Financial Audit: Restated Financial Statements: Agencies' Management and Auditor Disclosures of Causes and Effects and Timely Communication to Users: GAO-07-91.

GAO continues to have concerns about restatements to federal agencies' previously issued financial statements. During fiscal year 2005, at least 7 of the 24 Chief Financial Officers (CFO) Act agencies restated certain of their fiscal year 2004 financial statements to correct misstatements. To study this trend, GAO reviewed the nature and causes of the restatements made by certain CFO Act agencies in fiscal year 2004 to their fiscal year 2003 financial statements. Eleven CFO Act agencies had restatements for fiscal year 2003. Nine of those 11 received unqualified opinions on their originally issued fiscal year 2003 financial statements. GAO's view is that users of federal agencies' financial statements and the related audit reports need to be provided at least a basic understanding of why a restatement was necessary and its effect on the agencies' previously issued financial statements and related audit reports. This report communicates GAO's observations on the transparency and timeliness of the 9 federal agencies' and their auditors' restatement disclosures. The nine agencies GAO reviewed did not consistently communicate financial statement restatements. GAO found that all nine agencies could have greatly enhanced the adequacy, effectiveness, and timeliness of their restatement disclosures to users. Similar transparency issues existed with the associated audit reports regarding disclosure of all the essential information that would clearly explain the restatements. GAO highlighted the following issues as among the more prevalent issues to be addressed: 1) columns of the agencies' restated financial statements were not labeled as "Restated"; 2) agencies' restatement footnote disclosures lacked clarity or sufficient detail regarding the nature of the restatements and the effect on balances reported in previously issued financial statements; 3) restatement information was not sufficiently disclosed in the agencies' Management Discussion and Analysis; 4) audit reports did not disclose that the respective agencies had restated certain of their fiscal year 2003 financial statements; 5) audit reports did not provide a statement that the previously issued audit report was withdrawn and replaced by the opinion on the restated financial statements; and 6) material misstatements and potential material misstatements were not timely communicated by agencies to either their auditors or to the users of the financial statements. The primary contributing factor for the restatement disclosure issues that GAO identified was insufficient guidance available at the time to both the agencies' management and their respective auditors for disclosure of the restatements and the timeliness of such disclosures. GAO believes that information regarding restatements should be disclosed in a transparent and timely manner consistent with the qualitative characteristics of information in financial reports described in Statement of Federal Financial Accounting... [ABSTRACT FROM AUTHOR]