Financial Management: Effective Implementation of FFMIA Is Key to
Providing Reliable, Useful, and Timely Data (06-JUN-02,
GAO-02-791T).
The Federal Financial Management Improvement Act (FFMIA) of 1996
ensures that agency financial management systems routinely
provide reliable and timely financial information on the
investment of resources, reduced costs and programs oversight.
Although many agencies are receiving unqualified opinions on
their financial statements, auditor determinations of FFMIA
compliance are lagging. To achieve the financial management
improvements envisioned by the Chief Financial Officers Act,
FFMIA, and more recently, the President's Management Agenda,
agencies need to modernize their financial systems to generate
reliable, useful, and timely financial information throughout the
year and at year-end.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-791T
ACCNO: A03523
TITLE: Financial Management: Effective Implementation of FFMIA
Is Key to Providing Reliable, Useful, and Timely Data
DATE: 06/06/2002
SUBJECT: Accountability
Financial management
Financial management systems
Information resources management
HUD Central Accounting and Program
System
U.S. Government Standard General Ledger
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GAO-02-791T
A
Testimony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government Reform,
House of Representatives
For Release on Delivery Expected at 10 a. m. EDT
FINANCIAL Thursday,
June 6, 2002 MANAGEMENT
Effective Implementation of FFMIA Is Key to Providing Reliable, Useful, and
Timely Data
Statement of Sally E. Thompson Director, Financial Management and Assurance
GAO- 02- 791T
Mr. Chairman and Members of the Subcommittee: I am pleased to be here to
discuss the challenges most of the federal departments and agencies still
face in meeting the basic expectations outlined in the Federal Financial
Management Improvement Act (FFMIA). As you requested, our testimony today
addresses the status of agencies? efforts to implement and maintain systems
that substantially comply with FFMIA. FFMIA builds on the foundation laid by
the Chief Financial Officers (CFO) Act of 1990 by emphasizing the need for
agencies to have financial
management systems that can generate timely, accurate, and useful
information with which to make informed decisions and to ensure
accountability on an ongoing basis. FFMIA requires the 24 CFO Act agencies
to implement and maintain financial management systems that comply
substantially with the (1) federal financial management systems
requirements, (2) applicable federal accounting standards, and (3) U. S.
Standard General Ledger (SGL) at the transaction level. Further, FFMIA
requires auditors to report in their CFO Act financial statement audit
reports whether the agencies? financial management systems comply with
FFMIA?s requirements. We are also required to report annually on the
implementation of the act. We plan to issue our sixth annual report on
agency compliance with FFMIA by October 1 of this year. The results of the
fiscal year 2001 FFMIA assessments performed by agency inspectors general
(IG) or their contract auditors again show that the same types of problems
still plague the financial management systems
used by the 24 CFO Act agencies. While much more severe at some agencies
than others, the nature and severity of the problems indicate that, overall,
agency management lacks the full range of information needed for
accountability, performance reporting, and decision making. While the
CFO Act agencies have obtained more clean or unqualified audit opinions on
their financial statements, often through extraordinary, labor- intensive
measures, there is little evidence of marked improvements in agencies?
capacities to create the full range of information needed to manage day-
today
operations. As we have previously testified 1 before this subcommittee, 1 U.
S. General Accounting Office, U. S. Government Financial Statements: FY 2001
Results Highlight the Continuing Need to Accelerate Federal Financial
Management Reform,
GAO- 02- 599T (Washington, D. C.: April 9, 2002) and Financial Management:
Agencies Face Many Challenges in Meeting the Goals of the Federal Financial
Management Improvement Act, GAO/ T- AIMD- 00- 178 (Washington, D. C.: June
6, 2000).
if agencies continue year after year to rely on significant costly and
timeintensive manual efforts to achieve or maintain unqualified opinions
without improving underlying financial management systems, it can mislead
the public about the true status of the agencies? financial management
capabilities. An unqualified opinion achieved on this basis will become an
accomplishment without much substance.
Increasing attention from the highest levels of the federal government is
being targeted on improving federal financial management. Most importantly,
The President?s Management Agenda Fiscal Year 2002 includes improved
financial performance as one of the five top governmentwide management
goals. Improvement in federal financial management systems is central to
achieving improved financial performance. The administration plans to use
the Executive Branch Management Scorecard to highlight agency progress in
achieving the management and performance improvements embodied in the
President?s
Management Agenda. Moreover, the Joint Financial Management Improvement
Program (JFMIP) principals 2 have been holding a series of periodic meetings
that have resulted in unprecedented substantive deliberations and agreements
focused on key reform issues such as betterdefined measures for gauging
financial management success and the establishment of audit committees. In
addition, the JFMIP principals have agreed to significantly accelerate
financial statement reporting so that the government?s financial statements
are more timely and to discourage costly efforts designed to obtain
unqualified opinions without addressing underlying systems challenges. For
fiscal year 2004, agency audited financial statements are to be issued no
later than November 15. These top management efforts underscore the critical
need for the modernization of financial management systems as called for by
the CFO Act, including the systematic measurement of performance;
development of cost information; and integration of program, budget, and
financial information.
Today I will discuss (1) auditors? determinations of FFMIA compliance for
fiscal year 2001, (2) problems that affect agency systems? compliance with
FFMIA, (3) current actions leading to renewed emphasis on timely, accurate,
and useful information from federal financial management
2 The JFMIP principals are the Secretary of the Treasury, the Directors of
the Office of Management and Budget (OMB) and the Office of Personnel
Management (OPM), and the Comptroller General of the United States. JFMIP is
a joint and cooperative undertaking of OMB, the Department of the Treasury,
OPM, and GAO working with executive agencies to improve financial management
practices throughout the government.
systems, (4) the increasing importance of managerial cost information to
fulfill the objectives of the President?s Management Agenda, and (5) agency
efforts to implement new financial management systems. To develop this
testimony, we analyzed the audit reports issued for the 24 CFO Act agencies
for fiscal year 2001 and summarized previously issued GAO
reports. We also included information from our ongoing work on cost
management in the federal government. We conducted our work in accordance
with generally accepted government auditing standards. Auditors? Most
agencies do not yet have timely, accurate, and useful financial
Determinations of
information, including cost data, with which to make informed decisions and
ensure accountability on an ongoing basis. IGs and their contract FFMIA
Compliance for auditors reported that the systems of 20 of the 24 CFO Act
agencies did not Fiscal Year 2001
substantially comply with at least one of FFMIA?s three requirements for
fiscal year 2001. As shown in figure 1, the long- standing weaknesses in
agency financial management systems, including internal control issues,
can be seen by the steady number of agencies with systems that did not
substantially comply with FFMIA over the past several years. In contrast, as
also shown in figure 1, the number of qualified or disclaimers of opinions
on agency financial statements have steadily decreased over the past 5 years
from 13 for fiscal year 1997 to 6 for fiscal years 2000 and 2001. This
decrease in qualified and disclaimers of opinions results from monumental
efforts in which agencies expend significant resources simply to prepare
financial statements. For agencies equipped with modern, fully integrated
financial management systems, preparation of financial statements would be
more routine and much less costly.
Auditors for four agencies- the Departments of Energy and Labor, the General
Services Administration (GSA), and the Social Security Administration
provided negative assurance in reporting on FFMIA compliance for fiscal year
2001, meaning that nothing came to their attention indicating these
agencies? financial management systems do not
meet FFMIA requirements. If readers do not understand the concept of
negative assurance, they may have gained an incorrect impression that these
systems have been reported by the auditors to be substantially
compliant. It is our opinion that because the act requires auditors to
?report whether? agency systems are compliant, the auditor needs to provide
positive assurance, which would be a definitive statement as to whether
agency financial management systems comply with FFMIA. We provide positive
assurance on FFMIA compliance for those federal entities
for which we conduct financial audits. For example, we reported that the
Internal Revenue Service?s financial management systems did not
substantially comply with FFMIA. Later in my statement, I will discuss other
implications related to FFMIA compliance testing and reporting.
Figure 1: Agency Systems? Compliance with FFMIA 1997 through 2001
25 Number of agencies
20 15 10
5 0
1997 1998 1999 2000 2001 Years
Qualified/ disclaimer opinions Noncompliant systems
Source: Agency audit reports for fiscal years 1997 through 2001.
Widespread Systems The continuing trend of noncompliance with FFMIA
indicates the overall Problems Affect
long- standing poor condition of agency financial systems. Correcting the
systems problems is a difficult challenge for agencies because of the age
FFMIA Compliance
and poor condition of their critical financial systems. Some of the federal
government?s computer systems were originally designed and developed years
ago (in some cases, over a decade ago) and do not meet current systems
requirements. These legacy systems cannot provide reliable financial
information for key governmentwide initiatives, such as integrating budget
and performance information.
Based on our review of the fiscal year 2001 audit reports for the 20
agencies reported to have systems not in substantial compliance with one or
more of FFMIA?s three requirements, we identified six primary reasons. The
weaknesses reported by the auditors ranged from serious, pervasive systems
problems to less serious problems that may affect one aspect of an agency?s
accounting operation:
nonintegrated financial management systems,
inadequate reconciliation procedures,
lack of accurate and timely recording of financial information,
noncompliance with the SGL,
lack of adherence to federal accounting standards and/ or OMB
requirements, and
weak security controls over information systems. Figure 2 shows the
relative frequency that these problems were cited by the auditors at the 20
agencies. However, the auditors may not have reported these problems as
specific reasons for lack of substantial compliance with
FFMIA. We caution that the degree of noncompliance in a particular category
may be even greater since auditors may not have included all problems
affecting FFMIA compliance in their reports. For some agencies, the problems
are so serious and well known that the auditor can readily determine that
the systems lack substantial compliance without examining every facet of
FFMIA compliance. Therefore, the reported problems may not be all-
inclusive.
Figure 2: Problems Reported by the Auditors for Fiscal Year 2001 24 Number
of agencies
20
20 16
14 14
13
12
12
8
8
4 0
entries SGL
of Weak systems
Inadequate Untimely Lack adherence accounting
standards information
security to Nonintegrated reconciliations Noncompliance
Source: GAO analysis of agency audit reports for fiscal year 2001. We did
not independently verify or test the data in the agency audit reports.
Nonintegrated Financial According to the CFO Act, each of the 24 agencies is
to develop and Management Systems
maintain an integrated accounting and financial management system 3 that 3
Federal financial system requirements define an integrated financial system
as one that coordinates a number of previously unconnected functions to
improve overall efficiency and control. Characteristics of such a system
include (1) standard data classifications for recording financial events,
(2) common processes for processing similar transactions, (3) consistent
control over data entry, transaction processing, and reporting, and (4) a
system design that eliminates unnecessary duplication of transaction entry.
complies with federal systems requirements and provides for (1) complete,
reliable, consistent, and timely information that is responsive to the
financial information needs of the agency and facilitates the systematic
measurement of performance, (2) the development and reporting of cost
information, and (3) the integration of accounting, budgeting, and program
information. In this regard, OMB Circular A- 127, Financial Management
Systems, requires agencies to establish and maintain an integrated
financial management system that conforms with JFMIP?s functional
requirements.
An integrated financial system coordinates a number of functions to improve
overall efficiency and control. For example, integrated financial management
systems are designed to avoid unnecessary duplication of transaction entry
and greatly lessen reconciliation issues because transactions are entered
only once. Moreover, with an integrated financial management system, an
agency is more likely to have reliable, useful, and
timely financial information for day- to- day decision making as well as
external reporting. Agencies that do not have integrated financial
management systems typically must expend major effort and resources,
including in some cases hiring external consultants, to develop information
that their systems should be able to provide on a daily or recurring basis.
In addition, opportunities for errors are significantly increased when
agencies? systems are not integrated. Agencies with nonintegrated financial
systems are more likely to be required to devote more resources to
collecting information than those with integrated systems. OMB?s accelerated
reporting dates for
agency performance and accountability reports 4 make these major efforts and
devotion of resources unsustainable in the long term. In fiscal year 2001,
agency performance and accountability reports were due February 27, 2002. In
contrast, under OMB?s current reporting requirements, agency performance and
accountability reports for fiscal year 2002 are due to OMB by February 1,
2003. OMB is further accelerating the deadline so that by fiscal year 2004,
agencies will submit these reports by November 15, 2004. With these new
accelerated reporting dates, it will be difficult for agencies to continue
to rely on significant, costly, and timeintensive
manual efforts to achieve or maintain unqualified opinions until automated,
integrated processes and systems are implemented that readily 4 Agency
performance and accountability reports include the audit report and the
audited financial statements.
produce the necessary information. As a result, many agencies must
accelerate their efforts to improve underlying financial management systems
and controls, which is consistent with reaching the financial management
success measures envisioned by the President?s Management Agenda and the
JFMIP principals. Auditors frequently mentioned the lack of modern,
integrated financial management systems in their fiscal year 2001 audit
reports. As shown in
figure 2, auditors for 14 of the 20 agencies with noncompliant systems
reported this as a problem. For example, the Department of Education?s lack
of a fully integrated financial management system seriously affects its
ability to accumulate, analyze, and present reliable financial information.
According to its auditors, Education compiles its financial statements
through a multistep process that includes both manual and automated
procedures, which increase the risk of errors in the departmentwide
financial statements. These manual processes can lead to errors that may
affect current and prior fiscal years. For example, Education recorded
numerous restatements and reclassifications of prior fiscal year financial
statement balances based on its extensive analysis of certain general ledger
balances in an effort to resolve errors that existed in past years. While
the auditors noted that some of the entries to correct or reclassify amounts
resulted from Education?s extensive analysis, the identification of these
errors reinforces concerns about Education?s lack of an integrated financial
management system. According to the auditors, Education processed and
approved adjustments to correct or reclassify amounts that were later
discovered to be erroneous. These new errors resulted in the need for
additional manual adjustments to correct these new errors, which cast doubt
on the sufficiency of the process for reviewing and approving
adjustments. To focus attention on long- standing financial management
issues, the Secretary of Education created a Management Improvement Team
(MIT). The MIT?s goals include addressing outstanding recommendations
related to the financial statement audits and ensuring an
environment with effective internal controls. The Education IG noted that
the MIT has identified corrective actions for improving the department?s
programs and operations.
The Department of Defense?s (DOD) lack of integration between its financial
management systems and its other business systems is a critical issue to be
addressed in its transformation of business practices. DOD has reported that
an estimated 80 percent of the data needed for sound financial management
comes from other business operations, such as its acquisition and logistics
communities. As we testified in March, 5 DOD?s
vast array of costly, nonintegrated, duplicative, and inefficient financial
management systems reflects the lack of an enterprisewide, integrated
approach to addressing its management challenges. DOD?s Under Secretary of
Defense (Comptroller) has stated that the development of a financial
management enterprise architecture 6 is a major step toward achieving the
Secretary?s goal of transforming DOD?s outdated support structure, including
decades old financial systems that are not well interconnected. Most
recently, DOD selected International Business Machines (IBM) to develop its
departmentwide financial management enterprise architecture and set aside
nearly $100 million for this effort. According to DOD officials, this reform
effort will integrate the
department?s systems and business processes in the fields of logistics,
health care, accounting, finance, personnel and other areas and reduce the
more than 1100 stand- alone systems currently generating financial
information.
5 U. S. General Accounting Office, DOD Financial Management: Integrated
Approach, Accountability, Transparency, and Incentives Are Keys to Effective
Reform, GAO- 02- 497T (Washington, D. C.: March 6, 2002). 6 An enterprise
architecture establishes an agency?s roadmap to achieve its mission through
the optimal performance of its core business practices within an efficient
Information Technology environment. Enterprise architectures are
?blueprints? used for defining an agency?s current (baseline) and desired
(target) environments along with a capital investment roadmap for
transitioning from the current to the target environment.
Inadequate Reconciliation A reconciliation process, even if performed
manually, is a valuable part of a
Procedures sound financial management system. In fact, the less integrated
the
financial management system, the greater the need for adequate
reconciliations because data for the same transaction may be separately
entered in multiple systems, causing the risk of errors to be greater. For
example, according to its auditors, the Agency for International Development
(AID) places a greater reliance on processes like
reconcilations because it lacks an integrated system. Reconciliation of
records from the multiple systems would ensure transaction data were entered
correctly in each one. Reconciliation procedures are a control necessary to
maintain and substantiate the accuracy of the data reported in an agency?s
financial statements and reports. The Comptroller General?s
Standards for Internal Control in the Federal Government 7 highlights
reconciliation as a key control activity. As shown in figure 2, auditors for
13 of the 20 agencies with noncompliant systems reported that the agencies
had reconciliation problems, including difficulty reconciling their Fund
Balance with Treasury accounts 8 with the Department of the Treasury?s
records. Treasury policy requires agencies to reconcile their accounting
records with Treasury records monthly, which is comparable to individuals
reconciling their checkbooks to their monthly
bank statements. However, such reconciliations are not being routinely
performed. For example, some of the fund balances with Treasury for the
Department of State did not reconcile with Treasury?s fund balance amounts.
State?s auditors reported that the absolute difference 9 between
State?s and Treasury?s balances as of September 30, 2001, was about $131
million. State?s auditors noted that while progress had been made in
reducing the net difference between State?s and Treasury?s records,
weaknesses in the reconciliation process still remain, particularly
affecting older fund balances. The auditors recommended that State reexamine
its reconciliation processes and also assess whether adjustments should be
made to its records. 7 U. S. General Accounting Office, Standards for
Internal Control in the Federal Government, GAO/ AIMD- 00- 21. 3. 1
(Washington, D. C.: November 1999). 8 Agencies record their budget spending
authorizations in their Fund Balance with Treasury
accounts. Agencies increase or decrease these accounts as they collect or
disburse funds. 9 Absolute differences are computed with all numbers
considered to be positive numbers.
Inadequate reconciliation procedures also complicate the identification and
elimination of intragovernmental transactions. As we testified in April, 10
agencies have not reconciled intragovernmental balances with their
trading partners 11 and, as a result, information reported to Treasury is
not reliable. For several years, OMB and Treasury have required the CFO Act
agencies to reconcile selected intragovernmental activity and balances
with their trading partners. However, numerous agencies did not fully
perform these reconciliations for fiscal year 2000. Beginning with fiscal
year 2001, OMB and Treasury required agency CFOs to report on the extent
and results of intragovernmental activity reconciliation efforts. The IGs
reviewed these reports and communicated the results to OMB, Treasury, and
GAO. IGs reported that the required reconciliations for fiscal year 2001
were not fully performed, citing reasons such as (1) trading partners? not
providing needed data, (2) limitations and incompatibility of agency and
trading partner systems, and (3) human resource issues. For fiscal years
2001 and 2000, amounts reported for agency trading partners for certain
intragovernmental accounts were significantly out of balance. The continued
involvement of the CFO Act agencies, the JFMIP principals and OMB will be
critical to resolving this issue.
Lack of Accurate and Timely Accurate and timely recording of financial
information is key to successful Recording of Financial financial
management. Recording transactions timely can facilitate Information
accurate reporting in agencies? financial reports and other management
reports that are used to guide managerial decision making. The Comptroller
General?s Standards for Internal Control in the Federal Government states
that transactions should be promptly recorded to maintain their relevance
and value to management in controlling operations and making decisions. As
shown in figure 2, auditors for 12 of the 20 agencies with noncompliant
systems found that agencies did not accurately and timely record
transactions in the general ledger.
10 U. S. General Accounting Office, U. S. Government Financial Statements:
FY 2001 Results Highlight the Continuing Need to Accelerate Federal
Financial Management Reform, GAO- 02- 599T (Washington, D. C.: April 9,
2002).
11 Trading partners are U. S. government agencies, departments, or other
components that do business with each other.
The lack of timely transaction recording can also result in the use of
inaccurate information for decision making. For example, auditors for six
agencies reported that unliquidated obligations 12 were not deobligated
timely due to the lack of procedures for reviewing unliquidated obligations
or the failure to follow these procedures. Agency failure to deobligate
funds timely may result in the loss of the use of those funds. For example,
auditors for the Department of Transportation (DOT) identified about $293
million of obligations that were no longer needed and could be used for
other valid purposes or returned to the U. S. Treasury.
Untimely transaction recording during the fiscal year can also result in
substantial efforts at fiscal year- end to perform extensive manual
financial statement preparation efforts that are susceptible to error and
increase the risk of misstatements. For example, auditors reported that
Department of Justice components did not perform their accrual- based
financial transaction processing on an ongoing basis. Auditors for two
components, the Drug Enforcement Administration and the Offices, Boards, and
Divisions, stated that the financial statement preparation effort must be a
componentwide effort, involving all program budget and administrative
offices. Gathering financial data only at year- end does not provide
adequate time to analyze transactions or account balances. Without time to
perform these analyses, misstated or unsupported financial statement account
balances can occur. Further, it impedes management?s ability to have timely
and useful information for decision making.
12 The value of goods and services ordered and obligated which have not been
paid.
Noncompliance with the Implementing the SGL at the transaction level is one
of the specific
SGL requirements of FFMIA. However, as shown in figure 2, auditors for 8 of
the 20 noncompliant agencies reported that the agencies? systems did not
comply with SGL requirements. The SGL, mandated for use by OMB and Treasury
in 1986, promotes consistency in financial transaction processing and
reporting by providing a uniform chart of accounts and pro forma
transactions. These defined accounts and pro forma transactions are used to
standardize the accumulation of agency financial information, as well as
enhance financial control and support financial statement preparation and
other external reporting. By not implementing the SGL, agencies are
challenged to provide consistent financial information across their
component agencies and functions. For example, auditors for AID
reported that AID does not report on its mission activities 13 using the SGL
at the transaction level. These mission activities account for approximately
52 percent of AID?s total net cost of operations. AID records its mission
activities in its Mission Accounting and Control System- an
automated system that uses transaction codes that do not match to the SGL
chart of accounts. AID uses a monthly process to crosswalk these mission
transactions to the SGL, but cannot ensure that transactions are posted
properly and consistently from mission to mission. OMB officials have stated
that while this monthly process may be a good interim solution until AID has
fully implemented its new core financial system, this process does
not allow AID?s systems to be substantially compliant with the SGL at the
transaction level. Until AID deploys its newly implemented core financial
system worldwide, it will continue to use the Mission Accounting and Control
System for its overseas missions. 14
The Department of Housing and Urban Development?s (HUD) Federal Housing
Administration (FHA) must use several manual processing steps to convert its
commercial accounts to SGL accounts. FHA?s legacy core financial system,
which includes its general ledger, is based on commercial rather than
governmental accounting. FHA has 22 systems that feed
transactions to its core financial system, 15 of which cannot process
transactions in the SGL format. FHA?s manual processes include the use of
personal computer- based software to convert its commercial accounts to
13 An AID mission is a representative in a cooperating country. AID has
overseas missions and offices that manage projects associated with this
foreign assistance. 14 AID has estimated that the worldwide deployment of
the core financial system will not begin until fiscal year 2008.
the SGL. FHA then transfers the balances to HUD?s Central Accounting and
Program System (HUDCAPS). HUD?s auditors noted that FHA?s current process
does not meet federal financial management systems requirements that a core
financial system ?provide for the automated and year- end
closing of SGL accounts and rollover of the SGL account balances.? FHA has
completed the initial phases of its project to implement a commercial off-
the- shelf (COTS) financial software system. FHA intends to complete
implementation of the general ledger module of this COTS system by the
beginning of fiscal year 2003, including the implementation of the SGL at
the transaction level.
Lack of Adherence to FFMIA requires that agencies? financial management
systems comply with Federal Accounting
applicable federal accounting standards, which are developed by the
Standards
Federal Accounting Standards Advisory Board (FASAB). Agency CFOs are
required to use these standards in developing financial management systems
and in preparing financial statements. Currently, there are 22
statements of federal financial accounting standards (SFFAS) and 3
statements of federal financial accounting concepts. FASAB continues to
deliberate on new and emerging issues that could result in the promulgation
of additional standards; therefore, agencies? systems must be
able to accommodate any new standards issued in the future. As shown in
figure 2, auditors for 14 of the 20 agencies with noncompliant systems
reported that these agencies had problems complying with one or more federal
accounting standards. Auditors reported that agencies are having problems
implementing standards that have been in effect for some time, as well as
standards that have been promulgated in the last few years. Auditors for 3
agencies reported weaknesses affecting compliance with
SFFAS No. 7, Revenue and Other Financing Sources, which became effective in
fiscal year 1998. For example, FHA, a major component of HUD, was reported
by the HUD IG to be in violation of the Anti- Deficiency
Act due to a lack of systems and processes capable of fully monitoring and
controlling budgetary resources. Auditors for 5 agencies reported trouble
implementing SFFAS No. 10, Accounting for Internal Use Software, which
became effective at the beginning of fiscal year 2001.
Auditors for 7 agencies reported problems implementing SFFAS No. 4,
Managerial Cost Accounting Concepts and Standards. The requirement for
managerial cost information has been in place since 1990 under the CFO Act
and since 1998 as a federal accounting standard. For example, auditors for
the Department of Agriculture stated that the department?s
systems have not been designed to enable them to provide sufficient and
relevant data to comply with SFFAS No. 4. Specifically, the auditors? review
of the accounting for user fees at two agencies disclosed that both
agencies were not including the full costs of their user fee programs when
determining fees. As a result, Agriculture is unable to provide reliable and
timely cost information.
Later in my statement today, I will discuss further the impact of managerial
cost information on implementation of the President?s Management Agenda.
While SFFAS No. 4 uses the term ?managerial cost accounting,? some agencies
have adopted the term ?cost management? instead to
emphasize that cost and performance data are needed to improve management
decision making and goes beyond the cost data required for external
reporting.
Weak Security Controls over Information security weaknesses are one of the
frequently cited reasons Information Systems
for noncompliance with FFMIA and are a major concern for federal agencies
and the general public. These weaknesses are placing enormous amounts of
government assets at risk of inadvertent or deliberate misuse, financial
information at risk of unauthorized modification or destruction, sensitive
information at risk of inappropriate disclosure, and critical operations at
risk of disruption. Auditors for 20 of the 24 CFO Act agencies identified
weaknesses in security controls over information systems. Auditors for the 4
agencies that provided negative assurance in reporting on compliance with
FFMIA, in their fiscal year 2001 audit reports did not consider the computer
security problems identified significant enough to be instances of a lack of
substantial compliance with FFMIA. Unresolved
information security weaknesses could adversely affect the ability of
agencies to produce accurate data for decision making and financial
reporting because such weaknesses could compromise the reliability and
availability of data that are recorded in or transmitted by an agency?s
financial management system.
Concerned with reports of significant weaknesses in federal computer systems
that make them vulnerable to attack, the Congress enacted Government
Information Security Reform (GISR) provisions 15 to reduce these risks and
provide more effective oversight of federal information security. GISR
requires agencies to implement an information security program that is
founded on a continuing risk management cycle and largely
incorporates existing security policies found in OMB Circular A- 130,
Management of Federal Information Resources, Appendix III. GISR also added
an important new requirement by calling for both annual management and
independent evaluations of the information security program and practices of
an agency. We recently testified 16 that information security weaknesses
were most often identified 17 for (1) security program management, (2)
access controls, and (3) service continuity controls. Security program
management provides the framework for ensuring that risks are understood and
that effective controls are selected and properly implemented. Access
controls ensure that only authorized individuals can read, alter, or delete
data. Service continuity controls ensure that when unexpected events occur,
such as the
terrorist attacks on September 11, 2001, critical operations will continue
without undue interruption and that crucial, sensitive data are protected.
All 24 agencies were reported to have weaknesses in security program
management and access controls. Nineteen of the 24 agencies were reported to
have weaknesses in their service continuity controls.
Information security weaknesses were cited by auditors for the National
Science Foundation (NSF) as an instance in which NSF?s systems did not
substantially comply with FFMIA?s federal financial management systems
requirements. 18 Auditors reported that NSF had several weaknesses in its
agencywide information security that result in vulnerabilities in logical
and physical access controls and has certain vulnerabilities in the design,
administration, and monitoring of its controls. Specifically, the auditors
noted weaknesses in several areas including (1) application security
15 These provisions are part of the Floyd D. Spence National Defense
Authorization Act for Fiscal Year 2001. 16 Information Security: Additional
Actions Needed to Fully Implement Reform Legislation, GAO- 02- 470T
(Washington, D. C.: March 6, 2002). 17 We analyzed the results of IG and GAO
audit reports published from July 2000 through September 2001, including the
results of the IGs? independent evaluations. 18 NSF?s systems had been
reported to be compliant for fiscal years 1997 through 2000.
design, (2) database security, (3) intrusion detection, (4) physical access,
and (5) administration of access privileges. These weaknesses increase NSF?s
vulnerability to unauthorized viewing, modification, and deletion of
financial and other sensitive data, accidentally or deliberately, by
internal and external parties. While NSF has been responsive to initiating
corrective actions to address these vulnerabilities, limited resources and
competing management priorities have affected its ability to fully address
these weaknesses.
As we recently reported, 19 the overriding reason that Treasury?s Financial
Management Service (FMS) continues to have problems related to its computer
controls is that FMS does not have an effective entitywide computer security
program. Consequently, billions of dollars 20 of payments and collections
are at significant risk of loss or fraud, sensitive data are at risk of
inappropriate disclosure, and critical computer- based operations are
vulnerable to serious disruptions. For fiscal year 2001, the Treasury IG
continued to report computer controls as a material weakness at FMS. Work
Performed by
While the FFMIA requires auditors to report on the compliance of agency
Auditors to Determine
systems with the act in the financial statement audit reports, the
assessment of compliance can be performed as a separate review. FFMIA
Compliance
Moreover, this separate review could be conducted during another period of
the year or staggered throughout the year when the auditors? workloads are
not as burdensome. While financial statement audits offer some
assurances regarding FFMIA compliance, the work needed to assess the
compliance of systems with FFMIA is more comprehensive than the testing
normally performed as part of a financial statement audit. 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. In contrast, FFMIA
requires auditors to assess whether an agency?s financial management
systems comply with systems requirements and provide complete, accurate, and
timely information for managing day- to- day operations.
19 U. S. General Accounting Office, Financial Management Service:
Significant Weaknesses in Computer Controls Continue, GAO- 02- 317
(Washington, D. C.: January 2002). We assessed general computer controls
over key financial systems as of September 30, 2000. 20 FMS is the
government?s financial manager, central disburser, collections agency, as
well
as its accountant and reporter of financial information.
FFMIA was designed to lead to system improvements that provide agency
managers with useful information to measure performance and increase
accountability on an ongoing basis, rather than just at year- end. In our
most recent report on FFMIA, 21 we recommended that OMB develop additional
guidance, in accordance with the Financial Audit Manual (FAM), 22 to specify
expected procedures for auditors to perform when
assessing FFMIA compliance. This additional guidance should clearly outline
(1) the minimum scope of work and (2) the procedures for auditors to perform
in determining whether management has reliable, timely, and useful financial
information for managing day- to- day operations. Working jointly with
representatives from the President?s Council on Integrity and
Efficiency (PCIE), we have drafted a section for the FAM with detailed audit
steps for testing agencies? systems? compliance with FFMIA. If appropriately
implemented, these detailed work steps should provide a sufficient basis to
conclude as to whether agencies? systems comply with FFMIA. We will continue
to work with PCIE to finalize this new section of the FAM. Remediation Plans
FFMIA requires agency management to prepare remediation plans, in Improved
but Continue
consultation with OMB, that describe the corrective actions they plan to
take to resolve their instances of noncompliance, as well as the target
dates to Lack Important and resources necessary to bring financial systems
into substantial Details compliance with FFMIA requirements. Although the
plans have improved over the years, in the past, we have consistently found
that many of these plans lack sufficient detail and descriptions of the
resources needed for
executing the corrective actions. We are reviewing the remediation plans
agencies prepared to address the instances of lack of substantial compliance
with FFMIA reported for fiscal year 2000 and will report the
results of our analysis in our report to be issued by October 2002. 21 U. S.
General Accounting Office, Financial Management: FFMIA Critical for Federal
Accountability, GAO- 02- 29 (Washington, D. C.: October 1, 2001). 22 The
Financial Audit Manual, jointly issued by GAO and the President?s Council on
Integrity and Efficiency, provides the methodology for performing financial
statement audits of federal entities.
Increasing Emphasis on Improving Financial Management from the
Highest Levels of Government
President?s Management
The administration, with its release of the President?s Management Agenda
and the Executive Agenda in August 2001, has set forth improved financial
performance as Branch Management
one of its five governmentwide initiatives. OMB?s criteria for measuring
Scorecard improved financial performance include not just getting clean
opinions on agency financial statements, but also (1) ensuring that
financial
management systems meet federal requirements, (2) integrating financial and
performance management systems to support day- to- day agency operations,
and (3) resolving repeated material weaknesses. 23 This is another area that
the JFMIP principals have addressed and on which they are in agreement. The
administration plans to use the Executive Branch Management Scorecard, based
on OMB?s criteria, to highlight agencies? progress in achieving the
improvements embodied in the President?s Management Agenda. This is a step
in the right direction to improving management and performance, but the
value of the scorecards will be the degree to which the scores lead to
sustained focus and demonstrable improvements. It is important that there be
continual rigor in the scoring
process for the approach to be credible and effective. OMB has provided its
baseline scores judging agency financial management as of September 30,
2001, and an updated version of the scorecard will be
released during the summer. JFMIP Principals In August 2001, the JFMIP
principals began a series of periodic meetings that have resulted in
unprecedented substantive deliberations and
agreements focused on key financial management reform issues, such as better
defining measures for financial management success. As mentioned previously,
the principals agreed to significantly accelerate financial 23 A material
weakness is a condition that precludes the entity?s internal control from
providing reasonable assurance that misstatements, losses, or noncompliance
material in relation to the financial statements would be prevented or
detected on a timely basis.
statement reporting so that the government?s financial statements are issued
more timely and to discourage costly efforts designed to obtain unqualified
opinions on financial statements without addressing the underlying systems
challenges. In these meetings, the principals have focused on key issues,
some of which I have already highlighted, such as:
defining success measures for financial management performance that go far
beyond an unqualified audit opinion on financial statements and include
measures such as financial management systems that routinely provide timely,
reliable, and useful financial information and no material internal control
weaknesses or material noncompliance with laws and
regulations and FFMIA requirements;
restructuring the FASAB?s composition to enhance the independence of the
board and increasing public involvement in setting standards for federal
financial accounting and reporting;
establishing audit committees for the major federal agencies;
overseeing DOD?s business transformation efforts;
monitoring actions to modernize and reduce the cost of routine operations
of federal payroll systems; and
addressing the impediments to an audit opinion on the U. S. government?s
consolidated financial statements, including intragovernmental transactions.
Future meetings will enable the JFMIP principals to reach agreements and
monitor progress on strategies critical to the full and successful
implementation of federal financial management reform.
Managerial Cost According to the President?s Management Agenda, the
accomplishment of
the other four governmentwide initiatives 24 will matter little without the
Information Is Critical integration of agency budgets with performance. The
lack of a consistent for Implementing the information and reporting
framework for performance, budgeting, and
President?s
accounting obscures how well government programs are performing as
Management Agenda
well as comparisons of performance and cost across programs. Timely,
accurate, and useful financial and performance information can form the
basis for reconsidering the relevance or ?fit? of any federal program or
activity in today?s world and for the future. However, even the most
meaningful links between performance results and resources consumed
are only as good as the underlying data. Therefore, agencies must first
address long- standing problems within their financial systems.
Linking of agency budgets with performance is enhanced when agencies
integrate managerial cost information into their program activities (or
lines of business). For example, Treasury?s IG stated that one of the
management and performance challenges 25 that Treasury faces is the
integration of cost accounting with its business activities. Currently,
Treasury managers are unable to link resources to results and often report
their accomplishments based on anecdotal performance evidence and outdated
financial information.
Agency implementation of managerial cost accounting can be a complex and
arduous task. For example, the Federal Aviation Administration (FAA) has
been developing a cost accounting system, as required by the Federal
Aviation Reauthorization Act of 1996, 26 for several years. DOT?s IG
recently reported 27 that notwithstanding the progress and successes
realized so far, FAA still faces significant challenges to complete and
operate a credible 24 The other four governmentwide initiatives are improved
financial performance, strategic management of human capital, competitive
sourcing, and expanded electronic government. 25 U. S. Department of the
Treasury, Office of the Inspector General, Management and
Performance Challenges Facing the Department of the Treasury (Washington, D.
C.: January 30, 2002). 26 This act required FAA to develop a cost accounting
system that adequately and accurately reflects the investments, operating
and overhead costs, revenues, and other financial measurement and reporting
aspects of its operations. 27 U. S. Department of Transportation, Office of
Inspector General, 2001 Status Assessment of Cost Accounting System and
Practices, Federal Aviation Administration (Washington, D. C.: January 10,
2002).
cost accounting system. FAA still needs to (1) implement, on a timely basis,
fully developed cost accounting and labor distribution systems, (2)
establish cost and performance management practices, (3) account for
overhead costs, (4) track assets, and (5) develop an adequate system of
internal controls.
Other agencies have adopted various methods of accumulating and assigning
costs to obtain managerial cost information needed to enhance programs,
improve processes, establish fees, develop budgets, prepare
financial reports, and report on performance. A number of agencies have
implemented activity- based costing (ABC), which creates a cost model of an
organization by identifying the activities performed, the resources
consumed, and the outputs (products and services) produced by that
organization. ABC then uses accounting and workload data to assign costs to
the activities and related outputs. For example, the Small Business
Administration (SBA) uses ABC to support financial reporting, management
decision making, performance reporting, budgeting, and cost reimbursements.
For example, SBA has used information from its cost management system to
prepare the Statement of Net Costs, make resource
allocation decisions, and provide information for outsourcing alternatives.
SBA has also used managerial costing to provide a crosswalk between the
costs of activities and programs and the agency?s strategic goals and
objectives. SBA?s cost allocation model provides information about the full
costs (direct and indirect) of its programs as well as unit costs for many
program outputs. In fiscal year 2001, SBA began using activity- based
budgeting (ABB) to analyze program office budgets. The purpose of ABB is to
show the linkage between the resources the agency plans to consume and the
outputs it plans to produce. ABC and ABB can provide SBA?s management with
the information needed for sound decision making. While some agencies have
found this method to be useful, ABC is not a universal solution for all
organizations. Other agencies have developed managerial costing approaches
that build upon existing accounting systems. For example, the Department of
the Interior?s Bureau of Land Management (BLM) has implemented an innovative
cost model that aligns the costs of the bureau?s activities with its work
processes and mission goals. This model was developed with extensive
coordination with field
personnel and has been used for management decision making and to develop
budget requests. For instance, BLM analyzed information on the costs of
various activities associated with its Wild Horse and Burro Program. Based
on this analysis, bureau officials formulated a proposal for managing horse
and burro populations to achieve appropriate management
levels by 2005. They presented their analysis to the House and Senate
Appropriations Subcommittees and were provided an additional $9 million for
the implementation of the proposal.
Agency Efforts to Across government, agencies have many efforts under way to
implement or Implement New
upgrade financial systems to alleviate some of the long- standing weaknesses
in financial management. Some of these agencies, including Financial Systems
the Departments of Agriculture, Commerce, and Transportation; GSA; and the
National Aeronautics and Space Administration (NASA), are in the
implementation phases of these projects. Other agencies are in the planning
and design phases, such as the Departments of Defense, Energy, and Justice.
Many of these new financial systems are COTS packages sold by vendors whose
software has been certified by JFMIP. 28
GSA?s IG recently reported 29 that GSA faces significant challenges in
implementing its new integrated financial management system solution,
Pegasys. GSA had planned to replace its aging and costly- to- maintain
current system, the National Electronic Accounting and Reporting (NEAR)
system with Pegasys, a COTS product. However, since the project to
replace NEAR with Pegasys began, significant modifications have been made to
the COTS product to meet specific GSA requirements. The IG reported that the
magnitude and complexity involved in modifying a COTS
product to meet GSA?s needs have been underestimated, necessitating a
reassessment of the ability of the COTS product to perform necessary key
functions. While the Office of the Chief Financial Officer has rescoped the
Pegasys project, numerous technical challenges remain, including completing
an enterprise financial management system architecture and adding some
critical financial functionality needed before GSA can fully transition to
Pegasys.
28 JFMIP tests vendor COTS packages and certifies that they meet current
financial management system requirements for core financial systems. 29
General Services Administration, Office of Inspector General, GSA Faces
Significant Challenges in Deploying a Fully Integrated Pegasys Financial
Management System Solution, Report Number A010023/ B/ T/ F02205 (Washington,
D. C.: January 17, 2002).
NASA is working toward implementing an integrated financial management
system that it expects to be fully operational in 2006 at an estimated cost
of $475 million. As we testified in March, 30 this is NASA?s third attempt
to implement a new financial management system. The first two efforts were
abandoned after 12 years and spending $180 million. Given the high stakes
involved, it is critical that NASA?s leadership provide the necessary
direction, oversight, and sustained attention to ensure that this project is
successful. As mentioned earlier, DOD has taken a significant step in
transforming its
business processes by awarding a contract to IBM to develop a departmentwide
financial management enterprise architecture. DOD officials have stated that
the enterprise architecture will propose new ways of conducting DOD
financial activities and offer solutions for modernizing the department?s
financial practices. DOD faces financial management problems that are
pervasive, complex, long- standing, and deeply rooted in
virtually all business operations throughout the department. At DOD,
overhauling financial management represents a major management challenge
that goes far beyond simply installing new software to the very fiber of the
department?s business operations and management culture. Cultural resistance
to change and military service parochialism have played a significant role
in impeding previous attempts to implement broad- based management reforms
at DOD. The Secretary of Defense has made the fundamental transformation of
business practices throughout the
department a top priority and has estimated that his envisioned
transformation will take 8 or more years to complete. In addition to
utilizing sound information technology management practices, DOD needs
to address the underlying causes of its inability to resolve long- standing
financial management problems, such as providing for sustained leadership;
controlling resources; establishing clear lines of authority,
responsibility, and accountability; incorporating results- oriented
performance measures; providing incentives for action; and ensuring
effective oversight and monitoring.
30 U. S. General Accounting Office, National Aeronautics and Space
Administration: Leadership and Systems Needed to Effect Financial Management
Improvements, GAO- 02551T (Washington, D. C.: March 20, 2002).
Agencies can help ensure that financial management systems investments
deliver the intended results by (1) using Clinger- Cohen Act information
technology (IT) management requirements, (2) undertaking financial
management systems modernization in a broad enterprise architecture context,
and (3) redesigning business processes in conjunction with implementing new
technology. To assist federal agencies in this process, we have developed
the IT Investment Management Framework 31 to provide
a common structure for discussing and assessing IT capital planning and
investment management practices. This framework has five maturity stages,
which represent steps toward achieving both a stable and mature IT
investment management process. Other key factors for successful
implementation include having top management commitment, adequate funding,
and staff with the right skill mix. Once a project has been selected, good
project management is a critical ingredient to successful implementation.
For example, it is imperative that managers sufficiently plan their project
and that the sponsors are involved in the implementation. Next, deadlines
should be realistic and project managers should be capable of understanding
the complexities of the job. Throughout the job, the implementation should
be monitored to ensure the project is going as planned.
Closing Comments The primary purpose of FFMIA is to ensure that agency
financial management systems routinely provide reliable, useful, and timely
financial information so that government leaders will be better positioned
to invest resources, reduce costs, oversee programs, and hold agency
managers accountable for the way they run programs. While many agencies are
receiving unqualified opinions on their financial statements, auditor
determinations of FFMIA compliance are lagging behind. To achieve the
financial management improvements envisioned by the CFO Act, FFMIA, and more
recently, the President?s Management Agenda, agencies need to modernize
their financial systems to generate reliable, useful, and timely financial
information throughout the year and at year- end. Today, we are
seeing a strong commitment from the President, the JFMIP principals, and the
Secretaries of major departments, such as DOD, to ensuring that these needed
modernizations come to fruition. This commitment is critical to the 31 U. S.
General Accounting Office, Information Technology Investment Management: An
Overview of GAO?s Assessment Framework (Exposure Draft), GAO/ AIMD- 00- 155
(Washington, D. C.: May 2000).
success of the efforts under way and those still in a formative stage and
must be sustained. Finally, Mr. Chairman, the leadership demonstrated by you
and the members of this subcommittee has been an important catalyst to
reforming financial management in the federal government. Continued
attention to these issues will be critical to sustaining momentum on
financial management reform efforts.
Mr. Chairman, this concludes my statement. I would be pleased to answer any
questions you or other members of the subcommittee may have at this time.
Contacts and For further information about this statement, please contact
Kay L. Daly at Acknowledgments
(202) 512- 9312. Other key contributors to this testimony include William S.
Lowrey, Debra S. Rucker, Sandra S. Silzer, and Bridget A. Skjoldal.
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