FFMIA and other financial management reform legislation have emphasized the importance of improving financial management across the federal government. Beginning in 1990, the Congress has passed a series of management reform legislation to improve the general and financial management of the federal government. As shown in figure 2, the combination of reforms ushered in by the (1) CFO Act of 1990, (2) Government Performance and Results Act of 1993, (3) Government Management Reform Act of 1994, (4) FFMIA, (5) Clinger-Cohen Act of 1996, and (6) Accountability of Tax Dollars Act of 2002, if successfully implemented, provides a solid basis for improving accountability of government programs and operations as well as routinely producing valuable cost and operating performance information. Figure 2 shows the three levels of the pyramid that result in the end goal, accountability and useful management information. The bottom level of the pyramid is the legislative framework that underpins the improvement of the general and financial management of the federal government. The second level shows the drivers that build on the legislative requirements and influence agency actions to meet these requirements. The three drivers are the (1) President’s Management Agenda (PMA), (2) congressional and other oversight, and (3) the Joint Financial Management Improvement Program (JFMIP). The third level of the pyramid represents the key success factors for accountability and meaningful management information—integrating core and feeder financial systems, producing reliable financial and performance data for reporting, and ensuring effective internal control. The result of these three levels, as shown at the top of the pyramid, is accountability and meaningful management information needed to assess and improve the government’s effectiveness, financial condition, and operating performance. Building on the foundation laid by the CFO Act, FFMIA reflects the need for 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. FFMIA requires the departments and agencies covered by the CFO Act to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the SGL at the transaction level. FFMIA also requires auditors to state in their CFO Act financial statement audit reports whether the agencies’ financial management systems substantially comply with FFMIA’s systems requirements. The PMA, announced in the summer of 2001, is a plan for improving the management and performance of the federal government. It targets the most apparent deficiencies, where the opportunity to improve performance is the greatest. The modernization of agency financial management systems, as reflected in FFMIA, is critical to the success of all five PMA initiatives. Although FFMIA implementation relates directly to the improved financial performance initiative, development and maintenance of FFMIA-compliant systems will also affect the implementation of the other initiatives. A key element of PMA’s performance budgeting initiative is the Performance and Assessment Rating Tool (PART). The development of PART represents a step toward a more structured involvement of program and performance analysis in the budget. It is a systematic method of assessing the performance of program activities across the federal government, consisting of a set of general questions on (1) program purpose and design, (2) strategic planning, (3) program management, and (4) program results. It also includes a set of more specific questions, which vary according to the type of delivery mechanism or approach an individual program uses, and calls for timely, reliable data to perform those assessments. The leadership demonstrated by the Congress has been an important catalyst to reforming financial management in the federal government. As previously discussed, the legislative framework provided by the CFO Act and FFMIA, among others, produces a solid foundation to stimulate change needed to achieve sound financial systems management. For example, in November 2002, the Congress enacted the Accountability of Tax Dollars Act to extend the financial statements audit requirements of the CFO Act to additional federal agencies. Further, the Congress is currently contemplating adding DHS to the list of CFO Act agencies and requiring DHS to obtain an audit opinion on its internal controls. There is value in sustained congressional interest in these issues, as demonstrated by hearings on federal financial management and reform held over the past several years. It will be key that the appropriations, budget, authorizing, and oversight committees hold agency top management accountable for resolving these problems and that they support improvement efforts. The continued attention by the Congress to these issues will be critical to sustaining momentum for financial management reform. JFMIP is a joint and cooperative undertaking of the U.S. Department of the Treasury, GAO, OMB, and the Office of Personnel Management (OPM), working in cooperation to improve financial management practices in the federal government. Leadership is provided by the four principals of JFMIP—the Comptroller General of the United States, the Secretary of the Treasury, and the Directors of OMB and OPM. Since August 2001, the JFMIP principals have met regularly to discuss financial management issues, such as the acceleration of financial statement reporting. The Program Management Office (PMO), managed by the Executive Director of the JFMIP using funds provided by the CFO Council agencies, is responsible for the testing and certification of commercial off-the-shelf (COTS) core financial systems for use by federal agencies and coordinating the development and publication of functional requirements for financial management systems. OMB Circular No. A-127, Financial Management Systems requires agencies to purchase only COTS packages sold by vendors whose core financial systems software has been certified by PMO. As shown in table 1, in 2003 and 2004, PMO certified that six core financial software packages met the core financial systems requirements. PMO assesses COTS packages for conformity with the minimum level or “floor” of system requirements. Therefore agencies should be aware that simply implementing a core financial system that has been certified by PMO does not ensure that these agencies will have financial systems that are compliant with FFMIA or provide reliable, useful, and timely data for day-to-day management. Factors that affect the FFMIA compliance and the effectiveness of an implemented COTS core financial system include how the software package has been configured to work in the agency’s environment, whether any customization is made to the software, the success of converting data from legacy systems to new systems, and the quality of transaction data in the feeder systems. OMB sets governmentwide financial management policies and requirements and has issued two sources of guidance related to FFMIA. First, OMB Bulletin No. 01-02, Audit Requirements for Federal Financial Statements, dated October 16, 2000, prescribes specific language auditors should use when reporting on an agency system’s substantial compliance with FFMIA. Specifically, this guidance calls for auditors to provide negative assurance when reporting on an agency system’s FFMIA compliance. Second, in OMB Memorandum, Revised Implementation Guidance for the Federal Financial Management Improvement Act (Jan. 4, 2001), OMB provides guidance for agencies and auditors to use in assessing substantial compliance. The guidance describes the factors that should be considered in determining whether an agency’s systems substantially comply with FFMIA’s requirements. Further, the guidance provides examples of the types of indicators that should be used as a basis in assessing whether an agency’s systems are in substantial compliance with each of the three FFMIA requirements. Finally, the guidance discusses the corrective action plans, to be developed by agency heads, for bringing their systems into compliance with FFMIA. We worked with representatives from the President’s Council on Integrity and Efficiency (PCIE) to revise the joint GAO/PCIE Financial Audit Manual (FAM) to include 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 FFMIA. The FAM guidance on FFMIA assessments recognizes that while financial statement audits offer some assurance regarding FFMIA compliance, auditors should design and implement additional testing to satisfy FFMIA criteria. For example, in performing financial statement audits, auditors generally focus on the ability of the financial management systems to process and summarize financial information that flows into annual agency financial statements. In contrast, FFMIA requires auditors to assess whether an agency’s financial management systems comply with system requirements. 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. We reviewed the fiscal year 2003 financial statement audit reports for the 23 CFO Act agencies to identify the auditors’ assessments of agency financial systems’ compliance and the problems that affect FFMIA compliance. We also reviewed the fiscal year 2003 financial statement audit report for DHS to identify any FFMIA-related issues. Our prior experience with these auditors and our review of their reports provided the basis to determine the sufficiency and relevancy of evidence provided in these documents. Based on the audit reports, we identified problems reported by the auditors that affect agency systems’ compliance with FFMIA. The problems identified in these reports are consistent with long- standing financial management weaknesses that we have reported based on our work at the Department of Agriculture, NASA, Treasury, and other agencies. However, we caution that the occurrence of problems in a particular category may be even greater than auditors’ reports of FFMIA noncompliance would suggest because auditors may not have included all problems in their reports. We also reviewed our previously issued reports and those by the inspectors general to identify the challenges federal agencies face when implementing new systems. Finally, we held discussions with OMB officials to obtain information about its current efforts to help agencies develop systems that will comply with FFMIA.