The Wizards

Chief financial officers are making real progress in demystifying agency finances.

In 1991, a year after Congress passed the Chief Financial Officers Act requiring agencies to exercise better financial controls and provide accurate and timely financial data that could be reviewed by independent auditors, only one of the 24 agencies covered by the law was able to receive a clean bill of financial health-the General Services Administration. Now, 19 departments and independent agencies have received clean audits for the past two years.

To Linda Combs, that's incredible progress. She should know. Combs served in numerous financial management positions across the federal government, beginning with the Reagan administration and ending last month, when she retired after two years as comptroller at the Office of Management and Budget. "We certainly are trending in the right direction," she says. When President Bush announced his management agenda in 2001 with a green-yellow-red score card for rating agencies' proficiency in five management areas, there was one forlorn green dot on the entire matrix, for financial management at the National Science Foundation. It was essentially the only agency in government that could provide managers with timely and accurate financial information they could then use to make sound business decisions.

Today, 12 agencies have achieved that standard, according to OMB. "CFOs have taken a lot of responsibility for helping their business units to use financial data in better ways. What I like to say about the CFO Act is that it took CFOs from the backroom to the boardroom. I think [Comptroller General] David Walker first said that, but I've adopted that quote because it's so descriptive of what happened," Combs says.

Progress hasn't come easily. Only in the last two years have most agencies been able to meet the 45-day reporting requirement for providing financial statements at the close of the fiscal year-and many of those reports were filed only after herculean manual efforts by employees working overtime to meet the deadline.

Reducing Improper Payments

Progress has been labor intensive, but it's also been measurable. In an area of particular importance to taxpayers, OMB estimates that improper payments declined to $36.3 billion for programs that reported $45.1 billion in 2004. While that's still a lot of money paid out incorrectly, it's an improvement, relatively speaking.

Timothy Hill, director of the Office of Financial Management and chief financial officer at the Centers for Medicare and Medicaid Services, told the House Budget Committee in July that CMS executes four parallel strategies to reduce error rates: prevention of improper payments, early detection of errors, coordination with outside entities to identify fraud, and enforcement.

This year, CMS estimates that Medicare contractors will process well over 1 billion claims from providers, physicians and suppliers for items and services covered by the program. Last year, Medicare outlays were nearly $382 billion. "Given the staggering size of Medicare program expenditures, even small payment errors can have a significant impact on the Treasury," Hill said. The agency has exceeded its performance goals for reducing errors for the past two years. CMS set the goal of reducing the error rate from 5.2 percent in 2005 to 4.2 percent by end of 2008, which it achieved midway through this fiscal year.

Another area of notable progress across federal agencies has been real property management. Two years ago, the government had no centralized inventory of its real property-no reliable data reflecting the operation and maintenance costs of federal facilities, where facilities were located, what condition they were in, whether they were critical to agencies' missions. In 2005, OMB launched an effort to create such an inventory. In the process, it disposed of $4.5 billion in excess property.

Eliminating Stovepipes

Chief financial officers at every agency share a common purpose. They all are responsible for ensuring that agencies comply with accounting and reporting laws, and they play key roles in strategic planning. But their function can vary significantly from agency to agency. When William M. McCabe was acting chief financial officer at the Education Department, his attention was on the business of making loans and issuing grants.

"The primary focus was an outflow of cash," he says. Now he is chief financial officer at the Nuclear Regulatory Commission, an agency that bills for a lot of the services it performs for its mission of ensuring safety and security at civilian nuclear power plants. "The focus has a more commercial bent-billing for services, recovering that money," he says.

Unlike a lot of agencies, the Nuclear Regulatory Commission is going through a period of tremendous growth. Its budget has grown about 12 percent annually in recent years to accommodate a renewed emphasis on nuclear power to generate electricity. "That growth rate stresses the organization in many ways-the systems that we have, processes, personnel," says McCabe. The agency is replacing its main core accounting system with a Web-enabled, commercial off-the-shelf system certified for federal accounting.

For many CFOs, including McCabe, improving finance and accounting systems has required greater cooperation with other chief executives, especially chief information officers. "I work very closely with our new CIO, Darren Ash," says McCabe. "We're working on many fronts together, looking at investments as a portfolio other than a single stovepipe, system by system. We want to make sure we're spending money wisely and not redundantly."

The Nuclear Regulatory Commission formed a capital planning and investment control process, chaired by the CIO, to make sure investments in technology are tied to the budget and planning process. "It becomes more and more critical the larger we get. It comes down to managing this growth," McCabe says.

It was a similar level of cooperation between CIO and CFO that led the Homeland Security Department last year to cancel its financial management modernization program known as eMerge, after investing more than $52 million-but well before spending an estimated $229 million on the system.

Homeland Security, which was formed from the merger of 22 agencies in 2003, inherited dozens of separate financial systems that were unable to share data across the department, creating a host of problems with functions ranging from paying employees accurately to processing travel vouchers. The eMerge program was intended to integrate finance, accounting, procurement and asset management systems, but it ran into technical challenges and the department cut its losses, said David L. Norquist, Homeland Security's chief financial officer, at a Senate hearing in June.

Homeland Security is migrating agencies to one of two finance and accounting systems adopted by the Customs and Border Protection directorate and the Transportation Security Administration. "When you review the different systems the department has, these two agency solutions stand out. They use core accounting applications that are also used by other large federal agencies with unqualified audit opinions," said Norquist.

"They were successfully and broadly implemented inside DHS, so we have people who are experienced with these applications. The products also are commercially available and supported by multiple vendors, which promotes competition," he said. Rather than buy a new departmentwide system, Homeland Security plans to migrate nearly all agencies to either the TSA system or the CBP system by 2011. At that point, the department plans to choose one of the two to meet all its financial management needs.

By eventually moving all agencies to a single system, Norquist said Homeland Security will save money in operation and maintenance costs and improve internal controls.

Progress at Defense

When it comes to financial management, the Defense Department remains the elephant in the room. With an operating budget that dwarfs all other agencies combined, finance and accounting systems there are hugely complicated, and most weren't designed to provide data in the way agencies are now required to provide it.

"Whenever financial management is raised, there's the broad assertion that we don't understand where money is going," Undersecretary of Defense and Chief Financial Officer Tina W. Jonas said in an interview earlier this year. "That's just not accurate at all. We know and do understand where our money is going-we understand it by appropriation account, we understand it by program. . . . It doesn't mean that we shouldn't be able to apply generally accepted accounting principles to what we do and be able to have independent auditors come assess the books," Jonas concedes.

For years, Jonas' predecessors made predictions about when Defense would be able to achieve a clean opinion by outside auditors, but those dates came and went. Jonas is taking a different approach, with the blessing of both GAO and OMB. In the past, managers worked agency by agency within the department to render the books ready for audit. While they continue to do that, Defense financial managers are focusing more on resolving material weaknesses and strengthening internal controls that affect agencies across the department. The focus areas include things such as health care liabilities, military equipment, and real property.

Looking across the various agencies that comprise Defense, about 16 percent of assets and 48 percent of liabilities have received clean audits. Jonas' goal is to boost those numbers to 65 percent and 79 percent, respectively, by 2009.

By focusing on material weaknesses that are problems across the department, Defense is making measurable progress, according to a senior official at OMB: "They have very specific action plans associated with strengthening controls around the inventory and valuation of those different items, and they've made measurable progress in improving the readiness of those audit areas."

This year, in a first for any large component of the Defense Department, the Army Corps of Engineers is going through an outside audit. The audit, which was being conducted "off cycle," according OMB, was not yet complete at press time, "but the fact that they were ready to do an audit and have gone through 97 percent of the process at this point-and things look like they went very well-is tremendous progress," the OMB official says. Another major entity at Defense-the Marine Corps-is nearly ready to face outside auditors as well.

While Defense remains years, maybe decades, away from receiving a departmentwide clean audit, progress is substantial, Combs says. "An organization the size of EPA, an $8 billion entity, can work through a common accounting code in a year or two. That will take Defense a much longer period of time. They have done a very good job of laying out what needs to be done, and they've done an excellent job of making some of those things happen as they said they would. While we don't see the immediate green dots on the score card, as we go through with them each quarter some of the complex changes they're having to make, we are seeing tremendous progress.

"Financial management in the federal government is an evolution, not a revolution," says Combs.