Federal Financial Reporting: An Overview

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Federal Financial Reporting: An Overview

Summary

Federal financial reporting—defined here as the process of recording retrospective executive

department-level financial and performance information—can provide both a snapshot of the

government’s financial health at a given moment in time, as well as an accounting of its financial

performance over a particular time frame. Federal financial reports may help the federal

government demonstrate accountability, provide information for policy formulation and planning,

and be used to evaluate governmental performance. Multiple reports are required by law, and all

are intended to permit users—Congress, the President, agency heads, program managers, and

citizens—to see how the government raises, handles, and expends public money. Congress, in

particular, may find the information in federal financial reports useful for oversight.

The Budget and Accounting Procedures Act of 1950 was the first statute to require executive

agencies to provide reports and information on their financial condition to the Secretary of the

Treasury. The Chief Financial Officers Act of 1990 (CFO Act) mandates the preparation of

audited annual financial statements for certain funds and accounts from a number of executive

branch agencies, with 10 agencies selected to provide audited annual financial statements for all

agency accounts. The latter provision was expanded to every agency covered under the CFO Act

(commonly referred to as CFO agencies) in the Government Management Reform Act of 1994

(GMRA) and to every executive agency in the Accountability of Tax Dollars Act of 2002

(ATDA). In addition, the CFO Act requires the director of the Office of Management and Budget

(OMB) to furnish an annual financial management status report and a government-wide five-year

financial management plan, and GMRA requires the Secretary of the Treasury to provide

government-wide annual consolidated financial statements to be audited by the Government

Accountability Office (GAO).

GAO has documented improvements to federal financial reporting since the enactment of the

CFO Act. Demonstrable progress has been in evidence across numerous financial management

indicators, including timeliness, consistency, and auditability. In FY2012, 21 of 24 CFO agencies

received unqualified (clean) audit opinions on their annual financial statements, which means that

their statements were free of material misstatements and accord with Generally Accepted

Accounting Principles (GAAP). Challenges have persisted, though, both within agencies and

government-wide.

Unqualified overall audit opinions can obscure material weaknesses that underlie systematic

financial management issues. In addition, two agencies—the Department of Homeland Security

(DHS) and the Department of Defense (DOD)—have never received unqualified audit opinions,

which signifies the persistence of financial problems at these agencies. Government-wide, the

U.S. consolidated financial statements have received a disclaimer of opinion every year since

they were first required under GMRA. GAO was unable to express an opinion on the FY2012

U.S. consolidated financial statements due to material weaknesses in internal control over

financial reporting and other limitations on the scope of its work. Finally, federal financial

statements may not provide readily understandable information to their multiple stakeholders.

Congress has recently considered legislation relating to audits of federal financial statements. In

the 113th Congress, Representative Lee has introduced legislation (H.R. 559) that would require

a 5% reduction in a federal agency’s discretionary budgetary authority for failure to produce an

annual financial statement or failure to receive either an unqualified or qualified audit opinion on

its annual financial statement. H.R. 559 was referred to the Committee on Oversight and

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Federal Financial Reporting: An Overview

Government Reform and the Committee on Armed Services. The 112th Congress considered

similar legislation, as well as legislation on audited annual financial statements at DOD and DHS,

specifically.

In the 112th Congress, Senator Coburn introduced the Audit the Pentagon Act, which would have

mandated auditable financial statements by DOD for its FY2017 statements. The legislation also

would have required DOD to provide a complete and validated statement of budgetary resources

by FY2014. Congress also considered legislation to address problems at the Department of

Homeland Security in the 112th Congress. The DHS Audit Requirement Target Act of 2012

(DART, 126 Stat. 1591) was signed into law on December 20, 2012. The DART Act directs DHS

to obtain an unqualified audit opinion beginning with its FY2013 annual financial statements.

This report will be updated to reflect significant developments.

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Federal Financial Reporting: An Overview

Contents

Background ...................................................................................................................................... 1

Objectives of Federal Financial Reporting ................................................................................ 2

Audiences for Federal Financial Reports .................................................................................. 4

Statutory History and Current Authorities ....................................................................................... 4

Early Foundations of Modern Federal Financial Reporting ...................................................... 4

The Current Statutory Framework for Federal Financial Reporting................................................ 6

Chief Financial Officers Act of 1990......................................................................................... 6

Government Management Reform Act of 1994 ........................................................................ 7

Accountability of Tax Dollars Act of 2002................................................................................ 7

Selected Federal Financial Reports.................................................................................................. 8

Possible Oversight Issues for Congress ........................................................................................... 9

Achievements in Federal Financial Reporting Since the CFO Act ........................................... 9

Ongoing Challenges ................................................................................................................ 11

Financial Reporting Issues Within the CFO Agencies ...................................................... 11

Government-Wide Financial Reporting Issues.................................................................. 15

Accessibility of Federal Financial Reports ....................................................................... 17

Recent Legislation ......................................................................................................................... 18

Audit the Pentagon Act ............................................................................................................ 19

DHS Audit Requirement Target Act ........................................................................................ 20

Figures

Figure 1. The Financial Management Cycle .................................................................................... 2

Figure 2. Agency Unqualified (Clean) Audits ............................................................................... 15

Figure 3. Example of the Relationship Between Terms in Different Federal Financial

Reports ........................................................................................................................................ 18

Tables

Table 1. Selected Federal Financial Reports: Authorities and Requirements .................................. 8

Appendixes

Appendix. Agencies and Federal Financial Reporting .................................................................. 21

Contacts

Author Contact Information........................................................................................................... 23

Acknowledgments ......................................................................................................................... 23

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Federal Financial Reporting: An Overview

Background

ederal financial reporting—defined here as the process of recording retrospective executive

department-level financial and performance information—may provide both a snapshot of

the government’s financial health at a given moment in time, as well as an accounting of its

financial performance over a given time frame. According to the Federal Accounting Standards

Advisory Board (FASAB),1 the committee that establishes accounting standards for federal

entities,

“Financial reporting” may be defined as the process of recording, reporting, and interpreting,

in terms of money, an entity’s financial transactions and events with economic consequences

for the entity. Reporting in the federal government also deals with nonfinancial information

about service efforts and accomplishments of the government, i.e., the inputs of resources

used by the government, the outputs of goods and services provided by the government, the

outcomes and impacts of governmental programs, and the relationships among these

elements.2

Responsible stewardship of public money is integral to governmental accountability, and federal

financial reports supply information that links stewardship to accountability. According to

FASAB, “Because a democratic government should be accountable for its integrity, performance,

and stewardship, it follows that the government must provide information useful to assess that

accountability.”3 Reliable financial information may facilitate informed decision making,

government management, and policy implementation. In addition, federal financial reports may

make it easier to monitor waste, fraud, and abuse in federal programs.

Several types of federal financial reports are required by law. Each report presents a distinct array

of financial information intended to permit various stakeholders—Congress, the President,

agency heads, program managers, and citizens—to evaluate the federal government’s

performance relative to the collection and disbursement of public money. Congress, in particular,

may utilize the information in federal financial reports for policy formulation and planning,

programmatic decision making, and exercising oversight authority (Figure 1).

The Federal Accounting Standards Advisory Board was established in 1990 by the Government Accountability Office

(then the General Accounting Office), U.S. Department of the Treasury, and the Office of Management and Budget.

Federal Accounting Standards Advisory Board, “The History of FASAB,” webpage, at http://www.fasab.gov/about/

our-history/the-history-of-fasab/.

Federal Accounting Standards Advisory Board, “SFFAC 1,” in FASAB Handbook of Federal Accounting Standards

and Other Pronouncements, as Amended (Washington, DC: 2011), p. 10, at http://www.fasab.gov/pdffiles/

2011_fasab_handbook.pdf. SFFAC is an acronym for Statement of Federal Financial Accounting Concepts.

Ibid., p. 21.

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Federal Financial Reporting: An Overview

Figure 1. The Financial Management Cycle

Auditing

Budgeting

Audit(s) of Agency

Financial Statements

Formulation of President’s Budget

Audit of the U.S.

Consolidated Financial

Statements

Congressional Budget Actions

(budget resolution, actions on

appropriations bills, etc.)

Accounting

Budget Execution

Agency Financial

Statements

Appropriation

U.S. Consolidated

Financial Statements

Allotment

Apportionment

Obligation

Outlay

Source: Adapted from Gerald J. Miller, and Donijo Robbins, “Progressive Government Budgeting,” in Frederic

B. Bogui, ed., Handbook of Governmental Accounting (Boca Raton, FL: CRC Press, 2009), p. 75.

Objectives of Federal Financial Reporting

According to FASAB’s “Authoritative Source of Guidance”4 on generally accepted accounting

principles (GAAP), there are four objectives of federal financial reporting: budgetary integrity,

operating performance, stewardship, and systems and control.5 FASAB defines a set of concepts

for federal entities’ general purpose financial reporting that meet these objectives.6 Each

statutorily mandated report addresses these objectives, albeit with varying degrees of emphasis.

Federal Accounting Standards Advisory Board, “Authoritative Source of Guidance,” at http://www.fasab.gov/

accounting-standards/authoritative-source-of-gaap/.

Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 21.

Federal Accounting Standards Advisory Board, “SFFAC 2,” in FASAB Handbook of Federal Accounting Standards

and Other Pronouncements, as Amended, p. 5. FASAB does not, however, identify those entities actually responsible

for preparing and issuing financial statements. Federal statutes, as explained below, enumerate which agencies must

issue federal financial reports.

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Federal Financial Reporting: An Overview

Budgetary integrity. A federal financial report may satisfy the budgetary integrity objective if it

provides information on “how budgetary resources have been obtained and used.”7 The Statement

of Budgetary Resources, which must be included in agencies’ annual financial statements,

accords with the budgetary integrity objective by providing information on budgetary resources,

obligations, and outlays.

Operating performance. A federal financial report may meet the operating performance

objective by providing information on program and activity costs and accomplishments, as well

as management of the reporting entity’s assets and liabilities.8 An example is the Statement of Net

Cost required in agencies’ annual financial statements. The Statement of Net Cost specifically

addresses the operating performance objective9 through its inclusion of information on program

costs and the net cost of operations for the entire reporting entity, amongst other cost-related

items.10

Stewardship. The stewardship objective concerns the government’s financial position, defined as

“a point-in-time snapshot of an entity’s economic resources and the claims on those resources,”

and financial condition, which also conveys information about current financial health, as well as

future expectations.11 The Financial Report of the United States Government, the annual report on

government-wide financial and performance information required by law, documents whether the

government’s financial position improved or worsened over the reporting period, indicates

whether current budgetary resources are sustainable to meet future obligations, and presents other

key indicators of the government’s financial position and condition.12 In so doing, it permits the

reader to evaluate whether the government has been an effective steward of the nation’s

resources.

Systems and control. The systems and control objective states that federal financial reports

should assist readers in determining whether financial management systems, internal accounting,

and administrative controls are sufficient to satisfy the three previous objectives of budgetary

integrity, operating performance, and stewardship.13 Management’s assertions about the

effectiveness of internal controls14—for example, the “Management Assurances” statement in

agencies’ annual Performance and Accountability Reports (PARs)—fulfill the systems and control

objective by documenting internal control over financial reporting.15

Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 1.

Ibid., p. 2.

Federal Accounting Standards Advisory Board, “SFFAC 2,” p. 22.

Office of Management and Budget, Financial Reporting Requirements, August 3, 2012, at

http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a136/a136_revised_2012.pdf.

Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 46.

U.S. Department of the Treasury, 2011 Financial Report of the United States Government, at

http://www.fms.treas.gov/frsummary/frsummary2011.pdf.

Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 37.

Ibid.

Office of Management and Budget, Circular A-123, Management’s Responsibility for Internal Control, December

21, 2004, at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a123/a123_rev.pdf.

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Federal Financial Reporting: An Overview

Audiences for Federal Financial Reports

FASAB identifies several audiences of federal financial reports: Congress, the President, agency

heads, program managers, and citizens. Federal financial reports might be useful to each of these

audiences for different reasons. In addition, certain aspects of federal financial reports might vary

in degree of relevance for the stakeholder in question.

•

Congress may use financial information contained in financial reports to conduct

oversight of federal government programs and policies, consider policy

alternatives, make decisions on the financing and execution of programs, monitor

the effect of governmental financial commitments on the economy, and address

persistent, long-standing accountability problems.

•

The President and agency heads may use financial information to evaluate

program performance, make program reauthorization decisions, and provide

Congress with the resources necessary to perform its oversight function.

•

Program managers may use financial information to ensure that resources are

allocated properly, detect waste and inefficiency in program operations, and

provide information that enables Congress, the President, and agency heads to

monitor programs and activities.

•

Citizens may use financial information to evaluate whether their elected and

appointed representatives are responsible stewards of the public purse and gauge

whether “the government is functioning economically, efficiently, and

effectively.”16

Statutory History and Current Authorities

Early Foundations of Modern Federal Financial Reporting

The U.S. Constitution serves as the foundation for federal financial reporting. Article I, Section 9,

paragraph 7 states, “No Money shall be drawn from the Treasury, but in Consequence of

Appropriations made by Law; and a regular Statement and Account of the Receipts and

Expenditures of all public Money shall be published from time to time.” This clause grants

Congress the “power of the purse” but also requires a regular report of the receipts and

expenditures of public money. In so doing, it links appropriations to accountability. Justice Joseph

Story, who served on the U.S. Supreme Court from 1811-1845, stated, “Congress is made the

guardian of this treasure; and to make their responsibility complete and perfect, a regular account

of the receipts and expenditures is required to be published, that the people may know, what

money is expended, for what purposes, and by what authority.” 17 More recently, one Senator has

observed of the appropriations-accountability link, “This is Congress’s most important check on

the executive branch in the Constitution’s entire scheme of checks and balances. Congress cannot

“SFFAC 1,” p. 23.

Joseph Story, Commentaries on the Constitution (Boston: Hilliard, Gray, and Company, 1833), vol. 3, §§ 1341-43, at

http://press-pubs.uchicago.edu/founders/documents/a1_9_7s4.html.

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Federal Financial Reporting: An Overview

know that the executive branch is obeying the first part of the appropriations clause (spending) of

the Constitution without confidence in the second (accountability).”18

Several measures subsequently established provisions for federal financial reporting that

expanded on the constitutional mandate. In 1791, the U.S. House of Representatives approved a

resolution on statements of receipts and expenditures. It resolved

That it shall be the duty of the Secretary of the Treasury to lay before the House of

Representatives, on the fourth Monday of October in each year, if Congress shall then be in

session, or if not then in session, within the first week of the session next following the said

fourth Monday of October, an accurate statement and account of the receipts and

expenditures of all public moneys, down to the last day inclusively of the month of

December immediately preceding the said fourth Monday of October, distinguishing the

amount of the receipts in each State or District, and from each officer therein; in which

statements shall also be distinguished the expenditures which fall under each head of

appropriation, and shall be shown the sums, if any, which remain unexpended, and to be

accounted for in the next statement, of each and every of such appropriation.19

Two pieces of legislation enacted during the Progressive Era further expanded on federal

financial reporting requirements. The Dockery Act of 1894 required the Secretary of the Treasury

to provide Congress with “an accurate, combined statement of the receipts and expenditures

during the last preceding fiscal year of all public moneys.”20 Appropriations legislation for

FY1908 legislative, executive, and judicial expenses contained a section that required the

Secretary of the Treasury to include estimates of current and future public revenue and

expenditures in its annual report to Congress.21

Finally, the Budget and Accounting Procedures Act of 1950 (BAPA) made significant changes to

federal reporting requirements, and arguably was the foundation for present-day financial

reporting.22 BAPA authorized the Comptroller General, in consultation with OMB (formerly

Bureau of the Budget) and Treasury, to “prescribe the principles, standards, and related

requirements for accounting to be observed by each executive agency, including requirements for

suitable integration between the accounting processes of each executive agency and the

accounting of the Treasury Department.”23 Additionally, BAPA required agency heads to

“establish and maintain systems of accounting and internal control designed to provide

(1) full disclosure of the financial results of the agency’s activities;

(2) adequate financial information needed for the agency’s management purposes;

Senator Tom Coburn, “Amendment #3111, Importance of Audit the Pentagon Act–Talking Points,” undated, at

http://www.coburn.senate.gov/public//index.cfm?a=Files.Serve&File_id=eb595449-4af1-4c8c-a6d3-f1567b1fc60c

U.S. Congress, House of Representatives, Annals of Congress, 2nd Cong., 1st sess., December 30, 1791, p. 302.

28 Stat. 205, July 31, 1894 (at 210). The Dockery Act, it has been written, provided “for a greater centralization of

accounting functions and for a single audit of accounts in place of the ancient and cumbersome system of triplicate

audits.” Paul Studenski and Herman E. Kroos, Financial History of the United States (New York: McGraw-Hill Book

Company, 1952), p. 224.

34 Stat. 949, February 26, 1907.

64 Stat. 832, September 12, 1950.

64 Stat. 835.

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Federal Financial Reporting: An Overview

(3) effective control over and accountability for all funds, property, and other assets for

which the agency is responsible, including appropriate internal audit;

(4) reliable accounting results to serve as the basis for preparation and support of the

agency’s budget requests, for controlling the execution of its budget, and for providing

financial information ... ; [and]

(5) suitable integration of the accounting of the agency with the accounting of the Treasury

Department[.]”24

BAPA further required the Secretary of the Treasury to use agencies’ financial information to

prepare “such reports for the information of the President, the Congress, and the public as will

present the results of the financial operations of the Government.”25

The Current Statutory Framework for Federal

Financial Reporting

During the past two decades, Congress has further developed federal financial reporting through

enactment of three statutes: (1) the Chief Financial Officers Act of 1990 (CFO Act), the

Government Management Reform Act of 1994 (GMRA), and (3) the Accountability of Tax

Dollars Act of 2002 (ATDA).

Chief Financial Officers Act of 1990

According to the Government Accountability Office (GAO, then the General Accounting Office),

the CFO Act26

is the most comprehensive and far-reaching financial management improvement legislation

since the Budget and Accounting Procedures Act of 1950 was passed ... The CFO Act will

lay a foundation for comprehensive reform of federal financial management. The act

establishes a leadership structure, provides for long-range planning, requires audited

financial statements, and strengthens accountability reporting.27

More specifically, the CFO Act

•

established the Office of Federal Financial Management (OFFM) within OMB

and designated a CFO in each executive department and major executive agency

(subsequently known as CFO agencies);

•

requires each CFO agency to prepare and audit annual financial statements for

each revolving fund and trust fund and for accounts that performed substantial

commercial functions;

64 Stat. 836.

Ibid.

104 Stat. 2838, November 15, 1990.

General Accounting Office, The Chief Financial Officers Act: A Mandate for Federal Financial Management

Reform, GAO/AFMD-12.19.4, September 1991, p. 1, at http://www.gao.gov/special.pubs/af12194.pdf.

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Federal Financial Reporting: An Overview

•

directed 10 agencies, including the Department of Agriculture, the General

Services Administration, and the Department of the Army, to prepare audited

financial statements for all of their agency accounts; 28 and

•

requires the director of the OMB to produce an annual financial management

status report and a government-wide, five-year financial management plan.29

Government Management Reform Act of 1994

GMRA30 carried a range of provisions that sought to “improve the management of the Federal

government through reforms to the management of human resources, financial management, and

by other means.”31

With regard to financial reporting, GMRA expanded the number of agencies covered by the CFO

Act’s reporting provisions from 10 to all CFO agencies (then 23).32 The statute also requires

•

all CFO agencies to prepare and submit audited financial statements for the

previous year for all accounts and activities to the director of OMB;

•

the Secretary of the Treasury to coordinate with the Director of OMB to prepare

and submit an audited financial statement for the preceding fiscal year (i.e., all

accounts and activities of the U.S. government) to the President and Congress

beginning with financial statements prepared for FY1997; and

•

GAO to audit these financial statements.

Accountability of Tax Dollars Act of 2002

To build upon this improvement, Congress enacted ATDA,33 which

•

further expanded the CFO Act’s reporting requirements to cover all executive

branch agencies to prepare and submit audited financial statements to OMB and

the Congress; and

The latter provision was expanded to every covered CFO agency under GMRA and to every executive agency under

ATDA.

For an assessment of the CFO Act, see the Chief Financial Officers Council and the Council of Inspectors General on

Integrity and Efficiency, The Chief Financial Officers Act of 1990—20 Years Later, July 2011, at http://www.ignet.gov/

randp/cigiecforpt0711.pdf.

108 Stat. 3410, October 13, 1994.

U.S. Congress, Senate, Committee on Governmental Affairs, Government Management Reform Act of 1994, report to

accompany S. 2170, 2nd sess., S. Rept. 103rd Congress (Washington: GPO, 1994), p. 1. For example, the statute

established a pilot program in 6 agencies that permitted them to sell (“franchise”) services to other federal agencies,

and also limited the automatic cost of living raises for Members of Congress, the Executive Schedule, and the judiciary

to not exceed those given to General Schedule (GS) federal employees. The statute emerged subsequent to the National

Performance Review of President William J. Clinton and Vice President Albert Gore, Jr. See Office of the Vice

President, “From Red Tape to Results: Creating a Government that Works Better & Costs Less: Report of the National

Performance Review,” 1993.

For a current list of CFO agencies, see the Appendix.

116 Stat. 2049, November 7, 2002.

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Federal Financial Reporting: An Overview

•

permits OMB to exempt a non-CFO agency from this requirement if “the total

amount of budget authority available to the agency for the fiscal year does not

exceed $25,000,000; and ... the Director determines that requiring an annual

audited financial statement for the agency with respect to the fiscal year is not

warranted due to the absence of risks associated with the agency’s operations, the

agency’s demonstrated performance, or other factors that the Director considers

relevant.”34

The Senate committee report on ATDA stated

The financial reporting requirements of GMRA have prompted improvement in federal

financial accountability. There has been steady progress at federal agencies toward achieving

unqualified, or ‘clean,’ audit opinions. Only 6 of the 24 CFO Act agencies received clean

opinions for fiscal year 1996, the first year GMRA was effective. For fiscal year 2001, 18 of

the 24 agencies received clean opinions, and all of the CFO Act agencies met the statutory

reporting deadline for the second year in a row.35

Selected Federal Financial Reports

Each agency produces a range of reports on its financial activities. These reports are produced on

different timetables and include different data and may be intended for either internal or external

audiences.

Table 1 presents a selection of required annual federal financial reports. These reports provide

data and analyses that are particularly useful for stakeholders wishing to examine agencies’

financial performance in the previous year.

Table 1. Selected Federal Financial Reports: Authorities and Requirements

Report

Agency

Financial

Report

Authorities

Submitted

From

Submitted

Submission

Date

CFO Act (1990)

Agency head

Congress

November 15

GMRA (1994)

GAO

ATDA (2002)

OMB

Treasury

(Main / FMS)

Contains

Agency Head Message

Management’s Discussion

and Analysis (MD&A)

Financial Sectiona

Other Accompanying

Information (OAI)

116 Stat. 2049.

U.S. Congress, Senate Committee on Governmental Affairs, Accountability of Tax Dollars Act of 2002, report to

accompany S. 2644, 107th Congress, 2nd sess., S.Rept. 107-331 (Washington: GPO, 2002), p. 1.

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Federal Financial Reporting: An Overview

Report

Authorities

Financial

Report of the

United States

Government

GMRA (1994)

Submitted

From

Submitted

Submission

Date

Secretary of

the Treasury

(coordinates

with Director

of OMB)

Congress

December 15

President

Contains

Citizen’s Guide

Management’s Discussion

and Analysis (MD&A)

Financial Statements

Notes to Financial

Statements

Supplemental Information

Stewardship Information

GAO Auditor’s Report

Federal

Financial

Management

Reportb

CFO Act (1990)

Director of

OMB

Congress

January 31

Description of financial

management in the executive

branch

Summary of agencies’

audited financial statements

Government-wide 5-year

financial management plan

Source: Compiled by CRS from several sources: relevant statutory authorities (CFO Act, GMRA, and ATDA);

Office of Management and Budget, Financial Reporting Requirements, August 3, 2012, at

http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a136/a136_revised_2012.pdf; Department

of the Treasury, Financial Report of the United States Government (selected years), http://www.fms.treas.gov/fr/

index.html; Government Accountability Office, Understanding the Primary Components of the Annual Financial Report

of the United States Government, GAO-09-946SP, September 2009, at http://www.gao.gov/assets/80/77222.pdf.

Notes: While the submission date varies for the different reports, each is required annually.

The Financial Section must contain: a CFO Letter, an Auditor’s Report, and Financial Statements and Notes.

Financial Statements and Notes consists of the principal financial statements—Balance Sheet, Statement of

Net Cost, Statement of Changes in Net Position, Statement of Budgetary Resources, Statement of

Custodial Activity (when applicable), Statement of Social Insurance (when applicable), and Statement of

Changes in Social Insurance Amounts (when applicable)—and notes to financial statements, required

supplementary information (RSI), and required supplementary stewardship information (RSSI). Office of

Management and Budget, Financial Reporting Requirements, August 3, 2012, at http://www.whitehouse.gov/

sites/default/files/omb/assets/omb/circulars/a136/a136_revised_2012.pdf.

The most recent Federal Financial Management Report that CRS was able to locate is the 2009 report.

Office of Management and Budget, Federal Financial Management Report 2009, at http://www.whitehouse.gov/

sites/default/files/omb/assets/about_omb/2009_fin.pdf.

Possible Oversight Issues for Congress

More than two decades have passed since the enactment of the first of the modern financial

reporting statutes—the CFO Act. As recounted below, the congressional efforts to upgrade federal

financial reporting have produced significant achievements; however, challenges remain.

Achievements in Federal Financial Reporting Since the CFO Act

Prior to the enactment of the CFO Act, GAO contended that agency-wide problems with internal

control, poor executive management, and dated accounting systems were costing taxpayers

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Federal Financial Reporting: An Overview

billions of dollars.36 Testifying before the House Committee on Government Operations, thenComptroller General Charles A. Bowsher stated, “In 1990, the federal government is operating

with 1950s vintage accounting systems and concepts that just do not get the job done.”37 One

bureau in a cabinet-level department, for example, had an unexpended balance recorded in its

system that differed by over five times that reported by contractors and grantees.38 Some financial

managers attributed the prevalence of such poor financial information to the lack of an

auditability requirement for executive departments.39 Auditable financial statements, GAO has

noted, form a pillar of the financial management structure insofar as they enhance the reliability

of financial information and assist stakeholders in diagnosing problems preemptively.40

Low-quality financial information can have congressional implications. Writing prior to

enactment of the CFO Act, GAO observed that financial statements did not disclose fully the

federal government’s financial commitments.41 According to GAO, incomplete disclosures of

financial information limited informed policymaking.42 GAO recommended a permanent federal

financial management structure that would ameliorate these problems and recommended that

Congress pass legislation that would require, amongst other provisions, the preparation of

auditable agency financial statements.43

Less than four years after the passage of the CFO Act, Comptroller General Bowsher noted its

effect on federal financial reporting:

The act’s requirement for producing annual audited financial statements, in particular, is

demonstrating its value in many important ways, including better highlighting the agencies’

true financial conditions. Audited financial statements have also been integral to identifying

management inefficiencies and weaknesses and highlighting gaps in safeguarding the

government’s assets and possible illegal acts. Additionally, the CFO Act financial audits

have identified actual and potential savings of hundreds of millions of dollars.44

Further improvements have built on these initial results, with demonstrable progress across

numerous financial management indicators, including timeliness, consistency, and auditability.

The CFO Act mandated the production of timely financial information. Overall, agencies have

accelerated the delivery of their annual auditable financial statements from the statutorily required

General Accounting Office, Financial Integrity Act: Inadequate Controls Result in Ineffective Federal Programs and

Billions in Losses, GAO/AFMD-90-10, November 1989, p. 4, at http://www.gao.gov/assets/150/148414.pdf.

General Accounting Office, Financial Management Reform, T-AFMD-90-31, September 17, 1990, p. 2, at

http://www.gao.gov/assets/110/103480.pdf.

General Accounting Office, Managing The Cost Of Government: Building An Effective Financial Management

Structure, GAO/AFMD-85-35-A, February 1985, p. 11, at http://archive.gao.gov/d10t2/126342.pdf.

Ibid.

General Accounting Office, The Chief Financial Officers Act: A Mandate for Federal Financial Management

Reform, p. 14.

General Accounting Office, Managing The Cost Of Government: Building An Effective Financial Management

Structure, pp. 13-14.

Ibid.

General Accounting Office, Financial Integrity Act: Inadequate Controls Result in Ineffective Federal Programs and

Billions in Losses, p. 54.

General Accounting Office, Financial Management: CFO Act Is Achieving Meaningful Progress, GAO/T-AIMD-94149, June 21, 1994, p. 1, at http://www.gao.gov/assets/110/105597.pdf.

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five months (following the close of the fiscal year) to the current time frame of 45 days from the

end of the fiscal year.45 According to a joint report in 2011 from the Chief Financial Officers

(CFO) Council and the Council of Inspectors General on Integrity and Efficiency (CIGIE), the

financial reporting requirements in the CFO Act46 have translated into higher quality and more

consistent financial information, which has “provided increasing levels of credibility and

confidence in government finances.”47 In FY2012, 21 of 24 CFO agencies received unqualified

audit opinions on their annual financial statements. As shown in Figure 2, the number of CFO

agencies per year with unqualified audit opinions has steadily increased over time, from 6 in

FY1996 to 13 in FY1999 to 18 in FY2005 to the current high of 21. Unqualified (clean)

opinions48 on financial statements are indicators of strong financial management.49

Ongoing Challenges

The CFO Act, as amended by GMRA and ATDA, established a legislative framework that

enhanced federal financial reporting, though several challenges have persisted, both at the agency

level and government-wide. In addition, federal financial statements may not provide readily

understandable information to their multiple stakeholders.

Financial Reporting Issues Within the CFO Agencies

Across the CFO agencies, the increase in numbers of unqualified audit opinions reflects the

general trend over time (Figure 2), but these overall opinions may be only partially revealing.

Unqualified overall audit opinions can obscure material weaknesses that underlie systematic

financial management issues. In addition, two agencies—the Department of Homeland Security

(DHS) and the Department of Defense (DOD)—have never received unqualified audit opinions,

which signifies the persistence of financial problems at these agencies.50

Chief Financial Officers Council and the Council of Inspectors General on Integrity and Efficiency, The Chief

Financial Officers Act of 1990—20 Years Later, p. 13.

As amended by GMRA and ATDA.

Chief Financial Officers Council and the Council of Inspectors General on Integrity and Efficiency, The Chief

Financial Officers Act of 1990—20 Years Later, p. 12.

An unqualified or clean opinion means that an agency’s financial statements are free of material misstatements and

accord with Generally Accepted Accounting Principles (GAAP). Office of Management and Budget, Audit

Requirements for Federal Financial Statements, OMB Bulletin No. 07-04, September 4, 2007, p. 14, at

http://www.whitehouse.gov/sites/default/files/omb/assets/omb/bulletins/fy2007/b07-04.pdf. There are three other types

of audit opinions: a qualified opinion is issued when financial statements are fairly presented but there is a

misstatement or some portion of the financial statements could not be audited; an adverse opinion states that the

information contained in the financial statements is materially incorrect; and a disclaimer of opinion indicates that the

auditor is unable to form an opinion on the financial statements.

Chief Financial Officers Council and the Council of Inspectors General on Integrity and Efficiency, The Chief

Financial Officers Act of 1990—20 Years Later, p. 13.

The President’s budget submission for FY2013 includes a request for $613.9 billion in discretionary budget authority

for DOD. Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, Overview: United States

Department of Defense Fiscal Year 2013 Budget Request, February 2012, p. 1-1, at http://comptroller.defense.gov/

defbudget/fy2013/FY2013_Budget_Request_Overview_Book.pdf. According to GAO, this represents about 57% of the

discretionary federal budget authority requested for FY2013. Government Accountability Office, DOD Financial

Management: Challenges in Attaining Audit Readiness and Improving Business Processes and Systems, GAO-12642T, pp. 2-3, at http://www.gao.gov/assets/600/590203.pdf.

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Material Weaknesses

Some agencies have received unqualified overall audit opinions despite auditor-identified

financial material weaknesses51 that would not necessarily affect an agency’s overall audit

opinion but could signal costly underlying financial management issues regardless.52 GAO has

observed that “[m]any CFO Act agencies have obtained clean or unqualified audit opinions on

their financial statements, but the underlying agency financial systems and controls still have

some serious problems.”53 For example, the Department of Labor (DOL) received an unqualified

audit opinion on its FY2011 consolidated financial statements, but the auditor’s report still

identified three material weaknesses:

•

lack of sufficient controls over financial reporting;

•

lack of sufficient controls over budgetary accounting; and

•

lack of sufficient security controls over key financial and support systems.54

The auditor cited one case in which differences between general ledger transactions in DOL’s

accounting and reporting system and the consolidated trial balance for several general ledger

accounts ranged from $30 billion to $47 billion for each account.55 In general, OMB has

suggested that as material weaknesses increase, so too does the likelihood of a significant

misstatement in financial information.56 According to OMB, unreliable financial information can

inhibit program management and policy implementation.57

Financial Reporting Problems at DHS and DOD

Neither DHS nor DOD has ever achieved an unqualified audit opinion.58 After eight years of

disclaimers, though, DHS received a qualified audit opinion on its FY2011 annual financial

statements.59 The qualified audit opinion represented an improvement over the preceding

disclaimers in that most of the line items on DHS’s balance sheet were materially correct for the

According to OMB, “A material weakness is defined as a significant deficiency, or combination of significant

deficiencies, that result in a more than remote likelihood that a material misstatement of the financial statements will

not be prevented or detected.” Office of Management and Budget, Audit Requirements for Federal Financial

Statements, p. 6.

With regard to internal control over financial reporting, one or more material weaknesses would not necessarily

affect the overall audit opinion, provided that the material weaknesses do not result in a limitation on the scope of the

auditor’s work.

Government Accountability Office, CFO Act of 1990: Driving the Transformation of Federal Financial

Management, GAO-06-242T, November 17, 2005, p. 16, at http://www.gao.gov/new.items/d06242t.pdf.

U.S. Department of Labor, Agency Financial Report: Fiscal Year 2011, November 14, 2011, p. 35, at

http://www.dol.gov/_sec/media/reports/annual2011/2011annualreport.pdf.

DOL’s Office of the Chief Financial Officer (OFCO) ultimately provided revised data to the auditors that permitted

reconciliation. Ibid., p. 41.

Office of Management and Budget, Increase Reliability of Financial Information, Performance.gov, at

http://finance.performance.gov/initiative/increase-reliability/home.

Ibid.

Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated

Financial Statements, GAO-13-271R, January 17, 2013, p. 28, at http://www.gao.gov/assets/660/651357.pdf.

Office of Management and Budget, Increase Reliability of Financial Information, Performance.gov, at

http://finance.performance.gov/initiative/increase-reliability/agency/DHS.

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first time since FY2003.60 DHS’s FY2012 annual financial statements also received a qualified

opinion.61 DHS has stated that its next financial management objective is progress toward an

unqualified audit opinion.62 In order to accomplish this goal, DHS indicated that it would use risk

assessments to identify and correct material weaknesses and deficiencies; implement a plan to

modernize its core financial management system; establish standard business practices and

internal controls, as well as implement a standard line of accounting; and retroactively obtain a

clean, full-scope audit opinion on its FY2012 financial statements.63

Unlike DHS, DOD’s current objective is auditability. Its annual financial statements have

received a disclaimer of opinion since 1997, the first year in which department-wide annual

audited financial statements were required.64

At a House hearing on financial management at DOD, Daniel Blair, the deputy inspector general

for auditing at DOD, identified data quality, internal controls, and financial systems as three

impediments to auditability.65 Between FY2007 and FY2011, DOD’s Office of Inspector General

(OIG) issued 89 reports citing data quality problems.66 Deputy Inspector General Blair described

one example of a data quality issue in which DOD did not provide reliable information to

Congress on the costs of Guam realignment for calendar year 2009—obligations were understated

by over 10%, and expenditures were overstated by over 35%.67 Poor internal controls have also

had financial repercussions, according to Deputy Inspector General Blair.68 In one example, Army

Commercial Vendor Services incorrectly coded domestic contractors as foreign and then failed to

file federal information returns to the Internal Revenue Service (IRS) for approximately 316 of

the incorrectly coded payments in the amount of $351.92 million.69 The OIG identified 13 areas

of material weakness in DOD’s financial reporting for FY2012.70 Among the issues with financial

U.S. Department of Homeland Security, U.S. Department of Homeland Security Annual Financial Report: Fiscal

Year 2011, November 11, 2011, p. 256, at http://www.dhs.gov/xlibrary/assets/mgmt/cfo_afrfy2011.pdf.

U.S. Department of Homeland Security, Annual Financial Report: Fiscal Year 2012, November 15, 2012, p. 193, at

http://www.dhs.gov/sites/default/files/publications/dhs-annual-financial-report-fy2012-fullpdf.pdf.

Ibid., pp. 280-281.

Ibid., p. 281. The DHS Audit Requirement Target Act of 2012 (DART, 126 Stat. 1591), which requires DHS to

obtain an unqualified audit opinion beginning with its FY2013 annual financial statements, was passed soon after the

publication of DHS’s Annual Financial Report for FY2012. The DART Act will be discussed in a subsequent section

of this report.

Government Accountability Office, DOD Financial Management: Improvement Needed in DOD Components’

Implementation of Audit Readiness Effort, GAO-11-851, September 2011, p. 4, at http://www.gao.gov/new.items/

d11851.pdf; Office of Management and Budget, Increase Reliability of Financial Information, Performance.gov, at

http://finance.performance.gov/initiative/increase-reliability/agency/DOD.

U.S. Congress, House Committee on Oversight and Government Reform, Subcommittee on Government

Organization, Efficiency, and Financial Management, The Department of Defense: Challenges in Financial

Management, 112th Cong., 1st sess., September 23, 2011, H. Hrg. HRG-2011-CGR-0103, p. 23.

Ibid., p. 25.

Ibid.

Ibid., p. 27.

Ibid.

The 13 auditor-identified material weaknesses are: Financial Management Systems; Fund Balance with Treasury;

Accounts Receivable; Inventory; Operating Materials and Supplies; General Property, Plant, and Equipment;

Government Property in Possession of Contractors; Accounts Payable; Environmental Liabilities; Statement of Net

Cost; Intragovernmental Eliminations; Accounting Entries; and Reconciliation of Net Cost of Operations to Budget.

U.S. Department of Defense, Agency Financial Report: Fiscal Year 2012, November 15, 2012, p. 73, at

http://comptroller.defense.gov/afr/fy2012/DoD_FY12_Agency_Financial_Report.pdf.

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systems is the Logistics Modernization Program, the Army Working Capital Fund’s system for

achieving auditable financial statements.71 According to a 2011 OIG report, the Logistics

Modernization Program was in development for 10 years and cost $1.1 billion, yet did not

produce a system that was compliant with the U.S. Standard General Ledger.72

While the goal for DOD is auditability, auditability is not an end unto itself.73 According to

Deputy Inspector General Blair, auditable financial statements indicate improvement to the three

impediments to auditability—data quality, internal controls, and financial systems.74 The deputy

inspector general noted that improvements in these three areas would permit DOD to provide

accurate and timely financial information.75 In the absence of reliable financial information, DOD

is vulnerable to waste, fraud, and abuse. One GAO report states that

DOD financial management has been on GAO’s high-risk list since 1995 and, despite several

reform initiatives, remains on the list today. Pervasive deficiencies in financial management

processes, systems, and controls, and the resulting lack of data reliability, continue to impair

management’s ability to assess the resources needed for DOD operations; track and control

costs; ensure basic accountability; anticipate future costs; measure performance; maintain

funds control; and reduce the risk of loss from fraud, waste, and abuse. DOD spends billions

of dollars each year to maintain key business operations intended to support the warfighter,

including systems and processes related to the management of contracts, finances, supply

chain, support infrastructure, and weapon systems acquisition. These operations are directly

impacted by the problems in financial management. In addition, the long-standing financial

management weaknesses have precluded DOD from being able to undergo the scrutiny of a

financial statement audit.76

Congress has had a sustained interest in financial management problems at DOD. Reliable

financial information helps Congress “distinguish between necessary budget cuts and cuts that

would harm our troops and damage military readiness.”77 Various House and Senate committees

have held hearings on the issue, and the House Armed Services Committee convened an oversight

panel in the 112th Congress to perform a comprehensive review of DOD’s financial management

system. The House Armed Services Committee Panel on Defense Financial Management and

Auditability Reform evaluated DOD’s financial management challenges and plans for audit

readiness and recommended courses of action in these areas.78 The severity of the financial

U.S. Congress, House Committee on Oversight and Government Reform, Subcommittee on Government

Organization, Efficiency, and Financial Management, The Department of Defense: Challenges in Financial

Management, p. 35.

Ibid.

Ibid., p. 38.

Ibid.

Ibid., p. 39.

Government Accountability Office, DOD Financial Management: Numerous Challenges Must Be Addressed to

Improve Reliability of Financial Information, GAO-11-835T, July 27, 2011, Highlights Page, http://www.gao.gov/

assets/130/126745.pdf. Financial management at DOD remains on GAO’s high-risk list. Government Accountability

Office, High-Risk Series: An Update, GAO-13-283, February 2013, pp. 134-141, at http://www.gao.gov/assets/660/

652133.pdf.

Statement of Senator Kelly Ayotte, U.S. Congress, Senate Committee on Armed Services, Subcommittee on

Readiness and Management Support, Financial Management and Business Transformation at the Department of

Defense, 112th Cong., 2nd sess., April 18, 2012, S. Hrg. 112–658, p. 3.

House Armed Services Committee, Panel on Defense Financial Management and Auditability Reform: Findings and

Recommendations, 112th Cong., 2nd sess., January 24, 2012.

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management problems at DOD extend beyond the agency level to have government-wide

implications—GAO has identified the financial management problems at DOD as a barrier to

auditing the U.S. consolidated financial statements, as discussed in the next section.

Figure 2. Agency Unqualified (Clean) Audits

Number of Unqualified Opinions

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Compiled by CRS from agency data.

Government-Wide Financial Reporting Issues

Government-wide, the U.S. consolidated financial statements79 have received a disclaimer of

opinion every year since they were first required under GMRA.80 GAO was unable to express an

opinion on the FY2012 U.S. consolidated financial statements due to material weaknesses in

internal control over financial reporting and other limitations on the scope of its work.81 The

Comptroller General’s transmission letter in the FY2012 Financial Report of the United States

Government stated,

While significant progress has been made in improving federal financial management since

the federal government began preparing consolidated financial statements 16 years ago, three

major impediments continued to prevent us from rendering an opinion on the federal

government’s accrual-based consolidated financial statements over this period: (1) serious

financial management problems at DOD that have prevented its financial statements from

being auditable, (2) the federal government’s inability to adequately account for and

reconcile intragovernmental activity and balances between federal agencies, and (3) the

The U.S. government’s accrual-based consolidated financial statements are contained in the annual Financial Report

of the United States Government.

Under GMRA, the first government-wide financial statement was required no later than March 31, 1998.

Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated

Financial Statements, p. 224.

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federal government’s ineffective process for preparing the consolidated financial

statements.82

These three enduring issues have continued to mitigate GAO’s ability to render an opinion on the

U.S. government’s consolidated financial statements.83 For FY2012, GAO identified several other

underlying material weaknesses in internal control over financial reporting. GAO stated that the

federal government could not

•

determine whether property, plant, and equipment (PPE), primarily held by DOD,

were properly reported;

•

estimate or adequately support amounts reported for certain liabilities;

•

support significant portions of the reported net cost of operations; and

•

identify and resolve or explain material differences between certain components

of the budget deficit and related amounts reported in federal entities’ financial

statements.84

According to GAO, the limitations that preclude it from expressing an opinion on the U.S.

financial statements carry consequences. The material weaknesses identified by GAO inhibit the

federal government in safeguarding its assets and recording its transactions correctly, as well as in

measuring the full cost and performance of programs and activities.85 They also diminish the

reliability of information that would permit the federal government to operate efficiently and

effectively.86

GAO found four additional material weaknesses beyond those that contributed to its disclaimer of

opinion on the U.S. consolidated financial statements. These material weaknesses are improper

payments,87 information security control deficiencies, tax collection issues, and problems

associated with federal grants management.88

GAO provides recommendations for resolving weaknesses in the U.S. consolidated financial

statements. The recommendations, which may be issued in a separate management report, are

tracked over time so that it is possible to determine which have been implemented and which

have not. In its most recent management report, GAO noted that at the end of FY2011, there were

48 prior year recommendations that had yet to be implemented.89 Of those, 31 remained open

Gene L. Dodaro, Comptroller General, Government Accountability Office, Financial Audit: U.S. Government’s

Fiscal Years 2012 and 2011 Consolidated Financial Statements, GAO-13-271R, January 17, 2013, Transmission

Letter–2, at http://www.gao.gov/assets/660/651357.pdf.

Ibid. See also Government Accountability Office, Fiscal Year 2011 U.S. Government Financial Statements: The

Federal Government Faces Continuing Financial Management and Long-Term Fiscal Challenges, GAO-12-444T,

March 1, 2012, p. 6, at http://www.gao.gov/assets/590/589002.pdf.

Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated

Financial Statements, p. 227.

Ibid.

See CRS Report R42878, Improper Payments and Recovery Audits: Legislation, Implementation, and Analysis, by

(name redacted).

Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated

Financial Statements, pp. 243-246.

Government Accountability Office, Management Report: Improvements Needed in Controls over the Preparation of

(continued...)

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through the end of FY2012, including 14 that were first identified in FY2002.90 The report

identifies steps being taken to implement the recommendations.

Accessibility of Federal Financial Reports

Federal financial statements may not provide readily understandable information to their multiple

stakeholders. According to the 2011 joint report prepared by the CFO Council and CIGIE, the

ability to analyze financial statements requires specialized knowledge:

Although the information contained in financial statements and Annual Performance Reports

for the CFO Act agencies is robust, many believe that there is limited demand for this

information outside of government, perhaps due to its technical nature, seeming complexity,

and granular characteristics. Analyzing financial statements requires an in-depth

understanding of government accounting principles, and most financial and performance

reports contain details that may only appeal to the financial management community. In the

continuing quest to improve government financial reports and ensure data accuracy, the

financial management community should increase efforts to make financial information

more relevant to all of its stakeholders, including decision-makers, program managers, and

the public.91

For example, the various federal financial reports use similar terms (e.g., “cost,” “net cost,” etc.)

but the definitions of these terms and the relationships between them and the accompanying

financial figures conveyed can be difficult to discern to non-expert stakeholders (Figure 3). The

Federal Accounting Standards Advisory Board established a task force on the financial reporting

model in April 2010.92 The task force reported that the government-wide financial report was

difficult to navigate, even for task force members.93 FASAB’s user needs study94 found that

federal executives and managers, as well as citizens, found some difficulty in understanding

information in financial reports—the prevailing belief was that financial reports were intended for

accountants or economists.95

In addition, some have suggested that federal financial reports are not necessarily accessible to

Congress. A survey of 239 federal financial management executives and managers indicated that

the majority of respondents “believed federal financial statements cost too much to prepare and

audit while delivering little useful information to government decision makers.”96 In a House

subcommittee hearing on financial information in the federal government, Representative

Edolphus Towns appeared to concur. He stated:

(...continued)

the U.S. Consolidated Financial Statements, GAO-13-540, June 2013, p 10.

Ibid.

Chief Financial Officers Council and the Council of Inspectors General on Integrity and Efficiency, The Chief

Financial Officers Act of 1990—20 Years Later, p. 16.

FASAB, Financial Reporting Model Task Force: Report to the FASAB, December 22, 2010, p. 10, at

http://www.fasab.gov/pdffiles/2010dec22_financial_reporting_model_task_force.pdf.

Ibid., p. 15.

FASAB, User Needs Study, April 14, 2010.

FASAB, Financial Reporting Model Task Force: Report to the FASAB, p. 11.

KPMG Government Institute, Moving to the Next Stage of Federal Financial Reporting: Bringing Greater Value and

Transparency through “Open Government” Electronic Reporting, July 6, 2012, p. 6, at

http://www.kpmginstitutes.com/government-institute/insights/2012/pdf/federal-financial-reporting_2.pdf.

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[W]hen it comes to interpreting the actual documents, too much complex information can

lead to confusion. Too little information can be misleading.... From our experience, we know

that understanding federal government financial statements and reports can be difficult, even

for the experts. We need to have more readily available, simplified financial information in

order to help both us here in the legislative branch, as well as the public.97

Congress requires tractable information to address issues as they arise.98 Specifically, accessible

information permits better understanding of government operations, serves as a shared platform

from which policy positions may be established, affords an historical perspective on budgets and

spending, allows comparison of agencies’ fiscal results relative to budgets, and permits the

performance of program evaluations.99

Figure 3. Example of the Relationship Between Terms

in Different Federal Financial Reports

Source: Created by CRS based upon U.S. Department of the Treasury, “How the Federal Government’s

Financial Statements are Related to Each Other,” 2006 Financial Report of the United States Government, December

15, 2006, p. 12, at http://www.gao.gov/financial/fy2006/fy06finanicalrpt.pdf.

Recent Legislation

Congress has recently considered legislation relating to audits of federal financial statements. In

the 113th Congress, Representative Barbara Lee has introduced legislation (H.R. 559) that would

Statement of Representative Edolphus Towns, U.S. Congress, House Committee on Oversight and Government

Reform, Subcommittee on Government Organization, Efficiency, and Financial Management, Making Sense of the

Numbers: Improving the Federal Financial Reporting Model, 112th Cong., 1st sess., February 16, 2011, H. Hrg. HRG2011-CGR-0007, pp. 3-4.

FASAB, Financial Reporting Model Task Force: Report to the FASAB, p. 11.

General Accounting Office, Financial Reporting: Framework for Analyzing Federal Agency Financial Statements,

GAO/AFMD-91-19, March 1991, pp. 11-12, at http://gao.justia.com/department-of-veterans-affairs/1991/3/financialreporting-afmd-91-19/AFMD-91-19-full-report.pdf.

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require a 5% reduction in a federal agency’s discretionary budgetary authority for failure to

produce an annual financial statement or failure to receive either an unqualified or qualified audit

opinion on its annual financial statement. The 112th Congress considered similar legislation, as

well as legislation on audited annual financial statements at DOD and DHS, specifically.

Audit the Pentagon Act

In the 112th Congress, Senator Tom Coburn introduced the Audit the Pentagon Act (S. 3487). S.

3487 would have mandated auditable financial statements by DOD for its FY2017 statements.

Specifically, this legislation would have amended Section 1003 of the National Defense

Authorization Act for Fiscal Year 2010 (2010 NDAA, P.L. 111-118). The 2010 NDAA required

DOD’s Chief Management Officer (CMO), in consultation with the Under Secretary of Defense

(Comptroller), to ensure that its financial statements are validated as ready for audit no later than

September 30, 2017.100 S. 3487 differed from the 2010 NDAA in that it would have required the

statements to be auditable, not just validated as ready for audit.101

The legislation also would have required DOD to provide a complete and validated statement of

budgetary resources by FY2014. Failure to obtain an unqualified opinion on its FY2017 financial

statements would have resulted in (1) the cessation of authorities on reprogramming and

availability of funds authorized under the act, (2) a prohibition of expenditures of funds for major

defense acquisition program activities beyond Milestone B,102 and (3) a reorganization of the

CMO position. S. 3487 was referred to the Senate Committee on Armed Services and was not

enacted by the 112th Congress.

Representative Lee introduced companion legislation (H.R. 6528) in the House on September

21, 2012. H.R. 6528 differed from the Senate version in that it did not amend the auditability

requirement. It would have imposed a 5% reduction in the discretionary budgetary authority of

any agency required to produce an annual auditable financial statement that failed to (1) submit a

financial statement for the previous fiscal year or (2) obtain either an unqualified or qualified

audit opinion by an independent external auditor. The bill excluded from reduction accounts for

military, reserve, and National Guard personnel and the Defense Health Program Account of

DOD. In addition, the President would have been permitted to waive the reduction in

discretionary budget authority if it jeopardized national security or members of the Armed Forces

in combat. H.R. 6528 was not enacted by the 112th Congress.

In the 113th Congress, Representative Lee introduced the Audit the Pentagon Act of 2013 (H.R.

559).103 It was referred to the Committee on Oversight and Government Reform and the

100

123 Stat. 2439-2441.

S. 3487 defines “validated as ready for audit” to mean that DOD’s audit agencies would have reviewed the financial

statements and determined, in writing, that such statements are ready for audit.

102

Milestone B is defined as a decision to enter into system development and demonstration pursuant to guidance

prescribed by the Secretary of Defense for the management of Department of Defense acquisition programs (10 U.S.C.

2366(e)(7)).

103

Representative Lee introduced the legislation on February 6, 2013.

101

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Committee on Armed Services. H.R. 559 is nearly identical to the legislation proposed in the

112th Congress.104

DHS Audit Requirement Target Act

Congress also considered legislation to address problems at the Department of Homeland

Security in the 112th Congress. Senator Scott Brown introduced the DHS Audit Requirement

Target Act (DART, S. 1998) on December 15, 2011. Representative Todd Platts introduced the

House version of the bill on June 8, 2012. Unlike the Audit the Pentagon Act, the purpose of the

DART Act is not auditability. The DART Act directs DHS to obtain an unqualified audit opinion

beginning with its FY2013 annual financial statements. In addition, the legislation requires DHS

to provide Congress with its plan for meeting the deadline and for achieving better financial

management. Congress instituted this requirement for the purposes of enhanced monitoring and

oversight.105 The DART Act of 2012 (126 Stat. 1591) was signed into law on December 20,

2012.106

104

There are some differences between H.R. 6528 and H.R. 559. The summary of H.R. 559 includes the word

“qualified” in reference to an agency’s overall audit opinion, though the text of both H.R. 6528 and H.R. 559 in Section

4(c)(2) refers to unqualified and qualified audit opinions. Section 4(c)(1) of H.R. 6528 and H.R. 559 contains the

financial accountability deadline (i.e., March 2 of each fiscal year in question is when the discretionary budgetary

authority adjustment would be imposed). The initial fiscal year would have been FY2013 in H.R. 6528 but was

changed to FY2014 in H.R. 559. Lastly, H.R. 559 eliminates the reporting requirement in Section 5(1) of H.R. 6528

that would have required the Under Secretary of Defense (Comptroller) to submit a report to Congress itemizing those

reports that would no longer be necessary if the financial statements of the Department of Defense were audited with an

unqualified opinion.

105

U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, DHS Audit Requirement Target

(DART) Act of 2012, report to accompany S. 1998, 112th Cong., 2nd sess., November 2, 2012, p. 1.

106

126 Stat. 339.

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Appendix. Agencies and Federal Financial

Reporting

Executive Departments and Agencies Subject to the CFO Act (CFO Agencies)

Required to Prepare Financial Statements

Department of Agriculture

Department of Transportation

Department of Commerce

Department of the Treasury

Department of Defense

Department of Veterans Affairs

Department of Education

Agency for International Development

Department of Energy

Environmental Protection Agency

Department of Health and Human Services

General Services Administration

Department of Homeland Security

National Aeronautics and Space Administration

Department of Housing and Urban Development

National Science Foundation

Department of the Interior

Nuclear Regulatory Commission

Department of Justice

Office of Personnel Management

Department of Labor

Small Business Administration

Department of State

Social Security Administration

Executive Agencies Subject to ATDA Required to Prepare Financial Statements

Advisory Council on Historic Preservation

Japan-U.S. Friendship Commission

African Development Fund

Marine Mammal Commission

Appalachian Regional Commission

Merit Systems Protection Board

Architectural and Transportation Barriers

Compliance Board

Morris K. Udall Scholarship and Excellence in

National Environmental

Armed Forces Retirement Home

Policy Foundation

Barry Goldwater Scholarship and Excellence in

Education Fund

National Archives and Records Administration

Broadcasting Board of Governors

National Capital Planning Commission

Central Intelligence Agency

National Commission on Libraries and Information

Science

Chemical Safety and Hazard Investigation Board

National Council on Disability

Christopher Columbus Fellowship Foundation

National Credit Union Administration

Commission on Civil Rights

National Endowment for the Arts

Commission of Fine Arts

National Endowment for the Humanities

Commission for the Preservation of America’s

Heritage Abroad

National Labor Relations Board

Committee for Purchase from People Who Are

Blind or Severely Disabled

National Mediation Board

Commodities Futures Trading Commission

National Transportation Safety Board

Consumer Product Safety Commission

Nuclear Waste Technical Review Board

Congressional Research Service

Federal Financial Reporting: An Overview

Court Services and Offender Supervision Agency

for DC

Occupational Safety and Health Review Commission

Defense Nuclear Facilities Safety Board

Office of Government Ethics

Delta Regional Authority

Office of Navajo and Hopi Indian Relocation

Commission

Denali Commission

Office of Special Counsel

Equal Employment Opportunity Commission

Peace Corps

Farm Credit Administration

Presidio Trust

Farm Credit System Insurance Corporation

Railroad Retirement Board

Federal Communications Commission

Securities and Exchange Commission

Federal Election Commission

Selective Service System

Federal Financial Institutions Examination Council

Appraisal Subcommittee

Smithsonian Institution (SI)

Federal Housing Finance Board

SI/John F. Kennedy Center for the Performing Arts

Federal Labor Relations Authority

SI/National Gallery of Arts

Federal Mediation and Conciliation Service

SI/Woodrow Wilson International Center for

Scholars

Federal Mine Safety and Health Review Commission

Trade and Development Agency

Federal Retirement Thrift Investment Board

U.S. Court of Appeals for Veterans Claims

Federal Trade Commission

U.S. Holocaust Memorial Museum

Harry S. Truman Scholarship Fund

U.S. Interagency Council on Homelessness

Institute of American Indian and Alaska Native

Culture and Arts Development

U.S. International Trade Commission

Institute of Museum and Library Services

Vietnam Education Foundation

Inter-American Foundation

White House Commission on the National Moment

of Remembrance

James Madison Memorial Fellowship Foundation

Government Corporations Required to Prepare Financial Statements

Commodity Credit Corporation

Government National Mortgage Association

Community Development Financial Institutions Fund

Millennium Challenge Corporation

Corporation for National and Community Service

National Credit Union Administration Central

Liquidity Facility

Export-Import Bank of the United States

Overseas Private Investment Corporation

Federal Crop Insurance Corporation

Pension Benefit Guaranty Corporation

Federal Deposit Insurance Corporation

Rural Telephone Bank

Federal Home Loan Banks

Resolution Funding Corporation

Federal Housing Administration Fund

Saint Lawrence Seaway Development Corporation

Federal Prison Industries, Incorporated

Tennessee Valley Authority

Financing Corporation

Congressional Research Service

Federal Financial Reporting: An Overview

Source: Constructed from Appendix A, Appendix C, and Appendix D of Office of Management and Budget,

Audit Requirements for Federal Financial Statements, OMB Bulletin No. 07-04, September 4, 2007, pp. 33, 35-37, at

http://www.whitehouse.gov/sites/default/files/omb/assets/omb/bulletins/fy2007/b07-04.pdf.

Author Contact Information

(name redacted), Coordinator

Specialist in American National Government

[redacted]@crs.loc.gov, 7-....

Acknowledgments

This report was originally written by Meredith A. Levine, a former Analyst in Government Organization

and Management at CRS. Readers with questions about this report’s subject matter may contact (name re

dacted).

Congressional Research Service

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