GAO says consolidated statements can’t clarify the status of federal finances

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Financial management problems at the Defense Department show up year after year. Throw in problems at the Small Business Administration and a few other persistent issues, and it’s impossible to accurately assess the state of federal finances. And that’s the conclusion from the latest look at the government’s consolidated statements conducted by the Government Accountability Office. The...

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Best listening experience is on Chrome, Firefox or Safari. Subscribe to Federal Drive’s daily audio interviews on Apple Podcasts or PodcastOne.

Financial management problems at the Defense Department show up year after year. Throw in problems at the Small Business Administration and a few other persistent issues, and it’s impossible to accurately assess the state of federal finances. And that’s the conclusion from the latest look at the government’s consolidated statements conducted by the Government Accountability Office. The Federal Drive with Tom Temin got the latest from the GAO’s Director of Financial Management and Assurance issues, Dawn Simpson.

Interview transcript:

Tom Temin: Miss Simpson, good to have you back.

Dawn Simpson: Thank you, Tom. Glad to be here.

Tom Temin: Well give us the bottom line, I guess, for lack of a better word, on the ability for GAO to certify these statements and say, yeah, we know what the state of federal finances really is.

Dawn Simpson: So we issued a disclaimer of opinion on the consolidated financial statements for this year. And our opinion has not changed on the accrual basis, consolidated financial statements since we performed our first audit back in fiscal year 1997. And so while the disclaimer of opinion is continuing, the major impediments that have been here since the beginning, there are three major impediments, those major impediments still continue to exist. One of those specifically is the Department of Defense. Department of Defense has been making improvements, though. And so when you think about, you know, maybe what has changed since the prior year is we are still continuing to see corrective actions that are being taken by both the Defense Department and the Department of Treasury and the Office of Management and Budget, which are responsible for preparing the consolidated financial statements. We are continuing to see commitment at those levels to improving their financial management, as well as specific corrective actions being taken to improve financial management.

Tom Temin: Now, another problem area is the Small Business Administration, as stated in your most recent report, my question there is have they always been a persistent problem, or the enormous amount of pandemic spending funneled through SBA, did that make things worse?

Dawn Simpson: That did affect SBA. They prior to the pandemic, were receiving clean opinions on their financial statements. And then beginning in fiscal year 2020, and then again, in fiscal year 2021, they were not able to obtain an opinion on their financial statements for SBA. And the problems that they are having and the control issues that are at that agency are because of the additional spending that has been occurring and the new programs that have been established because of the COVID-19 pandemic.

Tom Temin: And we don’t even know the extent of improper payments under all of those programs, yet the reports are starting to trickle in. And they’re not pretty. But we don’t know the outside edges of any of this yet, do we?

Dawn Simpson: Right, the estimated amount of improper payments increased to 281 billion for fiscal year 2021. And there are each year of increases and decreases across different programs that factor into that estimated amount of improper payments. And so it did increase over the prior year by about 70 billion. But the thing to keep in mind is what you were just mentioning is some of the new programs established for COVID-19 programs are not yet incorporated into those estimates. And that’s the way the process works per OMB guidance is the first year of programs established goes through a risk assessment process. And then once that process has occurred, and it’s determined that the program is susceptible to improper payments, then the agency goes forward in estimating the amount of improper payments. And so that is what is occurring currently.

Tom Temin: And I think it’s worth noting that when you just list one of the very early charts, the 2021 net costs of the U.S. government, and when you hear Congress talking about the $1.3, $1.4 trillion of appropriations for the fiscal year that they are trying to get past the CR, but the total net costs of the government are 7.4 trillion. And most of that is benefits through the Department of Health and Human Services and through Social Security. That’s 38% to 37%, a third of all the government, but I think that fact sometimes gets lost that those benefits and non so called discretionary programs are really, really big and growing, aren’t they?

Dawn Simpson: Yes, you will see that while our net cost stayed pretty consistent with fiscal year 2020. Net costs, when you look at it, is higher these last couple of years because of the additional spending from COVID-19. Another thing that I think is interesting to look at you mentioned that you know the top two agencies there, but you can take the top seven agencies and you’re at 80% of the net cost for the entire federal government. And so when thinking about it, that there’s seven agencies that are making up 80% of that, that’s another interesting way to look at the statement of net cost.

Tom Temin: Well, nobody talks about reducing federal expenditures anymore. That’s just quaint talk from the last century, I guess. We’re speaking with Dawn Simpson, director of financial management and assurance issues at the GAO. And what were your recommendations this year, I mean, it’s always, you know, get your house in order DoD, get your house in order SBA. But anything new specifically that you feel came out of this latest look at the consolidated statements?

Dawn Simpson: So from GAO, what we have been suggesting for some time, is that a fiscal plan is needed to put the government on a more sustainable fiscal path. If you look at the financial statements and specifically, when you look at the long term fiscal projections that are included within the financial statements and the accompanying information, you see that based on those projections, the government is on an unsustainable fiscal path. And that means that debt is increasing faster than GDP, our debt to GDP ratio is increasing over the long term, which means that we’re not on a sustainable path. And we have been, as I said, for several years specifically, recommending that a plan be established to put the government more on a sustainable fiscal path and thinking about fiscal rules or targets that can help do that.

Tom Temin: And in looking into the year ahead, I mean, I’m looking again at this pie chart, and the interest on the federal debt is 5% of the net costs of the government. And now the Fed is talking about, you know, inflationary controls, which would raise interest rates, would that affect the interest on the federal debt?

Dawn Simpson: Yes, with the current long term fiscal projections where non interest spending is greater than your receipts, the difference is, of course, then a debt that makes up that difference where you’re spending, or where their projections are showing that there’s more spending than receipts, then that showing that debt is increasing. And so with more debt, obviously, is more interest expense, as well as the compounding effect of higher interest rates. A good percentage of the current debt outstanding is in securities like bills that come due within one year or less. And when Treasury then has to roll over that debt into new securities, it’s the prevailing interest rate that Treasury then incurs on that debt. And so there’s that effect of new debt being issued at a higher interest rate that does play a significant effect into the amount of interest that would be paid.

Tom Temin: Yeah, so all those variables remind me of like a really tall wedding cake. And if it gets more than two or three degrees off vertical, pretty soon, the whole thing just collapses. And again, getting back to the major impediments, we talked about DoD, and there were some weaknesses that emerged in SBA. But there’s also weaknesses in the federal government’s process for preparing the consolidated financial statements, maybe elaborate on that for a bit.

Dawn Simpson: So there are three major impediments, the one being DoD, and the other two, one is intergovernmental transactions. And so federal agencies do a lot of business among each other. And those intergovernmental transactions, according to federal accounting standards must be eliminated in consolidation to accurately present the financial statements at that consolidated level. And so there continue to be issues in effectively eliminating those intergovernmental transactions during the consolidated process. And it starts at the agency level of really, the agencies having the processes and controls that they need to identify and resolve these differences with their trading partners.

And then the second impediment relates to the actual preparing of the consolidated financial statements by the Department of Treasury and Office of Management and Budget. And they have made significant improvements over the years in how they’re collecting the data and reconciling the data and presenting it. The intergovernmental transactions issue that I just mentioned, affects the preparation process as well. They currently can’t balance the financial statements because of these intergovernmental transactions not eliminating correctly. There are also issues in the presentation of information in accordance with generally accepted accounting principles. And then another area in the preparation process is there are two financial statements that are prepared only at the consolidated level. And these financial statements reconcile the budget deficit to net operating costs as well as changes in cash and Treasury is still working to improve its processes to effectively present the reconciling items on those financial statements.

Tom Temin: So lots of work for lots of people with big piles of sharp pencils.

Dawn Simpson: Yes, there is still work that remains in improving those areas, but a lot of improvements, too, I mean, it’s hard to see when you see that our overall opinion as far as a disclaimer has not changed over the 25 years, but there are improvements by both Treasury and Office Management and Budget as well as the Defense Department on these major impediments. And we continue to see the corrective action plans that the agencies have, the improvements that they are making and things we are seeing that things are getting better. There’s still work to be done. But we are seeing the commitment by agency officials, as well as the corrective actions that they’re taking to make those improvements.

Tom Temin: Dawn Simpson is director of financial management and assurance issues at the GAO. Thanks so much for joining me. We’ll catch you next year, if not before.

Dawn Simpson: Thank you, Tom.

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