Financial Management: Sustained Efforts Needed to Achieve FFMIA Accountability
Published: 2003-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The ability to produce the data needed to efficiently and effectively manage the day-to-day operations of the federal government and provide accountability to taxpayers has been a long-standing challenge to most federal agencies. To help address this challenge, the Federal Financial Management Improvement Act of 1996 (FFMIA) requires the 24 Chief Financial Officers Act agencies to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) federal accounting standards, and (3) the U.S. Government Standard General Ledger (SGL). FFMIA also requires GAO to report annually on the implementation of the act.
section_title: What GAO Found
paragraphs: Federal agencies are making progress to address financial management systems weaknesses. At the same time, for fiscal year 2002, 19 of the 24 CFO Act agency inspectors general or their contract auditors reported that these agencies' financial management systems did not comply with FFMIA. The nature and seriousness of the reported problems indicate that, generally, agency management does not yet have the full range of reliable information needed for accountability, performance reporting, and decision making. Audit reports highlight six recurring problems that have been consistently reported for those agencies whose auditors reported noncompliant systems. Following OMB's reporting guidance, auditors for 5 agencies provided negative assurance on agency systems' FFMIA compliance for fiscal year 2002. This means that nothing came to their attention indicating that these agencies' financial management systems did not meet FFMIA requirements. GAO does not believe that this type of reporting is sufficient for reporting under the act. FFMIA requires the auditor to state "whether" the agency systems are in substantial compliance, which in our view, requires the auditor to perform sufficient audit tests to be able to provide positive assurance. Agencies have recognized the seriousness of their financial systems weaknesses, and as of September 30, 2002, 17 of the 24 CFO Act agencies were planning to or were implementing a new core financial system. It is imperative that agencies adopt leading practices, such as top management commitment and business process reengineering, to ensure successful systems implementation. The JFMIP Principals, congressional oversight, and the President's Management Agenda are driving governmentwide initiatives to transform federal financial management. Modernization of agency financial systems and continued attention is needed to sustain momentum on these initiatives.

section_title: Letter
paragraphs: The ability to produce the data needed to efficiently and effectively manage  the day-to-day operations of the federal government and provide  accountability to taxpayers and the Congress has been a long-standing  challenge at most federal agencies.  To address this challenge, the Chief  Financial Officers (CFO) Act of 1990 calls for the modernization of  financial management systems, so that the systematic measurement of  performance, the development of cost information, and the integration of  program, budget, and financial information for management reporting can  be achieved.
The Federal Financial Management Improvement Act of 1996 (FFMIA)  builds on the foundation laid by the CFO Act by emphasizing the need for  agencies to have systems that can generate reliable, useful, and timely  information with which to make fully informed decisions and to ensure  accountability on an ongoing basis.  FFMIA requires the major departments and agencies covered by the CFO Act to implement and maintain financial  management systems that comply substantially with (1) federal financial  management systems requirements, (2) applicable federal accounting  standards, and (3) the U.S. Government Standard General Ledger (SGL)  at the transaction level.   FFMIA also requires auditors to report in their  CFO Act financial statement audit reports whether the agencies’ financial  management systems substantially comply with FFMIA’s systems  requirements.  We are required to report annually on the implementation of  the act.  This, our seventh annual report, discusses (1) auditors’ FFMIA  assessments for fiscal year 2002 and the problems, reported by the  auditors, that continue to impair agency accountability, (2) agency efforts  to implement financial systems, (3) key characteristics of successful  systems implementation efforts and the challenges federal agencies face,  and (4) the status of federal financial management improvement efforts.
subsections: section_title: Background
paragraphs: FFMIA and other financial management reform legislation have  emphasized the importance of improving financial management across the  federal government.  The primary purpose of FFMIA is to ensure that  agency financial management systems routinely generate timely, accurate,  and useful information.  With such information, government leaders will be  better positioned to invest resources, reduce costs, oversee programs, and  hold agency managers accountable for the way they run government  programs.  Financial management systems’ compliance with federal  financial management systems requirements, applicable accounting  standards, and the SGL are building blocks to help achieve these goals.
Beginning in 1990, the Congress has passed management reform legislation  to improve the general and financial management of the federal  government.  As shown in figure 2, the combination of reforms ushered in  by the (1) CFO Act of 1990, (2) Government Performance and Results Act  of 1993, (3) Government Management Reform Act of 1994, (4) FFMIA,   (5) Clinger-Cohen Act of 1996, and (6) Accountability of Tax Dollars Act of  2002, if successfully implemented, provides a basis for improving  accountability of government programs and operations as well as routinely  producing valuable cost and operating performance information.
Figure 2 shows the three levels of the pyramid that result in the end goal,  accountability and useful management information.  The bottom level of  the pyramid is the legislative framework that underpins the improvement  of the general and financial management of the federal government.  The  second level shows the drivers that build on the legislative requirements  and influence agency actions to meet these requirements.  The three  drivers are the (1) PMA, (2) congressional and other oversight, and (3) the  activities of the JFMIP Principals.  The third level of the pyramid represents  the key success factors for accountability and meaningful management  information—integrating core and feeder financial systems, producing  reliable financial and performance data for reporting, and ensuring  effective internal control.  The result of these three levels, as shown at the  top of the pyramid, is accountability and meaningful management  information needed to assess and improve the government’s effectiveness,  financial condition, and operating performance.
subsections: section_title: FFMIA Guidance Issued by OMB
paragraphs: OMB sets governmentwide financial management policies and  requirements and currently has two sources of guidance related to FFMIA.    First, OMB Bulletin No. 01-02, Audit Requirements for Federal Financial  Statements, dated October 16, 2000, prescribes specific language auditors  should use when reporting on an agency system’s substantial compliance  with FFMIA.  Specifically, this guidance calls for auditors to provide  negative assurance when reporting on an agency system’s FFMIA  compliance.  Second, in a January 4, 2001, Memorandum, Revised  Implementation Guidance for the Federal Financial Management  Improvement Act, OMB provided guidance for agencies and auditors to use  in assessing substantial compliance.  The guidance describes the factors  that should be considered in determining an agency’s systems compliance  with FFMIA.  In addition, examples are provided in the guidance as to the  types of indicators that should be used as a basis in assessing whether an  agency’s systems are in substantial compliance with each of the three  FFMIA requirements.  The guidance also discusses the corrective action  plans, to be developed by agency heads, for bringing their systems into  compliance with FFMIA.
section_title: Financial Audit Manual Section on FFMIA
paragraphs: Relating to our recommendation that OMB develop specific procedures  auditors should perform when assessing FFMIA compliance, we worked  with representatives from the President’s Council on Integrity and  Efficiency (PCIE) to develop a section for the joint GAO/PCIE Financial  Audit Manual (FAM).  This section, part of the FAM update issued in April  2003, includes detailed audit steps for testing agency systems’ substantial  compliance with FFMIA.  The FAM guidance on FFMIA assessments  recognizes that while financial statement audits offer some assurances  regarding FFMIA compliance, auditors should design and implement  additional testing to satisfy FFMIA criteria.  For example, in performing  financial statement audits, auditors generally focus on the capability of the  financial management systems to process and summarize financial  information that flows into agency financial statements.  In contrast,  FFMIA requires auditors to assess whether an agency’s financial  management systems comply with system requirements.  To do this,  auditors need to consider whether agency systems provide complete,  accurate, and timely information for managing day-to-day operations so  that agency managers would have the necessary information to measure  performance on an ongoing basis rather than just at year-end.
section_title: Scope and Methodology
paragraphs: We reviewed the fiscal year 2002 financial statement audit reports for the  24 CFO Act agencies to identify the (1) auditors’ assessments of agency  financial systems’ compliance, (2) problems that affect FFMIA compliance,  and (3) agency management’s FFMIA assessments.  While we did not  independently verify or test the data in the agency audit reports or make  efforts to validate auditor conclusions regarding agency systems’  compliance with FFMIA’s requirements, our prior experience with these  auditors and our review of their reports provided the basis to determine the  sufficiency and relevancy of evidence provided in these documents.  Based  on the audit reports, we identified problems reported by the auditors that  affect agency systems’ compliance with FFMIA.  The problems identified in  these reports are consistent with long-standing financial management  weaknesses that we have reported based on our work at agencies such as  DOD, NASA, and the Departments of Agriculture, Education, and Housing  and Urban Development (HUD).  However, we caution that the occurrence  of problems in a particular category may be even greater than auditors’  reports of FFMIA noncompliance would suggest because auditors may not  have included all problems in their reports.
To identify the status of agency efforts to modernize core financial  management systems, we reviewed publicly available information that we  then confirmed with agency officials.  However, we did not validate the  information provided by agency officials on efforts to modernize these core  systems.  Furthermore, we researched current literature on private sector  and other financial management systems implementations to identify the  key factors leading to success.  We also reviewed reports issued by GAO  and the IGs to identify the challenges federal agencies face when  implementing new systems.
Based on publicly available information, we summarized the status of  governmentwide efforts to improve federal financial management.  We also  summarized the status and progress scores received by the agencies for  PMA’s five crosscutting initiatives.  Furthermore, we reviewed documents  pertaining to governmentwide efforts to implement PMA, including the  efforts to develop a federal enterprise architecture and consolidate the  number of federal civilian payroll providers.  We also obtained information  about OMB and its role in helping to integrate budget and performance  data.  Finally, we held discussions with OMB officials to obtain current  information about its efforts to help agencies develop systems that will  comply with FFMIA.
We conducted our work from March through July 2003 in the Washington,  D.C. area in accordance with generally accepted government auditing  standards.  We requested comments on a draft of this report from the  Director of OMB or his designee.  These comments are discussed in the  “Agency Comments and Our Evaluation” section and reprinted in appendix  VI.  We also requested oral comments from agency officials whose financial  management systems are discussed in the report.  These comments, which  are of an editorial or technical nature, have been incorporated as  appropriate.
section_title: Continued Systems Weaknesses Impair Financial Management Accountability
paragraphs: Most agencies still do not have reliable, useful, and timely financial  information, including cost data, with which to make informed decisions  and help ensure accountability on an ongoing basis.  While agencies are  making progress in producing auditable financial statements and  addressing their financial management systems weaknesses, most agency  systems are still not substantially compliant with FFMIA’s requirements.   Figure 3 summarizes auditors’ assessments of FFMIA compliance for fiscal  years 2000 through 2002 and suggests that the instances of noncompliance  with FFMIA’s three requirements remain fairly constant.  For fiscal year  2002, IGs and their contract auditors reported that the systems of 19 of the  24 CFO Act agencies did not substantially comply with at least one of  FFMIA’s three requirements—federal financial management systems  requirements, applicable federal accounting standards, or the SGL.   Auditors’ assessments of financial systems’ compliance with FFMIA for  three agencies—DOL, EPA, and NSF—changed from fiscal years 2001 to  2002.  For fiscal year 2002, the auditors for DOL concluded that its systems  were not in substantial compliance with the managerial cost standard and  thus were not in compliance with FFMIA.  Auditors for EPA and NSF found  the agencies’ respective systems to be in substantial compliance, a change  from the fiscal year 2001 assessments.
Agencies’ inability to meet the federal financial management systems  requirements continues to be the major barrier to achieving compliance  with FFMIA.  As shown in figure 3, auditors most frequently reported  instances of noncompliance with federal financial management systems  requirements.  These instances of noncompliance identified by auditors  affected not only the core financial systems, but also administrative and  programmatic systems.
The creation of DHS will affect future FFMIA reporting by the federal  agencies and components it has absorbed.  While DHS must prepare  audited financial statements under the Accountability of Tax Dollars Act of  2002, DHS is not a CFO Act agency and therefore is not subject to FFMIA.   However, for fiscal year 2003, DHS has agreed to have its auditors report on  the FFMIA compliance of the department’s systems, which we view as a  key positive action by the department.  One CFO Act agency, FEMA, was  moved in its entirety to DHS, effective March 1, 2003.  Accordingly, FEMA  is no longer a CFO Act agency and will not be required to prepare audited  stand-alone financial statements under the CFO Act and be subject to  FFMIA. DHS is also being formed from components of other CFO Act  agencies.  For example, the Immigration and Naturalization Service,  formerly part of the Department of Justice, is merging into DHS.  The U.S.  Coast Guard and the Transportation Security Administration are moving  from the Department of Transportation (DOT) to DHS.  Finally, the U.S.  Customs Service is moving from the Department of the Treasury to DHS.   As we reported, each of these components faces at least one management  problem, such as strategic human capital risks, information technology  management challenges, or financial management vulnerabilities.
While more CFO Act agencies have obtained clean or unqualified audit  opinions on their financial statements, there is little evidence of marked  improvements in agencies’ capacities to create the full range of information  needed to manage day-to-day operations.  The number of unqualified  opinions has been increasing over the past 6 years, from 11 in fiscal year  1997 to 21 for fiscal year 2002; but the number of agencies reported to have  substantially noncompliant systems has remained relatively steady.  As  stated in OMB’s May 2002 report on the status of governmentwide  financial management, many agencies have worked around systems  problems for years to obtain unqualified opinions by expending significant  resources and making extensive manual adjustments after the end of the  fiscal year.  The result is a 5-month-old snapshot of an agency’s financial  position as of September 30 of any given year, which is not useful for day- to-day decision making.  While the increase in unqualified opinions is  noteworthy, a more important barometer of financial systems’ capability  and reliability is that the number of agencies for which auditors provided  negative assurance of FFMIA compliance has remained relatively constant  throughout this same period.  In our view, this has led to an expectation  gap. When more agencies receive clean opinions, expectations are raised  that the government has sound financial management and can produce  reliable, useful, and timely information on demand throughout the year,  whereas FFMIA assessments offer a different perspective.
While all agencies met the February 1, 2003, deadline for fiscal year 2002  agency performance and accountability reports, the deadline for the fiscal  year 2004 reports is November 15, 2004, just 45 days after the close of the  fiscal year.  Auditors have expressed concern that agencies will have  difficulty meeting the accelerated reporting dates for audited financial  statements generated from the agencies’ existing financial management  systems because of nonintegrated systems and manual processes.  In their  fiscal year 2002 reports, auditors for nine agencies—Agriculture,  Commerce, Education, the Department of Health and Human Services  (HHS), Justice, FEMA, GSA, NASA, and the Small Business Administration  (SBA)—reported concerns about the agencies meeting these accelerated  reporting deadlines.  For example, Agriculture’s IG cautioned that unless  management implements a departmentwide quality control process, there  is a high risk that the opinion on its financial statements could deteriorate.   Auditors for Commerce reported that an integrated financial management  system for Commerce will be key to achieving the accelerated reporting  dates in future years.  Similarly, auditors for HHS reported that they remain  concerned that HHS’s nonintegrated financial management systems will be  an obstacle to meeting the accelerated reporting dates.
subsections: section_title: Crosscutting Reasons for Noncompliance Indicate Serious Problems Remain
paragraphs: Based on our review of the fiscal year 2002 audit reports for the 19 agencies  reported to have systems not in substantial compliance with one or more of  FFMIA’s three requirements, we identified several primary reasons related  to FFMIA noncompliance.  The weaknesses reported by the auditors,  which we grouped into the following six categories, ranged from serious,  pervasive systems problems to less serious problems that may affect one  aspect of an agency’s accounting operation:  nonintegrated financial management systems,  lack of accurate and timely recording of financial information,  noncompliance with the SGL,  lack of adherence to federal accounting standards, and  weak security controls over information systems.
Figure 4 shows the relative frequency of these problems at the 19 agencies  reported to have noncompliant systems and the problems relevant to  FFMIA that were reported by their auditors.  The same six types of  problems were cited by auditors in their fiscal years 2000 and 2001 audit  reports, as highlighted in figure 4.  However, the auditors may not have  reported these problems as specific reasons for lack of substantial  compliance with FFMIA.  In addition, we caution that the occurrence of  problems in a particular category may be even greater than auditors’  reports of FFMIA noncompliance would suggest because auditors may not  have included all problems in their reports.  As we discuss later, the FFMIA  testing may not be comprehensive and other problems may exist that were  not identified and reported.  For some agencies, the problems are so  serious and well known that the auditor can readily determine that the  systems are not substantially compliant without examining every facet of  FFMIA compliance.
The CFO Act calls for agencies to develop and maintain an integrated  accounting and financial management system that complies with federal  systems requirements and provides for (1) complete, reliable, consistent,  and timely information that is responsive to the financial information needs  of the agency and facilitates the systematic measurement of performance,  (2) the development and reporting of cost management information, and  (3) the integration of accounting, budgeting, and program information.  In  this regard, OMB Circular A-127, Financial Management Systems, requires  agencies to establish and maintain a single integrated financial  management system that conforms with functional requirements published  by JFMIP.
An integrated financial system coordinates a number of functions to  improve overall efficiency and control.  For example, integrated financial  management systems are designed to avoid unnecessary duplication of  transaction entry and greatly lessen reconciliation issues.  With integrated  systems, transactions are entered only once and are available for multiple  purposes or functions.  Moreover, with an integrated financial management  system, an agency is more likely to have reliable, useful, and timely  financial information for day-to-day decision making as well as external  reporting.
Agencies that do not have integrated financial management systems  typically must expend major effort and resources, including in some cases  hiring external consultants, to develop information that their systems  should be able to provide on a daily or recurring basis.  In addition,  opportunities for errors are increased when agencies’ systems are not  integrated.  Agencies with nonintegrated financial systems are more likely  to be required to devote more resources to collecting information than  those with integrated systems.
Auditors frequently mentioned the lack of modern, integrated financial  management systems in their fiscal year 2002 audit reports.  As shown in  figure 4, auditors for 12 of the 19 agencies with noncompliant systems  reported this as a problem.  For example, auditors for DOT reported that its  major agencies still use the Departmental Accounting and Financial  Information System (DAFIS), the existing departmentwide accounting  system and cannot produce auditable financial statements based on the  information in DAFIS.  For example, DOT’s IG reported that DOT made  about 860 adjustments outside of DAFIS totaling $51 billion in order to  prepare the financial statements.  DOT’s IG also reported that there were  problems linking some information between DAFIS and the Federal  Highway Administration’s Fiscal Management Information System (FMIS).   DOT uses FMIS to record initial obligations for federal aid grants to states.   However, due to problems resulting from upgrades and changes made to  the FMIS system, all obligations are not electronically transferred from  FMIS to DAFIS.  As of September 30, 2002, valid obligations of about   $388 million were understated.  Moreover, problems linking information  also existed between Delphi, DOT’s new financial management system, and  the Federal Transit Administration’s (FTA) financial feeder systems that  prevented FTA from electronically processing about $350 million in  payments related to its Electronic Clearing House Operation.  These  transactions had to be manually processed into Delphi.  What is important  here is that the information developed to prepare auditable annual financial  statements is not available on an ongoing basis for day-to-day management  of DOT’s programs and operations.
As we have reported, cultural resistance to change, military service  parochialism, and stovepiped operations have played a significant role in  impeding previous attempts to implement broad-based reforms at DOD.   The department’s stovepiped approach is most evident in its current  financial management systems environment, which DOD recently  estimated to include approximately 2,300 systems and systems  development projects—many of which were developed in piecemeal  fashion and evolved to accommodate different organizations, each with its  own policies and procedures.  As DOD management has acknowledged,  the department’s current financial environment is comprised of many  discrete systems characterized by poor integration and minimal data  standardization and prevents managers from making more timely and cost- effective decisions.
subsections: section_title: Inadequate Reconciliation Procedures
paragraphs: A reconciliation process, even if performed manually, is a valuable part of a  sound financial management system.  In fact, the less integrated the  financial management system, the greater the need for adequate  reconciliations because data are accumulated from various sources.  For  example, the HHS IG reported that the department’s lack of an integrated  financial management system continues to impair the ability of certain  operating divisions to prepare timely information.  Moreover, certain  reconciliation processes were not adequately performed to ensure that  differences are properly identified, researched, and resolved in a timely  manner and that account balances were complete and accurate.   Reconciliations are needed to ensure that data has been recorded properly  between the various systems and manual records.  The Comptroller  General’s Standards for Internal Control in the Federal Government  highlights reconciliation as a key control activity.
As shown in figure 4, auditors for 11 of the 19 agencies with noncompliant  systems reported that the agencies had reconciliation problems, including  difficulty reconciling their fund balance with Treasury accounts with  Treasury’s records.  Treasury policy requires agencies to reconcile their  accounting records with Treasury records monthly, which is comparable to  individuals reconciling their checkbooks to their monthly bank statements.   As we recently testified, DOD had at least $7.5 billion in unexplained  differences between Treasury and DOD fund activity records.  Many of  these differences represent disbursements made and reported to Treasury  that had not yet been properly matched to obligations and recorded in DOD  accounting records.  In addition to these unreconciled amounts, DOD  identified and reported an additional $3.6 billion in payment recording  errors.  These include disbursements that DOD has specifically identified  as containing erroneous or missing information and that cannot be  properly recorded and charged against the correct, valid fund account.   DOD records many of these payment problems in suspense accounts.   While DOD made $1.6 billion in unsupported adjustments to its fund  balances at the end of fiscal year 2002 to account for a portion of these  payment recording errors, these adjustments did not resolve the related  errors.
Inadequate reconciliation procedures also complicate the identification  and elimination of intragovernmental activity and balances, which is one of  the principal reasons we continue to disclaim on the government’s  consolidated financial statements.  As we testified in April 2003, agencies  had not reconciled intragovernmental activity and balances with their  trading partners and, as a result, information reported to Treasury is not  reliable.  For several years, OMB and Treasury have required CFO Act  agencies to reconcile selected intragovernmental activity and balances  with their trading partners.  However, a substantial number of CFO Act  agencies did not perform such reconciliations for fiscal years 2002 and  2001, citing such reasons as (1) trading partners not providing needed data,  (2) limitations and incompatibility of agency and trading partner systems,  and (3) human resource issues.  For both of these years, amounts reported  for federal trading partners for certain intragovernmental accounts were  significantly out of balance.  As discussed later in this report, actions are  being taken governmentwide under OMB’s leadership to address problems  associated with intragovernmental activity and balances.
section_title: Lack of Accurate and Timely Recording of Financial Information
paragraphs: Auditors for 17 agencies reported the lack of accurate and timely recording  of financial information for fiscal year 2002 compared to the 14 agencies  for which auditors noted similar problems last year.  Accurate and timely  recording of financial information is key to successful financial  management.  Timely recording of transactions can facilitate accurate  reporting in agencies’ financial reports and other management reports that  are used to guide managerial decision making.  The Comptroller General’s  Standards for Internal Control in the Federal Government states that  transactions should be promptly recorded to maintain their relevance and  value to management in controlling operations and making decisions.
Untimely recording of transactions during the fiscal year can result in  agencies making substantial efforts at fiscal year-end to perform extensive  manual financial statement preparation efforts that are susceptible to error  and increase the risk of misstatements.  Gathering financial data only at  year-end does not provide adequate time to analyze transactions or account  balances.   Further, it impedes management’s ability throughout the year to  have timely and useful information for decision making.  For example,  auditors reported that, for fiscal year 2002, Justice components did not  adjust the status of obligations on a quarterly basis as required, and as a  result, extensive manual efforts had to be performed at year-end to correct  the status of obligation records.  This process of reviewing the status of  obligations only at the end of the year increases the risk that errors will go  undetected, does not provide managers with accurate information during  the year for decision making, and results in misstatements in the financial  statements.
section_title: Noncompliance with the SGL
paragraphs: Implementing the SGL at the transaction level is one of the specific  requirements of FFMIA.  However, as shown in figure 4, auditors for 9 of  the 19 noncompliant agencies reported that the agencies’ systems did not  comply with SGL requirements.  The SGL promotes consistency in financial  transaction processing and reporting by providing a uniform chart of  accounts and pro forma transactions.  Use of the SGL also provides a basis  for comparison at the agency and governmentwide levels.  These defined  accounts and pro forma transactions are used to standardize the  accumulation of agency financial information, as well as enhance financial  control and support financial statement preparation and other external  reporting.  By not implementing the SGL, agencies are challenged to  provide consistent financial information across their components and  functions.
As in previous years, HUD’s auditors reported that the Federal Housing  Administration’s (FHA) systems were noncompliant with the SGL for fiscal  year 2002 because FHA must use several manual processing steps to  convert its commercial accounts to SGL accounts.  FHA’s 19 legacy  insurance systems, which fed transactions to its commercial general ledger  system, lacked the capabilities to process transactions in the SGL format.   Therefore, FHA provided only consolidated summary-level data to HUD’s  Central Accounting and Program System (HUDCAPS).  As we reported,  FHA used several manual processing steps to provide summary-level data,  including the use of personal-computer-based software to convert the  summary-level commercial accounts to government SGL, and transfer the  balances to HUDCAPS.  This process did not comply with JFMIP  requirements that the core financial system provide for automated month- and year-end closing of SGL accounts and the roll-over of the SGL account  balances.
section_title: Lack of Adherence to Federal Accounting Standards
paragraphs: One of FFMIA’s requirements is that agencies’ financial management  systems account for transactions in accordance with federal accounting  standards.  Agencies face significant challenges implementing these  standards.  As shown in figure 4, auditors for 13 of the 19 agencies with  noncompliant systems reported that these agencies had problems  complying with one or more federal accounting standards.  Auditors  reported that agencies are having problems implementing standards that  have been in effect for some time, as well as standards that have been  promulgated in the last few years.  For example, auditors for three  agencies—DOD, Justice, and FEMA—reported weaknesses in compliance  with Statement of Federal Financial Accounting Standards (SFFAS) No. 6,  Accounting for Property, Plant, and Equipment, which became effective  for fiscal year 1998.  Auditors for DOD reported that DOD did not capture  the correct acquisition date and cost of its property, plant, and equipment,  due to system limitations.
Therefore, DOD could not provide reliable information for reporting  account balances and computing depreciation.  Auditors for 2 agencies— HUD and Justice—reported weaknesses in compliance with SFFAS No. 7,  Revenue and Other Financing Sources, which also became effective for  fiscal year 1998.  For example, auditors reported a material weakness for  FHA’s budget execution and fund control.  According to the auditors, FHA’s  financial systems and processes are not capable of fully monitoring and  controlling budgetary resources.  Finally, auditors for 3 agencies—the  Agency for International Development (AID), NASA, and NRC—reported  trouble with implementing SFFAS No. 10, Accounting for Internal Use  Software, which became effective at the beginning of fiscal year 2001.  For  example, auditors reported that NASA’s policies and procedures do not  specifically address purchasing software as part of a package of products  and services.  In their testing, NASA’s auditors identified errors for costs  that were originally recorded as expenses, but instead should have been  capitalized as assets.
The requirement for managerial cost information has been in place since  1990 under the CFO Act and since 1998 as a federal accounting standard.   Auditors for five agencies reported problems implementing SFFAS No. 4,  Managerial Cost Accounting Concepts and Standards.  For example,  auditors for DOL reported that the department has not developed the  capability to routinely report the cost of outputs used to manage program  operations at the operating program and activity levels.  Moreover, DOL  does not use managerial cost information for purposes of performance  measurement, planning, budgeting, or forecasting.  At DOT, auditors stated  that its agencies, other than the Federal Aviation Administration (FAA) and  the U.S. Coast Guard, have begun to identify requirements for  implementing cost accounting systems.  DOT’s existing accounting system,  DAFIS, does not have the capability to capture full costs, including direct  and indirect costs assigned to DOT programs.  The Secretary recently  advised OMB that as the remaining DOT agencies migrate to Delphi, DOT’s  new core financial system, Delphi will provide them enhanced cost  accounting capabilities.
Managerial cost information is critical for implementing the PMA.   According to the PMA, the accomplishment of the other four crosscutting  initiatives will matter little without the integration of agency budgets with  performance.  Although the lack of a consistent information and reporting  framework for performance, budgeting, and accounting may obscure how  well government programs are performing as well as inhibit comparisons,  no one presentation can meet all users’ needs.  Any framework should  support an understanding of the links between performance, budgeting,  and accounting information measured and reported for different purposes.   However, even the most meaningful links between performance results and  resources consumed are only as good as the underlying data.  Moreover,  this link between resources consumed and performance results is  necessary to make public-private competition decisions as part of  competitive sourcing.  Therefore, agencies must address long-standing  problems within their financial systems.  As agencies implement and  upgrade their financial management systems, opportunities exist for  developing cost management information as an integral part of the system  to provide important information that is timely, reliable, and useful.
As we recently reported, DOD’s continuing inability to capture and report  the full cost of its programs represents one of the most significant  impediments facing the department.  DOD does not have the systems and  processes in place to capture the required cost information from the  hundreds of millions of transactions it processes each year.  Lacking  complete and accurate overall life-cycle cost information for weapons  systems impairs DOD’s and congressional decision makers’ ability to make  fully informed decisions about which weapons, or how many, to buy.  DOD  has acknowledged that the lack of a cost accounting system is its largest  impediment to controlling and managing weapon systems costs.
section_title: Weak Security Controls over Information Systems
paragraphs: Information security weaknesses are one of the frequently cited reasons  for noncompliance with FFMIA and are a major concern for federal  agencies and the general public.  These weaknesses are placing enormous  amounts of government assets at risk of inadvertent or deliberate misuse,  financial information at risk of unauthorized modification or destruction,  sensitive information at risk of inappropriate disclosure, and critical  operations at risk of disruption.  Auditors for all 19 of the agencies reported  as noncompliant with FFMIA identified weaknesses in security controls  over information systems.  Unresolved information security weaknesses  could adversely affect the ability of agencies to produce accurate data for  decision making and financial reporting because such weaknesses could  compromise the reliability and availability of data that are recorded in or  transmitted by an agency’s financial management system.
General controls are the policies, procedures, and technical controls that  apply to all or a large segment of an entity’s information systems and help  ensure their proper operation.  The six major areas are (1) security  program management, which provides the framework for ensuring that  risks are understood and that effective controls are selected and properly  implemented, (2) access controls, which ensure that only authorized  individuals can read, alter, or delete data, (3) software development and  change controls, which ensure that only authorized software programs are  implemented, (4) segregation of duties, which reduces the risk that one  individual can independently perform inappropriate actions without  detection, (5) operating systems controls, which protect sensitive  programs that support multiple applications from tampering and misuse,  and (6) service continuity, which ensures that computer-dependent  operations experience no significant disruption.  As we discussed in our  April 2003 testimony, our analyses of audit reports issued from October  2001 through October 2002 for 24 of the largest federal agencies continued  to show significant weaknesses in federal computer systems that put  critical operations and assets at risk.  Weaknesses continued to be reported  in each of the 24 agencies included in our review, and they covered all six  major areas of general controls.  Although our analyses showed the most  agencies had significant weaknesses in these six control areas, weaknesses  were most often cited for access controls and security program  management.
Since 1997, GAO has considered information security a governmentwide  high-risk area. As shown by our work and work performed by the IGs,  security program management continues to be a widespread problem.   Concerned with reports of significant weaknesses in federal computer  systems that make them vulnerable to attack, the Congress enacted  Government Information Security Reform provisions (commonly known  as GISRA) to reduce these risks and provide more effective oversight of  federal information security.  GISRA required agencies to implement an  information security program that is founded on a continuing risk  management cycle and largely incorporates existing security policies found  in OMB Circular A-130, Management of Federal Information Resources,  Appendix III.  GISRA provided an overall framework for managing  information security and established new annual review, independent  evaluation, and reporting requirements to help ensure agency  implementation and both OMB and congressional oversight.
In its required fiscal year 2002 GISRA report to the Congress, OMB stated  that the federal government had made significant strides in addressing  serious and pervasive information technology security problems, but that  more needed to be done, particularly to address both the governmentwide  weaknesses identified in its fiscal year 2001 report to the Congress and new  challenges.  Also, OMB reported significant progress in agencies’  information technology security performance, primarily as indicated by  quantitative governmentwide performance measures that OMB required  agencies to disclose beginning with their fiscal year 2002 reports. These  include measures such as the number of systems that have been assessed  for risk, have an up-to-date security plan, and for which security controls  have been tested.
As discussed in our June 2003 testimony, the governmentwide  weaknesses identified by OMB, as well as the limited progress in  implementing key information security requirements, continue to  emphasize that, overall, agencies are not effectively implementing and  managing their information security programs.  For example, of the 24  large federal agencies we reviewed, 11 reported that they had assessed risk  for 90 to 100 percent of their systems for fiscal year 2002, but 8 reported  that they had assessed risk for less than half of their systems.
The information security program, evaluation, and reporting requirements  established by GISRA have been permanently authorized and strengthened  through the recently enacted Federal Information Security Management  Act of 2002 (FISMA).  In addition, FISMA provisions establish additional  requirements that can assist the agencies in implementing effective  information security programs, help ensure that agency systems  incorporate appropriate controls, and provide information for  administration and congressional oversight.  These requirements include  the designation of and establishment of specific responsibilities for an  agency senior information security officer, implementation of minimum  information security requirements for agency information and information  systems, and required agency reporting to the Congress. Agencies’ fiscal  year 2003 FISMA reports, due to OMB in September 2003, should provide  additional information on the status of agencies’ efforts to implement  federal information security requirements.  In addition, FISMA requires  each agency to report any significant deficiency in an information security  policy, procedure, or practice, if relating to financial management systems,  as an instance of a lack of substantial compliance under FFMIA.
section_title: Auditors Provided Negative Assurance of Substantial Compliance
paragraphs: Auditors for five agencies—the Department of Energy, EPA, GSA, NSF,  and SSA—provided negative assurance in reporting on FFMIA compliance  for fiscal year 2002.  In their respective reports, they included language  stating that while they did not opine as to compliance with FFMIA, nothing  had come to their attention indicating that these agencies’ financial  management systems did not meet FFMIA requirements.  While this form  of reporting has useful applications, it is not relevant or appropriate for this  particular type of engagement given the requirements of FFMIA.
Our fundamental concern is that this type of reporting may provide a false  impression that the systems have been found to be substantially compliant  by the auditors, which is not what the auditors are saying.  In fact, the  provisions of FFMIA require auditors to “…report whether the agency  financial management systems comply with the requirements of .”   In providing guidance on reporting on substantial compliance with FFMIA,  OMB Bulletin No. 01-02, Audit Requirements for Federal Financial  Statements, states that auditors should report that “the results of our tests  disclosed no instances in which the agency’s financial management  systems did not substantially comply .” If testing disclosed  that the agencies’ systems are not substantially compliant, auditors are  required to report the instances of noncompliance identified.  This is an  important distinction because the term “disclosed no instances” carries a  commonly accepted and well-known interpretation across the audit  community that providing negative assurance requires only limited testing  because the auditor is not giving an opinion on whether the systems are  substantially compliant.
While work performed in auditing financial statements would naturally  offer some perspective regarding FFMIA compliance, the work needed to  assess substantial compliance of systems with FFMIA would have to be  more comprehensive than that performed for purposes of rendering an  opinion on the financial statements.  In performing financial statement  audits, auditors generally focus on the capability of the financial  management systems to process and summarize financial information that  flows into the financial statements.  In contrast, FFMIA is much broader,  and auditors need to consider many other aspects of the financial  management system including whether an agency’s systems comply with  systems requirements and provide reliable, useful, and timely financial- related information for managing day-to-day operations.  FFMIA was  designed to identify weaknesses and lead to system improvements that  would result in agency managers being routinely provided with reliable,  useful, and timely financial-related information to measure performance  and increase accountability throughout the year, rather than just at year- end.  One important consideration is that the law does not specify when  FFMIA compliance testing must be done.  Thus, auditors can perform  FFMIA assessments at any time throughout the fiscal year, as long as the  assessment is updated to the end of the reporting period.  FFMIA  assessments can be a separate review that could be staggered throughout  the year when the auditors’ workloads are not as burdensome or to spread  out the work.
Today, for some agencies, the auditor may have sufficient knowledge to  conclude that an agency is not in substantial compliance with FFMIA  without performing additional testing beyond that needed for the financial  statement audit opinion, because systems deficiencies are well known and  well documented.  Because not all areas were tested, additional  weaknesses might exist that were not identified and reported.  However, as  agencies’ systems move toward substantial compliance with FFMIA,  auditors will need to perform more comprehensive testing to assess  agencies’ systems compliance with FFMIA.
In addition to recommending that OMB require agency auditors to provide  a statement of positive assurance when reporting substantial compliance,  we also previously recommended that OMB (1) explore further  clarifications of the definition of “substantial compliance” to help ensure  consistent application of the term, (2) reiterate that the indicators of  compliance in its January 4, 2001, guidance are not meant to be all  inclusive, (3) develop additional guidance, in accordance with the  GAO/PCIE FAM, to specify procedures that auditors should perform  when assessing FFMIA compliance, and (4) emphasize the importance of  cost accounting to managers by requesting that auditors pay special  attention to agencies’ ability to meet the requirements of SFFAS No. 4,  Managerial Cost Accounting Concepts and Standards.
As mentioned previously, PCIE, working with GAO, has issued a new  section of its joint GAO/PCIE FAM that provided detailed audit steps for  testing agency systems’ substantial compliance with FFMIA.  The new FAM  guidance also emphasized the importance of assessing cost management  and reiterated that OMB’s indicators of compliance were examples and  therefore are not all-inclusive.  Appropriately implemented by agency  auditors, this FAM guidance would provide a sufficient basis to conclude  whether agencies’ systems substantially comply with FFMIA.  While the  new FAM guidance addresses three of our prior recommendations, the  other two recommendations have not yet been addressed.
Accordingly, we reaffirm the remaining two prior recommendations,  aimed at enhancing OMB’s FFMIA audit guidance, relating to requiring  agency auditors to provide a statement of positive assurance when  reporting an agency’s systems to be in substantial compliance with FFMIA,  and further clarifying the definition of “substantial compliance” to  encourage consistent reporting.  As stated in its comments on a draft of  this report, OMB disagreed with our recommendation that it require agency  auditors to provide a statement of positive assurance when reporting that  agency systems substantially comply with FFMIA.  OMB stated that, in its  view, positive assurance does not measure the quality or usefulness of the  financial information.  To the contrary, in our view, positive assurance can  lead to improvements in both the quality and usefulness of the financial  information by providing a higher standard for the auditors’ FFMIA  assessment.  In response to our reaffirmation of our recommendation to  clarify the meaning of substantial compliance so that agency auditors and  management can consistently interpret the term, OMB commented that  clear performance and results standards are better at promoting such  consistency.  OMB added that it will consider this recommendation in that  context in any future policy and guidance updates.
section_title: Agency Efforts to Implement New Financial Systems
paragraphs: Across government, agencies have many efforts underway to implement or  upgrade financial systems to alleviate long-standing weaknesses in  financial management.  As we recently reported, as of September 30, 2002,  17 agencies advised us that they were planning to or were in the process of  implementing a new core financial system.  Of these 17 agencies, 11 had  selected a software product certified by the Program Management Office  (PMO).  According to OMB Circular A-127, agencies are required to  purchase COTS packages sold by vendors whose core financial systems  software have been certified by the PMO.  The other 6 agencies have not  reached the software selection phase of their acquisition process.
Implementing a core financial system that has been certified does not  guarantee that these agencies will have financial systems that are  compliant with FFMIA.  One critical factor affecting FFMIA compliance is  the integration of the core system with the agency’s administrative and programmatic systems and the validity and completeness of data from  systems.  Another factor affecting the capability of agency systems to  comply with FFMIA is whether modifications or customizations have  been made to the certified core financial system software.
As of September 30, 2002, target implementation dates for 16 of the 17  agencies planning to implement new core financial systems ranged from  fiscal years 2003 to 2008.  One agency—DOD—had not yet determined its  target date for full implementation.  As shown in figure 5, 3 of the 16  agencies—Agriculture, GSA, and NASA—planned to complete  implementation in fiscal year 2003.  Three other agencies—SSA,  Commerce, and DOT—planned to complete their implementations in fiscal  year 2004.  The Department of Energy established fiscal year 2005 as its  target implementation date and 3 agencies—the Departments of State and  Veterans Affairs and AID—have targeted fiscal year 2006 for completion.   Moreover, as shown in figure 5, 4 agencies—DOL, HHS, EPA, and HUD— have set fiscal year 2007 as their implementation target date.  Finally, 2  agencies—the Departments of the Interior and Justice—projected fiscal  year 2008 for completion of their core financial systems implementation.
The remaining 7 of the 24 CFO Act agencies that advised us that they had  no plans to implement a new system had either recently implemented a  new core financial system in the last several years or were not planning to  implement an agencywide core financial system.  Five of the 7 agencies had  fully implemented new core financial systems since the beginning of fiscal  year 2001—including the Department of Education, NSF, the Nuclear  Regulatory Commission (NRC), SBA, and OPM.  FEMA had implemented a  new system prior to fiscal year 2001.  The remaining agency, Treasury, is  not planning to implement an agencywide core financial system, but  several of its subcomponent agencies—including the Internal Revenue  Service and the Office of the Comptroller of the Currency—are in the  process of implementing core financial system software packages.
In their performance and accountability reports, management for some  agencies stated that full implementation of these new systems will address  their systems’ substantial noncompliance with FFMIA. However, as we  previously discussed, implementation of a new core financial system may  not resolve all of an agency’s financial management weaknesses because of  the myriad of problems affecting agencies beyond their core financial  systems.  Nevertheless, it is imperative that agencies adopt leading  practices to help ensure successful systems implementation.
section_title: Successful Implementation of Financial Management Systems Is Key for Improved Financial Reporting
paragraphs: Implementing new financial management systems provides a foundation  for improved financial management, including enhanced financial  reporting capabilities that will help financial managers meet OMB’s  accelerated reporting deadlines and make better financial management  decisions due to more timely information. Successful implementation of  financial management systems has been a continuous challenge for both  federal agencies and private sector entities.  In the past, federal agencies  have experienced setbacks and delays in their implementation processes.   According to OMB’s former Associate Director for Information Technology  and e-Government, agencies have experienced lengthy or delayed  deployment schedules and implementation cost overruns.  These delays  were caused by various factors, including a lack of executive level  involvement, poor communication between managers and users, and  inadequate project planning.  Our work at NASA and DOD, for example,  has also shown the need for consistent executive support, communication  with all stakeholders, full identification of user requirements, and adequate  planning.
Federal agencies, such as NASA and DOD, have experienced many of these  challenges in attempting to implement new financial management systems.   For example, NASA began its IFMP in April 2000, its third attempt in recent  years at modernizing financial processes and systems.  NASA’s previous  two efforts were eventually abandoned after a total of 12 years and a  reported $180 million in spending.  As part of this effort, NASA recently  implemented a new core financial module that was expected to provide  financial and program managers with timely, consistent, and reliable cost  and performance information for management decisions.  However, earlier  this year we reported that NASA’s core financial module was not being  implemented to accommodate the information needed by program  managers, cost estimators, and the Congress.  The need for ongoing  communication between project managers and systems users is crucial to  any successful systems implementation project.   Project managers need to  understand the basic requirements of users while users should be involved  in the project’s planning process.  NASA’s program officials chose to defer  the development of some functions and related user requirements in order  to expedite the systems implementation process.  As a result, the new  system will not meet the needs of some key users who will continue to rely  on information from nonintegrated programs outside of the core financial  module, or use other labor-intensive means, to capture the data they need  to manage programs.
NASA has also not followed certain other best practices for acquiring and  implementing its new financial management system.  NASA’s  implementation plan calls for the system to be constructed using  commercial components; however, NASA has not analyzed the  interdependencies of the various subsystems.  When constructing a system  from commercial components, it is essential to understand the features and  characteristics of each component in order to select compatible systems  that can be integrated without having to build and maintain expensive  interfaces.  By acquiring components without first understanding their  relationships, NASA has increased its risks of implementing a system that  will not optimize mission performance, will cost more, and take longer to  implement than necessary.
Past DOD initiatives to improve its financial operations and other key  business support processes, such as the Corporate Information  Management (CIM) initiative, failed in part because the department did  not obtain and sustain departmentwide senior management leadership,  commitment, and support.  In recognition of the far-reaching nature of  DOD’s financial management problems, on September 10, 2001, Secretary  Rumsfeld announced a broad, top-priority initiative intended to “transform  the way the department works and what it works on.”  For its current  business enterprise architecture, DOD established two executive  committees to provide program guidance; however, these committees are  not responsible for directing and overseeing the architecture effort, nor are  they accountable for approving the architecture.  Our recent reports  highlight this and other investment management and project weaknesses at  DOD.  GAO recommended that DOD ensure that the executive committee  members are singularly and collectively made accountable for the delivery  and approval of the enterprise architecture.  DOD agreed and has a  proposed governance structure to implement the architecture.
Private sector entities have also encountered a number of challenges and  setbacks when implementing new systems.  These challenges have  included competition between internal organizational units, user resistance  to the new systems, and frequent changes in management and to  underlying corporate strategy.  Entities are overcoming their challenges  because better tools have been created to monitor and control progress  and skilled project managers with better management processes are being  used.
The Standish Group International, Inc has reported that the number of  successful systems implementation projects in the private sector is  increasing.  From 1994 to 2000, successful projects increased from 28,000  to 78,000.  The Standish Group, through its research, has identified 10  project success factors.  These factors include  other, including small milestones, proper planning, competent staff, and  ownership.
Also, according to the Standish Group, although no project requires all 10  factors to be successful, the more factors that are present in the project  strategy, the higher the chance of a successful implementation.  As  discussed above, many of these factors have been challenges for both  private sector and federal entities.  By its very nature, the implementation  of a new financial management system is a risky proposition.   Therefore, it  is crucial that federal departments and agencies follow accepted best  practices and embrace as many of the key characteristics for successful  implementation projects as possible to help minimize the risk of failed  projects and result in systems that provide the necessary data for  management’s needs.
Our executive guide on creating value through world-class financial  management describes 11 practices critical for establishing and  maintaining sound financial operations.  These practices include  reengineering processes in conjunction with new technology.  As a result,  using commercial components such as COTS packages may require  significant changes in the way federal departments conduct their business.   According to the leading finance organizations that formed the basis for  our executive guide, a key to successful implementation of COTS systems  is reengineering business processes to fit the new software applications  that are based on best practices.  Moreover, OMB’s former Associate  Director for Information Technology and e-Government has stated that “IT  will not solve management problems – re-engineering processes will.”
The conversion of data from an old system to a new system is also critical.   In December 2002, JFMIP issued its “White Paper: Financial Systems Data  Conversion – Considerations.”  The purpose of this JFMIP document is to  raise awareness of financial systems data conversion considerations to be  addressed by financial management executives and project managers when  planning or implementing a new financial management system.  The JFMIP  paper addresses (1) key considerations regarding data conversion and  cutover to the new system, (2) best approaches for completing the data  conversion and cutover, and (3) ways to reduce the risks associated with  these approaches.
section_title: Status of Governmentwide Financial Management Improvement Efforts
paragraphs: In addition to individual agency efforts as discussed in a prior section, the  JFMIP Principals, congressional oversight, and the PMA are key drivers of  governmentwide efforts now underway to improve federal financial  management.  In fiscal year 2002, the JFMIP Principals continued the series  of regular, deliberative meetings that focused in key financial management  reform issues.  Legislation enacted by the Congress as well as its oversight  of federal financial management also has had a significant impact on  stimulating change.  The PMA, being implemented by the administration as  an agenda for improving the management and performance of the federal  government, targets the most apparent deficiencies where the opportunity  to improve performance is the greatest.  The success of agency  implementation of FFMIA impacts all five of the PMA’s crosscutting  initiatives to a greater or lesser extent.  Furthermore, the modernization  of agency financial management systems, as envisioned by FFMIA, is  critical to the success of all of these initiatives.
subsections: section_title: JFMIP Principals
paragraphs: Starting in August 2001, the JFMIP Principals have been meeting regularly  to deliberate and reach agreements focused on financial management  reform issues including (1) defining success measures for financial  performance that go far beyond an unqualified audit opinion,   (2) significantly accelerating financial statement reporting to improve  timeliness for decision making, and (3) addressing difficult accounting and  reporting issues, including impediments to an audit opinion on the federal  government’s consolidated financial statements.  This forum has provided  an opportunity to reach decisions on key issues and undertake strategic  activities that reinforce the effectiveness of groups such as the CFO  Council in making progress toward federal financial management.  In fiscal  year 2002, the JFMIP Principals continued the series of these deliberative  meetings.  Continued personal involvement of the JFMIP Principals is  critical to the full and successful implementation of federal financial  management reform and to providing greater transparency and  accountability in managing federal programs and resources.
One effort attributable to the JFMIP Principals is the ongoing  governmentwide effort to resolve the problems accounting for  intragovernmental activity and balances.  As we have reported, the federal  government’s inability to properly account for intragovernmental activity  and balances impedes achieving the goal of a clean opinion on the U.S.  consolidated financial statements.  OMB has identified the lack of  standardization in processing and recording intragovernmental activity as a  major contributing factor to the federal government’s inability to properly  account for intragovernmental activity and balances.  As a step to resolve  this weakness, OMB, which is providing important leadership for this  effort, and the Integrated Acquisition Environment (IAE) steering  committee have established basic requirements for processing and  recording intragovernmental activity for all agencies.  The vision for  intragovernmental activity is that they will eventually be fed through a  central portal system and tracked.  The IAE has established the Business  Partner Network (BPN) to provide information on all trading partners,  including commercial, government, and grantees.  Moreover, a Web-based  portal, the Intragovernmental Transaction Portal, has been developed and a  small group of agencies will be testing two types of transactions—space  rental and information technology—as part of a pilot project.
section_title: Congressional Oversight
paragraphs: The leadership demonstrated by the Congress has been an important  catalyst to reforming financial management in the federal government.  As  previously discussed, the legislative framework provided by the CFO Act  and FFMIA, among others, produces a solid foundation to stimulate needed  change.  For example, in November 2002, the Congress enacted the  Accountability of Tax Dollars Act of 2002 to extend the financial  statements audit requirements of the CFO Act to additional federal  agencies.  In addition, there is value in sustained congressional interest in  these issues, as demonstrated by hearings on federal financial management  and reform held over the past several years.  It will be key that the  appropriations, budget, authorizing, and oversight committees hold agency  top management accountable for resolving these problems and that they  support improvement efforts.  The continued attention by the Congress to  these issues will be critical to sustaining momentum for financial  management reform.
section_title: President’s Management Agenda
paragraphs: As stated in the PMA, there are few items more urgent than ensuring that  the federal government operates efficiently and is results-oriented.  Several  of the governmentwide efforts underway to improve federal financial  management support the implementation of the PMA’s five crosscutting  initiatives.  While FFMIA implementation relates directly to the improved  financial performance initiative, development and maintenance of FFMIA- compliant systems will also affect the implementation of the other four  initiatives.  Notably, OMB is developing a federal enterprise architecture  that will impact the government’s ability to make significant progress  across the PMA.  For example, as part of the e-gov initiative, the number of  federal payroll providers is being consolidated.  Numerous agencies had  targeted their payroll operations for costly modernization efforts.   According to OMB, millions of dollars will be saved through shared  resources and processes and by modernizing on a cross-agency,  governmentwide basis.  The administration’s implementation of its  Program Assessment Rating Tool (PART) relates specifically to the PMA  initiative of integration of budget and performance information.  Reliable  cost data, so crucial to effective FFMIA implementation, is critical not only  for the improved financial performance and budget and performance  integration initiatives, but also for competitive sourcing.  For effective  management, this cost information must not only be timely and reliable,  but also both useful and used.
The administration is using the Executive Branch Management Scorecard,  based on governmentwide standards for success, to highlight agencies’  progress in achieving the improvements embodied in the PMA.  OMB uses a  grading system of red, yellow, and green to indicate agencies’ status in  achieving the standards for success for each of the five crosscutting  initiatives.  It also assesses and reports progress using a similar “stoplight”  system.  Information about agencies’ status scores and progress scores will  be provided later in this report.
subsections: section_title: Financial Performance Initiative
paragraphs: The PMA initiative to improve financial performance is aimed at ensuring  that federal financial systems produce accurate and timely information to  support operating, budget, and policy decisions.  It focuses on key issues  such as data reliability, clean financial statement audit opinions, and  effective financial management systems and internal control.  The  standards for success used for scoring agency status and progress for the  improved financial performance initiative not only recognize the  importance of achieving an unqualified or “clean” opinion, but also focus  on the fundamental and systemic issues that must be addressed to  routinely generate timely, accurate, and useful financial information and  provide a sound environment of internal control and effective systems.  For  example, the scorecard measures whether agencies have material internal  control weaknesses or material noncompliance with laws and regulations,  and whether agency systems meet FFMIA requirements.  As stated in the  PMA, without sound internal controls and accurate and timely financial  information, it will not be possible to accomplish the President’s agenda to  secure the best performance and highest measure of accountability for the  American people.  FFMIA embodies the same things—systems that can  generate reliable, useful, and timely information with which to make fully  informed decisions and to ensure accountability on an ongoing basis.
section_title: E-gov Initiative
paragraphs: To implement this PMA initiative, OMB has selected 25 presidential e-gov  efforts that focus on a wide variety of services, aiming to simplify and unify  agency work processes and information flows, provide one-stop services to  citizens, and enable information to be collected online once and reused,  rather than being collected many times.  One of the 25 presidential e-gov  efforts is “e-payroll,” which is intended to consolidate the federal  government’s many incompatible payroll systems into just two that would  service all government employees.  GAO has long supported and called for  such initiatives to standardize and streamline common systems, which can  not only reduce costs, but if done correctly, can improve accountability.   OMB and OPM, the managing partner for the e-payroll initiative, announced  on January 10, 2003, the selection of two partnerships for federal civilian  payroll processing--one partnership between DOD’s Defense Finance and  Accounting Service and GSA, and another between Agriculture’s National  Finance Center and Interior’s National Business Center.  According to the  former Director of OMB, the e-payroll effort, by consolidating duplicative  payroll modernization efforts, should save the federal government an  estimated $1.2 billion over the next decade in future information  technology investments given the economies of scale and cost avoidance.
According to OMB, the need for a federal enterprise architecture has  arisen from the e-gov effort.  OMB has stated that the development of a  Federal Enterprise Architecture (FEA) is a cornerstone to the federal  government’s success in managing its nearly $60 billion in IT spending.   Among other things, the FEA, being developed by the Federal Enterprise  Architecture Program Management Office (FEAPMO), has been described  as a tool to enable the federal government to identify opportunities to  leverage technology and alleviate redundancy, or to highlight where agency  overlap limits the value of IT investments.  OMB recently reported that by  using the FEA Business Reference Model to evaluate agency IT budget  requests for fiscal year 2004, it has been able to identify potential  redundancies in six business lines.  According to OMB, the Business  Reference Model, one of five reference models, is the foundation of the  FEA and is intended to describe the business operations of the federal  government independent of the agencies that perform them.
section_title: Budget and Performance Integration Initiative
paragraphs: The PMA recognized that improvements in the management of human  capital, financial performance, expanding electronic government, and  competitive sourcing matter little if they are not linked to program  performance and resource allocation decisions.  Although the lack of a  consistent information and reporting framework for performance,  budgeting, and accounting may obscure how well government programs  are performing as well as inhibit comparisons, no one presentation can  meet all users’ needs.  Any framework should support an understanding of  the links between performance, budgeting, and accounting information  measured and reported for different purposes.  However, even the most  meaningful links between performance results and resources consumed  are only as good as the underlying data.  Therefore, agencies must address  long-standing problems within their financial systems.  As agencies  implement and upgrade their financial management systems, opportunities  exist for developing cost management information as an integral part of the  system to provide important information that is timely, reliable, and useful.
The administration has set forth an ambitious agenda for performance  budgeting, calling for agencies to better align their budgets with their  performance goals and focus on capturing full budgetary cost and matching  these costs with output and outcome goals.  Performance-based budgeting  can help shift the focus of debate from inputs to outcomes and results,  enhancing the government’s ability to gauge performance and assess  competing claims for scarce resources.  While budget reviews have always  involved discussions of program performance, such discussions have not  always been conducted in a common language or with transparency.  Last  year, the administration introduced a formal assessment tool into its  deliberations, PART, that is the central element of the PMA’s performance  budgeting initiative.  PART represents a step toward more structured  involvement of program and performance analysis in the budget and  includes general questions on (1) program purpose and design, (2) strategic  planning, (3) program management, and (4) program results.  It also  includes a set of more specific questions that vary according to the type of  delivery mechanism or approach the program uses, and calls for timely,  reliable data to perform those assessments.
PART was applied during the fiscal year 2004 budget cycle to 234  “programs.”  OMB’s four-point scale rated programs as “effective,”  “moderately effective,” “adequate,” or “ineffective” based on program  design, strategic planning, management, and results.  Programs that do not  have acceptable performance measures or have not yet collected  performance data generally received a fifth rating of “results not  demonstrated.”  In the fiscal year 2004 President’s budget request, OMB  rated 50 percent of PART-assessed programs as “results not demonstrated”  because OMB found that the programs did not have adequate performance  goals and/or data to gauge program performance were not available.  The  administration plans to review approximately one-fifth of all federal  programs every year, so that every program will have been evaluated using  PART by the fiscal year 2008 budget submission.
PART could be useful in focusing discussions about progress toward  planned performance; about what progress has been made toward  achieving specific program goals and objectives; and about what tools and  strategies may be used to bring about improvements.  Furthermore,  performance budgeting should not be expected to provide the answers to  resource allocation questions in some automatic or formula-driven  process.  Because budgeting is the allocation of resources, it involves  setting priorities—making choices among competing claims.  Performance  information is an important factor, but it cannot substitute for difficult  political choices.  It can, however, help move the debate to a more  informed plane—one in which the focus is on competing claims and  priorities.  As OMB has stated, “The PART serves its purpose if it produces  an honest starting point for spending decisions that take results seriously.”
section_title: Competitive Sourcing Initiative
paragraphs: Among the factors that agencies must consider as they determine how best  to meet their missions is whether the public or private sector would be the  most appropriate provider of the services the government needs.  As we  recently testified, the government’s competitive sourcing process—set  forth in OMB Circular A-76—has been difficult to implement and has  profoundly impacted the morale of the federal workforce.  Due to these  difficulties, the Congress enacted legislation mandating a study of the  government’s competitive sourcing process.  In April 2002, following a  yearlong study, the Commercial Activities Panel (CAP), chaired by the  Comptroller General, reported its findings on competitive sourcing in the  federal government.  The report lays out 10 sourcing principles and several  recommendations, which provide a road map for improving sourcing  decisions across the federal government.  On May 29, 2003, OMB issued a  revised Circular A-76 to simplify and improve the procedures for evaluating  public and private sources.  Overall, the revised circular is generally  consistent with the CAP principles and recommendations.
Implementing the revised circular, however, will likely be challenging.   Agencies will need to consider how competitive sourcing relates to the  other four PMA crosscutting initiatives.  For example, accurate cost  information from financial management systems and other sources clearly  will be needed to make reliable cost calculations in conducting public- private competitions.
DOD has been at the forefront of federal agencies in using the A-76 process  and, since the mid-to-late 1990s, we have tracked DOD’s progress in  implementing its A-76 program. While the revised circular includes a major  section on calculating public-private competition costs, DOD’s experiences  with public-private competitions suggest important lessons on financial  calculations that agencies should consider as they implement their  competitive sourcing initiatives.  Notably, we have found that costs and  resources required for the competitions were underestimated, and  determining and maintaining reliable estimates of savings were difficult.
In addition, DOD’s IG recently issued a report regarding errors in a  public/private competition for the department’s military retired and  annuitant pay functions.  Although DOD awarded the contract to a private  contractor, more accurate cost estimates may have led to a different  decision.  The cost estimate for performing this function in-house included  $33.7 million of overhead costs.  In calculating this estimate, DOD followed  OMB Circular A-76 guidance that required the department to use the  standard 12 percent cost factor for overhead costs.  This was because DOD  had not developed and submitted for OMB approval a reliable overhead  factor for the department.  The DOD IG stated that using the mandatory  overhead factor affected the results of the competition because a reduced  overhead cost factor would have lowered the in-house cost estimate.   According to the IG, two of the main premises of OMB Circular A-76 cost  comparison studies are fairness of the competitions and achieving realistic  cost savings.  These premises can only be achieved when supportable cost  data are used.
section_title: Strategic Human Capital Management
paragraphs: People are an agency’s most important organizational asset, and strategic  human capital management should be the centerpiece of any serious  change management initiative or any effort to transform the cultures of  government agencies.  One step in meeting the government’s human  capital challenges is for agency leaders to identify and make use of all the  appropriate administrative authorities available to them to manage their  people both effectively and equitably.  As we reported, much of the  authority agency leaders need to manage human capital strategically is  already available under current laws and regulations, as recognized by  PMA.
Another step in meeting the government’s human capital challenges is for  policymakers to continue to pursue incremental legislative reforms to give  agencies additional tools and flexibilities to hire, manage, and retain the  human capital they need, particularly in critical operations.
As more agency systems are automated and integrated, those working in  the federal financial management community will require new skills.  In its  recent final report, JFMIP mentioned a skill imbalance as one of the  challenges facing today’s financial management workforce.  Specifically,  the federal financial management workforce will shift from primarily  transaction processing support to performing multiskilled analysis for  decision making.  According to JFMIP, to meet this skill imbalance,  agencies must not only acquire the right skills, but must develop them.  One  of several ways to do this is to design a broader financial management  career concept to support the new culture.
section_title: Proud To Be Initiative
paragraphs: Specific goals to be achieved by July 1, 2004, have been established for  each of the five crosscutting initiatives under the “Proud To Be” initiative.   According to an April 2003 memorandum from the OMB Deputy Director  for Management-designate, progress on the PMA had reached a point  where it is appropriate to think about where the administration would be  proud to be a year or so from now, after 3 full years of implementing the  PMA.  To begin this effort, the owners of the five crosscutting initiatives  assessed where he/she would be “proud to be” on July 1, 2004.  For  example, for the improved financial performance initiative, specific goals  include (1) 50 percent of agencies completing their fiscal year 2003  financial statement audits by November 15, 2003, (2) all CFO Act agencies,  except for DOD, having unqualified audit opinions on their fiscal year 2003  financial statements, and (3) financial audits for fiscal year 2003 achieving  a 50 percent reduction in material weaknesses.
section_title: Financial Performance Metrics
paragraphs: The CFO Council has developed a draft list of financial performance  metrics to be reviewed monthly for all agencies.  The financial performance  metrics under consideration include (1) reconciled and unreconciled  balances relating to fund balance with Treasury accounts, (2) delinquent  accounts receivable from the public, (3) purchase and travel card  delinquency trends, and (4) electronic payments.  According to OMB  officials, an online system has been developed to capture this information  and the agency-level metrics reported will roll up into governmentwide  metrics.
section_title: Executive Branch Management Scorecard
paragraphs: As mentioned previously, the administration assesses agency status in  achieving the standards for success for each of the five crosscutting  initiatives using a grading system of red, yellow, and green.  It also  assesses progress using a similar “stoplight” system.  Although we  collaborated in some cases with OMB and the lead agencies regarding the  broad standards for success, we have not had the opportunity to review the  more specific criteria that OMB uses to assess each agency’s progress on  these initiatives nor have we examined the specific evidence that OMB  used to assess the agency’s accomplishments.  Table 1 shows the Scorecard  status and progress scores for the improved financial performance  initiative at the CFO Act agencies starting with the December 2002  scorecard.
The focus that the administration’s scorecard approach brings to improving  management and performance, including financial management  performance, is certainly a step in the right direction.  The value of the  scorecard is not in the scoring per se, but the degree to which the scores  lead to sustained focus and demonstrable improvements.  This will depend  on continued efforts to assess progress and maintain accountability to  ensure that the agencies are able to, in fact, improve their performance.  It  will be important that there be continuous rigor in the scoring process for  this approach to be credible and effective in providing incentives that  produce lasting results.  Also, it is important to recognize that many of the  challenges the federal government faces, such as improving financial  management, are long-standing and complex, and will require sustained  attention.
section_title: Conclusions
paragraphs: The ultimate objective of FFMIA is to ensure that agency financial  management systems routinely provide reliable, useful, and timely financial  information, not just at year-end or for financial statements, so that  government leaders will be better positioned to invest resources, reduce  costs, oversee programs, and hold agency managers accountable for the  efficiency of their programs.  To achieve the financial management  improvements envisioned by the CFO Act, FFMIA, and more recently, the  PMA, agencies need to modernize their financial management systems to  generate reliable, useful, and timely financial information throughout the  year and at year-end.  Meeting the requirements of FFMIA presents long- standing, significant challenges that will be attained only through time,  investment, and sustained emphasis on correcting deficiencies in federal  financial management systems.
To provide positive assurance when reporting on compliance with FFMIA,  auditors need to perform detailed audit procedures that are more  comprehensive than those necessary to render an opinion in a financial  statement audit.  Such an assessment of an agency’s financial management  system is essential to improving the performance, productivity, and  efficiency of federal financial management and achieving the PMA.  If  auditors do more comprehensive testing for FFMIA compliance, as  described in the GAO/PCIE FAM, they will be able to provide positive  assurance when reporting on substantial compliance with FFMIA, which is  what we believe the law requires.  Therefore, we reaffirm our prior  recommendation that OMB require agency auditors to provide a statement  of positive assurance when reporting an agency’s systems to be in  substantial compliance with FFMIA.  While the current language that  auditors are using to report substantial compliance with FFMIA may have  useful applications, it is not relevant or appropriate given the requirements  of FFMIA.  The term “disclosed no instances” carries a commonly accepted  and well-known interpretation among the audit community that only  limited testing is required because the auditor is not giving an opinion on  whether the systems are substantially compliant.    However, our concern is  that this type of reporting may give the general public the false impression  that the systems have been found to be substantially compliant.  We also  reaffirm our other prior recommendation for OMB to explore further  clarification of the definition of “substantial compliance” in its FFMIA  guidance to encourage consistent reporting among agency auditors.  As we  stated last year, auditors we interviewed had concerns about providing  positive assurance in reporting on agency systems’ FFMIA compliance  because of a need for clarification regarding the meaning of substantial  compliance.
Agencies that do not have integrated financial systems typically must  expend major efforts and resources to develop information that their  systems should be able to provide on a daily and recurring basis.  Across  government, agencies have many efforts underway to implement or  upgrade financial systems to alleviate long-standing weaknesses in  financial management.  However, the size and complexity of many federal  agencies and the discipline needed to upgrade or replace their financial  management systems present a significant challenge.  While progress  continues to be made to improve financial management systems, for some  agencies there is a long way to go.  To be successful, agencies need to  identify the root causes as to why systems have these continuing financial  management weaknesses.
The widespread systems problems facing the federal government need  sustained management commitment at the highest levels of government.  Today, we are seeing a strong commitment from the President, the JFMIP  Principals, and the secretaries of major departments, such as DOD—which  has taken positive steps to transform its business operations and systems— to ensuring that needed modernization efforts come to fruition.  This  commitment is critical to the success of these efforts underway, as well as  those still in a formative stage, to achieve the goals of the CFO Act and  FFMIA.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments (reprinted in app. VI) on a draft of this report, OMB  agreed with our view that financial management success encompasses  more than agencies receiving unqualified opinions on their financial  statements.  However, as indicated by its comments, OMB and GAO  continue to have a philosophical difference as to the breadth and nature of  activities related to FFMIA compliance.  In discussing FFMIA compliance,  OMB focuses on the compliance requirements of FFMIA.  We have a  broader view when considering agency systems’ FFMIA compliance.  From  our viewpoint, the primary purpose of FFMIA is to ensure that agency  financial management systems routinely provide reliable, useful, and timely  financial information for managerial decision making on a day-to-day basis.   With such information, government leaders will be better positioned to  invest resources, reduce costs, oversee programs, and hold agency  managers accountable for the way they run government programs.  By  enacting FFMIA, Congress envisioned that agency managers would have  necessary financial information to measure performance on an ongoing  basis rather than just at year-end.  Financial management systems’  compliance with federal financial management systems requirements,  applicable accounting standards, and the SGL at the transaction level are  the building blocks to help achieve these goals.
Specifically, OMB disagreed with our recommendation that OMB require  agency auditors to provide a statement of positive assurance when  reporting that agency systems substantially comply with FFMIA.  OMB  stated that, in its view, positive assurance does not measure the quality or  usefulness of the financial information.  To the contrary, positive assurance  does provide a more meaningful measure of the quality and usefulness of  the financial information by providing a higher standard for the auditors’  FFMIA assessment.  When providing negative assurance with FFMIA,  auditors state that nothing came to their attention indicating that these  agencies’ financial management systems did not substantially meet FFMIA  requirements.  Providing positive assurance, as we believe the law requires,  means that the auditors must report unequivocally whether the agency  financial management systems substantially comply with the act’s  requirements.  OMB also pointed out that preliminary data suggest such an  additional reporting burden would raise audit costs without a  commensurate improvement in financial information.  As discussed in the  FAM, there are a number of techniques auditors could use to minimize the  burden and associated cost of providing positive assurance.  For example,  under 31 U.S.C. 3512(c),(d) (commonly referred to as the Federal  Managers’ Financial Integrity Act of 1982 (FIA)), agency management is  responsible for systematically developing, assessing, and reporting on  internal controls and financial management systems.  Auditors can review  the related FIA documentation to determine the degree of reliance that can  be placed on management’s FIA process.  Depending on the thoroughness  and completeness of the annual FIA assessment of agency financial  management systems done by management, auditors may not need to  significantly increase their workload to provide positive assurance.
In its comments, OMB also stated that FFMIA compliance is determined by  the agency head, after considering all relevant information, including the  results of the independent audit.  While we agree that the law requires  agency heads to make an FFMIA determination, the auditor’s FFMIA  assessment is a key element of this FFMIA determination due to auditor  independence.  The act specifically states that the determination should be  based on a review of the auditor’s report on the applicable agencywide  audited financial statements as well as other information the agency head  considers relevant and appropriate.  Moreover, as the legislative history  shows, Congress intended to use the financial statement audit process to  assure that FFMIA’s requirements are implemented and maintained in  agency financial management systems.  As with financial statement audits,  an auditor’s FFMIA assessment provides an objective and independent  view of an agency systems’ compliance with FFMIA.
OMB, in reference to our recommendation that it explore further  clarifications of the definition of “substantial compliance” to help ensure  the consistent application of this term, suggested that clear performance  and results standards are better at promoting such consistency.  OMB  added that it will consider our recommendation in that context in any  future policy and guidance updates.  As we previously reported, auditors  we interviewed that performed FFMIA assessments saw a need for  clarification of the meaning of substantial compliance to help them  perform the assessments.
OMB also stated that the report overlooks progress agencies have made  across all areas of IT security performance measures.  Similarly, in its fiscal  year 2002 report to the Congress, OMB reported that the federal  government had made significant strides in addressing serious and  pervasive IT security problems, but that much work remained.  However,  our analyses of governmentwide performance measures showed more  limited progress.  Further, our analyses of individual agency reports  showed that significant challenges remained in implementing information  security requirements.  OMB also commented that this progress has been  demonstrated in the federal government’s general success in withstanding  malicious code activity.  As we recently testified, the federal government  has taken several steps to address security vulnerabilities that affect  federal agency systems, but we identified additional steps that can be taken  to address software vulnerabilities.
In its comments, OMB stated that we should limit the scope of this report  to agencies’ efforts to implement and maintain financial systems that  comply with the act in fulfilling our statutory requirement to report  annually on FFMIA compliance.  We disagree with OMB’s view that this  report includes considerable information that is not germane to our  statutory reporting requirements.  To the contrary, the governmentwide  financial management improvement efforts, discussed in our report, have a  direct impact on agency systems’ compliance with FFMIA and provide  additional context on the importance of financial management systems in  achieving certain initiatives.  For example, the e-payroll effort, part of the e- gov initiative, if successful, should substantially reduce the number of  individual agency payroll systems, which affects agencies’ financial  systems architecture and the flow of information through their financial  management systems.  Similarly, as we discuss in the report, PART  represents a step toward more structured involvement of program and  performance analysis in the budget.  This initiative is dependent upon  meaningful links between performance results and resources consumed  that are supported by reliable, useful, and timely underlying information,  including financial data.  In our view, it will be difficult, if not impossible, to  achieve success with these governmentwide financial management  improvement efforts without the modernization of agency financial  systems envisioned by the CFO Act and FFMIA.
OMB and several agencies also provided other technical comments that we  incorporated as appropriate.
We are sending copies of this report to the Chairman and Ranking Minority  Member, Subcommittee on Financial Management, the Budget, and  International Security, Senate Committee on Governmental Affairs; and to  the Chairman and Ranking Minority Member, Subcommittee on  Government Efficiency and Financial Management, House Committee on  Government Reform.  We are also sending copies to the Director of the  Office of Management and Budget, the Secretary of the Department of  Homeland Security, the heads of the 23 CFO Act agencies, and agency  CFOs and IGs.  Copies will also be made available to others upon request.
This report was prepared under the direction of Sally E. Thompson,  Director, Financial Management and Assurance, who may be reached at  (202) 512-9450 or by e-mail at thompsons@gao.gov if you have any  questions.  Staff contacts and other key contributors to this report are  listed in appendix VII.
section_title: Requirements and Standards Supporting Federal Financial Management
subsections: section_title: Financial Management Systems Requirements
paragraphs: The policies and standards prescribed for executive agencies to follow in  developing, operating, evaluating, and reporting on financial management  systems are defined in OMB Circular A-127, Financial Management  Systems.  The components of an integrated financial management system  include the core financial system, managerial cost accounting system, and  administrative and programmatic systems.  Administrative systems are  those that are common to all federal agency operations and programmatic  systems are those needed to fulfill an agency’s mission.  JFMIP has issued  federal financial management systems requirements (FFMSR) for the core  financial system and managerial cost accounting system, and is in the  process of issuing these requirements for the administrative and  programmatic systems.  Appendix II lists the federal financial management  systems requirements published to date.  Figure 6 is the JFMIP model that  illustrates how these systems interrelate in an agency’s overall systems  architecture.
OMB Circular A-127 requires agencies to purchase commercial off-the-shelf  (COTS) software that has been tested and certified through the JFMIP  software certification process when acquiring core financial systems.   JFMIP’s certification process, however, does not eliminate or significantly  reduce the need for agencies to develop and conduct a comprehensive  testing effort to ensure that the COTS software meets their requirements.   Moreover, according to JFMIP, core financial systems certification does not  mean that agencies that install these packages will have financial  management systems that are compliant with FFMIA.  Many other factors  can affect the capability of the systems to comply with FFMIA, including  modifications made to the JFMIP-certified core financial management  systems software, and the validity and completeness of data from feeder  systems.
section_title: Federal Accounting Standards
paragraphs: The Federal Accounting Standards Advisory Board (FASAB) promulgates  federal accounting standards that agency CFOs use in developing financial  management systems and preparing financial statements.  FASAB develops  the appropriate accounting standards after considering the financial and  budgetary information needs of the Congress, executive agencies, and  other users of federal financial information and comments from the public.   FASAB forwards the standards to the three Sponsors—the Comptroller  General, the Secretary of the Treasury, and the Director of OMB—for a 90- day review.  If there are no objections during the review period, the  standards are considered final and FASAB publishes them on its Web site  and in print.
The American Institute of Certified Public Accountants has recognized the  federal accounting standards promulgated by FASAB as being generally  accepted accounting principles for the federal government.  This  recognition enhances the acceptability of the standards, which form the  foundation for preparing consistent and meaningful financial statements  both for individual agencies and the government as a whole.  Currently,  there are 25 statements of federal financial accounting standards (SFFAS)  and 4 statements of federal financial accounting concepts (SFFAC).  The  concepts and standards are the basis for OMB’s guidance to agencies on the  form and content of their financial statements and for the government’s  consolidated financial statements.  Appendix III lists the concepts,  standards, and interpretations along with their respective effective dates.
FASAB’s Accounting and Auditing Policy Committee (AAPC) assists in  resolving issues related to the implementation of accounting standards.   AAPC’s efforts result in guidance for preparers and auditors of federal  financial statements in connection with implementation of accounting  standards and the reporting and auditing requirements contained in OMB’s  Form and Content of Agency’s Financial Statements Bulletin and Audit  Requirements for Federal Financial Statements Bulletin.  To date, AAPC  has issued five technical releases, which are listed in appendix IV along  with their release dates.
section_title: Standard General Ledger
paragraphs: The SGL was established by an interagency task force under the direction  of OMB and mandated for use by agencies in OMB and Treasury regulations  in 1986.  The SGL promotes consistency in financial transaction processing  and reporting by providing a uniform chart of accounts and pro forma  transactions used to standardize federal agencies’ financial information  accumulation and processing throughout the year, enhance financial  control, and support budget and external reporting, including financial  statement preparation.  For example, agency use of the SGL accounts and  OMB’s new intragovernmental business rules for standardizing  intragovernmental activity and balances are key to removing one of the  material weaknesses that GAO has reported on the governmentwide  consolidated statements since fiscal year 1997.  The SGL is intended to  improve data stewardship throughout the federal government, enabling  consistent reporting at all levels within the agencies and providing  comparable data and financial analysis at the governmentwide level.
section_title: Internal Control Standards
paragraphs: The Congress enacted legislation, 31 U.S.C. 3512(c),(d) (commonly  referred to as the Federal Managers’ Financial Integrity Act of 1982 (FIA)),  to strengthen internal controls and accounting systems throughout the  federal government, among other purposes.  Issued pursuant to FIA, the  Comptroller General’s Standards for Internal Control in the Federal Government provides the standards that are directed at helping agency  managers implement effective internal control, an integral part of  improving financial management systems.  Internal control is a major part  of managing an organization and comprises the plans, methods, and  procedures used to meet missions, goals, and objectives.  In summary,  internal control, which under OMB’s guidance for FIA is synonymous with  management control, helps government program managers achieve desired  results through effective stewardship of public resources.
Effective internal control also helps in managing change to cope with  shifting environments and evolving demands and priorities.  As programs  change and agencies strive to improve operational processes and  implement new technological developments, management must  continually assess and evaluate its internal control to ensure that the  control activities being used are effective and updated when necessary.
section_title: Publications in the Federal Financial Management Systems Requirements Series
section_title: Statements of Federal Financial Accounting Concepts, Statements of Federal Financial Accounting Standards, and Interpretations
paragraphs: SFFAC No. 1 Objectives of Federal Financial Reporting SFFAC No. 2 Entity and Display SFFAC No. 3  Management’s Discussion and Analysis SFFAC No. 4  Intended Audience and Qualitative Characteristics for the Consolidated  Financial Report of the United States Government  SFFAS No. 1 Accounting for Selected Assets and Liabilities SFFAS No. 2 Accounting for Direct Loans and Loan Guarantees SFFAS No. 3 Accounting for Inventory and Related Property SFFAS No. 4 Managerial Cost Accounting Concepts and Standards SFFAS No. 5 Accounting for Liabilities of the Federal Government SFFAS No. 6 Accounting for Property, Plant, and Equipment SFFAS No. 7 Accounting for Revenue and Other Financing Sources SFFAS No. 8 Supplementary Stewardship Reporting SFFAS No. 9 Deferral of the Effective Date of Managerial Cost Accounting  Standards for the Federal Government in SFFAS No. 4 SFFAS No. 10 Accounting for Internal Use Software SFFAS No. 11 Amendments to Accounting for Property, Plant, and  Equipment—Definitional Changes SFFAS No. 12 Recognition of Contingent Liabilities Arising from Litigation:   An Amendment of SFFAS No. 5, Accounting for Liabilities of the Federal  Government SFFAS No. 13 Deferral of Paragraph 65-2—Material Revenue-Related  Transactions Disclosures SFFAS No. 14 Amendments to Deferred Maintenance Reporting SFFAS No. 15 Management’s Discussion and Analysis SFFAS No. 16 Amendments to Accounting for Property, Plant, and  Equipment SFFAS No. 17 Accounting for Social Insurance SFFAS No. 18 Amendments to Accounting Standards for Direct Loans and  Loan Guarantees in SFFAS No. 2 2001 (Continued From Previous Page)
section_title: AAPC Technical Releases
section_title: Checklists for Reviewing Systems under the Federal Financial Management Improvement Act
paragraphs: GAO/AIMD-98-21.2.1 Framework for Federal Financial Management  System Checklist GAO/AIMD-00-21.2.2 Core Financial System Requirements Checklist February 2000 GAO/AIMD-00-21.2.3 Human Resources and Payroll Systems  Requirements Checklist GAO-01-99G Seized Property and Forfeited Assets Systems  Requirements Checklist  GAO/AIMD-21.2.6 Direct Loan System Requirements Checklist GAO/AIMD-21.2.8 Travel System Requirements Checklist GAO/AIMD-99-21.2.9 System Requirements for Managerial Cost  Accounting Checklist GAO-01-371G Guaranteed Loan System Requirements Checklist  GAO-01-911G Grant Financial System Requirements Checklist  GAO-02-171G Property Management Systems Requirements  Checklist GAO-02-762G Benefit System Requirements (Exposure Draft)
section_title: Comments from the Office of Management and Budget
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Debra S. David, Rosa R. Harris,   Kristen A. Kociolek, Kelly A. Lehr, William S. Lowrey, Sandra S. Silzer, and  Bridget A. Skjoldal made key contributions to this report.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the audit, evaluation and investigative arm of  Congress, exists to support Congress in meeting its constitutional responsibilities  and to help improve the performance and accountability of the federal government  for the American people. GAO examines the use of public funds; evaluates federal  programs and policies; and provides analyses, recommendations, and other  assistance to help Congress make informed oversight, policy, and funding  decisions. GAO’s commitment to good government is reflected in its core values of  accountability, integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select “Subscribe to   e-mail alerts” under the “Order GAO Products” heading.
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs