GovernmentExecutive.com

David M. Walker has left the building, but his ideas for managing the Defense Department live on. As comptroller general and head of the Government Accountability Office, Walker regularly called for the appointment of a chief management officer to oversee Defense's business affairs. Now the fiscal 2008 National Defense Authorization Act has mandated the appointment of a deputy chief management officer for the department. Operating at the undersecretary level, the deputy CMO would advise the deputy secretary (the CMO) and other Defense leaders on ways to improve business operations.

Those operations include human resources, acquisition, real property and installations, logistics, and financial and information management. Reform efforts aimed at those activities began with the Defense Management Review in the 1980s, followed by acquisition reform and the Defense Reform Initiative in the 1990s, and continue today with the Business Transformation Agency effort that started in 2001. After almost 20 years, however, the major improvements long promised still have not been realized. Congress is unhappy with the rate of change and believes that establishing a full-time senior executive post accountable for results is the only way to achieve results.

Like the current legislation, the 1990 Chief Financial Officers Act and the 1996 Clinger-Cohen Act were enacted in response to GAO recommendations. Both laws called for the establishment of chief officers and required them to take specific steps to achieve business reforms. The chief financial officer would work toward auditable external financial statements and the chief information officer would set up an integrated information technology architecture to support the production of such statements at a reasonable cost.

The result has been the never-ending development of business enterprise architectures, which has done nothing to improve operations. To make matters worse, it never will - even if Defense were to achieve CFO Act compliance. Unlike profit-seeking businesses in a competitive marketplace whose ability to attract capital depends on their production of auditable financial statements, Defense's business activities are publicly funded, nonprofit government operations that rely on annual appropriations from Congress. And Congress' decisions about those activities never will depend on the kind of financial information that the CFO Act calls for.

The private-sector-style financial statements the CFO Act requires provide three kinds of information: what a business is worth, its income and its cash flow. None of that has anything to do with Defense's business activities because they aren't bought or sold, they don't exist to make profits, and they don't rely on cash to pay their bills (they use obligation authority from approved budgets to do that).

The one external financial report required by the CFO Act that does make sense is the annual statement of budgetary resources. That report tells Congress whether obligations were made in accordance with authorization legislation. But that kind of financial accountability is no different from the accountability called for almost 90 years ago by the 1921 Budget and Accounting Act. Thus, what is helpful in the CFO Act (the requirement for audited statements of budgetary resources) is not new, and what is new (the requirement for audited private-sector-style financial statements) is not helpful.

This is not to say Defense doesn't need better accounting. Textbooks make a clear distinction, however, between financial accounting - which serves external decision-makers such as stockholders, investors and creditors - and managerial cost accounting, which serves internal decision-makers such as managers. The Defense Department needs better managerial cost accounting, not financial accounting. Yet the comptroller's office, the Defense Finance and Accounting Service, and the department's new Business Transformation Agency have been unable to focus on managerial cost accounting because they've been required to build financial accounting systems.

But systems able to meet external reporting requirements are inadequate for "estimating the costs of activities and business processes" or for "providing useful feedback to improve business processes," writes Robert S. Kaplan of Harvard Business School in Cost and Effect (Harvard Business School Press, 1997). Choices have had to be made, therefore, between complying with the financial accounting demands of the CFO Act and developing managerial cost accounting. So far, managerial cost accounting is losing.

If the new deputy CMO is going to have any chance to succeed, he or she must find a way to work with Congress to mitigate the unproductive requirements in the CFO Act. Fortunately, language in the 2008 authorization bill does not explicitly require CFO-style financial accountability. Rather, it calls for the deputy CMO to work with Defense leaders to make business operations more effective and efficient - and that means there is hope.

Christopher Hanks is a mathematician and defense analyst. He can be contacted at chhanks@gmail.com.

COMMENTS

• Gee…this is what I've been saying pretty much since DFAS brought me here (8 years ago) to help with FFMIA compliance (because I'm a CPA) — that the Comptroller General who foisted auditable accrual based financial statements on the Federal government should be boiled in red ink. Any benefits will never outweigh the costs we've already spent. Yes, there are benefits to auditable budgetary statements (which is what state and local governments do) and to managerial accounting — but we can do both of those without doing auditable accrual based financial accounting, and a lot cheaper too. As for the claim that having these types of financial statements allows the taxpayers to hold us accountable — the corporate analogy would be to small shareholders of larger corporations…and there's a (false) assumption that enough of those type of people read and understand a corporation's financial statements to act on them in a way that will affect the corporation's actions. But reality doesn't work that way — it's the banks and big investment funds (etc.) that use the financial statements to make decisions that will affect the corporation. The only thing a small shareholder can use them for is to decide whether to invest in a particular company or not — which is NOT a choice taxpayers have. For the Federal government, the people that have the power equivalent to the banks and big investment funds are Congress and the political appointees — and they're going to make their decisions based on political considerations (by definition that's what they do), and whether or not we have good audited accrual based financial statements or not isn't going to make a whit of difference in their decision. To think otherwise is to be in a fantasy world. (As for the comments about A-76 and service contracts — I don't see what they have to do with this article…other than that if we didn't have to do audited accrual based financial statements, we might have enough resources to do a better job at managerial accounting.) Michaël Posted May 28, 2008 3:47 PM
• What's distressing from his comments is the lack of commitment to A76. Unless ALL government jobs are bid out every 5 years the taxpayer will continue to see a never bloating of the workforce. A76 is the only means that the taxpayers have to insure their dollars are buying the minimum overhead for the war fighter. DOD was establish to fight our nations battles not to be an Oasis for landcrabs and feather merchants Dan ketter Posted May 28, 2008 11:09 AM
• I agree with Mr. Hanks whole-heartedly. The CFO Act has been 90% a contractor/auditor make-work program that has done little or nothing to improve the core financial functions of most government agencies. The Federal government is a cash-based business. Trying to strap-on an accrual accounting system to yield financial statements has been a cruel joke at best. Clinger-Cohen isn't far behind. Despite all the architecture work done, basic services and especially security remain a huge issue. Both of these laws mostly have generated what the government loves--lots of meetings and plans and documents and way to create the illusion of progress without having to get down in the weeds and fix real problems. RickT Posted May 28, 2008 8:46 AM