FFMIA is part of a series of financial management reform legislation enacted since the early 1980s. 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 plays a major role in 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 and sufficiently improved general and financial management in the federal government. Therefore, beginning in the 1990s, the Congress passed additional management reform legislation to achieve these management improvements in 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) Federal Information Security Management Act of 2002 (FISMA), and (9) Department of Homeland Security 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 laws reflect the importance of improving financial management of the federal government. Appendixes II through VI include details on the various requirements, guidance, standards, and checklists that support federal financial management. OMB sets governmentwide financial management policies and requirements, as well as guidance related to FFMIA. OMB Circular No. A-127, Financial Management Systems, defines the policies and standards prescribed for executive agencies to follow in developing, operating, evaluating, and reporting on financial management systems. OMB Circular No. 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. Federal financial management systems requirements, among other things, provide a framework for establishing integrated financial management systems to support program and financial managers. Appendix III lists the series of federal financial management systems requirements published to date. In a January 4, 2001, memorandum, Revised Implementation Guidance for the Federal Financial Management Improvement Act, OMB provided 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 three requirements and provides guidance to agency heads to assist in developing corrective action plans for bringing their systems into compliance with FFMIA. There are examples included in the guidance on the types of indicators that should be used as a basis in assessing whether an agency’s systems are in substantial compliance with FFMIA requirements. In addition, 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 presents a methodology that auditors may, but are not required to, use to perform financial statement audits of federal entities in accordance with professional standards and includes sections that provide specific procedures auditors should perform when assessing FFMIA compliance. These sections include guidance and detailed audit steps for testing agency financial management systems’ substantial compliance with the requirements of FFMIA. 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. Testing for compliance with FFMIA is efficiently accomplished, for the most part, as part of the work done in understanding agency systems in the internal control phase of the audit, and the FAM provides specific guidance on what additional testing should be performed, such as tests of information system controls and nonsampling control tests. The purpose of financial management systems goes beyond providing the data necessary to comply with various financial reporting requirements to focus on routinely producing reliable, useful, and timely financial information that federal managers can use for day-to-day decision-making purposes. Recognizing that decision makers can benefit from a better understanding of the challenges and opportunities associated with federal financial management systems, the Comptroller General convened a forum on improving federal financial management systems in December 2007. According to several participants, producing accurate financial statements should be viewed as a by-product of effective business processes and financial management systems. We have consistently provided this perspective for a number of years in our prior reports. As in prior years, the auditors’ fiscal year 2007 FFMIA assessments for the 24 CFO Act agencies illustrate that many agencies still do not have effective financial management systems, including processes, procedures, and controls in place that can produce reliable, useful, and timely financial information with which to make informed decisions on an ongoing basis. The primary goal of FFMIA is for agencies to improve financial management systems so that financial information from these systems can be used to help manage agency programs more effectively and enhance the ability to prepare auditable financial statements. Auditors reported a change in their FFMIA assessment for five agencies’ systems that they determined are no longer in substantial noncompliance for fiscal year 2007. The auditors noted these agencies took corrective action in the areas of compliance with federal accounting standards and federal financial management systems requirements. However, in light of the significant deficiencies and problems that auditors are still reporting, we remain concerned that criteria for substantial compliance with FFMIA requirements are not well defined or consistently implemented across the 24 CFO Act agencies. Recognizing that decision makers can benefit from a better understanding of the challenges and opportunities associated with federal financial management systems, the Comptroller General convened a forum on December 11, 2007. The forum brought together knowledgeable and recognized financial management leaders from the federal government, including the CFO, Chief Information Officer, and IG communities, and selected other officials with extensive experience in financial management from both the public and private sectors. One of the themes from the forum was that federal financial management leaders should refocus their efforts on comprehending and meeting program managers’ financial information requirements and not simply on meeting financial reporting compliance requirements. Despite agencies’ emphasis on meeting financial reporting compliance requirements, about two thirds of forum participants (21 of 33 respondents) agreed that financial management systems are not able to provide or provide little information that is reliable, useful, and timely to assist managers in their day-to-day decision-making, which is the ultimate goal of FFMIA. Figure 1 shows 19 of the 24 CFO Act agencies received an unqualified opinion on their financial statements in fiscal year 2007. However, for 8 of these 19 agencies, auditors reported that systems did not substantially comply with one or more of the three FFMIA requirements and that significant problems exist, as discussed later. According to auditors, some of these 8 agencies have been able to obtain unqualified audit opinions through extensive labor-intensive efforts, which include using ad hoc procedures, expending significant resources, and making billions of dollars in adjustments to derive financial statements. This is usually the case when agencies have inadequate systems that are not integrated and routinely reconciled. These time-consuming procedures must be combined with sustained efforts to improve agencies’ underlying financial management systems and controls. Forum participants said that producing accurate financial statements should be viewed as a byproduct of effective business processes and financial management systems. We have expressed a similar viewpoint in the past. If agencies continue year after year to rely on costly and time-intensive manual efforts to achieve or maintain unqualified opinions, the Congress and others may be misled as to the true status of agencies’ financial management systems capabilities. While work performed in auditing financial statements would naturally offer some perspective regarding FFMIA compliance, the work necessary to assess substantial compliance of systems with the FFMIA requirements has a complementary but broader focus than that performed for purposes of rendering an opinion on the financial statements. In performing financial statement audits, auditors generally focus on the capability of the financial management systems to process and summarize financial information that flows into the financial statements. For purposes of FFMIA, financial management systems include systems, processes, procedures, and controls that produce the information management uses day to day, not just systems that produce annual financial statements. Thus, according to the FAM, to report on system compliance with FFMIA, the auditor should understand the design of and test, as needed, the financial management systems (including the financial portion of any mixed systems) used for managing financial operations, supporting financial planning, management reporting, budgeting activities, and systems accumulating and reporting cost information. Several forum participants expressed concern that because of the efforts devoted to preparing financial reports and meeting financial reporting compliance requirements, finance organizations have not focused sufficient attention on understanding and meeting the financial management needs of their own program managers. FFMIA was designed to lead to system improvements that would result in agency managers routinely having access to reliable, useful, and timely financial-related information to measure performance and increase accountability throughout the year.