Uncle Sam's Audit Gap-no one knows how much it's costing taxpayers

If Uncle Sam were a public company, the feds would be all over it about accounting. Six years after Congress completed the most sweeping reform of federal financial management in 40 years, 83% of the federal agencies subject to it aren't in full compliance with the law.

The accounting is so bad that no one knows how much it's costing taxpayers in erroneous payments and inefficiency. Reports from the U.S. General Accounting Office indicate that $100 billion annually wouldn't be unreasonable. That's equal to an Enron --or a tax cut--every year.

Before we look at those big money problems, something less problematic but less known and very awkward deserves attention.

The chief arbiter of auditing isn't audited. Action last week by the U.S. Senate and the Securities and Exchange Commission seems certain to bring federal oversight of the accounting profession with the assistance of the SEC. Yet the SEC, which administers securities-related fees that last year totaled $2 billion, doesn't produce audited financial statements of its own operations, as do 36 of the most significant federal agencies.

The SEC and 25 other independent agencies aren't subject to federal law requiring audited financials similar to those of public companies. Still, a dozen of those agencies, including the Federal Communications Commission and Federal Trade Commission, have provided them.

The issue isn't possible accounting shenanigans, just good business practice. Maintaining audited financials is essential to efficient management.

The SEC also is the only agency that doesn't have a top-level management position equivalent to chief financial officer. As required of all agencies, it has an inspector general who can conduct audits. But responsibility for financial management and accounting is with the office of comptroller, which lies at the bottom of the SEC organization chart.

The SEC blames lack of budget authorization for its audit absence. Of course, keeping public-company accounting in line should be the priority. But it's just plain embarrassing that the SEC doesn't practice what it regulates.

Pending legislation would require audited financials from the SEC and all other agencies having budget authority greater than $25 million. The SEC recently told lawmakers that's a good idea. But it noted that in addition to funding problems, its regulatory power over accounting makes it difficult to contract with outside accountants to prepare for audits, as do other smaller agencies.

That's a ludicrous excuse. The SEC lives and breathes auditing. It might have to hike headcount. But it certainly has the institutional know-how. And funding presumably could be found in the huge 66% increase in the SEC's budget--to $766 million--proposed by accounting oversight legislation that the Senate passed last week.

Now, about that $100 billion of problems among the 24 major agencies currently audited by law.

Since 1997, the U.S. Treasury has reported federal accounts on a combined basis, with an overall accounting opinion issued by the General Accounting Office. 2001 was the fifth consecutive year that the GAO was unable to judge "whether the consolidated statements are fairly stated in conformity with U.S. generally accepted accounting principles." The GAO says that "the government did not maintain adequate systems or have sufficient, reliable information."

One result is erroneous payments, either via plain mistakes or vulnerability to fraudulent claims. Estimates just for Medicare, food stamps and earned income tax credit refunds alone totaled $21 billion in 2001. Estimates, much less exact amounts, for the entire government are unknown. $100 billion would be 19% of Uncle Sam's $515 billion net operating cost last year.

The fine print of the tidy-looking Financial Report of the United States Government reveals painfully basic accounting deficiencies. For example, to make the statements balance, there's a $17.3 billion decrease to net operating cost labeled "unreconciled transactions." That's up from $4.8 billion in 2000.

According to the GAO, a major reason is failure of agencies to accurately reconcile their records of disbursements to the Treasury's records of actual payments. That's as basic as reconciling a checkbook with bank statements.

The balance sheet is equally crude. The negative $6.5 trillion total net position isn't derived via balanced accounting entries. Instead, the $7.4 trillion of liabilities is simply subtracted from $926 billion of assets. And the GAO reported that substantial amounts of government-owned plant, equipment and inventories, on the books at $491 billion, couldn't be verified to exist or have their value substantiated.

Though 16 of the 24 major agencies required to provide audited financials received a "clean" opinion, the GAO found it often was achieved only by "extensive ad hoc procedures" and "billions of dollars in adjustments"--much like a taxpayer organizing a shoebox of financial documents on April 14.

Just preparing a tax return or audited financials isn't financial management. That requires accurately maintaining records on a current basis. The auditors of 20 of the 24 federal agencies deemed the financial management systems significantly deficient in meeting federal requirements enacted in 1996.

The Department of Defense, whose $735 billion cost for 2001 is by far the largest of any agency, is the major offender. Intramural rivalry has created a rat's nest of 1,100 financial systems. A $200 million two-year plan announced in April aims to design an integrated architecture of just 100 systems. Implementation will take at least four more years.

Elsewhere, some meaningful progress has been made. The number of agencies able to attain clean audit opinions has tripled since 1996. And the GAO reports significant improvement in tracking loan programs at key agencies such as the Department of Agriculture.

A priority of President Bush's management agenda is more aggressive implementation of federal financial management laws enacted between 1990 and 1996. But the goal of having the government operate as if it's Uncle Sam Inc. is up against the politics of spending money, not saving it, and the ability to literally paper over the consequences of sloppy accounting.

It's much easier to raise the debt limit, dip into the Social Security trust fund and otherwise jigger appropriations. In fact, apart from the critical aspects of disclosure and nefarious intent, the techniques of politicos have much in common with the public-company accounting shenanigans they now seek to end.

The Department of Defense, whose $735 billion cost for 2001

Is this number right? I thought the defense budget was closer to $300 Billion.

I'm not surprised one bit. When the Republicans took back Congress in '94 they hired an auditor to go over Congressional books. After 13 months they gave up. They said it couldn't be done.

And we are calling for the executives at Enron, Adelphia, and WorldCom to go to jail?

WorldCom: 3.8 Billion - Whacky Accounting Procedure
Department of Education: 6.0 Billion - Totally Missing

Which is more criminal?

It was actually a Stafford Loan, which is a little different than a Pell grant, but it is similar.

This was actually from 1999.

Here is the article that details the absolute incompetence in our government. It is my understanding that they still don't know who the $800 million went to, even today.

This is one of the items that Rush was talking about on his show yesterday. I was talking to a teacher friend of mine who has dealt with the Department of Education many times...says they are completely incompetent and is not surprised at all that they would steal/lose/misplace $800 Million.

While the DOJ is putting a ton of fat-cat execs in jail (deservedly) for lying and fraud, they should use the same accounting and punishment yardsticks on the Feds. It's only "fair".

But, don't hold your breath. Many of these would be sitting congressmen or senators, and would also include most major Clinton appointees, including Slick himself.

So, let the pogrom by the Media and the Usual Suspects proceed against corporate CEOs and their minions. That can be more easily be blamed on Republican Corporate Greed and be used as political capital for the next election!

I wrote the author of this article with this same quesiton. He replied:

$300 billion is the DOD BUDGET. The actual COST in 2001 was $735 billion. This, from the report, explains the difference:

Accrual based financial reporting is critical to gaining a comprehensive understanding of the U.S. Government’s operations. For fiscal year 2001, our results were an accrual-based deficit of $515 billion in contrast to a $127 billion budget surplus reported last fall. The primary difference between the accrual deficit and the budget surplus is the recognition of expanded military retiree health benefit costs provided by the National Defense Authorization Act, which was signed into law on October 30, 2000, and other actuarial expenses. In fact, these expenses caused the government’s future obligations to its military and civilian retirees to exceed the federal debt held by the public.

"... our government is on it," - George W. Bush

Quotes like this almost make me sympathesize with the Libertarian Bush Bashers (said with a smile - not trying to start a fight ...). As much as we desparately need to take back control of liberal courts and keep Ms. Hillary Rodham Murderess Trator Marxist Dictator Klintoon out of the Whitehouse, we also need to come to a genuine national understanding in our leaders that Washington D.C. is way way out of control and far far too invasive.

One step at a time -- first get the Senate in November. But patience is hard. And while the honest, faithful, competent, patriotic, moral, visionary leadership of Bush is a vast vast improvement over his predecessor, I sure wish he displayed more awareness of the desparate state of the federal beauracracy.

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