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Accounting and Accountability in Government

July 17, 2007

Tags Big GovernmentMoney and BanksMonetary Theory

This is a story about Linda Combs, who cleaned up the government's financial reporting process.

A remarkable fact jumps off the page at me: "Nineteen of the 24 agencies received unqualified audit opinions in 2005, a vast improvement compared to 1990, when only one had a clean audit opinion." Then the article goes on to say that:

Still, many of the agencies have been dogged by lack of integrated controls, material weaknesses, and restatements. Many of them have consistently performed below par when it comes to being able to "produce reliable, useful, and timely financial information," according to the Government Accountability Office's most recent annual report on the progress of the Federal Financial Management Improvement Act of 1996.

...The government won't be able to achieve a consolidated audit until the largest agency, the Department of Defense, achieves a clean audit, Combs says. The agency's sordid financial history is rife with failed business systems and missed budget projections.

I don't doubt this lady worked a zillion hours per week and cleaned up the financial reporting and accounting processes of these agencies. Nineteen of twenty-four (agencies that received an unqualified opinion) is still unacceptable and indicates that something is very wrong. However, my guess is that she was a superstar to even accomplish that much within the halls of ill repute. In fact, in 1996 only six agencies received clean opinions, and in 2000 there were eighteen clean audit opinions from the twenty-four agencies. Wait — back in 2002, David Walker, the comptroller general of the United States and head of the General Accounting Office (GAO), said this:

"If you look at the 18 departments and agencies that did receive clean opinions on their [FY2000] financial statements," says Walker, "a majority of those received that clean opinion only because they engaged in 'heroic efforts' — whereby they spent millions of dollars and thousands of person-hours...adjusting journal entries and reconstructing the books."

What is the agency that consistently does the best job of accounting for its financial condition? The Social Security Administration, believe it or not.

The government still cannot produce a consolidated annual report for the federal government as a whole. Private corporations do produce consolidated financial statements for their businesses. Fiscal year 2006 was the 10th consecutive year in which the government's consolidated audit statement received a judgment of "no comment" from auditors. The GAO has cited the following shortcomings: "financial management problems at the Defense Department, an inability to account for and to reconcile balances that cross agency lines, and an ineffective process for preparing financial statements."

Before we all get too confident in the ability of a few good people to go in and clean up the government's financial mess, a reminder that an October 2006 GAO report noted that out of the eleven agencies that restated the results of their fiscal 2003 audits, nine of those agencies initially received unqualified [clean] opinions.

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