Balancing Act

Chief financial officers have made substantial progress in reconciling the government's books, but serious problems remain.

The federal government took in $2.6 trillion last year; unfortunately it spent $2.9 trillion during the same period. Given the $276 billion shortfall, it's more important than ever that agencies can reliably track the money that flows through their coffers.

The good news is that most can: 19 of the 24 agencies covered by the 1990 Chief Financial Officers Act received clean audit opinions on their 2007 financial statements. The law requires those agencies responsible for 80 percent of federal outlays to produce auditable financial statements. The bad news is that number hasn't budged since 2005. Problems are so complex and entrenched at the Defense, Homeland Security and State departments and NASA that reliably accounting for the funds handled by those agencies is likely years away.

Eighteen years ago, when Congress first demanded that agencies meet the finance and accounting standards required of private companies, only the General Services Administration passed muster with independent auditors. Through the diligent work of countless employees across government and three presidential administrations, substantial, and more important, sustainable progress has been made.

The Office of Management and Budget found in its 2008 Federal Financial Management Report that "overall, federal agencies have achieved more clean audit opinions, fewer auditor-identified material weaknesses, more timely financial reporting, more disposals of excess real estate and have made fewer improper payments."

In May, the Association of Government Accountants, a 15,000-member professional organization that promotes accountability at all levels of government, recognized 17 federal agencies and departments for excellence in financial reporting. Nine of the awards went to major departments or agencies covered by the CFO Act. Not surprisingly, all those agencies received unqualified audit opinions on their 2007 financial statements.

"We are heartened by the unprecedented numbers of agencies and departments receiving the certificate and those who participated in the program," says Relmond P. Van Daniker, AGA's executive director. "Seventeen awards is a record number, and we welcome it as evidence not only of continuous improvement, but also of a real commitment to accountability and transparency among federal financial managers and their agencies."

Major Challenges

Unquestionably the greatest challenges in federal financial management can be found at the Defense and Homeland Security departments. Defense Comptroller Tina W. Jonas has repeatedly expressed frustration with the notion that the department doesn't know where its money goes. Like other agencies, Defense tracks money by appropriations and program accounts, but the data are not readily translatable into generally accepted accounting formats that can withstand the scrutiny of outside auditors.

The reasons are myriad. Many of the department's finance and accounting systems are antiquated and never were intended to provide the data now required.

Additionally, the military services historically have managed their own accounts using unique processes and software systems, making it difficult to reconcile interservice transactions. Fixing those flaws-developing a common accounting code, acquiring the systems and instituting the processes that allow the department to share data across its components-is a multiyear prospect.

The wars in Iraq and Afghanistan also have complicated Defense financial management. Tracking funds on the battlefield has proved enormously difficult. The Defense inspector general reported in May that since 2003, the Defense Finance and Accounting Service has processed more than $7.8 billion in payments for goods and services in Iraq without proper documentation. The budget process fails to provide a predictable stream of funds to cover the wars, which creates other obstacles for the services. In late May, Defense Secretary Robert Gates pleaded with Congress to pass supplemental war funding; other- wise by this summer Defense would have to furlough civilian employees and reprogram funds from the Navy and Air Force to cover budget shortfalls in the Army and Marine Corps, which are bearing the brunt of the wars' costs.

The financial management challenges are so great that Defense finance officials no longer talk about trying to achieve a clean audit opinion for the entire department, and Jonas won't even attempt to predict when that might be possible. Instead, they are focused on fixing material weaknesses and strengthening internal controls with the expectation that once they are resolved a clean audit opinion, at least for some Defense agencies, will then be within reach. The approach has yielded positive results. By 2009, Defense officials expect that 65 percent of the department's assets and 79 percent of its liabilities will receive clean audit opinions. It's not a clean opinion across the board or for any of its agencies, but it's progress.

Fixing material weaknesses will be a major challenge for the Homeland Security Department as well. Material weaknesses are defined as significant deficiencies that increase the odds that financial data will be stated inaccurately, and that misstatements will go undetected. The inspector general reported in January that the majority of the department's material weaknesses are attributable to problems at the Coast Guard.

The accounting firm KPMG LLP, in attempting to audit Homeland Security's financial statement in November 2007, noted that "long-standing procedural, control, personnel and cultural issues have impeded progress toward installing an effective financial management structure" at the Coast Guard.

"The accuracy of financial information is highly dependent on the knowledge and experience of a limited number of key financial personnel rather than on clearly documented procedural manuals and process-flow documentation. In addition, the Coast Guard has serious general ledger structural and IT system functionality deficiencies that make the financial reporting process more complex and difficult. Consequently, the Coast Guard cannot be reasonably certain that its financial statements are complete or accurate at any time," KPMG auditors reported.

Rear Adm. Keith Taylor, the Coast Guard's CFO, has the responsibility for fixing those things. Just four weeks into the job in late May, Taylor, the assistant commandant for resources, said the Coast Guard's structure and culture play a big role in how the service's financial management woes have evolved.

"We have a very decentralized organization when it comes to financial management," he says. "We have a culture that over the years gave a lot of autonomy to field commanders to get the mission done and take the financial actions they needed to take." But by pushing funds control and procurement to the lowest level of the organization-the Coast Guard station-it became virtually impossible to track funds. Multiple general ledgers gradually came into being, which must be reconciled manually.

"We have roughly 45,000 to 50,000 people in the Coast Guard," Taylor says. "We have 26,000 people who use our finance and procurement desktop system-they manage money or do procurement. Over half of our people touch that system on a regular basis. In my mind that creates an environment that is hard to control. There are so many users, and [they're] so distributed and we don't have rigorous systems in place for that control environment. We need to roll some of that activity up."

Shifting to a more centralized system no doubt will be extraordinarily difficult, especially if field commanders perceive a loss of autonomy or flexibility in managing the funds required to accomplish their missions. Taylor says he thinks of it as "unburdening" them so they can focus on the mission more fully.

"I think we'll move to some model where the sector will handle more of the transactions now handled at the station level," he says. "Does the station in the Coast Guard need to manage money? What they need is to get the parts for the things they need when they need them in the right way-whatever they need to save a life, protect our borders, respond to an oil spill, inspect a large passenger vessel-all those mission areas. We want to keep them focused on that."

Like his counterparts at Defense, Taylor isn't willing to hazard a guess as to when the Coast Guard might receive a clean audit opinion. Reforming financial management is part of a much broader modernization effort at the agency, one that will take years to fully deploy, he says.

Moving Forward

Future progress in federal financial management isn't likely to be substantial until agencies invest in improved finance and accounting systems, turn to other, more qualified agencies for financial services they cannot perform well themselves, and adopt uniform business processes.

In a January memo to chief financial officers, OMB acting Comptroller Danny Werfel stressed that improving the cost, quality and performance of financial management operations across government is a top administration priority. Two years ago, OMB began requiring that agencies seeking to upgrade their core financial management systems must, with few exceptions, migrate to a designated shared service provider or a qualified private sector provider, unless the agency already was a shared service provider. The intent was to avoid redundant investments for common services.

But Werfel also acknowledged that a significant stumbling block remains: financial business processes are not standardized across the government and agencies frequently pursue unique software products to solve their financial management problems. Consequently, the Financial Systems Integration Office at OMB has been working with agencies to develop and promote common governmentwide accounting code and business processes. Once those standards are complete, each agency is to migrate to a shared service provider that complies with those requirements and uses only software certified by the integration office.

By December, Werfel said, OMB expects to have finalized business standards for managing funds and tracking payments, receivables and reimbursements, as well as reporting processes. OMB also plans to have developed cost and performance measures for the new business standards as well as acquisition guidance for agencies moving to shared services.

But that's only another step on the long road to true fiscal accountability. The real payoff will be when all agencies have migrated to certified finance and accounting systems that comply with federal law and OMB standards. That will take far more time, money and a lot of heavy lifting from rank-and-file employees.

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