CFO Act of 1990: Driving the Transformation of Federal Financial
Management (17-NOV-05, GAO-06-242T).
In 1990, the Chief Financial Officers (CFO) Act, heralded as the
most comprehensive financial management reform legislation in 40
years, was enacted. The Act's goal is to improve management
through reliable, useful, and timely financial and performance
information for day-to-day decisionmaking and accountability.
This testimony outlines the legislative history of the CFO Act,
and its key elements, progress to date in implementing the Act,
and the challenges for the future. Prior to passage of the CFO
Act, the seemingly never ending disclosures of fraud, waste,
abuse, and mismanagement in federal programs painted a picture of
a government unable to manage its programs, protect its assets,
or provide taxpayers with the effective and economical services
they expect. The enactment of the CFO Act represented a
broad-based recognition that federal financial management was in
great need of fundamental reform. The Act mandated a financial
management leadership structure; required the preparation and
audit of annual financial statements; called for modernized
financial management systems and strengthened internal control;
and required the systematic measurement of performance, the
development of cost information, and the integration of program,
budget, and financial systems.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-242T
ACCNO: A41717
TITLE: CFO Act of 1990: Driving the Transformation of Federal
Financial Management
DATE: 11/17/2005
SUBJECT: Accountability
Accounting procedures
Accounting standards
Financial management
Financial management systems
Financial records
Financial statement audits
Financial statements
Internal controls
Performance measures
Risk management
Strategic planning
******************************************************************
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GAO-06-242T
Testimony Before the Subcommittee on Government Management, Finance and
Accountability, Committee on Government Reform, House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery Expected at 2:30 p.m. EST Thursday, November 17,
2005
CFO ACT OF 1990
Driving the Transformation of Federal Financial Management
Statement of Jeffrey C. Steinhoff Managing Director, Financial Management
and Assurance
GAO-06-242T
United States Government Accountability Office
Washington, DC 20548
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today on the 15th anniversary of the enactment of
the Chief Financial Officers Act of 19901 (CFO Act) to discuss the effect
of this groundbreaking legislation as well as the challenges that still
remain. Having worked closely with the members of Congress on passage of
the CFO Act, I can attest first hand that while many challenges still
exist, the state of federal financial management has come a long way since
1990. Nearly all the CFO Act agencies2 have made marked improvements in
financial management and have shown that issuing timely audited financial
statements can become a routine part of doing business at the federal
level. At the same time, there are opportunities to take federal financial
management to the next level, which will be important as the federal
government faces difficult fiscal challenges that will require reliable
financial and performance information to support timely decisions on
spending, and pressures to address fraud, waste, abuse, and mismanagement
will only intensify. Also, certain material weaknesses in internal control
and in selected accounting and financial reporting practices have
continued to prevent the GAO from being able to issue an opinion on the
consolidated financial statements of the U.S. government. These weaknesses
which hinder management's ability to manage day-to-day operations, most
notably at the Department of Defense, need to be resolved.
Today, I would like to
o highlight the legislative history of the CFO Act;
o summarize the key elements of the CFO Act;
o outline progress made to date in implementing the CFO Act; and
o provide our views on the challenges remaining.
1Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
2The CFO Act agencies are the executive branch agencies listed at 31
U.S.C. S:901(b). See Appendix I.
CFO Act Enacted to Address Longstanding Problems
Prior to passage of the CFO Act in 1990, the seemingly never ending
disclosures of fraud, waste, abuse, and mismanagement in federal programs
painted a picture of a government unable to manage its programs, protect
its assets, or provide taxpayers with the effective and economical
services they expect. As the Comptroller General pointed out around the
time the CFO Act was passed,3 the problems that existed were not limited
to a few agencies or a few programs; rather, all of the major agencies had
serious problems. For years, GAO and the Inspectors General had reported a
litany of problems that resulted in wasteful spending, poor management,
and losses totaling billions of dollars. In some cases, the government's
ability to carry out crucial programs had been severely hampered.
The financial management environment was in such disarray that not only
were audited annual financial statements not required, most in the federal
financial management community did not even see the value of annual
financial reporting. The need for federal financial statements was an area
of major disagreement. Budgeting was what financial management was all
about, and accountability for how the money was being spent was not the
priority. Federal managers in the government were more concerned with the
budget and did not focus on improved financial management.
Concerned about the ever-growing problems in federal financial management
and the need for a more integrated, comprehensive, and systematic approach
to reform, in 1985 the Comptroller General issued a two-volume report
entitled, Managing the Cost of Government: Building an Effective Financial
Management Structure.4 This report laid out the nature and scope of the
problem and provided the conceptual framework for the reforms needed to
improve the federal financial management and therefore, manage the cost of
government. Problems included the poor quality of financial management
information and antiquated financial management systems, with recommended
reforms such as strengthened accounting, auditing, and financial reporting
and the systematic measurement of performance. In addition, GAO and the
Office of Management and Budget (OMB) conducted separate studies of "high
risk" programs that demonstrated breakdowns in internal control affecting
hundreds of billions of dollars. Since January 1990, GAO has designated
certain federal programs and operations as high risk because of their
greater vulnerabilities to fraud, waste, abuse, and mismanagement. The
increased awareness of the nature and extent of high-risk programs further
bolstered the need for broad-based congressional action.
3GAO, Financial Management Reform, GAO/T-AFMD-90-31 (Washington, D.C.:
Sept.17, 1990).
4GAO, Managing the Cost of Government: Building an Effective Financial
Management Structure, GAO/AFMD-85-35 (Washington, D.C.: February, 1985).
While the federal government had not made concerted progress in reforming
financial management, state and local governments had moved beyond the
federal government in this area because of key factors including federal
legislation such as the Single Audit Act of 1984.5 The Single Audit Act of
1984 established financial audit requirements for state and local
governments that receive federal financial assistance in excess of certain
dollar thresholds in any fiscal year. The Single Audit Act also included a
requirement for independent auditors to review whether state and local
governments have adequate internal control over federal funds. The need to
comply with this law prompted states and local governments to focus on
improving financial management and accountability. In the 1980s, many
states began producing financial reports based on generally accepted
accounting principles to provide a more complete picture of their
financial situation. Consequently, in 1990, many in the financial
management community believed that state and local governments were ahead
of the federal government.6
To address the underlying problems that plagued federal financial
management in March 1986, Senator William Roth introduced S.2230, the
Federal Management Reorganization and Cost Control Act of 1986. Over the
ensuing 4 1/2 years, the concepts in S.2230 were refined and debated.7
What resulted was the CFO Act of 1990. The CFO Act, with bipartisan and
bi-cameral support, had as its principle sponsors Senators John Glenn and
William Roth and Representatives John Conyers and Frank Horton. Signed
into law by President George H.W. Bush on November 15, 1990, the CFO Act
was the most comprehensive and far-reaching financial management
improvement legislation since the Budget and Accounting Procedures Act of
1950. The CFO Act established a leadership structure, provided for
long-range planning, required audited financial statements, and
strengthened accountability reporting.
5Pub. L. No. 98-502, Stat. 1510 (Oct. 19, 1984).
6The Single Audit Act was later amended by the Single Audit Act Amendments
of 1996. Pub. L. No.104-156. 110 Stat. 1396 (Jul. 5, 1996).
7See H.R. Rep. No. 101-818, Part 1 (1990).
The CFO Act was the beginning of a series of management reform legislation
to improve the general and financial management of the federal government,
and laid the foundation for other key legislative reforms that followed a
common thread of increased accountability and better management practices.
The first legislation that followed the CFO Act was the Government
Performance and Results Act of 19938 (GPRA), which requires agencies to
develop strategic plans, set performance goals, and report annually on
actual performance compared to goals. GPRA was followed by the Government
Management Reform Act of 19949 (GMRA), which made permanent the pilot
program in the CFO Act for annual audited agency-level financial
statements, expanded this requirement to all CFO Act agencies, and
established a requirement for the preparation and audit of governmentwide
consolidated financial statements. The Federal Financial Management
Improvement Act of 199610 (FFMIA) built on the foundation laid by the CFO
Act by reflecting the need for CFO Act agencies to have systems that can
generate reliable, useful, and timely information with which to make fully
informed decisions and to ensure accountability on an ongoing basis. The
Clinger-Cohen Act of 199611 (also known as the Information Technology
Management Reform Act of 1996) sets forth a variety of initiatives to
support better decision making for capital investments in information
technology, which has led to the development of the Federal Enterprise
Architecture and better-informed capital investment and control processes
within agencies and across government. The Accountability of Tax Dollars
Act of 200212 (ATDA) required most executive agencies that are not
otherwise required, or exempted by OMB, to prepare annual audited
financial statements and to submit such statements to Congress and the
Director of OMB.13 Lastly, the Department of Homeland Security Financial
Accountability Act of 200414 added the Department of Homeland Security
(DHS) to the list of CFO Act agencies.
8Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).
9Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).
10Pub. L. No. 104-208, div. A., sec. 101(f), title VIII 110 Stat. 3009,
3009-389 (Sept. 30, 1996).
11Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996).
12Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002).
13ATDA agencies are not required to comply with FFMIA.
14Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).
As shown in figure 1, if successfully implemented, these reforms provide a
solid basis for improving accountability of government programs and
operations as well as routinely producing valuable cost and operating
performance information.
Figure 1: Federal Financial Management Reform Framework
The CFO Act Mandated Numerous Changes
The enactment of the CFO Act represented a broad-based recognition that
federal financial management was in great need of fundamental reform. Key
elements of the CFO Act require centralized financial management
leadership, both governmentwide and at the agency level, and as expanded
by GMRA, agency-level and governmentwide annual audited financial
statements. To facilitate stewardship and accountability at executive
branch agencies, the CFO Act designated CFOs with broad responsibility for
modernizing financial management systems, financial reporting, asset
management, and strengthened internal control practices. The systematic
measurement of performance, the development of cost information, and the
integration of financial management systems are some of the financial
management practices called for by the CFO Act that, if properly
implemented, will significantly improve financial management throughout
the federal government. Furthermore, the Act statutorily designates the
2415 executive departments and agencies covered. These 24 departments and
agencies represent 95 percent of net outlays in fiscal year 2004.
Strong centralized leadership is essential to solving the government's
long-standing financial management problems. The CFO Act provided for such
leadership by giving OMB broad new authority and responsibility for
directing federal financial management, modernizing the government's
financial management systems, strengthening financial reporting, and
internal control. The CFO Act also created a new position in OMB, the
Deputy Director for Management, who serves as the government's chief
official responsible for financial management. In addition, the CFO Act
established a new Office of Federal Financial Management (OFFM) in OMB to
carry out the government-wide financial management initiatives and
responsibilities. To head this office, the CFO Act established the
position of Controller, an individual who must possess demonstrated
ability and practical experience in accounting, financial management, and
financial systems. This individual has responsibility for handling the
day-to-day operations of OFFM to ensure that financial operations are
being properly carried out government-wide.
Executive-level leadership is a critical success factor for building a
foundation of control and accountability that supports external reporting
and performance management, which is needed to achieve the goals of the
CFO Act. For this reason, an agency CFO must be a key figure in an
agency's top management team. The CFO Act stipulates that the CFO is a
presidential appointee or appointed by the agency head and is assisted by
a Deputy Chief Financial Officer. Both the CFO and the Deputy CFO
generally must possess demonstrated ability in accounting, budget
execution, financial and management analysis, systems development, and
practical experience in financial management practices in large
governmental or business entities. Among the CFO's responsibilities are
developing and maintaining integrated accounting and financial management
systems, directing, managing, and providing policy guidance and oversight
of all agency financial management personnel, activities, and operations,
and overseeing the recruitment, selection, and training of personnel to
carry out agency financial management functions. In addition, each CFO for
the 24 agencies serves on the Chief Financial Officers Council, which
regularly meets to advise and coordinate the activities of the agencies of
its members on such matters as consolidation and modernization of
financial systems. The CFO Act created the council and specified that the
council will be chaired by OMB's Deputy Director for Management. Other
members will be OMB's Controller and the Department of the Treasury's
Fiscal Assistant Secretary.
15As shown in appendix I, initially, 23 agencies were designated as
subject to the CFO Act. Upon its establishment as an independent agency,
the Social Security Administration was added in 1994. The Federal
Emergency Management Agency, one of the original CFO Act agencies, was
transferred to the Department of Homeland Security in 2003. The Department
of Homeland Security Financial Accountability Act of 2004 added DHS to the
list of CFO Act agencies thus bringing the number of CFO Act agencies
again to 24 for fiscal year 2005.
The CFO Act, as expanded by GMRA, required that annual financial
statements be prepared and audited for each CFO Act agency covering all
accounts and associated activities of each office, bureau, and activity of
the agency.16 The CFO Act also requires that the financial statements
prepared pursuant to the act be audited in accordance with applicable
generally accepted government auditing standards. These audits are the
responsibility of the Inspectors General, but may be conducted by, and at
the discretion of, the Comptroller General, in lieu of the Inspectors
General. Inspectors General may contract with independent public
accountants to conduct financial statement audits.
Important Progress Made to Achieving CFO Act Goals
The federal government has made substantial progress in financial
management in the 15 years since the enactment of the CFO Act. If I were
to summarize in just a few words the environment in 2005 as compared to
1990, financial management has gone from the backroom to the boardroom.
16The CFO Act initially called for pilot financial statements from
selected agencies that covered all of the offices, bureaus, and activities
of that department or service.
Achieving Cultural Change-Perhaps most importantly, we have seen true
cultural change in how financial management is viewed, this has been
accomplished through a lot of hard work by OMB and the agencies and
continued strong support and oversight by Congress. As I previously
discussed, federal financial management had suffered from decades of
neglect and an organizational culture that for the most part, had not
fully recognized the value of good financial management-as a means of
ensuring accountability and sound management.
Although the views about how an organization can change its culture vary
considerably, the organizations we and others have studied17 identified
leadership as the most important factor in successfully making cultural
changes. Top management must be totally committed in both words and deeds
to changing the culture and the fundamental way that business is
conducted. At the top level, federal financial management reform has
gained momentum through the committed support of top federal leaders. For
example, improved financial performance is one of the six governmentwide
initiatives in the President's Management Agenda (PMA). Under this
initiative, agency CFOs share responsibility-both individually and through
the efforts of the CFO Council-for improving the financial performance of
the government. To achieve the goals of the financial performance
initiative, agencies must now have more timely and reliable financial
information, improve the integrity of their financial activities, and have
sound and dependable financial systems. In conjunction with the other
governmentwide program initiatives of the PMA, the federal government is
improving its financial reporting practices and overall accountability.
Establishing a Governmentwide Leadership Structure-As established by the
CFO Act, OFFM, the OMB organization with governmentwide responsibility for
federal financial management, has undertaken a number of initiatives
related to improving financial management capabilities ranging from
requiring the use of commercial-off-the-shelf financial systems to the
promotion of cost accounting. In addition to assessing agency financial
performance for the PMA, OFFM has issued financial management guidance to
agencies. Some of OFFM's initiatives are in collaboration with the CFO
Council and are broad-based attempts to reform financial management
operations across the federal government. While reforming federal
financial management is an undertaking of tremendous complexity, it
presents great opportunities for improvements in financial management and
related business operations. In their efforts to continue financial
management improvement, OFFM has recently collaborated with the CFO
Council on initiatives in the following areas:
17Grant Thornton LLP and the Association of Government Accountants, CFO
Survey: Preparing for Tomorrow's Way of Doing Business, (Alexandria,
Virginia: March 1998) and GAO, Executive Guide: Creating Value Through
World-class Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April
2000).
o internal control,
o full implementation of FFMIA,
o asset management,
o improper payments, and
o control over federal charge cards
Selecting Qualified CFOs-The CFO Act established CFOs at the major
departments and agencies and established minimum qualifications for CFOs.
Measured in terms of coming to the job with a proven track record in
financial management, the background of individuals selected for these
positions has improved tremendously over the past 15 years. For example,
the CFO at the Department of Labor has held a range of CFO and CFO-related
positions in the private sector and government over a 30-year career that
included serving as Treasury's CFO in a previous administration.
Testifying with me today, Dr. Linda M. Combs, the Controller at OMB,
brings impeccable credentials and extensive experience to the federal
government's financial management leadership and policy-setting
organization and exemplifies today's federal CFO.
Improving Financial Management Systems and Operations-Since 1990, progress
has been made towards improving financial management systems in the
federal government. Improved agency financial management systems and
operations are essential to support management decision making and
results-oriented activities as addressed by the CFO Act. At a minimum,
federal managers must have financial information that is reliable, useful,
and timely to support this effort. Federal financial management systems
requirements for the core financial system, managerial cost system, and 12
other administrative and programmatic systems, such as grants, property,
revenue, travel, and loans, which are part of an overall financial
management system, have been developed. Beginning in 1999, OMB required
agencies to purchase commercial-off-the-shelf (COTS) software that had
been tested and certified through the Joint Financial Management
Improvement Program (JFMIP)18 Program Management Office19 against the
systems requirements that I just mentioned as well as the standard general
ledger issued by the Department of Treasury. With these requirements, the
federal government has better defined the functionality needed in its
financial management systems which has helped the vendor community
understand federal agencies needs. Concurrently, there has been an
evolving realization that agencies need to change their business processes
to adapt to the practices embedded in commercially available software
versus modifying the software to accommodate their existing practices.
Looking at financial management systems from another perspective, the
federal government has acted on opportunities to consolidate operations.
For example, a number of agencies perform accounting or business
operations on behalf of others, consequently, the number of agencies
processing payroll has been dramatically reduced from 22 to 4. According
to OMB, through these initiatives, millions of dollars will be saved
through shared resources and processes and by modernizing on a
cross-agency, governmentwide basis. Further, OMB had established agency
task forces that focused on developing Centers of Excellence to (1) reduce
the number of systems that each individual agency must support, (2)
promote standardization, and (3) reduce the duplication of efforts. If we
were to compare the state of financial management systems today to where
agencies were 15 years ago, the evolution has been dramatic. On the other
hand, systems are at the top of our list in terms of remaining challenges
for the future. As I will discuss later, agencies continue to struggle
with developing and implementing integrated systems that achieve expected
functionality within cost and timeliness goals.
Preparing Auditable Financial Statements-Most CFO Act agencies have
obtained clean or unqualified audit opinions on their financial
statements. Unqualified audit opinion for CFO Act agencies financial
statements have grown from 6 in fiscal year 1996 to 18 in fiscal year
2005. Improvements in timeliness have been even more dramatic this year.
Agencies were able to issue their audited financial statements within the
accelerated reporting time frame-all of the 24 CFO Act agencies issued
their audited financial statements by the November 15, 2005 deadline, set
by OMB, just 45 days after the close of the fiscal year. The CFO Act calls
for agency financial statements to be issued no later than March 31st,
which is 6 months after the fiscal year end, and in the earlier years some
agencies were unable to meet that timeframe. OMB has incrementally
accelerated the financial statement issuance date to address the
timeliness of the information provided by the financial statements. Just a
few years ago, most considered this accelerated timeframe unachievable.
While the increase in unqualified and timely opinions is noteworthy, we
are concerned about the number of CFO Act agencies that have had to
restate certain of their financial statements to correct errors. I will
discuss these issues in more detail later in this statement.
18 JFMIP was originally formed under the authority of the Budget and
Accounting Procedures Act of 1950 and was a joint and cooperative
undertaking of the Government Accountability Office, the Department of the
Treasury, OMB, and the Office of Personnel Management (OPM), working in
cooperation with each other to improve financial management practices in
the federal government. In a December 2004 memorandum, OMB announced a
realignment of JFMIP's responsibilities for financial management policy
and oversight in the federal government.
19 Under the realignment of JFMIP's responsibilities announced in December
2004, the Program Management Office will continue its software
certification process. Also, systems requirements will be issued by OFFM.
Therefore, JFMIP ceased to exist as a separate organization, although the
Principals will continue to meet at their discretion.
Preparing Performance and Accountability Reports-Another clear indication
of progress to date is the preparation of the annual Performance and
Accountability Reports (PAR) by CFO Act agencies. The PARs provide
financial and performance information that enables the President, the
Congress, and the public to assess the performance of an agency relative
to its mission and to demonstrate accountability. These reports summarize
program, management, and financial performance data, including the Annual
Performance Reports required by GPRA with annual financial statements and
other reports, such as agencies' assurances on internal control,
accountability reports by agency heads and Inspectors' General assessments
of agencies' most serious management and performance challenges. These
reports serve as the federal government's report to the American public
and provide an accounting for the return on the taxpayers' investment.
This information is also provided to decision -makers who are interested
in CFO Act agencies' performance, such as OMB and the Congress.
Furthermore, the Association of Government Accountants recognizes federal
agencies for their high-quality performance and accountability reports by
its annual awarding of the Certificate of Excellence in Accountability
Reporting (CEAR). For the most recent evaluation of 21 agencies
performance and accountability reports, 10 agencies were recognized for
achieving excellence in their reports. Of particular note, the Social
Security Administration and Department of Labor have received the CEAR
award for the past 7 and 5 years, respectively. As part of our effort to
be a model agency, GAO has been awarded the CEAR award since it first
applied in 2001 and for the 19th consecutive year, independent auditors
gave our financial statements an unqualified opinion with no material
weaknesses and no major compliance problems.
Strengthening Internal Control-Accountability is part of the
organizational culture that goes well beyond receiving an unqualified
audit opinion; the underlying premise is that agencies must become more
results-oriented and focus on internal control. In December 2004, OMB
revised its Circular No. A-123, Management's Responsibility for Internal
Control, to provide guidance to federal managers on improving the
accountability and effectiveness of federal programs and operations by
establishing, assessing, correcting, and reporting on management controls.
Requiring federal managers, at the executive level, to focus on internal
control demonstrates a renewed emphasis on identifying and addressing
internal control weaknesses. Based on our 2005 assessment of high-risk
programs,20 three programs previously designated as high-risk, largely due
to financial management weaknesses, were removed from the list. The
Department of Education's Student Financial Aid Programs, the Federal
Aviation Administration's Financial Management, and the Department of
Agriculture's Forest Service Financial Management all sustained
improvements in financial management and internal control weaknesses and
thus warranted removal. Further, as I testified21 before this subcommittee
earlier this year, thousands of internal control problems were identified
and fixed over the past two decades, especially at the lower levels where
internal control assessments were performed and managers could take
focused actions to fix relatively simple problems. But again as I will
discuss later, this type of work is far from complete.
Developing New Accounting Standards-Another definitive example of progress
made to date as well as a critical component of improved financial
performance is the establishment of the Federal Accounting Standards
Advisory Board (FASAB). In conjunction with the passage of the CFO Act,
the OMB Director, Secretary of the Treasury, and the Comptroller General
established FASAB to develop accounting standards and principles for the
newly required financial statements and other federal entities. FASAB is
comprised of a 10-member advisory board of 4 knowledgeable individuals
from government and 6 non-federal members selected from the general
financial community, the accounting and auditing community, and academia
to promulgate proposed accounting standards designed to meet the needs of
federal agencies and other users of federal financial information. The
mission of FASAB is to develop accounting standards after considering the
financial and budgetary information needs of congressional oversight
groups, executive agencies, and other users. These accounting and
reporting standards are essential for public accountability and for an
efficient and effective functioning of our democratic system of
government. To date, FASAB has issued 30 statements of federal financial
accounting standards (SFFAS) and 4 statements of federal financial
accounting concepts (SFFAC).22 The concepts and standards are the basis
for OMB's guidance to agencies on the form and content of their financial
statements and for the government's consolidated financial statements. The
standards developed by FASAB have been recognized by the American
Institute of Certified Public Accountants as generally accepted accounting
standards for federal entities.
20GAO, High-Risk Series an Update, GAO-05-207 (Washington, D.C.: January
2005).
21GAO, Financial Management: Effective Internal Control is Key to
Accountability, GAO-05-321T, (Washington, D.C.: Feb. 16, 2005).
Challenges Remain to Fulfilling the Objectives of the CFO Act
While there has been marked progress in financial management, as I have
just highlighted, a number of challenges still remain. The principal
challenges remaining are (1) modernizing financial management systems, (2)
improving financial reporting, (3) building a financial management
workforce for the future, (4) addressing long-standing internal control
weaknesses, and (5) ensuring the continuity of financial management
reform. Fully meeting these challenges will enable the federal government
to provide the world-class financial management anticipated by the CFO
Act. While there continues to be much focus on the agency and
governmentwide audit opinions, getting a clean audit opinion, though
important in itself, is not the end goal. The end goal is the
establishment of a fully functioning CFO operation that includes (1)
modern financial management systems that provide, reliable, timely, and
useful information to support day-to-day decision-making and oversight and
for the systematic measurement of performance; (2) a cadre of highly
qualified CFOs and supporting staff; and (3) sound internal controls that
safeguard assets and ensure proper accountability.
22Accounting standards are authoritative statements of how particular
types of transactions and other events should be reflected in financial
statements. SFFACs explain the objectives and ideas upon which FASAB
develops the standards.
Financial Management Systems
First and foremost, agencies must take full advantage of modern technology
and develop financial management systems that are integrated with the
range of other business systems. The federal landscape is littered with
far too many unsuccessful financial management system implementation
efforts. Most notable has been the Department of Defense (DOD) where
billions of dollars have been invested in financial management systems
with little return on the investment. DOD has historically been unable to
develop and implement business systems on time, within budget, and with
the promised capability. For example, we recently reported23 that the
Department of Navy spent approximately $1 billion for four largely failed
pilot Enterprise Resource Planning (ERP) system24 efforts, without marked
improvement in its day-to-day operations. The Navy now has underway a new
ERP project, which early Navy estimates indicate will cost another $800
million. While the new project, as currently envisioned, has the potential
to address some of the Navy's financial management weaknesses, it will not
provide an all-inclusive end-to-end corporate solution for the Navy.
Further, there are still significant challenges and risks ahead as the
project moves forward, such as developing and implementing 44 system
interfaces with other Navy and DOD systems and converting data from legacy
systems into the ERP system.
The results of the fiscal year 2005 assessments performed by agency
inspectors general or their contract auditors under FFMIA show that these
problems continue to affect financial management systems at most of the 24
CFO Act agencies. While the problems are much more severe at some agencies
than at others, the nature and severity of the problems indicate that
overall, management at most CFO Act agencies do not yet receive the
complete range of information needed for accountability, performance
management and reporting, and decision making.
23GAO, DOD Business Systems Modernization: Navy ERP Adherence to Best
Business Practices Critical to Avoid Past Failures, GAO-05-858
(Washington, D.C.: Sept. 29, 2005).
24An ERP solution is an automated system using commercial off-the-shelf
(COTS) software consisting of multiple, integrated functional modules that
perform a variety of business-related tasks such as payroll, general
ledger accounting, and supply chain management.
As we recently testified in September 200525, managerial cost accounting
essentially entails answering very simple questions such as how much does
it cost to do whatever is being measured, thus allowing assessments of
whether those costs seem reasonable. In other cases, it could involve
establishing a baseline for comparison with what it costs others to do
similar work or achieve similar performance. To date, accumulating and
analyzing the relevant financial and nonfinancial data26 to determine the
cost of achieving performance goals, delivering programs, and carrying out
discrete activities has proven difficult to do. Among the barriers
standing in the way of this enhanced data are nonintegrated financial
systems, lack of accurate and timely recording of data, inadequate
reconciliation procedures, noncompliance with accounting standards,
including the cost management standard, and failure to adhere to the U.S.
Government Standard General Ledger (SGL).
What is most important is that the problem has been recognized. Across
government, agencies have efforts underway to implement new financial
management systems or to upgrade existing systems. Agencies expect that
the new systems will provide reliable, useful, and timely data to support
day-to-day managerial decision making and assist taxpayer and
congressional oversight. Whether in government or the private sector,
implementing and upgrading information systems is a difficult job and
brings a degree of new risk. Organizations that follow and effectively
implement accepted best practices in systems development and
implementation (commonly referred to as disciplined processes) can manage
and reduce these risks to acceptable levels, organizations that do not
typically suffer the consequences. For example, our work at DOD27 and the
National Aeronautics and Space Administration28 this past year has shown
that these agencies, which have experienced significant problems in the
past in implementing new financial management systems, were not following
the necessary disciplined processes for efficient and effective
development and implementation of such systems. As I mentioned earlier,
NASA is on its third attempt to implement a new financial management
system. The first two attempts, which cost $180 million, failed and the
current system initiative which is expected to cost close to $1 billion,
has experienced problems. As we pointed out in recent testimony29 before
this subcommittee, many of the problems NASA has been experiencing with
its financial management system stemmed from inadequate implementation of
disciplined processes. As the federal government moves forward with
ambitious financial management system modernization efforts to identify
opportunities to eliminate redundant systems and enhance information
reliability and availability, adherence to disciplined processes is a
crucial element to reduce risks to acceptable levels.
25GAO, Managerial Cost Accounting Practices: Departments of Labor and
Veterans Affairs, GAO-05-1031T (Washington, D.C.: Sept. 21, 2005)
26Nonfinancial data measures the occurrences of activities and can
include, for example, hours worked, units produced, grants managed,
inspections conducted, or people trained.
27GAO, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance
Operations and System Implementation Efforts, GAO-05-441 (Washington,
D.C.: Jun. 30, 2005).
28GAO, Business Modernization: Some Progress Made toward Implementing GAO
Recommendations Related to NASA's Integrated Financial Management Program,
GAO-05-799R (Washington, D.C.: Sept. 9, 2005).
Financial Reporting
In the area of financial reporting, we see two challenges: (1) the
elimination of restatements and (2) greater transparency in financial
reporting. Many CFO Act agencies have obtained clean or unqualified audit
opinions on their financial statements, but the underlying agency
financial systems and controls still have some serious problems. This
manifested itself last year when a number of CFO Act agencies had to
restate their financial statements. As we have previously testified,30 at
least 1131 of the 2332 CFO Act agencies restated their fiscal year 2003
financial statements, and 533 CFO Act agencies restated their fiscal year
2002 financial statements. The restatements to CFO Act agencies' fiscal
year 2003 financial statements ranged from correcting 2 line items on an
agency's balance sheet to numerous line items on several of another
agency's financial statements. The amounts of the agencies' restatements
ranged from several million dollars to over $91 billion. Nine34 of those
11 agencies received unqualified opinions on their financial statements
originally issued in fiscal year 2003. Seven of the 9 auditors issued
unqualified opinions on the restated financial statements, which in
substance replace the auditors' opinions on their respective agencies'
original fiscal year 2003 financial statements. For 235 of these 9
agencies, the auditors not only withdrew their unqualified opinions on the
fiscal year 2003 financial statements but also issued other than
unqualified opinions on their respective agencies' restated fiscal year
2003 financial statements because they could not determine whether there
were any additional misstatements and the effect that these could have on
the restated fiscal year 2003 financial statements. We have reported36 on
some of these agency restatements and have work ongoing37 at a number of
other agencies to more fully understand the issues surrounding these
restatements. We have not yet had a chance to look in any depth at
restatements for fiscal year 2005 because fiscal year 2005 financial
statements, which would identify any such restatements, were just issued
by the deadline of November 15. We did note though, that there were a
number of restatements.
29GAO, National Aeronautics and Space Administration: Long-standing
Financial Management Challenges Threaten the Agency's Ability to Manage
Its Programs, GAO-06-216T (Washington, D.C.: Oct. 27, 2005).
30GAO, Fiscal Year 2004 U.S. Government Financial Statements: Sustained
Improvement in Federal Financial Management Is Crucial to Addressing Our
Nation's Future Fiscal Challenges, GAO-05-284T (Washington, D.C.: Feb. 9,
2005).
31Departments of Agriculture, Defense, Health and Human Services, Justice,
State, and Transportation, and the General Services Administration,
National Science Foundation, Nuclear Regulatory Commission, the Office of
Personnel Management, and the Small Business Administration.
32At the time of our review there were only 23 CFO Act agencies because as
we discussed earlier, FEMA was no longer required to prepare and have
audited financial statements under the CFO Act, leaving 23 CFO Act
agencies for fiscal years 2003 and 2004.
33Departments of Agriculture, Health and Human Services, the Interior,
Transportation, and the Treasury.
The second challenge is that current financial reporting does not clearly
and transparently show the wide range of responsibilities, programs, and
activities that may either obligate the federal government to future
spending or create an expectation for such spending. The current financial
reporting model provides information on financial position and changes in
such position during the year, as well as budget results. However, more
important than current and short-term deficits, we face large and growing
structural deficits in the future due primarily to known demographic
trends, rising health care costs and relatively low federal revenues as a
percentage of the economy. Our nation's current fiscal path is
unsustainable and failure to highlight, analyze and appropriately respond
to the resulting long-term consequences could have significant adverse
consequences on our future economy and standard of living. While the
Statement of Social Insurance will provide long-term information for those
specific programs, in our view, more comprehensive reporting is necessary
to fully and fairly reflect the nation's longer-term fiscal challenges.
Consequently, a top priority should be communicating important information
to users about the long-term financial condition of the U.S. government
and annual changes therein. Furthermore, FASAB recognized that tax
expenditures, which can be large in relation to spending programs that are
measured under federal accounting standards, may not be fully considered
in entity reporting. Reporting information on tax expenditures would
ensure greater transparency of and accountability for such expenditures.38
34General Services Administration, National Science Foundation, Nuclear
Regulatory Commission, Office of Personnel Management , and the
Departments of Agriculture, Health and Human Services, Justice, State, and
Transportation.
35Nuclear Regulatory Commission and the Department of Justice.
36GAO, Financial Audit: Restatements to the Department of State's Fiscal
Year 2003 Financial Statements, GAO-05-814R (Washington, D.C.: Sept. 20,
2005). Financial Audit: Restatements to the Nuclear Regulatory
Commission's Fiscal Year 2003 Financial Statements, GAO-06-30R
(Washington, D.C.: Oct. 27, 2005).
37Departments of Agriculture, Health and Human Services, Justice, and
Transportation, the General Services Administration, National Science
Foundation, and Office of Personnel Management.
Financial Workforce
Changing the way business is done in a large, diverse, and complex
organization like the federal government is not an easy undertaking.
According to a survey of federal CFOs,39 federal finance organizations of
the future will have fewer people, with a greater percentage of analysts,
as opposed to accounting technicians. However, today, most functions
within federal finance organizations are focused primarily on (1)
establishing and administering financial management policy; (2) tracking,
monitoring, and reconciling account balances; and (3) ensuring compliance
with laws and regulations. While they recognize the need for change,
according to the CFOs surveyed, many questions remain unanswered regarding
how best to facilitate such changes. When it comes to world-class
financial management, our study40 of nine leading private and public
sector financial organizations found that leading financial organizations
often had the same or similar core functions (i.e., budgeting, treasury
management, general accounting, and payroll), as the federal government.
However, the way these functions were put into operation varied depending
on individual entity needs. Leading organizations reduced the number of
resources required to perform routine financial management activities by
(1) consolidating activities at a shared service center and (2)
eliminating or streamlining duplicative or inefficient processes. Their
goal was not only to reduce the cost of finance but also to organize
finance to add value by reallocating finance resources to more productive
and results-oriented activities like measuring financial performance,
developing managerial cost information, and integrating financial systems.
38GAO, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to be Reexamined,
GAO-05-560 (Washington, D.C.: Sept. 23, 2005).
39Grant Thornton LLP and the Association of Government Accountants, CFO
Survey: Preparing for Tomorrow's Way of Doing Business, (Alexandria,
Virginia: March 1998).
40GAO, Executive Guide: Creating Value Through World-class Financial
Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000). Appendix II
includes a synopsis of the key concepts discussed in the study. See
Appendix II.
The federal financial workforce that supports the business needs for today
is not well-positioned to support the needs of tomorrow. A JFMIP study41
indicated that a significant majority of the federal financial management
workforce performs transaction support functions of a clerical and
technical nature. These skills do not support the vision of tomorrow's
business that will depend on an analytic financial management workforce
providing decision support. The financial management workforce plays a
critical role in government because the scale and complexity of federal
activities requiring financial management and control is monumental.
Building a world-class financial workforce will require a workforce
transformation strategy devised in partnership between CFOs and agency
human resource departments, now established in law as Chief Human Capital
Officers, working with OMB and the Office of Personnel Management. Agency
financial management leadership must identify current and future required
competencies and compare them to an inventory of skills, knowledge, and
current abilities of current employees. Then, they must strategically
manage to fill gaps and minimize overages through informed hiring,
development, and separation strategies. This is similar to the approach
that we identified when we designated strategic human capital management
as a high-risk area in 2001 recognizing that agencies, working with
Congress and OPM, must assess future workforce needs and determine
strategies to meet those needs, especially in light of long-term fiscal
challenges.42 Achieving the financial management vision of the future will
be directly effected by the workforce who support it.
41JFMIP, Building a World Class Financial Workforce, The Federal Financial
Management Workforce of the Future, (Washington, D.C.: September 2003).
42 GAO-05-207.
Internal Control
Earlier, I noted that while important progress in strengthening internal
control has been made, the federal government faces numerous internal
control problems, some of which are long-standing and are well-documented
at the agency level and governmentwide. As we have reported for a number
of years in our audit reports on the U.S. government's consolidated
financial statements, the federal government continues to have material
weaknesses and reportable conditions in internal control related to
property, plant, and equipment; inventories and real property; liabilities
and commitments and contingencies; cost of government operations; and
disbursement activities, just to mention a few of the problem areas.
As an example, consider DOD which has many known material internal control
weaknesses. Of the 25 areas on GAO's high-risk list, 14 relate wholly or
partially to DOD, particularly its financial management problems.
Overhauling DOD's financial management controls and operations represents
a challenge that goes far beyond financial accounting to the very fiber of
DOD's range of business operations, management information systems, and
culture. Although the Secretary of Defense and several key agency
officials have shown commitment to transformation, as evidenced by key
initiatives such as the Business Management Modernization Program43 and
the Financial Improvement and Audit Readiness Plan, little tangible
evidence of significant broad-based and sustainable improvements has been
seen in DOD's business operations to date. For DOD to successfully
transform its business operations, it will need a comprehensive and
integrated business transformation plan; people with the skills,
responsibility, and authority to implement the plan; an effective process
and related tools, such as a business enterprise architecture;44 and
results-oriented performance measures that link institutional, unit, and
individual personnel goals and expectations to promote accountability for
results.
43GAO, DOD Business Systems Modernization: Long-standing Weaknesses in
Enterprise Architecture Development Need to Be Addressed, GAO-05-702
(Washington, D.C.: Jul. 22, 2005)
44A business enterprise architecture is a well-defined blueprint for
operational and technological change.
As I testified before you in February 2005, we support OMB's efforts to
revitalize internal control assessments and reporting through the December
2004 revisions to Circular No. A-123. These revisions recognize that
effective internal control is critical to improving federal agencies
effectiveness and accountability and to achieving the goals established by
Congress. They also considered the internal control standards issued by
the Comptroller General,45 which provide an overall framework for
establishing and maintaining internal control and for identifying and
addressing major performance and management challenges and areas at
greatest risk of fraud, waste, abuse, and mismanagement.
Effective internal control, as envisioned in the newly revised Circular
No. A-123, inherently includes a successful strategy for addressing
improper payments. Our prior work46 has demonstrated that attacking
improper payment problems requires a strategy appropriate to the
organization involved and its particular risks. We have found that
entities using successful strategies to address their improper payment
problems shared a common focus of improving the internal control
system-the first line of defense in safeguarding assets and preventing and
detecting errors and fraud. Moreover, as we testified47 before this
subcommittee in July of this year, even though progress has been made,
certain agencies have not yet performed risk assessments of all their
programs and/or estimated improper payments for their respective programs.
I pointed out in my February 2005 testimony, six issues critical to
effectively implementing the changes to Circular No. A-123, specifically,
the need for
1. development of supplemental guidance and implementation tools
to help ensure that agency efforts are properly focused and
meaningful;
2. vigilance over the broader range of controls covering program
objectives;
3. strong support from managers throughout the agency, and at all
levels;
4. risk-based assessments and an appropriate balance between the
costs and benefits of controls;
5. management testing of controls in operation to assess if they
are designed adequately and operating effectively, and to assist
in formulating corrective actions;
6. management accountability for control breakdowns.
45GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington D.C.: November 1999).
46GAO, Financial Management: Effective Implementation of the Improper
Payments Information Act of 2002 Is Key to Reducing the Government's
Improper Payments, GAO-03-991T (Washington, D.C.: Jul. 14, 2003).
47GAO, Financial Management: Challenges in Meeting Governmentwide Improper
Payment Requirements, GAO-05-907T (Washington, D.C.: Jul. 20, 2005).
Since that time, in July 2005, the CFO Council, in collaboration with the
President's Council on Integrity and Efficiency (PCIE)48 and OMB, issued
an implementation guide to assist departments and agencies in addressing
the Circular No. A-123 requirements related to internal control over
financial reporting. As I mentioned earlier, this is a positive first step
to helping the federal government clearly articulate its objectives and
criteria for measuring whether the objectives of Circular No. A-123 have
been successfully achieved. Equally important will be the rigor with which
these criteria are applied.
Continuity of Leadership
The federal government has always faced the challenge of sustaining the
momentum of transformation because of the limited tenure of key
administration officials. The current administration's PMA has served as a
driver for governmentwide financial management improvements. It has been
clear from the outset that the current administration is serious about
improved financial management. We have been fortunate that, since the
passage of the CFO Act, all three administrations have been supportive of
financial management reform initiatives. And, as I discussed earlier,
we've seen a positive cultural shift in the way the federal government
conducts business. Given the long-term nature of the comprehensive changes
needed and challenges still remaining to fully realize the goals of the
CFO Act, it is unlikely they will all occur before the end of the current
administration's term. Therefore, sustaining a commitment to
transformation in future administrations will be critical to ensure that
key management reforms such as the CFO Act are fully attained.
48 The PCIE is an interagency council comprised principally of the
presidentially appointed and Senate-confirmed IGs, which is governed by
Executive Order No. 12805 (1992), to coordinate and enhance the work of
the IGs. The Deputy Director for Management in OMB serves as the chair.
In closing, over the past 15 years, we have seen continuous movement
toward the ultimate goals of accountability laid out in the CFO Act. I
applaud the CFO and audit communities for the tremendous progress that has
been made. While early on some were skeptical, the CFO Act has
dramatically changed how financial management is carried out and the value
placed on good financial management across government. Sound decisions on
the current results and future direction of vital federal programs and
policies, while never easy, are made less difficult when decision makers
have timely, reliable, and useful financial and performance information.
Across government, financial management improvement initiatives are
underway, and if effectively implemented, have the potential to greatly
improve the quality of financial management information. Proper accounting
and financial reporting practices are even more essential at the federal
level than they were 15 years ago given the difficult spending challenges
and the long-term fiscal condition of the federal government.
Further, I want to reiterate the value of sustained congressional interest
in these issues, as demonstrated by this subcommittee's leadership. It
will be key that going forward, the appropriations, budget, authorizing,
and oversight committees hold agency top leadership accountable for
resolving remaining problems and that they support improvement efforts
that address the challenges for the future I highlighted today. The
federal government has made tremendous progress in the past 15 years, and
sustained congressional attention has been and will continue to be a
critical factor to ensuring achievement of the CFO Act's goals and
objectives.
Mr. Chairman, this completes my prepared statement and I want to thank you
for the opportunity to participate in this hearing and for the strong
support of this Subcommittee in addressing the need for financial
management reform and accountability. I would be happy to respond to any
questions you or other members of the subcommittee may have at this time.
Contacts and Acknowledgments
For information about this statement, please contact Jeffrey C. Steinhoff
at (202) 512-2600 or McCoy Williams, Director, Financial Management and
Assurance, at (202) 512-6906 or [email protected]. Individuals who made
key contributions to this testimony include Felicia Brooks, Kay Daly, and
Chanetta Reed. Numerous other individuals made contributions to the GAO
reports cited in this testimony.
Appendix I: Chief Financial Officers Act Agencies Appendix I: Chief
Financial Officers Act Agencies
Agency
The Department of Agriculture
The Department of Commerce
The Department of Defense
The Department of Education
The Department of Energy
The Department of Health and Human
Services
The Department of Housing and Urban
Development
The Department of the Interior
The Department of Justice
The Department of Labor
The Department of State
The Department of Transportation
The Department of the Treasury
The Department of Veterans Affairs
The Environmental Protection Agency
The National Aeronautics and Space
Administration
The Agency for International Development
The Federal Emergency Management Agency1
The General Services Administration
The National Science Foundation
The Nuclear Regulatory Commission
The Office of Personnel Management
The Small Business Administration
The Social Security Administration
The Department of Homeland Security
1The Federal Emergency Management Agency, one of the original CFO Act
agencies, was transferred to the Department of Homeland Security in 2003
and thus removed from the original list of CFO Act agencies. The
Department of Homeland Security Financial Accountability Act of 2004 added
DHS to the list of CFO Act agencies thus bringing the total number of CFO
Act agencies again to 24.
Appendix II: KeFinan Appendix II: Key Concepts of World-class Financial
Management
(195075)
www.gao.gov/cgi-bin/getrpt?GAO-06-242T.
To view the full product, click on the link above. For more information,
contact McCoy Williams at (202) 512-6906 or [email protected].
Highlights of GAO-06-242T, a testimony before the Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives
November 17, 2005
CFO ACT OF 1990
Driving the Transformation of Federal Financial Management
In 1990, the Chief Financial Officers (CFO) Act, heralded as the most
comprehensive financial management reform legislation in 40 years, was
enacted. The Act's goal is to improve management through reliable, useful,
and timely financial and performance information for day-to-day
decisionmaking and accountability. This testimony outlines the legislative
history of the CFO Act, and its key elements, progress to date in
implementing the Act, and the challenges for the future.
Prior to passage of the CFO Act, the seemingly never ending disclosures of
fraud, waste, abuse, and mismanagement in federal programs painted a
picture of a government unable to manage its programs, protect its assets,
or provide taxpayers with the effective and economical services they
expect. The enactment of the CFO Act represented a broad-based recognition
that federal financial management was in great need of fundamental reform.
The Act mandated a financial management leadership structure; required the
preparation and audit of annual financial statements; called for
modernized financial management systems and strengthened internal control;
and required the systematic measurement of performance, the development of
cost information, and the integration of program, budget, and financial
systems.
In the 15 years since the enactment of the CFO Act, the federal government
has made substantial progress in strengthening financial management. The
past 3 administrations have all made financial management reform a
priority. Improved financial management has been one of the cornerstones
of the President's Management Agenda from the outset of the current
administration. There has been a clear cultural change in how financial
management is viewed and carried out in the agencies and a recognition of
the value and need for good financial management throughout government,
which was not the case in 1990. There are now qualified CFOs across
government, who bring to the job proven track records in financial
management. Financial management systems and internal control have been
strengthened. Generally accepted government accounting standards have been
developed. For fiscal year 2005, 18 of 24 CFO agencies received clean
audit opinions on their financial statements, up from just 6 in fiscal
year 1996. This year's audited financial statements were issued in just 1
1/2 months after the close of the fiscal year as opposed to 5 months,
which is the deadline in the Act. Agencies are also now preparing
performance and accountability reports that tie together financial and
performance information. Though not yet auditable, primarily because of
problems in the Department of Defense, comprehensive annual consolidated
financial statements are being issued in 2 1/2 months as opposed to the
6-month timeframe allowed in the Act.
While there has been marked progress in the past 15 years and the CFO Act
has proven itself as the foundation for financial accountability, GAO has
identified five principal challenges to fully realizing the world-class
financial management anticipated by the CFO Act. The need to:
1. modernize and integrate financial management systems to provide
a complete range of financial and cost information needed for
accountability, performance reporting, and decision making, with
special emphasis on the Department of Defense, which has
deeply-rooted systems problems,
2. build a more analytic financial management workforce to support
program managers and decisionmakers,
3. solve long-standing internal control weaknesses,
4. enhance financial reporting to provide a complete picture of
the federal government's overall performance, financial condition,
and future fiscal outlook, and
5. ensure that financial management reform is sustained given the
leadership changes that occur at the end of any administration and
the long-term nature of many of the ongoing reform initiatives.
The continuing strong support of the Congress has been a catalyst to the
important progress that has already taken place and will be essential
going forward.
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