U.S. Government Financial Statements: Results of GAO's Fiscal Year 1997 Audit (Testimony, 04/01/98, GAO/T-AIMD-98-128). Pursuant to a legislative requirement, GAO discussed the results of its audit of the United States government's consolidated financial statements. GAO noted that: (1) significant financial systems weaknesses, problems with fundamental recordkeeping, incomplete documentation, and weak internal controls, including computer controls, prevented the government from accurately reporting a large portion of assets, liabilities, and costs; (2) these deficiencies affect the reliability of the consolidated financial statements and much of the underlying financial information; (3) they also affect the government's ability to accurately measure the full cost and financial performance of programs and effectively and efficiently manage its operations; (4) such deficiencies prevented GAO from being able to form an opinion on the reliability of the consolidated financial statements; (5) they are the result of widespread material internal control and financial systems weaknesses that significantly impair the federal government's ability to adequately safeguard assets, ensure proper recording of transactions, and ensure compliance with laws and regulations; (6) GAO's audit of the federal government's consolidated financial statements and the Inspectors General audits of agencies' financial statements have resulted in an identification and analysis of deficiencies in the government's recordkeeping and control systems and recommendations to correct them; (7) fixing these problems represents a significant challenge because of the size and complexity of the federal government and the discipline needed to comply with new accounting and reporting requirements; (8) several individual agencies that have been audited for a number of years faced serious deficiencies in their initial audits and made good progress in resolving them; (9) with a concerted effort, the federal government, as a whole, can continue to make progress toward ensuring full accountability and generating reliable information on a regular basis; (10) annual financial statement audits are essential to ensuring the effectiveness of the improvements now underway, and ultimately, to producing the reliable and complete information needed by decisionmakers and the public to evaluate the government's financial performance; and (11) they are also central to helping the government implement broader management reforms called for by the Government Performance and Results Act. TAX COLLECTION ACTIVITIES -------------------------------------------------------- Chapter 0:2.2 The federal government has material weaknesses in controls related to its tax collection activities, which affect its ability to efficiently and effectively account for and collect the government's revenue.\4 This situation requires extensive reliance on ad hoc programming and analysis and material audit adjustments to prepare basic financial information. For example, the government currently does not obtain information necessary to identify tax collections by every type of tax at the time of collection. As a result, the government cannot separately report revenue for three of the four largest revenue sources--Social Security, Hospital Insurance, and individual income taxes. Because of this, the government had to report these three tax types in the same line item on the Consolidated Statement of Changes in Net Position. Additionally, excise tax revenues are distributed to the relevant trust funds based on assessments rather than, as required by the Internal Revenue Code, on collections. Serious weaknesses also affect the federal government's ability to effectively manage its taxes receivable and other unpaid assessments.\5 The lack of appropriate subsidiary systems to track the status of taxpayer accounts affects the government's ability to make informed decisions about collection efforts. This weakness, for example, has resulted in the government pursuing and collecting, from individual taxpayers, taxes that had already been paid. Additionally, the federal government is vulnerable to loss of tax revenue due to weaknesses in controls over disbursements for tax refunds. The government does not perform fundamental verification procedures to ensure the validity of amounts claimed by taxpayers as overpayments prior to making disbursements for refunds. Consequently, it does not have effective controls to prevent the inappropriate payment of refunds, increasing its exposure to lost revenue.