Financial Management: Improvements Under Way but Serious Financial Systems Problems Persist
Published: 2006-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The ability to produce the financial information needed to efficiently and effectively manage the day-today operations of the federal government and provide accountability to taxpayers continues to be a challenge for most federal agencies. To help address this challenge, the Federal Financial Management Improvement Act of 1996 (FFMIA) requires the Chief Financial Officers (CFO) 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 at the transaction level. FFMIA also requires GAO to report annually on the implementation of the act.
section_title: What GAO Found
paragraphs: While the number of CFO Act agencies receiving unqualified opinions on their financial statements has increased significantly since 1997, the number of CFO Act agencies that did not substantially comply with FFMIA has remained fairly constant as shown below. Although agencies have made improvements and have other enhancements under way, the systems deficiencies that have prompted unfavorable FFMIA assessments indicate that the financial management systems of many agencies are still not able to routinely produce reliable, useful, and timely financial information. GAO views the continuing lack of compliance with FFMIA and the associated problems with agency financial systems to be significant challenges to improving the management of the federal government. For fiscal year 2005, auditors for five agencies provided negative assurance that agency systems substantially complied with FFMIA as allowed by the Office of Management and Budget's (OMB) current audit guidance. This means that nothing came to their attention to indicate that agency financial management systems did not substantially comply with FFMIA requirements. GAO continues to believe that this type of reporting is not sufficient for reporting under the act. In addition, negative assurance may provide the false impression that the auditors are reporting that the agencies' systems are compliant. In contrast, auditors for the Department of Labor (Labor) provided positive assurance, which is an opinion, by reporting that Labor's financial management systems substantially complied with FFMIA requirements--a reporting practice that adds more value. Auditors have expressed concern about providing positive assurance because of the need to clarify the meaning of substantial compliance. In addition, some auditors stated that a change in OMB's guidance that permits negative assurance would be necessary for them to provide an opinion on FFMIA compliance. To help address financial management systems deficiencies, OMB continues to move ahead on initiatives to enhance financial management in the federal government. Moreover, the continuing leadership and support of Congress will be crucial in reforming financial management in the federal government.

section_title: Letter
paragraphs: The lack of reliable, useful, and timely financial data needed to efficiently  and effectively manage the day-to-day operations of the federal  government and provide accountability to taxpayers and the Congress  continues to be a weakness at many federal agencies. To address this long- standing weakness, the Congress mandated financial management reform  within the federal government by enacting the Chief Financial Officers  (CFO) Act of 1990. The CFO Act laid the foundation for a comprehensive  reform of federal financial management by establishing a leadership  structure, requiring audited financial statements, and strengthening  accountability reporting. This act also requires agencies to implement  modern financial management systems in order to attain the systematic  measurement of performance; the development of cost information; and  the integration of program, budget, and financial information for  management reporting. The end goal of the CFO Act is to greatly enhance  the ability of managers to do their jobs by providing the full range of  financial information needed for day-to-day management.
The Federal Financial Management Improvement Act of 1996 (FFMIA)  was enacted on September 30, 1996, and builds on the foundation laid by  the CFO Act by highlighting the need for agencies to have financial  management systems that are able to generate reliable, useful, and timely  information needed 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. The act also requires auditors to state in their audit  reports whether the agencies’ financial management systems comply with  the act’s requirements. In addition, we are required to report annually on  the implementation status of the act. This report, our tenth, discusses   (1) the auditors’ assessments of agency systems’ compliance with FFMIA  requirements for fiscal years 1997 through 2005 and the financial  management systems problems that continued to affect systems’ FFMIA  compliance in fiscal year 2005 and (2) the initiatives under way to help  move federal financial management toward FFMIA compliance.
We conducted our work from January through July 2006 in Washington,  D.C., Baltimore, Md., and Kansas City, Mo., in accordance with U.S.  generally accepted government auditing standards. We requested  comments on a draft of this report from the Director of OMB or his  designee. We received written comments from the OMB Controller. OMB’s  comments are discussed in the Agency Comments and Our Evaluation  section and reprinted in appendix VI.
subsections: section_title: Background
paragraphs: FFMIA is part of a series of management reform legislation passed by the  Congress over the past two decades. This series of legislation started with  the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), which the  Congress passed to strengthen internal controls and accounting systems  throughout the federal government, among other purposes. Issued  pursuant to 31 U.S.C. § 3512 (c), (d), still commonly known as FMFIA, 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 FMFIA 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.  While agencies had achieved some early success in identifying and  correcting material internal control and accounting system weaknesses,  their efforts to implement FMFIA had not produced the results intended  by the Congress.
Therefore, in the 1990s, the Congress passed additional management  reform legislation to improve the general and financial management of the  federal government. This legislation includes 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, (6) Accountability of Tax Dollars Act of 2002, (7) Improper  Payments Information Act of 2002, and (8) Department of Homeland  Security (DHS) Financial Accountability Act of 2004. The combination of  reforms ushered in by these laws, if successfully implemented, provides a  solid foundation to improve the accountability of government programs  and operations as well as to routinely produce valuable cost and operating  performance information. These financial management reform acts  emphasize the importance of improving financial management across the  federal government.
In particular, building on the foundation laid by the CFO Act, FFMIA  emphasizes the need for CFO Act agencies to have systems that are able to  generate reliable, useful, and timely information for decision-making  purposes and to ensure ongoing accountability. FFMIA requires the  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 SGL at the transaction level.  FFMIA also requires auditors to state in their CFO Act financial statement  audit reports whether the agencies’ financial management systems  substantially comply with these three FFMIA systems requirements.  Appendixes I through IV include details on the various requirements and  standards that support federal financial management.
subsections: section_title: Guidance for FFMIA Issued by OMB
paragraphs: OMB establishes governmentwide financial management systems policies  and requirements and has issued two sources of guidance related to  FFMIA reporting. First, OMB Bulletin No. 01-02, Audit Requirements for  Federal Financial Statements, dated October 16, 2000, prescribed audit  requirements, including specific language auditors should use when  reporting on an agency system’s substantial compliance with the three  FFMIA requirements. Specifically, this guidance called for auditors to  provide negative assurance when reporting on an agency system’s FFMIA  compliance. On August 23, 2006, OMB issued Bulletin No. 06-03, Audit  Requirements for Federal Financial Statements, which superseded OMB  Bulletin No. 01-02. The new bulletin did not substantially revise OMB’s  FFMIA audit guidance contained in Bulletin No. 01-02. Second, in OMB  Memorandum, Revised Implementation Guidance for the Federal  Financial Management Improvement Act (Jan. 4, 2001), OMB provides  guidance for agencies and auditors to use in assessing substantial  compliance. The guidance describes the factors that should be considered  in determining whether an agency’s systems substantially comply with  FFMIA’s three requirements. Further, the guidance provides examples of  the types of indicators that should be used as a basis for assessing whether  an agency’s systems are in substantial compliance with each of the three  FFMIA requirements. Finally, the guidance discusses the corrective action  plans, to be developed by agency officials, for bringing their systems into  compliance with FFMIA.
section_title: Financial Audit Manual Section on FFMIA Developed by GAO and the President’s Council on Integrity and Efficiency
paragraphs: We have worked in partnership with representatives from the President’s  Council on Integrity and Efficiency (PCIE) to develop and maintain the  joint GAO/PCIE Financial Audit Manual (FAM). The FAM provides  specific procedures auditors should perform when assessing FFMIA  compliance. As detailed in appendix V, we have also issued a series of  checklists to help assess whether agencies’ systems meet systems  requirements. The FAM guidance on FFMIA assessments recognizes that  while financial statement audits offer some assurance on 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 ability of the financial management  systems to process and summarize financial information that flows into  annual agency financial statements. In contrast, FFMIA requires auditors  to assess whether an agency’s financial management systems comply with  system requirements, accounting standards, and the SGL. To do this,  auditors need to consider whether agency systems provide reliable, useful,  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. Further, OMB’s current  audit guidance calls for financial statement auditors to review  performance information for consistency with the financial statements,  but does not require auditors to determine whether this information is  available to managers for day-to-day decision making as called for by the  FAM guidance for testing compliance with FFMIA.
section_title: Scope and Methodology
paragraphs: We reviewed the fiscal year 2005 financial statement audit reports for the  24 CFO Act agencies to identify the auditors’ assessments of agency  financial systems’ compliance and the problems that affect FFMIA  compliance. Prior experience with the auditors and our review of their  reports provided the basis for determining the sufficiency and relevancy of  evidence provided in these documents. Based on their audit reports, we  identified reported problems that affect agency systems’ compliance with  FFMIA. The problems identified in these reports are consistent with long- standing financial management weaknesses we have reported based on  our work at a number of agencies. 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 identified all instances of noncompliance with  systems requirements and included all problems in their reports. We also  met with OMB officials to discuss their current efforts to improve federal  financial management and address our prior recommendations related to  FFMIA.
In addition, we performed site visits to 12 agencies to assess the amount  and type of FFMIA-related work being performed by the independent  public auditors. The agencies selected for visits included the 5 agencies  where auditors provided negative assurance of FFMIA compliance in fiscal  year 2005 (Commerce, Environmental Protection Agency (EPA), National  Science Foundation (NSF), Office of Personnel Management (OPM), and  Social Security Administration (SSA)); the agency where auditors provided  an opinion, or positive assurance, of FFMIA compliance in fiscal year 2005  (Labor); the 2 agencies where auditors provided negative assurance of  FFMIA compliance in fiscal year 2004 but reported those agencies as  noncompliant in fiscal year 2005 (the Department of Energy (Energy) and  the General Services Administration (GSA)); and 4 of the agencies with  the largest net costs as reported in the fiscal year 2005 Financial Report of  the United States Government. We also met with representatives for the  Inspector General of the Department of Defense (DOD), which has the  largest net costs of any federal agency in fiscal year 2005, to confirm our  understanding of its FFMIA-related audit procedures.
We conducted our work from January 2006 through July 2006 in  Washington, D.C., Baltimore, Md., and Kansas City, Mo., in accordance  with U.S. generally accepted government auditing standards. We requested  written comments on a draft of this report from the Director of OMB or his  designee. We received written comments from the OMB controller. OMB’s  comments are discussed in the Agency Comments and Our Evaluation  section and reprinted in appendix VI. We also received technical  comments from OMB and the Departments of Health and Human Services  and Transportation which we incorporated as appropriate.
section_title: FFMIA Assessments Identify Continuing Systems Weaknesses
paragraphs: While the 24 CFO Act agencies have made demonstrable progress in  producing auditable financial statements and progress in addressing their  financial management systems weaknesses since the passage of FFMIA,  about three-fourths are still not substantially compliant with FFMIA’s  three requirements. In contrast, the number of CFO Act agencies receiving  unqualified opinions on their financial statements has increased  significantly since 1997, when FFMIA reporting began. In fiscal year 1997,  11 of the CFO Act agencies attained unqualified opinions on their financial  statements, while 19 agencies received unqualified opinions in fiscal year  2005. As shown in figure 3, the ability of federal financial management  systems to address FFMIA requirements has not advanced at the same  pace. In fiscal year 1997, 20 agencies were reported as having systems that  were not in substantial compliance with at least one of the three FFMIA  systems requirements. In fiscal year 2005, auditors for 18 of the CFO Act  agencies reported that the agencies’ financial management systems do not  substantially comply with at least one of the three FFMIA requirements.
Auditors’ assessments for three agencies changed from fiscal year 2004 to  2005. For fiscal year 2005, auditors for OPM were able to provide negative  assurance that OPM’s financial management systems, as a whole, were  substantially compliant with FFMIA’s three requirements. Conversely,  auditors for Energy and GSA reported that those agencies’ financial  management systems did not substantially comply with FFMIA  requirements in fiscal year 2005, but had not reported any FFMIA  compliance issues at those federal agencies in fiscal year 2004. At Energy,  the auditors indicated that Energy’s systems problems stemmed from the  implementation of a new accounting system. At GSA, the auditors reported  recently identified internal control weaknesses over financial reporting. In  addition, consistent with the DHS Financial Accountability Act of 2004,  which added DHS to the list of CFO Act agencies, DHS’s auditors reported  that the department’s financial management systems did not substantially  comply with any of the three FFMIA requirements for fiscal year 2005.
Figure 4 summarizes auditors’ assessments of agencies’ compliance with  the three requirements of FFMIA for fiscal years 1997 through 2005 and  suggests that the instances of noncompliance with FFMIA’s three  requirements have remained fairly constant. In particular, in fiscal year  2005, auditors for eight agencies reported that their agencies’ systems  were not in substantial compliance with any of the three FFMIA  requirements—federal financial management systems requirements,  applicable federal accounting standards, or the SGL at the transaction  level.
While substantially more CFO Act agencies have obtained clean or  unqualified audit opinions on their financial statements, we are concerned  over the number of CFO Act agencies that have restated certain of their  financial statements. As we have previously reported, a number of CFO  Act agencies have restated certain of their financial statements over the  past few years to correct for material errors. Errors in financial statements  result from mathematical mistakes, mistakes in the application of  accounting principles, or oversight or misuse of facts that existed at the  time the financial statements were prepared. Generally, these restatements  resulted from weaknesses in internal control over the processing and  reporting of certain transactions and inadequate audit procedures to  detect these errors. The auditors for the seven agencies that restated their  financial statements in fiscal year 2005 also reported that the agencies’  financial systems had not met FFMIA requirements. Further, restatements  raise questions about the reliability of other information in previously  issued financial statements and indicate a continuing lack of improvement  in the underlying agency financial systems. Frequent restatements to  correct errors can undermine public trust and confidence in both the  entity and all responsible parties.
subsections: section_title: Auditors Mostly Provide Negative Assurance on FFMIA Compliance
paragraphs: In fiscal year 2005, auditors for five agencies (Commerce, EPA, NSF, OPM,  and SSA) provided negative assurance that the agencies’ systems were  compliant with FFMIA requirements. The auditor for one agency, Labor,  provided positive assurance on FFMIA compliance. From our perspective,  FFMIA requires auditors to provide positive assurance, which is an  opinion, because section 803 (b)(1) of FFMIA requires auditors to “report  whether the agency financial management systems comply with the  requirements of .” Auditors provide negative assurance when they  state that nothing came to their attention during the course of their  planned procedures to indicate that the agency’s financial management  systems did not meet FFMIA requirements. Under generally accepted  government auditing standards, there are no requirements to perform  additional testing beyond that needed for a financial statement audit for an  auditor to give negative assurance. However, if financial statement users  are not familiar with the concept of negative assurance, which we believe  is generally the case, they may incorrectly assume that these five agencies’  systems have been fully tested by the auditors and that the agencies have  achieved FFMIA compliance. In addition, testing that is not sufficient to  support an opinion also means that an area of noncompliance may be  missed; therefore, the number of problems in a particular category may be  even greater than auditors’ reports of FFMIA noncompliance would  suggest, because not all problems are being included. Although OMB’s  current audit guidance instructs auditors to test for compliance with  FFMIA, it does not provide guidance on the nature and extent of tests to  be performed. It only calls for auditors to provide negative assurance  when reporting whether an agency’s systems are in substantial compliance  with the three FFMIA requirements. We did note greater attention to  assessing FFMIA compliance at the agencies we visited. Auditors at 8 of  the 12 CFO Act agencies visited prepared and used a separate audit  program to assess FFMIA compliance. Auditors stated that separate  FFMIA audit programs were developed to ensure consistency and to share  best practices among their audit teams.
In fiscal years 2005 and 2004, auditors for Labor provided positive  assurance of Labor’s financial management systems’ compliance with  FFMIA requirements. For both years, Labor’s Inspector General  contracted with an independent public accounting firm to conduct the  financial statement audit and included a provision to specifically perform  an FFMIA examination in accordance with American Institute of Certified  Public Accountants attestation standards. In general, providing positive  assurance of FFMIA compliance requires auditors to perform more audit  procedures than those needed to render an opinion on the financial  statements. While financial statement audits in general will offer some  assurance on FFMIA compliance, auditors should also design and  implement additional testing to satisfy the criteria in FFMIA. 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, assessing FFMIA compliance involves determining whether an  agency’s financial management systems comply with systems  requirements. To do this, auditors need to consider whether agency  systems provide complete, accurate, and timely information for managing  day-to-day operations. For fiscal year 2005, Labor’s independent auditor  performed transaction testing, provided FAM Section 700 training to audit  team members, analyzed whether financial management systems provided  reliable and timely financial information for managing current operations  to senior management and program managers, and completed the audit  procedures provided in FAM 701A and associated Joint Financial  Management Improvement Program (JFMIP) checklists for each operating  division. The auditor estimated that the cost of the additional procedures  needed to provide positive assurance was between $50,000 and $80,000.  The efforts of Labor to perform the level of review necessary to provide  positive assurance of FFMIA compliance in fiscal years 2005 and 2004 are  noteworthy, and we look forward to other agencies adopting similar  auditing and reporting practices.
Performing audit procedures designed to provide positive assurance of an  agency’s financial management systems’ compliance with FFMIA  requirements can identify weaknesses and lead to improvements that  enhance the performance, productivity, and efficiency of federal financial  management systems. It also provides a clear “bottom line,” whereas  negative assurance does not. Therefore, as we have discussed in prior  reports covering fiscal years 2000 through 2004, we continue to believe  that our prior recommendation for OMB to require agency auditors to  provide a statement of positive assurance when reporting an agency’s  systems to be in substantial compliance with the three FFMIA systems  requirements is still appropriate. Given OMB’s explicit instruction to  provide negative assurance, some auditors also indicated that a change in  OMB’s guidance on FFMIA reporting would be necessary in order for them  to provide an opinion on FFMIA compliance.
In a recent discussion with OMB officials, as well as OMB’s comments on a  draft of this report and our prior FFMIA reports, OMB continues to  support the requirement for negative assurance of FFMIA compliance.  While OMB agrees that testing should occur, and its guidance on FFMIA  calls for it, it does not specify the nature and extent of audit procedures.  OMB officials continue to express the belief that the level of testing  needed for positive assurance may be too time-consuming and costly.  OMB officials said that different, more coordinated approaches toward  assessing an agency’s internal controls and FFMIA compliance could  provide sufficient assurance on an agency’s systems. We share concerns  about the added cost, but want to make our view quite clear that the focus  needs to be on the ultimate end goal of having financial management  systems able to routinely produce reliable, useful, and timely financial  information. Until such systems exist, the ability of federal managers to  effectively manage and oversee their major programs was and continues to  be restricted.
In its comments, OMB emphasized that its PMA and financial management  line of business initiatives, along with the strengthened internal control  requirements incorporated into the revised OMB Circular No. A-123, are  helping agencies to identify and correct FFMIA deficiencies. We agree  these initiatives can drive systems improvements and support OMB’s  leadership in this area. Our concern lies in the fact that the full value of  independent auditors’ assessments of FFMIA compliance will not be fully  realized until auditors perform a sufficient level of audit work to be able to  provide positive assurance that agencies are in compliance with FFMIA as  called for in the act. When reporting an agency’s financial management  systems to be in substantial compliance, positive assurance from  independent auditors will provide users with confidence that the agency  systems provide the reliable, useful, and timely information envisioned by  the act.
section_title: Additional FFMIA Guidance Needed
paragraphs: As we have previously reported, a number of auditors we interviewed  expressed a need for clarification on the definition of “substantial  compliance.” In fiscal year 2005, auditors for 7 of the 12 agencies we  visited stated that additional guidance on the definition of substantial  compliance would be useful. As a result, we reiterate our previous  recommendation that OMB explore clarifying the definition of “substantial  compliance” to meet the needs of the auditing community and to allow for  consistent application of the doctrine.
In addition, 8 of the 12 independent auditors cited a need for additional  guidance to assist them in assessing whether agency systems substantially  comply with the three FFMIA requirements. For example, at SSA, the  auditors reported a need for clearer guidance from OMB on assessing  FFMIA compliance that is consistent with the GAO/PCIE FAM. Auditors  for other agencies we visited professed a need for (1) more clearly defined  and objective criteria to assist in their determination of FFMIA  compliance, (2) more specific guidance on testing and sampling  methodologies, and (3) additional guidance for assessing compliance with  certain accounting standards, such as the Statement of Federal Financial  Accounting Standards (SFFAS) No. 4, Managerial Cost Accounting  Concepts and Standards for the Federal Government. In its comments,  OMB stated that its growing experience helping agencies implement the  PMA enables it to refine the existing FFMIA indicators associated with  substantial compliance. Accordingly, OMB said it would consider our  recommendation in any future policy and guidance updates.
section_title: Reasons for Noncompliance
paragraphs: Audit reports for the 18 agencies reported to have systems not in  substantial compliance with one or more of FFMIA’s three requirements  during fiscal year 2005, again identified the same six primary reasons for  noncompliant agency systems. They ranged from serious, pervasive  systems problems to less serious problems that may affect only one aspect  of an agency’s accounting operation:    nonintegrated financial management systems,   inadequate reconciliation procedures,   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 5 shows the relative frequency of these problems at the agencies  reported to have noncompliant systems. The same six types of problems  have been cited by auditors in the fiscal years 2001 through 2004 audit  reports, although the auditors may not have reported these problems as  specific reasons for their systems’ lack of substantial compliance with the  three FFMIA requirements. In addition, we caution that the occurrence of  problems in any particular category may be even greater than auditors’  reports of FFMIA noncompliance would suggest because auditors may not  have identified all problems during the reviews.
The CFO Act calls for agencies to develop and maintain integrated  accounting and financial management systems that comply with federal  systems requirements and provide 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. OMB Circular No. A-127, Financial Management Systems,  requires agencies to establish and maintain a single integrated financial  management system that conforms to functional requirements issued by  the Financial Systems Integration Office (FSIO), formerly the Joint  Financial Management Improvement Program (JFMIP). More details on  the financial management systems requirements can be found in  appendixes I and II.
The lack of integrated financial management systems typically results in  agencies expending 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. Agencies with  nonintegrated financial systems are also more likely to devote more time  and resources to collecting information than those with integrated  systems. In addition, opportunities for errors are increased when agencies’  systems are not integrated.
Auditors frequently mentioned the lack of integrated financial  management systems in their fiscal year 2005 audit reports. As shown in  figure 5, auditors for 13 of the 18 agencies with noncompliant systems  reported this to be a problem, compared with 12 of the 16 agencies  reported with noncompliant systems in fiscal year 2004. For example,  auditors for the Department of Housing and Urban Development (HUD)  reported that HUD has not been in compliance with FFMIA, in part due to  the lack of an integrated financial management system, since fiscal year  1997, when reports under the act were first required. As a result, HUD has  had to rely on extensive ad hoc analyses and special projects to produce  account balances and disclosures. The auditors further reported that  HUD’s most significant system challenges exist at the Federal Housing  Administration (FHA), which continues to conduct some day-to-day  business operations with legacy-based systems, thereby limiting its ability  to integrate the financial processing environment, although the auditors  noted that FHA is making progress in achieving compliance with federal  financial system requirements. Consequently, according to the HUD Office  of Inspector General, since HUD’s existing core financial system could be  better integrated, more user-friendly, and less costly to maintain, HUD  management is proceeding with plans to develop and implement a modern  financial management system through the HUD Integrated Financial  Management Improvement Project.
At DHS, auditors reported that the financial management systems for  Immigration and Customs Enforcement (ICE) and the U.S. Coast Guard  lack appropriate integration. Specifically, DHS auditors reported that ICE  had not successfully integrated the accounting processes of the five DHS  components for which it became responsible in fiscal year 2004. Auditors  also noted that ICE continued to operate unreliable processes and  procedures that support accounting and financial reporting, resulting in  material errors, irregularities, and abnormal balances in the DHS  consolidated financial statements that existed for most of fiscal year 2004  and continued unresolved in fiscal year 2005. As a result, auditors reported  that ICE’s financial systems were inadequate to process financial  transactions for the five DHS components. Further, auditors for the Coast  Guard reported that the financial reporting process was complex and  labor-intensive with a significant number of adjustments being made  outside the core accounting system. In addition, Coast Guard officials had  to perform a significant amount of manual review in order to integrate  data from three separate general ledger systems. As a result, the auditors  found that DHS was unable to prepare a consolidated financial statement  for fiscal year 2005 until November 2005 and that the consolidated  financial statement disclosures and notes contained critical errors and  inconsistencies that required material adjustments to correct.
subsections: section_title: Inadequate Reconciliation Procedures
paragraphs: A reconciliation process, whether manual or automated, is a necessary  and valuable part of a sound financial management system. The less  integrated the financial management system, the greater the need for  adequate reconciliations because data are being accumulated from a  number of different sources. Reconciliations are needed to ensure that  data have been recorded properly between the various systems and  manual records. The Comptroller General’s Standards for Internal  Control in the Federal Government highlight reconciliation as a key  control activity.
As shown in figure 5, auditors for 14 of the 18 agencies with noncompliant  systems reported that the agencies had reconciliation problems, including  a number of agencies that could not reconcile their Fund Balance with  Treasury (FBWT) accounts with the Department of the Treasury’s  (Treasury) records, compared with 11 of the 16 agencies reported with  noncompliant systems in fiscal year 2004. Treasury policy requires  agencies to reconcile their accounting records with Treasury records  monthly (comparable to individuals reconciling their personal checkbooks  to their monthly bank statements).
As a case in point, in fiscal year 2005, the auditor for GSA reported  instances of improper reconciliation procedures that contributed to errors  in financial reporting. Specifically, the auditor noted that differences  between budgetary account balances in various GSA subsystems and the  core financial management system had not been reconciled, nor had  proper budgetary account reconciliation procedures been developed.  These weaknesses inhibit GSA management’s ability to detect and prevent  budgetary accounting and reporting misstatements. Further, the auditors  noted that GSA continued to lack adequate controls for reconciling  intragovernmental balances. As a result, GSA has developed extensive  manual workarounds and used estimates to determine the break down of  revenue and receivables for DOD—the largest customer of GSA’s Federal  Acquisition Service. For example, as of June 30, 2005, GSA was unable to  assign $582 million in unidentified receivable transactions to a specific  department within DOD and therefore simply allocated this difference  among the Department of the Army, Department of the Navy, and the  Department of the Air Force. Proper reconciliation procedures would  allow GSA to resolve these types of unidentified transactions, identify  material out-of-balance conditions between federal entities, assist in the  preparation of governmentwide financial statements, help ensure that  intra-governmental balances are properly eliminated in the  governmentwide financial statements, and provide some level of  assurance that balances have been accurately and appropriately recorded.
section_title: Lack of Accurate and Timely Recording of Financial Information
paragraphs: As shown in figure 5, auditors for 17 of 18 agencies with noncompliant  systems reported the lack of accurate and timely recording of financial  information as a problem for fiscal year 2005, compared with 16 of 16  agencies reported with noncompliant systems in fiscal year 2004. Accurate  and timely recording of financial information is essential for successful  financial management. Timely recording of transactions facilitates  accurate reporting in agencies’ financial reports and other management  reports used to guide managerial decision making. In addition, having  systems that record information in an accurate and timely manner is  critical for key governmentwide initiatives, such as integrating budget and  performance information.
In contrast, lack of timely 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. For example,  auditors for the Department of Health and Human Services (HHS) noted  that one of the monthly reports prepared by the Program Support Center  to reconcile the general ledger with Treasury’s records has lost its  usefulness due to old and invalid items that remain in the general ledger.  Specifically, they identified differences with an absolute value of  approximately $5.5 billion, in part due to transactions dating back to as  early as 1993. In addition, the auditors noted that 53 of 105 reconciliations  selected for review were not completed within HHS’s allotted 30-day  deadline—several taking up to 84 days to complete. Finally, the auditors  identified more than 32,000 grants with net obligation balances of  approximately $2.3 billion that were eligible to be closed. Many of those  grants have been eligible for closure for several years. As a result of these  and other problems, more than 270 entries with an absolute value of more  than $208 billion were recorded outside the general ledger system. The  auditors noted that the majority of these entries could have been  eliminated by more timely analyses and reconciliations, as well as  improved estimation methodologies.
section_title: Noncompliance with the SGL
paragraphs: As shown in figure 5, auditors for 11 of the 18 agencies with noncompliant  systems reported that the agencies’ systems did not comply with SGL  requirements for fiscal year 2005, compared with 11 of the 16 agencies  reported with noncompliant systems in fiscal year 2004. FFMIA  specifically requires federal agencies to implement the SGL at the  transaction level. Using the SGL promotes consistency in financial  transaction processing and reporting by providing a uniform chart of  accounts and pro forma transactions and provides a basis for comparison  at the agency and governmentwide levels. The defined accounts and pro  forma transactions standardize the accumulation of agency financial  information as well as enhance financial control and support financial  statement preparation and other external reporting.
A lack of adherence to the SGL impedes the ability of the federal  government to complete accurate, governmentwide financial statements.  For example, auditors for the Small Business Administration (SBA) noted  that certain accounting transactions were not recorded, processed,  summarized, or reported in accordance with the SGL. Specifically, the  auditors found that the SBA used improper rules to record a transaction,  resulting in a subsidy account having a zero balance, while an expense  account was misstated by $58 million. SBA also incorrectly characterized  $30.5 million as a decrease in borrowing authority instead of an actual  repayment of debt. Finally, the department used improper posting logic in  preparing budget pro forma data, resulting in various overstatements and  understatements totaling $24.2 million.
Moreover, by not implementing the SGL, agencies may experience  difficulties in providing consistent financial information across their  components and functions. For example, auditors for the Department of  Justice (DOJ) found that DOJ does not substantially comply with the SGL,  in part due to noncompliance issues at the Federal Bureau of Investigation  (FBI) and the United States Marshals Service (USMS). Specifically, the  auditors noted that the FBI’s financial management systems do not permit  use of the SGL at the transaction level, in that certain transactions are  processed outside of the core system and then must be recorded into the  core system through a manual or automated batch transaction process.  Further, USMS does not maintain transaction-level detail for upward and  downward adjustments of prior-year undelivered orders and does not use  an appropriate liability account, as called for by the SGL.
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; however, agencies continue to face significant challenges in  implementing these standards. As shown in figure 5, auditors for 11 of the  18 agencies with noncompliant systems reported that these agencies had  problems complying with one or more federal accounting standards for  fiscal year 2005, compared with 11 of the 16 agencies reported with  noncompliant systems in fiscal year 2004. Appendixes III and IV list the  federal financial accounting standards and other guidance issued by the  Federal Accounting Standards Advisory Board and its Accounting and  Auditing Policy Committee, respectively. The purpose of these standards  and other guidance is to ensure that federal agencies’ financial reports  provide users with understandable, relevant, and reliable information  about the financial position, activities, and results of operations of the U.S.  government and its components.
Auditors expressly reported compliance problems with 11 specific  accounting standards in fiscal year 2005. Of those standards, the 3 that  were most troublesome for agencies were SFFAS No. 1, Accounting for  Selected Assets and Liabilities; SFFAS No. 4, Managerial Cost  Accounting Concepts and Standards for the Federal Government; and  SFFAS No. 6, Accounting for Property, Plant, and Equipment. In  particular, SFFAS No. 4, which became effective in 1998 and requires the  use of managerial cost accounting information in the decision-making  process, continues to be difficult for federal managers to fully implement.  As we recently reported, the Department of Transportation (DOT) has in  recent years shown strong leadership in developing managerial cost  accounting systems both departmentwide and at the individual component  agencies. For example, according to DOT officials, the Federal Aviation  Administration—DOT’s largest component agency—has completed the  initial implementation of a managerial cost accounting system. Several  other DOT component agencies are also implementing detailed costing  and billing systems to meet their cost accounting needs. However, DOT  management reported that it will be several years before cost accounting  data systems are fully mature and include historical data that will allow  DOT managers to integrate performance and accounting information. As a  result, DOT managers will not know the full costs associated with their  programs and activities, which could impair their decision-making  abilities.
Accurate and timely cost management information is critical for federal  managers to transform how government agencies manage the business of  government and vital in developing meaningful links between budget,  accounting, and performance. Starting in July 2005, we performed a series  of congressional briefings and issued corresponding reports concerning  the status of managerial cost accounting activities at several large federal  agencies, including Labor, Education, HHS, DOT, SSA, Treasury, and  Veterans Affairs (VA). We found that generally these agencies have  experienced uneven success in the implementation of managerial cost  accounting and that managerial cost accounting-related internal controls  within the agencies need to be strengthened. We also identified strong  upper-level management support and leadership as a key component in  the successful implementation of managerial cost accounting and  promotion of managerial cost accounting information departmentwide.
section_title: Weak Security Controls over Information Systems
paragraphs: Information security weaknesses are a major concern for federal agencies  and the general public and one of the frequently cited reasons for  noncompliance with FFMIA. As shown in figure 5, auditors for 16 of the 18  agencies with noncompliant systems reported security weaknesses in  information systems to be a problem, compared with 15 of the 16 agencies  reported with noncompliant systems in fiscal year 2004. These control  weaknesses place vast 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.  Since 1997, we have considered information security to be high-risk area  at a governmentwide level.
For example, the Department of Agriculture (Agriculture) and its  component agencies accelerated their efforts during fiscal year 2005 to  comply with the federal information security requirements; however, even  though progress was made, the auditors noted that several material  security weaknesses still exist. The weaknesses identified include an  unreliable certification and accreditation process and ineffective controls  in the general control environment, as well as weaknesses in controls over  physical and logical access, inventory of systems and network equipment,  effective policies and procedures, and vulnerability scanning and  mitigation. The auditors noted that these departmental weaknesses have a  significant impact on the integrity, confidentiality, and availability of  systems and data.
The recent information security breaches at Agriculture, VA, and other  agencies compromised the personal data of millions of U.S. citizens and  highlighted the importance of adequate system security policies and  programs. Robust federal security programs are critically important to  properly protect personal and financial information and the privacy of  individuals. On June 20, 2006, we reported on a number of actions that  agencies can take to help guard against the possibility that databases of  personally identifiable information are inadvertently compromised. We  noted that a key step is to develop a privacy impact assessment—an  analysis of how personal information is collected, stored, shared, and  managed—whenever information technology is used to process personal  information. In addition, agencies can take more specific practical  measures aimed at preventing data breaches, including limiting the  collection of personal information, limiting the time that these data are  retained, limiting access to personal information and training personnel  accordingly, and considering the use of technological controls, such as  encryption, when data need to be stored on portable devices. On June 23,  2006, OMB issued a memorandum focusing on the protection of  information that is being accessed remotely or physically transported  outside an agency’s secured location. Federal agencies are required to  implement guidance developed by the National Institute of Standards and  Technology for the protection of remote information. In addition, OMB  recommends that all agencies implement additional safeguards, including  data encryption and proper user authentication procedures for the remote  access of data.
Unresolved information security weaknesses can also compromise the  reliability and availability of data recorded in or transmitted by an agency’s  financial management system. As a case in point, in fiscal year 2005,  auditors for Treasury noted that the general controls over the  department’s computer systems did not effectively prevent unauthorized  access to and disclosure of sensitive information, unauthorized changes to  systems and application software, and unauthorized access to programs  and files that control computer hardware and secure applications. In  particular, weaknesses we reported in information security controls at  the Internal Revenue Service (IRS) could result in unauthorized  individuals being able to access, alter, or abuse proprietary IRS programs  and electronic data and taxpayer information. The auditors noted that a  key reason for Treasury’s information security weaknesses was that the  department had not yet fully implemented an agencywide information  security program to ensure that controls were effectively established and  maintained. They further reported that Treasury’s information security  programs and practices needed additional improvements to adequately  protect the information systems that support the department’s operations.
section_title: Federal Financial Management System Initiatives Continue to Evolve
paragraphs: Agencies have a number of efforts under way to address their existing  financial management systems problems. Recent efforts to modernize  financial management systems have often exceeded budgeted costs,  resulted in delays in delivery dates, and not provided the anticipated  system functionality and performance. The key for federal agencies to  avoid the long-standing problems that have plagued financial management  system improvement efforts is to address the foremost causes of those  problems and adopt solutions that reduce the risks associated with these  efforts to acceptable levels. Our March 2006 report discusses in detail the  key causes of past financial management system implementation failures,  the significant governmentwide initiatives currently under way, and  actions that can be taken to improve the management and control of  agency financial management system modernization efforts. The report  also highlights some of the issues we identified with OMB’s financial  management line of business initiative and includes actions that would  help reduce the risks associated with financial management system  implementation efforts. In a related initiative, OMB established the FSIO to  address some of the responsibilities of the former JFMIP Program  Management Office, which was realigned in December 2004. OMB will  provide oversight and guidance to FSIO on priorities and expected  performance, in consultation with the FSIO Transformation Team of the  CFO Council. Further, OMB’s December 2004 revision of Circular No. A- 123, Management’s Responsibility for Internal Control, which was  effective for fiscal year 2006, is intended to strengthen requirements for  conducting management’s assessment of internal control over financial  reporting. Through these various initiatives, OMB is taking action to  improve financial management in the federal government. However,  establishing good financial management throughout the federal  government will also require changing the organizational culture of some  federal agencies; therefore, the sustained leadership and support of the  Congress has been and continues to be essential to the reform of financial  management in the federal government.
subsections: section_title: Adherence to Best Practices Is Critical to Successful Modernization Initiatives
paragraphs: Across government, agencies have many efforts under way to implement  new financial management systems or to upgrade existing systems that  may help improve FFMIA compliance. However, these efforts far too often  result in systems that do not meet their cost, schedule, and performance  goals. While agencies anticipate that the new systems will provide reliable,  useful, and timely data to support managerial decision making, our work  and that of others has shown that has often not been the case. For  example, modernization efforts at Energy, HHS, DOD, and Treasury have  been hampered by agencies not following best practices in systems  development and implementation efforts (commonly referred to as  disciplined processes).
According to Energy’s independent auditor, Energy implemented a  new financial accounting system in April 2005, shortly after  reorganizing and consolidating its finance and accounting services  organization in October 2004. At the same time, Energy also adopted a  new chart of accounts in conjunction with the new accounting system.  Prior to 2005, Energy’s auditors had consistently provided negative  assurance that the financial management systems were in compliance  with FFMIA; however, the reorganization and consolidation adversely  affected the financial accounting staffing levels and skills mix  throughout the department and Energy did not complete corrective  actions to address these weaknesses. As a result, in the process of  implementing the new system, Energy encountered a number of  problems involving data conversion, reconciliation, posting, and  reporting. Energy’s auditor specifically noted problems in accounting  for obligations, monitoring budget execution and control, reconciling  integrated contractor trial balances with departmental records,  reconciling accounting system modules to the general ledger, resolving  various posting errors, and identifying and reporting intragovernmental  transactions. The auditor also noted that, after the implementation of  the new system, many reports needed for management, internal  control, and audit purposes were no longer available. These problems  hindered the department’s ability to assure the accuracy and  completeness of data needed for audit testing and it was unable to  provide the accurate and supportable financial statements required for  audit. As a result, Energy’s auditors issued a disclaimer on the fiscal  year 2005 financial statements and concluded that the financial  management systems did not substantially comply with federal  financial management systems requirements and federal accounting  standards.
As part of its modernization effort, HHS developed plans to reduce the  number of financial management systems from five to two using the  Unified Financial Management System (UFMS). This system is  expected to integrate the HHS financial management structure to  provide more timely and consistent information and to promote the  consolidation of accounting services throughout HHS. On the basis of  our fiscal year 2004 review of UFMS, we reported that HHS had not  effectively implemented the best practices needed to reduce the risks  associated with the implementation of a new system. Specifically, we  reported that the UFMS implementation project was schedule driven  rather than event driven based on effectively implemented disciplined  processes, with limited time devoted to critical steps in the system  development life cycle. We also stated that data conversion and system  interface challenges were critical to the ultimate success of UFMS. In  April 2005, HHS deployed the core financial portion of UFMS at the  Centers for Disease Control and Prevention (CDC) and the Food and  Drug Administration (FDA). Subsequently, auditors at HHS reported  problems with the implementation process at CDC and FDA.  Specifically, they stated that HHS experienced significant challenges in  resolving issues with the system conversion and implementation,  including configuration issues, insufficient resources, inadequate  training, and limited report capability of financial and budget activity  within the system. Furthermore, the auditors noted that UFMS, as  currently configured, cannot produce financial statements. Therefore,  FDA and CDC used cumbersome processes to crosswalk the  unadjusted trial balance to the financial statements and to record  thousands of nonstandard accounting entries both prior and  subsequent to the UFMS conversion. For example, FDA recorded about  14,000 nonstandard accounting entries totaling an absolute value of  approximately $9.4 billion to create the September 30, 2005, financial  statements. In addition, CDC had to record (1) accounting entries  totaling an absolute value of approximately $11.3 billion either to its  financial statements or those of another HHS operating division;   (2) adjustments totaling an absolute value of about $24.4 billion, related  to conversion, data cleanup, corrections, account reclassifications, and  other adjustments to conform to UFMS processing; and (3) an  approximately $19.1 billion absolute value adjustment to the database  used to generate financial statements as a result of conversion  adjustments made in UFMS that could not be extracted into the  database. The auditors reported that HHS management continues to  develop and implement corrective actions to improve its  implementation of UFMS, develop internal controls, train personnel,  and develop necessary reports, policies, and procedures; however, they  noted that sustained efforts will be necessary to overcome the  seriousness of the weaknesses noted.
According to DOD management, the department’s inability to comply  materially with FFMIA is primarily the result of structural problems  related to legacy accounting systems that do not accurately account for  both budgetary and proprietary activities. Quite simply, according to  DOD management, the department does not have the systems and  accounting structures in place to achieve compliance with FFMIA. We  have reported that DOD has historically been unable to develop and  implement business systems on time, within budget, and with the  promised capability. For example, in September 2005, we reported  that the Department of the Navy spent approximately $1 billion for four  largely failed pilot Enterprise Resource Planning (ERP) system  efforts, without marked improvement in its day-to-day operations.  Although the pilots used the same ERP commercial off-the-shelf  software, inconsistencies in the design and implementation resulted in  them not being interoperable. Furthermore, if there had been effective  project management oversight of the pilot programs at the outset, there  would not have been a need to, in essence, start over. The Navy now  has a new ERP project under way, which early Navy estimates indicate  will cost another $800 million. While the new project, as currently  envisioned, has the potential to address some of the Navy’s financial  management weaknesses, it will not provide an all-inclusive end-to-end  corporate solution for the Navy. For example, the current scope of the  ERP does not provide for real-time asset visibility of shipboard  inventory, which has been and continues to be a long-standing problem  within the department. Further, there are still significant challenges  and risks ahead as the project moves forward, such as developing and  implementing 44 system interfaces with other Navy and DOD systems  and converting data from legacy systems to the ERP system. In  addition, the Navy does not have in place the structure to capture  quantitative data that can be used to assess the effectiveness of the  overall effort and has not established an independent verification and  validation function.
The ability to prepare the consolidated financial statements of the U.S.  government (CFS) has been a long-standing challenge for Treasury’s  Financial Management Service. To address some of the internal control  weaknesses identified in our audit report, Treasury began developing  the Governmentwide Financial Report System (GFRS). The goal of this  new system is to directly link information from federal agencies’  audited financial statements to amounts reported in the CFS. We  found that Treasury had not yet effectively implemented the  disciplined processes necessary to provide reasonable assurance that  GFRS will meet its performance, schedule, and cost goals. Specifically,  Treasury had not (1) developed a concept of operations or any other  document that adequately defines or documents the expected  performance of GFRS, (2) developed a detailed project plan and  schedule through completion of GFRS, (3) developed a budget   justification for GFRS as called for in OMB Circular No. A-11, and   (4) implemented the disciplined processes necessary to effectively  manage the GFRS project. These deficiencies have contributed to the  various usability problems encountered by its users. Going forward, it  will be important for Treasury to better mitigate its risks so that long- standing internal control weaknesses regarding the preparation of the  CFS can be eliminated and, more importantly, so that Treasury ends up  with a system that fully meets its and agencies’ needs.
In addition to the examples above, our March 2006 report summarizes  many of the agencies’ financial management system implementation  failures that have been previously reported by us and agency inspectors  general. In our report, we identified several problems related to agencies’  implementation of financial management systems in three recurring and  overarching themes: disciplined processes, human capital management,  and other information technology (IT) management practices. Key causes  of failure within each area are identified in table 1. Although the  implementation of any major system will never be a risk-free proposition,  organizations that follow and effectively implement disciplined processes,  along with effective human capital and other IT management practices,  can reduce the risks of financial management system modernization  efforts to acceptable levels.
section_title: Goals for the Financial Management Line of Business Have Been Established
paragraphs: To help address financial management systems’ weaknesses and  implementation failures and to support the President’s Management  Agenda goal to expand electronic government, OMB launched the  financial management line of business in March 2004. The financial  management line of business was one of five original lines of business that  were initiated to develop business-driven, common solutions for specific  lines of business that extend across the entire federal government. OMB  and designated agency lines of business task forces plan to use enterprise  architecture-based principles and best practices to identify common  solutions for business processes, technology-based shared services, or  both, to be made available to government agencies. The original five lines  of business were financial management, human resources management,  grants, federal health architecture, and case management. These lines of  business share similar business requirements and processes. In March  2005, OMB started a task force to address a sixth line of business on IT  security. As introduced in the President’s fiscal year 2007 budget proposal,  three new lines of business initiatives will join the six existing lines of  business. The three new lines of business are IT infrastructure  optimization, geospatial, and budget formulation and execution.
The financial management line of business initiative promotes leveraging  shared service solutions to enhance the government’s performance and  services, such as establishing shared service providers to consolidate  financial management activities for major agencies. Under this initiative,  OMB developed an approach for competitively migrating financial  management systems to a limited number of shared service providers,  including OMB designated federal shared service providers, or private  sector entities. As part of the fiscal year 2006 budget process, in February  2005 OMB designated four federal agencies as governmentwide financial  management shared service providers. OMB evaluated business cases  submitted by agencies using a due diligence checklist and selected the  four agencies to be shared service providers. Three of the agencies have  had significant experience providing financial management services to  other small federal entities.
OMB has indicated that other agencies may also serve as shared service  providers in the future, but has not yet established any limits or targets on  the number of providers to be designated. Although there have been  subsequent requests by agencies and departments to become shared  services providers, as of September 2006, OMB has not designated any  new providers beyond the four original service providers previously  selected. According to OMB’s Migration Planning Guidance that was  issued in September 2006, OMB has encouraged private sector providers  that can satisfy the shared services requirements to participate in the  procurement process for these services. Agencies are responsible for  determining, through competition, if a private sector shared service  provider meets the financial management line of business requirements.  OMB officials told us they may consider the designation of these providers  in the future.
In a December 2005 memorandum to agency CFOs, OMB provided an  update on the financial management line of business. The memorandum  explained that the overall vision of the financial management line of  business (as depicted in fig. 6) is to improve the cost, quality, and  performance of financial management systems by leveraging shared  service solutions and implementing other governmentwide reforms that  foster efficiencies in federal financial operations. The memorandum also  stated that the goals of the financial management line of business include    providing timely and accurate data for decision-making; facilitating stronger internal controls that ensure integrity in  accounting and other stewardship activities;  reducing costs by providing a competitive alternative for agencies to  acquire, develop, implement, and operate financial management  systems through shared service solutions;    standardizing systems, business processes, and data elements; and   providing for seamless data exchange between and among federal  agencies by implementing a common language and structure for  financial information and system interfaces.
subsections: section_title: Transparency
paragraphs: OMB stated, in the December 2005 memorandum, that federal agencies  have begun implementing the financial management line of business  initiative by actively migrating to shared service providers and initiating  solutions to integrate financial data among and between agency business  systems. In August 2005, OPM was the first CFO Act agency to announce  its plans to move to a designated shared service provider. In addition, in  March 2006, Labor awarded a 5-year contract to a private sector firm to  provide financial management hosting and operation and maintenance  services, which includes hardware, software, and other services. As part of  its best-value determination, EPA was also considering the designated  shared service providers as well as private sector providers for software,  integration, and hosting and plans to award its contract no later than the  first quarter of fiscal year 2007. Moreover, DHS officials testified in March  2006, that rather than acquiring, configuring, and implementing a new  system within DHS, they recognized the opportunity to leverage  investments that have already been made, both within DHS and at OMB- designated shared service providers.
OMB noted that nothing in the December 2005 memorandum changes the  expectations that agencies will continue to take all the necessary steps (in  the earliest possible time frames) to meet the financial management line of  business goals. OMB stated that it had instituted a policy that agencies  seeking to modernize their financial systems must either be designated as  a public shared service provider or must migrate to a shared service  provider (public, private, or a combination of both). However, exceptions  will be made in limited situations when an agency demonstrates  compelling evidence of a best value and lower risk alternative. It is OMB’s  intent to avoid investments in “in-house” solutions wherever possible so  that the shared service framework can fully achieve potential and  anticipated returns.
section_title: Challenges and Implications in Implementing the Financial Management Line of Business
paragraphs: We have long supported and called for initiatives to standardize and  streamline common systems, which can reduce costs and, if done  correctly, improve accountability. Likewise, OMB has correctly recognized  that enhancing the government’s ability to implement financial  management systems that are capable of providing accurate, reliable, and  timely information on the results of operations needs to be addressed as a  governmentwide solution, rather than individual agency stove-piped  efforts designed to meet a given entity’s needs. However, this is a  significant change in how agencies acquire new system capacity and raises  numerous complex issues that have far-reaching implications for the  government and private sector shared service providers. As we reported in  March 2006, OMB has not yet fully defined and implemented the  processes necessary to successfully complete the financial management  line of business initiative.
OMB has been proactive since the beginning of the financial management  line of business initiative in making speeches, discussing the initiative with  the media, including it in the President’s budget request, highlighting it on  its Web site, and issuing draft guidance. Until recently there were limited  tools and guidance available. In our March 2006 report, we found, for  example, that the requirements for agencies and private sector firms to  become shared service providers and the services that they must provide  have not been adequately documented or effectively communicated to  agencies and the private sector. In addition, OMB had not provided shared  service providers with standard document templates needed to minimize  risk, provide assurance, and develop understandings with customers on  topics such as service-level agreements and a concept of operations. We  made a number of recommendations to address these issues, and OMB has  been taking steps to address them. For example, in May 2006, OMB issued  an initial competition framework and draft Migration Planning Guidance  that was circulated to agencies and the public for comment and included  some of this important information. The Migration Planning Guidance  issued in September 2006 included change management best practices and  templates for service level agreements and project plans, among other  items. As explained later, FSIO plays a key role in developing the guidance  to move the financial management line of business forward.
OMB has stated that agencies will consistently meet cost, schedule, and  performance goals when implementing new financial management  systems once the financial management line of business is fully realized.  However, agencies’ financial management system problems may not all be  solved by moving to a shared service provider and this may actually create  additional problems if agencies put less focus on their risk management  and financial management efforts. In addition, there may be some  misconception that moving to a shared service provider would guarantee  an agency of getting a clean audit opinion and being compliant with  FFMIA. There are a number of factors that affect FFMIA compliance,  including the quality of transaction data in agency feeder systems, the  success of converting data from legacy systems, and the interaction of  people, process, and technology within an agency’s environment.
In March 2006, we reported that careful consideration of the following  four concepts, each one building upon the next, would be integral to the  success of OMB’s initiatives and could help break the cycle of failure in  implementing financial management systems. The four concepts were   (1) developing a concept of operations, (2) defining standard business  processes, (3) developing a strategy for ensuring that agencies migrate to a  limited number of service providers in accordance with OMB’s stated  approach, and (4) defining and effectively implementing disciplined  processes necessary to properly manage the specific projects. Because  these issues have not been addressed, a firm foundation to address the  long-standing problems that have impeded success has not yet been  established.
A concept of operations would help provide the foundation for the  financial management line of business. An effective concept of operations  would describe, at a high level, (1) how all of the various elements of  federal financial systems and mixed systems relate to each other and   (2) how information flows from and through these systems. A concept of  operations would provide a useful tool to explain how financial  management systems at the agency and governmentwide levels can  operate cohesively. It would be geared to a governmentwide solution  rather than individual agency stove-piped efforts. Because the federal  government has lacked such a document, a clear understanding of the  interrelationships among federal financial systems and how the shared  service provider concept fits into this framework has not yet been  achieved.
Standard business processes are critical to implementing the financial  management line of business and need to be defined and communicated to  all federal agencies. Standard business processes promote consistency and  provide the framework for agencies and shared service providers. OMB  officials recognize that standardization is important and are developing a  standard set of business processes in four areas: funds control, accounts  payable, accounts receivable, and financial reporting. As illustrated  previously in figure 6, OMB is also developing a common accounting code  that may help address some of this lack of standardization. According to  OMB officials, OMB also has other initiatives under way to develop  standard interfaces for feeder systems such as acquisitions. While these  are positive steps, there are numerous other areas where standardization  is important, such as inventory, supplies, and material management as well  as the loan management areas. Absent this standardization, shared service  providers have been designated without common business rules and  potential customer agencies continue to implement and operate individual  stove-piped systems that may require additional work to adopt these  processes.
To maximize the success of a new system acquisition, organizations need  to consider the redesign of current business processes. As we noted in our  Executive Guide: Creating Value Through World-class Financial  Management, leading finance organizations have found that productivity  gains typically result from more efficient processes, not from simply  automating old processes. In the past, agencies have resisted change and  failed to develop transition plans, reengineer business processes, and limit  customization. Agencies may continue to resist change and this approach  for outsourcing their financial management systems because of the  perceived (1) loss of control of their own data, (2) potential increase in  costs with a decrease in the level of customer service and quality,   (3) inability of providers to meet specific user needs, (4) loss of control to  upgrade the system, and (5) negative effect on an agency’s individual  employees. The shared service provider concept will still require that  agencies address long-standing human capital problems by incorporating  elements of strategic workforce planning such as aligning an  organization’s human capital program with its current and emerging  mission and programmatic goals, and developing long-term strategies for  acquiring, developing, and retaining an organization’s total workforce to  meet the needs of the future.
A clear migration strategy for implementing the financial management line  of business will be crucial. However, OMB has not articulated a clear and  measurable strategy for achieving this goal. This is important because  there has been a historical tendency for agencies and units within agencies  to prefer internally developed processes and resist standardization. OMB’s  general principle is that agencies should migrate to shared service  providers when it is cost effective to do so and they have maximized the  useful life and investment in the current system, which averages about 5 to  7 years. According to OMB’s draft Migration Planning Guidance, it is  anticipated that within 10 years all agencies will have decided whether to  migrate their technology hosting and application management to a shared  service provider, or will have become a shared service provider  themselves. However, OMB does not plan to establish a specific migration  path or time table for agencies to move to a shared service provider. It is  not clear how this will impact the adoption of this initiative. Given the  pressures to reduce budgets, instilling discipline with respect to following  a clear migration path will be essential. Furthermore, without a clear  migration path, while some agencies may readily migrate to a shared  service provider to minimize the tremendous undertaking of implementing  or significantly upgrading a financial system, other agencies will likely  perpetuate the waste of taxpayer dollars previously described related to  failed system implementation efforts.
Whether agencies move to a shared service provider or implement their  own systems, they must have disciplined processes (e.g., testing,  requirements management, and risk management) in place to achieve the  intended results within established resources on schedule. Effective  implementation and testing processes are still required to ensure that the  system delivers the desired functionality on time and within budget.  Agencies have frequently struggled to implement key best practices when  implementing commercial off-the-shelf financial management systems and  relied too heavily on JFMIP testing and certification. A standard set of best  practices will be needed to guide the migration from legacy systems to  new systems and shared service providers. The Migration Planning  Guidance is a good first step in stressing the importance of this standard  set of best practices.
section_title: Financial Systems Integration Office Established and Priorities Identified
paragraphs: In accordance with a December 2004 memorandum, JFMIP  responsibilities were realigned and the four JFMIP principals will  continue to meet at their discretion to discuss major financial management  issues. FSIO has been established with staff from the previous JFMIP  program management office to address some of the former JFMIP  responsibilities. According to a December 2005 OMB memorandum, the  governance structure for financial management system initiatives gives  FSIO direct responsibility for completing priority projects under the  financial management line of business, such as developing the Migration  Planning Guidance. As depicted in figure 7, OMB will provide oversight  and guidance to FSIO on priorities and expected performance, in  consultation with the FSIO Transformation Team of the CFO Council.  According to OMB, the updated governance structure ensures that the  FSIO, financial management line of business, and the FSIO Transformation  Team do not operate in separate stovepipes. Responsibility for work  products will now rest with FSIO where full-time dedicated staff including  the FSIO Executive Director will be held accountable for achieving  financial management line of business milestones. FSIO will coordinate  the collection and expenditure of financial management line of business  funds.
OMB will continue its role as Executive Sponsor of the financial  management line of business. In December 2005, FSIO moved from GSA’s  Office of the Chief Financial Officer to the Office of Governmentwide  Policy, Office of Technology Strategy (OTS). OMB named GSA the  managing partner responsible for project management of the financial  management line of business. Specifically, GSA’s responsibilities include  organizing the work effort, involving the Federal CFO community in the  initiative, and setting the schedule of priorities with input from Executive  Steering Committee members selected from partner agencies. The  Executive Steering Committee provides strategic direction and agency  sponsorship, assists in priority setting, and approves partner agency  resource contributions. The members of the committee meet quarterly or  on an as-needed basis and are comprised of the FSIO Executive Director,  six representatives from CFO Act agencies at the CFO or Deputy CFO- level, a non-voting representative from OMB’s Office of E-Government and  a non-voting representative from OMB’s Office of Federal Financial  Management. The members were selected from the CFO Act agencies to  represent diverse perspectives in regards to size of agency, financial  management technical platform, and migration status.
The FSIO Transformation Team meets monthly and has a larger  membership than the Executive Steering Committee, including agency  representatives from all CFO Act agencies. The team functions as an  advisory group to the Executive Steering Committee, manages the delivery  of interdisciplinary work packages, and makes recommendations to the  FSIO Executive Committee and the financial management line of business  managing partner. The team is responsible for: (1) providing an internal  review function for final work products, (2) providing recommendations  to the financial management line of business project management office,  and (3) continuously seeking to refine processes to increase the quality of  and buy-in for their work products.
In terms of mission and scope, FSIO has three major areas of  responsibilities: (1) continuing its primary role of core financial system  requirements development, testing, and certification; (2) providing support  to the federal financial community by taking on special priority projects as  determined by the OMB Controller, CFO Council, and the FSIO Executive  Director; and (3) conducting outreach through an annual financial  management conference sponsored by the JFMIP principals and other  related activities. The projects that the FSIO undertakes will directly  reflect the priorities of the CFO community and OMB. The priority  projects to be undertaken in the near term will relate to the transparency  and standardization initiatives of the financial management line of  business, which were previously discussed and illustrated in figures 6   and 7.
section_title: Opinions on Internal Control May Further Strengthen New Internal Control Reporting Requirements
paragraphs: Another key initiative for improving financial management in the federal  government was OMB’s December 2004 revision of Circular No. A-123,  which we support, and was effective at the start of fiscal year 2006.  Financial systems weaknesses are frequently caused by a lack of adequate  internal control within an agency. The revisions to OMB Circular No. A-123  were intended to strengthen the requirements for conducting  management’s assessment of internal control over financial reporting at  CFO Act agencies. One major revision requires CFO Act agency  management to annually provide a separate assurance statement on  internal control over financial reporting in its performance and  accountability report, along with a report on identified material  weaknesses and corrective actions. The revision also establishes that OMB  may, at its discretion, require a CFO Act agency to obtain an opinion on  internal control over financial reporting.
We view auditor opinions on internal control over financial reporting as an  important component of monitoring the effectiveness of an entity’s risk  management and accountability systems. OMB’s efforts to enhance  Circular No. A-123 through the December 2004 revision and its continued  efforts to improve the quality of internal control in the federal government  financial management environment reflect substantial progress in both the  criteria and expectations for this issue. As we point out in our recent  reporton this issue, because agencies are not uniformly ready for such  audits, specific criteria to ascertain when an agency should initially be  required to obtain an audit opinion on its internal control over financial  reporting are critical to ensuring that the internal control audits fully  contribute to the overarching goal of ongoing improvement in federal  agency internal control and accountability. Additionally, implementing a  multiyear cycle for an opinion on internal control over financial reporting  could assist in mitigating the cost of the requirement while still providing  an effective quality control mechanism for ascertaining that management’s  assessment of its internal control is reliable. Although all of the benefits  associated with obtaining an audit opinion on internal control are not  quantifiable in monetary terms, it is clear that having set criteria as to  when an agency should initially be required to obtain an auditor opinion  on internal control over financial reporting would be a key oversight  mechanism for the Congress and ultimately the U.S. taxpayer.
section_title: Sustained and Committed Leadership Is Key to Success for Financial Management Initiatives
paragraphs: Sustained leadership will be key to a successful strategy for moving  federal agencies towards consolidated financial management systems and  FFMIA compliance. In our Executive Guide: Creating Value Through  World-class Financial Management, we found that leading organizations  made financial management improvement an entitywide priority by,  among other things, providing clear, strong executive leadership. We also  reported that making financial management a priority throughout the  federal government involves changing the organizational culture of federal  agencies. Much work remains to develop a change management strategy to  minimize the risk associated with the implementation of the financial  management line of business initiative. Because the tenure of political  appointees is relatively short, the current and future administrations must  continue a strong emphasis on top-notch financial management. In  addition, continued attention and oversight by the Congress is crucial to  the success of these initiatives and federal financial management reform.
The leadership and support demonstrated by the Congress have been and  continue to be essential in the reform of financial management in the  federal government. As previously discussed, the legislative framework  provided by the CFO Act and FFMIA, among others, established a solid  foundation to stimulate change needed to achieve sound financial systems  management. Further, in October 2004, the Congress added DHS to the list  of CFO Act agencies and thus subject to FFMIA in fiscal year 2005.  Sustained congressional interest in these issues has been demonstrated by  the number of hearings on federal financial management and reform held  over the past several years. For example, hearings have recently been held  on the financial management line of business initiative that provided a  constructive discussion on some of the challenges inherent in such a large  undertaking. It is critical that the various appropriations, budget,  authorizing, and oversight committees hold agency top management  accountable for resolving these problems and that the committees  continue to support improvement efforts.
section_title: Conclusions
paragraphs: The size and complexity of the federal government and the long-standing  nature of its financial management systems weaknesses continues to  present a formidable management challenge. Modernizing and improving  financial management systems will require continued attention from the  highest levels of government. We recognize that it will take time,  investment, and sustained emphasis on correcting these deficiencies to  improve federal financial management systems to the level required by  FFMIA. However, with concerted and coordinated effort, including  attention from top agency management and the Congress, the federal  government can make progress toward improving its financial  management systems and thus achieve the goals of the CFO Act and  provide accountability to the nation’s taxpayers.
We continue to be concerned that the full nature and scope of the  problems have not yet been identified because most auditors have only  provided negative assurance in their FFMIA reports. We also believe the  law requires auditors to provide positive assurance on FFMIA compliance.  Therefore, we reaffirm our recommendation made in prior reports that  OMB revise its current FFMIA guidance to require agency auditors to  provide a statement of positive assurance when reporting an agency’s  systems to be in substantial compliance with FFMIA. A key benefit of  providing positive assurance is that auditors will need to perform  additional audit procedures in order to have a strong basis for definitively  stating whether agencies’ financial management systems substantially  comply with FFMIA’s three requirements. 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 have stated in prior reports, the  auditors that we interviewed continue to express concerns about  providing positive assurance in reporting on agency systems’ FFMIA  compliance due to a perceived need for a clearer definition of substantial  compliance. Further, some auditors that we interviewed stated that a  change in OMB’s guidance on FFMIA reporting will be necessary in order  for them to provide an opinion on FFMIA compliance.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments (reprinted in app. VI) on a draft of this report, OMB  generally agreed with our assessment that while federal agencies continue  to make progress in addressing financial management systems  weaknesses, many agencies still need to make improvements to produce  the information needed to efficiently and effectively manage day-to-day  operations. As in previous years, OMB did not see the necessity of our  recommendation for agency auditors to provide a statement of positive  assurance when reporting agency systems to be in substantial compliance  with the requirements of FFMIA. While OMB commended Labor’s auditors  for performing the additional level of audit work needed to provide  positive assurance of compliance with FFMIA and encouraged similar  efforts at other agencies, OMB stated that requiring a statement of positive  assurance would prove only marginally useful.
OMB stated that the goals of its various initiatives—the President’s  Management Agenda (PMA), the Financial Management Line of Business  (FMLOB), and the strengthened internal control requirements  incorporated into the revised OMB Circular No. A-123, Management’s  Responsibility for Internal Control—align with the goal of FFMIA to  create the full range of information needed for day-to-day management.  From OMB’s perspective, the broad scope of the PMA and the fundamental  changes occurring under the FMLOB initiative, combined with the  strengthened reporting requirements of Circular No. A-123, are helping  agencies to identify and correct FFMIA deficiencies.
While we agree that the PMA, FMLOB, and OMB Circular No. A-123  initiatives are helping to drive improvements, auditors need to consider  other aspects of financial management systems as well when assessing  FFMIA compliance that are not fully addressed through the current  reporting structure. For example, in preparing the PMA scorecard  assessments, OMB officials meet with agencies to discuss a number of  financial management issues and have systems demonstrations. Our  concern is that some of the information provided by this approach does  not come under audit scrutiny and may not be reliable. Similarly, internal  control assessments performed under Circular No. A-123 are based on  management’s judgment and are subject to an opinion-level review by  independent auditors only in limited circumstances. From our perspective,  an opinion by an independent auditor on FFMIA compliance would  confirm whether an agency’s systems substantially met the requirements  of FFMIA and provide additional confidence in the information provided  as a result of the PMA, FMLOB, and Circular No. A-123 initiatives. Finally,  we continue to believe that a statement of positive assurance is a statutory  requirement under the act.
With regard to our prior recommendation, which we reaffirmed in this  report, for revised guidance that clarifies the definition of substantial  compliance, OMB said that the experience obtained from helping agencies  implement the high standards incorporated in the PMA and the FMLOB  will allow a further refinement of the FFMIA indicators associated with  substantial compliance. Therefore, OMB agreed to consider clarifying the  definition of “substantial compliance” in future policy and guidance  updates. As we noted in our prior reports, auditors that we interviewed  expressed a need for clarification regarding the meaning of substantial  compliance; and in fiscal year 2005, auditors for 7 of the 12 agencies we  visited stated that additional guidance on the definition of substantial  compliance would be useful.
OMB and the Departments of Health and Human Services and  Transportation also provided technical comments, which we incorporated  as appropriate.
We are sending copies of this report to the Chairman and Ranking  Minority Member, Subcommittee on Federal Financial Management,  Government Information, and International Security, Senate Committee on  Homeland Security and Governmental Affairs, and to the   Chairman and Ranking Minority Member, Subcommittee on Government  Management, Finance, and Accountability, House Committee on  Government Reform. We are also sending copies to the Director of the  Office of Management and Budget, the heads of the 24 CFO Act agencies in  our review, and agency CFOs and Inspectors General. Copies will be made  available to others upon request. In addition, this report will be available  at no charge on the GAO Web site at http://www.gao.gov.
This report was prepared under the direction of McCoy Williams, Director,  Financial Management and Assurance, who may be reached at (202) 512- 9095 or williamsm1@gao.gov if you have any questions. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix VIII.
section_title: Appendix I: 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 Office of Management and Budget (OMB) Circular  No. A-127, Financial Management Systems. The components of an  integrated financial management system include the core financial  system,  managerial cost accounting system, administrative systems, and  certain 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. Circular No. A-127 refers to the  series of publications entitled Federal Financial Management Systems  Requirements, initially issued by the Joint Financial Management  Improvement Program’s (JFMIP) Program Management Office (PMO) as  the primary source of governmentwide requirements for financial  management systems. However, as of December 2004, the Financial  Systems Integration Office (FSIO) assumed responsibility for coordinating  the work related to federal financial management systems requirements  and OMB’s Office of Federal Financial Management (OFFM) is responsible  for issuing the new or revised regulations. In December 2004, the JFMIP  Principals voted to modify the roles and responsibilities of JFMIP,  resulting in the creation of FSIO. Appendix II lists the federal financial  management systems requirements published to date. Figure 8 is the  current model that illustrates how these systems interrelate in an agency’s  overall systems architecture.
OMB establishes governmentwide financial management policies and  requirements and has issued two sources of guidance related to FFMIA  reporting. First, OMB Bulletin No. 01-02, Audit Requirements for Federal  Financial Statements, dated October 16, 2000, prescribed specific  language auditors should use when reporting on an agency system’s  substantial compliance with the three FFMIA requirements. Specifically,  this guidance called for auditors to provide negative assurance when  reporting on an agency system’s FFMIA compliance. On August 23, 2006,  OMB issued Bulletin No. 06-03, Audit Requirements for Federal Financial  Statements, which superseded OMB Bulletin No. 01-02. This bulletin did  not substantially revise the FFMIA audit guidance included in Bulletin No.  01-02. Second, in OMB Memorandum, Revised Implementation Guidance  for the Federal Financial Management Improvement Act (Jan. 4, 2001),  OMB provides guidance for agencies and auditors to use in assessing  substantial compliance. The guidance describes the factors that should be  considered in determining whether an agency’s systems substantially  comply with FFMIA’s three requirements. Further, the guidance provides  examples of the types of indicators that should be used as a basis for  assessing whether an agency’s systems are in substantial compliance with  each of the three FFMIA requirements. Finally, the guidance discusses the  corrective action plans, to be developed by agency heads, for bringing  their systems into compliance with FFMIA.
We have worked in partnership with representatives from the President’s  Council on Integrity and Efficiency (PCIE) to develop and maintain the  joint GAO/PCIE Financial Audit Manual (FAM). The FAM provides  specific procedures auditors should perform when assessing FFMIA  compliance. As detailed in appendix V, we have also issued a series of  checklists to help assess whether agencies’ systems meet systems  requirements. The FAM guidance on FFMIA assessments recognizes that  while financial statement audits offer some assurance regarding FFMIA  compliance, auditors should design and implement additional testing to  satisfy FFMIA criteria.
OMB Circular No. A-127 also requires agencies to purchase commercial  off-the-shelf (COTS) software that has been tested and certified through  the PMO software certification process when acquiring core financial  systems. However, in December 2004, OMB transferred the responsibility  of certifying systems to FSIO as part of the realignment of JFMIP. The  certification process does not eliminate or significantly reduce the need  for agencies to develop and conduct comprehensive testing efforts to  ensure that the COTS software meets their requirements. Moreover, 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 FSIO-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 and concepts that agency chief financial  officers use in developing financial management systems and preparing  financial statements. FASAB develops the appropriate accounting  standards and concepts 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 and concepts to the Comptroller General, the  Director of OMB, the Secretary of the Treasury, and the Director of the  Congressional Budget Office (CBO) for a 90-day review. If, within 90 days,  neither the Comptroller General nor the Director of OMB objects to the  standard or concept, then it is issued and becomes final. FASAB  announces finalized concepts and standards in The Federal Register.
The American Institute of Certified Public Accountants designated 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 30 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, interpretations,and technical bulletins, 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  Bulletin No. 01-09, Form and Content of Agency Financial Statements  (Sept. 25, 2001), and Bulletin No. 01-02, Audit Requirements for Federal  Financial Statements (Oct. 16, 2000). To date, AAPC has issued six  technical releases, which are listed in appendix IV along with their release  dates.
section_title: U.S. Government Standard General Ledger
paragraphs: The U.S. Government Standard General Ledger (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.  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 governmentwide.
section_title: Internal Control Standards
paragraphs: Congress enacted legislation, 31 U.S.C. § 3512(c), (d) (commonly referred  to as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA)), to  strengthen internal controls and accounting systems throughout the  federal government, among other purposes. Issued pursuant to FMFIA, the  Comptroller General’s Standards for Internal Control in the Federal  Governmentprovides 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 FMFIA is synonymous  with management control, helps government program managers achieve  desired results through effective stewardship of public resources.
In December 2004, OMB revised Circular No. A-123 (effective beginning  with fiscal year 2006) to strengthen the requirements for conducting  management’s assessment of internal control over financial reporting.  Significant revisions contained in Appendix A of the circular include  requiring Chief Financial Officers (CFO) Act agency management to  annually assess the adequacy of internal control over financial reporting,  provide a report on identified material weaknesses and corrective actions,  and provide a separate assurance statement on the agency’s internal  control over financial reporting. In initiating the revisions, OMB cited the  internal control requirements for publicly traded companies that are  contained in section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes- Oxley).Sarbanes-Oxley was enacted in response to corporate  accountability failures of several years prior to its enactment and contains  a provision (section 404) calling for management’s assessment of internal  control over financial reporting similar to the long-standing requirements  for executive branch agencies contained in FMFIA to issue annual  statements of assurance over internal control in the agencies. Opinions on  internal control over financial reporting as required by Sarbanes-Oxley for  publicly traded companies are important to protect investors by improving  the accuracy and reliability of corporate disclosures made pursuant to the  securities laws. Regulators, public companies, audit firms, and investors  generally agree that Sarbanes–Oxley has had a positive and significant  impact on investor protection and confidence.
section_title: Appendix II: Publications in the Federal Financial Management Systems Requirements Series
subsections: section_title: OFFM-NO-0106 Core Financial System Requirements
section_title: Appendix III: Statements of Federal Financial Accounting Concepts, Standards, Interpretations, and Technical Bulletins
subsections: section_title: SFFAC No. 1Objectives of Federal Financial Reporting
section_title: TR-6 Preparing Estimates for Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform Act (Amendments to TR-3)
section_title: Appendix V: Checklists for Reviewing Systems under the Federal Financial Management Improvement Act
subsections: section_title: GAO-05-225G Core Financial System Requirements
section_title: Appendix VI: Comments from the Office of Management and Budget
section_title: Appendix VII: Auditors’ FFMIA Assessments for Fiscal Year 2005
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Kay L. Daly, Assistant Director;  Jeremy Cockrum; Debra Cottrell; Daniel Egan; C. Robin Hodge; Michael  LaForge; W. Stephen Lowrey; Bennet E. Severson; and George Warnock  made key contributions to this report.