Audits form the bedrock of the private sector. Without accurate, factual and independently verified financial information, there would be no bank lending, no trade credit, no corporate bond market and no stock market.
The private sector is also keenly aware of the hazards caused by inaccurate or fraudulent accounting. Two infamous examples would be Enron and Worldcom, both of which committed multi-year accounting fraud and both of which collapsed immediately when the fraud was finally detected. The losses incurred were measured in the billions. Arthur Andersen, the audit firm responsible for Enron, was put out of business.
Governments also need independent audits to 1) assure citizens that the money entrusted to them is being properly and efficiently used, 2) to provide government officials with accurate information upon which to make decisions, and 3) provide transparency so everyone can see what’s really going on.
At the state and local level, audits are the norm. Vermont law requires the state, all towns and cities and all school districts to complete annual independent audits. All 50 states do annual independent audits.
The federal government is a different story.
The Chief Financial Officers Act of 1990 and the Government Management and Reform Act of 1994 finally required all 24 major government agencies, all other significant reporting entities and the entire government, on a consolidated basis, to prepare audits. At the departmental level, these audits were to be independent. The Government Accountability Office (“GAO”) was charged with the preparation of the consolidated government audit.
Twenty plus years on and the GAO has never been able to issue a clean audit opinion for the consolidated financial report of the United States! That means they cannot confirm that the financial statements of the United States accurately reflect the results and operations of the government!
According to the GAO, the reasons for this failure are broadly as follows:
- “serious financial management problems leading to financial statements at the Department of Defense that cannot be audited”
- “the federal government’s inability to adequately account for and reconcile intergovernmental activity and balances between federal agencies”, and
- “the federal government’s ineffective process for preparing the consolidated financial statements”.
In the fiscal year ended September 30, 2016, 4 of 24 major government agencies were unable to deliver a clean audit opinion. These are not small government departments. The biggest problems are in the Department of Defense, followed by the US Department of Agriculture, the Department of Housing and Urban Development and the National Science Foundation. Several of the smaller “additional significant reporting entities” were also unable to deliver clean audits.
The auditors of the various government departments reported over 40 material weaknesses in internal controls, and this excludes the DOD and HUD, for which numbers seem not to be available (perhaps too many material weaknesses to count).
The failure of the federal government to deliver a clean audit over twenty years is a disgrace. Without accounts, they can’t be held accountable. Some combination of incompetence and complexity probably explain much of this long-term failure. Unfortunately, without clean audits you cannot rule out foul play and fraud.
In the next article, The Informed Vermonter will examine Improper Payments.