Foundation

Deficiencies in Reporting Prevent a Clear View of the Federal Government's Financial Health

by Demian Brady / /

Regardless of what political party is in power, transparency and accountability in government should always be a key concern of citizens. In order to maintain a democracy, a good level of transparency and accountability are essential. The government must be able to effectively keep track of all of its financial activities and have information readily available for the public.

Sadly, after its recent audit of the U.S. government’s fiscal years 2016 and 2015 consolidated financial statements, the Government Accountability Office (GAO), was unable to report an unqualified, clean opinion. This would have signified that the records were in accordance with generally accepted accounting principles. But due to several deficiencies in the data, GAO was unable to provide a clean reckoning, which according to the Comptroller General of the GAO, “underscores that much work remains to improve federal financial management.”

GAO’s audit revealed that parts of the federal government are in desperate need of better financial management. While most departments and agencies received a clean audit, the main culprits cited by the Comptroller General were the Department of Defense (DoD) and the Department of Housing and Urban Development which “have continuing impediments to receiving a clean opinion on their financial statements,” and the Department of Agriculture which obtained a clean audit for only one of its financial statements.

Without audited financial statements and more information, the GAO cannot provide an opinion on the state of the government’s financial status. A disclaimer of opinion means that “the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.”

Specifically, the GAO highlights three major problems that precluded a clean audit. First, the DoD continues to have serious financial mismanagement that prevents its record books from being auditable. A clean audit at the Pentagon has never been a reality, but the tide may be changing with the  DoD has spent over a $1 billion to get its records into audit-ready condition by the end of FY 2017. (The Marine Corps did receive a clean audit opinion in 2014, but that was subsequently rescinded.) GAO reports that some progress has been made on this front, but continued leadership from the DOD and the Treasury is necessary to meet the deadline goal.

Second, the federal government fails to “adequately account for and reconcile intragovernmental activity and balances between federal entities.” This occurs when one federal agency has a transaction with another, yet there are unmatched balances between the two that Treasury must resolve. Finally, the GAO cites “significant uncertainties surrounding the achievement of projected reductions in Medicare cost growth and a material weakness in internal control over financial reporting.”

These obstructions prevent the federal government from properly identifying and reporting on the value of government-owned assets and services, determining the effectiveness and cost of government programs, effectively documenting improper payments and tax collections, and undertaking actions with reliable financial information. Since these are all aspects that are vital to an efficient and effective functioning government, their absence should be concerning to taxpayers.

The GAO echoes the warning from other fiscal watchdogs that the federal government’s current fiscal path is unsustainable, but the lack of financial transparency and shoddy accounting practices hinders effective oversight of how taxpayer dollars are being used. If this next administration is serious about shaping a better functioning government, the necessary reforms include better transparency and accountability, especially on the financial level. (A smaller federal government would also ease the burden on both taxpayers and Congress’s oversight committees.) Taxpayers should expect the same standards of accountability from the government that the Internal Revenue Service and regulatory agencies like the Securities and Exchange Commission demand of citizens and companies.  


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