Financial Management: Achieving FFMIA Compliance Continues to Challenge Agencies
Published: 2005-09-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The ability to produce the data needed to efficiently and effectively manage the day-to-day operations of the federal government and provide accountability to taxpayers 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 (SGL). FFMIA also requires GAO to report annually on the implementation of the act.
section_title: What GAO Found
paragraphs: While most CFO Act agencies have obtained clean or unqualified audit opinions on their financial statements, the underlying financial systems remain a serious problem. Agencies still lack the capacity to create the full range of information needed for effective day-to-day management. In fiscal year 2004, auditors for 16 of the 23 CFO Act agencies reported that agencies' financial management systems failed to comply with FFMIA. Primarily six types of problems related to agencies systems were identified in the audit reports. These same types of problems have been consistently reported for agencies with noncompliant systems for a number of years. GAO views these problems with agency financial systems to be a significant challenge to improving the management of the federal government. Auditors for six agencies provided negative assurance on systems' FFMIA compliance for fiscal year 2004. This means that nothing came to their attention to indicate that financial management systems did not meet FFMIA requirements. OMB's current reporting guidance calls for negative assurance; however, 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 (DOL) provided positive assurance by reporting that DOL's financial management systems substantially complied with FFMIA requirements. In fiscal year 2005, DOL auditors plan to enhance their audit procedures to focus on the reliability and use of managerial cost information. GAO looks forward to other auditors adopting a similar reporting practice that adds more value. In addition, auditors have expressed concern about providing positive assurance because of the need to clarify the meaning of substantial compliance. OMB continues to move ahead on other 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: Most federal agencies continue to lack the financial data needed to  efficiently and effectively manage day-to-day operations and to provide an  acceptable level of accountability to taxpayers. In 1990, to address this  long-standing weakness, Congress mandated financial management reform  within the federal government by enacting the Chief Financial Officers  (CFO) Act, which requires the modernization of financial management  systems by agencies 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  goal of the CFO Act is to improve accounting and financial management  practices by providing management with the full range of information  needed for day-to-day management.
The Federal Financial Management Improvement Act of 1996 (FFMIA)  builds on the foundation laid by the CFO Act by emphasizing the need for  agencies to have financial management systems that can generate reliable,  useful, and timely information with which to make fully informed decisions  and to ensure accountability on an ongoing basis. FFMIA requires the major departments and agencies covered by the CFO Act to implement  and maintain financial management systems that comply substantially with  (1) federal financial management systems requirements, (2) applicable  federal accounting standards, and (3) the U.S. Government Standard  General Ledger (SGL) at the transaction level. The act also requires  auditors to state in their audit reports whether the agencies’ financial  management systems substantially comply with the act’s requirements. In  addition, we are required to report annually on the implementation status  of the act. This report, our ninth, discusses (1) the auditors’ assessments of  agency systems’ compliance with FFMIA for fiscal year 2004 and the  financial management systems problems that continue to affect systems’  FFMIA compliance and (2) the initiatives underway to help move federal  financial management toward FFMIA compliance.
We conducted our work in the Washington, D.C. area from February 2005  through May 2005, in accordance with U.S. generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: FFMIA is part of a series of management reform legislation passed by  Congress over the past two decades. This series of legislation started with  the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), which  Congress passed 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 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 success in identifying and correcting  material internal control and accounting system weaknesses, their efforts  to implement FMFIA had not produced the results intended by Congress.
Therefore, in the 1990s, Congress passed additional management reform  legislation to improve the general and financial management of the federal  government. The combination of reforms ushered in by the (1) CFO Act of  1990, (2) Government Performance and Results Act of 1993,  (3) Government Management Reform Act of 1994, (4) FFMIA, (5) Clinger- Cohen Act of 1996, (6) Accountability of Tax Dollars Act of 2002, and (7) Department of Homeland Security Financial Accountability Act of  2004, if successfully implemented, provides a solid foundation for  improving the accountability of government programs and operations as  well as for routinely producing 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 agencies to have systems that are able to generate  reliable, useful, and timely information for decision-making purposes and  to ensure accountability on an ongoing basis. 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 FFMIA’s systems requirements. Appendixes I  through IV include details on the various requirements and standards that  support federal financial management.
section_title: Guidance for FFMIA Issued by OMB
paragraphs: 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, prescribes specific  language auditors should use when reporting on an agency system’s  substantial compliance with FFMIA. Specifically, this guidance calls for  auditors to provide negative assurance when reporting on an agency  system’s FFMIA compliance. Second, in 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 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.
section_title: Financial Audit Manual Section on FFMIA Developed by GAO and PCIE
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 regarding FFMIA  compliance, auditors should design and implement additional testing to  satisfy FFMIA criteria. For example, in performing financial statement  audits, auditors generally focus on the 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 such 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 2004 financial statement audit reports for the  23 CFO Act agencies to identify the auditors’ assessments of agency  financial systems’ compliance and the problems that affect FFMIA  compliance. We also reviewed the fiscal year 2004 financial statement audit  report for DHS to identify any FFMIA-related issues. 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 the audit reports, we identified problems reported by  the auditors that affect agency systems’ compliance with FFMIA. The  problems identified in these reports are consistent with long-standing  financial management weaknesses 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 included all problems in their reports. Finally, we held discussions  with OMB officials to obtain information about their current efforts to  improve federal financial management and address our prior  recommendations related to FFMIA.
We conducted our work in the Washington, D.C. area from February 2005  through May 2005 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.
section_title: Systems Weaknesses Continue to Impede Financial Management Accountability
paragraphs: While agencies have made demonstrable progress in producing auditable  financial statements and some progress in addressing their financial  management systems weaknesses, the majority of agencies’ systems are  still not substantially compliant with FFMIA’s requirements. Figure 2  summarizes auditors’ assessments of FFMIA compliance for fiscal years  2000 through 2004 and suggests that the instances of noncompliance with  FFMIA’s three requirements have remained fairly constant. For fiscal year  2004, offices of inspectors general (OIG) and their contract auditors  reported that the systems of 16 of the 23 CFO Act agencies did not  substantially comply with at least one of FFMIA’s three requirements— federal financial management systems requirements, applicable federal  accounting standards, or the SGL at the transaction level.
In fiscal year 2004, auditors for six agencies—the Department of  Commerce (Commerce), the Department of Energy (Energy), the  Environmental Protection Agency (EPA), the General Services  Administration (GSA), the National Science Foundation (NSF), and the  Social Security Administration (SSA)—provided negative assurance that  the agencies’ financial systems were in compliance with FFMIA. In  addition, for the first time, auditors for one agency, DOL, provided positive  assurance that its systems were in compliance with FFMIA. In contrast, in  fiscal year 2003, the auditors for Commerce, Energy, EPA, the Nuclear  Regulatory Commission (NRC), NSF, and SSA reported that the results of  their tests disclosed no instance in which their financial management  systems did not meet FFMIA requirements.
At the NRC, the auditors determined that the financial management  systems did not comply with the requirements of FFMIA in fiscal year 2004,  although they had previously determined that the systems were in  compliance in fiscal year 2003. The change was due to audit tests  performed on NRC’s fee billing system in fiscal year 2004. As a result of  their tests, the auditors concluded that the billing system lacked sound  internal controls and does not comply with existing requirements for  revenue systems. At GSA, the auditors provided negative assurance that the  financial management systems were FFMIA-compliant in fiscal year 2004,  although they had previously determined that the systems were not in  compliance for fiscal year 2003 due to significant reconciliation problems.  For fiscal year 2004, the GSA auditors closed the material weakness  regarding the significant reconciliation problems that had affected GSA the  prior year.
DHS will be subject to FFMIA for the first time in fiscal year 2005. The  Department of Homeland Security Financial Accountability Act added  DHS to the list of CFO Act agencies effective for fiscal year 2005. Because  DHS was not subject to FFMIA in fiscal year 2004, we have not included  DHS in our summaries of compliance with FFMIA and problems reported  by the auditors for fiscal year 2004. However, we have noted that the DHS  auditors identified and reported deficiencies that relate to all three FFMIA  requirements. We plan to include DHS in our analysis of the fiscal year 2005  FFMIA results.
While substantially more CFO Act agencies have obtained clean or  unqualified audit opinions on their financial statements, as shown in figure  2, the underlying agency financial systems remain a serious problem. The  number of unqualified opinions has increased over the past 8 years (from  11 in fiscal year 1997 to 18 for fiscal year 2004), and most agencies were  able to issue their audited financial statements within the accelerated  reporting time frame—22 of the 23 CFO Act agencies issued their audited  financial statements by the November 15, 2004, deadline set by OMB, just  46 days after the close of the fiscal year. While the increase in unqualified  and timely opinions is noteworthy, we are concerned over the growing  number of CFO Act agencies that have restated certain of their financial  statements for fiscal year 2003 to correct errors and have included a matter  of emphasis paragraph in our report on the audit of the fiscal year 2004  consolidated financial statements given the seriousness of this problem. As we have previously testified, at least 11 of the 23 CFO Act agencies  restated their fiscal year 2003 financial statements, whereas 5 CFO Act  agencies restated their fiscal year 2002 financial statements. The  restatements to CFO Act agencies’ fiscal year 2003 financial statements  ranged from correcting two line items on one agency’s balance sheet to  numerous line items on several of another agency’s financial statements.  The amounts of the agencies’ restatements ranged from several million  dollars to over $91 billion. Nine of those 11 agencies received unqualified  opinions on their financial statements originally issued in fiscal year 2003.  Seven of the 9 auditors issued unqualified opinions on the restated financial  statements, which in substance replace the auditors’ opinions on their  respective agencies’ original fiscal year 2003 financial statements. For 2 of  these 9 agencies, the auditors not only withdrew their unqualified opinions  on the fiscal year 2003 financial statements but also issued other than  unqualified opinions on their respective agencies’ restated fiscal year 2003  financial statements because they could not determine whether there were  any additional misstatements and the effect that these could have on the  restated fiscal year 2003 financial statements.
For two of the agencies with restated financial statements, auditors  provided negative assurance that the agencies’ systems were in compliance  with FFMIA for fiscal year 2003. The restatements at these agencies  reflected inaccurate recording of transactions, and in one case, the cause  for the restatement could be traced back to the implementation of new  software, among other factors. The necessity for these agencies to restate  certain financial accounts in the subsequent fiscal year raises questions  about whether the agencies systems substantially met FFMIA requirements  and whether financial managers had access to reliable, useful, and timely  information with which to make fully informed operational decisions in  fiscal year 2003.
The need for restatements and end-of-the-year adjustments to correct for  errors undermines public trust and confidence in both the entity and all  responsible parties and indicates a continuing lack of improvement in the  underlying agency financial systems. Undue emphasis on receiving  unqualified or clean audit opinions has led to an expectation gap since, as  more agencies receive clean opinions, public expectations are raised that  the government has sound financial management and can produce reliable,  useful, and timely information on demand throughout the year, whereas the  annual FFMIA assessments offer a different perspective.
section_title: FFMIA Compliance Findings Mostly Based on Negative Assurance
paragraphs: In fiscal year 2004 auditors for seven agencies reported their systems to be  in substantial compliance with the requirements of FFMIA. Auditors for six  of these agencies (Commerce, Energy, EPA, NRC, NSF, and SSA) provided  negative assurance that the agencies’ systems were in compliance with  FFMIA. Auditors provide negative assurance when they state that nothing  came to their attention during the course of their planned procedures to  indicate that these agencies’ financial management systems did not meet  FFMIA requirements. If readers are not familiar with the concept of  negative assurance, which we believe is generally the case, they may  incorrectly assume that these systems have been fully tested by the  auditors and that the agencies have achieved compliance. OMB’s current  audit guidance only calls for auditors to provide negative assurance when  reporting whether an agency’s systems are in substantial compliance with  FFMIA.
To provide positive assurance of FFMIA compliance, auditors need to  perform more comprehensive audit procedures than those necessary to  render an opinion for a financial statement audit. 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 financial statements. In contrast, FFMIA is much broader and  requires auditors to assess whether an agency’s financial management  systems substantially comply with systems requirements. To do this,  auditors need to consider whether agency systems provide complete,  accurate, and timely information for day-to-day decision making and  management.
In fiscal year 2004, auditors for DOL provided an opinion, or positive  assurance, of DOL’s financial management systems’ compliance with  FFMIA. At DOL, the Inspector General (IG) contracted with an  independent public accounting firm to perform the FFMIA examination in  accordance with American Institute of Certified Public Accountants  attestation standards, which by reference are incorporated in Government  Auditing Standards. To do so, the auditors used a combination of financial  statement and FFMIA-specific audit procedures. Specifically, they  performed extensive transaction testing and reconciliations combined with  FFMIA-related audit procedures based on the GAO/PCIE FAM  requirements. For example, they developed a good understanding of the  financial systems capabilities, documented their assessments of DOL’s  financial systems’ compliance with systems requirements, and considered  the nature and extent of managerial cost information available for effective  day-to-day management.
According to the auditors, two developments at DOL in fiscal year 2004  were key to the ability of the auditors to conclude that DOL systems  substantially complied with the three requirements of FFMIA for fiscal year  2004. First, during fiscal year 2004, DOL management assigned staff the  responsibility of reconciling the Fund Balance with Treasury (FBWT)  accounts on a daily basis. Due to this increased focus on FBWT, at the end  of fiscal year 2004, the auditors found no material differences between DOL  and Treasury’s records. Second, DOL implemented a cost management  system during fiscal year 2004 in order to provide current year cost data to  managers that has not been available in prior years. The auditors also  determined that none of the internal control deficiencies reported as part  of the financial statement audit indicated substantial noncompliance with  FFMIA requirements. For the fiscal year 2005 financial statement audit, the  auditors plan to increase their focus on the types of reports being produced  currently by the cost system and how managers are using that information  for day-to-day operations. In addition, the fiscal year 2005 DOL audit plan  requires the auditors to perform the FFMIA-related FAM audit procedures  and complete the associated checklists.
The efforts by the DOL auditors to perform the level of review necessary to  provide positive assurance of FFMIA compliance in fiscal year 2004 is most  noteworthy. We have discussed the importance of providing positive  assurance on FFMIA as required by the act for a number of years. We look  forward to other agencies adopting similar auditing and reporting practice.
Providing positive assurance of an agency’s financial management system  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 do so. Therefore, as we have discussed in prior reports, we  reaffirm our prior recommendation that OMB require agency auditors to  provide a statement of positive assurance when reporting an agency’s  systems to be in substantial compliance with FFMIA. 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, OMB officials stated that different, more coordinated  approaches toward assessing an agency’s internal controls and FFMIA  compliance might provide sufficient assurance on an agency’s systems. For  example, in preparing the President’s Management Agenda (PMA)  scorecard assessments, OMB officials meet with agencies to discuss a  number of financial management issues and have systems demonstrations.  Agencies are asked to identify key business questions and related cost  drivers. Then, the agencies must develop systems that can produce the  information needed on those cost drivers to help management at all levels  focus on results. OMB officials stated that they believed the PMA scorecard  framework offers an alternate route toward substantial compliance that is  similar to that offered by positive assurance. In its written comments on a  draft of this report (see app. VI), OMB stated that the processes used in  evaluating agencies against the PMA standards can provide a corroborative  mechanism in evaluating compliance with FFMIA. Our concern is that the  information provided by this approach does not come under audit scrutiny,  which is what the law requires, and may not be reliable.
In December 2004, OMB revised Circular No. A-123, Management’s  Responsibility for Internal Control, to strengthen the requirements for  conducting management’s assessment of internal control over financial  reporting. The revision incorporates the internal control requirements for  publicly traded companies that are contained in the Sarbanes-Oxley Act of  2002. The circular emphasized management’s responsibility for  establishing, maintaining, and reporting on internal control to achieve the  objectives of effective and efficient operations, reliable financial reporting,  and compliance with laws and regulations. In commenting on a draft of this  report, OMB emphasized that through its revision to Circular No. A-123,  agencies are required to implement more rigorous processes for  conducting management’s assessment of the effectiveness of internal  controls over financial reporting. Given that PMA and Circular No. A-123  reviews help to ensure agencies’ access to and use of timely and accurate  financial data, OMB believes that requiring a statement of positive  assurance would prove only marginally useful.
From our perspective, auditor reporting on internal control is a critical  component of monitoring the effectiveness of an organization’s  accountability, especially for large, complex, or challenged entities.  Auditors can better serve their clients and other financial statement users  and better protect the public interest by having a greater role in providing  assurances of the effectiveness of internal control in deterring fraudulent  financial reporting and protecting assets. Financial management systems  are a critical element of an entity’s internal control over financial reporting.  Although enhanced internal control reporting would not necessarily  address the full capability of the financial management systems in place,  such reporting would include reportable internal control weaknesses  caused by financial systems problems. However, 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.
In addition, we also reaffirm our previous recommendation that OMB  explore clarifying the definition of “substantial compliance” to help ensure  consistent application of the term. As we noted in our prior reports,  auditors we interviewed had concerns about providing positive assurance  in reporting on agency systems’ FFMIA compliance because of a need for  clarification regarding the meaning of substantial compliance. 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: Based on our review of the fiscal year 2004 audit reports for the 16 agencies  reported to have systems not in substantial compliance with one or more of  FFMIA’s three requirements, we identified six primary reasons cited by the  auditors for agency systems not being compliant. The weaknesses reported  by the auditors 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,  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 3 shows the relative frequency of these problems at the 16 agencies  reported to have noncompliant systems. The same six types of problems  have been cited by auditors in their fiscal years 2000 through 2003 audit  reports, although the auditors may not have reported these problems as  specific reasons for their systems’ lack of substantial compliance with  FFMIA. 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 in their reviews.
subsections: section_title: Nonintegrated Financial Management Systems
paragraphs: 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 published  by JFMIP’s Program Management Office (PMO). 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 2004 audit reports. As shown in figure 3,  auditors for 12 of the 16 agencies with noncompliant systems reported this  to be a problem, compared with 11 of the 17 agencies reported with  noncompliant systems in fiscal year 2003. For example, auditors for the  Department of Justice reported that the financial management systems of  the department’s component agencies are not integrated or configured to  support financial management and reporting. For instance, the U.S.  Marshals Service’s core financial system lacks integrated subsidiary ledgers  for certain key account balances. Consequently, staff at this organization  must perform time-consuming manual procedures to document  adjustments and crosswalks between the general ledger and the financial  statements. However, the limited amount of time available at the end of  each financial reporting period increases the risk that errors existing in the  financial statements were not detected and corrected prior to final  issuance. The auditors also noted that the nonintegrated systems do not  support management’s need for timely and accurate information for day-to- day decision making.
At the National Aeronautics and Space Administration (NASA), auditors  reported numerous weaknesses in the core financial system, the integrated  financial management system first implemented by NASA in fiscal year  2003. We have previously reported on problems NASA faced when implementing this system. Specifically, the auditors found that the core  financial system lacked integration with certain key subsidiary systems,  such as the property system, and does not facilitate the preparation of  financial statements. Although the auditors recognized that management  identified and resolved significant system problems in fiscal year 2004, the  auditors identified serious continuing weaknesses in their review of  property, plant, and equipment (PP&E)—specifically contractor-held  PP&E. For example, due to a lack of integration with the property system,  entries for contractor-held property, totaling $8.5 billion, had to be  manually entered into the core financial system. The auditors concluded  that the problems will not be fully addressed until NASA implements a  single integrated system for reporting property and develops a  methodology to identify costs that should be capitalized at the time that  transactions are processed. The auditors further noted that certain  transactions continue to be posted incorrectly due to improper  configurations within the system. Consequently, they concluded that NASA  lacks an integrated financial management system that provides effective  and efficient interrelationships between software, hardware, personnel,  procedures, controls, and data.
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 highlights reconciliation as a key control activity.
As shown in figure 3, auditors for 11 of the 16 agencies with noncompliant  systems reported that the agencies had reconciliation problems, including  difficulty in reconciling their FBWT accounts with Treasury’s records,  compared with 11 of the 17 agencies reported with noncompliant systems  in fiscal year 2003. Treasury policy requires agencies to reconcile their  accounting records with Treasury records on a monthly basis (comparable  to individuals reconciling their personal checkbooks to their monthly bank  statements).
For example, in fiscal year 2003, auditors for the Department of  Transportation (DOT) reported that the department had not implemented  effective processes to reconcile transactions with other federal agencies.  During fiscal year 2004, DOT did improve its reconciliation procedures  using a new reporting tool within its financial management system.  However, on September 30, 2004, DOT still had not identified agencies  associated with $27 billion, or about half, of the $55 billion of transactions  with other federal agencies that were processed and reported to Treasury  in fiscal year 2004. The large amount associated with unknown trading  partners demonstrates that DOT still lacks an effective process for  reconciling transactions. Furthermore, DOT lacked an effective process for  reconciling transactions among its own subsidiary agencies. In fiscal year  2004, DOT’s subsidiary agencies reported a total of $17 million in accounts  receivable, or amounts due from other departmental agencies. These same  organizations, however, reported $582 million in accounts payable, or  amounts owed to other departmental agencies. Because these amounts  should reflect only transactions within DOT, at the consolidated agency  level the amount due should match the amount owed. Due to this  discrepancy, DOT management had to perform extensive research and  make numerous manual adjustments to balance its records and prepare  reliable financial statements.
Until DOT is able to automatically track transactions with other federal  agencies and between its own subsidiary agencies, it will not be able to  make significant progress in reconciling its transaction balances internally  and with those of other agencies. As a result of these problems at DOT and  other federal agencies, the federal government’s ability to determine the  impact of these differences on the amounts reported in the consolidated  financial statements is impaired, which we cite in our audit report on the  U.S. government’s consolidated financial statements as one of three major  impediments to providing an opinion on those financial statements.  Resolving the intragovernmental transactions problem remains a difficult  challenge and will require a commitment by federal agencies and strong  leadership and oversight by OMB.
section_title: Lack of Accurate and Timely Recording of Financial Information
paragraphs: As shown in figure 3, auditors for all 16 of the agencies with noncompliant  systems reported the lack of accurate and timely recording of financial  information as a problem for fiscal year 2004, compared with 15 of the 17  agencies reported with noncompliant systems in fiscal year 2003. 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, untimely recording of transactions during the fiscal year can  result in agencies making substantial efforts at fiscal year-end to perform  extensive manual financial statement preparation efforts that are  susceptible to error and increase the risk of misstatements. For example,  auditors for the U.S. Department of Agriculture (USDA) reported that the  department had to make about 1,800 closing adjustments, totaling billions  of dollars, to the financial statements at year-end. The auditors noted that  most of the adjustments they reviewed were necessary; however, having to  make numerous adjustments at year-end diminished the utility of the  financial data in assisting managers in administering USDA programs and  operations throughout the year.
In another case, the Department of Defense’s (DOD) auditors reported that  the Defense Finance and Accounting Service in Indianapolis made  $204.8 billion (excluding adjustments for intragovernmental transactions)  in unsupported accounting entries to prepare the fiscal year 2004 Army  General Fund financial statements. Since these adjustments were  unsupported, it was difficult for auditors to assess the accuracy of the  transactions and account balances, and was one of a number of financial  statement material weaknesses that led DOD auditors to disclaim an  opinion on DOD’s fiscal year 2004 financial statements.
section_title: Noncompliance with the SGL
paragraphs: As shown in figure 3, auditors for 11 of the 16 agencies with noncompliant  systems reported that the agencies’ systems did not comply with SGL  requirements for fiscal year 2004, compared with 10 of the 17 agencies  reported with noncompliant systems in fiscal year 2003. 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.
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 Health and Human  Services (HHS) found that approximately 1,550 nonstandard accounting  entries with an absolute value of almost $30 billion were recorded in HHS’  Program Support Center’s CORE accounting system to compensate for  noncompliance with the SGL. These nonstandard accounting entries were  recorded to correct for misstatements, to record reclassifications, and to  correct reported balances. The auditors noted that these amounts were  significantly less than those in fiscal year 2003, when approximately 2,300  nonstandard accounting entries were recorded with an absolute value of  about $41 billion.
In another instance, auditors for the U.S. Agency for International  Development (USAID) found that the agency’s overseas missions continue  to use the Mission Accounting and Control System (MACS) as their primary  financial system. MACS is a computer-based system that does not  substantially comply with FFMIA’s SGL requirement since it lacks the SGL  chart of accounts. Instead, the system uses transaction codes to record  entries; therefore, USAID cannot ensure that transactions are posted  properly and consistently from mission to mission.
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 3, auditors for 11 of the  16 agencies with noncompliant systems reported that these agencies had  problems complying with one or more federal accounting standards for  fiscal year 2004, compared with 11 of the 17 agencies reported with  noncompliant systems in fiscal year 2003. 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.
Auditors expressly reported compliance problems with 11 specific  accounting standards in fiscal year 2004. Of those standards, the 4 that  were most troublesome for agencies are Statement of Federal Financial  Accounting Standards (SFFAS) No. 1, Accounting for Selected Assets and  Liabilities; SFFAS No. 4, Managerial Cost Accounting Concepts and  Standards; SFFAS No. 6, Accounting for Property, Plant, and Equipment;  and SFFAS No. 7, Accounting for Revenue and Other Financing Sources.  In particular, SFFAS No. 4, which became effective in 1998, continues to be  difficult for federal managers to fully implement. For example, as auditor  for the Department of the Treasury’s Internal Revenue Service (IRS), we  reported that during fiscal year 2004 IRS continued to lack a cost  accounting system capable of accurately and timely tracking and reporting  the costs of its programs and projects. This condition also renders IRS  unable to produce reliable cost-based performance information. IRS  officials stated that they have the information necessary to determine the  cost of various activities, such as conducting investigations; however, this  information is widely distributed among a variety of information systems  that are not integrated and therefore cannot share data. This makes the  accumulation of cost information time consuming and labor intensive, and  thus such information is not readily available for decision-making  purposes. 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. The requirement for managerial cost  information has been in place since 1990 under the CFO Act and since  October 1997 as a federal accounting standard.
Similar system and process deficiencies also impede agency efforts to  accurately and timely track and report the cost of their PP&E in  accordance with SFFAS No. 6. For example, in its annual report on  reliability, as required by section 1008 of the National Defense  Authorization Act for Fiscal Year 2002, DOD acknowledged material  deficiencies that impede its ability to reliably report the cost and  depreciation of its general PP&E. Specifically, DOD disclosed a lack of (1) supporting documentation for general PP&E purchased many years  ago, (2) integrated acquisition and financial systems, and (3) systems  designed to capture the acquisition and modification costs and calculate  depreciation. The consequences of not complying with this accounting  standard are also similar: management lacks accurate and timely  information to adequately safeguard, account for, and control these assets.
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. 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. Accordingly, we have considered information security to  be a governmentwide high-risk area since 1997. As shown in figure 3,  auditors for 15 of the 16 agencies with noncompliant systems reported  security weaknesses in information systems to be a problem, compared  with all 17 of the agencies reported with noncompliant systems in fiscal  year 2003. Consistent with section 1008 of the National Defense  Authorization Act for Fiscal Year 2002, which requires DOD to minimize the  use of resources to develop, compile, report, and audit unreliable financial  statements, DOD auditors relied upon management’s assertion regarding  DOD’s lack of compliance with federal financial management systems  requirements. Accordingly, the DOD auditors limited their audit work and  did not report information security weaknesses in their disclaimer report  on DOD’s fiscal year 2004 financial statements. However, DOD  management reported that in addition to being unable to provide  information that is reliable, timely, and accurate, the department’s  information systems are potentially vulnerable to an information warfare  attack and reported this issue as a “significant deficiency” under the  reporting requirements of the Federal Information Security Management Act of 2002. The DOD auditors advised us that they agree with DOD  management’s acknowledgement of information security weaknesses.  Therefore, we have included DOD in the summary of agencies with  information security weaknesses. In addition, most of the agencies whose  auditors provided negative assurance of substantial compliance with  FFMIA still have computer security issues that need to be addressed by  agency management.
Unresolved information security weaknesses could adversely affect the  ability of agencies to produce accurate data for decision making and  financial reporting because such weaknesses could compromise the  reliability and availability of data that are recorded in or transmitted by an  agency’s financial management system. As a case in point, in fiscal year  2004, auditors for the Department of Veterans Affairs reported that  program and financial data continue to be at risk due to (1) the  implementation and enforcement of controls and oversight over access to  information systems, (2) the segregation of key duties and responsibilities  of employees, and (3) contingency planning. They concluded that these  weaknesses placed sensitive information, including financial data and  sensitive veteran medical and benefit information, at risk of inadvertent or  deliberate misuse, fraudulent use, improper disclosure, or destruction,  possibly without detection.
section_title: Key Initiatives That Impact Federal Financial Management Systems
paragraphs: As agencies move forward with initiatives to address FFMIA-related  problems, it is important that consideration be given to the numerous  governmentwide initiatives under way to address long-standing financial  management weaknesses. OMB continues to move forward on new  initiatives to enhance financial management and provide results-oriented  information in the federal government. Two notable developments in this  area in fiscal year 2004 were the realignment of responsibilities formerly  performed by JFMIP and its PMO and the development of financial  management lines of business. Furthermore, the continuing leadership and  support of Congress will be crucial to sustaining momentum in the  reformation of financial management in the federal government.
subsections: section_title: Changes to Federal Financial Management due to JFMIP Realignment
paragraphs: In a December 2004 memorandum, OMB announced a realignment of  JFMIP’s responsibilities for financial management policy and oversight in  the federal government. JFMIP was originally formed under the authority  of the Budget and Accounting Procedures Act of 1950 and was a joint and  cooperative undertaking of the General Accounting Office, the  Department of the Treasury, OMB, and the Office of Personnel  Management (OPM), working in cooperation with each other to improve  financial management practices in the federal government. Leadership and  program guidance was provided by the four principals of JFMIP—the  Comptroller General of the United States, the Secretary of the Treasury,  and the Directors of OMB and OPM. The PMO, managed by the Executive  Director of JFMIP using funds provided by the CFO Council (CFOC), was  established in 1999. The PMO was responsible for the testing and  certification of commercial off-the-shelf (COTS) core financial systems for  use by federal agencies and coordinating the development and publication  of functional requirements for financial management systems.
On December 1, 2004, in an effort to eliminate duplicative roles and  streamline financial management improvement efforts, the four principals  agreed to realign JFMIP’s responsibilities for financial management policy  and oversight. Specifically, under the announced realignment, the PMO will  now report to the chair of a new CFOC committee—the Financial Systems  Integration Committee (FSIC). Other JFMIP functions, such as issuing  systems requirements, were assumed by OMB’s Office of Federal Financial  Management (OFFM) and the CFOC. While JFMIP ceased to exist as a  separate organization, the Principals will continue to meet at their  discretion consistent with the 1950 act.
The newly established FSIC will be responsible for advising OFFM on  systems requirements and overseeing the PMO, which will continue  certifying core financial systems. The realignment recognizes that OMB  and the agencies have responsibility for all facets of financial management  systems and the work of the FSIC will be critical to the success of the  realignment.
section_title: Federal Financial Management Line of Business Initiative Continues to Evolve
paragraphs: In spring 2004, OMB launched task forces to conduct a governmentwide  analysis of five lines of business supporting the President’s Management  Agenda (PMA) goal to expand electronic government. The goal of the Line  of Business (LOB) initiative is to develop business-driven, common  solutions for five specific lines of business that extend across the entire  federal government. The five lines of business are financial management,  human resources management, grants, federal health architecture, and  case management. These lines of business share similar business  requirements and processes. In the spring of 2005, OMB added the  Information Technology Security LOB task force. OMB and designated  agency LOB 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. Driven from a business perspective rather than a  technology focus, the solutions are expected to address distinct business  improvements to enhance government’s performance and services for  citizens.
The financial management LOB goals are to achieve or enhance process  improvements and cost savings in the acquisition, development,  implementation, and operation of financial management systems through  shared services, joint procurements, consolidation, and other means;  promote seamless data exchange between and among federal agencies;  provide for the standardization of business processes and data elements;  and strengthen internal controls through real-time integration of core  financial and subsidiary systems. To achieve these goals, OMB and the  associated agency task forces have focused on developing Centers of  Excellence (COE).
OMB officials stated that the purpose of developing COEs is to reduce the  number of systems that each individual agency must support, promote  standardization, and reduce the duplication of efforts. COEs can also  create economies of scale by consolidating selected financial functions into  a single agency or center. The economies of scale come from being able to  use fewer staff to achieve the same results. For example, major software  vendors often issue a software patch daily that must be tested and  installed. A single COE would be able to test and update multiple agencies’  systems rather than having multiple agencies each performing the same  update.
Officials at OMB stated that the financial management LOB continues to  evolve with four agencies being selected to become COEs through the  fiscal year 2006 budgetary process. In addition, OMB led the development  of a due diligence checklist to assess an agency’s capacity to be a COE. This  checklist documents whether an agency can perform specific functions,  has proper certification and accreditation, and uses a PMO-certified  system. OMB has plans to develop additional tools and guidance to  facilitate the COE concept. For example, OMB is considering a service level  agreement template to provide agencies with standard contract clauses and  will require agencies to document and justify the competition and selection  process.
OMB officials stated that the policies and procedures established through  the financial management LOB will help keep federal financial  management systems current; improve business processes; and with fewer  systems in operation, facilitate vendor contracts. We have long supported  and called for initiatives to standardize and streamline common financial  systems, which may not only reduce costs but, if done correctly, can  dramatically improve accountability. We have ongoing work to analyze the  financial management LOB.
section_title: DOD Continues to Struggle to Enhance Financial Management
paragraphs: As we have stated in our prior reports, DOD’s financial management and  related business operations continue to cause substantial waste and  inefficiency, have an adverse impact on mission performance, and result in  the lack of adequate transparency and appropriate accountability across all  major business areas. Of the 25 areas on GAO’s governmentwide high-risk  list, 8 are DOD-specific program areas related to key business functions,  and the department shares responsibility for 6 other high-risk areas that are  governmentwide in scope. These problems preclude the department from  producing reliable and timely data on its results of operations and  accurately reporting on its trillions of dollars of assets and liabilities.  Additionally, DOD’s stovepiped, duplicative, and nonintegrated systems  environment contributes to these operational problems and costs the  American taxpayers billions of dollars each year. For fiscal year 2005, the  department requested approximately $13 billion to operate, maintain, and  modernize its reported 4,150 business systems.
Overhauling the financial management and business operations of one of  the largest and most complex organizations in the world represents a  daunting challenge. In an effort to better manage DOD’s resources, the  Secretary of Defense has appropriately placed a high priority on  transforming key business processes to improve their efficiency and  effectiveness in supporting the department’s military mission. The Business  Management Modernization Program is the department’s business  transformation initiative; it encompasses defense policies, processes,  people, and systems that guide, perform, or support all aspects of business  management—including development and implementation of the business  enterprise architecture or modernization blueprint. The Secretary of  Defense has estimated that improving business operations of the  department could save 5 percent of DOD’s annual budget, which equates to  a savings of over $20 billion a year.
Transformation of DOD’s business systems and operations is critical to the  department having the ability to provide Congress and DOD management  with accurate and timely information for use in the decision-making  process. Although the Secretary of Defense and several key agency officials  have shown commitment to transformation, little tangible evidence of  significant broad-based and sustainable improvements has been seen in  DOD’s business operations. For DOD to successfully transform its business  operations, it will need a comprehensive and integrated business  transformation plan; people with the skills, responsibility, and authority to  implement the plan; an effective process and related tools, such as a  business enterprise architecture; and results-oriented performance  measures that link institutional, unit, and individual personnel goals and  expectations to promote accountability for results.
section_title: Continuing Congressional Interest Helps Provide Accountability
paragraphs: The leadership and support demonstrated by Congress has been essential  in the reformation 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 for stimulating  change needed to achieve sound financial systems management. For  example, in November 2002, Congress enacted the Accountability of Tax  Dollars Act to extend the financial statements audit requirements of the  CFO Act to additional federal agencies. Then, in October 2004, Congress  added DHS to the list of CFO Act agencies and required DHS to obtain an  audit opinion on its internal controls. In addition, DHS will be subject to  FFMIA for fiscal year 2005 and its auditors will be required to report any  FFMIA-related systems deficiencies or weaknesses identified. 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. 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.
The continued attention by Congress to these issues is crucial in sustaining  momentum for financial management reform in the federal government.  Toward this end, the Subcommittee on Government Management, Finance  and Accountability, House Committee on Government Reform is currently  examining the consolidation of existing federal financial management laws  into legislation that would simplify, streamline, and enhance the laws  governing agency financial management. These laws were primarily  designed to increase financial accountability, enhance agency strategic  focus, promote sound management through effective internal control,  provide for effective information technology deployment, facilitate debt  collection activities, and encourage better asset management. These are all  interrelated management concepts, which the subcommittee intends to  bring together under a single unified statute so that rules and regulations  are clearly delineated for federal managers, which will enhance  accountability for the federal government.
section_title: Conclusions
paragraphs: Continuing problems with agencies’ financial systems make it difficult for  agencies to produce reliable, useful, and timely financial information on an  ongoing basis for day-to-day management. While the number of agencies  receiving unqualified or “clean” opinions on their financial statements has  increased since fiscal year 1997, the continued widespread noncompliance  with FFMIA shows that agencies have a long way to go before having  systems, processes, and controls able to routinely generate reliable, useful,  and timely information.
As shown by the FFMIA-related problems reported in agency audit reports,  federal financial management systems are not currently able to provide  federal managers with the financial data needed for effective day-to-day  management of their programs or for efficient external reporting. 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 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. Such a determination will require auditors to  perform a more thorough examination of their agencies’ systems. 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 we have interviewed expressed  concerns about providing positive assurance when reporting on agency  systems’ FFMIA compliance because of their belief that the meaning of  substantial compliance needs to be clarified.
The size and complexity of the federal government presents a formidable  management challenge to modernize and improve its financial management  systems that will require continued attention from the highest levels of  government. We recognize that it will take time, investment, and sustained  emphasis on correcting 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.
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 commends DOL’s auditors for  performing the additional level of audit work needed to provide positive  assurance of compliance with FFMIA and encourages similar efforts at  other agencies, OMB stated that requiring a statement of positive assurance  for all agencies would prove only marginally useful. OMB stated that the  framework of performance standards established under the PMA, as well  as the ongoing efforts to update policy guidance, such as the internal  control requirements in OMB Circular No. A-123, provide alternative  mechanisms for evaluating FFMIA compliance. The PMA and Circular No.  A-123 initiatives are two examples of current OMB efforts intended to  complement FFMIA’s goal of creating the full range of information needed  for day-to-day management. From OMB’s perspective, these efforts  together with existing audit processes can provide an accurate assessment  of substantial compliance, identify deficiencies, and suggest corrective  actions.
While we agree that the PMA and OMB Circular No. A-123 initiatives are  helping to drive improvements, auditors need to consider other aspects of  financial management systems 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  review by independent auditors only in limited circumstances. From our  perspective, an opinion by an independent auditor on FFMIA compliance  would confirm that an agency’s systems substantially met the requirements  of FFMIA and provide additional confidence in the information provided as  a result of the PMA 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 standards incorporated in the PMA 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 we interviewed expressed a need for  clarification regarding the meaning of substantial compliance.
OMB also provided additional oral 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  Secretary of Homeland Security, the heads of the 23 CFO Act agencies in  our review, and agency CFOs and IGs. 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 Sally E. Thompson,  Director, Financial Management and Assurance, who may be reached at  (202) 512-2600 or by e-mail at thompsons@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. Key  contributors to this report are listed in appendix VIII.
section_title: Requirements and Standards Supporting Federal Financial Management
subsections: section_title: Financial Management Systems Requirements
paragraphs: The policies and standards prescribed for executive agencies to follow in  developing, operating, evaluating, and reporting on financial management  systems are defined in 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. Appendix II lists the  federal financial management systems requirements published to date.  Figure 4 is the current model that illustrates how these systems interrelate  in an agency’s overall systems architecture.
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.  The PMO’s certification process, however, 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, according to the PMO, 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 PMO-certified core financial  management systems software and the validity and completeness of data  from feeder systems.
section_title: Federal Accounting Standards
paragraphs: The Federal Accounting Standards Advisory Board (FASAB) promulgates  federal accounting standards that agency Chief Financial Officers use in  developing financial management systems and preparing financial  statements. FASAB develops the appropriate accounting standards after  considering the financial and budgetary information needs of Congress,  executive agencies, and other users of federal financial information and  comments from the public. FASAB forwards the standards to the three  sponsors—the Comptroller General, the Secretary of the Treasury, and the  Director of OMB—for a 90-day review. If there are no objections during the  review period, the standards are considered final, and FASAB publishes  them on its Web site and in print.
The American Institute of Certified Public Accountants has recognized the  federal accounting standards promulgated by FASAB as being generally  accepted accounting principles for the federal government. This  recognition enhances the acceptability of the standards, which form the  foundation for preparing consistent and meaningful financial statements  both for individual agencies and the government as a whole. Currently,  there are 29 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’s 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 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 (FIA)), to  strengthen internal controls and accounting systems throughout the federal  government, among other purposes. Issued pursuant to FIA, the  Comptroller General’s Standards for Internal Control in the Federal  Government provides standards that are directed at helping agency  managers implement effective internal control, an integral part of  improving financial management systems. Internal control is a major part  of managing an organization and comprises the plans, methods, and  procedures used to meet missions, goals, and objectives. In summary,  internal control, which under OMB’s guidance for FIA is synonymous with  management control, helps government program managers achieve desired  results through effective stewardship of public resources.
In December 2004, OMB revised Circular No. A-123, Management’s  Responsibility for Internal Control, to strengthen the requirements for  conducting management’s assessment of internal control over financial  reporting. The circular emphasized management’s responsibility for  establishing and maintaining internal control to achieve the objectives of  effective and efficient operations, reliable financial reporting, and  compliance with laws and regulations.
Effective internal control also assists in managing the changes due to  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 objectives are being achieved.
section_title: Publications in the Federal Financial Management Systems Requirements Series
subsections: section_title: OFFM-NO-0206 Insurance System Requirements (Exposure Draft)
section_title: Statements of Federal Financial Accounting Concepts, Standards, Interpretations, and Technical Bulletins
paragraphs: SFFAC No. 1Objectives of Federal Financial Reporting SFFAC No. 3 Management’s Discussion and Analysis SFFAC No. 4 Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government  SFFAS No. 1 Accounting for Selected Assets and Liabilities SFFAS No. 2 Accounting for Direct Loans and Loan Guarantees SFFAS No. 3 Accounting for Inventory and Related Property SFFAS No. 4 Managerial Cost Accounting Concepts and Standards SFFAS No. 5 Accounting for Liabilities of the Federal Government SFFAS No. 6 Accounting for Property, Plant, and Equipment SFFAS No. 7 Accounting for Revenue and Other Financing Sources SFFAS No. 8 Supplementary Stewardship Reporting SFFAS No. 9 Deferral of the Effective Date of Managerial Cost Accounting Standards for the Federal Government in  SFFAS No. 4 SFFAS No. 10 Accounting for Internal Use Software SFFAS No. 11 Amendments to Accounting for Property, Plant, and Equipment—Definitional Changes SFFAS No. 12 Recognition of Contingent Liabilities Arising from Litigation: An Amendment of SFFAS No. 5, Accounting  for Liabilities of the Federal Government SFFAS No. 13 Deferral of Paragraph 65-2—Material Revenue-Related Transactions Disclosures SFFAS No. 14 Amendments to Deferred Maintenance Reporting SFFAS No. 15 Management’s Discussion and Analysis SFFAS No. 16 Amendments to Accounting for Property, Plant, and Equipment SFFAS No. 17 Accounting for Social Insurance SFFAS No. 18 Amendments to Accounting Standards for Direct Loans and Loan Guarantees in SFFAS No. 2 SFFAS No. 19 Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in SFFAS No. 2 2003 SFFAS No. 20 Elimination of Certain Disclosures Related to Tax Revenue Transactions by the Internal Revenue  Service, Customs, and Others SFFAS No. 21 Reporting Corrections of Errors and Changes in Accounting Principles SFFAS No. 22 Change in Certain Requirements for Reconciling Obligations and Net Cost of Operations SFFAS No. 23 Eliminating the Category National Defense Property, Plant, and Equipment SFFAS No. 24 Selected Standards for the Consolidated Financial Report of the United States Government SFFAS No. 25 Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessment  (amended)
SFFAS No. 26 Presentation of Significant Assumptions for the Statement of Social Insurance: Amending SFFAS 25  (amended)
SFFAS No. 27 Identifying and Reporting Earmarked Funds SFFAS No. 28 Deferral of the Effective Date of Reclassification of the Statement of Social Insurance: Amending SFFAS  25 and 26 SFFAS No. 29 Heritage Assets and Stewardship Land No. 2 Accounting for Treasury Judgment Fund Transactions No. 3 Measurement Date for Pension and Retirement Health Care Liabilities No. 4 Accounting for Pension Payments in Excess of Pension Expense No. 5 Recognition by Recipient Entities of Receivable Nonexchange Revenue No. 6 Accounting for Imputed Intra-departmental Costs TB 2000-1 Purpose and Scope of FASAB Technical Bulletins and Procedures for Issuance TB 2002-1 Assigning to Component Entities Costs and Liabilities That Result From Legal Claims Against the Federal Government TB 2002-2 Disclosures Required by Paragraph 79(g) of SFFAS 7 TB 2003-1 Certain Questions and Answers Related to the Homeland Security Act of 2002 TR-1 Audit Legal Representation Letter Guidance TR-2 Determining Probable and Reasonably Estimable for Environmental Liabilities in the Federal Government March 15, 1998 TR-3 Preparing and Auditing Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform Act July 31, 1999 TR-4 Reporting on Non-Valued Seized and Forfeited Property TR-5 Implementation Guidance on SFFAS No. 10: Accounting for Internal Use Software TR-6 Preparing Estimates for Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform Act  (Amendments to TR-3)
section_title: Checklists for Reviewing Systems under the Federal Financial Management Improvement Act
subsections: section_title: GAO-05-225G Core Financial System Requirements
section_title: Comments from the Office of Management and Budget
section_title: Auditors’ FFMIA Determinations for Fiscal Year 2004
section_title: 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;  W. Stephen Lowrey; and Chanetta R. Reed made key contributions to this  report.