Financial Management: Federal Financial Management Improvement Act Results for Fiscal Year 1997
Released: 1998-09-30T00:00:00

Letter

Background

The overall purpose of FFMIA is to ensure that agency financial management systems provide timely, uniform, reliable, and thus more useful financial information. With such information, government leaders will be better positioned to invest scarce resources, reduce costs, oversee programs, and hold agency managers accountable for the way they run government programs. Compliance with federal financial management systems requirements, applicable accounting standards, and the SGL are all necessary to help achieve these goals.

Financial Management System Requirements

The financial management systems policies and standards prescribed for executive agencies to follow in developing, operating, evaluating, and reporting on financial management systems are defined in OMB Circular A-127, Financial Management Systems, which was revised in July 1993. Circular A-127 references the series of publications, entitled Federal Financial Management Systems Requirements, issued by the Joint Financial Management Improvement Program (JFMIP), as the primary source of governmentwide requirements for financial management systems. Table 1 lists the publications in the Federal Financial Management System Requirements Series and their issue dates.

Federal Accounting Standards

Federal accounting standards, which agency CFOs use in preparing financial statements and in developing financial management systems, are recommended by FASAB. FASAB recommends accounting standards after considering the financial and budgetary information needs of the Congress, executive agencies, other users of federal financial information, and comments from the public. The Secretary of the Treasury, the Director of OMB, and the Comptroller General then decide whether to adopt the recommended standards. If they do, the standards are published by OMB and GAO and go into effect. This process has resulted in the issuance of two statements of accounting concepts and nine statements of accounting standards.

The Accounting and Auditing Policy Committee (AAPC) assists in resolving issues related to the implementation of accounting standards. AAPC’s efforts result in authoritative guidance for preparers and auditors of federal financial statements in connection with implementation of accounting and auditing standards as well as the reporting and auditing requirements contained in OMB’s form and content and audit bulletins. To date, AAPC has recommended and OMB has issued two technical releases.

The Standard General Ledger

The SGL provides a uniform chart of accounts and pro forma transactions used to standardize federal agencies’ financial information accumulation and processing, enhance financial control, and support budget and external reporting, including financial statement preparation. Use of the SGL improves data stewardship throughout the government, enabling consistent reporting at all levels within the agencies and providing comparable data and financial analysis at the governmentwide level. SGL guidance is published in the Treasury Financial Manual. Treasury’s Financial Management Service (FMS) is responsible for maintaining the SGL and answering agency inquiries.

Scope and Methodology

In performing our work, we reviewed fiscal year 1997 audit results for the 23 CFO agencies that have issued audited financial statements as of August 28, 1998, and for the governmentwide consolidated financial statements which we audited. We also reviewed OMB’s implementation guidance for FFMIA and OMB’s 1998 Federal Financial Management Status Report & Five-Year Plan. We did not independently verify or test the reliability of the data in OMB’s report. Further, we reviewed applicable federal accounting standards. We also interviewed agency management and auditors of the 24 CFO agencies to obtain their views on FFMIA implementation. We conducted our work from July through August 1998 at the 24 CFO agencies and OMB in Washington, D.C. in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Acting Director of OMB and the Commissioner of FMS or their designees. The Deputy Controller of OMB’s Office of Federal Financial Management provided us with written comments and the Commissioner of FMS provided us with oral comments. These comments are discussed in the “Agency Comments” section, and OMB’s comments are reprinted in appendix III.

Fiscal Year 1997 Results

The majority of federal agencies’ financial management systems do not meet current accounting standards and systems requirements and cannot, as currently operated, provide uniform and reliable financial information for managing government operations. Audit reports for fiscal year 1997 agency financial statements disclosed the continuing problems agencies are experiencing with their financial management systems.

In their fiscal year 1997 audit reports, auditors for 19 of 23 CFO agencies reported that the agencies’ financial systems did not substantially comply with FFMIA’s requirements. Auditors for these 19 agencies reported noncompliance in the area of systems requirements, and auditors for 12 of the 19 agencies also reported noncompliance in the area of accounting standards. In addition, auditors for nine agencies reported that the agencies’ systems did not substantially comply with all three requirements of FFMIA. Auditors for four agencies—the Department of Energy, General Services Administration, National Aeronautics and Space Administration, and National Science Foundation—reported that their agencies’ financial systems complied substantially with FFMIA’s three requirements.

Table 2 summarizes the auditors’ and agencies’ determinations of substantial compliance with the requirements of FFMIA.

A September 9, 1997, OMB memorandum for agency managers and auditors provided guidance for assessing compliance with FFMIA requirements for fiscal year 1997. This guidance, with minor revisions, was recently incorporated into OMB’s audit bulletin (OMB Bulletin 98-08) and initially focuses on financial systems essential to meeting financial statement preparation and budgetary reporting requirements.

OMB’s guidance provides information on the meaning of substantial compliance and describes indicators that should be used in assessing whether an agency’s financial systems are in substantial compliance with FFMIA’s three requirements. The guidance states that substantial noncompliance in any one of the three requirements results in substantial noncompliance with FFMIA. For example, an agency could have an unqualified opinion on its financial statements and no material weaknesses in internal control indicating that the financial statements are prepared in accordance with applicable federal accounting standards, yet have financial management systems that are not in substantial compliance with financial management systems requirements.

As we testified on April 1, 1998, there are serious financial management improvement challenges facing the federal government. Agencies must overcome significant financial systems weaknesses, problems with fundamental recordkeeping, incomplete documentation, and weak internal controls (including computer controls). These problems contributed to agencies’ noncompliance with FFMIA’s requirements. The primary reasons for agencies’ financial systems noncompliance with the three requirements of FFMIA, which are discussed in detail in the respective audit reports on the agency financial statements, include the following. 1) Primary reasons for noncompliance with financial management systems requirements.

Ineffective general controls over automated information systems.

Systems data were not updated or reconciled in a timely manner, resulting in unreliable and incomplete data.

Systems were not integrated and thus required a manual, untimely process and many adjustments for the preparation of financial statements. 2) Primary reasons for noncompliance with federal accounting standards.

Inability to properly account for and report billions of dollars of property, plant, and equipment and supplies. Inability to accurately and properly estimate the cost of most federal credit programs and the related loans receivable and loan guarantee liabilities. Inability to estimate the proper amount of various liabilities, including postemployment health benefits for federal employees and veterans compensation benefits. Inability to properly account for basic transactions, especially those between governmental agencies and other entities. Inability to estimate and report material amounts of the costs and liabilities for remedying environmental contamination. 3) Primary reasons for noncompliance with the SGL at the transaction level.

Core system data could not be reconciled to feeder system data.

Transaction detail supporting account information was nonexistent or not readily available.

System financial data were not consistent with the SGL and its posting requirements.

As a result of these weaknesses, government managers are not receiving the timely, uniform, reliable information needed to oversee programs, reduce costs, and help make resource decisions.

Agencies’ Determination of Agreement With FFMIA Compliance

Once the auditor of an agency reports on FFMIA compliance, the agency head is responsible for determining, based on a review of the auditor’s report and any other relevant information, whether the agency’s financial management systems comply substantially with the three requirements.The agency head is required to make this determination no later than 120 days after (1) the receipt of the auditor’s report or (2) the last day of the fiscal year following the year covered by the audit, whichever comes first.

Although there are no formal procedures required or in use for making or communicating the agency head’s determination, agency comments included in the auditor’s report or agency management’s comments during interviews are good indicators as to whether the agency head agrees or disagrees with the auditor’s assessment of FFMIA compliance. On the basis of agency comments or interviews with agency management, it appears that 20 of the 23 CFO agencies, for which audit reports have been issued, agreed with their auditors’ determination—16 agreed that their systems are not in substantial compliance and 4 agreed that their systems are in substantial compliance. The three remaining agencies—the Environmental Protection Agency, the Social Security Administration, and the Office of Personnel Management—are in the process of resolving differences with their auditors. The primary factor contributing to differences between the agencies’ and auditors’ assessments of FFMIA compliance is the interpretation of substantial compliance.

OMB is currently meeting with these agencies to assist them in resolving their differences. According to OMB, if a disagreement cannot be resolved through mediation, the agency head is to send a formal letter stating the disagreement and requesting that the Director of OMB make a decision. Under the act, the Director is to review the differing determinations and report on the findings to the appropriate congressional committees. As of August 28, 1998, OMB had not received any formal letters of disagreement.

Preparation of Agency Remediation Plans

If an agency head determines that the agency’s systems are not in substantial compliance, the act requires that the agency head, in consultation with the Director of OMB, establish a remediation plan to bring the systems into substantial compliance with FFMIA’s requirements. According to subsequent guidance issued by OMB, for fiscal year 1997, agencies are to include remediation plans in their annual agency financial management status report and 5-year plan submitted to OMB by September 14, 1998. Of the 16 agencies that agreed with the auditors’ assessment of noncompliance with FFMIA, three of these agencies—the departments of Justice and Labor, and the Nuclear Regulatory Commission—have submitted their remediation plans to OMB. As of August 28, 1998, the remaining 13 agencies were in the process of preparing their remediation plans.

Remediation plans are to include corrective actions, intermediate target dates, and resources necessary to achieve substantial compliance with FFMIA’s requirements within 3 years of the date the noncompliance determination is made. If, with the concurrence of the Director of OMB, the agency head determines that substantial compliance cannot be reached within 3 years, the remediation plan must specify the most feasible date by which the agency will achieve compliance and designate an official responsible for effecting the necessary corrective actions.

As we testified on June 18, 1998, congressional committees, as part of annual appropriation or oversight hearings, could use the agencies’ financial statement audits, reports on compliance with FFMIA, and remediation plans to measure the progress agencies are making toward improving financial management. We also discussed the need for the remediation plans to be sufficiently detailed to provide a “road map” for agency management and staff to resolve financial management problems. Agency remediation plans should provide a detailed description of planned actions accompanied by reasonable milestones and also assign accountability for resolving specific financial management issues. Therefore, it is important that agencies determine the actions necessary to effectively resolve problems, prepare timely remediation plans, and monitor the progress made toward improving financial management systems and practices.

Agencies Have Difficulty Providing Information in Accordance With Accounting Standards

We did not express an opinion on the first governmentwide consolidated financial statements because serious deficiencies prevented us and the government from having assurance that it had properly reported large portions of its assets, liabilities, and costs. These deficiencies affect the reliability of the consolidated financial statements and much of the underlying information. They also affect the government’s ability to accurately measure the full cost of programs, and effectively and efficiently manage its operations.

Appendix II summarizes the fiscal year 1997 audit opinions for the 23 CFO agencies that have issued audited financial statements as of August 28, 1998. Also, for agencies that did not receive an unqualified opinion, appendix II identifies the year the agency first anticipates obtaining an unqualified opinion, as reported in OMB’s 1998 Federal Financial Management Status Report & Five-Year Plan. As shown in appendix II, 10 agencies received an unqualified opinion. Ten other agencies received either qualified opinions or disclaimers of opinion. An additional two agencies, which received more than one audit opinion, received unqualified opinions on financial statements covering a portion of their operations and qualified or disclaimers of opinion on statements for the remaining segments of their operations. One agency that prepared combined statements covering a portion of its operations received an unqualified opinion. Our report on the governmentwide consolidated financial statements and other auditors’ reports identified deficiencies that show that many agencies have difficulty providing information in accordance with applicable federal accounting standards. The executive branch recognizes the extent and severity of the reported financial management deficiencies and that addressing them will require concerted improvement efforts across government.

Financial management has been designated one of the President’s priority management objectives, with the goal of having performance and cost information in a timely, informative, and accurate way, consistent with federal accounting standards. Also, the administration has made a commitment to obtain an unqualified opinion on the fiscal year 1999 governmentwide consolidated financial statements. However, Department of Defense management has indicated that the agency will not be able to obtain an unqualified opinion on its agencywide consolidated financial statements until after fiscal year 2000. This could pose a significant obstacle in achieving the administration’s goal.

To help achieve this goal, strategies are being established for many agencies. The President has asked OMB to identify agencies with financial reporting deficiencies and have them prepare agency specific strategies, including milestones, for resolving such deficiencies by September 30, 1999. Initial agency strategy plans were due to OMB by July 31, 1998, and all have been received. We are currently reviewing these strategy plans and will be conducting meetings with agencies to discuss the sufficiency of the plans and make any needed suggestions for improvement. While corrective actions detailed in the strategy plans may fix annual financial statement reporting deficiencies, they may not necessarily fix identified instances of noncompliance with FFMIA’s requirements.

Status of Federal Accounting Standards

Using a due process approach, FASAB has developed accounting standards for the federal government. So far, FASAB has recommended and the three principals—OMB, Treasury, and GAO—have approved two statements of accounting concepts and nine statements of accounting standards with various effective dates ranging from fiscal year 1994 through fiscal year 1998. The concepts and standards, as recommended by FASAB, underpin OMB’s guidance to agencies on the form and content of their financial statements and the government’s consolidated financial statements. Table 3 provides a list of concepts, standards, and interpretations along with their respective effective dates.

Four of the standards, which were issued in 1995 and 1996, are effective for the first time in fiscal year 1998. In addition, FASAB has recommended Statement of Recommended Accounting Standard No. 10, Accounting for Internal Use Software. This Statement is currently before the principals for adoption. After being adopted by the principals, it will go before the Congress for a 45-day congressional review period. FASAB is also considering additional accounting issues:

Management’s Discussion and Analysis;

Governmentwide Supplementary Stewardship Reporting;

Amendments to Accounting for Property, Plant, and Equipment; and

Accounting for Social Insurance.

Challenges in Complying With FFMIA Requirements

We previously reported that agencies face significant challenges in fully implementing systems requirements, accounting standards, and the SGL. Agencies made some progress in fiscal year 1997 toward implementing and maintaining financial systems that comply with these requirements. However, agencies have indicated concerns with implementing new accounting requirements imposed by accounting standards which became effective in fiscal year 1998. Moreover, the need to update a significant number of critical systems applications coupled with the government’s history of systems development difficulties portends problems in achieving substantial compliance with FFMIA’s requirements in the near future, particularly as agencies are struggling to address critical Year 2000 computer conversion issues.

Although the accounting standards were issued several years ago, some agencies are not prepared to address key elements of the requirements that became effective for fiscal year 1998. For example, the managerial cost accounting concepts and standards promulgated in SFFAS No. 4 are aimed at providing reliable and timely information on the full cost of federal programs, their activities, and outputs. The standard requires agency management to define responsibility segments and to measure and report the costs of each segment’s outputs. However, management of several agencies have expressed difficulty in linking responsibility segments to general ledger accounts, which is necessary to assign costs to segment outputs.

In addition, the deferred maintenance requirements of SFFAS No. 6 require disclosures related to the condition and the estimated cost to remedy deferred maintenance of property, plant, and equipment. As we reported in January 1998, a critical step in developing a deferred maintenance estimate is a complete and reliable inventory of property, plant, and equipment on which to assess maintenance needs. However, in our report on the U.S. government’s fiscal year 1997 consolidated financial statements, we identified the federal government’s inability to properly account for and report billions of dollars of property, plant, and equipment as a material deficiency. The lack of accurate accounting of property, plant, and equipment could impede efforts to implement the deferred maintenance requirements. Moreover, the requirement to disclose deferred maintenance will be a challenge because most agencies do not have experience in generating agencywide estimates of deferred maintenance. Historically, agencies were not required to develop deferred maintenance estimates for financial reporting purposes. Although the 11 agencies responsible for almost 99 percent of property, plant, and equipment reported that they have estimated deferred maintenance for budgetary and other purposes, these estimates were generally limited in scope and not independently verified.

Also, SFFAS No. 7 requires a new statement—Statement of Financing—to show how budgetary resources obligated during the period relate to the net cost of operations for that reporting entity. Several agencies have expressed concerns about having the available resources to prepare the Statement. In particular, agencies are concerned that preparing the Statement will require extensive analysis by trained accountants because agency accounting systems have not been modified to support the preparation of the Statement. As a result, some agencies requested that FASAB defer the requirements for the Statement of Financing for 2 years. While FASAB recently decided not to recommend deferral of the Statement, it, along with OMB, GAO, and agency CFOs are working to develop a presentation of required information that will satisfy requirements of the standard with data which can be reasonably developed by agencies’ existing systems. Agencies’ problems implementing the new accounting standards will be considered as part of fiscal year 1998 FFMIA reporting.

Agencies are further challenged by the condition of many of the government’s critical financial systems applications, which are not designed to meet current accounting standards and systems requirements. These systems will need to be replaced or significantly upgraded in the next 5 years. OMB’s Federal Financial Management Status Report & Five-Year Plan reveals that as of the end of fiscal year 1997, agencies identified 809 operating financial management system applications that fall into this category. According to OMB, this represents 72 percent of total applications in operation. OMB also reports that agencies lack the resources to replace or upgrade some systems that need modernization.

The serious questions that remain in addressing the federal government’s Year 2000 readiness further complicate agencies’ efforts to improve their financial management systems. We specifically discussed the Year 2000 problem as a high-risk area in our February 1997 high-risk report, and have issued guidance to help organizations successfully address the issue. To monitor agencies’ accountability in addressing the Year 2000 problem in their systems, OMB requires agencies to regularly report on their progress.

We recently reported that the CFO agencies’ progress in addressing Year 2000 computing issues continues at a slow pace. Agencies are appropriately focusing their priorities on Year 2000 compliance issues, and consequently, other efforts to improve financial management systems may be delayed, including efforts to address FFMIA noncompliance.

Long-standing problems with agencies’ financial management systems decrease the government’s ability to produce timely, uniform, and reliable financial information, which is important for formulating budgets, managing government programs, and making difficult policy choices. The federal government’s size and complexity and the discipline needed to fix its financial management systems present a significant challenge. It will take time and continued effort to improve federal financial management systems to the level required by FFMIA.

Agency Comments

In comments on a draft of this report, the Deputy Controller of OMB’s Office of Federal Financial Management generally agreed that our report fairly presented the status of the federal government’s implementation of FFMIA. The Commissioner of FMS concurred with the report’s contents. OMB also offered technical comments, which we have incorporated as appropriate.

We are sending copies of this report to the Chairmen and Ranking Minority Members of the Subcommittee on Oversight of Government Management, Restructuring, and the District of Columbia, Senate Committee on Governmental Affairs and Subcommittee on Government Management, Information, and Technology, House Committee on Government Reform and Oversight, other interested congressional committees, the Director of OMB, the Secretary of the Treasury, heads of the 24 CFO agencies, and agency CFOs and Inspectors General. Copies will also be made available to others upon request.

This report was prepared under the direction of Gloria L. Jarmon, Director, Health and Human Services Accounting and Financial Management, who may be reached at (202) 512-4476 if you or your staffs have any questions. Major contributors to this letter are listed in appendix IV.

Agencies and Components Required to Issue Audited Financial Statements for Fiscal Year 1997

CFO Agencies’ Fiscal Year 1997 Net Outlays, Audit Opinions, and Target Dates

The 1990 CFO Act laid the legislative foundation for the federal government to provide taxpayers, the nation’s leaders, and agency program managers with reliable financial information through audited financial statements. Under the CFO Act, as expanded by the Government Management Reform Act of 1994, 24 major agencies, which account for 99 percent of federal outlays, are required to annually prepare organizationwide audited financial statements beginning with those for fiscal year 1996. Table II.1 lists the 24 CFO agencies, their reported fiscal year 1997 net outlays, the audit opinion issued for fiscal year 1997, and the fiscal year for which the agency expects to first receive an unqualified opinion on its financial statements, as reported in OMB’s 1998 Federal Financial Management Status Report & Five-Year Plan.

Table II.1: The 24 CFO Agencies’ Fiscal Year 1997 Net Outlays, Audit Opinions, and Expected Dates to Obtain Unqualified Audit Opinions Reported fiscal year 1997 outlays (in billions)

Expected date to obtain an unqualified opinion (fiscal year)

Department of Health and Human Services Department of Housing and Urban Development National Aeronautics and Space Administration (continued)

Reported fiscal year 1997 outlays (in billions)

Expected date to obtain an unqualified opinion (fiscal year)

N/A N/A 2000 2000 2000 The Department of Defense (DOD) is making some progress in meeting the audited financial statement requirements of the CFO Act. However, significant and long-standing deficiencies preclude DOD from expecting an unqualified opinion on its agencywide consolidated financial statements until after fiscal year 2000.

Source for reported fiscal year 1997 net outlays: Budget of the United States Government, Fiscal Year 1999.

Comments From the Office of Management and Budget

The following are GAO’s comments on the Office of Management and Budget’s letter of September 17, 1998.

GAO’s Comments

1. Report has been modified to reflect OMB’s comment. 2. Report has been modified to reflect that OMB’s audit bulletin addresses financial systems essential to meeting financial statement preparation and budgetary reporting requirements. 3. Report has been modified to accurately reflect the list of agencies and components OMB provided, but the attachment has not been included.

Major Contributors to This Report

Accounting and Information Management Division, Washington, D.C.

Deborah A. Taylor, Assistant Director Anastasia Kaluzienski, Senior Audit Manager Diane Morris, Audit Manager Sandra Silzer, Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

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