Federal Financial Reporting: An Overview
Meredith A. Levine
Analyst in Government Organization and Management
February 27, 2013
Congressional Research Service
7-5700
www.crs.gov
R42975
CRS Report for Congress
Pr
epared for Members and Committees of Congress
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 ......................................................................................... 10
Achievements in Federal Financial Reporting Since the CFO Act ......................................... 10
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 .................................. 9
Appendixes
Appendix. Agencies and Federal Financial Reporting .................................................................. 21
Contacts
Author Contact Information........................................................................................................... 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
F 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).
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/.
2 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.
3 Ibid., p. 21.
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Figure 1. The Financial Management Cycle
Auditing
Budgeting
Audit(s) of Agency
Formulation of President’s Budget
Financial Statements
Congressional Budget Actions
Audit of the U.S.
(budget resolution, actions on
Consolidated Financial
appropriations bills, etc.)
Statements
Accounting
Budget Execution
Agency Financial
Appropriation
Statements
Apportionment
U.S. Consolidated
Allotment
Financial Statements
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.
4Federal Accounting Standards Advisory Board, “Authoritative Source of Guidance,” at http://www.fasab.gov/
accounting-standards/authoritative-source-of-gaap/.
5 Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 21.
6 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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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
7 Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 1.
8 Ibid., p. 2.
9 Federal Accounting Standards Advisory Board, “SFFAC 2,” p. 22.
10 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.
11 Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 46.
12 U.S. Department of the Treasury, 2011 Financial Report of the United States Government, at
http://www.fms.treas.gov/frsummary/frsummary2011.pdf.
13 Federal Accounting Standards Advisory Board, “SFFAC 1,” p. 37.
14 Ibid.
15 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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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
16 “SFFAC 1,” p. 23.
17 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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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;
18 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
19 U.S. Congress, House of Representatives, Annals of Congress, 2nd Cong., 1st sess., December 30, 1791, p. 302.
20 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.
21 34 Stat. 949, February 26, 1907.
22 64 Stat. 832, September 12, 1950.
23 64 Stat. 835.
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(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;
24 64 Stat. 836.
25 Ibid.
26 104 Stat. 2838, November 15, 1990.
27 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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• 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
28 The latter provision was expanded to every covered CFO agency under GMRA and to every executive agency under
ATDA.
29 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.
30 108 Stat. 3410, October 13, 1994.
31 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.
32 For a current list of CFO agencies, see the Appendix.
33 116 Stat. 2049, November 7, 2002.
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• 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.
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.
34 116 Stat. 2049.
35 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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Table 1. Selected Federal Financial Reports: Authorities and Requirements
Submitted
Submitted
Submission
Report Authorities From
To
Date Contains
Agency
CFO Act (1990)
Agency head
Congress
November 15 Agency Head Message
Financial
Report
GMRA (1994)
GAO
Management’s Discussion
and Analysis (MD&A)
ATDA (2002)
OMB
Financial Sectiona
Treasury
(Main / FMS)
Other Accompanying
Information (OAI)
Financial
GMRA (1994)
Secretary of
Congress
December 15
Citizen’s Guide
Report of the
the Treasury
United States
(coordinates
President
Management’s Discussion
Government
with Director
and Analysis (MD&A)
of OMB)
Financial Statements
Notes to Financial
Statements
Supplemental Information
Stewardship Information
GAO Auditor’s Report
Federal
CFO Act (1990)
Director of
Congress
January 31
Description of financial
Financial
OMB
management in the executive
Management
branch
Reportb
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.
a. 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.
b. 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.
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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
billions of dollars.36 Testifying before the House Committee on Government Operations, then-
Comptroller 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’
36 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.
37 General Accounting Office, Financial Management Reform, T-AFMD-90-31, September 17, 1990, p. 2, at
http://www.gao.gov/assets/110/103480.pdf.
38 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.
39 Ibid.
40 General Accounting Office, The Chief Financial Officers Act: A Mandate for Federal Financial Management
Reform, p. 14.
41 General Accounting Office, Managing The Cost Of Government: Building An Effective Financial Management
Structure, pp. 13-14.
42 Ibid.
43 General Accounting Office, Financial Integrity Act: Inadequate Controls Result in Ineffective Federal Programs and
Billions in Losses, p. 54.
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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
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.
44 General Accounting Office, Financial Management: CFO Act Is Achieving Meaningful Progress, GAO/T-AIMD-94-
149, June 21, 1994, p. 1, at http://www.gao.gov/assets/110/105597.pdf.
45 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.
46 As amended by GMRA and ATDA.
47 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.
48 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.
49 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.
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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
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
50 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 percent
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-12-
642T, pp. 2-3, at http://www.gao.gov/assets/600/590203.pdf.
51 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.
52 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.
53 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.
54 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.
55 DOL’s Office of the Chief Financial Officer (OFCO) ultimately provided revised data to the auditors that permitted
reconciliation. Ibid., p. 41.
56 Office of Management and Budget, Increase Reliability of Financial Information, Performance.gov, at
http://finance.performance.gov/initiative/increase-reliability/home.
57 Ibid.
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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
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
58 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.
59 Office of Management and Budget, Increase Reliability of Financial Information, Performance.gov, at
http://finance.performance.gov/initiative/increase-reliability/agency/DHS.
60 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.
61 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.
62 Ibid., pp. 280-281.
63 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.
64 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.
65 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.
66 Ibid., p. 25.
67 Ibid.
68 Ibid., p. 27.
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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
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
69 Ibid.
70 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.
71 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.
72 Ibid.
73 Ibid., p. 38.
74 Ibid.
75 Ibid., p. 39.
76 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.
77 Statement of Senator Kelly Ayotte, U.S. Congress, Senate Committee on Armed Services, Subcommittee on
(continued...)
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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
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
25
20
15
10
5
0
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
(...continued)
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.
78 House Armed Services Committee, Panel on Defense Financial Management and Auditability Reform: Findings and
Recommendations, 112th Cong., 2nd sess., January 24, 2012.
79 The U.S. government’s accrual-based consolidated financial statements are contained in the annual Financial Report
of the United States Government.
80 Under GMRA, the first government-wide financial statement was required no later than March 31, 1998.
81 Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated
Financial Statements, p. 224.
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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
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
82 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.
83 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.
84 Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated
Financial Statements, p. 227.
85 Ibid.
86 Ibid.
87 See CRS Report R42878, Improper Payments and Recovery Audits: Legislation, Implementation, and Analysis, by
(continued...)
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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.89
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 2010.90 The task force reported that the government-wide financial report was
difficult to navigate, even for task force members.91 FASAB’s user needs study92 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.93
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.”94 In a House
subcommittee hearing on financial information in the federal government, Representative
Edolphus Towns appeared to concur. He stated:
[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
(...continued)
Garrett Hatch and Meredith A. Levine.
88 Government Accountability Office, Financial Audit: U.S. Government’s Fiscal Years 2012 and 2011 Consolidated
Financial Statements, pp. 243-246.
89 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.
90 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.
91 Ibid., p. 15.
92 FASAB, User Needs Study, April 14, 2010.
93 FASAB, Financial Reporting Model Task Force: Report to the FASAB, p. 11.
94 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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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.95
Congress requires tractable information to address issues as they arise.96 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.97
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
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
95 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. HRG-
2011-CGR-0007, pp. 3-4.
96 FASAB, Financial Reporting Model Task Force: Report to the FASAB, p. 11.
97 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/financial-
reporting-afmd-91-19/AFMD-91-19-full-report.pdf.
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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, 2017.98 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.99
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,100 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).101 It was referred to the Committee on Oversight and Government Reform and the
Committee on Armed Services. H.R. 559 is nearly identical to the legislation proposed in the
112th Congress.102
98 123 Stat. 2439-2441.
99 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.
100 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)).
101 Representative Lee introduced the legislation on February 6, 2013.
102 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 Sec.
4(c)(2) refers to unqualified and qualified audit opinions. Sec. 4(c)(1) of H.R. 6528 and H.R. 559 contains the financial
(continued...)
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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.103 The DART Act of 2012 (126 Stat. 1591) was signed into law on December 20,
2012.104
(...continued)
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 Sec. 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.
103 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.
104 126 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
Smal 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
Morris K. Udall Scholarship and Excellence in
Compliance Board
National Environmental
Armed Forces Retirement Home
Policy Foundation
Barry Goldwater Scholarship and Excel ence in
National Archives and Records Administration
Education Fund
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 Fel owship 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
National Labor Relations Board
Heritage Abroad
Committee for Purchase from People Who Are
National Mediation Board
Blind or Severely Disabled
Commodities Futures Trading Commission
National Transportation Safety Board
Consumer Product Safety Commission
Nuclear Waste Technical Review Board
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Federal Financial Reporting: An Overview
Court Services and Offender Supervision Agency
Occupational Safety and Health Review Commission
for DC
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
Smithsonian Institution (SI)
Appraisal Subcommittee
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
U.S. International Trade Commission
Culture and Arts Development
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
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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 Bul etin No. 07-04, September 4, 2007, pp. 33, 35-37, at
http://www.whitehouse.gov/sites/default/files/omb/assets/omb/bul etins/fy2007/b07-04.pdf.
Author Contact Information
Meredith A. Levine
Analyst in Government Organization and
Management
mlevine@crs.loc.gov, 7-8417
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