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Current Events and Commentary

GAO's Report On The 2005 Financial Statements Describe A Complete Disaster

March 2006
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Reading financial statements is something that only an accounting firm (like us) might enjoy doing.  But the just-released financial statements for the U.S. government and related auditors' report deserve more attention than has been reported in the press.

The U.S. government's records are so bad that no one can figure out how bad it really is.

Since 1996, the Government Accountability Office (GAO) is required to audit the annual financial statements of the U.S. government.  The audit report continues to report a disaster that no one would begin to tolerate in private industry.  For example, imagine that you were on the board of directors of a company that obtained even one of the multitudes of problems reported by the GAO.  How would you react to the following language from the most recent GAO audit report?

"A significant number of material weaknesses relating to financial systems, fundamental recordkeeping, and financial reporting, and incomplete documentation continued to:
  1. hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs and other 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;
  4. hinder the federal government from having reliable financial information to operate in an economical, efficient, and effective manner."
"We found … material deficiencies in financial reporting (which also represent material weaknesses) and other limitations on the scope of our work resulted in conditions that continued to prevent us from expressing an opinion on the accompanying financial statements for the fiscal years ended September 30, 2005 and 2004.
  • The federal government did not maintain effective internal control over financial reporting (including safeguarding of assets) and compliance with significant laws and regulations as of September 30, 2005.
  • Our work to determine compliance with selected provisions of significant laws and regulations in fiscal year 2005 was limited by the material weaknesses and scope limitations discussed in this report."

"Because [of the above], we are unable to, and we do not, express an opinion on such financial statements. … Readers are cautioned that amounts reported in the consolidated financial statements and related notes may not be reliable."

In other words, the recordkeeping is so bad we can't even figure out the scope of material law violations, inefficiency, and theft, and whether the accompanying financial statements are a reasonable representation of what actually happened.

In case this was not bad enough, this is the ninth straight year that the GAO was unable to provide an opinion on the fairness of the government's financial statements.  While one might argue that it would take awhile to get the financial affairs in order of an organization as complex as the U.S. government, nine years of this nonsense simply shows that both of the last two administrations failed to make this a priority.

The federal deficit is even larger than reported.

Some public reports claim that the federal deficit is getting better. The report explains otherwise. Total current costs, excluding obligations for pensions, "have increased steadily throughout the [last five year] period. This cost increase is even more dramatic if one includes the actuarial costs for retirement obligations.

The excess of expenses over revenues has nothing to do with poor tax collections. According to the GAO report,

"Fiscal year 2005's total revenues of $$2.2 trillion were 14.3 percent higher than in 2004, the highest increase in revenues in over 20 years.  Tax revenue increased in all categories, mainly due to large increases in both personal income and corporate profits."

Medicare's Upcoming Disaster

In the past year, great attention was given to Social Security, but the real issue is Medicare.  Neither Social Security nor Medicare are included in the above amounts, but are reported separately.  These costs will provide an enormous drain on the long-term viability of our economy.  According to the GAO:

"A good way to view the projected cost of Social Security and Medicare is in relation to gross domestic product (GDP), the most frequently used measure of the total U.S. economy.  Medicare's cost is projected to exceed Social Security's in 2024.  Social Security outgo amounted to 4.3 percent of GDP in 2004, and is projected to increase to 6.4 percent of GDP in 2079.  Medicare's cost amounted to 2.6 percent of GDP in 2004, and is projected to grow more than fivefold to 13.6 percent of GDP in 2079.  The two together, absent reform, will almost triple as a percentage of the U.S. economy, from just under 7 percent last year to 20 percent by 2079."

As taxpayers and citizens, each of us should look upon this dismal reporting in the same way that owners view the financial statements of their business.  If a business owner continued to face such non-performance from employees, there would be no choice but to get more motivated workers.

Fulcrum Inquiry is a licensed CPA firm that performs forensic accounting and special purpose audits.