Two Federal Budget Deficit Estimates; Two Accounting Methods

According to the Financial Report of the United States Government for the year ending September 30, 2006, which was released by the Treasury Department (DoT) on Friday, the federal budget deficit totaled $449.5 billion, nearly 81 percent higher than the $247.7 billion in the President’s annual budget report published two months ago. The two different deficit estimates do not mean two sets of books, the Treasury Executive Summary says, but come from different financial reports, using two different accounting methods -- cash and accrual -- that complement each other and reflect different perspectives.

The President’s budget report is prepared on a cash basis; the numbers reflect cash collected and checks sent out. The Treasury’s Financial Report, prepared on an accrual basis, recognizes costs when owed but not necessarily paid -- for example, on Social Security, federal pensions, and Medicare. Revenues are recognized when owed but not necessarily received.

“There is no magic, no sleight of hand; just cost accruals to adjust for the timing of the cash outlay versus the portion of non cash-based cost attributable to the current period,” the Executive Summary accompanying the Financial Report says.

Costs declined in the current year over last year despite an increase in spending due largely to a change in actuarial assumptions regarding lower interest rates, Reuters reports.

The 2006 Financial Report is the tenth issued by the government, and for the tenth time, the Government Accountability Office (GAO) said that it could not sign off on the books because of problems in reporting, the Associated Press reports. Comptroller General David Walker, the head of GAO, said that 53 percent of the government’s assets could not be audited properly. Among other problems, he cited “serious financial management problems at the Department of Defense (DoD).”

Other agencies that received disclaimers on their 2006 audits included Homeland Security, State (DoS) and NASA. The Energy Department (DoE) earned a qualified opinion, as did the Transportation Department (DoT) and the Smithsonian, reports. Audit problems included accounting for and reconciling balances across agency lines and “ineffective” processes for preparing financial statements.

In a letter accompanying the “Financial Report of the United States Government”, Treasury Secretary Henry M. Paulsen, Jr. emphasized the importance of the audited Statement of Social Insurance, which appears in the report for the first time this year.

“This report highlights the biggest long-term economic issue facing our country, the future claim on spending for our major entitlement programs: Medicare and Social Security. Without fundamental reform to ensure the sustainability of these programs, by the year 2080, the cost to the federal government of Social Security and Medicare together will nearly triple as a percentage of the U.S. economy, growing to 17 percent.”

The Treasury Department estimates a funding shortfall of $44.15 trillion over the next 80 years, up from the estimate of $40.04 trillion made in 2005.

In his letter, Comptroller General Walker echoes Mr. Paulsen’s urgent message. He calls for the adoption of a new statement in the government’s annual report, according to, that would prove “a long term look at the sustainability of current social insurance and other federal programs.”

The Executive Summary to the financial statements says, however, that even with the new Statement of Social Insurance, the financial statements do not reflect on an accrual basis “future costs implied by current policy, such as national defense, the global war on terrorism and hurricane cleanup efforts.”

You may like these other stories...

The Public Company Accounting Oversight Board (PCAOB) on Tuesday adopted a new auditing standard and amendments in three areas of the audit that could pose an increased risk of material misstatement in company financial...
Read more from Larry Perry here and in the Today’s World of Audits archive.In my last article, I presented an overview of one of the first steps in the preplanning phase of an audit engagement: reviewing prior year...
Read more from Larry Perry here and in the Today’s World of Audits archive.AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (SPFs),...

Upcoming CPE Webinars

Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.