Read the Financials

The United States' federal spending budget for 2001-02 fiscal year end is $2 trillion. To put that in perspective, that's two thousand billions or two million millions. For comparison, $2 trillion amounts to more than twice the combined gross income of Exxon Mobil, Wal-Mart, General Motors, Ford Motors and Daimler Chrysler--the world's five largest corporations in 2000 according to Fortune. 

Straight to the Source
Being a CPA with a curiosity for numbers, I decided to go directly to the source, www.gao.gov (scroll down to "Other Publications" and you will find "Financial Report of the US Government"). There I found the U.S. government's financial statements, for the prior year ended Sept. 30, 2000.

Governmental accounting is not my forte. But as I read the treasury secretary's message, I began to notice a certain theme.

There is a vaguely stated point that the time and quality of the consolidated statements "continues to improve." And, for the first time, the statements included information regarding Social Security, Medicare, railroad retirement benefits, Black Lung benefits and unemployment insurance, to "assist users in evaluating ... future budgetary resources to sustain program services and meet program obligations." You mean they weren't included before?

Turning to the comptroller's cover letter, my suspicion was verified as I read: "This is the fourth consecutive year for which we are unable to express an opinion. Certain material weaknesses in internal control and accounting and reporting issues resulted in conditions that prevented us from being able to provide the Congress and the American citizens an opinion as to whether the consolidated financial statements are fairly stated in accordance with U.S. generally accepted accounting principles."

Wait a minute, "unable to express an opinion?" The report continued citing "significant financial management weaknesses, problems with fundamental record keeping, incomplete documentation and weak internal controls."

A Little Background
The General Accounting Office and the Comptroller General have been required, pursuant to the Federal Financial Management Act of 1994, to present the activities of the U.S. government, with the goal of being "timely, accurate and professional."

As such, the 24 major federal agencies and a related 25 additional entities, from the Department of Agriculture to the U.S. Postal Service, are included in the financials.

The report proudly states that of the 24 consolidated agencies within the financials, 18 received unqualified opinions, "up from only six agencies four years ago."

However, reading further, we find "many agencies have been able to obtain unqualified audit opinions only through 'heroic efforts,' which include expending significant resources to use extensive ad hoc procedures and making billions (emphasis added) of dollars in adjustments to derive financial statements months after the end of the fiscal year.

"Also, irrespective of the unqualified opinions on their financial statements, many agencies do not have timely, accurate, and useful financial information and sound controls with which to make informed decisions and to ensure accountability on an ongoing basis. In addition, reports from the Inspector General and their contract auditors indicated that only five of the 24 agencies' financial management systems were in substantial compliance with the three federal financial management systems requirements of the Federal Financial Management Improvement Act of 1996."

Billions in Adjustments?
Wait a minute. Billions of dollars in adjustments? Agencies cannot make useful, informed financial decisions? Only 21 percent of agencies were in substantial compliance? That ought to send chills down the spine of even the most creative audit partners.

In the comptroller's report I found the disclaimer of opinion along with related discussion about the material deficiencies and other issues causing such a report. Examples included: $484 billion of unsupported documentation for property, plant and equipment, as well as an inability to estimate the net loan amounts expected to be collected on $208 billion of Department of Agriculture loans receivable; or to balance the Statement of Operations and Changes in Net Position, the Treasury Department plugged $7.2 billion labeled "unreconciled transactions."

Out of Balance
The report even tells us that a total reconciliation between all government agencies and departments could not be completed and as such, was "out-of-balance by more than $250 billion."

My personal favorite was located under Improper Payments, "The reasons for improper payments range from program design issues to inadvertent errors to fraud and abuse. ... While reported estimates of improper payments totaled approximately $20 billion for both fiscal years 2000 and 1999, the government did not estimate the full extent of improper payments." How would you like to present these financials to your banker?

Last year, the debate over the Economic Growth and Tax Relief Reconciliation Act of 2001 focused on whether or not the tax cut of $1.3 trillion over 10 years was going to harm the economy by reducing the surplus. It seems that the real issue may be that the federal government really has no idea where it stands fiscally.

Further Analysis
An analysis of the balance sheet reveals assets totaling approximately $912 billion, while total liabilities are approximately $6.8 trillion (no, that's not a typo). Therefore, the negative net position of the United States is $5.9 trillion.

Granted, $2.7 trillion is accrued pension and other retirement benefits (unfunded) and $3.4 trillion are bills, notes, bonds and other instruments held by the public. Does it fill you with confidence that the assets include $484 billion of unsupported PP&E?

Arriving at the actual Statement of Operations, approximately 80 percent of government revenue is provided by individual income taxes; corporations, 10 percent; and about 1.4 percent is from estate and gift taxes. Maybe this is why Congress was persuaded to eliminate the estate tax. Additionally, I noticed that human resources consume approximately three times as much as national defense, with Social Security as its biggest category.

"Trust Funds"
Turning to the notes, we finally get the actual definition of what is meant when the government calls something a "trust fund." I cringed at, " ... in the federal budget, the term 'trust fund' means only that the law requires a particular fund be accounted for separately, used only for a specified purpose, and designated as a 'trust fund.' A change in law may change the future receipts and the terms under which the funds resources are spent. In the private sector, 'trust fund' refers to funds of one party held and managed by a second party (the trustee) in a fiduciary capacity."

Now I get it. It's a trust fund because they call it a trust fund, but that doesn't mean there is a trust fund, unless of course, they want to call it a "lock box." Boy, I bet younger workers sure feel secure in that knowledge.

The power to collect taxes and spend those sums in a manner that defies fiscal responsibility is very dangerous. Regardless of a person's good intentions, the opportunity for favoritism, fraud and corruption is omnipresent. If we allow our elected officials to control $2 trillion of our money, without proper oversight, we become the farmer who ignores the fox that's guarding the chicken coop.

The accounting profession is an increasingly hot topic in the news. We are not necessarily lauded as the "trusted, ethical and honest" advisers we've carried as our mantle for decades. And I can't help but lay the blame upon our own shoulders. We quietly do our work, with integrity and--remain quiet.

It's time we begin to raise our collective voices to make the public aware, and regain their faith and trust. CPAs can be the purveyors of truth and fact.

Tell it to your friends, tell it to your clients, tell it to the press--Read the Financials.

Ben Mozzetti Jr., CPA, is the principal of Mozzetti Inc. A/C in Santa Clara. He is president of the Silicon Valley San Jose Chapter and can be reached at ben_mozzetti@mozzetti.com.

© 2002 California Society of Certified Public Accountants. For reprint permission, contact Aldo Maragoni, managing editor.