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2014 Financial Report of the United States Government


U.S. Government Accountability Office

Independent Auditor’s Report

The President
The President of the Senate
The Speaker of the House of Representatives

In our audits of the U.S. government’s consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 2013, we found the following:

  • Certain material weaknesses1 in internal control over financial reporting and other limitations on the scope of our work resulted in conditions that continued to prevent us from expressing an opinion on the accompanying accrual-based consolidated financial statements2 as of and for the fiscal years ended September 30, 2014, and 2013.3
  • Significant uncertainties (discussed in Note 24 to the consolidated financial statements), primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance, prevented us from expressing an opinion on those statements as well as on the 2014 and 2013 Statements of Changes in Social Insurance Amounts.4
  • Material weaknesses resulted in ineffective internal control over financial reporting for fiscal year 2014.
  • Material weaknesses and other scope limitations discussed in this audit report limited our tests of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements for fiscal year 2014.

The following sections of this audit report discuss in more detail (1) our report on the accompanying consolidated financial statements, which includes (a) two emphasis of matters—equity investments related to the federal government’s actions to stabilize financial markets and to promote economic recovery and long-term fiscal challenges, (b) required supplementary information (RSI),5 required supplementary stewardship information (RSSI),6 and other information7 included with the consolidated financial statements in the Fiscal Year 2014 Financial Report of the United States Government (2014 Financial Report), and (c) information on Chief Financial Officers (CFO) Act agency financial management systems; (2) our report on internal control over financial reporting; (3) our report on compliance with laws, regulations, contracts, and grant agreements; and (4) the Department of the Treasury’s (Treasury) and the Office of Management and Budget’s (OMB) comments on a draft of this audit report. Appendix I discusses our audit objectives, scope, and methodology.

Report on the Consolidated Financial Statements

The Secretary of the Treasury, in coordination with the Director of OMB, is required to annually submit audited financial statements for the U.S. government to the President and Congress. GAO is required to audit these statements.8 As noted above, the consolidated financial statements consist of the accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 2013; the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance; the 2014 and 2013 Statements of Changes in Social Insurance Amounts; and the related notes to the financial statements.

We performed sufficient audit work to provide this report on the consolidated financial statements. We considered the limitations on the scope of our work regarding the accrual-based consolidated financial statements; the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance; and the 2014 and 2013 Statements of Changes in Social Insurance Amounts in forming our conclusions. Our work was performed in accordance with U.S. generally accepted government auditing standards.

Management’s Responsibility

Management of the federal government is responsible for (1) the preparation and fair presentation of annual consolidated financial statements of the U.S. government in accordance with U.S. generally accepted accounting principles; (2) preparing, measuring, and presenting the RSI and RSSI in accordance with U.S. generally accepted accounting principles; and (3) preparing and presenting other information included in documents containing the consolidated financial statements and auditor’s report, and ensuring the consistency of that information with the consolidated financial statements, RSI, and RSSI. This includes maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. 

Auditor’s Responsibility

Our responsibility is to express opinions on these consolidated financial statements based on conducting the audit in accordance with U.S. generally accepted government auditing standards. We are also responsible for applying certain limited procedures to the RSI, RSSI, and other information included with the consolidated financial statements. Because of the matters discussed below, we were unable to obtain sufficient appropriate evidence to provide a basis for audit opinions on the consolidated financial statements.

Basis for Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements as of and for the Fiscal Years Ended September 30, 2014, and 2013

The federal government is not able to demonstrate the reliability of significant portions of the accompanying accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 2013, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting and other limitations affecting the reliability of these financial statements and the scope of our work as discussed below.9 As a result of these limitations, readers are cautioned that amounts reported in the accrual-based consolidated financial statements and related notes may not be reliable.

The federal government did not maintain adequate systems or have sufficient appropriate evidence to support certain material information reported in the accompanying accrual-based consolidated financial statements. The underlying material weaknesses in internal control, which have existed for years, contributed to our disclaimer of opinion on the accrual-based consolidated financial statements. Specifically, these weaknesses concerned the federal government’s inability to

  • satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the Department of Defense (DOD), were properly reported in the accrual-based consolidated financial statements;
  • reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported;
  • support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities;
  • adequately account for and reconcile intragovernmental activity and balances between federal entities;
  • reasonably assure that the consolidated financial statements are (1) consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in accordance with U.S. generally accepted accounting principles; and
  • reasonably assure that the information in the Reconciliation of Net Operating Cost and Unified Budget Deficit and the Statement of Changes in Cash Balance from Unified Budget and Other Activities is complete and consistent with the underlying information in the audited entities’ financial statements and other financial data.

These material weaknesses continued to (1) hamper the federal government’s ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government’s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government’s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an efficient and effective manner. Due to these material weaknesses and to other limitations on the scope of our work discussed below, additional issues may exist that could affect the accrual-based consolidated financial statements that were not identified. Appendix II describes these material weaknesses in more detail and highlights the primary effects of these material weaknesses on the accompanying accrual-based consolidated financial statements and on the management of federal government operations.

Statements of Social Insurance for 2014, 2013, 2012, 2011, and 2010 and the Statements of Changes in Social Insurance Amounts for 2014 and 2013

Significant uncertainties (discussed in Note 24 to the consolidated financial statements), that primarily relate to the achievement of projected reductions in Medicare cost growth, affect the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance. As a result of these significant uncertainties, readers are cautioned that amounts reported in the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance; the 2014 and 2013 Statements of Changes in Social Insurance Amounts; and the related notes to such financial statements may not fairly present, in all material respects, the financial condition and changes in the financial condition of the federal government’s social insurance programs for those years, in accordance with U.S. generally accepted accounting principles.

For the 2014 Statement of Social Insurance, these significant uncertainties primarily relate to the following.

  • Medicare projections in the 2014 Statement of Social Insurance were based on benefit formulas under the Medicare Trustees’ projected baseline and included a significant reduction in Medicare payment rates for productivity improvements relating to most categories of Medicare providers,10 based on full implementation of the provisions of the Patient Protection and Affordable Care Act, as amended (ACA).11
  • Management has noted that actual future costs for Medicare are likely to exceed those shown by the projected baseline projections presented in the 2014 Statement of Social Insurance due, for example, to the likelihood of modifications to the scheduled reductions in Medicare payment rates for productivity adjustments relating to most categories of Medicare providers. The extent to which actual future costs exceed the projected baseline amounts due to changes to the scheduled reductions in Medicare payment rates for productivity adjustments depends on both the specific changes that might be legislated and whether such legislation would include further provisions to help offset such costs. Consequently, there are significant uncertainties concerning the achievement of these projected reductions in Medicare payment rates.
  • Management has developed an illustrative alternative projection intended to provide additional context regarding the long-term sustainability of the Medicare program and to illustrate the uncertainties in the Statement of Social Insurance projections. The present value of future estimated expenditures in excess of future estimated revenue for Medicare, included in the illustrative alternative projection, exceeds the $28.5 trillion estimate in the 2014 Statement of Social Insurance by $6.7 trillion.

The 2014 Statement of Social Insurance reflects a change from the assumption regarding scheduled reductions in Medicare payment rates for physician services that was used in the 2013, 2012, 2011, and 2010 Statements of Social Insurance. Specifically, the 2014 Statement of Social Insurance reflects a projected baseline that assumes that the physician payment rate reductions will not occur and that physician payment rates will annually increase at a rate equal to the average sustainable growth rate (SGR) override that occurred over the 10-year period ending on March 31, 2015. This revised assumption is based on a similar change in assumption in the 2014 Medicare Trustees Report, which noted that since the scheduled reductions under the SGR formula for updating the physician fee schedule have been overridden by lawmakers each year beginning with 2003, it is a virtual certainty that lawmakers will override this reduction.12 Because it is difficult to predict the extent to which policymakers will finance future SGR overrides with other Medicare savings, the Medicare projections do not include any such savings. As discussed in Note 24, the projected baseline included in the 2014 Statement of Social Insurance exceeded management’s projection based on current law, which included the reductions in payment rates for physician services, by about $1.8 trillion.

The 2013, 2012, 2011, and 2010 Statements of Social Insurance were affected by significant uncertainties primarily related to the achievement of projected reductions in Medicare payment rates for productivity improvements as well as for physician services. Specifically, the Medicare projections in the 2013, 2012, 2011, and 2010 Statements of Social Insurance were based on benefit formulas in current law and included significant reductions in Medicare payment rates for productivity improvements and physician services. Further, for these years, management noted that actual future costs for Medicare were likely to exceed those shown by the current-law projections presented in the 2013, 2012, 2011, and 2010 Statements of Social Insurance due, for example, to the likelihood of modifications to the scheduled reductions in Medicare payment rates for productivity adjustments and physician services.

Projections of Medicare costs are sensitive to assumptions about future decisions by policymakers and about the behavioral responses of consumers, employers, and health care providers as policy, incentives, and the health care sector change over time. Such secondary impacts are not fully reflected in the Statement of Social Insurance projections but could be expected to influence the excess cost growth rate used in the projections.13 Key drivers of uncertainty about the excess cost growth rate include the future development and deployment of medical technology, the evolution of personal income, and the cost and availability of insurance, as well as federal policy changes, such as the implementation of the ACA.

Readers are cautioned that the uncertainties discussed previously also affect the projected Medicare and Medicaid costs reported in the Fiscal Projections for the U.S. Government and Social Insurance information included in the unaudited Required Supplementary Information section of the 2014 Financial Report and summarized in Management’s Discussion and Analysis. The Required Supplementary Information section of the 2014 Financial Report includes unaudited information concerning how changes in various assumptions would change the present value of future estimated expenditures in excess of future estimated revenue. As discussed in that section, Medicare projections are very sensitive to changes in the health care cost growth assumption.

The Statement of Social Insurance presents the actuarial present value of the federal government’s estimated future revenue to be received from or on behalf of participants and estimated future expenditures to be paid to or on behalf of participants, based on benefit formulas in current law (except for the 2014 Medicare projections which use the projected baseline) and using a projection period sufficient to illustrate the long-term sustainability of the social insurance programs.14 In preparing the Statements of Social Insurance, management considers and selects assumptions and data that it believes provide a reasonable basis for the assertions in the statement. However, because of the large number of factors that affect the Statement of Social Insurance and the fact that such assumptions are inherently subject to substantial uncertainty (arising from the likelihood of future events, significant uncertainties, and contingencies), there will be differences between the estimates in the Statement of Social Insurance and the actual results, and those differences may be material.

The scheduled future benefits presented in the Statement of Social Insurance are based on benefit formulas in current law (except for the 2014 Medicare projections which use the projected baseline). However, consistent with the respective annual Trustees Reports, the Social Security and Medicare programs are not projected to be sustainable under current financing arrangements. Also, the law concerning these programs can be changed at any time. Payment of Social Security and Medicare Hospital Insurance (Part A) benefits is limited by law to the balances in the respective trust funds. Consequently, future scheduled benefits are limited to future revenues plus existing trust fund assets.

As discussed in the unaudited Required Supplementary Information section of the 2014 Financial Report, the Social Security and Medicare Hospital Insurance (Part A) trust funds are, based on achievement of the cost reductions discussed above, projected to be exhausted in 2033 and 2030, respectively, at which time they would be unable to pay the full amount of scheduled future benefits.15 For Social Security, future revenues were projected to be sufficient to pay 77 percent of scheduled benefits in 2033, the year of projected trust funds (combined) exhaustion, and decreasing to 72 percent of scheduled benefits in 2088. For Medicare Hospital Insurance (Part A), future revenues were projected to be sufficient to pay 85 percent of scheduled benefits in 2030, the year of projected trust fund exhaustion, and then decreasing to 77 percent of scheduled benefits in 2088.

Other Limitations on the Scope of Our Work

For fiscal years 2014 and 2013, there were other limitations on the scope of our work, in addition to the material weaknesses and significant uncertainties noted above, that contributed to our disclaimers of opinion on the consolidated financial statements. Such limitations primarily relate to our ability to obtain adequate representations from management. Treasury and OMB depend on representations from certain federal entities to provide their representations to us regarding the U.S. government’s consolidated financial statements. Treasury and OMB were unable to provide us with adequate representations regarding the U.S. government’s accrual-based consolidated financial statements for fiscal years 2014 and 2013 primarily because of insufficient or no representations provided to them by certain federal entities, including DOD.16

Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements as of and for the Fiscal Years Ended September 30, 2014, and 2013

Because of the significance of the related matters described in the Basis for Disclaimer of Opinion paragraphs above, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the accrual-based consolidated financial statements. Accordingly, we do not express an opinion on the accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 2013.

Statements of Social Insurance for 2014, 2013, 2012, 2011, and 2010 and the Statements of Changes in Social Insurance Amounts for 2014 and 2013

Because of the significance of the related matters described in the Basis for Disclaimer of Opinion paragraphs above, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the Statements of Social Insurance for 2014, 2013, 2012, 2011, and 2010 as well as on the Statements of Changes in Social Insurance Amounts for 2014 and 2013. Accordingly, we do not express an opinion on the 2014, 2013, 2012, 2011, or 2010 Statements of Social Insurance or on the 2014 and 2013 Statements of Changes in Social Insurance Amounts.

Emphasis of Matters

The following key items deserve emphasis in order to put the information contained in the consolidated financial statements and the Management’s Discussion and Analysis section of the 2014 Financial Report into context. However, our disclaimers of opinion noted above are not modified with respect to these matters.

Equity Investments Related to the Federal Government’s Actions to Stabilize Financial Markets and to Promote Economic Recovery

The last economic recession and the federal government’s actions to stabilize financial markets and promote economic recovery, among other factors, significantly affected the federal government’s financial condition, including the addition of significant assets and liabilities. While the federal government has significantly reduced the assets and liabilities related to such actions, the accrual-based consolidated financial statements, as of September 30, 2014, continue to include significant equity investments in the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) totaling about $96 billion (reported net of about $99 billion in valuation reserves).

In valuing these equity investments, management considered and selected assumptions and data that it believed provided a reasonable basis for the estimated values reported in the accrual-based consolidated financial statements. However, as discussed in Note 1 to the consolidated financial statements, there are many factors affecting these assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of the transactions and the likelihood of future changes in general economic, regulatory, and market conditions. As such, there will be differences between the estimated values as of September 30, 2014, and the actual results, and such differences may be material. Also, as discussed in Note 1 to the consolidated financial statements, the financial statements do not include the assets, liabilities, or results of operations of entities in which Treasury holds either a direct, indirect, or beneficial equity interest. Treasury and OMB have determined that none of the entities meet the criteria for a federal entity.17

Long-Term Fiscal Challenges

While the near-term outlook has improved, the comprehensive long-term fiscal projections presented in the unaudited Required Supplementary Information section of the 2014 Financial Report show that absent policy changes, the federal government continues to face an unsustainable long-term fiscal path. In the near term, deficits are expected to continue to decline from the recent historic highs as the economy further recovers and actions taken by Congress and the President continue to take effect. Over the long term, the imbalance between spending and revenue that is built into current law and policy will lead to continued growth of debt held by the public as a share of gross domestic product (GDP). This situation—in which debt grows faster than GDP—means the current federal fiscal path is unsustainable.

Under these projections, spending for the major health and retirement programs will increase in coming decades more rapidly than GDP as more members of the baby boom generation become eligible for benefits. These projections, with regard to Social Security and Medicare, are based on the same assumptions underlying the information presented in the Statement of Social Insurance and assume that the provisions enacted in the ACA designed to slow the growth of Medicare costs are sustained and remain effective throughout the projection period. If, however, the Medicare cost containment measures are not sustained over the long term—a concern expressed by the Trustees of the Medicare trust funds, the Centers for Medicare & Medicaid Services’ (CMS) Chief Actuary, the Congressional Budget Office, and others—spending on federal health care programs will grow more rapidly.

GAO also prepares long-term federal fiscal simulations, which continue to show debt rising as a share of GDP.18 Under GAO’s Alternative simulation,19 using the CMS Office of the Actuary’s alternative health care cost projections, future spending in excess of receipts would be greater and debt held by the public as a share of GDP would grow more quickly than the projections in the 2014 Financial Report.

Both the projections in the 2014 Financial Report and our long-term simulations follow the spending limits previously enacted in the Budget Control Act of 2011 (BCA).20 Under these limits, discretionary spending will continue to decline as a share of the economy and in fiscal year 2021 will be lower as a share of GDP than any level seen in the last 50 years. At the same time, revenues are projected to rise in the near term as the economy continues to recover.

Debt held by the public as a share of GDP, however, remains well above historical averages. At the end of fiscal year 2014, debt held by the public reached 74 percent of GDP—the highest it has been as a share of GDP since 1950. Debt held by the public at these high levels could limit the federal government’s flexibility to address emerging issues and unforeseen challenges, such as another economic downturn or large-scale natural disaster. Further, our past work has also identified a variety of fiscal exposures—responsibilities, programs, and activities that explicitly or implicitly expose the federal government to future spending.21 Fiscal exposures vary widely as to source, extent of the government’s legal commitment, and magnitude. Over the past decade, some fiscal exposures have grown due to events and trends and the government’s response to them. Increased attention to these fiscal exposures will be important for understanding risks to the federal fiscal outlook and enhancing oversight of federal resources.

Other Matters

Required Supplementary Information and Required Supplementary Stewardship Information

U.S. generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board (FASAB) require that RSI and RSSI be presented in the 2014 Financial Report to supplement the financial statements. Although not a part of the financial statements, FASAB considers this information to be an essential part of financial reporting for placing the financial statements in appropriate operational, economic, or historical context. We were unable to apply certain limited procedures to the RSI and RSSI in accordance with U.S. generally accepted government auditing standards because of the material weaknesses and other scope limitations discussed in this audit report. We did not audit and do not express an opinion or provide any assurance on the RSI or RSSI.

Other Information

Other information included in the 2014 Financial Report contains a wide range of information, some of which is not directly related to the consolidated financial statements. This information is presented for purposes of additional analysis and is not a required part of the consolidated financial statements, RSI, or RSSI. We read the other information included with the consolidated financial statements in order to identify material inconsistencies, if any, with the consolidated financial statements. We did not audit and do not express an opinion or provide any assurance on the other information in the 2014 Financial Report.

Readers are cautioned that the material weaknesses, significant uncertainties, and other scope limitations discussed in this audit report may affect the reliability of certain information contained in the RSI, RSSI, and other information that is taken from the same data sources as the accrual-based consolidated financial statements; the 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance; and the 2014 and 2013 Statements of Changes in Social Insurance Amounts.

CFO Act Agency Financial Management Systems

The federal government’s ability to efficiently and effectively manage and oversee its day-to-day operations and programs relies heavily on the ability of entity financial management systems to produce complete, reliable, timely, and consistent financial information for use by executive branch agencies and Congress.22 The Federal Financial Management Improvement Act of 1996 (FFMIA) was designed to lead to system improvements that would result in CFO Act agency managers routinely having access to reliable, useful, and timely financial-related information with which to measure performance and increase accountability throughout the year.

The 24 CFO Act agencies are responsible for implementing and maintaining financial management systems that substantially comply with the requirements of FFMIA. FFMIA requires auditors, as part of the 24 CFO Act agencies’ financial statement audits, to report whether those agencies’ financial management systems substantially comply with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the federal government’s U.S. Standard General Ledger at the transaction level.

For both fiscal years 2014 and 2013, auditors for 11 of the 24 CFO Act agencies reported that the agencies’ financial management systems did not substantially comply with one or more of the three FFMIA requirements. Agency management at the 24 CFO Act agencies also annually report on FFMIA compliance. For fiscal years 2014 and 2013, agency management at 10 and 9 of the CFO Act agencies, respectively, reported that their agencies’ financial management systems were not in substantial compliance with one or more of the three FFMIA requirements. Based on agency financial reports, the differences in the assessments of substantial compliance between the auditors and agency management reflected differences in management’s and auditors’ views of the impact reported deficiencies had on agencies’ financial management systems.

Long-standing financial management systems weaknesses at several large CFO Act agencies, along with the size and complexity of the federal government, continue to present a formidable management challenge in providing accountability to the nation’s taxpayers and have contributed significantly to certain of the material weaknesses and other limitations discussed in this audit report.

Report on Internal Control over Financial Reporting

Management’s Responsibility

Management of the federal government is responsible for (1) maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, and (2) evaluating the effectiveness of internal control over financial reporting, based on criteria established under the Federal Managers’ Financial Integrity Act (FMFIA).23

Auditor’s Responsibility

The purpose of an audit of financial statements is to express an opinion on the financial statements. An audit of financial statements includes considering internal control over financial reporting to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of internal control over financial reporting. We did not consider all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations.

Our responsibility is to report any material weaknesses or significant deficiencies in internal control over financial reporting for fiscal year 2014 that come to our attention as a result of our audit. Based on the scope of our work and the effects of the other limitations on the scope of our audit noted throughout this audit report, our internal control work was not designed to, and would not necessarily, identify all deficiencies in internal control, including those that might be material weaknesses or significant deficiencies.24 Therefore, additional material weaknesses or significant deficiencies may exist that were not identified. Our work was performed in accordance with U.S. generally accepted government auditing standards.

Definitions and Inherent Limitations of Internal Control over Financial Reporting

An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and (2) transactions are executed in accordance with laws governing the use of budget authority and with other applicable laws, regulations, contracts, and grant agreements that could have a direct and material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements due to fraud or error.

Material Weaknesses Resulted in Ineffective Internal Control over Financial Reporting 

The material weaknesses discussed in this audit report resulted in ineffective internal control over financial reporting. Consequently, the federal government’s internal control did not provide reasonable assurance that a material misstatement of the consolidated financial statements would be prevented, or detected and corrected, on a timely basis.

In addition to the material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial statements, which were discussed previously, we found the following three other material weaknesses in internal control. These other material weaknesses were the federal government’s inability to

  • determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them,
  • identify and resolve information security control deficiencies and manage information security risks on an ongoing basis, and
  • effectively manage its tax collection activities.

These material weaknesses are discussed in more detail in appendix III, including the primary effects of the material weaknesses on the accompanying accrual-based consolidated financial statements and on the management of federal government operations.

We also found a significant deficiency in the federal government’s internal control related to implementing effective internal controls over management of federal grants at certain federal entities. This significant deficiency is discussed in more detail in appendix IV.

Further, individual federal entity financial statement audit reports identified additional control deficiencies that were reported by the entities’ auditors as either material weaknesses or significant deficiencies at the individual entity level. We do not consider these additional deficiencies to represent material weaknesses or significant deficiencies with respect to the U.S. government’s consolidated financial statements.

Intended Purpose of Report on Internal Control over Financial Reporting

The purpose of this report on internal control over financial reporting is solely to describe the scope of our consideration of internal control over financial reporting, and the results of our procedures, and not to provide an opinion on the effectiveness of internal control over financial reporting. This report on internal control over financial reporting is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering internal control. Accordingly, this report on internal control over financial reporting is not suitable for any other purpose.

Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

Management’s Responsibility

Management of the federal government is responsible for the federal government’s compliance with laws, regulations, contracts, and grant agreements.

Auditor’s Responsibility

An audit of federal financial statements includes testing compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements that have a direct effect on the determination of material amounts and disclosures in the consolidated financial statements, and performing certain other limited procedures. Accordingly, we did not test the federal government’s compliance with all laws, regulations, contracts, and grant agreements. Due to the limitations discussed below and the scope of our procedures, noncompliance may occur and not be detected by these tests.

Our objective was not to provide an opinion on the federal government’s compliance with laws, regulations, contracts, and grant agreements. Accordingly, we do not express such an opinion. Our work was performed in accordance with U.S. generally accepted government auditing standards.

Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements

Our work to test compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements was limited by certain of the material weaknesses and other scope limitations discussed in this audit report. U.S. generally accepted government auditing standards and OMB guidance require auditors to report on entities’ compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements. Certain component entity audit reports contain instances of noncompliance. None of these instances were deemed to be reportable noncompliance with regard to the accompanying U.S. government’s consolidated financial statements.

Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements

The purpose of this report on compliance with laws, regulations, contracts, and grant agreements is solely to describe the scope of our testing of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements, and the results of that testing, and not to provide an opinion on compliance. This report on compliance with laws, regulations, contracts, and grant agreements is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance. Accordingly, this report on compliance with laws, regulations, contracts, and grant agreements is not suitable for any other purpose.

Agency Comments

We provided a draft of this audit report to Treasury and OMB officials, who provided technical comments, which have been incorporated as appropriate. Treasury and OMB officials expressed their continuing commitment to address the problems this report outlines.

Robert F. Dacey
Chief Accountant
U.S. Government Accountability Office

Washington, DC

February 19, 2015

Footnotes

1A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. (Back to Content)

2The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2014, and 2013, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash basis. The 2014, 2013, 2012, 2011, and 2010 Statements of Social Insurance and the 2014 and 2013 Statements of Changes in Social Insurance Amounts, including the related notes, are also included in the consolidated financial statements. (Back to Content)

3We previously reported that certain material weaknesses and, for some years, other limitations on the scope of our work prevented us from expressing an opinion on the accrual-based consolidated financial statements of the U.S. government for fiscal years 1997 through 2013. (Back to Content)

4Statements of Social Insurance are presented for the current year and each of the 4 preceding years in accordance with U.S. generally accepted accounting principles. Also, both the Statements of Social Insurance and the Statements of Changes in Social Insurance Amounts do not interrelate with the accrual-based consolidated financial statements. In addition, the valuation date is January 1 for all social insurance programs except the Black Lung program, which has a valuation date of September 30. (Back to Content)

5RSI consists of Management’s Discussion and Analysis and information in the Required Supplementary Information section of the Fiscal Year 2014 Financial Report of the United States Government.(Back to Content)

6RSSI consists of information on stewardship investments in the Required Supplementary Stewardship Information section of the Fiscal Year 2014 Financial Report of the United States Government. (Back to Content)

7Other information consists of information in the Fiscal Year 2014 Financial Report of the United States Government other than the consolidated financial statements, RSI, RSSI, the auditor’s report, and the Statement of the Comptroller General of the United States. (Back to Content)

8The Government Management Reform Act of 1994 has required such reporting, covering the executive branch of government, beginning with financial statements prepared for fiscal year 1997. 31 U.S.C. § 331(e). Treasury and OMB have elected to include certain financial information on the legislative and judicial branches in the consolidated financial statements as well. (Back to Content)

9In addition to the limitations discussed in this audit report, as of the date of this audit report, the Department of Housing and Urban Development‘s (HUD) audited financial statements for fiscal year 2014 had not been issued. It is possible that additional recordkeeping by HUD and auditing procedures by its Office of Inspector General will result in changes in HUD’s financial statements. Based on the audit procedures we have performed, we believe that any such changes will not significantly affect our findings and conclusions in this audit report. (Back to Content)

10These categories include, but are not limited to, inpatient/outpatient hospital services, skilled nursing facilities, home health care, ambulance, ambulatory surgical centers, durable medical equipment, and prosthetics. (Back to Content)

11 Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). In this report, references to ACA include any amendments made by the Health Care and Education Reconciliation Act of 2010. (Back to Content)

12Statutes have been enacted with provisions that prevented scheduled reductions in Medicare payment rates for physician services from taking effect from 2003 through March 2015, including the most recent provision enacted in the Protecting Access to Medicare Act of 2014, which prevented the scheduled reductions in Medicare payment rates for the period of April 1, 2014, through March 31, 2015. Pub. L. No. 113-93, § 101, 128 Stat. 1040, 1041 (Apr. 1, 2014), which is classified at 42 U.S.C. § 1395w-4(d)(15)-(16). (Back to Content)

13The excess cost growth rate is the increase in health care spending per person relative to the growth of gross domestic product per person after removing the effects of demographic changes on health care spending. (Back to Content)

14The projection period used for the Social Security, Medicare, and Railroad Retirement social insurance programs is 75 years. For the Black Lung program, the projections are through September 30, 2040. (Back to Content)

15The combined Social Security trust funds consist of the Federal Old-Age and Survivors Insurance (OASI) trust fund and the Federal Disability Insurance (DI) trust fund. The OASI and DI trust funds’ assets are projected to be exhausted in 2034 and 2016, respectively. (Back to Content)

16For fiscal year 2014, HUD had not provided representations to Treasury and OMB by the date that they provided us with representations regarding the U.S. government’s consolidated financial statements because the audit report on HUD’s financial statements was not yet issued as of such date. (Back to Content)

17For additional information on the criteria used to determine which federal entities are included in the reporting entity for the consolidated financial statements, as well as the reasons for not including certain entities, such as Fannie Mae and Freddie Mac, see Appendix A: Reporting Entity of the 2014 Financial Report. (Back to Content)

18GAO, Fiscal Outlook: Federal Fiscal Outlook (Spring 2014) (Washington, D.C.: 2014), accessed on February 19, 2015, http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview. (Back to Content)

19GAO’s Spring 2014 Alternative simulation, the most recent one available as of the date of our audit report, incorporates the CMS Office of the Actuary’s 2013 alternative projections for health care cost growth, which assume physician payments are not reduced as specified under current law and certain cost controls are not maintained over the long term. Also, in this simulation, expiring tax provisions, such as the research and experimentation tax credit, are extended to 2024. In the Alternative simulation, discretionary spending follows the original discretionary spending caps set by the Budget Control Act of 2011, but not the lower caps triggered by the automatic enforcement procedures. Over the long term, discretionary spending and revenue are held at their historical average share of GDP. (Back to Content)

20The BCA, Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011), which enacted changes to the Balanced Budget and Emergency Deficit Control Act, as amended (BBEDCA), imposed discretionary spending limits for fiscal years 2012 through 2021 to reduce projected spending by about $1 trillion. The BCA also established the Joint Select Committee on Deficit Reduction, which was tasked with proposing legislation to reduce the deficit by an additional $1.2 trillion through fiscal year 2021. The Joint Committee did not report a proposal, and Congress and the President did not enact legislation. This triggered the sequestration process in section 251A of BBEDCA. Section 251A also provides for an annual reduction of the discretionary spending limits and a sequestration of direct spending from fiscal years 2014 through 2021. The Bipartisan Budget Act of 2013 (budget agreement), which enacted further changes to BBEDCA, as amended, established new (higher) limits on defense and nondefense discretionary appropriations for fiscal years 2014 and 2015, extended sequestration for direct spending programs by 2 years through fiscal year 2023, and made other changes to direct spending and revenue. Pub. L. No. 113-67, div. A, tit. I, § 101,127 Stat. 1165, 1166-69 (Dec. 26, 2013). In all, BBEDCA, as amended through December 2013, reduced deficits over the next 10 years in our Spring 2014 Baseline Extended simulation without significantly changing the long-term federal budget outlook. In 2014, sequestration for direct spending programs was extended by 1 year to fiscal year 2024. Pub. L. No. 113-82, § 1, 128 Stat. 1009 (Feb. 15, 2014). The Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, 128 Stat. 2130 (Dec. 16, 2014), enacted discretionary appropriations for fiscal year 2015 consistent with BBEDCA. Our updated simulations for 2015 will incorporate the effects of more recently enacted amendments to BBEDCA. (Back to Content)

21GAO, Fiscal Outlook: Federal Fiscal Outlook (Washington, D.C.: 2015), accessed on February 19, 2015, http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview#t=3, and Fiscal Exposures: Improving Cost Recognition in the Federal Budget, GAO-14-28 (Washington, D.C.: Oct. 29, 2013). (Back to Content)

22The Federal Financial Management Improvement Act of 1996, which is reprinted in 31 U.S.C. § 3512 note, defines “financial management systems” to include the financial systems and the financial portions of mixed systems necessary to support financial management, including automated and manual processes, procedures, controls, data, hardware, software, and support personnel dedicated to the operation and maintenance of system functions. (Back to Content)

2331 U.S.C. § 3512 (c), (d) (commonly referred to as FMFIA). This act requires executive agency heads to evaluate and report annually to the President and Congress on the adequacy of their internal control and accounting systems and on actions to correct significant problems. (Back to Content)

24A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. (Back to Content)



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