Federal financial management needs urgent attention. They’re such a mess that the Government Accountability Office once again is unable to provide an opinion on whether government financial statements are reliable. It’s an old problem but becomes more urgent as the financial situation becomes less and less sustainable. GAO’s director of financial management and assurance issues, Dawn Simpson, joined the Federal Drive with Tom Temin to discuss the issue and where it currently stands.
Interview transcript:
Tom Temin And this latest release simply, I guess, reiterates something that has not changed in a long time. Give us the latest. What do we need to know here?
Dawn Simpson So we continued to not be able to give an opinion on the U.S. Government’s consolidated financial statements. So we did provide a disclaimer of opinion. And the three major impediments that that have been since the very first audit and for fiscal year 1997 continued to be there, and that the government is on a long term unsustainable fiscal path.
Tom Temin Right. Well, there’s two issues here, really: Is the government good at accounting for all of the money that comes in and goes out, or I guess in some cases moves among agencies? That’s one of the big issues that comes up in improper payments and also in accountability. And then the other issue is it’s simply spending way more than it takes in year, after year, after year. Two separate things?
Dawn Simpson So there are two separate financial statements: There’s the accrual-based financial statements which do present for the fiscal year or as the end of the fiscal year, your assets, liabilities, costs and revenues. And then you also have the sustainability financial statements that are based on projections into the future. And what that looks like as far as comparing revenues to expenditures.
Tom Temin And on that last one, revenues to expenditures, what what does it look like for ten years, in the broad sense?
Dawn Simpson So what the sustainability financial statements do is look at the present value of future revenues and expenditures and then show what that difference is. And when you look at the sustainability financial statements, there’s one for the government as a whole, and then there’s separate statements specifically related to the social insurance programs. And they show that the expenditures are exceeding the revenues during that 75-year period into the future. And so the other way to look at this is the comparison of the federal debt that we have to GDP. And where that is, is at. And basically, when you when you look at the projections and what that means with debt into the future means that we’re on an unsustainable fiscal path.
Tom Temin Right. Eventually the debt service will crowd out every other expenditure at the rate we’re going.
Dawn Simpson Yeah, they do show that interest on the debt continues to grow and that is affecting the expenditures into into the future.
Tom Temin But getting back to the opinion idea, I guess saying that you can’t render an opinion, is kind of an opinion, which says things are too much of a mess to make an opinion. And what are some of the factors there?
Dawn Simpson Yeah. So the three major impediments and continued one of those is the Department of Defense. They continue to not be able to receive an opinion on the Department of Defense financial statements, and they contribute significantly to the consolidated financial statements, and so they still have financial management issues there. And then there’s two other impediments: The inter-governmental, which is transactions between federal entities and being able to adequately account for that, as well as the preparation of the financials, the consolidated financial statements themselves.
Tom Temin And that last one, the preparation of the federal financial statements. Who does that? And what is it that they don’t have?
Dawn Simpson So the statements are prepared by the Department of Treasury in coordination with the Office of Management and Budget. And there are two there’s a few issues that are in there. The intergovernmental not being able to adequately account for intergovernmental, which then to prepare the consolidated financial statements, intergovernmental transactions need to eliminate properly and so that is part of the preparation process. And then there’s two financial statements that are prepared at the consolidated level that reconcile budget results to net operating cost and the changes in cash. And the preparation process for those two financial statements are still needing improvements in that area.
Tom Temin Right. I guess cash is king, they say. And if that doesn’t add up correctly than anything backing up to it is suspect.
Dawn Simpson Yeah. And these these two financial statements, when you look at the accrual-based financial statements and the financial report, you see that there’s explanations explaining that the budget is another corollary document that gives gives a lot of good financial information as well. And there is, you know, always questions, “What’s the differences between when I see the budget compared to what I see in the financial statements at the end of the day?” and so these two financial statements are there to help users understand differences between the budget and your net operating cost, which is on an accrual basis, as well as differences between the budget and how that was financed with cash and debt. And so those two financial statements kind of bridge that gap between understanding the financial statements and then and then what’s reported in the budget.
Tom Temin We’re speaking with Dawn Simpson. She’s director of Financial Management and Assurance Issues at the Government Accountability Office. And on that question of intergovernmental transfers, this comes up year-after-year. What is a good example of what’s not well accounted for?
Dawn Simpson So there actually has been progress in this area in the last few years. And so sometimes when, you know, when you see that we’ve been issuing a disclaimer since the very first audit, there is a lot of progress that’s occurring, even though we are still at a disclaimer. And one of the examples is in the intergovernmental area. There’s a lot of transactions between federal agencies throughout the government. There’s a lot of time between what is called buy-sell, where agencies buy and sell between each other. That’s a key example. But when you get to the consolidated financial statements, all those transactions between basically the government itself has to eliminate, in order to properly prepare the financial statements in accordance with accounting principles. And the progress has been that those differences, when you get to the preparation side, how much of a difference do you have, because the agencies have reported different amounts, or in different periods or accounts, or whatever the case might be. And those differences starting last year and then continued again this year were at a level that the Department of Treasury determined they were immaterial to the financial statements. And so they were able to write the difference off to cost, which meant that for the first time ever in last year in 2023 and then again for this year, the financial statements were balanced. Whereas, in the past there was actually like a plug on the financial statements. And so that has been progress, that the inter-governmental differences have decreased to a point where the financial statements can now be balanced at the consolidated level. The issue remains that there’s still control weaknesses, you know, significant control weaknesses at certain agencies in our intergovernmental processes. And as a result of those control deficiencies, there is the risk of material misstatement. And so it is something that, you know, as far as if this progress, you know, can be sustained.
Tom Temin And if you’re talking about the trillions and trillions involved here in a given year, $4, $5, or $6 trillion in outlays, and the lack of an opinion, is there a practical effect to that? Because it doesn’t seem to bother the politicians very much.
Dawn Simpson And the goal, as the Chief Financial Officers Act of 1990, I mean, the vision of that Act that really started the financial statement, preparation and audit within the federal government, I mean, the vision of that was to have data that was reliable at any point in time, and you so you would have your processes, your systems, your controls, to have that reliable data at any point, not just when you’re preparing your financial statement at the end of the year. And there’s been a lot of progress related to having that reliable data at any point in time. But there’s still a lot of work to be done. And the reason you want to get to that having that reliable data at any point in time is that managers within the federal government have data to be able to effectively and efficiently manage to performance throughout the year.
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