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Department of Defense Financial Management: Past, Present, and Future.

It has been nearly 200 years since Thomas Jefferson made that proclamation, and yet the fundamental need to simplify our accounting system to provide federal managers and the Congress with better financial information remains as valid today as it was in 1802. Clearly, attempts to improve federal financial management are not anomalies that were brought about by a spate of recent legislative change; the federal government has been attempting to improve the federal system of accounting for almost 200 years! Nonetheless, the Congress has enacted several legislative changes over the past decade to focus the efforts of federal managers toward achieving the highest standards of financial management, and providing the level of accountability expected by the American taxpayer.

The Department of Defense (Department/DoD) is committed to being a proper steward of the resources and investments that the Congress and the American taxpayer have entrusted to it. Further, the Department recognizes that it needs to have better financial information to conduct its worldwide operations. Accordingly, the Department is in the process of a vigorous transformation of its financial management operations, processes, and systems. The goal of this financial management reform is to ensure that DoD financial management fulfills the information needs of decision makers, satisfies statutory requirements, eliminates fraud and waste, and provides superior customer service.

Current Environment

Virtually all of the Department's accounting systems were designed to account for how money appropriated by the Congress was spent-and these systems perform, very well, the function for which they were designed. But most of these systems were not designed to meet generally accepted accounting principles (GAAP), and did not incorporate features such as accrual accounting that are prevalent outside of the government. Rather, these systems were often "stovepipe" systems specifically designed to meet a particular DoD Component's needs. And most of these systems are not compatible with each other, making it difficult for DoD financial managers to develop meaningful financial reports. Complicating matters further, a significant portion of the financial information needed to compile financial statements does not reside in these accounting systems but, rather, resides in nonfinancial feeder systems.

These nonfinancial systems contain the day-to-day operating information used by the Military Departments and the Defense Agencies. They are called feeder systems because the day-to-day operating information needs to be translated into financial information. This is accomplished by having the information "fed" into the financial and accounting systems used to develop reports provided to DoD financial managers.

Legislative Financial Management Reform

Beginning with the passage of the Chief Financial Officers Actin 1990, and continuing with subsequent legislation, the Congress has been stimulating financial management reform and challenging federal agencies to operate in a more businesslike manner, especially as relates to the reporting of financial data. Foremost among these legislative changes are the Chief Financial Officers Act, the Government Performance and Results Act, the Government Management Reform Act, the Federal Financial Management Improvement Act, and the National Defense Authorization Act of 1998. These Acts are interrelated and, taken together, create rigorous demands and challenges for federal financial reform.

Chief Financial Officers (CFO) Act of 1990. The purpose of the CFO Act is to improve the general and financial management practices in the federal government by requiring the development of an integrated financial management system, including financial reporting and internal controls. The Act establishes a financial management leadership structure, requires preparation and audit of financial statements (for certain agencies) that conform with GAAP, and strengthens accountability reporting. The Act also requires the appointment of a chief financial officer in operating departments and agencies.

Government Performance and Results Act (GPRA) of 1993. The purpose of GPRA is to improve public confidence, federal program effectiveness, and public accountability. The Act requires each federal agency to develop strategic plans, prepare annual plans setting performance goals, and report annually on actual performance as part of the annual budget submission. The legislation mandates the requirement to measure outputs and outcomes of federal programs.

Government Management Reform Act (GMBA) of 1994. The GMRA builds on the CFO Act and requires all agencies to produce annual audited financial statements and accurate cost and performance information, as well as to integrate budget, accounting, and program data. This act also requires preparation and audit of a government-wide financial statement. The GMRA is designed to provide for a more effective, efficient, and responsive government.

Federal Financial Management Improvement Act (FFMIA) of 1996. The purpose of the FFMIA is to require all federal departments and agencies to install and maintain financial management systems that will allow them to prepare financial statements that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger (USGSGL) at the transaction level. The USGSGL provides a uniform Chart of Accounts to be used in standardizing federal agency accounting. The FFMIA also requires that each federal agency head report to the Congress on the implementation of actions needed to bring its agency's financial management systems into compliance (i.e., a remediation plan).

National Defense Authorization Act of 1998. The 1998 Defense Authorization Act requires the Department to create a Biennial Financial Management Improvement Plan. The plan is required to address financial management within the Department, including feeder systems not owned or controlled by the financial community, that provide data to the Department's finance and accounting systems. The Act also requires that the Biennial Plan contain a concept of operations detailing how the Department intends to manage its financial operations. The Department is required to submit the Biennial Plan to the Congress no later than September 30th of each even-numbered year.

The Department is responsible for complying with the above and other applicable laws enacted by the Congress and for implementing rules, regulations, and guidelines established by the federal government's "financial principals." The financial principals-the Department of the Treasury, the Office of Management and Budget (OMB), and the General Accounting Office (GAO)--shape and define the requirements for financial compliance.

In 1990, the financial principals established the Federal Accounting Standards Advisory Board (FASAB). The FASAB was created to consider and recommend accounting standards and principles to improve federal financial accountability and reporting. On October 19, 1999, the American Institute of Certified Public Accountants designated the FASAB as the body to establish accounting principles for federal government entities. Therefore, Statements of Federal Financial Accounting Standards issued by the FASAB are recognized as GAAP for applicable federal government entities. Further, this designation means that auditors of federal entity financial statements cannot express an opinion on federal financial statements as being in conformity with GAAP unless the financial statements comply with accounting standards promulgated by the FASAB.

Collectively, the five major pieces of legislation described above and the efforts of the federal government's financial principals and the FASAB are designed to provide the Department with the necessary guidance needed to be complied with in order to obtain an "unqualified audit opinion." (An unqualified pinion is the best opinion that may be provided by an auditor and, when given, means that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with GAAP.)

Audited Financial Statements

In March 1998, the GAO issued its first-ever audit opinion on the fiscal year (IN) 1997 government wide financial statements. The GAO rendered a disclaimer of opinion on those financial statements. (A disclaimer of opinion states that the auditor does not express an opinion on the financial statements, often because it cannot be determined whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity.) In rendering its audit opinion, the GAO cited material discrepancies with certain amounts reported on the government-wide financial statements for five major categories. These "show stopper" issues were: (1) property, plant and equipment, (2) inventory, (3) liabilities, (4) fund balance with Treasury, and (5) intragovernmental eliminations.

In May 1998, the Administration issued a memorandum to the Heads of Executive Departments and Agencies establishing a goal of obtaining an unqualified audit opinion on the government-wide financial statements. In that same month, the Secretary of Defense issued a memorandum to the DoD leadership expressing his commitment to achieve the Administration's objective.

The GAO again issued a disclaimer audit opinion on the FY 1999 government-wide financial statements. The GAO audit opinion on the government-wide financial statements considers the 24 largest federal agencies, only 13 of which received unqualified ("clean") audit opinions on their FY 1999 financial statements. While the Department has made significant improvements in its financial activities, the Office of the Inspector General, Department of Defense, rendered a disclaimer of opinion on the DoD agency-wide financial statements for FY 1999. The Department is committed to attaining an unqualified opinion and considers a disclaimer of opinion to be unfavorable. Since DoD's financial statements have a material effect on the government-wide financial statements, the DoD has been cited by the GAO as one of the agencies responsible for the disclaimer of opinion on the government-wide financial statements.

Despite the disclaimer of opinion, the Department does know how the funds entrusted to it are spent and has reasonable control over its assets. To a large extent, the major "show stopper" issues that prevent the Department from obtaining a more favorable audit opinion on its audited financial statements can be attributed to the myriad of archaic feeder and accounting systems that were never designed to comply with new accounting standards, and which do not integrate well with the Department's financial management systems. The Department is working diligently to modify its systems and procedures, to update its policy guidance, and to overcome other obstacles that preclude the Department from obtaining a favorable opinion.

Department Actions

The Department is taking aggressive action to implement the new federal accounting standards. This requires overhauling DoD-wide management information systems and involves both a long-term and short-term strategy.

The long-term strategy is, through reengineering or replacement, to ensure that both the Department's financial and nonfinancial systems can implement new federal accounting standards and that they interface with the Department's other financial and nonfinancial systems that feed data into, or receive data from, them. It is estimated that less than half of the information needed for sound financial management originates in systems under the control of the Department's financial community. The remainder comes from nonfinancial feeder systems--most notably from acquisition, logistics, medical, and personnel systems. It is an enormous challenge to upgrade these feeder systems to produce the needed information and to improve their interfaces with DoD financial systems--especially since the primary purpose of these nonfinancial systems is to support the U.S. military forces defending our nation, not to produce financial data. Additionally, these systems often are not sufficiently flexible to respond rapidly to cha nging customer needs, legislative changes, contingency operations, management initiatives, or requirements from other government agencies.

The Department developed a comprehensive plan--the Financial Management Improvement Plan (FMIP)--to reform its business practices. On October 26, 1998, the Department submitted to the Congress its first Biennial FMIP. Since then, the Department has voluntarily updated and submitted the Plan annually. In the Plan, the Department lays out a strategy for improving future financial management operations. The Plan includes the Department's financial management concept of operations and addresses both financial systems and nonfinancial feeder systems. The Plan also reflects the Department's plans for improving and/or replacing systems throughout the Department. The projected timeframe for having new or improved systems in place is September 30, 2003. [The FMIP may be found at]

As substantial and significant amounts of the information that is reported in the Department's financial statements originates in non-financial feeder systems, the Department is initiating a Year 2000 (Y2K)-like process for monitoring the progress in enhancing the Department's systems. As with Y2K, the Department needs a sophisticated tracking system to monitor progress on remediating information management systems. The objective of this process is to monitor and ensure that DoD systems are in compliance with federal financial management requirements. The estimated completion date for this process is September 30, 2003.

For the short-term, the Department is developing interim methodologies to achieve acceptable results in its major accounts sufficient so as to support a more favorable audit opinion on the Department's financial statements. For example, the Department hired Certified Public Accounting (CPA) firms to assist in the valuation of its property and in the development of new procedures on accountability. The Department also is working with the audit community to develop more detailed policy guidance to assist DoD Components in identifying and reporting information needed for more accurate, consistent and reliable financial reports. Interim actions likewise are being advanced to overcome gaps or problems in current information flows. All these actions are being accomplished in partnership with the OMB, the GAO, and the OIG, DoD. Collectively, these interim methodologies are referred to as the Department's Implementation Strategies.


Under the umbrella of DoD financial business practices reform, the Department as a whole, and functional managers in particular, desire better financial information to conduct their worldwide operations. Taking positive and effective measures to correct systemic deficiencies is a Department-wide management challenge. The Department continues to work with the audit community to develop more detailed policy guidance to assist the DoD Components in identifying and reporting additional information not previously required and, therefore, not currently provided. The Department's financial management reforms are continuing to cut costs and improve effectiveness by exploiting the best of private and government practices.

The Department has achieved substantial progress and fundamentally is transforming DoD financial activities, as well as other functional areas with which those activities must interact, but much work remains to be done. In both the financial and the nonfinancial communities, a significant investment in modernizing systems, upgrading procedures, and in training people needs to be accomplished. Given the magnitude and complexity of the Department's global mission, coupled with the plethora of nonfinancial and financial systems, it is likely that the long-term actions required to correct the Department's systemic deficiencies could cost substantial amounts and will not be completed prior to fiscal year 2003.


Dramatic changes related to federal financial management have occurred in the last decade. The CFO Act mandates that agencies and departments develop and maintain integrated accounting and financial management systems, including financial reporting and internal controls, that comply with applicable accounting principles, standards and requirements, and internal control standards. The Government Performance and Results Act requires agencies to submit to the Congress of a strategic plan for agency program activities, and requires the measurement of outputs and outcomes of federal programs. The Government Management Reform Act requires the head of each agency to submit an audited financial statement to the OMB annually. The Federal Financial Management Improvement Act requires the annual submission of a remediation plan for all agencies and departments that have not fulfilled the requirement for compliant integrated accounting and financial management systems. The Defense Authorization Act of 1998 requires the D epartment to provide to the Congress a Biennial Financial Management Improvement Plan that addresses all aspects of financial management within the Department of Defense, including the financial systems, accounting systems, and nonfinancial data feeder systems. Finally the FASAB issued new federal-wide accounting standards designed to improve federal financial accountability and reporting. Collectively these changes are intended to make the government operate in a more businesslike manner.

Achieving the mandates required by these legislative changes and incorporating new accounting standards is a daunting challenge for the Department because its financial and nonfinancial systems were not designed to produce business-type financial statements. Nonetheless, the Department has made, and continues to make, significant financial management reforms to comply with these new requirements, and expects to make substantial progress each year toward achieving more favorable audit opinions on its financial statements.

The enormous efforts undertaken by the Department to modify its systems and procedures, and to update policy guidance are not, however, designed solely to achieve an unqualified opinion on its financial statements. Rather, these efforts are designed to improve overall financial information to better ensure that decision makers within the Department are provided the data needed to effectively execute their duties. The senior leaders within the DoD are committed to demonstrating, to the American taxpayer, that the Department is a proper steward of the resources entrusted to it. Achieving favorable audit opinions on our financial statements will do much to improve credibility with the public that the Department's senior financial managers are effectively carrying out their fiduciary responsibilities.

And it will bring us much closer to attaining that goal set by Thomas Jefferson almost 200 years ago!

Frank Murphy has held a variety of financial management and logistics positions during his 22-year career with the Department of Defense. He currently is a senior financial management analyst within the Office of the Under Secretary of Defense (Comptroller), Directorate for Accounting Policy. He is an active ASMC Washington Chapter member.
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Author:Murphy, Frank
Publication:Armed Forces Comptroller
Geographic Code:1USA
Date:Jun 22, 2000
Previous Article:Message from the Executive Director.
Next Article:Department of Defense Implementation Strategies for Audited Financial Statements.

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