Terry Gerton GAO has recently released the audit of the federal government’s consolidated financial statements for fiscal years 2024 and 2025. And once again, GAO said it was unable to issue an audit opinion on the government’s financial statements. For our listeners who don’t live in the audit world, what does that actually mean in practical terms?
Dawn Simpson So it means we were not able to determine whether the amounts presented in the financial statements were reliable in all material respects. And the reason being is, you know, not having a sufficient amount of evidence in order to make a conclusion as to the of the amount.
Terry Gerton When we’re talking about $7.3 trillion in costs, that’s a pretty significant statement in terms of unreliability.
Dawn Simpson The federal government has not been able to achieve a clean opinion on its financial statements — we’ve been auditing the financial statements since fiscal year 1997. And we continue to find that there’s really three major impediments preventing an opinion on those financial statements, that those three impediments are the financial management problems at the Department of Defense, the accounting for activity between federal entities and the preparation of the consolidated financial statements.
Terry Gerton The Department of Defense says it is really, really serious about getting a clean audit, and they have an audit readiness plan. When you think about that approach, are they on track to maybe meet some of these critical shortfalls?
Dawn Simpson There is a lot of work ongoing at the Department of Defense. They are working towards the mandated date of 2028. There has been progress at the Department of Defense and one key example of that is with the Marine Corps. They have been able to achieve for now three years in a row, a clean opinion on their financial statement.
Terry Gerton The report highlights some long-standing material weaknesses that underlie those three major impediments that you just identified. What are the biggest problem areas that continue to keep the government from being auditable?
Dawn Simpson There are several material weaknesses that contribute to our disclaimer of opinion. And those are in the categories on the asset side with the property and equipment and inventory and supplies also with loans receivables and loan guarantees. And then moving on to some of the environmental and disposal liabilities, your commitments and contingencies, as well as then to your net cost. Those are some of the key line item areas where there are controlled efficiencies.
Terry Gerton And there’s a lot of work to do to get all of the systems working to actually create a clean audit. But when these weaknesses persist year after year, what are the real consequences? How does it affect decision-making and oversight and public trust?
Dawn Simpson That is the key. You can get to a clean opinion on your financial statements and still have material weaknesses in control. That’s not the case with the weaknesses in the controls right now are such at a point that they actually contribute to not being able to get to clean opinion. But it is possible to have reliable numbers at a single point in time on your finance statements that still have then significant problems with your controls and your processes. But the goal is then to have the processes and controls that function effectively so that then you have reliable data throughout the year, not just at that single point in time. And that’s really the goal of improving federal financial management in the federal government, is getting to a point where you have reliable financial data throughout the years from which managers can use to make decisions.
Terry Gerton I’m speaking with Dawn Simpson. She’s the director of the Financial Management and Assurances Issues Team at GAO. Ms. Simpson, let’s take a step back. We have not had much success in getting Congress to deliver budgets, appropriations on time for decades. Now we have consistent perpetual problems in financial reporting. When you put all of those together, what does that tell you at GAO about how well our systems are operating and how well we know exactly what we need to spend and what we needed to spend it on.
Dawn Simpson In a key part of our work at GAO, and what you’ll see in looking at the financial report of the U.S. Government, is really looking at the long term and when you look at that and you see there’s a specific financial statement that is required by federal accounting standards that’s prepared, it’s the statement of long term fiscal projections. And when you look at that and the other sustainability financial statement and you analyze those, I mean, you see that the federal government is on an unsustainable long-term fiscal path. And what that means is to be unsustainable means that your debt is growing faster than your economy and so you’re doing a calculation between your debt to your gross domestic product or GDP. And when that number is increasing then you’re on an sustainable fiscal path. And that is what has been the situation for many, many years now. And so that is where the financial report discusses the unsustainable fiscal path and our work and our audit report address that issue as well. And then GAO also prepares a separate report on an annual basis that we’ve done for about 10 years now called The Nation’s Fiscal Health that really goes into more details about the unsustainable fiscal path.
Terry Gerton Another key piece of GAO’s work is the examination you all do of improper payments and waste fraud and abuse. Given what you’ve just described in terms of material weaknesses across the federal agencies in terms financial reporting, how are those two things connected? Can you get good estimates of waste, fraud, abuse and improper payments when the systems are not giving you good data?
Dawn Simpson It’s interesting the whole issue with improper payments was actually identified because of the discipline of the financial statement audits and that being then a government wide problem … came about through the financial audits. And so, that discipline can, by improving controls, you know, if you’ve got the processes and the controls, then that should then help in the areas of improper payments and fraud. And so that discipline will continue to help in those areas.
Terry Gerton GAO does note in this audit that some progress is being made. So let’s flip over to the more optimistic side of the report. Where are you seeing progress?
Dawn Simpson So as I mentioned earlier, the Department of Defense with Marine Corps, that was a key example of progress. You know, in 2023, they achieved a clean opinion of the first military service to be able to do that. And they’ve been able to maintain it now for ’24 and 2025. Another key example this year was the Department of Education, who had had a disclaimer for the last three years. They did a balance sheet only audit, but they were able to get to a clean opinion on their balance sheet. You know, the agencies that are, other than the Department of Defense, the other agencies that are experiencing financial management challenges right now, all of them have in the past achieved a clean opinion. So they have the processes, the controls. I mean, they know what to do. It’s just getting over the financial management challenges that they’re experiencing right now.
Terry Gerton As you look ahead, what does Congress need to do to support agencies in their work to achieve a clean audit?
Dawn Simpson We have suggested to Congress to develop a strategy to … be able to place the government on a sustainable fiscal path and so, that one key area is really addressing the unsustainable long-term fiscal path.
Terry Gerton Do agencies need more funding to invest in new financial management systems?
Dawn Simpson Some work we did a few years ago, the Chief Financial Officers Act of 1990 has been around now over 30 years and we took a look back at seeing what progress had happened since that landmark legislation was passed compared to now. And also the challenges that still exist and there has been a lot of progress in federal financial management over the past 30 plus years. But there’s still a lot of challenges to get to that point of having the reliable data at any point in time. And one of the areas that we discussed in that report are the financial management systems and having the systems that work effectively to be able to have the financial reporting processes that are necessary.
Terry Gerton The federal government’s financial operations experienced quite a bit of disruption. When you think about having to audit this year’s financial statements, what will you be looking for?
Dawn Simpson So the disruption being with the, you know, the shutdown at the beginning of the fiscal year, the first result or aspect of that shutdown was just getting through the conclusion of the fiscal year ’25 financial reporting cycle and the audits, which normally, you know, the fiscal year ’25 audited financial statements at the agency level would go out in the November time frame. But with the shutdown, that was delayed until some through anywhere from December all the way through the end of January by the time agencies issued. So that audit work was later, you know, this year. And as a result, that means then that the beginning of the audits for the next fiscal year, are kind of at a later start, things get crunched together. So that’s just one aspect from an audit side, as far as getting the fiscal year ’26 audits underway. But then also, just like we do in any audit, as far is assessing risks and determining what the risks are during the year. I mean, we take all kinds of things into consideration between the environment and changes to the environment, whether that could be loss of personnel or changes in an organizational structure. I mean, all kinds of things like that that we assess when we’re performing an audit.
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