ast year, financial auditors in the inspector general's office at the Department of Housing and Urban Development noticed a problem when they looked at the books for Briarwood Hill Apartments, a public housing project in North Haven, Conn. A visit to the site confirmed their suspicions: The landlord was skimming federal funds for his personal use.
The audit of Briarwood Hill's financial statements triggered a chain of events that resulted in the U.S. Attorneys Office prosecuting the project owner in civil court for diverting public funds. He was slapped with a $400,000 judgment and barred from doing business with the federal government.
Since HUD began linking annual financial statement audits of multifamily rental projects to Justice Department efforts to prosecute civil violations of federal laws, HUD has recouped more than $75 million in penalties and legal costs in 106 cases. "We had to demonstrate that HUD had the will and the capacity to enforce compliance with its contracts," says David Derecola, assistant director of the HUD IG's office of audit.
HUD's experience demonstrates what federal auditors and legislators have been preaching for years now: Good financial management is not just an esoteric accounting exercise, but has a direct impact on the lives of citizens and on agencies' ability to perform their missions.
Thanks to a slate of new laws and regulations in the last decade, HUD is not alone in tying its financial management systems to broader management objectives. Agencies across the federal government are beginning to recognize the link between sound financial management and their ability to meet performance goals. Such recognition is the culmination of years of prodding by Congress to make federal agencies accountable for the taxpayer dollars they spend.
But real accountability is a long way off for most federal agencies. This year, for the first time, the federal government was required to produce a consolidated governmentwide financial statement. While officials at the White House and the Office of Management and Budget hailed the undertaking as a historic event, government auditors were less impressed. Even though the Treasury Department, working with OMB, met the March 31 deadline for filing the consolidated statement, the data was so unreliable it could not be audited by the General Accounting Office. In fact, of the 24 agencies required by law to submit audited statements to Treasury for inclusion in the consolidated report, only 11 did so. Four agencies filed disclaimers, explaining why their data could not be audited, and nine filed no reports at all. Only two agencies, NASA and the Department of Energy, received GAO's seal of approval for the three critical areas of reporting reliable financial data, maintaining effective internal controls and complying with all financial laws and regulations. Because of the reporting deficiencies, Treasury auditors had to rely on incomplete preliminary financial data from most agencies.
"Significant financial systems weaknesses, problems with fundamental recordkeeping, incomplete documentation and weak internal controls, including computer controls, prevented the government from accurately reporting a large portion of its assets, liabilities and costs," said Gene Dodaro, GAO's assistant comptroller general, explaining the audit results to the House Government Reform and Oversight Committee's Subcommittee on Government Management, Information and Technology.
Specifically, GAO found federal agencies could not, among other things:
- Account for billions of dollars of property, equipment, materials and supplies.
- Estimate the cost of most federal credit programs and loan guarantee liabilities.
- Estimate environmental liabilities.
- Correctly determine various reported liabilities, such as post-retirement health benefits for employees.
- Report accurately the net costs of operations.
- Account for billions of dollars in basic transactions.
Managers at some agencies acknowledge it will probably be years before they and the federal government as a whole can produce financial statements able to withstand the scrutiny of independent auditors. Nonetheless, GAO noted agencies have made solid progress on the road to fiscal responsibility.
"With a concerted effort, the federal government, as a whole, can continue to make progress toward ensuring full accountability and generating reliable information on a regular basis," Dodaro said. "Annual financial statement audits are essential to ensuring the effectiveness of the improvements now under way, and ultimately, to decision-makers and the public to evaluate the government's financial performance. They are also central to helping the government implement broader management reforms called for by the Government Performance and Results Act."
Despite much work done already, finishing the job will be a monstrous task. For example, at the Defense Department, the agency responsible for 50 percent of the government's discretionary spending, financial managers still cannot produce audited departmentwide financial statements. And that's after years of reform and a great deal of progress (see "Money Woes," June 1997). Forest Service financial management systems were in such disarray the agency was given a year's reprieve from auditing last year so managers could devote attention to fixing problems. And at the IRS, significant weaknesses in internal controls prevent managers from properly accounting for all $1.64 trillion in taxes collected.
Part of the problem facing federal financial managers is that their computer systems and software were never intended to provide the kind of information now required of agencies, says Dianne Guensberg, a GAO auditor assigned to the House Government Reform Committee to help evaluate agencies' compliance with new financial management laws.
"It's more the rule than the exception that these systems weren't designed with financial management in mind," Guensberg says. "The IRS, for example, mainly programmed their systems to be a tax-return factory. That's basically what they do and they do that pretty well. But in terms of getting information to Congress or their managers, it's not always as easy to pull that financial data together as you would hope."
Because the IRS, like many agencies, does not have a comprehensive general ledger system in compliance with federal standards, the agency must extract data from master files to produce the financial statements required under the 1994 Government Management Reform Act, says IRS Chief Financial Officer Anthony Musick. The process is cumbersome and not easily duplicated, making it impossible to produce the kind of monthly or quarterly reports most businesses use to manage their operations.
While the IRS received for the first time a "clean" audit of both its 1997 administrative and custodial accounts, it still lacks adequate internal controls for tracking money. "It's not an issue of money being lost," says Musick, but rather of accounting for that money in sufficient detail. Like most agencies, the IRS has devised interim solutions to enable it to produce required annual financial statements, but it is a long way from being able to produce the regular, consistent statements all corporations rely on to make sound business decisions. And because new financial management systems at the IRS are tied to the agency's much-troubled information technology reform program, the solutions will be doubly complex.
Ultimately, all federal agencies must produce annual accountability reports intended to provide a snapshot of agencies' overall performance. Modeled after corporate annual reports, the accountability reports will serve as a single source for gauging an agency's fiscal health.
Wayne Bobby, director of government financial solutions at Oracle Corp. and the former chief of financial systems at the State Department, says getting to the point where agencies can report accurately on their financial condition is turning out to be much more complicated than people originally thought. "I think the agencies are taking this very seriously and I think they're working hard at it, but I think it's taking a whole lot longer than people anticipated," he says.
"You're asking more of federal financial managers at a time when you're streamlining and getting rid of administrative positions. Where I came from in the State Department, there are far fewer financial managers today than there were 10 years ago, and over the last 10 years we've probably expected more of our financial managers than ever before in this country's 200-year history," he says.
"There's a real disconnect," Bobby says. "You're saying you need to do a whole lot more than you ever did before and you need to do it with less people. At the same time, it's not like CFOs are right on college campuses recruiting new accountants to come in and help them. They can't hire new people."
Until the last few years, agency financial reporting requirements were fairly straightforward, which is reflected in the transaction-based systems most agencies operate. The financial management systems were designed basically to keep track of how money was spent, much as consumers do with their checkbooks. But now the requirements are much broader. Not only must agencies keep track of spending, but they also must account for the value and depreciation of assets, justify inventory levels, plan for capital purchases, assess environmental liabilities and estimate future costs such as employees' post-retirement health care benefits. In short, agencies must manage their finances.
At the U.S. Customs Service, financial managers found a way to work around some of the shortcomings of financial management systems and provide managers with the financial data they need to make business decisions by implementing the Enterprise Information System (EIS), a graphical information presentation application. Through EIS, senior managers can access summary information from Customs' budget, financial management and human resources systems, along with trade data, from their desktop computers.
"The executives wanted to be able to take a mouse, click on an icon and obtain information," says Michelle Curtis, a project manager for financial systems at Customs. "It's got pretty colors and pretty charts, and if they want to see the numbers behind the graphics, they can click on the graphic and get the data."
Customs' original financial management systems were not designed to provide the kind of information managers now expect, says Stacy Barley Riggs, a financial systems planner at the agency. "Our accounting systems are good for what they were designed to do, but our legacy systems were never intended to provide management information or financial statements. EIS gives them the information they need to make decisions without calling in subordinates. It's the data they need to see every month."
The success of EIS notwithstanding, financial managers at Customs have faced tremendous challenges. Before 1995, the agency's problems were so severe that its books could not even be audited, says Customs Chief Financial Officer Vincette Goerl. The problems were serious enough that GAO put Customs on its "high risk" list of agencies susceptible to waste, fraud and abuse.
As recently as 1992, the agency, which collects about $22 billion a year in revenue, could not validate that it had collected all it was supposed to have taken in. Customs also had never conducted an inventory of its property, could not be sure it was correctly refunding import duties, and could not account for seized property, says Goerl.
The latter issue was particularly troubling, says Goerl, because the agency seizes large amounts of drugs every year. "It's pretty dangerous to not know where every bit of those drugs are until we dispose of them. It's a control issue. In the past three years we have inventoried in two weeks and reconciled in about one week all of our seized property-that's about a million pounds of drugs, $380 million worth of property."
In addition, by executing a multiyear compliance measurement program, Customs has validated its enforcement of approximately 10,000 tariff laws and that its revenue collection and inspections programs are in order.
"Until you know whether or not you're compliant, you don't know what you're losing," Goerl says. After the recent changes, "we estimated our loss of revenue was less than 1 percent-not a material loss, but around $200 million. It also told us where that was so we could target enforcement efforts. It changed the way we did business, which was a good thing," she says.
The changes have paid off. In 1996 and 1997, Customs received clean audits from GAO. Goerl is optimistic the agency will be removed from GAO's high risk list in the next few months, although much remains to be done.
Receiving a clean opinion on a financial statement is just the "tip of the iceberg," says Irwin David, deputy chief financial officer at the Agriculture Department. The real success of financial management reform will be measured by an agency's ability to produce timely and accurate financial data on an ongoing basis to managers across the agency.
Until recently, agencies have focused on getting their own fiscal houses in order, without regard to the larger federal financial picture. But now the governmentwide consolidated financial statement has highlighted significant crosscutting problems in federal financial management. For instance, Treasury was unable to reconcile $122 billion in government wide spending, largely because of inconsistencies in how agencies report interagency financial transactions, said Ron Longo, deputy chief financial officer for policy and planning at the Treasury Department, at a financial management conference in March.
The size of the problem suggests every agency needs to designate an individual to be responsible for reconciling interagency transactions on an ongoing basis. "We don't tend to think of the U.S. government as one entity, but that is going to change," Longo said.
The fundamental issue is accountability, says Guensberg. "The government has not really been held accountable for what [it's] spent. But in the last decade, there was a realization that you had a ton of waste out there. It was kind of like a leaking bucket; you didn't really know where all the holes were. I'm not saying we know where all the holes are now, but this exercise of going through the financial audits and making people accountable for what they're reporting is trying to find all the leaks, so we can find ways to patch them."