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2016 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, 2016, and 2015, 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 statements as of and for the fiscal years ended September 30, 2016, and 2015.2

  • Significant uncertainties (discussed in Note 22 to the consolidated financial statements), primarily related to the achievement of projected reductions in Medicare cost growth, prevented us from expressing an opinion on the sustainability financial statements,3 which consist of the 2016 and 2015 Statements of Long-Term Fiscal Projections; the 2016, 2015, 2014, 2013, and 2012 Statements of Social Insurance; and the 2016 and 2015 Statements of Changes in Social Insurance Amounts.4 A material weakness in internal control also prevented us from expressing an opinion on the 2016 and 2015 Statements of Long-Term Fiscal Projections.

  • Material weaknesses resulted in ineffective internal control over financial reporting for fiscal year 2016.

  • 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 2016.

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 2016 Financial Report of the United States Government (2016 Financial Report), and (c) information on Chief Financial Officers Act of 1990 (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, 2016, and 2015, and the sustainability financial statements, consisting of the 2016 and 2015 Statements of Long-Term Fiscal Projections; the 2016, 2015, 2014, 2013, and 2012 Statements of Social Insurance; the 2016 and 2015 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 and the sustainability financial statements 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 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

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, 2016, and 2015, 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 (1) Reconciliations of Net Operating Cost and Unified Budget Deficit and (2) Statements 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 were not identified and could affect the accrual-based consolidated financial statements. 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.

Sustainability Financial Statements

Significant uncertainties (discussed in Note 22 to the consolidated financial statements), which primarily relate to the achievement of projected reductions in Medicare cost growth, affect the sustainability financial statements. In addition, the material weakness related to the Reconciliations of Net Operating Cost and Unified Budget Deficit and the Statements of Changes in Cash Balance from Unified Budget and Other Activities, discussed above, hampers the federal government’s ability to demonstrate the reliability of historical budget information used for certain key inputs to the 2016 and 2015 Statements of Long-Term Fiscal Projections. As a result of these significant uncertainties and this material weakness, readers are cautioned that amounts reported in the 2016 and 2015 Statements of Long-Term Fiscal Projections; the 2016, 2015, 2014, 2013, and 2012 Statements of Social Insurance; the 2016 and 2015 Statements of Changes in Social Insurance Amounts; and the related notes to such financial statements may not fairly present, in all material respects, the sustainability information for those years in accordance with U.S. generally accepted accounting principles.

For 2016 and 2015, these significant uncertainties primarily relate to the following.

  • Medicare projections in the 2016 and 2015 Statements of Long-Term Fiscal Projections and the 2016 and 2015 Statements of Social Insurance were based on benefit formulas under current law and included a significant reduction in Medicare payment rate updates for productivity improvements for 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 and physician payment updates specified by the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).12

  • Management has noted that actual future costs for Medicare are likely to exceed those shown by the current law projections presented in the 2016 and 2015 Statements of Social Insurance due, for example, to the likelihood of modifications to the scheduled reductions in Medicare payment rate updates for productivity adjustments relating to most categories of Medicare providers and to the specified physician payment updates. The extent to which actual future costs exceed the current law amounts due to changes to the scheduled reductions in Medicare payment rate updates for productivity adjustments and to specified physician payment updates 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 rate updates.

  • 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 in Note 22, exceeds the $32.5 trillion estimate in the 2016 Statement of Social Insurance by $11.0 trillion.

  • Management noted that these significant uncertainties about projected reductions in health care cost growth also affect the projected Medicare and Medicaid costs reported in the 2016 and 2015 Statements of Long-Term Fiscal Projections.

The 2014, 2013, and 2012 Statements of Social Insurance were affected by significant uncertainties, primarily related to the achievement of projected reductions in Medicare payment rate updates for productivity improvements. The 2013 and 2012 Statements of Social Insurance were also affected by uncertainties related to projected reductions in Medicare payment rates for physician services. Specifically, the Medicare projections in the 2013 and 2012 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. The 2014 Statement of Social Insurance reflected a change from the assumption regarding scheduled reductions in Medicare payment rates for physician services that was used in the 2013 and 2012 Statements of Social Insurance. Specifically, the 2014 Statement of Social Insurance reflected a projected baseline that assumed that the physician payment rate reductions would not occur and that physician payment rates would 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. For 2014, 2013, and 2012, management noted that actual future costs for Medicare were likely to exceed those shown by the current-law projections presented in the 2014, 2013, and 2012 Statements of Social Insurance due, for example, to the likelihood of modifications to the scheduled reductions in Medicare payment rates for productivity adjustments.

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 sustainability financial statements 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. The Required Supplementary Information section of the 2016 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, the projections are very sensitive to changes in the health care cost growth assumption.

As discussed in Notes 22 and 23 to the financial statements, the sustainability financial statements are based on management’s assumptions. These sustainability financial statements present the present value of the U.S. government’s estimated future receipts and future spending using a projection period sufficient to illustrate long-term sustainability14. The sustainability financial statements are intended to aid users in assessing whether future resources will likely be sufficient to sustain public services and to meet obligations as they come due. The Statements of Social Insurance and Changes in Social Insurance Amounts are based on income and benefit formulas in current law (except for the 2014 Medicare projections, which use the projected baseline) and assume that scheduled benefits will continue after any related trust funds are exhausted. The Statements of Long-Term Fiscal Projections are based on the continuation of current policy and also assume that scheduled benefits will continue after any related trust funds are exhausted. The sustainability financial statements are not forecasts or predictions.

In preparing the sustainability financial statements, management considers and selects assumptions and data that it believes provide a reasonable basis to illustrate whether current policy or law is sustainable. Assumptions underlying such sustainability information do not consider changes in policy or all potential future events that could affect future receipts, future spending, and sustainability, such as, for example, implementation of policy changes to avoid trust fund exhaustion or unsustainable debt levels.

As discussed in the unaudited Required Supplementary Information section of the 2016 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 2034 and 2028, 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 79 percent of scheduled benefits in 2034, the year of projected trust funds (combined) exhaustion, and decreasing to 74 percent of scheduled benefits in 2090. For Medicare Hospital Insurance (Part A), future revenues were projected to be sufficient to pay 87 percent of scheduled benefits in 2028, the year of projected trust fund exhaustion, and then decreasing to 86 percent of scheduled benefits in 2090.

Because of the large number of factors that affect the sustainability financial statements and the fact that future events and circumstances cannot be estimated with certainty, even if current policy is continued, there will be differences between the estimates in the sustainability financial statements and the actual results, and those differences may be material.

Other Limitations on the Scope of Our Work

For fiscal years 2016 and 2015, 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 2016 and 2015, primarily because of insufficient or no representations provided to them by certain federal entities, including DOD.

Disclaimers of Opinion on the Consolidated Financial Statements

Accrual-Based Consolidated Financial Statements

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, 2016, and 2015.

Sustainability Financial Statements

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 Long-Term Fiscal Projections for 2016 and 2015; the Statements of Social Insurance for 2016, 2015, 2014, 2013, and 2012; and the Statements of Changes in Social Insurance Amounts for 2016 and 2015. Accordingly, we do not express an opinion on these sustainability financial statements.

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 2016 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

In 2008, during the financial crisis, the federal government placed the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) under conservatorship and entered into preferred stock purchase agreements with these government-sponsored enterprises (GSE) to ensure their financial stability. The agreements with the GSEs could affect the federal government’s financial position. As of September 30, 2016, the federal government continued to report about $109 billion of investments in the GSEs, which is net of about $86 billion in valuation losses.

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, 2016, 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.16

Long-Term Fiscal Challenges

The comprehensive long-term fiscal projections presented in the Statement of Long-Term Fiscal Projections, and related information in Note 23 and in the unaudited Required Supplementary Information section of the 2016 Financial Report show that absent policy changes, the federal government continues to face an unsustainable long-term fiscal path. In fiscal year 2016, the 75-year debt-to-GDP projections were higher than the fiscal year 2015 projections, but still lower than fiscal year 2014. The projections in the 2016 Financial Report show a slight improvement in the near term with the unified budget deficit decreasing over the next 5 years before increasing in 2022. In fiscal year 2016, the unified budget deficit increased following 6 years of declining deficits. 17 Over the long term, the imbalance between spending and revenue that is built into current law and policy is projected to lead to continued growth of the deficit and 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 more rapidly than GDP in coming decades 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. 18 They also reflect the effects of MACRA, which, among other things, revised the methodology for determining physician payment rates. If, however, the Medicare cost containment measures and physician payment rate methodology are not sustained over the long term—concerns 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 than assumed in the projections.

GAO also prepares long-term federal fiscal simulations, using different sets of assumptions, which continue to show debt held by the public rising as a share of GDP.19 Under GAO’s Alternative simulation,20 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 2016 Financial Report. Under the Alternative simulation, debt held by the public as a share of GDP will surpass its historical high (106 percent in 1946) by 2032.

Both the projections in the 2016 Financial Report and our long-term simulations follow the spending limits enacted in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), as amended.21 Under these limits, discretionary spending will continue to decline as a share of the economy and within the next 5 years will be lower as a share of GDP than any level seen in the last 50 years. At the same time, the projections in the 2016 Financial Report show revenues rising in the near term. Our long-term simulations also show revenues overall rising in the near term.

Debt held by the public as a share of GDP, however, remains well above the post-World War II historical average of 44 percent since 1946. At the end of fiscal year 2016, debt held by the public reached about 77 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 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.22 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 because of 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 2016 Financial Report to supplement the financial statements. Although RSI and RSSI are 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 2016 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 2016 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 and the sustainability financial statements.

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.23 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 fiscal year 2016, auditors at 9 of 21 CFO Act agencies reported that the agencies’ financial management systems did not substantially comply with one or more of the three FFMIA requirements.24 For fiscal year 2015, auditors at 12 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 year 2016, agency management at 7 of 21 CFO Act agencies reported that their agencies’ financial management systems were not in substantial compliance with one or more of the three FFMIA requirements. For fiscal year 2015, agency management at 10 of the 24 CFO Act agencies 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 on the impact of reported deficiencies 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 (FMIA).25

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 2016 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.26 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 provisions of applicable laws, including those governing the use of budget authority; regulations; contracts; and grant agreements, noncompliance with which could have a 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 disclaimers of opinion on the accrual-based consolidated financial statements and the sustainability 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 two significant deficiencies in the federal government’s internal control related to implementing effective internal controls at certain federal entities for the following areas:

  • loans receivable and loan guarantee liabilities and

  • federal grants management.

These significant deficiencies are 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 that we have incorporated as appropriate. Treasury and OMB officials expressed their continuing commitment to addressing the problems this report outlines.

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

Washington, DC

January 4, 2017

Footnotes

1 A 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)

2 The accrual-based consolidated financial statements as of and for the fiscal years ended September 30, 2016, and 2015, 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. We 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 2015. (Back to Content)

3 The Statements of Long-Term Fiscal Projections for fiscal years 2016 and 2015 present, for all the activities of the federal government, the present value of projected receipts and noninterest spending under current policy without change, the relationship of these amounts to projected gross domestic product (GDP), and changes in the present value of projected receipts and noninterest spending from the prior year. (Back to Content)

4 Statements 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, the sustainability financial statements do not interrelate with the accrual-based consolidated financial statements. In addition, with respect to the Statement of Social Insurance, the valuation date is January 1 for the Social Security and Medicare programs, October 1 for the Railroad Retirement program, and September 30 for the Black Lung program. The valuation date for the Statement of Long-Term Fiscal Projections is September 30. (Back to Content)

5 RSI consists of Management’s Discussion and Analysis and information in the Required Supplementary Information section of the Fiscal Year 2016 Financial Report of the United States Government.(Back to Content)

6 RSSI consists of information on stewardship investments in the Required Supplementary Stewardship Information section of the Fiscal Year 2016 Financial Report of the United States Government. (Back to Content)

7 Other information consists of information in the Fiscal Year 2016 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)

8 The 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)

9 In addition to the limitations discussed in this audit report, as of the date of this audit report, the audited financial statements for fiscal year 2016 were not issued for (1) the Department of Defense (DOD), (2) the Department of Housing and Urban Development (HUD), (3) the National Science Foundation (NSF), and (4) the Smithsonian Institution. Also, the Department of Agriculture obtained an unmodified opinion on its consolidated balance sheet as of September 30, 2016, but its consolidated statement of net cost, consolidated statement of changes in net position, combined statement of budgetary resources, and the related notes for the fiscal year ended September 30, 2016, were not audited. (Back to Content)

10 These 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 ACA, 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 the ACA include any amendments made by the Health Care and Education Reconciliation Act of 2010. (Back to Content)

12 MACRA, Pub. L. No. 114-10, title I, § 101, 129 Stat. 87, 89 (Apr. 16, 2015). MACRA included many provisions that affect Medicare, including the repeal of the sustainable growth rate (SGR) formula for calculating annual updates to Medicare reimbursement payment rates to physicians and certain nonphysician medical providers and established an alternative set of annual updates. (Back to Content)

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

14 The 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)

15 The combined Social Security trust funds consist of the Federal Old-Age and Survivors Insurance trust fund and the Federal Disability Insurance trust fund, whose assets are projected to be exhausted in 2035 and 2023, respectively. (Back to Content)

16 For 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 of the 2016 Financial Report. (Back to Content)

17 As we reported in last year’s audit report for fiscal year 2015, the enactment of the Bipartisan Budget Act of 2015 and the Consolidated Appropriations Act, 2016, which both included spending provisions intended to achieve certain national priorities and goals, contributed to the higher deficit in fiscal year 2017. (Back to Content)

18 ACA, 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). (Back to Content)

19 GAO, Fiscal Outlook: Federal Fiscal Outlook, accessed January 4, 2017, http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview. (Back to Content)

20 Our 2017 Alternative simulation, the most recent one available as of the date of our audit report, incorporates the CMS Office of the Actuary’s 2016 alternative projections for health care cost growth, which assume certain cost controls are not maintained over the long term. Our Alternative simulation also assumes that tax provisions that are scheduled to expire, such as the credit for construction of energy-efficient new homes, are extended. In the Alternative simulation, discretionary spending follows the limits established in the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, but not the lower limits triggered by the automatic enforcement procedures. (Back to Content)

21 The Budget Control Act of 2011 (BCA) amended BBEDCA, imposing discretionary spending limits for fiscal years 2012 through 2021 to reduce projected spending by about $1 trillion. Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011). BCA also established the Joint Select Committee on Deficit Reduction (Joint Committee), which was tasked with proposing legislation to reduce the deficit by at least 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, as amended by BCA, required (1) a sequestration for fiscal year 2013 and (2) annual downward adjustments to discretionary spending limits and sequestration of direct spending from fiscal years 2014 through 2021. BBEDCA has been amended several times since August 2011, most recently by the Bipartisan Budget Act (BBA) of 2015, which increased discretionary spending limits for fiscal years 2016 and 2017. The BBA of 2015 also extended the sequestration of direct spending through fiscal year 2025 and made other changes to direct spending and revenue. Pub. L. No. 114-74, §§ 101, 102, 129 Stat. 584, 585-87 (Nov. 2, 2015). (Back to Content)

22 GAO, Fiscal Outlook: Federal Fiscal Outlook accessed January 4, 2017, 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)

23 The 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)

24 As of the issue date of this audit report, the audited financial statements were not issued for three of the CFO Act agencies—DOD, HUD, and NSF. (Back to Content)

25 31 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)

26A 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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