    Financial Management: Recurring Financial Systems Problems Hinder
    FFMIA Compliance (29-OCT-03, GAO-04-209T).

    The Federal Financial Management Improvement Act of 1996 (FFMIA)
    requires Chief Financial Officers (CFO) Act agencies to implement
    and maintain financial management systems that comply
    substantially with (1) federal financial management systems
    requirements, (2) federal accounting standards, and (3) the U.S.
    Government Standard General Ledger. Most federal agencies face
    long-standing challenges, which are discussed in greater detail
    in our mandated September 2003 report, Sustained Efforts Needed
    to Achieve FFMIA Accountability (GAO-03-1062). In light of these
    circumstances, Congress asked GAO to testify about recurring
    financial management systems problems and agencies' efforts to
    upgrade their systems.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-209T
        ACCNO:   A08782
      TITLE:     Financial Management: Recurring Financial Systems
    Problems Hinder FFMIA Compliance
         DATE:   10/29/2003
      SUBJECT:   Accountability
    	     Accounting standards
    	     Computer security
    	     Financial management systems
    	     Financial records
    	     Internal controls
    	     Noncompliance
    	     Systems design
    	     Strategic planning
    	     President's Management Agenda
    	     U.S. Government Standard General Ledger

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    GAO-04-209T

    United States General Accounting Office

    GAO Testimony

    Before the Subcommittee on Government Efficiency and Financial Management,
    Committee on Government Reform, House of Representatives

    For Release on Delivery Expected at 2:30 p.m. EST Wednesday, October 29,
    2003

    FINANCIAL MANAGEMENT

              Recurring Financial Systems Problems Hinder FFMIA Compliance

    Statement of Sally E. Thompson
    Director, Financial Management and Assurance

                                           A

    GAO-04-209T

    Highlights of GAO-04-209T, a testimony before the Subcommittee on
    Government Efficiency and Financial Management, Committee on Government
    Reform, House of Representatives

    The Federal Financial Management

    Improvement Act of 1996 (FFMIA)

    requires Chief Financial Officers

    (CFO) Act agencies to implement

    and maintain financial management

    systems that comply substantially

    with (1) federal financial

    management systems

    requirements, (2) federal

    accounting standards, and (3) the

    U.S. Government Standard General

    Ledger. Most federal agencies face

    long-standing challenges, which are

    discussed in greater detail in our

    mandated September 2003 report,

    Sustained Efforts Needed to

    Achieve FFMIA Accountability

    (GAO-03-1062). In light of these

    circumstances, the Subcommittee

    asked GAO to testify about

    recurring financial management

    systems problems and agencies'

    efforts to upgrade their systems.

    GAO is not making new recommendations in this testimony, but in a past
    report has made specific recommendations aimed at addressing the problems
    hindering agencies' compliance with FFMIA.

    www.gao.gov/cgi-bin/getrpt?GAO-04-209T.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Sally Thompson,
    (202)512-9450, thompsons@gao.gov.

    October 29, 2003

    FINANCIAL MANAGEMENT

    Recurring Financial Systems Problems Hinder FFMIA Compliance

    The results of the fiscal year 2002 FFMIA assessments performed by agency
    inspectors general or their contract auditors again show that the same
    types of problems continue to plague the financial management systems used
    by the 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. As shown in
    the figure below, audit reports highlight six recurring problems that have
    been consistently reported for those agencies whose auditors reported
    noncompliant systems.

    Problems Reported by Auditors for Fiscal Years 2000 through 2002

    Agencies have recognized the seriousness of the financial systems
    weaknesses, and have many efforts underway to implement or upgrade
    financial systems to alleviate long-standing problems. As of September 30,
    2002, 17 CFO Act agencies advised us they were planning to or were in the
    process of implementing a new core financial system. It is imperative that
    agencies adopt leading practices, such as top management commitment and
    business process reengineering, to ensure successful systems
    implementation and to avoid complicating factors, such as poor
    communication and inadequate project planning, that have hampered some
    agencies' efforts in the past.

    Congressional oversight, the Joint Financial Management Improvement
    Program Principals, and the President's Management Agenda are driving
    forces behind several governmentwide efforts now underway to improve
    federal financial management. Continued attention by these key drivers is
    critical to sustaining agencies efforts to improve their financial
    management systems.

    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 primary goals of the
    Congress in enacting the Federal Financial Management Improvement Act of
    1996 (FFMIA).1 As you requested, our testimony today addresses the
    recurring financial management systems problems that agencies are facing
    and the status of their efforts to implement systems that substantially
    comply with FFMIA.

    As you know, FFMIA builds on the foundation laid by the Chief Financial
    Officers (CFO) Act of 19902 by reflecting 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 major departments
    and agencies covered by the CFO Act3 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. Government 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.

    1Pub. L. No. 104-208, sec.101(f)(title VIII), 110 Stat. 3009-389.

    2Pub. L. No. 101-576, 104 Stat. 2838 (1990).

    3There were initially 24 CFO Act agencies (see footnote 2 above). The
    Federal Emergency Management Agency (FEMA), one of the 24 CFO Act
    agencies, was subsequently transferred to the new Department of Homeland
    Security (DHS) effective March 1, 2003. With this transfer, FEMA will no
    longer be statutorily required to prepare audited stand-alone financial
    statements. We included FEMA in our review because FEMA was a CFO Act
    agency as of September 30, 2002. DHS must prepare audited financial
    statements under the Accountability of Tax Dollars Act of 2002, because it
    is a "covered executive agency" for purposes of 31 U.S.C. 3515. However,
    DHS was not established as a CFO Act agency and therefore is not
    statutorily subject to FFMIA. Consideration is now being given to making
    DHS a CFO Act agency and therefore subject to FFMIA in the Department of
    Homeland Security Financial Accountability Act, H.R. 2886, 108th Congress.

    As discussed in our recently issued annual report on FFMIA,4 the results
    of the fiscal year 2002 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 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-to-day operations. As we have
    previously testified5 before this Subcommittee, if agencies continue year
    after year to rely on significant costly and time-intensive 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.

    4U.S. General Accounting Office, Financial Management: Sustained Efforts
    Needed to Achieve FFMIA Accountability, GAO-03-1062 (Washington, D.C.:
    Sept. 30, 2003).

    5U.S. General Accounting Office, Financial Management: Effective
    Implementation of FFMIA is Key to Providing Reliable, Useful, and Timely
    Data, GAO-02-791T (Washington, D.C.: June 6, 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).

    Agencies have recognized the seriousness of the financial systems
    weaknesses, and have many efforts underway to implement or upgrade
    financial systems to alleviate long-standing problems. As of September 30,
    2002, 17 CFO Act agencies advised us they were planning to or were in the
    process of implementing a new core financial system. Under the Office of
    Management and Budget's (OMB) Circular A-127, Financial Management
    Systems, agencies are required to purchase commercial off-the-shelf (COTS)
    packages sold by vendors whose core financial systems software has been
    certified.6 Some of the key factors that affect FFMIA compliance of an
    implemented COTS package include how the software works in the agency's
    environment, whether any customizations or modifications7 have been made
    to the software, and the success of converting data from legacy systems to
    new systems.

    Successful implementation efforts of financial management systems are
    supported by the presence of several key characteristics, which apply to
    both the public and private sectors. These characteristics include, among
    others, (1) involvement by the users, (2) support of executive management,
    (3) leadership provided by experienced project managers, (4) clear
    definition and management of project requirements, (5) proper planning,
    and (6) realistic expectations. Conversely, financial systems
    implementation projects are often hindered by the lack of executive
    support, poor communication between managers and stakeholders, poor
    estimations and planning, and poor documentation and updating of user
    requirements.

    To provide impetus for upgrading financial management systems that provide
    reliable, timely, and useful data, congressional oversight, the Joint
    Financial Management Improvement Program (JFMIP) Principals,8 and the
    President's Management Agenda (PMA) are driving forces behind several

    6The Program Management Office, managed by the Executive Director of the
    Joint Financial Management Improvement Program (JFMIP), with funds
    provided by the CFO Council agencies, tests vendor COTS packages and
    certifies that they meet certain federal financial management systems
    requirements for core financial systems.

    7Customization is the process of setting parameters within an application
    to make it operate in accordance with the entity's business rules.
    Customizations are normally supported by vendors in subsequent upgrades.
    Modification is the process of writing or changing code and modifications
    are not supported by vendors in subsequent upgrades.

    8The JFMIP Principals are the Secretary of the Treasury, the Directors of
    OMB and the Office of Personnel Management (OPM), and the Comptroller
    General of the United States.

    governmentwide efforts now underway to improve federal financial
    management. The Congress has demonstrated leadership in improving federal
    financial management by enacting financial management reform laws and
    through oversight hearings, such as this one today. The JFMIP Principals
    have continued the series of regular deliberative meetings that focus on
    key financial management reform issues. The PMA, being implemented by the
    administration as an agenda for improving the management and performance
    of the federal government, includes five crosscutting initiatives,
    including improved financial performance. Continued attention by these key
    drivers is critical to sustaining agencies' efforts to improve their
    financial management systems.

    My statement today will focus on these issues and discuss (1) auditors'
    determinations of FFMIA compliance for fiscal year 2002, (2) problems that
    affect agency systems' compliance with FFMIA, (3) agency efforts to
    implement new core financial systems, (4) key characteristics of
    successful systems implementation and the challenges federal agencies
    face, and (5) the status of governmentwide financial management
    improvement efforts.

      Auditors' Assessments of FFMIA Compliance for Fiscal Year 2002

    For fiscal year 2002, Inspectors General and their contract auditors
    reported that the systems for 19 of the 24 CFO Act agencies did not comply
    substantially with at least one of the FFMIA requirements-federal
    financial management systems requirements, applicable federal accounting
    standards, or the SGL. Auditors' assessments of financial systems'
    compliance with FFMIA for 3 agencies-the Department of Labor (DOL),
    Environmental Protection Agency (EPA), and the National Science Foundation
    (NSF)-changed from fiscal years 2001 to 2002. For fiscal year 2002, the
    auditors for DOL concluded that its systems were not in substantial
    compliance with the managerial cost standard and thus were not in
    compliance with FFMIA. Auditors for EPA and NSF found the agencies'
    respective systems to be in substantial compliance, a change from the
    fiscal year 2001 assessments.

    As we have testified previously,9 while the number of agencies receiving
    clean opinions increased over the past 6 years from 11 in fiscal year 1997
    to 21 for fiscal year 2002, the number of agencies reported to have
    systems that lacked substantial compliance with FFMIA has remained steady.
    While the increase in unqualified opinions is noteworthy, a more important
    barometer of financial systems' capability and reliability is that the
    number of agencies for which auditors provided negative assurance10 of
    FFMIA compliance has remained relatively constant throughout this same
    period. In our view, this has led to an expectation gap. When more
    agencies receive clean opinions, expectations are raised that the
    government has sound financial management and can produce reliable,
    useful, and timely information on demand throughout the year, whereas
    FFMIA assessments offer a different perspective. For agencies equipped
    with modern, fully integrated financial management systems, preparation of
    financial statements would be more routine and much less costly.

    Auditors for the remaining five agencies-the Department of Energy, EPA,
    the General Services Administration (GSA), NSF, and the Social Security
    Administration (SSA)-provided negative assurance in reporting on FFMIA
    compliance for fiscal year 2002. In their respective reports, they
    included language stating that while they did not opine as to FFMIA
    compliance, nothing came to their attention during the course of their
    planned procedures indicating that these agencies' financial management
    systems did 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 fully tested by the auditors and
    found to be substantially compliant. Because the act requires auditors to
    "report whether" agency systems are substantially compliant, we believe
    the auditor needs to provide positive assurance, which would be a
    definitive statement as to whether agency financial management systems
    substantially comply with FFMIA, as required under the statute. This is
    what we will do for the financial statement audits we perform when
    reporting that an entity's financial management systems were in
    substantial compliance. To provide positive assurance, auditors need to
    consider many other aspects of financial management systems than those
    applicable to the purposes of rendering an opinion on the financial
    statements.

    9GAO-02-791T.

    10In providing negative assurance, auditors are stating that nothing came
    to their attention indicating that an agency's financial management
    systems do not meet FFMIA requirements.

      Widespread Systems Problems Affect FFMIA Compliance

    Based on our review of the fiscal year 2002 audit reports for the 19
    agencies reported to have systems not in substantial compliance with one
    or more of FFMIA's three requirements, we identified six primary
    problems11 affecting FFMIA noncompliance:

    o  nonintegrated financial management systems,

    o  inadequate reconciliation procedures,

    o  lack of accurate and timely recording of financial information,

    o  noncompliance with the SGL,

    o  lack of adherence to federal accounting standards, and

    o  weak security controls over information systems.

    The relative frequency of these problems12 at the 19 agencies reported as
    having noncompliant systems is shown in figure 1. In addition, we caution
    that the occurrence of problems in a particular category may be even
    greater than auditors' reports of FFMIA noncompliance would suggest
    because auditors may not have included all problems in their reports.
    FFMIA testing may not be comprehensive and other problems may exist that
    were not identified and reported. For example, at some agencies, the
    problems are so serious and well known that the auditor can readily
    determine that the systems are not substantially compliant without
    examining every facet of FFMIA compliance.

    11The same six types of problems were cited by auditors in their audit
    reports for fiscal years 2000 and 2001.

    12Auditors may not have reported these problems as specific reasons for
    lack of substantial compliance with FFMIA.

    Figure 1: Problems Reported by Auditors for Fiscal Years 2000 through 2002

    Nonintegrated Financial Management Systems

    The CFO Act calls for agencies to develop and maintain an integrated
    accounting and financial management system13 that 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 management
    information, and (3) the integration of accounting and budgeting
    information. In this regard, OMB Circular A-127, Financial Management
    Systems, requires agencies to

    13Federal 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.

    establish and maintain a single integrated financial management system
    that conforms with functional requirements published by JFMIP.

    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. With
    integrated systems, transactions are entered only once and are available
    for multiple purposes or functions. 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 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.

    Auditors frequently mentioned the lack of modern, integrated financial
    management systems in their fiscal year 2002 audit reports. As shown in
    figure 1, auditors for 12 of the 19 agencies with noncompliant systems
    reported this as a problem. For example, auditors for the Department of
    Transportation (DOT) reported that its major agencies still use the
    Departmental Accounting and Financial Information System (DAFIS), the
    existing departmentwide accounting system14 and cannot produce auditable
    financial statements based on the information in DAFIS. For example, DOT's
    IG reported that DOT made about 860 adjustments outside of DAFIS totaling
    $51 billion in order to prepare the financial statements.15 DOT's IG also
    reported that there were problems linking some information between DAFIS
    and the Federal Highway Administration's Fiscal Management Information
    System (FMIS). DOT uses FMIS to record initial obligations for federal aid
    grants to states. However, due to problems

    14DOT is implementing a COTS-based core financial system called Delphi.
    DOT management projects that the implementation will be complete in fiscal
    year 2004.

    15Office of Inspector General, Department of Transportation, Consolidated
    Financial Statements for Fiscal Years 2002 and 2001, FI-2003-018 (Jan. 27,
    2003).

    resulting from upgrades and changes made to the FMIS system, all
    obligations are not electronically transferred from FMIS to DAFIS. As of
    September 30, 2002, valid obligations of about $388 million were
    understated. Moreover, problems linking information also existed between
    Delphi, DOT's new financial management system, and the Federal Transit
    Administration's (FTA) financial feeder systems that prevented FTA from
    electronically processing about $350 million in payments related to its
    Electronic Clearing House Operation. These transactions had to be manually
    processed into Delphi. What is important here is that the information
    developed to prepare auditable annual financial statements is not
    available on an ongoing basis for day-to-day management of DOT's programs
    and operations.

    As we have reported,16 cultural resistance to change, military service
    parochialism, and stovepiped operations have played a significant role in
    impeding previous attempts to implement broad-based reforms at the
    Department of Defense (DOD). The department's stovepiped approach is most
    evident in its current financial management systems environment, which DOD
    recently estimated to include approximately 2,300 systems and systems
    development projects-many of which were developed in piecemeal fashion and
    evolved to accommodate different organizations, each with its own policies
    and procedures. As DOD management has acknowledged,17 the department's
    current financial environment is comprised of many discrete systems
    characterized by poor integration and minimal data standardization and
    prevents managers from making more timely and cost-effective decisions.

    Inadequate Reconciliation Procedures

    A reconciliation process, even if performed manually, is a valuable part
    of a sound financial management system. In fact, the less integrated the
    financial management system, the greater the need for adequate
    reconciliations because data are accumulated from various sources. For
    example, the Department of Health and Human Services (HHS) IG

    16U.S. General Accounting Office, Department of Defense: Status of
    Financial Management Weaknesses and Progress Toward Reform, GAO-03-931T
    (Washington, D.C.: June 25, 2003).

    17Department of Defense, Performance and Accountability Report, Fiscal
    Year 2002 (Jan. 31, 2003).

    reported18 that the department's lack of an integrated financial
    management system continues to impair the ability of certain operating
    divisions to prepare timely information. Moreover, certain reconciliation
    processes were not adequately performed to ensure that differences were
    properly identified, researched, and resolved in a timely manner and that
    account balances were complete and accurate. Reconciliations are needed to
    ensure that data have been recorded properly between the various systems
    and manual records. The Comptroller General's Standards for Internal
    Control in the Federal Government highlights reconciliation as a key
    control activity.

    As shown in figure 1, auditors for 11 of the 19 agencies with noncompliant
    systems reported that the agencies had reconciliation problems, including
    difficulty reconciling their fund balance with Treasury accounts19 with
    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.
    As we recently testified,20 DOD had at least $7.5 billion in unexplained
    differences between Treasury and DOD fund activity records. Many of these
    differences represent disbursements made and reported to Treasury that had
    not yet been properly matched to obligations and recorded in DOD
    accounting records. In addition to these unreconciled amounts, DOD
    identified and reported an additional $3.6 billion in payment recording
    errors. These include disbursements that DOD has specifically identified
    as containing erroneous or missing information and that cannot be properly
    recorded and charged against the correct, valid fund account. DOD records
    many of these payment problems in suspense accounts. While DOD made $1.6
    billion in unsupported adjustments to its fund balances at the end of
    fiscal year 2002 to account for a portion of these payment recording
    errors, these adjustments did not resolve the related errors.

    18Office of Inspector General, Independent Auditor's Report on Financial
    Statements, A-17-02-0001, Fiscal Year 2002 Performance and Accountability
    Report, U.S. Department of Health and Human Services.

    19Agencies record their budget spending authorizations in their fund
    balance with Treasury accounts. Agencies increase or decrease these
    accounts as they collect or disburse funds.

    20GAO-03-931T.

    Inadequate reconciliation procedures also complicate the identification
    and elimination of intragovernmental activity and balances, which is one
    of the principal reasons we continue to disclaim on the government's
    consolidated financial statements. As we testified in April 2003,21
    agencies had not reconciled intragovernmental activity and balances with
    their trading partners22 and, as a result, information reported to
    Treasury is not reliable. For several years, OMB and Treasury have
    required CFO Act agencies to reconcile selected intragovernmental activity
    and balances with their trading partners. However, a substantial number of
    CFO Act agencies did not perform such reconciliations for fiscal years
    2002 and 2001, citing such reasons as (1) trading partners not providing
    needed data, (2) limitations and incompatibility of agency and trading
    partner systems, and (3) human resource issues. For both of these years,
    amounts reported for federal trading partners for certain
    intragovernmental accounts were significantly out of balance. Actions are
    being taken governmentwide under OMB's leadership to address problems
    associated with intragovernmental activity and balances.

    Lack of Accurate and Timely Recording of Financial Information

    Auditors for 17 agencies reported the lack of accurate and timely
    recording of financial information for fiscal year 2002 compared to the 14
    agencies23 for which auditors noted similar problems in their 2001
    reports. Accurate and timely recording of financial information is key to
    successful financial management. Timely recording of transactions can
    facilitate 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.

    21U.S. General Accounting Office, Fiscal Year 2002 U.S. Government
    Financial Statements: Sustained Leadership and Oversight Needed for
    Effective Implementation of Financial Management Reform, GAO-03-572T
    (Washington, D.C.: Apr. 8, 2003).

    22Trading partners are U.S. government agencies, departments, or other
    components that do business with each other.

    23In our October 2002 FFMIA report, we stated that auditors had discussed
    the lack of accurate and timely recording of transactions at 12 agencies.
    As part of our analysis of most recent agency audit reports, it became
    apparent that these problems were reported in prior years for 2 additional
    agencies, but the earlier audit reports did not include sufficient detail
    to make these assessments.

    Untimely recording of transactions during the fiscal year can result in
    agencies making 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. Gathering
    financial data only at year-end does not provide adequate time to analyze
    transactions or account balances. Further, it impedes management's ability
    throughout the year to have timely and useful information for decision
    making. For example, auditors reported24 that, for fiscal year 2002,
    Department of Justice (Justice) components did not adjust the status of
    obligations on a quarterly basis as required, and as a result, extensive
    manual efforts had to be performed at year-end to correct the status of
    obligation records. This process of reviewing the status of obligations
    only at the end of the year increases the risk that errors will go
    undetected, does not provide managers with accurate information during the
    year for decision making, and results in misstatements in the financial
    statements.

    Noncompliance with the SGL

    Implementing the SGL at the transaction level is one of the specific
    requirements of FFMIA. However, as shown in figure 1, auditors for 9 of
    the 19 noncompliant agencies reported that the agencies' systems did not
    comply with SGL requirements. The SGL promotes consistency in financial
    transaction processing and reporting by providing a uniform chart of
    accounts and pro forma transactions. Use of the SGL also provides a basis
    for comparison at agency and governmentwide levels. 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 components and functions.

    24PricewaterhouseCoopers, Report of Independent Accountants, January 15,
    2003, FY 2002 Performance & Accountability Report, U.S. Department of
    Justice.

    As in previous years, the Department of Housing and Urban Development's
    (HUD) auditors reported that the Federal Housing Administration's (FHA)
    systems were noncompliant with the SGL for fiscal year 2002 because FHA
    must use several manual processing steps to convert its commercial
    accounts to SGL accounts.25 FHA's 19 legacy insurance systems, which fed
    transactions to its commercial general ledger system, lacked the
    capabilities to process transactions in the SGL format. Therefore, FHA
    provided only consolidated summary-level data to HUD's Central Accounting
    and Program System (HUDCAPS). As we reported,26 FHA used several manual
    processing steps to provide summary-level data, including the use of
    personal-computer-based software to convert the summary-level commercial
    accounts to government SGL, and transfer the balances to HUDCAPS. This
    process did not comply with JFMIP requirements that the core financial
    system provide for automated month-and year-end closing of SGL accounts
    and the roll-over of the SGL account balances.

    Lack of Adherence to Federal Accounting Standards

    One of FFMIA's requirements is that agencies' financial management systems
    account for transactions in accordance with federal accounting standards.
    Agencies face significant challenges implementing these standards. As
    shown in figure 1, auditors for 13 of the 19 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. For example, auditors for three agencies-DOD, Justice, and the
    Federal Emergency Management Agency (FEMA)-reported weaknesses in
    compliance with Statement of Federal Financial Accounting Standards
    (SFFAS) No. 6, Accounting for Property, Plant, and Equipment, which became
    effective for fiscal year 1998. Auditors for DOD reported that DOD did not
    capture the correct

    25To help address deficiencies with its legacy general ledger system, as a
    first step in upgrading its overall financial management system, FHA
    implemented the general ledger module of a COTS software package on
    October 1, 2002. This module automates the monthly interface of
    summary-level balances with HUD's Central Accounting and Program System
    (HUDCAPS).

    26U.S. General Accounting Office, Department of Housing and Urban
    Development: Status of Efforts to Implement an Integrated Financial
    Management System, GAO-03-447R (Washington, D.C.: Apr. 9, 2003).

    acquisition date and cost of its property, plant, and equipment, due to
    system limitations.

    Therefore, DOD could not provide reliable information for reporting
    account balances and computing depreciation. Auditors for two agencies-HUD
    and Justice-reported weaknesses in compliance with SFFAS No. 7, Revenue
    and Other Financing Sources, which also became effective for fiscal year
    1998. For example, auditors reported a material weakness for FHA's budget
    execution and fund control. According to the auditors, FHA's financial
    systems and processes are not capable of fully monitoring and controlling
    budgetary resources. Finally, auditors for three agencies-the Agency for
    International Development (AID), the National Aeronautics and Space
    Administration (NASA), and the Nuclear Regulatory Commission
    (NRC)-reported trouble with implementing SFFAS No. 10, Accounting for
    Internal Use Software, which became effective at the beginning of fiscal
    year 2001. For example, auditors reported that NASA's policies and
    procedures do not specifically address purchasing software as part of a
    package of products and services. In their testing, NASA's auditors
    identified errors for costs that were originally recorded as expenses, but
    instead should have been capitalized as assets.

    Managerial cost information is required by the CFO Act of 1990, and since
    1998 by a federal accounting standard. Auditors for five agencies reported
    problems implementing SFFAS No. 4, Managerial Cost Accounting Concepts and
    Standards. For example, auditors for DOL reported that the department has
    not developed the capability to routinely report the cost of outputs used
    to manage program operations at the operating program and activity levels.
    Moreover, DOL does not use managerial cost information for purposes of
    performance measurement, planning, budgeting, or forecasting. At DOT,
    auditors stated that its agencies, other than the Federal Aviation
    Administration (FAA) and the U.S. Coast Guard,27 have begun to identify
    requirements for implementing cost accounting systems. DOT's existing
    accounting system, DAFIS, does not have the capability to capture full
    costs, including direct and indirect costs assigned to DOT programs. The
    Secretary recently advised OMB that as the remaining DOT

    27FAA has efforts underway to implement a cost accounting system as
    required by the Federal Aviation Reauthorization Act of 1996 (Pub. L. No.
    104-264, 110 Stat. 3213, 3248 (1996)). The U.S. Coast Guard has a cost
    accounting system used for determining vessel documentation user fees.

    agencies migrate to Delphi, DOT's new core financial system, Delphi will
    provide them with enhanced cost accounting capabilities.

    Managerial cost information is critical for implementing the PMA.
    According to the PMA, the accomplishment of the other four crosscutting
    initiatives28 will matter little without the integration of agency budgets
    with performance. Although the lack of a consistent information and
    reporting framework for performance, budgeting, and accounting may obscure
    how well government programs are performing as well as inhibit
    comparisons, no one presentation can meet all users' needs. Any framework
    should support an understanding of the links between performance,
    budgeting, and accounting information measured and reported for different
    purposes. However, even the most meaningful links between performance
    results and resources consumed are only as good as the underlying data.
    Moreover, this link between resources consumed and performance results is
    necessary to make public-private competition decisions as part of
    competitive sourcing. Therefore, agencies must address long-standing
    problems within their financial systems. As agencies implement and upgrade
    their financial management systems, opportunities exist for developing
    cost management information as an integral part of these systems to
    provide important information that is timely, reliable, and useful.

    As we recently reported,29 DOD's continuing inability to capture and
    report the full cost of its programs represents one of the most
    significant impediments facing the department. DOD does not have the
    systems and processes in place to capture the required cost information
    from the hundreds of millions of transactions it processes each year.
    Lacking complete and accurate overall life-cycle cost information for
    weapons systems impairs DOD's and congressional decisionmakers' ability to
    make fully informed decisions about which weapons, or how many, to buy.
    DOD has acknowledged that the lack of a cost accounting system is its
    largest impediment to controlling and managing weapon systems costs.

    28The other four crosscutting initiatives are improved financial
    performance, strategic human capital management, competitive sourcing, and
    expanded electronic government.

    29GAO-03-931T.

    Weak Security Controls over Information Systems

    Information security weaknesses are one of the frequently cited reasons
    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 all 19 of the agencies reported as
    noncompliant with FFMIA identified weaknesses in security controls over
    information systems. 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.

    General controls are the policies, procedures, and technical controls that
    apply to all or a large segment of an entity's information systems and
    help ensure their proper operation. The six major areas are (1) security
    program management, which provides the framework for ensuring that risks
    are understood and that effective controls are selected and properly
    implemented, (2) access controls, which ensure that only authorized
    individuals can read, alter, or delete data, (3) software development and
    change controls, which ensure that only authorized software programs are
    implemented, (4) segregation of duties, which reduces the risk that one
    individual can independently perform inappropriate actions without
    detection, (5) operating systems controls, which protect sensitive
    programs that support multiple applications from tampering and misuse, and
    (6) service continuity, which ensures that computer-dependent operations
    experience no significant disruption. As we discussed in our April 2003
    testimony,30 our analyses of audit reports issued from October 2001
    through October 2002 for 24 of the largest federal agencies31

    30U.S. General Accounting Office, Information Security: Progress Made, But
    Challenges Remain to Protect Federal Systems and the Nation's Critical
    Infrastructures, GAO-03-564T (Washington, D.C.: Apr. 8, 2003).

    31These are the Departments of Agriculture, Commerce, Defense, Education,
    Energy, Health and Human Services, Housing and Urban Development,
    Interior, Justice, Labor, State, Transportation, Treasury, and Veterans
    Affairs, the Environmental Protection Agency, Federal Emergency Management
    Agency, General Services Administration, Office of Personnel Management,
    National Aeronautics and Space Administration, National Science
    Foundation, Nuclear Regulatory Commission, Small Business Administration,
    Social Security Administration, and U.S. Agency for International
    Development.

    continued to show significant weaknesses in federal computer systems that
    put critical operations and assets at risk. Weaknesses continued to be
    reported in each of the 24 agencies included in our review, and they
    covered all six major areas of general controls. Although our analyses
    showed that most agencies had significant weaknesses in these six control
    areas, weaknesses were most often cited for access controls and security
    program management.

    Since 1997, GAO has considered information security a governmentwide
    high-risk area.32 As shown by our work and work performed by the IGs,
    security program management continues to be a widespread problem.
    Concerned with reports of significant weaknesses in federal computer
    systems that make them vulnerable to attack, the Congress enacted
    Government Information Security Reform provisions33 (commonly known as
    GISRA) to reduce these risks and provide more effective oversight of
    federal information security. GISRA required 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. GISRA
    provided an overall framework for managing information security and
    established new annual review, independent evaluation, and reporting
    requirements to help ensure agency implementation and both OMB and
    congressional oversight.

    In its required fiscal year 2002 GISRA report to the Congress, OMB stated
    that the federal government had made significant strides in addressing
    serious and pervasive information technology security problems, but that
    more needed to be done, particularly to address both the governmentwide
    weaknesses identified in its fiscal year 2001 report to the Congress and
    new challenges.34 Also, OMB reported significant progress in agencies'
    information technology security performance, primarily as indicated by
    quantitative governmentwide performance measures that OMB required
    agencies to disclose beginning with their fiscal year 2002 reports. These

    32U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263
    (Washington, D.C.: January 2001).

    33These provisions are part of the Floyd D. Spence National Defense
    Authorization Act for Fiscal Year 2001, Pub. L. No. 106-398, 114 Stat.
    1654, 1654A-266 (2000).

    34Office of Management and Budget, FY 2002 Report to Congress on Federal
    Government Information Security Reform (May 16, 2003).

    include measures such as the number of systems that have been assessed for
    risk, have an up-to-date security plan, and for which security controls
    have been tested.

    As discussed in our June 2003 testimony,35 the governmentwide weaknesses
    identified by OMB, as well as the limited progress in implementing key
    information security requirements, continue to emphasize that, overall,
    agencies are not effectively implementing and managing their information
    security programs. For example, of the 24 large federal agencies we
    reviewed, 11 reported that they had assessed risk for 90 to 100 percent of
    their systems for fiscal year 2002, but 8 reported that they had assessed
    risk for less than half of their systems.

    The information security program, evaluation, and reporting requirements
    established by GISRA have been permanently authorized and strengthened
    through the recently enacted Federal Information Security Management Act
    of 2002 (FISMA).36 In addition, FISMA provisions establish additional
    requirements that can assist the agencies in implementing effective
    information security programs, help ensure that agency systems incorporate
    appropriate controls, and provide information for administration and
    congressional oversight. These requirements include the designation and
    establishment of specific responsibilities for an agency senior
    information security officer, implementation of minimum information
    security requirements for agency information and information systems, and
    required agency reporting to the Congress.

    Agencies' fiscal year 2003 FISMA reports, due to OMB in September 2003,
    should provide additional information on the status of agencies' efforts
    to implement federal information security requirements. In addition, FISMA
    requires each agency to report any significant deficiency in an
    information security policy, procedure, or practice relating to financial
    management systems as an instance of a lack of substantial compliance
    under FFMIA.37

    35U.S. General Accounting Office, Information Security: Continued Efforts
    Needed to Fully Implement Statutory Requirements, GAO-03-852T (Washington,
    D.C.: June 24, 2003).

    36Pub. L. No. 107-347, title III, 116 Stat. 2899, 2946 (2002).

    3744 U.S.C. 3544(c)(3).

      Agency Efforts to Implement New Core Financial Systems

    The continuing trend of noncompliance with FFMIA indicates the overall
    long-standing poor condition of agency financial systems. Correcting the
    systems problems is a difficult challenge for agencies because of the age
    and poor condition of their critical financial systems. Some of the
    federal government's computer systems were originally designed and
    developed years 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.

    Across government, agencies have many efforts underway to implement or
    upgrade financial systems to alleviate long-standing weaknesses in
    financial management. As we recently reported,38 as of September 30, 2002,
    17 agencies advised us that they were planning to or were in the process
    of implementing a new core financial system.39 Of these 17 agencies, 11
    had selected certified40 software. The other 6 agencies have not reached
    the software selection phase of their acquisition process.

    38U.S. General Accounting Office, Core Financial Systems at the 24 Chief
    Financial Officers Act Agencies, GAO-03-903R (Washington, D.C.: June 27,
    2003).

    39Core financial systems, as defined by JFMIP, include managing general
    ledger, funding, payments, receivables, and certain basic cost functions.
    Core financial systems receive data from other financial and feeder
    systems-such as acquisition, grant, and human resource and payroll
    systems-as well as from direct user input, and provide data for financial
    performance measurement and analysis and for financial statement
    preparation.

    40The Program Management Office, which is managed by JFMIP's Executive
    Director with funds provided by the CFO Council agencies, tests vendor
    COTS packages and certifies those that meet certain financial management
    system requirements for core financial systems.

    Implementing a core financial system that has been certified does not
    guarantee that these agencies will have financial systems that are
    compliant with FFMIA. Certification of core financial systems and testing
    vendor COTS packages help ensure that financial management system
    requirements and the vendor software remain aligned. One critical factor
    affecting FFMIA compliance is the integration of the core financial system
    with the agency's administrative41 and programmatic42 systems and the
    validity and completeness of data from these systems. Other factors
    affecting a COTS core financial system's ability to comply with FFMIA
    include how the software package works in the agency's environment,
    whether any modifications or customizations have been made to the
    software, and the success of converting data from legacy systems to new
    systems. As of September 30, 2002, target implementation dates for 16 of
    the 17 agencies planning to implement new core financial systems ranged
    from fiscal years 2003 to 2008. One agency-DOD-had not yet determined its
    target date for full implementation. As shown in figure 2, 3 of the 16
    agencies-Agriculture, GSA, and NASA-planned to complete implementation in
    fiscal year 2003. Three other agencies-SSA, Commerce, and DOT-planned to
    complete their implementations in fiscal year 2004. The Department of
    Energy established fiscal year 2005 as its target implementation date and
    3 agencies-the departments of State and Veterans Affairs and AID-have
    targeted fiscal year 2006 for completion. Moreover, as shown in figure 2,
    4 agencies-DOL, HHS, EPA, and HUD- have set fiscal year 2007 as their
    implementation target date. Finally, 2 agencies-the Departments of the
    Interior and Justice43-projected fiscal year 2008 for completion of their
    core financial systems implementation.

    41Examples of administrative systems are those common to all agencies such
    as budget, acquisition, travel, property, and payroll.

    42Programmatic systems are those needed to carry out an agency's mission.
    For example, HHS needs a grants management system to carry out its
    mission.

    43Justice plans a staggered implementation of its new core financial
    system in its component agencies with target completion dates ranging from
    October 2004 to October 2007.

    systems. Nevertheless, it is imperative that agencies adopt leading
    practices to help ensure successful systems implementation.

      Successful Implementation of Financial Management Systems Is Key for Improved
      Financial Reporting

    Implementing new financial management systems provides a foundation for
    improved financial management, including enhanced financial reporting
    capabilities that will help financial managers meet OMB's accelerated
    reporting deadlines46 and make better financial management decisions due
    to more timely information. Successful implementation of financial
    management systems has been a continuous challenge for both federal
    agencies and private sector entities. In the past, federal agencies have
    experienced setbacks and delays in their implementation processes. These
    delays were caused by various factors, including a lack of executive-level
    involvement, poor communication between managers and users, and inadequate
    project planning. For example, our work at NASA has shown the need for
    consistent executive support, communication with all stakeholders, full
    identification of user requirements, and adequate planning.

    Recent work at NASA illustrates some of the specific problems agencies are
    encountering in implementing JFMIP-certified financial systems. In April
    2000, NASA began its Integrated Financial Management Program (IFMP), its
    third attempt in recent years at modernizing financial processes and
    systems. NASA's previous two efforts were eventually abandoned after a
    total of 12 years and a reported $180 million in spending. As part of this
    third effort, NASA recently implemented a new core financial module that
    was expected to provide financial and program managers with timely,
    consistent, and reliable cost and performance information for management
    decisions. However, earlier this year we reported47 that NASA's core
    financial module was not being implemented to accommodate the information
    needed by program managers, cost estimators, and the Congress. The need
    for ongoing communication between project

    46In order to have timely, reliable and useful information OMB has
    required agencies to prepare financial statements closer to the end of the
    reporting period. Under the accelerated reporting requirements, agency
    performance and accountability reports for fiscal year 2004 are due to OMB
    by November 15, 2004, just 45 days after the close of the fiscal year.

    47U.S. General Accounting Office, Business Modernization: Improvements
    Needed in Management of NASA's Integrated Financial Management Program,
    GAO-03-507 (Washington, D.C.: Apr. 2003).

    managers and systems users is crucial to any successful systems
    implementation project. Project managers need to understand the basic
    requirements of users, while users should be involved in the project's
    planning process. NASA's program officials chose to defer the development
    of some functions and related user requirements in order to expedite the
    systems implementation process. As a result, the new system will not meet
    the needs of some key users who will continue to rely on information from
    nonintegrated programs outside of the core financial module, or use other
    labor-intensive means, to capture the data they need to manage programs.

    NASA has also not followed certain other best practices for acquiring and
    implementing its new financial management system. NASA's implementation
    plan calls for the system to be constructed using commercial components;
    however, NASA has not analyzed the interdependencies of the various
    subsystems. When constructing a system from commercial components, it is
    essential to understand the features and characteristics of each component
    in order to select compatible systems that can be integrated without
    having to build and maintain expensive interfaces. By acquiring components
    without first understanding their relationships, NASA has increased its
    risks of implementing a system that will not optimize mission performance,
    and that will cost more and take longer to implement than necessary.

    Private sector entities have also encountered a number of challenges and
    setbacks when implementing new systems. These challenges have included
    competition between internal organizational units, user resistance to the
    new systems, and frequent changes in management and to underlying
    corporate strategy. Entities are overcoming their challenges because
    better tools have been created to monitor and control progress and skilled
    project managers with better management processes are being used.

    The Standish Group International, Inc.48 (Standish Group) has reported
    that the number of successful systems implementation projects in the
    private sector is increasing. From 1994 to 2000, successful projects
    increased from 28,000 to 78,000. The Standish Group, through its
    research,49 has identified 10 project success factors. These factors
    include user involvement, executive support, experienced project managers,
    firm basic requirements, clear business objectives, minimized scope,
    standard software infrastructure, formal methodology, reliable estimates,
    and other.50

    Also, according to the Standish Group, although no project requires all 10
    factors to be successful,51 the more factors that are present in the
    project strategy, the higher the chance of a successful implementation. As
    discussed above, many of these factors have been challenges for both
    private sector and federal entities. By its very nature, the
    implementation of a new financial management system is a risky
    proposition. Therefore, it is crucial that federal departments and
    agencies follow accepted best practices and embrace as many of the key
    characteristics for successful implementation projects as possible to help
    minimize the risk of failed projects and result in systems that provide
    the necessary data for management's needs.

    Our executive guide52 on creating value through world-class financial
    management describes 11 practices critical for establishing and
    maintaining sound financial operations. These practices include
    reengineering processes in conjunction with new technology. As a result,
    using commercial components such as COTS packages may require significant
    changes in the way federal departments conduct their business. According
    to the leading finance organizations that formed the basis for our
    executive guide, a key to successful implementation of COTS systems is
    reengineering business processes to fit the new software applications

    48The Standish Group is a well-known research advisory firm that focuses
    on mission-critical software applications, management techniques, and
    technologies.

    49The Standish Group's research is done through focus groups, in-depth
    surveys, and extensive interviews with Fortune 500 companies.

    50Other includes small milestones, proper planning, competent staff, and
    ownership.

    51Successful implementation is defined as a project that is completed on
    time, on budget, and with all the features and functions originally
    specified.

    52U.S. General Accounting Office, Executive Guide: Creating Value Through
    World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April
    2000).

    that are based on best practices. Moreover, OMB's former Associate
    Director for Information Technology and e-Government has stated that "IT
    will not solve management problems-re-engineering processes will."

    The conversion of data from an old system to a new system is also
    critical. In December 2002, JFMIP issued its White Paper: Financial
    Systems Data Conversion - Considerations. The purpose of this JFMIP
    document is to raise awareness of financial systems data conversion
    considerations to be addressed by financial management executives and
    project managers when planning or implementing a new financial management
    system. The JFMIP paper addresses (1) key considerations regarding data
    conversion and cutover to the new system, (2) best approaches for
    completing the data conversion and cutover, and (3) ways to reduce the
    risks associated with these approaches.

      Status of Governmentwide Financial Management Improvement Efforts

    As we have discussed, the goal of FFMIA is for agencies to have timely,
    reliable, and accurate information with which to make informed decisions
    and to ensure accountability on an ongoing basis. Figure 3 shows the three
    levels of the pyramid that result in the end goal, accountability and
    useful management information. The bottom level of the pyramid is the
    legislative framework that underpins the improvement of the general and
    financial management of the federal government. The second level shows the
    drivers that build on the legislative requirements and influence agency
    actions to meet these requirements. The three drivers are (1)
    congressional and other oversight, (2) the activities of the JFMIP
    Principals, and (3) the PMA. The third level of the pyramid represents the
    key success factors for accountability and meaningful management
    information-integrating core and feeder financial systems, producing
    reliable financial and performance data for reporting, and ensuring
    effective internal control. The result of these three levels, as shown at
    the top of the pyramid, is accountability and meaningful management
    information needed to assess and improve the government's effectiveness,
    financial condition, and operating performance.

    Figure 3: Pyramid to Accountability and Useful Management Information
    Congressional Oversight

                                      Source: GAO.

    Congressional Oversight	The leadership demonstrated by the Congress has
    been an important catalyst to reforming financial management in the
    federal government. As previously discussed, the legislative framework
    provided by the CFO Act and FFMIA, among others, produced a solid
    foundation to stimulate needed change. For example, in November 2002, the
    Congress enacted the Accountability of Tax Dollars Act of 200253 to extend
    the financial statement audit requirements for CFO Act agencies to most
    executive branch agencies. In addition, there is value in sustained
    congressional interest in these issues, as demonstrated by hearings on
    federal financial management and reform held over the past several years.
    It will be key that the appropriations, budget, authorizing, and oversight
    committees hold agency top management accountable for resolving these
    problems and that they support improvement efforts. The continued
    attention by the

    53Pub. L. No. 107-289, 116 Stat. 2049 (2002).

    Congress to these issues will be critical to sustaining momentum for
    financial management reform.

    JFMIP Principals	Starting in August 2001, the JFMIP Principals have been
    meeting regularly to deliberate and reach agreements focused on financial
    management reform issues including (1) defining success measures for
    financial performance that go far beyond an unqualified audit opinion,54
    (2) significantly accelerating financial statement reporting to improve
    timeliness for decision making, and (3) addressing difficult accounting
    and reporting issues, including impediments to an audit opinion on the
    federal government's consolidated financial statements. This forum has
    provided an opportunity to reach decisions on key issues and undertake
    strategic activities that reinforce the effectiveness of groups such as
    the CFO Council in making progress toward federal financial management. In
    fiscal year 2002, the JFMIP Principals continued the series of these
    deliberative meetings. Continued personal involvement of the JFMIP
    Principals is critical to the full and successful implementation of
    federal financial management reform and to providing greater transparency
    and accountability in managing federal programs and resources.

    President's Management Agenda and the Executive Branch Management
    Scorecard

    The PMA, being implemented by the administration as an agenda for
    improving the management and performance of the federal government,
    targets the most apparent deficiencies where the opportunity to improve
    performance is the greatest. While FFMIA implementation relates directly
    to the improved financial performance initiative, development and
    maintenance of FFMIA-compliant systems will also affect the implementation
    of the other four initiatives. Furthermore, the modernization of agency
    financial management systems, as envisioned by FFMIA, is critical to the
    success of all of these initiatives. Notably, OMB is developing a federal
    enterprise architecture that will affect the government's ability to make
    significant progress across the PMA. For example, as part of the e-gov
    initiative, the number of federal payroll providers is being consolidated.
    Numerous agencies had targeted their payroll operations for costly
    modernization efforts. According to OMB, millions of dollars will be saved
    through shared resources and processes

    54These success measures include financial management systems that
    routinely provide timely, reliable, and useful financial information and
    no material control weaknesses or material noncompliance with laws and
    regulations as well as FFMIA.

    and by modernizing on a cross-agency and governmentwide basis. The
    administration's implementation of its Program Assessment Rating Tool
    (PART) relates specifically to the PMA initiative of integration of budget
    and performance information. Reliable cost data, so crucial to effective
    FFMIA implementation, is critical not only for the improved financial
    performance and budget and performance integration initiatives, but also
    for competitive sourcing. For effective management, this cost information
    must not only be timely and reliable, but also both useful and used.

    The administration is using the Executive Branch Management Scorecard,
    based on governmentwide standards for success, to highlight agencies'
    progress in achieving the improvements embodied in the PMA. OMB uses a
    grading system of red, yellow, and green to indicate agencies' status in
    achieving the standards for success for each of the five crosscutting
    initiatives. It also assesses and reports progress using a similar
    "stoplight" system.

    The focus that the administration's scorecard approach brings to improving
    management and performance, including financial management performance, is
    certainly a step in the right direction. The value of the scorecard is not
    in the scoring per se, but the degree to which the scores lead to
    sustained focus and demonstrable improvements. This will depend on
    continued efforts to assess progress and maintain accountability to ensure
    that the agencies are able to, in fact, improve their performance. It will
    be important that there be continuous rigor in the scoring process for
    this approach to be credible and effective in providing incentives that
    produce lasting results. Also, it is important to recognize that many of
    the challenges the federal government faces, such as improving financial
    management, are long-standing and complex, and will require sustained
    attention.

    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. However, as we
    have discussed today, agencies are facing significant challenges in
    implementing new financial management systems. We are seeing a strong
    commitment from the President, the JFMIP Principals, and the Secretaries
    of major departments to ensure that these needed modernizations come to
    fruition. This commitment is critical to the success of the efforts under
    way as well as those still in a formative stage, and must be sustained.
    Finally, Mr. Chairman, the leadership demonstrated by you and the members
    of this Subcommittee is 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 reforms.

    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 (202) 512-9312. Other key contributors to this testimony
    include Sandra S.

      Acknowledgments Silzer and Bridget A. Skjoldal.

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