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. 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, 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 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. 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. 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. 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. 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.