to the next. Our process does not introduce out of balance 
conditions, they are inherent in the agency balances. We do agree that 
increasing the granularity of the eliminations will help us focus on 
where the problem exists. That is why our new process will do two 
things. First, eliminations will be performed using reciprocal 
categories insofar as they exist. Second, we have devised a net 
position tracking methodology that will identify both the nature and 
the source of the plug (i.e. by financial area and by agency).

2. Reconciliation of net operating cost with budget surplus/deficit 
and Statements of changes in cash balance from budget. The GAO 
recommendation is to report the amount of net unreconciled differences 
as a separate reconciling activity in the reconciliation statement. We 
disagree. While we agree that this difference needs to be taken in to 
account we believe that showing the amount on the reconciliation 
schedule implies that we know that is where it belongs. This is an 
unidentified difference which by definition is unknown. Therefore we 
will continue to place it in results of operations until we have more 
information about where it belongs.

You have stated that we failed to ensure completeness in the 
preparation of the reconciliation statement and you have expressed a 
preference for a lower level of detail in the line items. While we 
agree that we can always improve the report, we take exception to your 
finding that the amounts identified as changes in the balance sheet 
items are incorrect. As the attached reconciliation shows, the prior 
period items account for the majority of the differences you 
identified. In addition, your preference for more detail flow 
information in the statements is not something we plan to do, in part 
because the report is already overly detailed and lengthy, and in part 
because the primary value of the reconciliation occurs in the display 
of the actuarial costs.

3. Statements of Changes in Cash Balance from Unified Budget and Other 
Activities You have recommended that we reconcile receipts and outlays 
used by agencies in their statements of budgetary resources to our 
statements. The FASAB Board realized that this information was not 
reliable or appropriate for our purposes. SFFAS 24 states:

9. SFFAS 7, paragraphs 77-82, require certain information abut 
budgetary resources and abut the relationship between budget 
obligations and proprietary net costs of operations. Such information 
is reported in the Statement of Budgetary Resources and Statement of 
Financing, respectively. This information is not required in the 
consolidated financial report of the Government as a whole and 
accordingly such statements are not required.

It is important to note that the "information" is not required 
therefore agency budgetary data is not used nor was ever contemplated 
to be used in our reports. We maintain the source of original entry for 
budgetary information in the STAR system and consider the use of other 
data not only less accurate but also a waste of taxpayer resources to 
both obtain and then correct the balances when we already have the 
information at our finger tips. There are no material differences 
between outlays reported by us and those included in the President's 
Budget. The standard does not require either receipts or outlays. SFFAS 
24 requires only the unified budget surplus or deficit as follows:

10. The financial report of the Government as a whole should provide a 
financial statement reconciling net operating revenue (or cost) and the 
annual unified budget surplus (or deficit). The financial statement 
should highlight:

GAO recommended that amounts used in preparing the consolidated 
statements be reconciled to agency statements. The unified government 
surplus is not reported in any agency statement.

As to the findings for cash and loans, we agree that the illustrative 
financial statement for Statement of Changes in Cash Balance provided 
in SFFAS No. 24 does show total cash and the gross amounts for receipts 
and disbursement s of cash related to direct loans and loan guarantees. 
However, we also see that presentation of this amount of detail is not 
authoritative, as seen in the following cite from SFFAS 24 for cash:

39. Several respondents urged the board to tic the change in cash on 
the new statement of changes in cash balance to balance sheet line item 
and accompanying note disclosure, and/or to include beginning and 
ending cash balances on the statement. The Board decided that such 
information would improve the statement and has included it in the 
illustration on the standard, but does not believe that it is necessary 
to require it as part of the standard.

At this time, we will not provide the amount of detail called for on 
the illustrative statement but will focus on resolving matters required 
by the standard.

The example cited about the difference between the Department of the 
Treasury's financial statement operating cash and the FR's operating 
cash is not an appropriate example. The Department of the Treasury 
includes time deposits and other cash items in what it presents as 
operating cash. The FR separately presents these items, as disclosed in 
footnote 2.

4. Management representation letters. We disagree with several of the 
statements in this section. First, we already are using the auditor's 
opinion where discrepancies exist between management and their auditor. 
Second, we believe that the appropriate level of the officials who are 
being asked to sign the letters is something determined by their 
auditors. These letters are written by the agencies to their auditors 
not to us. Third, audit standards do not require the materiality 
disclosures that GAO is recommending. In fact, materiality is a matter 
negotiated between each auditor and their clients and we believe it is 
inappropriate for us to take such a position. You obviously have 
concerns with regard to materiality levels used by agencies. We believe 
this should be taken up by GAO with those auditors along with any other 
audit quality issues you may have.

5. Allocation process. The draft report recommends that OPM costs be 
allocated by FTEs to the agencies listed in the Statement of Net Cost 
in accordance with Treasury's methodology. A new law mandating fully 
funded pension cost recognition at the LISPS occurred in mid-year, 
which necessitated that we adjust our OPM pension costs allocation 
methodology to reflect the change. To not have amended our methodology 
to reflect the change in the law would have resulted in an inaccurate 
allocation of OPM pension costs to the LISPS and to the other agencies 
listed in the Statement of Net Cost.

The draft report also recommended that reviews of the accuracy of the 
allocated OPM costs by Treasury management be a requirement. In fact, 
management played a large role in the adjustment of the OPM pension 
allocation methodology in FY 2003.

6. Criminal debt. As previously discussed with GAO, we will need to 
explore this with both Justice and the court system.

In conclusion, we are appreciative of GAO's recommendations. We agree 
with most of the recommendations and have been at work implementing 
them since we received the draft report. We would like to meet with you 
to discuss both our progress on correcting the deficiencies and those 
areas where we disagree. We look forward to working together to improve 
Federal financial reporting.

Sincerely,

Signed by: 

Donald V. Hammond: 
Fiscal Assistant Secretary: 
Department of the Treasury: 

GAO Comments: 

1. See "Agency Comments and Our Evaluation" section.

2. Treasury provided a detailed reconciliation that purports to show 
that prior period adjustments accounted for the majority of the 
differences we identified. The spreadsheet provided an expanded version 
of the information we had already taken into account in our review of 
the fiscal year 2003 reconciliation statement. Therefore, our view is 
unchanged.

3. As we stated last year as part of our fiscal year 2002 audit, we 
were not calling for Treasury to use federal agencies' financial 
statements to prepare the Statement of Changes in Cash Balance. 
Instead, we recommended that Treasury collect certain information 
already reported in federal agencies' audited financial statements and 
develop procedures that ensure consistency of the significant line 
items on the Statement of Changes in Cash Balance with the agency-
reported information. As we stated in our fiscal year 2002 report, 
Treasury has expressed the belief that the information it maintains in 
its system is materially reliable. However, federal agencies also 
believe their amounts are materially reliable and are supported by 
unqualified audit opinions on their financial statements.

4. Our example is appropriate. As stated in this report, we found that 
the total operating cash amount reported in the Statement of Changes in 
Cash Balance did not link to the underlying agencies' operating cash 
reported in their financial statements. Our analysis showed that 
Treasury reported operating cash in its own financial statements of $51 
billion but reported only $35 billion of operating cash in the 
Statement of Changes in Cash Balance in the CFS. Treasury attributes 
the difference to time deposits and other cash items which are included 
in Treasury's department wide financial statements as components of 
operating cash, but are reported in the CFS separately from operating 
cash. In that Treasury is the preparer of the CFS, we see this 
inconsistency as a relevant example.

5. As part of our audit of the fiscal year 2002 CFS, we found that 2 of 
the 30 federal agencies' management representation letters we had 
reviewed had discrepancies between what the auditor found and what the 
agency represented in its management representation letter. Treasury 
needs to be aware of these types of discrepancies and their resolution 
in order to determine the effects, if any, on the representations made 
in the management representation letter for the CFS.

6. As part of our audit of the fiscal year 2002 CFS, we found that 8 of 
the 30 federal agencies' management representation letters we had 
reviewed were not signed by the appropriate level of management. 
Treasury has a responsibility to determine that the agency management 
representation letters are signed by the highest-level agency officials 
that are responsible for and knowledgeable about the matters included 
in the agency management representation letter because Treasury is 
relying on federal agencies' representations in the management 
representations letter for the CFS.

7. As part of our audit of the fiscal year 2002 CFS, we found that 25 
of the 30 federal agencies' management representation letters we had 
reviewed did not disclose the materiality thresholds used by management 
in determining items to be included in the letter. Treasury stated that 
the audit standards do not require these amounts to be included in the 
management representation letter. While we agree that the standards do 
not require the materiality amounts to be included, we require Treasury 
and OMB to include a materiality threshold in the management 
representation letter for the CFS. Therefore, without assessing the 
materiality thresholds used by federal agencies in their management 
representation letters, we are unsure as to how Treasury and OMB can 
ensure that the representations made to GAO at the governmentwide level 
are within the materiality thresholds they state in the management 
representation letter for the CFS.

8. Materiality is one of several tools the auditor uses to determine 
that the nature, timing, and extent of procedures are appropriate. 
Materiality is a matter of the auditors' professional judgment, 
influenced by the needs of the reasonable person relying on the 
financial statements, and is not negotiated between the auditors and 
their clients. The management representation letter findings we 
reported as part of our fiscal year 2002 audit have also been 
communicated to agency auditors and we will continue to work with them 
to resolve these issues.

(198263): 

FOOTNOTES

[1] GAO, Financial Audit: Process for Preparing the Consolidated 
Financial Statements of the U.S. Government Needs Improvement, GAO-04-
45 (Washington, D.C.: Oct. 30, 2003).

[2] See footnote 1.

[3] The fiscal year 2003 Financial Report of the United States 
Government was issued by Treasury on February 27, 2004, and is 
available through GAO's Web site at www.gao.gov and Treasury's Web site 
at www.fms.treas.gov/fr/index.html.

[4] OMB and GAAP require agencies to report net outlays in their SBRs. 
The Statement of Changes in Cash Balance also reports unified budget 
outlays-actual. Both are intended to represent the same amount and be 
consistent with the information presented in the budget of the U.S. 
government. 

[5] OMB Bulletin No. 01-09, Form and Content of Agency Financial 
Statements (Washington, D.C.: Sept. 25, 2001), is OMB's official 
guidance for the form and content of federal agencies' financial 
statements. 

[6] In some agencies' fiscal year 2003 financial statements, the 
comparable fiscal year 2002 amounts were restated.

[7] Offsetting receipts are collections that are credited to general 
fund, special fund, or trust fund receipt accounts and that offset 
gross outlays at the agency or governmentwide level.

[8] These two agencies did not adequately explain their fiscal year 
2002 differences between the net outlays reported on their SBRs and the 
budget of the U.S. government in the notes to their fiscal year 2003 
financial statements.

[9] Treasury publishes the Monthly Treasury Statement, which contains 
year-to-date information for budget receipts and outlays. These reports 
present the same amounts that Treasury reports as the unified budget 
outlays in the Statement of Changes in Cash Balance and contain summary 
offsetting receipts information by agency or department. 

[10] The Financial Accounting Standards Board (FASB) sets financial 
reporting standards for privately owned entities in the United States. 
FASB pronouncements that are specifically made applicable to the 
federal government by the Federal Accounting Standards Advisory Board 
(FASAB) are part of federal GAAP hierarchy.

[11] The courts assess fines as punishment, whereas restitution is 
intended to make identifiable victims whole.

[12] The United States Attorneys' Annual Statistical Report summarizes 
and presents data related to criminal prosecutions and civil litigation 
conducted by the U.S. Attorneys for each fiscal year.

[13] GAO, Criminal Debt: Actions Still Needed to Address Deficiencies 
in Justice's Collection Processes, GAO-04-338 (Washington, D.C.: Mar. 
5, 2004).

[14] In July 2001, we reported that criminal debt owed the federal 
government was not being reported in accordance with SFFAS No.1 and 
SFFAS No. 7 and recommended that Justice, the Administrative Office of 
the U.S. Courts, OMB, and Treasury form a joint task force to develop a 
strategic plan that addresses managing, accounting for, and reporting 
criminal debt. See GAO, Criminal Debt: Oversight and Actions Needed to 
Address Deficiencies in Collection Process, GAO-01-664 (Washington, 
D.C.: July 16, 2001).

[15] Treasury refers to the significant agencies as "verifying 
agencies." They are the 23 Chief Financial Officers Act agencies, the 
Department of Homeland Security, the Export-Import Bank of the United 
States, the Farm Credit System Insurance Corporation, the Federal 
Communications Commission, the Federal Deposit Insurance Corporation, 
the National Credit Union Administration, the U.S. Postal Service, the 
Pension Benefit Guaranty Corporation, the Railroad Retirement Board, 
the Securities and Exchange Commission, the Smithsonian Institution, 
and the Tennessee Valley Authority.

[16] An item's omission or error is considered material if the 
surrounding circumstances make it probable that the judgment of a 
reasonable person relying on the information would have been changed or 
influenced by the inclusion or correction of the item.

[17] See footnote 1.

[18] See footnote 1.

[19] See footnote 1.

[20] See footnote 1.

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