Financial Management: Federal Financial Management Improvement Act
Results for Fiscal Year 1997 (Letter Report, 09/30/1998,
GAO/AIMD-98-268).

The inability of many federal agencies to accurately record and report
financial management data on both a year-end and interim basis for
decision-making purposes has been a serious, long-standing weakness. To
help improve federal accounting practices and strengthen the
government's ability to routinely provide reliable financial management
information, Congress passed legislation--the Federal Financial
Management Improvement Act of 1996--requiring auditors of 24 major
agencies to report on whether financial management systems comply
substantially with three requirements: federal financial management
systems requirements, applicable federal accounting standards, and the
U.S. Government Standard General Ledger at the transaction level.
Agencies not in substantial compliance must prepare remediation plans to
bring their systems into substantial compliance, generally within three
years. This report provides information on (1) compliance with the act's
requirements, including whether the agencies' financial statements have
been prepared in accordance with applicable accounting standards, and
(2) the adequacy of applicable accounting standards for the federal
government.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-268
     TITLE:  Financial Management: Federal Financial Management
	     Improvement Act Results for Fiscal Year 1997
      DATE:  09/30/1998
   SUBJECT:  Accounting standards
	     Accounting procedures
	     Federal agency accounting systems
	     Financial management systems
	     Financial statement audits
	     Internal controls
	     Reporting requirements
	     Financial statements
	     Noncompliance
	     Computer security
IDENTIFIER:  JFMIP Framework for Federal Financial Management Systems
	     U.S. Government Standard General Ledger
	     Y2K

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GAO/AIMD-98-268

Cover
================================================================ COVER

Report to Congressional Committees

September 1998

FINANCIAL MANAGEMENT - FEDERAL
FINANCIAL MANAGEMENT IMPROVEMENT
ACT RESULTS FOR FISCAL YEAR 1997

GAO/AIMD-98-268

FFMIA FY1997 Results

(919273)

Abbreviations
=============================================================== ABBREV

  AAPC - Accounting and Auditing Policy Committee
  CFO - Chief Financial Officer
  DOD - Department of Defense
  EPA - Environmental Protection Agency
  FASAB - Federal Accounting Standards Advisory Board
  FEMA - Federal Emergency Management Agency
  FFMIA - Federal Financial Management Improvement Act of 1996
  FFMSR - Federal Financial Management System Requirements
  FMS - Financial Management Service
  JFMIP - Joint Financial Management Improvement Program
  OMB - Office of Management and Budget
  OPM - Office of Personnel Management
  SFFAC - Statements of Federal Financial Accounting Concepts
  SFFAS - Statements of Federal Financial Accounting Standards
  SGL - Standard General Ledger

Letter
=============================================================== LETTER

B-280353

September 30, 1998

The Honorable Fred Thompson
Chairman
The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

The Honorable Dan Burton
Chairman
The Honorable Henry A.  Waxman
Ranking Minority Member
Committee on Government Reform and Oversight
House of Representatives

The inability of many federal agencies to accurately record and
report financial management data on both a year-end and interim basis
for decision-making purposes has been a serious, longstanding
weakness.  To help improve federal accounting practices and increase
the government's ability to routinely provide reliable financial
management information, the Congress enacted the Federal Financial
Management Improvement Act (FFMIA) of 1996, Public Law 104-208.
Under FFMIA, beginning with the fiscal year ended September 30, 1997,
auditors for each of the 24 major departments and agencies named in
the Chief Financial Officers (CFO) Act\1 (referred to as CFO
agencies) must report whether the agencies' financial management
systems comply substantially with three requirements--(1) federal
financial management systems requirements, (2) applicable federal
accounting standards, and (3) the U.  S.  Government Standard General
Ledger (SGL)\2 at the transaction level.  Agencies with systems not
in substantial compliance with the requirements must prepare
remediation plans to bring their systems into substantial compliance,
generally within 3 years.\3

To aid congressional oversight and keep the Congress advised on the
status of federal financial management, the General Accounting Office
(GAO) is required annually to report on FFMIA implementation by
October 1.  Specifically, our report is to summarize information
concerning (1) compliance with FFMIA's requirements, including
whether the CFO agencies' financial statements have been prepared in
accordance with applicable accounting standards and (2) the adequacy
of applicable accounting standards for the federal government.

--------------------
\1 FFMIA also applies to agency components required to be audited
under 31 U.S.C.  3521(e).  Because this is the first year of FFMIA
reporting for the 24 CFO agencies and most agencies issued
consolidated audit reports for fiscal year 1997, we focused our
review at the agency level.  Appendix I contains a list of the 24 CFO
agencies and components designated by the Office of Management and
Budget for fiscal year 1997.

\2 The SGL provides a standard chart of accounts and standardized
transactions that agencies are to use in all their financial systems.

\3 If the agency's financial management systems are so deficient that
substantial compliance cannot be reached within 3 years, the
remediation plan must specify the most feasible date by which the
agency will achieve compliance and designate an official responsible
for effecting the necessary corrective actions.

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In their fiscal year 1997 audit reports, auditors for 19 of 23\4 CFO
agencies reported that the agencies' financial systems did not comply
substantially with FFMIA's requirements, primarily due to
noncompliance with systems requirements.  Auditors reported that the
financial systems of 9 of those 19 agencies, including the
Departments of Defense, Treasury, and Labor, were noncompliant with
all three FFMIA requirements.  The serious problems described in the
auditors' reports limit the reliability, usefulness, and timeliness
of financial information needed to effectively manage government
operations.  For many agencies, the preparation of financial
statements requires considerable reliance on ad hoc programming and
analysis of data produced by inadequate financial systems that are
not integrated, reconciled, and often require significant
adjustments.  Therefore, it will take time and concerted effort to
raise government financial management systems to the level of quality
and reliability envisioned in FFMIA.

Our first-ever audit of the governmentwide consolidated financial
statements\5

indicates that many agencies' financial statements are not yet
meeting applicable accounting standards.  We were unable to render an
opinion on the fiscal year 1997 consolidated financial statements for
the government due to significant financial systems weaknesses,
problems with fundamental recordkeeping, incomplete documentation,
and weak internal controls, including computer controls.  Of the 23
CFO agencies for which audit reports have been issued as of August
28, 1998, 10 received unqualified opinions on their fiscal year 1997
financial statements.  An additional three agencies received
unqualified opinions on statements covering portions of their
operations.\6 The remaining 10 agencies received either qualified
opinions or disclaimers of opinion.\7 Agencies generally recognize
the extent and severity of their financial management deficiencies,
and there are several efforts underway to address these problems
across government.

The Federal Accounting Standards Advisory Board (FASAB) has
successfully developed a set of accounting standards.  FASAB has
recommended, and the Office of Management and Budget (OMB) and GAO
have issued, two statements of accounting concepts and nine
statements of accounting standards tailored to the federal
government's unique characteristics and special needs.  FASAB is also
considering additional accounting matters relevant to financial
statements for the federal government, including accounting and
reporting for social insurance entitlement programs.\8

Agencies' efforts to improve financial management are challenged by
implementing new accounting standards and updating financial
management systems.  Several agencies have expressed concerns
regarding their ability to effectively implement the accounting
requirements,\9 which became effective in fiscal year 1998.  In
addition, as the CFO agencies move toward a more effective system of
financial management, a significant challenge is the poor status of
financial management systems, which were not designed to meet current
accounting standards and system requirements.

Further, agencies' progress in implementing new accounting standards
and improving reported financial management weaknesses will be
affected by competing demands associated with Year 2000 computer
conversion issues.\10

Agencies are necessarily making Year 2000 compliance a priority, and
longer term efforts to address financial management systems are
expected to be delayed.

--------------------
\4 The statutory reporting deadline for audit reports discussing the
results of the fiscal year 1997 financial statement audits for the
CFO agencies was March 1, 1998.  As of August 28, the auditor for one
agency--Department of State--has not issued its fiscal year 1997
audit report.  The agency's auditor indicated that it plans to report
that the agency's financial systems did not comply substantially with
FFMIA's requirements.

\5 Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998).

\6 Consolidated agencywide financial statements were not issued for
the Office of Personnel Management (OPM) and the Federal Emergency
Management Agency (FEMA).  Instead, OPM received five opinions, two
unqualified and three disclaimers of opinion.  In addition, FEMA
prepared combined financial statements covering a portion of its
operations and received an unqualified opinion.  Also, the Department
of the Treasury received two opinions, an unqualified opinion on its
administrative financial statements and a qualified opinion on its
custodial financial statements.

\7 Auditors issue qualified opinions when the financial statements
are presented fairly, with exceptions that are specifically disclosed
and described.  The issuance of a qualified opinion indicates either
a departure from the standards or a limitation of audit scope.
Disclaimers of opinion are rendered when auditors cannot satisfy
themselves as to whether the financial statements are presented
fairly.

\8 Social insurance entitlement programs include Medicare, Social
Security, and Black Lung Disability.

\9 Some of the new requirements, which were issued in 1995 and 1996,
include the application of managerial cost accounting concepts and
preparation of the new Statements of Financing and Budgetary
Resources.

\10 For the past several decades, information systems have typically
used two digits to represent the year, such as "98" for 1998, to
conserve electronic data storage and reduce operating costs.  In this
format, however, 2000 is indistinguishable from 1900 because both are
represented as "00." As a result, computer systems or applications
that use dates or perform date- or time-sensitive calculations may,
if not modified, generate incorrect results beyond 1999.

   BACKGROUND
------------------------------------------------------------ Letter :2

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.

      FINANCIAL MANAGEMENT SYSTEM
      REQUIREMENTS
---------------------------------------------------------- Letter :2.1

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),\11 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.\12

                                Table 1

                 Publications in the Federal Financial
                 Management System Requirements Series

Federal Financial Management System Requirements (FFMSR)
document                                                  Issue date
--------------------------------------------------------  ------------
FFMSR-0 Framework for Federal Financial Management        January 1995
Systems

FFMSR-1 Core Financial System Requirements                September
                                                          1995

FFMSR-2 Personnel/Payroll System Requirements             May 1990

FFMSR-3 Travel System Requirements                        January 1991

FFMSR-4 Seized/Forfeited Asset System Requirements        March 1993

FFMSR-5 Direct Loan System Requirements                   December
                                                          1993

FFMSR-6 Guaranteed Loan System Requirements               December
                                                          1993

FFMSR-7 Inventory System Requirements                     June 1995

FFMSR-8 Managerial Cost Accounting System Requirements    February
                                                          1998
----------------------------------------------------------------------

--------------------
\11 JFMIP is a cooperative undertaking of OMB, Treasury, OPM, and GAO
working with operating agencies to improve financial management
practices throughout the government.  The program was initiated in
1948 and was given statutory authorization in the Budget and
Accounting Procedures Act of 1950 (31 U.S.C.  3511 (d)).

\12 JFMIP is in the process of updating some of these requirements.

      FEDERAL ACCOUNTING STANDARDS
---------------------------------------------------------- Letter :2.2

Federal accounting standards, which agency CFOs use in preparing
financial statements and in developing financial management systems,
are recommended by FASAB.\13 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\14 (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.\15 To date, AAPC has recommended and OMB
has issued two technical releases.

--------------------
\13 In October 1990, the Secretary of the Treasury, the Director of
OMB, and the Comptroller General established FASAB to recommend a set
of generally accepted accounting standards for the federal
government.  FASAB's mission is to recommend reporting concepts and
accounting standards that provide federal agencies' financial reports
with understandable, relevant, and consistent information about the
financial position, activities, and results of operations of the U.S.
government and its components.

\14 In 1997, FASAB in conjunction with OMB, Treasury, GAO, the CFO
Council, and the President's Council on Integrity and Efficiency,
established AAPC.  AAPC's mission is to assist the federal government
in improving financial reporting through the timely identification,
discussion, and recommendation of solutions to accounting and
auditing issues within the framework of existing authoritative
literature.  AAPC serves as a permanent committee sponsored by FASAB.

\15 OMB Bulletin 97-01, Form and Content of Agency Financial
Statements, and OMB Bulletin 98-08, Audit Requirements for Federal
Financial Statements.

      THE STANDARD GENERAL LEDGER
---------------------------------------------------------- Letter :2.3

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.

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

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.

   FISCAL YEAR 1997 RESULTS
------------------------------------------------------------ Letter :4

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.

                                     Table 2

                            Summary of Auditors' FFMIA
                      Determinations and Agencies' Responses

                      Auditor's
                      determinat
                        ion of                                      Agency's
                      substantia                                  response to
                          l            Areas of reported           auditor's
                      compliance   substantial noncompliance    determination\a
                      ----------  ----------------------------  ----------------
                                  Systems
                                  requiremen  Accounting
Agency                Yes   No    ts          standards   SGL   Agree   Disagree
--------------------  ----  ----  ----------  ----------  ----  ------  --------
Department of                                               
Agriculture

Department of                                               
Commerce

Department of                                               
Defense

Department of                                                 
Education

Department of Energy                                           

Department of Health                                          
and Human Services

Department of                                               
Housing and Urban
Development

Department of the                                             
Interior

Department of                                               
Justice

Department of Labor                                         

Social Security                                                       
Administration

Department of                                                
Transportation\

Department of the                                           
Treasury

Department of                                                 
Veterans Affairs

Agency for                                                  
International
Development

Environmental                                                        
Protection Agency

Federal Emergency                                             
Management Agency

General Services                                               
Administration

National Aeronautics                                           
and Space
Administration

National Science                                               
Foundation

Nuclear Regulatory                                            
Commission

Office of Personnel                                                 
Management

Small Business                                               
Administration

================================================================================
Total                 4     19    19          12          9     20      3
--------------------------------------------------------------------------------
\a Agreement or disagreement is based on agency comments included in
the auditors' reports or interviews with agency management.

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,\16 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\17 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.

--------------------
\16 U.S.  Government's Financial Statements:  Results of GAO's Fiscal
Year 1997 Audit (GAO/T-AIMD-98-128, April 1, 1998).

\17 General controls focus on systems security such as entitywide
security program planning and management, access controls, software
development and change management controls, separation of duties,
system software controls, and service continuity.

      AGENCIES' DETERMINATION OF
      AGREEMENT WITH FFMIA
      COMPLIANCE
---------------------------------------------------------- Letter :4.1

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.\18 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.

--------------------
\18 Under the FFMIA process, the auditor's and the agency head's
determinations of compliance may differ.

      PREPARATION OF AGENCY
      REMEDIATION PLANS
---------------------------------------------------------- Letter :4.2

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.  According to subsequent guidance issued by OMB,\19 for
fiscal year 1997, agencies are to include remediation plans in their
annual agency financial management status report and 5-year plan
submitted to OMB by September 14, 1998.  Of the 16 agencies that
agreed with the auditors' assessment of noncompliance with FFMIA,
three of these agencies--the departments of Justice and Labor, and
the Nuclear Regulatory Commission--have submitted their remediation
plans to OMB.  As of August 28, 1998, the remaining 13 agencies were
in the process of preparing their remediation plans.

Remediation plans are to include corrective actions, intermediate
target dates, and resources necessary to achieve substantial
compliance with FFMIA's requirements within 3 years of the date the
noncompliance determination is made.  If, with the concurrence of the
Director of OMB, the agency head determines that substantial
compliance cannot be reached within 3 years, the remediation plan
must specify the most feasible date by which the agency will achieve
compliance and designate an official responsible for effecting the
necessary corrective actions.

As we testified on June 18, 1998,\20 congressional committees, as
part of annual appropriation or oversight hearings, could use the
agencies' financial statement audits, reports on compliance with
FFMIA, and remediation plans to measure the progress agencies are
making toward improving financial management.  We also discussed the
need for the remediation plans to be sufficiently detailed to provide
a "road map" for agency management and staff to resolve financial
management problems.  Agency remediation plans should provide a
detailed description of planned actions accompanied by reasonable
milestones and also assign accountability for resolving specific
financial management issues.  Therefore, it is important that
agencies determine the actions necessary to effectively resolve
problems, prepare timely remediation plans, and monitor the progress
made toward improving financial management systems and practices.

--------------------
\19 OMB issued this guidance on July 1, 1998, as part of Circular
A-11 guidance.

\20 Financial Management:  Fostering the Effective Implementation of
Legislative Goals (GAO/T-AIMD-98-215, June 1998).

   AGENCIES HAVE DIFFICULTY
   PROVIDING INFORMATION IN
   ACCORDANCE WITH ACCOUNTING
   STANDARDS
------------------------------------------------------------ Letter :5

We did not express an opinion on the first governmentwide
consolidated financial statements because serious deficiencies
prevented us and the government from having assurance that it had
properly reported large portions of its assets, liabilities, and
costs.  These deficiencies affect the reliability of the consolidated
financial statements and much of the underlying information.  They
also affect the government's ability to accurately measure the full
cost of programs, and effectively and efficiently manage its
operations.

Appendix II summarizes the fiscal year 1997 audit opinions for the 23
CFO agencies that have issued audited financial statements as of
August 28, 1998.  Also, for agencies that did not receive an
unqualified opinion, appendix II identifies the year the agency first
anticipates obtaining an unqualified opinion, as reported in OMB's
1998 Federal Financial Management Status Report & Five-Year Plan.  As
shown in appendix II, 10 agencies received an unqualified opinion.
Ten other agencies received either qualified opinions or disclaimers
of opinion.  An additional two agencies, which received more than one
audit opinion, received unqualified opinions on financial statements
covering a portion of their operations and qualified or disclaimers
of opinion on statements for the remaining segments of their
operations.  One agency that prepared combined statements covering a
portion of its operations received an unqualified opinion.  Our
report on the governmentwide consolidated financial statements and
other auditors' reports identified deficiencies that show that many
agencies have difficulty providing information in accordance with
applicable federal accounting standards.  The executive branch
recognizes the extent and severity of the reported financial
management deficiencies and that addressing them will require
concerted improvement efforts across government.

Financial management has been designated one of the President's
priority management objectives, with the goal of having performance
and cost information in a timely, informative, and accurate way,
consistent with federal accounting standards.  Also, the
administration has made a commitment to obtain an unqualified opinion
on the fiscal year 1999 governmentwide consolidated financial
statements.  However, Department of Defense management has indicated
that the agency will not be able to obtain an unqualified opinion on
its agencywide consolidated financial statements until after fiscal
year 2000.  This could pose a significant obstacle in achieving the
administration's goal.

To help achieve this goal, strategies are being established for many
agencies.  The President has asked OMB to identify agencies with
financial reporting deficiencies and have them prepare agency
specific strategies, including milestones, for resolving such
deficiencies by September 30, 1999.  Initial agency strategy plans
were due to OMB by July 31, 1998, and all have been received.  We are
currently reviewing these strategy plans and will be conducting
meetings with agencies to discuss the sufficiency of the plans and
make any needed suggestions for improvement.  While corrective
actions detailed in the strategy plans may fix annual financial
statement reporting deficiencies, they may not necessarily fix
identified instances of noncompliance with FFMIA's requirements.

   STATUS OF FEDERAL ACCOUNTING
   STANDARDS
------------------------------------------------------------ Letter :6

Using a due process approach, FASAB has developed accounting
standards for the federal government.  So far, FASAB has recommended
and the three principals--OMB, Treasury, and GAO--have approved two
statements of accounting concepts\21 and nine statements of
accounting standards with various effective dates ranging from fiscal
year 1994 through fiscal year 1998.  The concepts and standards, as
recommended by FASAB, underpin OMB's guidance to agencies on the form
and content of their financial statements and the government's
consolidated financial statements.  Table 3 provides a list of
concepts, standards, and interpretations\22

along with their respective effective dates.

                                Table 3

                    Statements of Federal Financial
                Accounting Concepts (SFFAC), Statements
                    of Federal Financial Accounting
                 Standards (SFFAS), Interpretations and
                            Effective Dates

--------  --------------------------------------------------  --------
Concepts

SFFAC     Objectives of Federal Financial Reporting
No. 1

SFFAC     Entity and Display
No. 2

Standard                                                      Effectiv
s                                                             e for
                                                              fiscal
                                                              year

SFFAS     Accounting for Selected Assets and Liabilities      1994
No. 1

SFFAS     Accounting for Direct Loans and Loan Guarantees     1994
No. 2

SFFAS     Accounting for Inventory and Related Property       1994
No. 3

SFFAS     Managerial Cost Accounting Concepts and Standards   1998
No. 4

SFFAS     Accounting for Liabilities of the Federal           1997
No. 5     Government

SFFAS     Accounting for Property, Plant, and Equipment       1998
No. 6

SFFAS     Accounting for Revenue and Other Financing Sources  1998
No. 7

SFFAS     Supplementary Stewardship Reporting                 1998
No. 8

SFFAS     Deferral of Required Implementation Date for SFFAS  1998
No. 9     No. 4

Interpre
tations

No. 1     Reporting on Indian Trust Funds

No. 2     Accounting for Treasury Judgment Fund Transactions

No. 3     Measurement Date for Pension and Retirement Health
          Care Liabilities

No. 4     Accounting for Pension Payments in Excess of
          Pension Expense
----------------------------------------------------------------------
Four of the standards, which were issued in 1995 and 1996, are
effective for the first time in fiscal year 1998.  In addition, FASAB
has recommended Statement of Recommended Accounting Standard No.  10,
Accounting for Internal Use Software.  This Statement is currently
before the principals for adoption.  After being adopted by the
principals, it will go before the Congress for a 45-day congressional
review period.  FASAB is also considering additional accounting
issues:

  -- Management's Discussion and Analysis;

  -- Governmentwide Supplementary Stewardship Reporting;

  -- Amendments to Accounting for Property, Plant, and Equipment; and

  -- Accounting for Social Insurance.

--------------------
\21 Effective dates do not apply to Statements of Federal Financial
Accounting Concepts.

\22 Occasionally, FASAB clarifies existing federal accounting
standards by providing interpretations.  An interpretation is a
document of narrow scope that provides clarifications of original
meaning, additional definitions, or other guidance pertaining to an
existing standard.  Effective dates do not apply to interpretations.

   CHALLENGES IN COMPLYING WITH
   FFMIA REQUIREMENTS
------------------------------------------------------------ Letter :7

We previously reported\23 that agencies face significant challenges
in fully implementing systems requirements, accounting standards, and
the SGL.  Agencies made some progress in fiscal year 1997 toward
implementing and maintaining financial systems that comply with these
requirements.  However, agencies have indicated concerns with
implementing new accounting requirements imposed by accounting
standards which became effective in fiscal year 1998.  Moreover, the
need to update a significant number of critical systems applications
coupled with the government's history of systems development
difficulties portends problems in achieving substantial compliance
with FFMIA's requirements in the near future, particularly as
agencies are struggling to address critical Year 2000 computer
conversion issues.

Although the accounting standards were issued several years ago, some
agencies are not prepared to address key elements of the requirements
that became effective for fiscal year 1998.  For example, the
managerial cost accounting concepts and standards promulgated in
SFFAS No.  4\24 are aimed at providing reliable and timely
information on the full cost of federal programs, their activities,
and outputs.  The standard requires agency management to define
responsibility segments\25 and to measure and report the costs of
each segment's outputs.  However, management of several agencies have
expressed difficulty in linking responsibility segments to general
ledger accounts, which is necessary to assign costs to segment
outputs.

In addition, the deferred maintenance requirements of SFFAS No.  6
require disclosures related to the condition and the estimated cost
to remedy deferred maintenance of property, plant, and equipment.  As
we reported in January 1998,\26 a critical step in developing a
deferred maintenance estimate is a complete and reliable inventory of
property, plant, and equipment on which to assess maintenance needs.
However, in our report on the U.S.  government's fiscal year 1997
consolidated financial statements,\27 we identified the federal
government's inability to properly account for and report billions of
dollars of property, plant, and equipment as a material deficiency.
The lack of accurate accounting of property, plant, and equipment
could impede efforts to implement the deferred maintenance
requirements.  Moreover, the requirement to disclose deferred
maintenance will be a challenge because most agencies do not have
experience in generating agencywide estimates of deferred
maintenance.  Historically, agencies were not required to develop
deferred maintenance estimates for financial reporting purposes.
Although the 11 agencies responsible for almost 99 percent of
property, plant, and equipment\28 reported that they have estimated
deferred maintenance for budgetary and other purposes, these
estimates were generally limited in scope and not independently
verified.

Also, SFFAS No.  7 requires a new statement--Statement of
Financing--to show how budgetary resources obligated during the
period relate to the net cost of operations for that reporting
entity.  Several agencies have expressed concerns about having the
available resources to prepare the Statement.  In particular,
agencies are concerned that preparing the Statement will require
extensive analysis by trained accountants because agency accounting
systems have not been modified to support the preparation of the
Statement.  As a result, some agencies requested that FASAB defer the
requirements for the Statement of Financing for 2 years.  While FASAB
recently decided not to recommend deferral of the Statement, it,
along with OMB, GAO, and agency CFOs are working to develop a
presentation of required information that will satisfy requirements
of the standard with data which can be reasonably developed by
agencies' existing systems.  Agencies' problems implementing the new
accounting standards will be considered as part of fiscal year 1998
FFMIA reporting.

Agencies are further challenged by the condition of many of the
government's critical financial systems applications, which are not
designed to meet current accounting standards and systems
requirements.  These systems will need to be replaced or
significantly upgraded in the next 5 years.  OMB's Federal Financial
Management Status Report & Five-Year Plan reveals that as of the end
of fiscal year 1997, agencies identified 809 operating financial
management system applications that fall into this category.
According to OMB, this represents 72 percent of total applications in
operation.  OMB also reports that agencies lack the resources to
replace or upgrade some systems that need modernization.

The serious questions that remain in addressing the federal
government's Year 2000 readiness further complicate agencies' efforts
to improve their financial management systems.  We specifically
discussed the Year 2000 problem as a high-risk area in our February
1997 high-risk report,\29 and have issued guidance\30

to help organizations successfully address the issue.  To monitor
agencies' accountability in addressing the Year 2000 problem in their
systems, OMB requires agencies to regularly report on their progress.

We recently reported\31 that the CFO agencies' progress in addressing
Year 2000 computing issues continues at a slow pace.  Agencies are
appropriately focusing their priorities on Year 2000 compliance
issues, and consequently, other efforts to improve financial
management systems may be delayed, including efforts to address FFMIA
noncompliance.

--------------------
\23 Financial Management:  Implementation of the Federal Financial
Management Improvement Act of 1996 (GAO/AIMD-98-1, October 1, 1997).

\24 FASAB initially proposed that SFFAS No.  4 be effective for
fiscal year 1997.  FASAB subsequently recommended and the principals
adopted SFFAS No.  4 as effective for fiscal year 1998.

\25 A responsibility segment is a component of a reporting entity
that is responsible for carrying out a mission, conducting a major
line of activity, or producing one or a group of related products or
services.  Generally, a responsibility segment's manager reports
directly to the entity's top management, and its resources and
results of operations can be clearly distinguished from those of
other segments of the entity.

\26 Deferred Maintenance Reporting:  Challenges to Implementation
(GAO/AIMD-98-42, January 30, 1998).

\27 Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998).

\28 For our January report on deferred maintenance, we reviewed the
plans and progress of 11 agencies toward implementing this standard.

\29 High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, February 1997).

\30 Year 2000 Computing Crisis:  An Assessment Guide
(GAO/AIMD-10.1.14, September 1997), which includes the key tasks
needed to complete each phase of a Year 2000 program (awareness,
assessment, renovation, validation, and implementation), Year 2000
Computing Crisis:  Business Continuity and Contingency Planning
(GAO/AIMD-10.1.19, August 1998), which describes the tasks needed to
ensure the continuity of agency operations, and Year 2000 Computing
Crisis:  A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June
1998), which discusses the need to plan and conduct Year 2000 tests
in a structured and disciplined fashion.

\31 Year 2000 Computing Crisis:  Actions Must Be Taken Now to Address
Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998) and
Year 2000 Computing Crisis:  Strong Leadership and Partnerships
Needed to Mitigate Risk of Major Disruptions (GAO/T-AIMD-98-262,
August 13, 1998).

---------------------------------------------------------- Letter :7.1

Long-standing problems with agencies' financial management systems
decrease the government's ability to produce timely, uniform, and
reliable financial information, which is important for formulating
budgets, managing government programs, and making difficult policy
choices.  The federal government's size and complexity and the
discipline needed to fix its financial management systems present a
significant challenge.  It will take time and continued effort to
improve federal financial management systems to the level required by
FFMIA.

   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In comments on a draft of this report, the Deputy Controller of OMB's
Office of Federal Financial Management generally agreed that our
report fairly presented the status of the federal government's
implementation of FFMIA.  The Commissioner of FMS concurred with the
report's contents.  OMB also offered technical comments, which we
have incorporated as appropriate.

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Subcommittee on Oversight of Government
Management, Restructuring, and the District of Columbia, Senate
Committee on Governmental Affairs and Subcommittee on Government
Management, Information, and Technology, House Committee on
Government Reform and Oversight, other interested congressional
committees, the Director of OMB, the Secretary of the Treasury, heads
of the 24 CFO agencies, and agency CFOs and Inspectors General.
Copies will also be made available to others upon request.

This report was prepared under the direction of Gloria L.  Jarmon,
Director, Health and Human Services Accounting and Financial
Management, who may be reached at (202) 512-4476 if you or your
staffs have any questions.  Major contributors to this letter are
listed in appendix IV.

James F.  Hinchman
Acting Comptroller General

AGENCIES AND COMPONENTS REQUIRED
TO ISSUE AUDITED FINANCIAL
STATEMENTS FOR FISCAL YEAR 1997
=========================================================== Appendix I

Department of Agriculture
 Food and Consumer Service
 Forest Service
 Rural Development Service

Department of Commerce

Department of Defense
 Defense Logistics Agency Working Capital Funds
 Defense Security Assistance Agency
 Department of the Air Force General Funds
 Department of the Air Force Working Capital Funds
 Department of the Army General Funds
 Department of the Army Working Capital Funds
 Department of the Navy General Funds
 Department of the Navy Working Capital Funds
 Military Retirement Trust Fund
 National Defense Stockpile Transaction Trust Fund

Department of Education

Department of Energy

Department of Health and Human Services
 Health Care Financing Administration
 Indian Health Service

Department of Housing and Urban Development

Department of the Interior

Department of Justice

Department of Labor
 Unemployment Trust Fund

Department of State

Social Security Administration

Department of Transportation
 Federal Aviation Administration
 Highway Trust Fund

Department of the Treasury
 Bureau of Alcohol, Tobacco, and Firearms
 Bureau of Public Debt
 Internal Revenue Service
 United States Customs Service

Department of Veterans Affairs

Agency for International Development

Environmental Protection Agency

Federal Emergency Management Agency

General Services Administration

National Aeronautics and Space Administration

National Science Foundation

Nuclear Regulatory Commission

Office of Personnel Management
 Civil Service Retirement and Disability Fund

Small Business Administration

CFO AGENCIES' FISCAL YEAR 1997 NET
OUTLAYS, AUDIT OPINIONS, AND
TARGET DATES
========================================================== Appendix II

The 1990 CFO Act laid the legislative foundation for the federal
government to provide taxpayers, the nation's leaders, and agency
program managers with reliable financial information through audited
financial statements.  Under the CFO Act, as expanded by the
Government Management Reform Act of 1994, 24 major agencies, which
account for 99 percent of federal outlays, are required to annually
prepare organizationwide audited financial statements beginning with
those for fiscal year 1996.  Table II.1 lists the 24 CFO agencies,
their reported fiscal year 1997 net outlays, the audit opinion issued
for fiscal year 1997, and the fiscal year for which the agency
expects to first receive an unqualified opinion on its financial
statements, as reported in OMB's 1998 Federal Financial Management
Status Report & Five-Year Plan.

                                    Table II.1

                      The 24 CFO Agencies' Fiscal Year 1997
                         Net Outlays, Audit Opinions, and
                       Expected Dates to Obtain Unqualified
                                  Audit Opinions

                                                                    Expected
                                                                    date
                                        Reported                    to obtain an
                                     fiscal year                    unqualified
                                    1997 outlays                    opinion
                                             (in  Fiscal year 1997  (fiscal
Agency                                 billions)  audit opinion     year)
----------------------------------  ------------  ----------------  ------------
Department of Agriculture                  $52.5  Disclaimer        2000

Department of Commerce                       3.8  Disclaimer        1999

Department of Defense\a                    261.8  Disclaimer        after 2000

Department of Education                     30.0  Unqualified       N/A

Department of Energy                        14.5  Unqualified       N/A

Department of Health and Human             339.5  Qualified         1999
Services

Department of Housing and Urban             27.5  Qualified         1998
Development

Department of the Interior                   6.7  Unqualified       N/A

Department of Justice                       14.3  Disclaimer        2000

Department of Labor                         30.5  Unqualified       N/A

Department of State                          5.2  Not available     1999

Department of Transportation                39.8  Disclaimer        1999

Department of the Treasury                 379.3
Administrative Statements                         Unqualified       N/A
Custodial Statements                              Qualified         1999

Department of Veterans Affairs              39.3  Qualified         1998

Agency for International                     2.2  Disclaimer        1999
Development

Environmental Protection Agency              6.2  Unqualified       N/A

Federal Emergency Management                 3.3  Unqualified       1998
Agency\b

General Services Administration              1.1  Unqualified       N/A

National Aeronautics and Space              14.4  Unqualified       N/A
Administration

National Science Foundation                  3.1  Qualified         1998

Nuclear Regulatory Commission                0.1  Unqualified       N/A

Office of Personnel Management              45.4
Retirement Fund                                   Unqualified       N/A
Life Insurance Fund                               Unqualified       N/A
Revolving Funds                                   Disclaimer        2000
Health Benefits                                   Disclaimer        2000
Salaries and Expenses                             Disclaimer        2000

Small Business Administration                0.3  Unqualified       N/A

Social Security Administration             393.3  Unqualified       N/A

                                        $1,714.1
--------------------------------------------------------------------------------
\a The Department of Defense (DOD) is making some progress in meeting
the audited financial statement requirements of the CFO Act.
However, significant and long-standing deficiencies preclude DOD from
expecting an unqualified opinion on its agencywide consolidated
financial statements until after fiscal year 2000.

\b FEMA prepared combined financial statements for specified
activities and the Disaster Relief Fund.  FEMA plans to issue
agencywide consolidated financial statements for fiscal year 1998.

Source for reported fiscal year 1997 net outlays:  Budget of the
United States Government, Fiscal Year 1999.

(See figure in printed edition.)Appendix III
COMMENTS FROM THE OFFICE OF
MANAGEMENT AND BUDGET
========================================================== Appendix II

See comment 1.

See comment 2.

(See figure in printed edition.)

Now on p.  13.

The following are GAO's comments on the Office of Management and
Budget's letter of September 17, 1998.

GAO'S COMMENTS

1.  Report has been modified to reflect OMB's comment.

2.  Report has been modified to reflect that OMB's audit bulletin
addresses financial systems essential to meeting financial statement
preparation and budgetary reporting requirements.

3.  Report has been modified to accurately reflect the list of
agencies and components OMB provided, but the attachment has not been
included.

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C.

Deborah A.  Taylor, Assistant Director
Anastasia Kaluzienski, Senior Audit Manager
Diane Morris, Audit Manager
Sandra Silzer, Auditor

*** End of document. ***