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The Treasury Department has failed for years to fix controls in the systems it uses to account for the country’s finances. Therefore, in its latest audit of the government’s consolidated financial statement, the Government Accountability Office said it can’t render an opinion because of the ongoing material weaknesses. The GAO’s director of financial management and assurance issues, Dawn Simpson, joined Federal Drive with Tom Temin for the details.

Interview transcript:

Tom Temin: Isn’t this getting to be a little bit of an old story by now that the somehow all of the even with agencies individually being able to get clean financial statements, it doesn’t add up at the government wide level. Tell us what you found this year.

Dawn Simpson: So we did find that we were not able to provide an opinion on the US government’s consolidated financial statements. And that is because of continuing problems in certain areas that have been existing for for quite a while. But we did see progress as well, there continues to be progress in in many different areas that are moving in the right direction. One example is with the Department of Defense, which has historically been unable to provide reliable financial statements, they they did make progress in closing a significant number of their prior year findings. And so there are areas that are that are making good progress. But the overall conclusion this past year was that we were not able to provide an opinion is the lack of finalization of its controls and the ability to do a clean audit of the Defense Department that the reason that you can’t do the government wide one. That is to say, if you backed out the Defense Department, would everything else add up? Well, we do have three major impediments to providing an opinion, the Department of Defense is one of those major impediments. But there are two others. One relates to inter governmental transactions. And these are the transactions that occur between federal entities. And there’s quite a few of transactions that that occur between the federal entities and being able to eliminate those and consolidation is important in order to present the consolidated financial statements in accordance with generally accepted accounting principles. And so there there is a material weakness related to being able to eliminate those transactions. And then the third material weakness that long standing impediment relates to the preparation processes themselves that the Department of Treasury and the Office of Management and Budget as the prepares of the consolidated financial statements, they’re their deficiencies in the in those processes.

Tom Temin: And let’s talk for a minute about the intra governmental transfers Is this a substantial amount of money that goes back and forth among agencies, this is more than just a rounding error in the 1.5 or so trillion dollars that the government needs to account for every year?

Dawn Simpson: There is a substantial amount of activity that occurs between federal entities. And so all of that activity and balances, in order to present the consolidated financial statements must be eliminated. And there are still some, some deficiencies in being able to effectively eliminate that in consolidation. And when you look at the consolidated financial statements, you can see that there are line items on there called and unreconciled. And those are where those amounts are that are needed to have balanced financial statements. And because of the issues in the inter governmental area, these additional lines are needed on the financial statements in order to make them balance.

Tom Temin: And these are worth billions – fair to say?

Dawn Simpson: Yes, what you see on the financial statements is a net amount that, but there is a lot of pluses and minuses that are going into into that net amount that that does come up to the billions of dollars.

Tom Temin: All right. We’re speaking with Dawn Simpson, director of financial management and assurance issues at the Government Accountability Office. And with respect to the weaknesses in Treasury and OMB, these have been long standing and once again, you’re recommending that they fix, I guess, 12 recommendations that you had two years ago, there were 15 of them, so they fixed a few. Just give us the rundown there.

Dawn Simpson: Right. So the there are 12 open recommendations that we currently have as as of the end of our fiscal year 20 audit. And these recommendations are specifically related to the processes that the Department of Treasury and the Office of Management and Budget follow in preparing the consolidated financial statements. There are many other recommendations out at the agency at sea level that the auditors of those agency level financial statements, and the habits well, but our recommendations are focusing on the processes for preparing the consolidated financial statements. And we do have 12 that are currently open. And they follow with some of what we were talking about just a minute ago related to the major impediments in preparing the consolidated financial statements, both related to inter governmental as well as the preparation processes. But we did find that that Treasury is continuing to implement. They’ve been working diligently these past few years in implementing corrective actions to address our recommendations. And they may progress in many different areas. And as a result, we were able to close three recommendations from our prior year reports based on the corrective actions that they had implemented. And those dealt with certain improvements in their processes and procedures related to restatements and prior year information as well as improving corrective action plans. And a third one related to legal contingencies.

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Tom Temin: So fair to say that the CFOs at the individual departments and large agencies have what they need to get good statements. But somehow, when it all adds up at the Treasury level, that’s where the weaknesses are, that’s a fair way to describe the situation.

Dawn Simpson: It’s a combination. I mean, for the most part, yes, agencies are doing are able to obtain a clean or unmodified opinions on their financial statements. And most of the major departments and agencies do receive clean audit opinions. There are two agencies this past year that were not able to achieve a clean opinion, the Department of Defense, which we talked about being a major impediment, as well as the Small Business Administration. And so those those two entities being able to, to have clean audit opinions on their financial statements is key. And then, from the preparation process of the consolidation process that Treasury and OMB have, the improvements in their controls related to those preparation processes are also important.

Tom Temin: And what is the importance of all of this, I mean, the government takes in what it takes in and spends what it spends pretty much without regard to how much deficit they’re running up, because that’s just in the realm of politics more than anything else at this point. And so what’s the importance of having these consolidated financial statements that are clean?

Dawn Simpson: Consolidated financial statements provide a lot of good information to, to the citizens and Congress, about the finances of the government. It shows the government’s assets, liabilities, revenues, costs, and so a lot of good information and to have that information, be reliable is important to management and others that are making decisions. And so having that reliable information is key to be able to, to you make good, good decisions. And so that is really what you’re trying to achieve and improving federal financial Management is getting to where there are consolidated financial statements that do present your reliable amounts.

Tom Temin: And when a bill comes along, like the CARES Act, or the infrastructure bill, they’re contemplating these bills that are beyond the regular appropriations that we are familiar with, or the upcoming infrastructure bill that could be or the human infrastructure, that could be another three, four or 5 trillion. If you take up all of these trillions, that money is also included in the consolidated financial statements, or is that correct?

Dawn Simpson: Right. So yes, the consolidated financial statements are presenting the information that that would be included per federal accounting standards related to the federal government as a whole. And this past year, there was 165 federal entities that were part of the US government’s consolidated financial statements. And so all of that information is consolidated and presented as one set of financial statements. So it’s called this past year given the significance of the response to the COVID-19 pandemic. You all you will see, if you look at the entire report, you will see quite a few places given the significance of that information. Then that is discussed, including a new note disclosure that provides details related to that response. So that was definitely a very key area this past year. And you can gather quite a bit of information related to it in reading the consolidated financial statements.

Tom Temin: So if Congress appropriates it, it makes its way into the consolidated financial statements. Yes, it should make for good reading then. And with respect to the debt that is caused by the spending and the appropriations and what’s coming up could be much larger in terms of the debt that does also appear in the consolidated financial statements.

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Dawn Simpson: The balance sheet that’s presented with the consolidated financial statements shows the assets and liabilities of the federal government, one of which is the federal debt, which is what the government owes to outside investors, that debt is presented on the balance sheet and for fiscal year 20, as of the end of fiscal year 20, that amount, was $21.1 trillion. And so when you look at the balance sheet, you will see see that amount of debt there.

Tom Temin: And that 21 trillion is a big number. As Congress prepares to maybe add on more to it a lot more to it in just the next fiscal year, two, three, the GAO has commented on the unsustainability of the finances of the country going forward. What do we say now that even bigger spending is contemplated?

Dawn Simpson: One of the financial statements that’s presented at the consolidated are for the US government, it’s unique to the government is a statement of long term fiscal projections. And this is done just at the consolidated level. And it is to give your readers a sense of of where what that present value of receipts compared to non interest spending looks like over 75 years. And it’s to really see what what that over a 75 year period, what does that look like when you compare receipts to non interest bearing spending. And when you look at that, as well as the disclosures that are in the consolidated financial statements that show that debt is growing faster than gross domestic product, you see that that the government is on an unsustainable fiscal path. Given that and this comes this is under the assumption that there are related to no policy changes. So if there’s no policy changes, basically where the 75 year projections are showing is that we’re on an unsustainable fiscal path.

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