CFOs are on the hook for $100 billion in erroneous payments in 2009 and a host of other problems.
Federal financial managers played key roles in bolstering the flagging economy during the past year. They spent hundreds of billions of dollars in Recovery Act funds in a wide-ranging attempt to resuscitate spending and pumped similar amounts into the financial system to restore stability and liquidity under the Troubled Assets Relief Program. They also distributed tens of millions of dollars to promote automobile sales and to curb greenhouse gas emissions under Cash for Clunkers, and managed rebate programs to encourage consumers to buy more energy-efficient appliances.
All these new initiatives, designed to shore up a weak economy, boost consumer confidence and promote energy conservation, have taken a toll on the financial management staffs of the federal departments administering them.
Not only are agencies implementing complex new programs, but greater demands on existing social insurance programs, such as Medicare, Medicaid and unemployment insurance, have created additional burdens on staff. New transparency and reporting requirements have added to the workload as well, placing managers under greater scrutiny for how they spend taxpayer dollars.
Complicating matters is that as federal disbursements have risen, so too have erroneous payments, which stem in many cases from outdated computer systems, insufficient reporting processes and ineffective internal controls. In 2009, federal auditors estimated that agencies incorrectly paid $98 billion to individuals, organizations and contractors. That's only an estimate-the real number is likely much higher, officials say. To counter that trend, President Obama in November 2009 signed Executive Order 13520, which requires agencies to take a number of steps aimed at reducing errors and to designate individuals responsible for implementing those steps. So in addition to everything else on financial managers' plates, they can now add fixing the problems that lead to improper payments.
Federal agencies have struggled for years to address fundamental challenges with their financial reporting, accounting and internal controls, says Jeanette Franzel, managing director of financial management and assurance at the Government Accountability Office. "Now, on top of those basic challenges there are extremely complicated programmatic challenges," she says.
She cites the Treasury Department's Troubled Asset Relief Program as a prime example. "The amount of effort-heroic effort-that was required to put in place the accounting systems and successfully manage the program took a tremendous amount of resources and management attention," Franzel says, noting auditors gave the program a clean opinion, a testament to managers' commitment and skills.
Frederick Selby arrived at Treasury's TARP office just 12 days after then-President George W. Bush signed the 2008 Emergency Economic Stabilization Act, which created the program to buy up failing assets in the battered financial sector. As deputy CFO of the new Office of Financial Stability, which manages TARP, he knew he had his work cut out for him. The new entity was charged with pumping as much as $700 billion into banks and other financial institutions and issuing special loans to automakers and their suppliers. Adding to the pressure, he was the first full-time employee in the CFO's office. Selby's mission from superiors: Hire staff quickly.
"That was an enormous focus as we began our operations," he says. In the earliest days, OFS relied heavily on staff detailed from other Treasury offices. In addition, Selby says the office also turned to three experienced contractors, Ernst & Young, PricewaterhouseCoopers, and FI Consulting, to provide support for accounting services and internal controls and to perform credit reform modeling after it became clear TARP was going to get into the credit reform business.
As Selby interviewed prospective staff for the CFO's office he kept an eye out for people who would be comfortable in an evolving environment. "You've got to hire people who can act independently, who don't need a lot of hand-holding and procedures and guidance to follow, because there aren't any," he says.
Another quality that staff needed was resistance to public opinion: "When I interviewed people in the November- December 2008 time frame I told them they had to be very thick-skinned, because we were not getting very good press at the time and they had to be able to work in a very fluid environment," he says.
As a measure of its financial responsibility, within the first several weeks of its existence TARP disbursed $150 billion. "Before that, we had nothing-no procedures, no processes, nothing. We had to develop all that in the first 23 days," Selby notes.
A self-described Type A personality, Selby thrives on the adrenaline rush of working in a high-profile pressure cooker. He came out of retirement for the job-in 2007 he retired from government as director of the finance division at the Federal Deposit Insurance Corporation. The former Army finance officer has been involved in a number of startup organizations throughout his career, perhaps most notably the Resolution Trust Corporation, the federally owned company charged with liquidating assets of insolvent savings and loan associations following the S&L crisis of the 1980s.
Such crisis-born organizations have common themes that can be very appealing for managers, he says: "You've got a very clear mission; you have the ability to hand-pick staff; and you haven't had the ability to actually create much bureaucracy." On the other hand, you've got to create your own policies, procedures and controls, none of which existed for TARP. "Everything we did had to be made up from scratch," he says.
While TARP received clean audit opinions on both its financial statement as well as its internal controls over financial reporting (Congress required that TARP receive separate opinions on the functions, something not required of most agencies), much of the work was done on a just-in-time basis. As a result, "we're having to go back and take another look at our procedures and our policy documents and redo those," Selby says.
"Right now, the biggest challenge is to do it again, and do it faster," he says. At the same time, new programs continue to be developed under TARP in addition to the 11 existing programs, which means the workload isn't slowing anytime soon.
"It has calmed down a bit, but not as much as one might think," Selby says.
When acting Comptroller General Gene L. Dodaro presented GAO's annual report on the government's consolidated financial statements to President Obama and members of Congress in February, he noted auditors could not account for 34 percent of the government's total assets and 23 percent of its net costs. That's because they are associated with four agencies-the Defense, Homeland Security and State departments, and NASA-whose books are in such disarray auditors could not render an opinion.
The biggest culprit is Defense. With assets and operations whose value dwarfs those of multinational corporations and many nations, its long-standing financial and accounting failures have significant ramifications for the entire government.
"A financial audit involves making sure we can present the enterprise business in the way that a financial auditor can opine on the financial statement. This is where it becomes particularly challenging for DoD, based on the size and complexity of our business operations," says Mark Easton, Defense's deputy chief financial officer.
As an indicator of that complexity, the department has 50,000 financial managers supporting military operations worldwide, sometimes in very hostile environments, Easton says.
Until 2009, Defense was heavily focused on achieving clean audits within specific organizations. The Army Corps of Engineers is the largest organization to score a clean audit, but three others also have received unqualified opinions recently: the Defense Finance and Accounting Service, the Defense Contract Audit Agency, and the Defense Commissary Agency. Two major trust funds have been audited as well: the Military Retirement Fund was given an unqualified opinion and the Medicare Eligible Retiree Health Care Fund received a qualified opinion-it has some outstanding problems associated with billing at treatment facilities. What's more, the Marine Corps is undergoing an audit for the first time-the largest, most complex Defense entity to be reviewed.
Those entities under audit now account for about 13 percent of the budgetary resources within Defense, placing the dollar value above at least 10 Cabinet-level agencies that have clean opinions, Easton says.
"But that's not good enough," he adds. Defense cannot audit its way to a clean opinion because the greatest impediments to a departmentwide audit are associated with the business practices that go beyond the purview of finance and accounting offices.
Last fall, Defense Comptroller Robert F. Hale sent a memo to all the service chiefs and senior department executives outlining a new approach to achieving audit readiness, which he emphasized is a legal imperative for the department. While noting the significant progress of individual agencies, Hale wrote, "Many of the hardest problems remain unsolved, including implementing compliant systems and valuing our significant investment in property and equipment. The remaining tasks will be daunting both because of the department's size and complexity and because of the need to involve many functional communities that have pressing operational and management commitments. Further, some of the information required for a formal audit, including valuation of assets, is of limited use to DoD managers."
To focus limited resources most effectively, Hale directed Defense components to adjust their current plans to make improving the information and processes associated with budgetary information, which managers regularly use, their top priority. This eventually will lead to unqualified opinions on Statements of Budgetary Resources. Their second priority should be to verify that records accurately capture the number of each type of weapon system, real property, inventory, and operating materials and supplies. All other goals, including valuing assets and improving other information on balance sheets, are lower priorities, Hale says.
"We had to convince people, both inside financial management and the people who are doing logistics and writing contracts that we need to work together to achieve this goal and there's something in it for everyone-better quality financial information that will allow us to be able to put DoD business on a par with DoD operations," Easton says.
Deputy Chief Financial Officer
One of the slides in a briefing Mark Easton sometimes presents to colleagues at meetings is titled "The Quest." It's a reference to that stamp of approval all financial managers seek-the clean audit opinion. But at the Defense Department, where Easton serves as the deputy chief financial officer, a clean audit holds all the mystery and elusiveness of a mythological quest, attainable only in a financial manager's dreams.
Easton is under no illusions that Defense is going to win top honors for bookkeeping anytime soon. But for the first time since the 1990 Chief Financial Officers Act was passed requiring agencies to submit their consolidated financial statements to independent auditors for review, achieving an audit doesn't seem entirely far-fetched either.
Under Defense Comptroller Robert F. Hale's leadership, Defense organizations are redirecting their focus away from stove-piped finance and accounting systems toward end-to-end business processes that cross multiple disciplines. The top priority is to achieve successful audits of every organization's Statements of Budgetary Resources. Once that is accomplished, organizations will focus on documenting mission-critical assets. The idea is that by focusing on information people use, Defense can galvanize managers outside the finance and accounting spheres and lay the groundwork for the broader business management reforms that must precede financial reform.
"We've approached this in the past too much from the financial side. We've made some progress, but it hasn't gone to the heart of the challenge with the larger organizations," says Easton, who is leading the departmentwide effort.
GAO has endorsed the plan, which involves the chief management officers at all levels of the department.
"Obviously, budgetary information we use every day. And in focusing on property, we're most interested in where the materiel is, how much do we have, and what condition is it in. Information on property is critical to doing the job, particularly from a warfighter perspective," Easton says.
The new approach will improve the department's business operations along with the quality and integrity of information, and ultimately it will allow the department to be audited across the enterprise, he says.
"We want to maintain the ground we've taken and sustain that moving forward," says Easton, sounding more like an infantryman than the career Navy logistician he was before retiring as a captain after 29 years of service and moving into financial management 15 years ago.
"I spent 20-some years in logistics and when I was doing that my job was to get the part, get the ship under way, get the aircraft in the air or get the submarine under way and [the attitude was] we'd take care of the paperwork later. This is my penance," he says.
"Before I leave [this job] I have to see things change. This is the right recipe for success," says Easton.
CHIEF FINANCIAL CHALLENGES
The Government Business Council, the research arm of Government Executive, asked dozens of managers what they wish the chiefs would focus on . . .
Managers continue to bemoan the budget process, including the short cycle and inconsistent processes for developing a financial plan. Some say processes should be standardized, and most believe their agencies are behind the curve in moving to the two-year budget cycle.
Financial Management Systems
Many agencies have modernized their financial systems, or are in the process. Managers are eager to see the fruits of these efforts, including easier and more reliable financial tracking, payments and internal transactions. But many said updates are taking longer and costing more than expected.
Standardization and streamlining financial processes both within and across agencies would save the government money, managers say. Many remain frustrated by all the hoops they must jump through to complete simple transactions or standard tasks such as auditing.