The federal government has made substantial progress in financial management. If I were to summarize in just a few words the environment in 2007 as compared to prior to enactment of key financial management laws, financial management has gone from the backroom to the boardroom. There has been a 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 when the Congress passed the CFO Act. Financial management systems and internal control have been strengthened. Generally accepted government accounting standards have been developed. For fiscal year 2006, 19 of 24 CFO Act agencies received clean audit opinions on their financial statements, up from just 6 for fiscal year 1996. While there has been marked progress in federal financial management, a number of challenges still remain, including transforming financial management and business practices at DOD, modernizing financial management systems, and building a financial management workforce for the future. Fully meeting these challenges will enable the federal government to provide the world-class financial management anticipated by the CFO Act and other management reform legislation. First, I would like to briefly highlight the legislative framework that governs federal financial management. The Congress has long recognized the importance of the federal government implementing strong financial management practices. Towards this end, the Congress has passed a series of management reform legislation aimed at improving and providing a strong foundation for federal financial management. This series of legislation started with the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), which the Congress passed to strengthen internal control and accounting systems throughout the federal government, among other purposes. In accordance with FMFIA, GAO has issued Standards for Internal Control in the Federal Government, which provides the standards that are directed at helping agency managers implement effective internal control, an integral part of improving financial management systems. 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 intended results. Therefore, 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 (GPRA), (3) Government Management Reform Act of 1994 (GMRA), (4) Federal Financial Management Improvement Act of 1996 (FFMIA), (5) Clinger- Cohen Act of 1996, (6) Accountability of Tax Dollars Act of 2002 (ATDA), and (7) Improper Payments Information Act of 2002 (IPIA). The CFO Act is the most comprehensive and far-reaching financial management improvement act 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 modern financial systems, and strengthened accountability reporting for certain agencies. Three years later, the Congress enacted GPRA, which required certain agencies to develop strategic plans, set performance goals, and report annually on actual performance compared to goals. GPRA’s emphasis on performance management complements the concepts in the CFO Act. GPRA was followed by 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. In 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. ATDA required most executive agencies that were not otherwise required by statute or exempted by OMB, to prepare annual audited financial statements and to submit such statements to the Congress and the Director of OMB. Finally, IPIA has increased visibility over improper payments by requiring executive agency heads, based on guidance from the OMB, to identify programs and activities susceptible to significant improper payments, estimate amounts improperly paid, and report on the amounts of improper payments and their actions to reduce them. 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. The five key financial management improvements that we have noted from a governmentwide perspective are as follows. Achieving Cultural Change—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 the Congress. 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 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. The Executive Branch Management Scorecard, developed as part of the PMA, has been an effective tool to monitor progress and help drive much needed improvements. Establishing a Governmentwide Leadership Structure—The Joint Financial Management Improvement Program (JFMIP) Principals— the Secretary of the Treasury, the Director of OMB, the Director of OPM, and myself, the Comptroller General—have provided leadership by holding periodic meetings that have resulted in unprecedented substantive deliberations and agreements focused on key reform issues such as improving accounting for and reporting on social insurance, accelerating issuance of audited agency financial statements, and advocating audit committees. GAO has led by example in this regard, by establishing an audit advisory committee to help us in overseeing the effectiveness of our current financial reporting and audit processes. As established by the CFO Act, the Office of Federal Financial Management (OFFM), the OMB organization with governmentwide responsibility for federal financial management for executive agencies, has demonstrated leadership by undertaking 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 to improve the availability of management information for decision making. In addition to assessing the status of agencies’ progress in improving financial performance for the PMA, OFFM has also issued bulletins, circulars, and other guidance to provide a broad-based foundation for transforming agencies’ financial management operations. Strengthening 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. As we testified in 2005, many internal control problems have been identified and fixed, especially at the lower levels where internal control assessments were performed and managers could take focused actions to fix relatively simple problems. As a recent case in point, based on our 2006 assessment of high-risk programs, two programs previously designated as high risk, largely due to financial management weaknesses, were removed from the list. Agencies have also made progress in implementing processes and controls to identify, estimate, and reduce improper payments. After passage of IPIA, OMB established Eliminating Improper Payments in 2005 as a new program-specific initiative under the PMA. This separate PMA program initiative was established in this manner to ensure that agency managers are held accountable for meeting the goals of IPIA and are, therefore, dedicating the necessary attention and resources to meeting IPIA requirements. OMB also issued guidance in August 2006 to help clarify and update requirements to support governmentwide IPIA compliance. Improving Financial Management Systems and Operations—Since enactment of financial management reform legislation, federal financial management systems requirements have been developed for the core financial system; managerial cost system; and other administrative and programmatic systems, such as grants, property, revenue, travel, and loans, which are part of an overall financial management system. After the realignment of the JFMIP Program Management Office, OFFM has continued the practice of issuing these requirements. Beginning in 1999, OMB required agencies to purchase commercial off-the-shelf software that had been tested and certified by the federal government against the systems requirements that I just mentioned. 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. OMB continues to move forward on initiatives that support the PMA with the further development of the financial management line of business to promote leveraging shared service solutions to enhance the government’s performance and services. The financial management line of business initiative is modeled after the consolidation of agencies processing payroll, which were dramatically reduced from 22 to 4 systems. OMB, in conjunction with an interagency task force, estimated that these efforts could save billions of taxpayer dollars. Ultimately, this initiative is expected to (1) reduce the number of systems that each individual agency must support, (2) promote standardization, and (3) reduce the duplication of efforts. Preparing Auditable Financial Statements—Unqualified audit opinions for CFO Act agencies’ financial statements have grown from 6 in fiscal year 1996 to 19 in fiscal year 2006. Improvements in timeliness have been even more dramatic over the years.