When the president's budget is released every January, there is always a great deal of discussion, analysis and commentary about it. This emphasis is usually misplaced, however, because Congress decides how the budget pie is to be divided, and it seldom follows the president's blueprint.
A much more useful report on the federal government's finances, called the Financial Report of the United States Government, comes out some months later. Unfortunately, this report gets almost no media coverage whatsoever, despite the fact that it reveals far more about the sorry state of the federal government's finances than the budget does. The most recent of these reports was released by the Treasury Department on March 29 for fiscal year 2001.
This year's financial report is especially interesting in light of the Enron/Arthur Andersen scandal. For months, representatives and senators of both parties have been falling all over themselves with outrage, charging that Enron cooked its books with Andersen's help, and hid billions of dollars in liabilities from shareholders and lenders, leading to the largest bankruptcy in American history. Almost daily, at least one of them denounces the accounting practices that led to this debacle, often demanding jail time for the perpetrators.
These irate members of Congress might be more temperate in their denunciations if they knew that the federal government is guilty of worse accounting deficiencies than those that brought down Enron. This fact is fully documented in the Financial Report. Since Congress is, in effect, the federal government's board of directors -- it is ultimately responsible for this situation and any consequences that follow.
The most interesting part of the financial report is the opinion of the comptroller general of the United States on its accuracy and compliance with generally accepted accounting principles. This person heads the General Accounting Office, established to audit the government's books in 1921, and is, in effect, its chief accountant. David M. Walker now holds that position.
In Walker's statement, he is blistering in his criticism of the federal government's accounting methods, controls and inability to provide data that meet even minimal standards for accuracy, timeliness or comparability. He cites "pervasive and generally longstanding material weaknesses" in the government's accounting systems.
Says Walker, "The underlying causes of these issues are significant financial management systems weaknesses, problems with fundamental record-keeping and financial reporting, incomplete documentation and weak internal controls."
The Department of Defense is the worst offender. That's not surprising, since it is the largest purchaser of goods and services from the private sector and is divided among three competing services with radically different needs and requirements, and much of what it procures often ends up being destroyed in the process of normal usage.
For these and other reasons, Defense has long been a "black hole" from an accounting point of view. "DOD faces financial management problems that are pervasive, complex, longstanding and deeply rooted in virtually all business operations throughout the department," Walker states. "To date, none of the military services or major DOD components has passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations and controls."
Although DOD is the worst offender, it is not alone. Taxpayers now filling out their tax returns, fearful of an Internal Revenue Service audit if so much as a penny is misplaced, may be interested to learn that the IRS is another agency that is seriously deficient, according to the GAO.
Among the major areas where the GAO finds widespread accounting problems throughout the federal government are the following: Property, plant and equipment cannot properly be accounted for. It is often impossible to determine the exact cost of loans and loan guarantees, especially at the Department of Agriculture. Many large liabilities, such as for environmental cleanup and future health benefits, cannot accurately be determined. And many interagency financial transactions are significantly out of balance.
This is really just the tip of the iceberg. Since the federal government uses cash accounting, the long-term liabilities of programs like Medicare and Social Security are largely hidden. Costs for things like federal deposit insurance are not accounted for at all, even though the government laid out $130 billion for such commitments during the savings and loan crisis just a few years ago.
A careful reading of the Financial Report might lead one to believe that Enron and Arthur Andersen were models of honesty and transparency compared to the federal government. This is not to excuse anything illegal or unethical that Enron or Andersen did. But members of Congress busily denouncing shoddy accounting there might want to look a little more closely at comparable problems in the federal government, for which they themselves are answerable.