Page 18


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

—
In Taxpayers’

Eyes There Is
No Substitute
for Credibility
and
Accountability

annual costs of these programs and to
present the amount invested annually
over a period of years.

Another future challenge is to more
tightly tie financial reports with the
budget. This would enhance the utility
and quality of the data considered in
budget deliberations because numbers.
representing the execution of the
previous fiscal year’s budget would be
presented in financial statements and
reconciled to audited accounting data.

Also, budget data would be enhanced,
for example, by bringing accrual
accounting concepts to some areas of
the cash-based budget. This new way
of thinking is already being tried, for
instance, in budgeting for credit
programs, as required by the Credit
Reform Act.

Ultimately, decisionmakers will have
available reliable information on the
financial condition of programs and
operations as well as the performance
and costs of these activities.

The elements are now in place for a
greatly changed accountability system
that (1) measures results linked to
costs, (2) is based on credible
information, and (3) will enable annual
reporting to the American public of the
national government's financial
stewardship. Nonetheless, making
federal financial management reform a
reality remains a challenge.

Page 12




Reliable Financial Information:
A Key to Effective Program
Management and Accountability

At Long Last,

Federal
Financial
Statements Are
Becoming a
Priority

Today, taxpayers doubt the
government's ability to be a good
financial steward. Time and again, they
see media reports of mismanagement,
rampant waste, and scandalous fraud.
Each of these reports has a price tag,
adding up to billions of dollars in lost
taxpayer dollars each year and
undermining confidence in government
institutions.

The Chief Financial Officers (CFO) Act
of 1990 laid the legislative foundation
for the federal government—the
world’s largest and most complex
operation—to provide taxpayers, the
nation’s leaders, and agency program
managers with reliable financial
information through audited financial
statements. This kind of financial
information has been required in the
private sector for over 60 years and in
state and local governments since the
early 1980s.

Under the CFO Act, as expanded in
1994, the government's 24 major
agencies will each prepare annual
financial statements, beginning with
those for fiscal year 1996. Together,
these agencies account for virtually the
entire federal budget.

The agencywide financial statements
will be subjected to independent audit.
These financial audits will

determine the reliability of the financial
information reported,

Page 3


Related GAO Products

Financial Audit: Examination of IRS’
Fiscal Year 1995 Financial Statements
(GAO/AIMD-96-101, July 11, 1996).

Budget and Financial Management:
Progress and Agenda for the Future
(GAO/T-AIMD-96-80, April 23, 1996).

CFO Act Financial Audits: Increased
Attention Must Be Given to Preparing
Navy's Financial Reports
(GAO/AIMD-96-7, March 27, 1996).

Financial Audit: Federal Family
Education Loan Program's Financial
Statements for Fiscal Years 1994 and
1993 (GAO/AIMD-96-22, February 26,
1996).

Financial Management: Continued
Momentum Essential to Achieve CFO
Act Goals (GAO/T-AIMD-96-10,

December 14, 1995).

Must Be Sustained to Achieve the —
Reform Goals of the Chief Financial
Officers Act (GAO/T-AIMD-95-204,
July 25, 1995).

Managing for Results: Strengthening
Financial and Budgetary Reporting
(GAO/T-AIMD-95-181, July 11, 1995).

Managing for Results: Steps for
Strengthening Federal Management
(GAO/T-GGD/AIMD-95-158, May 9,
1995).

Page 19





Page 16


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

Audited
Financial
Information
Will Make a
Difference in
Program
Operations

Financial statements prepared using
the new accounting standards will
provide essential facts for more
informed decision-making and better
accountability in practically every
major aspect of the government's
operations. While providing this
information will require substantially
improved accounting systems, the new
data will be available to gauge progress
in meeting program goals, improving
program performance, and establishing
accountability. The reliability or
reasonableness of financial information
reported in the financial statements
will be determined through the annual
audit.

The following are just a few examples
of areas where audited financial
information will make a difference in
program operations.

Better financial information will
help to improve the collection of
revenue used to fund the
government.

Our financial audits at IRS have
identified fundamental, persistent
problems, including the following. The
amounts of total revenue (reported to
be $1.4 trillion for fiscal year 1995) and
tax refunds (reported to be $122 billion
for fiscal year 1995) cannot be verified
or reconciled to accounting records
maintained for individual taxpayers in
the aggregate. The amounts reported
for various types of taxes collected
(such as social security, income, and
excise taxes) cannot be substantiated.

Page 8


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

disability determination process to
reduce the average waiting time.

Beginning with fiscal year 1997, the
Secretary of the Treasury, in
coordination with the Director of the
Office of Management and Budget
(OMB), is to annually prepare and
submit to the President and the
Congress audited governmentwide
financial statements. These financial
statements, which GAO will audit, will
encompass the entire federal
government.

For the first time, the American public
will have an annual scorecard on the
national government's financial
stewardship.

Providing
Reports
Tailored to
Users’ Needs
and Based on
New Standards

The challenge of developing reports
specifically tailored to meet
decisionmakers’ needs and based on
appropriate accounting standards is
being met by the Federal Accounting
Standards Advisory Board (FASAB).
FASAB was created in October 1990 by
the Secretary of the Treasury, the
Director of OMB, and the Comptroller
General to consider and recommend
accounting principles for the federal
government.

FASAB has put together a new set of
accounting concepts and standards to
meet the special needs of the U.S.
government. These concepts and
standards, which are listed in appendix
I, underpin OMB’s guidance to agencies

Page 5


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

report on agencies’ compliance with
laws and regulations, and

provide information on the adequacy of
systems and controls used to ensure
accurate financial reports and
safeguard assets.

Also, recent legislation requires
auditors performing CFO Act financial
audits to report whether agencies’
financial management systems comply
with federal accounting standards and
other requirements.

Reliable financial statements would
show the financial results of these
agencies’ entire operations and
interpret, analyze, and provide relevant
information on the government's true
financial status—information that has
never before been available. In
addition, reliable financial statements
could result in increased accuracy of
the numbers reported in the budget as
“actual.”

The Social Security Administration
(SSA), for example, has prepared and
had audited annual financial
statements showing the status of social
security trust funds since 1987. SSA is
now Starting to report performance
information with its financial
statements, including information on
the adequacy of service satisfaction
and promptness in issuing earnings
statements and processing claims.
Reliable performance and financial
data are also necessary in SSA’s efforts
to reengineer its business processes,
such as efforts to reengineer its

Page 4


Page 17


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

the financial statements and explain
the differences;

show total cost, earned revenues (if
any), and net cost of an agency’s
organizations and programs in a
manner that enables users to relate
costs to outputs and outcomes;

display the sources of financing for an
entity's net cost—including those paid
by taxpayers through appropriations
and taxes—and the change in financial
position for an agency and its
organizations;

report (1) unspent funds, (2) other
operating assets available for use in
providing government goods, services,
and benefits, and (3) all liabilities
incurred, with separate display of those
which require future funding by the
Congress;

depict the various taxes and other
noneamed revenues collected and
collectible by the IRS and other
collection agencies, as well as the
amounts transferred to the general
fund and trust funds; and

reflect the nation’s assets and
investments for which the federal
government has a stewardship
responsibility.

Page 7



United States General Accounting Office

GAO

Accounting and Information
Management Division

January 1997

Reliable Financial
Information: A Key
to Effective Program
Management and
Accountability



Reliable Financial Information:
A Key to Effective Program
Management and Accountability

Cost accounting information will
be collected to show the full costs
of goods and services provided by
an agency.

Today, only a few federal agencies do
any form of cost accounting. This is
unfortunate, considering the enormity
of the federal government's spending.
Better cost information can help
agency managers determine the areas
where costs are disproportionate to
benefits received and where prudent
investment can yield the greatest
benefits in relation to the costs. Cost
accounting information can also cast
new light on the efficiency and
effectiveness of a host of
government-run programs.

Environmental damage resulting
from government activity will be
reported as a liability and
recognized as an expense when the
damage occurs.

Currently, the full magnitude of the
government's environmental cleanup
liability is unknown. Financial
statements will provide information on
the nature, location, and magnitude of
this exposure, which, at a minimum,
will be in the hundreds of billions of
dollars.

Page 10


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

The reliability of reported estimates for
fiscal year 1995 of $113 billion for valid
accounts receivable and of $46 billion
for collectible accounts receivable
cannot be determined.

Better financial data can help to
provide accountability for national
defense expenditures.

No single military service or major
component has been able to withstand
the scrutiny of a financial statement
audit. Billions of dollars of needed
adjustments to financial reports are
routinely identified. The stakes are
high—DOD has over a trillion dollars in
assets and a $250 billion annual budget.
Using the new accounting standards,
DOD could have available (1) financial
information essential for properly
managing billions of dollars in
inventories and (2) managerial cost
data for assessing activities, such as
infrastructure modemization and
specific military operations.

Improved reporting can help to
institute better management of
federal lending programs.

Financial audits have consistently
disclosed serious weaknesses in
financial systems and reporting for the
government's multi-billion dollar loan
and loan guarantee portfolios.
Decisionmakers can now have a
clearer picture of the government's
performance and loss estimates for its
lending programs for farmers, home
buyers, and students.

Page 9



Reliable Financial Information:
A Key to Effective Program
Management and Accountability

on the form and content of their
agencywide financial statements.

The objectives of federal financial
reporting are to provide users with
information about

budgetary integrity,
operating performance,
stewardship, and
systems and controls.

With these as the objectives of federal
financial reporting, FASAB has
developed a new reporting model for
federal government entities. Now
decisionmakers and others will have
available an annual report on the
government's financial condition and
financial statements for each major
agency that, for example, will

present a top-level overview discussion
of the significance of the financial
information in the accounting reports
and commentary on performance,
goals, and results consistent with
measures an agency uses under the
Government Performance and Results
Act of 1993;

report and thus enable the audit of

(1) budgetary resources made
available, (2) obligations incurred,

(3) the year-end balances of budgetary
resources available and obligations
outstanding, and (4) outlays;

reconcile budgetary obligations
incurred to the net costs presented in

Page 6


Related GAO Products

Financial Management: CFO Act Is

Improving Government: Actions
Needed to Sustain and Enhance

Management Reforms
(GAO/T-OCG-94-1, January 27, 1994).

Financial Management: Strong
Leadership Needed to Improve Army's
Financial Accountability
(GAO/AIMD-94-12, December 22, 1993).

The Chief Financial Officers Act: A
Mandate for Federal Financial
Management Reform

(GAO/AFMD-12.19.4, September 1991).

Hanasing the Cost of Government:

ig an Effective Finan
ianagenat Structure
(GAO/AFMD-85-35 and 35A,
February 1985).

Page 20


Financial
Systems Have
Become
Outdated and
Controls Have
Seriously
Deteriorated

Reliable Financial Information:
A Key to Effective Program
Management and Accountability

The federal government has a
responsibility—and an obligation—to
American citizens to be a good
financial steward of and properly
account for their tax dollars. Decades
of neglect and failed attempts to
improve financial management and
modernize outdated financial systems
have left the federal government
ill-equipped and unprepared to
adequately fulfill this responsibility.

Audits have shown that federal
financial management is in serious
disrepair:

recordkeeping is sloppy,

financial reports are inaccurate,
rudimentary accounting operations are
not effectively performed, and

basic controls are not in place.

The poor state of federal financial
systems and controls results in
incorrect financial information being
provided to the Congress and the
administration. Without reliable
financial information, government
Jeaders do not have the full facts
necessary to make investments of
scarce resources, reduce the deficit, or
direct programs.

The lack of reliable financial
information also impairs the
government's ability to adequately
fulfill another fundamental obligation
to taxpayers—holding agency
managers accountable for the way they
run government programs.

Page 2


Reliable Financial Information:
A Key to Effective Program
Management and Accountability

But the result should be meaningful
financial information showing what the
public gets for the taxpayer money the
government spends. This information is
essential to put the government's
financial house in order and to realize
broader management improvements.

The American public wants to believe
in our government and trust its
decisions. Reliable financial reporting
that is easy to understand could
provide the credible information
needed to help restore confidence in
government.

The matters presented in this
document are further discussed in
the related GAO products listed at
the end of this document. For
additional information, contact:

Gene L. Dodaro, (202) 512-2600
Assistant Comptroller General
for Accounting and Information
Management

Jeffrey C. Steinhoff, (202) 512-9450

Director for Planning and Reporting
‘Accounting and Information
Management Division

Philip T. Calder, (202) 512-7353
Acting Chief Accountant

Page 13



Appendix I
Statements of Federal Financial
Accounting Concepts and
Standards

Accounting for Revenue and Other
Financing Sources (SFFAS 7, May 10,
1996, effective for fiscal year 1998)

Supplementary Stewardship

Reporting (SFFAS 8, effective for
fiscal year 1998)

Page 15



Reliable Financial Information:
A Key to Effective Program
Management and Accountability

Our nation’s leaders make decisions
almost daily that affect the lives and
livelihoods of virtually every American
citizen. Their choices, for example, can

set the level of government debt we
shoulder;

expand or cut the funding of
government programs to support our
health, safety, education, and
recreation needs;

add to or restrict money made
available to maintain the quality and
readiness of our nation’s defense; and
determine the amount of taxes we pay.

Reliable financial information can
provide a foundation for formulating
budgets, managing government
program operations, and making
difficult policy choices. However,
financial data alone do not usually
provide hard and fast answers. Policy
decisions involve many considerations.

But the difficulty of making informed
decisions is increased when complete
and reliable information on the cost
and consequences of government
programs and activities is unavailable.
For example, efforts to deal with the
deficit or make tough decisions among
competing options may be undermined
when bad or missing financial
information masks huge, hidden costs.
It is also difficult to make fully
informed budget decisions when
information on actual costs for
programs is incorrect or unknown.

Page 1




Reliable Financial Information:
A Key to Effective Program
Management and Accountability

Information will be provided on the
condition and the future
maintenance requirements for
plant, property, and equipment.

With today’s budgetary constraints,
agencies often cut comers by failing to
maintain the federal government's
buildings, equipment, and other
property. While deferring maintenance
can squeeze scarce resources for other
uses, over time it can have an eroding
and costly effect on the government's
assets. Agencies’ financial statements
will now report the amount of deferred
maintenance on a potentially wide
range of assets from our military
weapons, embassies around the world,
and veterans hospitals to our national
parks.

The Next
Step—Linking
Performance,
Costs, and the
Budget

What are the American people getting
for their investment in the federal
government? Addressing this question
by measuring performance is central to
the 1993 Government Performance and
Results Act’s goal of focusing on the
results and outcomes of federal
programs.

The accounting standards can lead to
and support linking costs with
achieving performance levels. This can
give agency managers information for
assessing the full costs of goods,
services, and benefits compared to
program outputs and results. Also, the
accounting standards for investments
in education, training, and research and
development require agencies to
develop performance indicators for the

Page 12


Appendix I

Statements of Federal Financial
Accounting Concepts and

Standards
Statements of Objectives of Federal Financial
Federal Financial Reporting! (SFFAC 1, September 2,
Accounting 1993)
Concepts (SFFAC)

Entity and Display! (SFFAC 2,

June 6, 1995)
Statements of Accounting for Selected Assets and
Federal Financial Liabilities (SFFAS 1, March 30, 1993,
Accounting effective for fiscal year 1994)
Standards (SFFAS)

Accounting for Direct Loans and
Loan Guarantees (SFFAS 2,

August 23, 1993, effective for fiscal year
1994)

Accounting for Inventory and
Related Property (SFFAS 3,
October 27, 1993, effective for fiscal
year 1994)

Managerial Cost Accounting
Concepts and Standards (SFFAS 4,
July 31, 1995, effective for fiscal year
1997)

Accounting for Liabilities of the
Federal Government (SFFAS 5,
December 20, 1995, effective for fiscal
year 1997)

Accounting for Property, Plant, and
Equipment (SFFAS 6, November 30,
1995, effective for fiscal year 1998)

‘Effective dates do not apply to Statements
of Federal Financial Accounting Concepts.

Page 14