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statement audit have created significant challenges for us as a large, mature
Financial Statement Audit - A Major Challenge
As you are aware, prior to enactment of the 1990 CFO Act, the IRS was not
required to prepare financial statements or to have financial audits. When the GAO
began auditing our financial statements in 1992, we were not working with systems
designed to provide data in accordance with the CFO Act. Our revenue and
administrative accounting systems were designed many years ago to complement our
processing systems. These systems were designed with strong controls but did not
provide the information necessary to report on our financial position.
In addition to our system problems, our size alone has made it difficult to obtain a
clean opinion quickly. As the primary collector of the nation's revenues, we collect over
$1 trillion, and GAO has verified that this has been properly deposited in the Treasury.
This is no small accomplishment for an organization that also handles over one billion
information documents per year, processes more than 200 million returns, issues more
than 90 million refunds, and deals with over 12,000 financial institutions and 12 Federal
Reserve Banks in some 600 locations. Any complex system will produce some errors,
and ours does, but we make great efforts to detect and correct them promptly.
We are quite concerned that the IRS has not “passed” its financial audit. But it is
important to understand, as is explained in the GAO report, that the GAO is unable to
reconcile amounts reported in the financial statements to the detailed accounting
records. It does not mean that the money the IRS is supposed to be collecting or
spending has simply disappeared -- or somehow been misappropriated. This has not
Results of FY 1995 Audit
The IRS' first financial statement audit by the GAO was for FY1992. Since that
time, as I mentioned earlier, we have made some significant improvements. The GAO
has recognized the progress we have made since 1992 in implementing a new
administrative accounting system, in transferring our payroll processing to the
Department of Agriculture's National Finance Center, and in improving the accounting
for federal revenues. They also provided us with 59 recommendations for
improvements that are needed throughout our financial management operations.
Even though we have received a disclaimer each year, I think it is misleading to
characterize our financial management problems as ones that "remain uncorrected."
We have not been ignoring them. In the FY1995 audit report, GAO noted that progress
had been made, but that many of our corrective actions were not completed at the
conclusion of the audit. Our corrective actions are being taken in close coordination
with GAO, and they will continue to monitor our progress and advise us on the results.
For example, in June, I met for three days with GAO and Treasury Inspector
General representatives to review the FY1995 audit of the financial statements and
plan for the FY1996 audit. We discussed short-term and long-term strategies for
resolving our audit issues and identified detailed actions which were incorporated into
our action plan. We plan to hold follow-up meetings with GAO to ensure that the
FY1996 audit stays on schedule and that issues raised are resolved promptly.
We believe it is very important to work closely with the auditors, whether they are
the GAO, the IG, or a public accounting firm. As I have stated, we have not been
standing still. Over the past four fiscal years, GAO has been unable to attest to the
amounts reported on the IRS financial statements; however, in fiscal year 1992 we had
eight separate administrative systems that didn't talk to each other, the revenue system
flows had not been totally documented, and we did not have a definition of accounts
receivable. We now have five basic issues we are working on with the GAO -- I will
address each of these later in my testimony.
To better understand what we are doing to comply with the CFO Act, it is
important to keep in mind that the Service has two sets of financial statements: (1)
administrative and (2) custodial; and has two separate financial processes to track
funds: the administrative system that handles our appropriated funds and our revenue
system that tracks tax collections. To recognize the distinction between these two
systems is important to understand the GAO's audit findings and what we are doing to
improve both systems to comply with the CFO Act.
Improvements in Administrative Accounting
We are very proud of the significant improvements we have made in our
administrative accounting system. Just five years ago, we had eight separate systems
that were not linked to each other. Now we have a single corporate data base for our
approximately $7 billion in appropriated funds. This system provides an integrated,
auditable, comprehensive accounting and budgeting system that fully complies with the
Joint Financial Management Improvement Program (JFMIP) core requirements,
including the U. S. Standard General Ledger (SGL), and other government-wide
standards that apply to automated financial systems. It collects, processes, maintains,
transmits, and reports data about financial events; supports financial planning and
budgeting activities; accumulates and reports cost information; and supports the
preparation of financial statements. In addition, in the last several years we have made
other measurable improvements. For instance:
As stated, we implemented our integrated financial system. We also transferred payroll to the National Finance Center, and integrated other administrative systems to capture data at the source and transmit this data electronically to our corporate financial database.
Our travel vouchers have been automated nationwide. The traveler keys the
We implemented commitment accounting procedures, so that we will have timely information about how money is being spent and so that we can manage our expenditures more carefully.
We linked the procurement system with the administrative accounting system to enable obligations to be transferred electronically.
Since the first audit in 1992, I believe we have made significant improvements,
resulting in GAO's FY1994 and FY1995 audit reports focussing on just two
administrative accounting issues -- failure to reconcile our accounts with Treasury and
the lack of receipt and acceptance documentation for some non-payroll payments to
other Federal agencies, such as rent payments to GSA and printing payments to GPO.
The overriding problem with both cash reconciliation and receipt and acceptance
relates to interagency payments. We are currently reviewing this process to determine
the issues that we have to address and identify those that may be Government wide;
therefore, the solution may require the assistance of GSA and GPO, as well as other
We have reconciled our cash balances to Treasury's records through FY1995
and we are current on our FY1996 reconciliations. Furthermore, we will ensure that
these balances are reconciled on a monthly basis. However, we still have transactions
in a budget clearing account and in suspense accounts that will be resolved during our
Accounting for the Revenue that the IRS Collects
The Revenue Accounting Control System (RACS), which was implemented
during 1984, was not designed to provide the detailed information required by the CFO
Act for financial statement presentation. It also does not use the Standard General
Ledger because it was designed in 1984 to ensure that cash is deposited in the bank
and that the transactions are properly posted to a taxpayer's account. It does this very
well. However, we also believe that the system meets all the Treasury Financial
Manual reporting requirements and provides data to meet the Federal Accounting
Standards Advisory Board (FASAB) reporting requirements.
Most of the problems raised by GAO concern the substantiating of data with the
revenue collected. Because summary data is posted to RACS, it could not be
reconciled on a transaction-by-transaction basis with our Master file accounts.