The CFO Act: a look at federal accountability.

A progress report on Washington's financial management.

Eight years ago, the accounting profession sounded a clarion: The federal government was not following the accounting, auditing and financial reporting practices it required of the business community. At the same time, the U.S. General Accounting Office was performing full-fledged financial audits of the agencies to show government could better manage and report its spending. Since then, the federal government has taken its own steps to prove it can manage effectively the over $1 trillion with which it is entrusted.

In 1990, Congress enacted the Chief Financial Officers Act (CFO Act), requiring federal agencies to prepare financial statements and have them audited. Under the act, an Office of Federal Financial Management was established in the Office of Management and Budget and an eight-part program was started to move toward better financial management (see exhibit, page 57).

Substantial progress has been made with each of the eight components, but much remains to be done. The federal government, the largest entity in the world, has yet to issue a consolidated, audited financial statement. This article summarizes the status of the federal government's financial management six years after enactment of the CFO Act and describes other federal initiatives to make federal agencies more accountable.

IMPROVING THE FINANCIAL SYSTEMS

Following enactment of the CFO Act, the policies and standards that govern the government's central and agency-based financial systems were revised, various central systems were upgraded or changed and agency systems were consolidated or modernized. Nonetheless, at the end of the 1994 fiscal year, only 34% of the agencies' systems had fully implemented the government's standard general ledger, only 63% had met their agency standards for a computing environment and 55% of the system applications needed to be replaced or upgraded.

In response to this sluggish improvement, the OMB and the agencies' CFOs committed to establish financial management systems to "support program delivery, safeguard assets and manage taxpayer dollars." To achieve these objectives, the OMB and the agencies pledged to continue or initiate projects to

* Improve the integrity of data used governmentwide and shared between agencies.

* Define a complete set of common requirements for financial management systems.

* Maintain adequate mechanisms tor monitoring the status and number of financial management systems.

* Follow a comprehensive approach for upgrading and modernizing the financial management systems.

* Make better use of off-the-shelf technology.

* Improve the systems used to collect and analyze governmentwide financial management information.

* Develop and maintain an Internet-based system to support communications among government financial managers.

JUDGING PERFORMANCE

In 1993, Congress enacted the Government Performance and Results Act (GPRA), requiring the agencies to develop strategic plans and measure and report their performance against set goals. CFOs are a key component in the implementation of GPRA. As a result of their efforts, the amount and usefulness of performance information used for the development, evaluation and presentation of budget requests in the latest budget cycle have increased substantially.

Improvements in federal accountability can be seen in the latest agency financial reports. The Social Security Administration's annual financial statement reports the number of visitors to an SSA office with an appointment who are seen within 15 minutes and the number of initial disability income claims processed within six months of onset of the disability or 60 days after the claim was filed. The Internal Revenue Service's annual financial statement discloses the percentage of individual tax returns prepared by paid preparers, the average estimated time to complete an individual tax return and a business tax return and the accuracy of the information provided by the IRS taxpayer assistance program.

WHO WRITES THE STANDARDS

The Federal Accounting Standards Advisory Board (FASAB), a group of representatives from the OMB, the Treasury Department, the GAO, the Congressional Budget Office and other federal agencies and three people not employed by the federal government, is developing a basic set of federal accounting standards. The FASAB will only recommend the accounting concepts and standards, which ultimately have to be issued by the OMB and the GAO.

Since 1991, FASAB has developed two concepts statements, one defining the objectives for federal financial reporting and the other specifying the types of entities for which there ought to be financial reports. FASAB has recommended financial reports these entities should issue and what information each report should convey. It also has recommended standards for accounting for selected assets and liabilities, such as cash, accounts receivable, accounts payable, direct loans and loan guarantees, inventory and related property, managerial cost accounting, liabilities, property, plant and equipment, revenues and other financing sources and stewardship assets.

The FASAB has been able to recommend concepts and standards that reflect the unique environment and objectives of the federal government. For example, FASAB concluded that federal agencies should report separately revenues received as a result of an exchange transaction and those received through the government's exercise of its sovereign power. For example, the proceeds from the sales of oil in the Elk Hills petroleum reserve in California constitute an exchange transaction, while the taxes the reserve pays each year represents an exercise of the government's sovereign power.

FEDERAL AGENCIES REPORT LIKE CORPORATIONS

When the CFO Act was passed in 1990, only three agencies were issuing audited financial statements, and none had unqualified opinions. That number has steadily increased. In fiscal year 1994, audited financial statements were issued for 124 federal reporting entities, and almost 50% received unqualified opinions. This growth in the preparation and audit of the agencies' financial statements improves greatly the timeliness and accuracy of the financial information used by the executive branch and the Congress for evaluation and decision making. It also helps uncover material system deficiencies, strengthening internal controls and fostering improvements in both financial information systems and the disclosure of measures of program performance.

Congress was so pleased with the benefits of the process that it enacted the Federal Financial Management Act of 1994 to extend the audited financial statements requirement to all of the 24 agencies encompassed by the CFO Act. It also reduced the time to submit audited financial statements from 11 months following the fiscal year-end to 5 months. This provision will make the statements available to Congress for its budget deliberations. Congress also required that there be an audit of a governmentwide financial statement starting with fiscal year 1997.

The preparation and audit of these financial statements ,viii continue to present difficulties. Some of the problems include government accounting systems that are not capable of producing auditable financial data and the lack of a completed set of accounting and reporting standards.

A REPORT FOR THE ENTIRE GOVERNMENT

Perhaps the biggest difficulties will be tied to the audit of a consolidated financial statement for the entire government. Each of the 24 departments and major agencies will need to prepare its own financial statements and have them audited by the department's own inspector general, a public accounting firm or, in some instances, the GAO for fiscal year 1997. At the same time, the departments will electronically transmit their data directly from their general ledgers to the Treasury Department for consolidation, after which the GAO will perform an audit. The entire process will be overseen by an OMB-Treasury-GAO working group, with input provided by an advisory committee composed of agency CFOs and IGs. The consolidated financial statement will be released in 1998.

WHO IS RESPONSIBLE?

The CFO Act's requirement that each department and major agency vest its financial management functions in a chief financial officer has had a major effect. Formerly, no single organization or individual had the authority or responsibility for financial management. Now, the quality' of the financial systems and the reliability of the financial data receive proper attention.

Nonetheless, more must be done. The connection between the departmental CFOs and the CFOs in the components of each department, where so much of the financial operations are performed, must be strengthened. A departmental CFO's responsibilities must explicitly include all functions necessary to perform the role effectively.

As for personnel, it is clear that specialized, not generalized, skills are necessary to develop and maintain integrated accounting and financial management systems, prepare organizationwide financial statements and perform financial audits. Considering the recent downsizing efforts in Congress, these specialized skills will have to come through training, not hiring. The CFOs are defining the core competencies the government's financial management personnel need and cataloging the appropriate existing training programs. Selected government agencies, universities, professional associations and proprietary organizations are developing and providing additional training. The CFO Council will evaluate the benefits of instituting continuing education requirements for financial management personnel (similar to what is required by governmental auditing standards, AICPA membership and state licensing requirements) analyze the feasibility of instituting a certification program and consider establishing a governmentwide financial management training academy. The CFO Council is chaired by the OMB's deputy director of management and is composed of the CFOs and deputy CFOs of the 24 major agencies identified in the CFO Act, the controller of the Office of Federal Financial Management and the fiscal assistant secretary of the U.S. Treasury Department.

THE VALUE OF A MORE EFFICIENT GOVERNMENT

The federal government also is planning to reform its debt management by changing the design and administration of loan programs and making the collection of taxes and other debts more efficient. For example, one technique would publicize assets available for sale on the Internet along with joint agency real estate fairs and auctions. Another would aim to replace judicial foreclosures for defaulted mortgage debts and the resultant extensive court proceedings with simpler nonjudicial foreclosures.

Other reforms include

* Streamlining the processes agencies use to evaluate their controls and requiring them to report annually the status of these controls to the president and Congress.

* Modernizing the payment-making process. The key strategies will be to pay more federal employees and retirees electronically, use electronic funds transfer for payments to vendors and for federal benefits and initiate electronic data interchange partnerships with the private sector.

* Improving the administration of the approximately $200 billion in grants to nonfederal entities by continually updating management guidance circulars.

SUSTAINING THE MOMENTUM

The attention and progress that has been devoted to managing federal finances has given policy makers more control by giving them a clearer idea of how and where federal monies are spent. Providing financial statements in accordance with accepted accounting principles recommended by the FASAB will harmonize federal financial reporting and provide a relevant, useful way to measure federal performance.

But much more remains to be done, and the central and agency leadership must persevere. Congress has set a foundation of accountability and financial control, but momentum should not wane before a consolidated financial statement is completed for the entire federal government, accompanied by an unqualified auditor's opinion.

EXECUTIVE SUMMARY

* IN 1990, CONGRESS ENACTED the Chief Financial Officers Act (CFO Act), requiring federal agencies to prepare financial statements and have them audited. Federal agencies and Congress are working to establish a solid foundation for comprehensive reform of federal financial management.

* THE FEDERAL ACCOUNTING Standards Advisory Board (FASAB) is developing a basic set of federal accounting standards. The FASAB will only recommend the accounting concepts and standards, which need to be issued by the Office of Management and Budget and the General Accounting Office.

* IN FISCAL 1994, AUDITED financial statements were issued for 124 reporting entities, and almost 50% received unqualified opinions. Congress enacted the Federal Financial Management Act of 1994 to extend the requirement for audited financial statements to all of the 24 largest federal agencies encompassed by the CFO Act. Congress also required that there be an audit of a governmentwide financial statement starting with fiscal 1997.

* CHARLES BOWSHER, comptroller general of the U.S. General Accounting Office, said there would be opportunities for CPA firms to work with the GAO and the inspector generals of each of the large 24 federal agencies in auditing financial statements and improving financial management systems.

HAROLD I. STEINBERG is a retired partner of KPMG Peat Marwick in Washington, D.C. He most recently served as the Deputy Controller in the Office of Federal Financial Management in the Office of Management and Budget. Steinberg also served the OMB as its Associate Director for Management and was its representative to the Federal Accounting Standards Advisory, Board from 1993 to 1994. He is a member of the American Institute of CPAs and the Association of Government Accountants.

The Eight-Point Program for Improving Financial Management

1. Financial management organization. Establish a governmentwide and agency-level organization structure to support financial management improvements and foster communications and cooperation among financial management personnel.

2. Financial management personnel. Improve training and career development programs.

3. Accounting standards. Establish clear and comprehensive accounting standards and performance measures.

4. Financial systems. Develop and operate agency-level systems that process, track and provide accurate, timely information of financial activity in the most cost-effective and efficient manner.

5. Internal controls. Design and operate management structures that ensure accountability for achieving results, complying with laws and regulations and safeguarding assets.

6. Asset management. Design loan programs, collect taxes and other debts owed the federal government and manage federal cash.

7. Federal assistance management. Provide management guidance for grants to state and local governments, colleges and universities and not-for-profit organizations.

8. Audited financial reporting. Create and maintain a systematic means for disclosing information that enables decision makers to understand the financial implications of budgetary, policy and program issues and for strengthening agency accountability for sound management performance.

CASE STUDY

Executing the CFO Act: CPAs Will Be Involved

Charles Bowsher, comptroller general of the United States and head of the General Accounting Office, said the passage of the Chief Financial Officers Act in 1990 brought federal agencies closer to meeting the same financial statement reporting requirements as public corporations and state and local governments. Subsequent legislation, the Government Performance and Results Act (GPRA) and the Government Management Reform Act (GMR.) made performance management the standard of government operations and set the stage for annual financial audits of federal agencies and consolidated, governmentwide audit. "The inspectors general figs) of the 24 largest agencies are responsible for the agency audits," said Bowsher. "These IGs, in turn, can reach out and contract with accounting firms to assist them in the audit process."

The GAO began to perform full-fledged financial audits of large government agencies in the 1980s to prove they could be done. "Many people did not believe we could audit large government organizations, such as the Internal Revenue Service, the U.S. Army or the Air Force," said Bowsher. "But we proved it was possible, and we went on to advocate, with the support of the American Institute of CPAs and the Financial Executives Institute, the need for legislation that would mandate annual financial audits of government agencies.

"We expect the cooperation between the IGs and CPA firms to resemble the model used for the Single Audit Act audits for state and local governments following the New York City crisis in 1976," said Bowsher. "Maryland went straight to a CPA audit, while California used the state auditor, but contracted some audit work to CPA firms." Bowsher said the GAO would perform about four of the audits each year. "Federal audit agencies have been contracting with CPA firms in the past few years to do some of the agency audits," said Bowsher. "There will be plenty of opportunities for CPA firms to work with both the GAO and the IGs of each of the large federal agencies."

Improving financial systems

In addition to the audit initiatives, there is a need to improve federal financial management systems, said Bowsher. In testimony last July before the House Subcommittee on Government Management, Information and Technology, Bowsher recommended that in light of the government's poor record in systems development, it may be appropriate to consider contracting with private businesses to take over large segments of federal automated operations. "We expect CPA firms to help the agencies modernize their financial management systems," said Bowsher. He said outsourcing systems development work may cost the government less because equipment costs would be shared among all of the vendor's other customers, and the number of computer support staff would be drastically reduced. Another related advantage to outsourcing, said Bowsher, is that agencies were likely to acquire state-of-the-art technology faster.

Bowsher also recommended that federal agencies pool their resources to establish private-public sector partnerships to resolve major problems and test innovations.

Creating an accountability report

Jeffrey C. Steinhoff, GAO director of planning and reporting, said it was vital to ensure the federal financial reports provided relevant, useful information to the public. The Federal Accounting Standards Advisory Board recommended federal reporting objectives that have brought the federal government one step closer to what Steinhoff referred to as an accountability report. "The accountability report would tie together the statutory reporting under the CFO Act, the GPPA, the GMRA and the Federal Managers Financial Integrity Act," said Steinhoff. Under FASAB's reporting objectives, there would be four main components to the accountability report, including sections on

* The budget and its execution.

* Operating performance.

* Stewardship.

* Internal controls.

"Inspectors general will undoubtedly use CPA firms to assist them in auditing the accountability report, but they will be ultimately responsible for the audits and the GAO will be reviewing the IGs' report as part of its work as auditor of the consolidated financial statements" said Stemhoff.

--John von Brachel