CFO Act of 1990: Driving the Transformation of Federal Financial Management
Published: 2005-11-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1990, the Chief Financial Officers (CFO) Act, heralded as the most comprehensive financial management reform legislation in 40 years, was enacted. The Act's goal is to improve management through reliable, useful, and timely financial and performance information for day-to-day decisionmaking and accountability. This testimony outlines the legislative history of the CFO Act, and its key elements, progress to date in implementing the Act, and the challenges for the future. Prior to passage of the CFO Act, the seemingly never ending disclosures of fraud, waste, abuse, and mismanagement in federal programs painted a picture of a government unable to manage its programs, protect its assets, or provide taxpayers with the effective and economical services they expect. The enactment of the CFO Act represented a broad-based recognition that federal financial management was in great need of fundamental reform. The Act mandated a financial management leadership structure; required the preparation and audit of annual financial statements; called for modernized financial management systems and strengthened internal control; and required the systematic measurement of performance, the development of cost information, and the integration of program, budget, and financial systems.
section_title: What GAO Found
paragraphs: In the 15 years since the enactment of the CFO Act, the federal government has made substantial progress in strengthening financial management. The past 3 administrations have all made financial management reform a priority. Improved financial management has been one of the cornerstones of the President's Management Agenda from the outset of the current administration. There has been a clear cultural change in how financial management is viewed and carried out in the agencies and a recognition of the value and need for good financial management throughout government, which was not the case in 1990. There are now qualified CFOs across government, who bring to the job proven track records in financial management. Financial management systems and internal control have been strengthened. Generally accepted government accounting standards have been developed. For fiscal year 2005, 18 of 24 CFO agencies received clean audit opinions on their financial statements, up from just 6 in fiscal year 1996. This year's audited financial statements were issued in just 1 and 1/2 months after the close of the fiscal year as opposed to 5 months, which is the deadline in the Act. Agencies are also now preparing performance and accountability reports that tie together financial and performance information. Though not yet auditable, primarily because of problems in the Department of Defense, comprehensive annual consolidated financial statements are being issued in 2 and 1/2 months as opposed to the 6-month timeframe allowed in the Act. While there has been marked progress in the past 15 years and the CFO Act has proven itself as the foundation for financial accountability, GAO has identified five principal challenges to fully realizing the world-class financial management anticipated by the CFO Act. The need to: (1) modernize and integrate financial management systems to provide a complete range of financial and cost information needed for accountability, performance reporting, and decision making, with special emphasis on the Department of Defense, which has deeply-rooted systems problems, (2) build a more analytic financial management workforce to support program managers and decisionmakers, (3) solve long-standing internal control weaknesses, (4) enhance financial reporting to provide a complete picture of the federal government's overall performance, financial condition, and future fiscal outlook, and (5) ensure that financial management reform is sustained given the leadership changes that occur at the end of any administration and the long-term nature of many of the ongoing reform initiatives. The continuing strong support of the Congress has been a catalyst to the important progress that has already taken place and will be essential going forward.

section_title: Letter
paragraphs: I am pleased to be here today on the 15th anniversary of the enactment of  the Chief Financial Officers Act of 1990 (CFO Act) to discuss the effect of  this groundbreaking legislation as well as the challenges that still remain.  Having worked closely with the members of Congress on passage of the  CFO Act, I can attest first hand that while many challenges still exist, the  state of federal financial management has come a long way since 1990.  Nearly all the CFO Act agencies have made marked improvements in  financial management and have shown that issuing timely audited  financial statements can become a routine part of doing business at the  federal level. At the same time, there are opportunities to take federal  financial management to the next level, which will be important as the  federal government faces difficult fiscal challenges that will require  reliable financial and performance information to support timely decisions  on spending, and pressures to address fraud, waste, abuse, and  mismanagement will only intensify. Also, certain material weaknesses in  internal control and in selected accounting and financial reporting  practices have continued to prevent the GAO from being able to issue an  opinion on the consolidated financial statements of the U.S. government.  These weaknesses which hinder management’s ability to manage day-to- day operations, most notably at the Department of Defense, need to be  resolved.
Today, I would like to   highlight the legislative history of the CFO Act;   summarize the key elements of the CFO Act;   outline progress made to date in implementing the CFO Act; and   provide our views on the challenges remaining.
subsections: section_title: CFO Act Enacted to Address Longstanding Problems
paragraphs: Prior to passage of the CFO Act in 1990, the seemingly never ending  disclosures of fraud, waste, abuse, and mismanagement in federal  programs painted a picture of a government unable to manage its  programs, protect its assets, or provide taxpayers with the effective and  economical services they expect. As the Comptroller General pointed out  around the time the CFO Act was passed, the problems that existed were  not limited to a few agencies or a few programs; rather, all of the major  agencies had serious problems. For years, GAO and the Inspectors General  had reported a litany of problems that resulted in wasteful spending, poor  management, and losses totaling billions of dollars. In some cases, the  government’s ability to carry out crucial programs had been severely  hampered.
The financial management environment was in such disarray that not only  were audited annual financial statements not required, most in the federal  financial management community did not even see the value of annual  financial reporting. The need for federal financial statements was an area  of major disagreement. Budgeting was what financial management was all  about, and accountability for how the money was being spent was not the  priority. Federal managers in the government were more concerned with  the budget and did not focus on improved financial management.
Concerned about the ever-growing problems in federal financial  management and the need for a more integrated, comprehensive, and  systematic approach to reform, in 1985 the Comptroller General issued a  two-volume report entitled, Managing the Cost of Government: Building  an Effective Financial Management Structure. This report laid out the  nature and scope of the problem and provided the conceptual framework  for the reforms needed to improve the federal financial management and  therefore, manage the cost of government. Problems included the poor  quality of financial management information and antiquated financial  management systems, with recommended reforms such as strengthened  accounting, auditing, and financial reporting and the systematic  measurement of performance. In addition, GAO and the Office of  Management and Budget (OMB) conducted separate studies of “high risk”  programs that demonstrated breakdowns in internal control affecting  hundreds of billions of dollars. Since January 1990, GAO has designated  certain federal programs and operations as high risk because of their  greater vulnerabilities to fraud, waste, abuse, and mismanagement. The  increased awareness of the nature and extent of high-risk programs  further bolstered the need for broad-based congressional action.
While the federal government had not made concerted progress in  reforming financial management, state and local governments had moved  beyond the federal government in this area because of key factors  including federal legislation such as the Single Audit Act of 1984. The  Single Audit Act of 1984 established financial audit requirements for state  and local governments that receive federal financial assistance in excess  of certain dollar thresholds in any fiscal year. The Single Audit Act also  included a requirement for independent auditors to review whether state  and local governments have adequate internal control over federal funds.  The need to comply with this law prompted states and local governments  to focus on improving financial management and accountability. In the  1980s, many states began producing financial reports based on generally  accepted accounting principles to provide a more complete picture of  their financial situation. Consequently, in 1990, many in the financial  management community believed that state and local governments were  ahead of the federal government.
To address the underlying problems that plagued federal financial  management in March 1986, Senator William Roth introduced S.2230, the  Federal Management Reorganization and Cost Control Act of 1986. Over  the ensuing 4½ years, the concepts in S.2230 were refined and debated.  What resulted was the CFO Act of 1990. The CFO Act, with bipartisan and  bi-cameral support, had as its principle sponsors Senators John Glenn and  William Roth and Representatives John Conyers and Frank Horton. Signed  into law by President George H.W. Bush on November 15, 1990, the CFO  Act was the most comprehensive and far-reaching financial management  improvement legislation since the Budget and Accounting Procedures Act  of 1950. The CFO Act established a leadership structure, provided for long- range planning, required audited financial statements, and strengthened  accountability reporting.
The CFO Act was the beginning of a series of management reform  legislation to improve the general and financial management of the federal  government, and laid the foundation for other key legislative reforms that  followed a common thread of increased accountability and better  management practices. The first legislation that followed the CFO Act was  the Government Performance and Results Act of 1993 (GPRA), which  requires agencies to develop strategic plans, set performance goals, and  report annually on actual performance compared to goals. GPRA was  followed by the Government Management Reform Act of 1994 (GMRA),  which made permanent the pilot program in the CFO Act for annual  audited agency-level financial statements, expanded this requirement to all  CFO Act agencies, and established a requirement for the preparation and  audit of governmentwide consolidated financial statements. The Federal  Financial Management Improvement Act of 1996 (FFMIA) built on the  foundation laid by the CFO Act by reflecting the need for CFO Act  agencies to have systems that can generate reliable, useful, and timely  information with which to make fully informed decisions and to ensure  accountability on an ongoing basis. The Clinger-Cohen Act of 1996 (also  known as the Information Technology Management Reform Act of 1996)  sets forth a variety of initiatives to support better decision making for  capital investments in information technology, which has led to the  development of the Federal Enterprise Architecture and better-informed  capital investment and control processes within agencies and across  government. The Accountability of Tax Dollars Act of 2002 (ATDA)  required most executive agencies that are not otherwise required, or  exempted by OMB, to prepare annual audited financial statements and to  submit such statements to Congress and the Director of OMB. Lastly, the  Department of Homeland Security Financial Accountability Act of 2004  added the Department of Homeland Security (DHS) to the list of CFO Act  agencies.
As shown in figure 1, if successfully implemented, these reforms provide a  solid basis for improving accountability of government programs and  operations as well as routinely producing valuable cost and operating  performance information.
section_title: The CFO Act Mandated Numerous Changes
paragraphs: The enactment of the CFO Act represented a broad-based recognition that  federal financial management was in great need of fundamental reform.  Key elements of the CFO Act require centralized financial management  leadership, both governmentwide and at the agency level, and as expanded  by GMRA, agency-level and governmentwide annual audited financial  statements. To facilitate stewardship and accountability at executive  branch agencies, the CFO Act designated CFOs with broad responsibility  for modernizing financial management systems, financial reporting, asset  management, and strengthened internal control practices. The systematic  measurement of performance, the development of cost information, and  the integration of financial management systems are some of the financial  management practices called for by the CFO Act that, if properly  implemented, will significantly improve financial management throughout  the federal government. Furthermore, the Act statutorily designates the  24 executive departments and agencies covered. These 24 departments  and agencies represent 95 percent of net outlays in fiscal year 2004.
Strong centralized leadership is essential to solving the government’s long- standing financial management problems. The CFO Act provided for such  leadership by giving OMB broad new authority and responsibility for  directing federal financial management, modernizing the government’s  financial management systems, strengthening financial reporting, and  internal control. The CFO Act also created a new position in OMB, the  Deputy Director for Management, who serves as the government’s chief  official responsible for financial management. In addition, the CFO Act  established a new Office of Federal Financial Management (OFFM) in  OMB to carry out the government-wide financial management initiatives  and responsibilities. To head this office, the CFO Act established the  position of Controller, an individual who must possess demonstrated  ability and practical experience in accounting, financial management, and  financial systems. This individual has responsibility for handling the day- to-day operations of OFFM to ensure that financial operations are being  properly carried out government-wide.
Executive-level leadership is a critical success factor for building a  foundation of control and accountability that supports external reporting  and performance management, which is needed to achieve the goals of the  CFO Act. For this reason, an agency CFO must be a key figure in an  agency’s top management team. The CFO Act stipulates that the CFO is a  presidential appointee or appointed by the agency head and is assisted by  a Deputy Chief Financial Officer. Both the CFO and the Deputy CFO  generally must possess demonstrated ability in accounting, budget  execution, financial and management analysis, systems development, and  practical experience in financial management practices in large  governmental or business entities. Among the CFO’s responsibilities are  developing and maintaining integrated accounting and financial  management systems, directing, managing, and providing policy guidance  and oversight of all agency financial management personnel, activities, and  operations, and overseeing the recruitment, selection, and training of  personnel to carry out agency financial management functions. In  addition, each CFO for the 24 agencies serves on the Chief Financial  Officers Council, which regularly meets to advise and coordinate the  activities of the agencies of its members on such matters as consolidation  and modernization of financial systems. The CFO Act created the council  and specified that the council will be chaired by OMB’s Deputy Director  for Management. Other members will be OMB’s Controller and the  Department of the Treasury’s Fiscal Assistant Secretary.
The CFO Act, as expanded by GMRA, required that annual financial  statements be prepared and audited for each CFO Act agency covering all  accounts and associated activities of each office, bureau, and activity of  the agency. The CFO Act also requires that the financial statements  prepared pursuant to the act be audited in accordance with applicable  generally accepted government auditing standards. These audits are the  responsibility of the Inspectors General, but may be conducted by, and at  the discretion of, the Comptroller General, in lieu of the Inspectors  General. Inspectors General may contract with independent public  accountants to conduct financial statement audits.
section_title: Important Progress Made to Achieving CFO Act Goals
paragraphs: The federal government has made substantial progress in financial  management in the 15 years since the enactment of the CFO Act. If I were  to summarize in just a few words the environment in 2005 as compared to  1990, financial management has gone from the backroom to the  boardroom.
Achieving Cultural Change—Perhaps most importantly, we have seen  true cultural change in how financial management is viewed, this has been  accomplished through a lot of hard work by OMB and the agencies and  continued strong support and oversight by Congress. As I previously  discussed, federal financial management had suffered from decades of  neglect and an organizational culture that for the most part, had not fully  recognized the value of good financial management—as a means of  ensuring accountability and sound management.
Although the views about how an organization can change its culture vary  considerably, the organizations we and others have studied identified  leadership as the most important factor in successfully making cultural  changes. Top management must be totally committed in both words and  deeds to changing the culture and the fundamental way that business is  conducted. At the top level, federal financial management reform has  gained momentum through the committed support of top federal leaders.  For example, improved financial performance is one of the six  governmentwide initiatives in the President’s Management Agenda (PMA).  Under this initiative, agency CFOs share responsibility—both individually  and through the efforts of the CFO Council—for improving the financial  performance of the government. To achieve the goals of the financial  performance initiative, agencies must now have more timely and reliable  financial information, improve the integrity of their financial activities, and  have sound and dependable financial systems. In conjunction with the  other governmentwide program initiatives of the PMA, the federal  government is improving its financial reporting practices and overall  accountability.
Establishing a Governmentwide Leadership Structure—As established  by the CFO Act, OFFM, the OMB organization with governmentwide  responsibility for federal financial management, has undertaken a number  of initiatives related to improving financial management capabilities  ranging from requiring the use of commercial-off-the-shelf financial  systems to the promotion of cost accounting. In addition to assessing  agency financial performance for the PMA, OFFM has issued financial  management guidance to agencies. Some of OFFM’s initiatives are in  collaboration with the CFO Council and are broad-based attempts to  reform financial management operations across the federal government.  While reforming federal financial management is an undertaking of  tremendous complexity, it presents great opportunities for improvements  in financial management and related business operations. In their efforts  to continue financial management improvement, OFFM has recently  collaborated with the CFO Council on initiatives in the following areas:  internal control,  full implementation of FFMIA,    asset management,   improper payments, and    control over federal charge cards  Selecting Qualified CFOs—The CFO Act established CFOs at the major  departments and agencies and established minimum qualifications for  CFOs. Measured in terms of coming to the job with a proven track record  in financial management, the background of individuals selected for these  positions has improved tremendously over the past 15 years. For example,  the CFO at the Department of Labor has held a range of CFO and CFO- related positions in the private sector and government over a 30-year  career that included serving as Treasury’s CFO in a previous  administration. Testifying with me today, Dr. Linda M. Combs, the  Controller at OMB, brings impeccable credentials and extensive  experience to the federal government’s financial management leadership  and policy-setting organization and exemplifies today’s federal CFO.
Improving Financial Management Systems and Operations—Since 1990,  progress has been made towards improving financial management systems  in the federal government. Improved agency financial management  systems and operations are essential to support management decision  making and results-oriented activities as addressed by the CFO Act. At a  minimum, federal managers must have financial information that is  reliable, useful, and timely to support this effort. Federal financial  management systems requirements for the core financial system,  managerial cost system, and 12 other administrative and programmatic  systems, such as grants, property, revenue, travel, and loans, which are  part of an overall financial management system, have been developed.  Beginning in 1999, OMB required agencies to purchase commercial-off-the- shelf (COTS) software that had been tested and certified through the Joint  Financial Management Improvement Program (JFMIP) Program  Management Office against the systems requirements that I just  mentioned as well as the standard general ledger issued by the  Department of Treasury. With these requirements, the federal government  has better defined the functionality needed in its financial management  systems which has helped the vendor community understand federal  agencies needs.  Concurrently, there has been an evolving realization that  agencies need to change their business processes to adapt to the practices  embedded in commercially available software versus modifying the  software to accommodate their existing practices.
Looking at financial management systems from another perspective, the  federal government has acted on opportunities to consolidate operations.  For example, a number of agencies perform accounting or business  operations on behalf of others, consequently, the number of agencies  processing payroll has been dramatically reduced from 22 to 4. According  to OMB, through these initiatives, millions of dollars will be saved through  shared resources and processes and by modernizing on a cross-agency,  governmentwide basis. Further, OMB had established agency task forces  that focused on developing Centers of Excellence to (1) reduce the  number of systems that each individual agency must support, (2) promote  standardization, and (3) reduce the duplication of efforts. If we were to  compare the state of financial management systems today to where  agencies were 15 years ago, the evolution has been dramatic.  On the other  hand, systems are at the top of our list in terms of remaining challenges for  the future.   As I will discuss later, agencies continue to struggle with  developing and implementing integrated systems that achieve expected  functionality within cost and timeliness goals.
Preparing Auditable Financial Statements—Most CFO Act agencies have  obtained clean or unqualified audit opinions on their financial statements.
Unqualified audit opinion for CFO Act agencies financial statements have  grown from 6 in fiscal year 1996 to 18 in fiscal year 2005. Improvements in  timeliness have been even more dramatic this year.  Agencies were able to  issue their audited financial statements within the accelerated reporting  time frame—all of the 24 CFO Act agencies issued their audited financial  statements by the November 15, 2005 deadline, set by OMB, just 45 days  after the close of the fiscal year. The CFO Act calls for agency financial  statements to be issued no later than March 31st, which is 6 months after  the fiscal year end, and in the earlier years some agencies were unable to  meet that timeframe.  OMB has incrementally accelerated the financial  statement issuance date to address the timeliness of the information  provided by the financial statements.  Just a few years ago, most  considered this accelerated timeframe unachievable. While the increase in  unqualified and timely opinions is noteworthy, we are concerned about the  number of CFO Act agencies that have had to restate certain of their  financial statements to correct errors.  I will discuss these issues in more  detail later in this statement.
Preparing Performance and Accountability Reports—Another clear  indication of progress to date is the preparation of the annual Performance  and Accountability Reports (PAR) by CFO Act agencies. The PARs provide  financial and performance information that enables the President, the  Congress, and the public to assess the performance of an agency relative  to its mission and to demonstrate accountability. These reports summarize  program, management, and financial performance data, including the  Annual Performance Reports required by GPRA with annual financial  statements and other reports, such as agencies’ assurances on internal  control, accountability reports by agency heads and Inspectors’ General  assessments of agencies’ most serious management and performance  challenges. These reports serve as the federal government’s report to the  American public and provide an accounting for the return on the  taxpayers’ investment. This information is also provided to decision - makers who are interested in CFO Act agencies’ performance, such as  OMB and the Congress. Furthermore, the Association of Government  Accountants recognizes federal agencies for their high-quality  performance and accountability reports by its annual awarding of the  Certificate of Excellence in Accountability Reporting (CEAR). For the  most recent evaluation of 21 agencies performance and accountability  reports, 10 agencies were recognized for achieving excellence in their  reports. Of particular note, the Social Security Administration and  Department of Labor have received the CEAR award for the past 7 and   5 years, respectively. As part of our effort to be a model agency, GAO has  been awarded the CEAR award since it first applied in 2001 and for the  19th consecutive year, independent auditors gave our financial statements  an unqualified opinion with no material weaknesses and no major  compliance problems.
Strengthening Internal Control—Accountability is part of the  organizational culture that goes well beyond receiving an unqualified audit  opinion; the underlying premise is that agencies must become more  results-oriented and focus on internal control. In December 2004, OMB  revised its Circular No. A-123, Management’s Responsibility for Internal  Control, to provide guidance to federal managers on improving the  accountability and effectiveness of federal programs and operations by  establishing, assessing, correcting, and reporting on management controls.  Requiring federal managers, at the executive level, to focus on internal  control demonstrates a renewed emphasis on identifying and addressing  internal control weaknesses. Based on our 2005 assessment of high-risk  programs, three programs previously designated as high-risk, largely due  to financial management weaknesses, were removed from the list. The  Department of Education’s Student Financial Aid Programs, the Federal  Aviation Administration’s Financial Management, and the Department of  Agriculture’s Forest Service Financial Management all sustained  improvements in financial management and internal control weaknesses  and thus warranted removal. Further, as I testified before this  subcommittee earlier this year, thousands of internal control problems  were identified and fixed over the past two decades, especially at the  lower levels where internal control assessments were performed and  managers could take focused actions to fix relatively simple problems. But  again as I will discuss later, this type of work is far from complete.
Developing New Accounting Standards—Another definitive example of  progress made to date as well as a critical component of improved  financial performance is the establishment of the Federal Accounting  Standards Advisory Board (FASAB). In conjunction with the passage of  the CFO Act, the OMB Director, Secretary of the Treasury, and the  Comptroller General established FASAB to develop accounting standards  and principles for the newly required financial statements and other  federal entities. FASAB is comprised of a 10-member advisory board of   4 knowledgeable individuals from government and 6 non-federal members  selected from the general financial community, the accounting and  auditing community, and academia to promulgate proposed accounting  standards designed to meet the needs of federal agencies and other users  of federal financial information. The mission of FASAB is to develop  accounting standards after considering the financial and budgetary  information needs of congressional oversight groups, executive agencies,  and other users. These accounting and reporting standards are essential  for public accountability and for an efficient and effective functioning of  our democratic system of government. To date, FASAB has issued   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. The standards developed  by FASAB have been recognized by the American Institute of Certified  Public Accountants as generally accepted accounting standards for federal  entities.
section_title: Challenges Remain to Fulfilling the Objectives of the CFO Act
paragraphs: While there has been marked progress in financial management, as I have  just highlighted, a number of challenges still remain. The principal  challenges remaining are (1) modernizing financial management systems,  (2) improving financial reporting, (3) building a financial management  workforce for the future, (4) addressing long-standing internal control  weaknesses, and (5) ensuring the continuity of financial management  reform. Fully meeting these challenges will enable the federal government  to provide the world-class financial management anticipated by the CFO  Act. While there continues to be much focus on the agency and  governmentwide audit opinions, getting a clean audit opinion, though  important in itself, is not the end goal. The end goal is the establishment of  a fully functioning CFO operation that includes (1) modern financial  management systems that provide, reliable, timely, and useful information  to support day-to-day decision-making and oversight and for the  systematic measurement of performance; (2) a cadre of highly qualified  CFOs and supporting staff; and (3) sound internal controls that safeguard  assets and ensure proper accountability.
subsections: section_title: Financial Management Systems
paragraphs: First and foremost, agencies must take full advantage of modern  technology and develop financial management systems that are integrated  with the range of other business systems.  The federal landscape is littered  with far too many unsuccessful financial management system  implementation efforts. Most notable has been the Department of Defense  (DOD) where billions of dollars have been invested in financial  management systems with little return on the investment. DOD has  historically been unable to develop and implement business systems on  time, within budget, and with the promised capability. For example, we  recently reported that the Department of 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.  The Navy now has underway a new ERP project, 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. 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 into the ERP  system.
The results of the fiscal year 2005 assessments performed by agency  inspectors general or their contract auditors under FFMIA show that these  problems continue to affect financial management systems at most of the  24 CFO Act agencies. While the problems are much more severe at some  agencies than at others, the nature and severity of the problems indicate  that overall, management at most CFO Act agencies do not yet receive the  complete range of information needed for accountability, performance  management and reporting, and decision making.
As we recently testified in September 2005, managerial cost accounting  essentially entails answering very simple questions such as how much  does it cost to do whatever is being measured, thus allowing assessments  of whether those costs seem reasonable.  In other cases, it could involve  establishing a baseline for comparison with what it costs others to do  similar work or achieve similar performance.  To date, accumulating and  analyzing the relevant financial and nonfinancial data to determine the  cost of achieving performance goals, delivering programs, and carrying out  discrete activities has proven difficult to do.  Among the barriers standing  in the way of this enhanced data are nonintegrated financial systems, lack  of accurate and timely recording of data, inadequate reconciliation  procedures, noncompliance with accounting standards, including the cost  management standard, and failure to adhere to the U.S. Government  Standard General Ledger (SGL).
What is most important is that the problem has been recognized. Across  government, agencies have efforts underway to implement new financial  management systems or to upgrade existing systems. Agencies expect that  the new systems will provide reliable, useful, and timely data to support  day-to-day managerial decision making and assist taxpayer and  congressional oversight. Whether in government or the private sector,  implementing and upgrading information systems is a difficult job and  brings a degree of new risk. Organizations that follow and effectively  implement accepted best practices in systems development and  implementation (commonly referred to as disciplined processes) can  manage and reduce these risks to acceptable levels, organizations that do  not typically suffer the consequences. For example, our work at DOD and  the National Aeronautics and Space Administration this past year has  shown that these agencies, which have experienced significant problems  in the past in implementing new financial management systems, were not  following the necessary disciplined processes for efficient and effective  development and implementation of such systems. As I mentioned earlier,  NASA is on its third attempt to implement a new financial management  system.  The first two attempts, which cost $180 million, failed and the  current system initiative which is expected to cost close to $1 billion, has  experienced problems.  As we pointed out in recent testimony before this  subcommittee, many of the problems NASA has been experiencing with its  financial management system stemmed from inadequate implementation  of disciplined processes. As the federal government moves forward with  ambitious financial management system modernization efforts to identify  opportunities to eliminate redundant systems and enhance information  reliability and availability, adherence to disciplined processes is a crucial  element to reduce risks to acceptable levels.
section_title: Financial Reporting
paragraphs: In the area of financial reporting, we see two challenges: (1) the  elimination of restatements and (2) greater transparency in financial  reporting. Many CFO Act agencies have obtained clean or unqualified  audit opinions on their financial statements, but the underlying agency  financial systems and controls still have some serious problems. This  manifested itself last year when a number of CFO Act agencies had to  restate their financial statements. As we have previously testified, at least  11 of the 23 CFO Act agencies restated their fiscal year 2003 financial  statements, and 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 2 line items on an  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. We have reported on some of these  agency restatements and have work ongoing at a number of other  agencies to more fully understand the issues surrounding these  restatements.  We have not yet had a chance to look in any depth at  restatements for fiscal year 2005 because fiscal year 2005 financial  statements, which would identify any such restatements, were just issued  by the deadline of November 15.  We did note though, that there were a  number of restatements.
The second challenge is that current financial reporting does not clearly  and transparently show the wide range of responsibilities, programs, and  activities that may either obligate the federal government to future  spending or create an expectation for such spending. The current financial  reporting model provides information on financial position and changes in  such position during the year, as well as budget results. However, more  important than current and short-term deficits, we face large and growing  structural deficits in the future due primarily to known demographic  trends, rising health care costs and relatively low federal revenues as a  percentage of the economy. Our nation’s current fiscal path is  unsustainable and failure to highlight, analyze and appropriately respond  to the resulting long-term consequences could have significant adverse  consequences on our future economy and standard of living. While the  Statement of Social Insurance will provide long-term information for those  specific programs, in our view, more comprehensive reporting is  necessary to fully and fairly reflect the nation’s longer-term fiscal  challenges. Consequently, a top priority should be communicating  important information to users about the long-term financial condition of  the U.S. government and annual changes therein. Furthermore, FASAB  recognized that tax expenditures, which can be large in relation to  spending programs that are measured under federal accounting standards,  may not be fully considered in entity reporting. Reporting information on  tax expenditures would ensure greater transparency of and accountability  for such expenditures.
section_title: Financial Workforce
paragraphs: Changing the way business is done in a large, diverse, and complex  organization like the federal government is not an easy undertaking.  According to a survey of federal CFOs, federal finance organizations of  the future will have fewer people, with a greater percentage of analysts, as  opposed to accounting technicians. However, today, most functions within  federal finance organizations are focused primarily on (1) establishing and  administering financial management policy; (2) tracking, monitoring, and  reconciling account balances; and (3) ensuring compliance with laws and  regulations.  While they recognize the need for change, according to the  CFOs surveyed, many questions remain unanswered regarding how best to  facilitate such changes. When it comes to world-class financial  management, our study of nine leading private and public sector financial  organizations found that leading financial organizations often had the  same or similar core functions (i.e., budgeting, treasury management,  general accounting, and payroll), as the federal government. However, the  way these functions were put into operation varied depending on  individual entity needs. Leading organizations reduced the number of  resources required to perform routine financial management activities by  (1) consolidating activities at a shared service center and (2) eliminating  or streamlining duplicative or inefficient processes. Their goal was not  only to reduce the cost of finance but also to organize finance to add value  by reallocating finance resources to more productive and results-oriented  activities like measuring financial performance, developing managerial  cost information, and integrating financial systems.
The federal financial workforce that supports the business needs for today  is not well-positioned to support the needs of tomorrow. A JFMIP study  indicated that a significant majority of the federal financial management  workforce performs transaction support functions of a clerical and  technical nature. These skills do not support the vision of tomorrow’s  business that will depend on an analytic financial management workforce  providing decision support. The financial management workforce plays a  critical role in government because the scale and complexity of federal  activities requiring financial management and control is monumental.  Building a world-class financial workforce will require a workforce  transformation strategy devised in partnership between CFOs and agency  human resource departments, now established in law as Chief Human  Capital Officers, working with OMB and the Office of Personnel  Management. Agency financial management leadership must identify  current and future required competencies and compare them to an  inventory of skills, knowledge, and current abilities of current employees.  Then, they must strategically manage to fill gaps and minimize overages  through informed hiring, development, and separation strategies. This is  similar to the approach that we identified when we designated strategic  human capital management as a high-risk area in 2001 recognizing that  agencies, working with Congress and OPM, must assess future workforce  needs and determine strategies to meet those needs, especially in light of  long-term fiscal challenges. Achieving the financial management vision of  the future will be directly effected by the workforce who support it.
section_title: Internal Control
paragraphs: Earlier, I noted that while important progress in strengthening internal  control has been made, the federal government faces numerous internal  control problems, some of which are long-standing and are well- documented at the agency level and governmentwide. As we have reported  for a number of years in our audit reports on the U.S. government’s  consolidated financial statements, the federal government continues to  have material weaknesses and reportable conditions in internal control  related to property, plant, and equipment; inventories and real property;  liabilities and commitments and contingencies; cost of government  operations; and disbursement activities, just to mention a few of the  problem areas.
As an example, consider DOD which has many known material internal  control weaknesses. Of the 25 areas on GAO’s high-risk list, 14 relate  wholly or partially to DOD, particularly its financial management  problems. Overhauling DOD’s financial management controls and  operations represents a challenge that goes far beyond financial  accounting to the very fiber of DOD’s range of business operations,  management information systems, and culture. Although the Secretary of  Defense and several key agency officials have shown commitment to  transformation, as evidenced by key initiatives such as the Business  Management Modernization Program and the Financial Improvement and  Audit Readiness Plan, little tangible evidence of significant broad-based  and sustainable improvements has been seen in DOD’s business  operations to date. 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.
As I testified before you in February 2005, we support OMB’s efforts to  revitalize internal control assessments and reporting through the  December 2004 revisions to Circular No. A-123. These revisions recognize  that effective internal control is critical to improving federal agencies  effectiveness and accountability and to achieving the goals established by  Congress. They also considered the internal control standards issued by  the Comptroller General, which provide an overall framework for  establishing and maintaining internal control and for identifying and  addressing major performance and management challenges and areas at  greatest risk of fraud, waste, abuse, and mismanagement.
Effective internal control, as envisioned in the newly revised Circular No.  A-123, inherently includes a successful strategy for addressing improper  payments. Our prior work has demonstrated that attacking improper  payment problems requires a strategy appropriate to the organization  involved and its particular risks. We have found that entities using  successful strategies to address their improper payment problems shared  a common focus of improving the internal control system—the first line of  defense in safeguarding assets and preventing and detecting errors and  fraud. Moreover, as we testified before this subcommittee in July of this  year, even though progress has been made, certain agencies have not yet  performed risk assessments of all their programs and/or estimated  improper payments for their respective programs.
I pointed out in my February 2005 testimony, six issues critical to  effectively implementing the changes to Circular No. A-123, specifically,  the need for  1.  development of supplemental guidance and implementation tools to  help ensure that agency efforts are properly focused and meaningful;  2.  vigilance over the broader range of controls covering program  objectives;  3.  strong support from managers throughout the agency, and at all levels;  4.  risk-based assessments and an appropriate balance between the costs  and benefits of controls;  5.  management testing of controls in operation to assess if they are  designed adequately and operating effectively, and to assist in  formulating corrective actions;  6.  management accountability for control breakdowns.
Since that time, in July 2005, the CFO Council, in collaboration with the  President’s Council on Integrity and Efficiency (PCIE) and OMB, issued  an implementation guide to assist departments and agencies in addressing  the Circular No. A-123 requirements related to internal control over  financial reporting. As I mentioned earlier, this is a positive first step to  helping the federal government clearly articulate its objectives and criteria  for measuring whether the objectives of Circular No. A-123 have been  successfully achieved. Equally important will be the rigor with which these  criteria are applied.
section_title: Continuity of Leadership
paragraphs: The federal government has always faced the challenge of sustaining the  momentum of transformation because of the limited tenure of key  administration officials. The current administration’s PMA has served as a  driver for governmentwide financial management improvements. It has  been clear from the outset that the current administration is serious about  improved financial management. We have been fortunate that, since the  passage of the CFO Act, all three administrations have been supportive of  financial management reform initiatives. And, as I discussed earlier, we’ve  seen a positive cultural shift in the way the federal government conducts  business. Given the long-term nature of the comprehensive changes  needed and challenges still remaining to fully realize the goals of the CFO  Act, it is unlikely they will all occur before the end of the current  administration’s term. Therefore, sustaining a commitment to  transformation in future administrations will be critical to ensure that key  management reforms such as the CFO Act are fully attained.
In closing, over the past 15 years, we have seen continuous movement  toward the ultimate goals of accountability laid out in the CFO Act. I  applaud the CFO and audit communities for the tremendous progress that  has been made.  While early on some were skeptical, the CFO Act has  dramatically changed how financial management is carried out and the  value placed on good financial management across government.  Sound  decisions on the current results and future direction of vital federal  programs and policies, while never easy, are made less difficult when  decision makers have timely, reliable, and useful financial and  performance information. Across government, financial management  improvement initiatives are underway, and if effectively implemented,  have the potential to greatly improve the quality of financial management  information. Proper accounting and financial reporting practices are even  more essential at the federal level than they were 15 years ago given the  difficult spending challenges and the long-term fiscal condition of the  federal government.
Further, I want to reiterate the value of sustained congressional interest in  these issues, as demonstrated by this subcommittee’s leadership. It will be  key that going forward, the appropriations, budget, authorizing, and  oversight committees hold agency top leadership accountable for  resolving remaining problems and that they support improvement efforts  that address the challenges for the future I highlighted today. The federal  government has made tremendous progress in the past 15 years, and  sustained congressional attention has been and will continue to be a  critical factor to ensuring achievement of the CFO Act’s goals and  objectives.
Mr. Chairman, this completes my prepared statement and I want to thank  you for the opportunity to participate in this hearing and for the strong  support of this Subcommittee in addressing the need for financial  management reform and accountability. I would be happy to respond to  any questions you or other members of the subcommittee may have at this  time.
section_title: Contacts and Acknowledgments
paragraphs: For information about this statement, please contact Jeffrey C. Steinhoff at  (202) 512-2600 or McCoy Williams, Director, Financial Management and  Assurance, at (202) 512-6906 or williamsm1@gao.gov. Individuals who  made key contributions to this testimony include Felicia Brooks, Kay Daly,  and Chanetta Reed. Numerous other individuals made contributions to the  GAO reports cited in this testimony.
section_title: Appendix I: Chief Financial Officers Act Agencies
section_title: Appendix II: Key Concepts of World-class Financial Management
paragraphs: This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.