FFMIA is part of a series of management reform legislation passed by the Congress over the past two decades. This series of legislation started with the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), which the Congress passed to strengthen internal controls and accounting systems throughout the federal government, among other purposes. Issued pursuant to 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 helps government program managers achieve desired results through effective management 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 enhance operational processes and implement new technological developments, management must continually assess and evaluate its internal control to ensure that the control activities being used are effective and updated when necessary. While agencies had achieved some early success in identifying and correcting material internal control and accounting system weaknesses, their efforts to implement FMFIA had not produced the results intended by the Congress. Therefore, beginning in the 1990s, the Congress passed additional management reform legislation to improve the general and financial management of the federal government. This legislation includes the (1) CFO Act of 1990, (2) Government Performance and Results Act of 1993, (3) Government Management Reform Act of 1994, (4) FFMIA, (5) Clinger-Cohen Act of 1996, (6) Accountability of Tax Dollars Act of 2002, (7) Improper Payments Information Act of 2002, (8) The Federal Information Security Management Act of 2002, and (9) Department of Homeland Security (DHS) Financial Accountability Act of 2004. The combination of reforms ushered in by these laws, if successfully implemented, provides a solid foundation to improve the accountability of government programs and operations as well as to routinely produce valuable cost and operating performance information. These financial management reform acts emphasize the importance of improving financial management of the federal government. In particular, building on the foundation laid by the CFO Act, FFMIA emphasizes the need for CFO Act agencies to have systems that ensure ongoing accountability and generate reliable, useful, and timely information for decision-making purposes. FFMIA requires the departments and agencies covered by the CFO Act to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the SGL at the transaction level. FFMIA also requires auditors to state in their CFO Act financial statement audit reports whether the agencies’ financial management systems substantially comply with these three FFMIA systems requirements. Appendixes I through IV include details on the various requirements and standards that support federal financial management. OMB establishes governmentwide financial management systems policies and requirements and has issued two sources of guidance related to FFMIA reporting. First, OMB Bulletin No. 06-03, Audit Requirements for Federal Financial Statements, dated August 23, 2006, prescribes audit requirements, including language auditors should use when reporting on an agency system’s substantial compliance with the three FFMIA requirements. Specifically, this guidance calls for auditors to provide negative assurance when reporting on an agency system’s FFMIA compliance. Second, in the 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 some of the factors that should be considered in determining whether an agency’s systems substantially comply with FFMIA’s three requirements and examples of indicators that should be used in assessing whether an agency’s systems are in substantial compliance with each of the three FFMIA requirements. Finally, the guidance addresses the development of remediation plans to be developed by agency officials for bringing their systems into compliance with FFMIA. We have worked in partnership with the President’s Council on Integrity and Efficiency (PCIE) to develop and maintain the joint GAO/PCIE Financial Audit Manual (FAM). The FAM includes sections that provide specific procedures auditors should perform when assessing FFMIA compliance. These sections include detailed audit steps for testing agency systems’ substantial compliance with the requirements of FFMIA. As detailed in appendix V, we have also issued a series of checklists to help assess whether agencies’ systems meet systems requirements. The FAM guidance on FFMIA assessments recognizes that while financial statement audits offer some assurance on FFMIA compliance, auditors should design and implement additional testing to satisfy FFMIA criteria. For example, in performing financial statement audits, auditors generally focus on the ability of the financial management systems to process and summarize financial information that flows into annual agency financial statements. In contrast, FFMIA requires auditors to assess whether an agency’s financial management systems comply with system requirements, accounting standards, and the SGL. To do this, auditors need to consider whether agency systems provide reliable, useful, and timely information for managing day-to-day operations so that agency managers would have the necessary information to measure performance on an ongoing basis rather than just at year end. Further, OMB’s current audit guidance calls for financial statement auditors to review performance information for consistency with the financial statements, but does not require auditors to determine whether this information is available to managers for day-to-day decision making as called for by the FAM guidance for testing compliance with FFMIA. In collaboration with the PCIE, we are currently in the process of updating the FAM and expect to issue an updated version later in 2007. We reviewed the fiscal year 2006 financial statement audit reports for the 24 CFO Act agencies to identify the auditors’ assessments of agency financial systems’ compliance and the problems that affect FFMIA compliance. To determine whether the data were sufficiently reliable, we performed the following procedures. We gained an understanding of the quality control environments at the respective IGs; leveraged our understanding of the methodology used by the IGs and their contract auditors in past years to reach conclusions with respect to FFMIA compliance at the respective agencies; considered management responses to the auditor’s findings and conclusions; and asked questions to improve our understanding of the procedures applied and/or conclusions drawn, where appropriate. We also reviewed the data for obvious inconsistencies or errors, completeness, and changes from the prior year. When we found data which were inconsistent or incomplete we brought them to the attention of the cognizant IG staff and worked with them to resolve any issues before using the data as a basis for this report. When we encountered data that varied from the prior year, we reviewed the PAR and/or IPA report to determine the reason for the change. Based on these actions, we determined that the data from these reports were sufficiently reliable for the purposes of our report. Using the auditors’ reports for the 24 CFO Act agencies, 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 identified all instances of noncompliance with systems requirements and included all problems in their reports. Further, we identified other GAO and IG reports that discussed financial management systems issues and summarized the reports. We also obtained data from agencies’ annual PAR reports. We also met with OMB officials to discuss their current efforts to improve federal financial management and address our prior recommendations related to FFMIA. In addition, we reviewed documentation provided by OMB regarding its current initiatives. We conducted our work from January through June 2007, in accordance with U.S. generally accepted government auditing standards. We requested written comments on a draft of this report from the Director of OMB or his designee. We received written comments from the OMB Controller. OMB’s comments are discussed in the Agency Comments and Our Evaluation section and reprinted in appendix VI. We also received technical comments from OMB, which we incorporated as appropriate. Many agencies still do not have effective financial management systems in place that can produce reliable, useful, and timely financial information, including cost data, with which to make informed decisions and help ensure accountability on an ongoing basis. Agencies are making progress in addressing their financial management systems weaknesses—some dramatically. Most agency systems, though, are not yet substantially in compliance with FFMIA’s requirements. As shown in figure 3, IGs and their contract auditors reported for fiscal year 2006 that 17 of the 24 CFO Act agencies did not substantially comply with at least one of FFMIA’s three requirements—federal financial management systems requirements, applicable federal accounting standards, or the SGL at the transaction level. Figure 3 also shows that the number of agencies’ systems reported by auditors as noncompliant with FFMIA has decreased marginally (from 20 agencies to 17 agencies) since FFMIA was enacted. Of the seven remaining CFO Act agencies, one auditor provided positive assurance of FFMIA compliance, while the other six provided negative assurance in fiscal year 2006. However, it would be erroneous to assume that statements of negative assurance provided by auditors for the six agencies equate to compliance with FFMIA. Auditors’ assessments for three agencies changed from fiscal year 2005 to 2006. For fiscal year 2006, auditors for GSA provided negative assurance that GSA’s financial management systems, as a whole, were substantially compliant with FFMIA’s three requirements.