FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and members of the Subcommittee, I am pleased to appear today to discuss matters involving the first Consolidated Financial Statements of the U.S. Government (CFS).

The Department of the Treasury has been and continues to be a strong proponent for the development of financial statements for Government agencies. This is the first time audited consolidated financial statements are required to be prepared on a government-wide basis. The statements are intended to provide the President, the Congress, and the American people with information about the Government's financial position, the cost of its operations and its sources of financing. They are the capstone of a process which began eight years ago as a result of legislation originating with this Committee.

In 1990, Congress passed the Chief Financial Officers (CFO) Act which required the preparation and audit of financial statements for certain agencies and components of agencies. That same year, the Office of Management and Budget (OMB), Treasury and the General Accounting Office (GAO) created the Federal Accounting Standards Advisory Board (FASAB). This body has created a comprehensive set of accounting standards tailored to the unique characteristics and needs of the Federal Government. The Government Management Reform Act was passed requiring that the Federal Government's 24 largest departments and agencies produce audited financial statements beginning in FY 1996. Agency statements are due March 1.

The first Consolidated Financial Statements for FY 1997 are based on the financial statements prepared by Federal agencies under those statutes and the new accounting standards.

The Government Management Reform Act of 1994 (GMRA) requires that not later than March 31 of 1998 and each year thereafter, the Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget, shall annually prepare and submit to the President and the Congress an audited financial statement for the preceding fiscal year, covering all accounts and associated activities of the executive branch of the United States Government. The financial statement shall reflect the overall financial position, including assets and liabilities, and results of operations, of the executive branch of the United States Government, and shall be prepared in accordance with the form and content requirements set forth by the Director of the Office of Management and Budget. The Government Management Reform Act also requires the Comptroller General of the United States to audit the CFS.

In order to prepare the CFS by the statutory due date, it was necessary to request agency trial-balance data by February 15. Much of this information had not yet been audited but was transmitted to the Financial Management Service (FMS) electronically so we could get started. Subsequent audit adjustments were accepted, but not all agencies had completed audits when we closed our books to meet the statutory due date.

The data transmitted needed to be standardized throughout the Federal Government to allow for summarization at the government-wide level. This standardization was accomplished by requiring agencies to use the U.S. Government Standard General Ledger (SGL). The SGL is maintained by FMS and is required for agency level accounting and reporting as well as government-wide reporting. Without the SGL, data could not be summarized for the CFS. Approximately 2000 individual reporting components, each with many account balances, were telecommunicated to Treasury via our FACTS system. Without the electronic transmission system, data could not have been collected and processed quickly enough to meet the statutory due date.

The size and complexity of the CFS preparation process far exceeded any previous financial consolidation effort. The data came from the 24 CFO Act agencies and many more smaller ones. Each agency acts as an independent financial entity and maintains its own financial system. To consolidate data from all these various systems was a daunting task.

However, it is not enough to collect the data and be able to summarize it. There has to be a reporting model. The Government Management Reform Act specified that OMB set forth the form and content requirements for the CFS. The CFS prepared by the Department of the Treasury conforms to OMB's form and content requirements.

The reporting model used was recommended by FASAB and prescribed by OMB.

General

The U.S. Government has continuing responsibilities for the general welfare of its citizens and for the national defense. It also has unique access to financial resources in that it has the power to tax, to borrow and to create money. The Fiscal Year 1997 Consolidated Financial Statements of the United States Government represent the Federal Government's first effort to prepare, in accordance with new Federal accounting standards, financial statements that include all of its vast and complex activities and to subject the financial statements to the rigors of an independent audit.

The publication of the audited financial statements represents yet another stage in the Clinton Administration's continuing efforts to improve the management and efficiency of the United States Government. In 1994, the Administration strongly supported the Government Management Reform Act, which mandated the issuance of the audited financial statements. Despite the substantial progress that has been made, however, further improvements are clearly necessary. The audit report from GAO discusses many areas in which the reliability of the current financial statements must be enhanced and improved. As a result, GAO was unable to render an opinion on these statements.

The FY 1997 Consolidated Financial Statements are the first step in an effort to provide the President, the Congress and the American people with reliable information about the financial position of the United States Government on an accrual basis, the net cost of its operations, and the financing sources used to fund these operations. The United States Government does not have a single bottom line that reflects its financial status but the information included in the statements provides a view of the Government's finances that has not previously been available. The financial statements consist of Management's Discussion and Analysis (MD&A), a Balance Sheet, a Statement of Net Cost, a Statement of Changes in Net Position, Notes to the Financial Statements, and Supplementary Information, which includes a stewardship section.

Reporting Entity and Basis of Accounting

The financial statements include the executive branch and limited information from the legislative and judicial branches of the Federal Government. Information from the legislative and judicial branches is limited because they are not required to prepare financial statements covering all activities. For example, the property, plant, and equipment of the judicial branch and the Congress are not reflected in the statements. Excluded because they are privately owned are Government-sponsored enterprises such as the Federal Home Loan Banks and the Federal National Mortgage Association. The Federal Reserve System also is excluded because organizations and functions pertaining to monetary policy are separate from and independent of the other central government functions.

At the time Congress passed the CFO Act which required the preparation and audit of financial statements for selected components, the Federal Government did not have a comprehensive set of generally accepted accounting standards. The three principals concerned with overall financial management in the Federal Government (the Secretary of the Treasury, the Director of OMB, and the Comptroller General) created the Federal Accounting Standards Advisory Board (FASAB) to address this need. The accounting standards developed by FASAB are tailored to the Federal Government's unique characteristics and special needs. Consequently net costs, rather than profit, are used as the primary financial measure for assessing efficiency and effectiveness. Although FASAB completed work on the basic set of Federal Financial Accounting Standards (FFAS) in 1996, some of the standards did not become effective until Fiscal Year 1997 and others will become effective in Fiscal Years 1998 and 1999. Therefore, agencies are faced with improving systems while the requirements are changing.

Since passage of the CFO Act in 1990, much has been accomplished. There is now a comprehensive set of accounting standards in place. For the first time in its history, the Federal Government has prepared and subjected to audit consolidated financial statements covering all its vast and complex programs and activities. The 24 agencies subject to the CFO Act are issuing audited agency wide financial statements. Government corporations subject to the Government Corporation and Control Act also are issuing audited financial statements. While these accomplishments are significant, they are just a beginning.

The Administration has designated financial management as one of the President's priority management objectives. The Administration has expressed its commitment to assuring the integrity of Federal financial information and gaining an unqualified opinion on the 1999 Consolidated Financial Statements of the United States Government. For the Administration to achieve these objectives, agencies must improve the quality of their financial information. Agency commitment to the Administration's objectives is reflected in OMB's Federal Financial Management Status Report and Five-Year Plan. That document sets forth the dates by which agencies have pledged to submit timely financial statements with unqualified audit opinions.

Weaknesses in agency accounting practices and financial management systems are the fundamental cause of problems that precluded the auditor from rendering an opinion on the FY 1997 Consolidated Financial Statements. Actions to correct these weaknesses have been identified and are being implemented. OMB, Treasury, and GAO are working with the major credit agencies to improve reporting of loans and loan guarantees.

In addition, Treasury plans to step up its efforts with agencies to ensure effective cash disbursement reconciliations by providing frequent analysis of budget clearing accounts so that cash receipt and disbursement differences can be promptly resolved.

Treasury and OMB are coordinating efforts to resolve the problems agencies are having in eliminating transactions with other Federal agencies.

Guidance and requirements will be provided to enable agencies to capture information needed to reconcile balances with their Federal trading partners. Treasury will also begin the modification of its systems to support agency efforts.

Finally, Treasury will increase its formal and informal training of agency financial management personnel. The training will address common errors identified in agency information used in the preparation of the Federal Government's 1997 Consolidated Financial Statements.

Thank you, Mr. Chairman. This concludes my formal remarks.