The Little Things Add Up

Chief financial officers sharpen their focus on technology, internal controls and training to accomplish incremental goals.

Like everyone else these days, the government's chief financial officers are pinching pennies. Belt-tightening comes a bit more naturally to them than, say, their counterparts on Wall Street. After all, federal financial managers are used to juggling austere budgets under the ever-watchful eye of Congress.

In the current challenging fiscal environment-one marked by wide-ranging spending cuts to federal programs, a near government shutdown and debate over increasing the debt ceiling-CFOs have sharpened their focus on internal controls, technology and training for financial managers as a way to accomplish smaller-scale, incremental goals as opposed to pushing big-ticket items. As the saying goes, necessity is the mother of invention.

"The temperature here has been dialed up," says W. Todd Grams, chief financial officer at the Veterans Affairs Department. But Grams adds that all CFOs have the same mandate during an economic bust or boom. "I think the principal job of any CFO is about creating greater value through the taxpayer money we are entrusted with."

The Obama administration and Congress agree with that notion, and during the past few years have pushed a series of federal financial management initiatives designed to save money as well as recover the whopping $125 billion in improper payments the government made in fiscal 2010. The president's fiscal 2012 budget aims to reduce $50 billion in improper payments, recapturing $2 billion in such payments between fiscal 2010 and fiscal 2012-a goal Rep. Gerry Connolly, D-Va., has called "rather modest" given the amount of money at stake.

In April, OMB issued specific guidance for agencies on complying with the 2010 Improper Payments Elimination and Recovery Act, the latest effort by the administration to put the government's fiscal house in order. In June 2010, Obama announced the creation of a Do Not Pay List, a network of databases that agencies can check for the status of a potential contractor or individual in an effort to prevent improper payments. That memo followed a March 2010 memorandum directing agencies to expand their use of payment recapture audits, which leverage technology and skilled accountants and fraud examiners to ferret out over- and underpayments to contractors, individuals and other recipients of federal funds. A November 2009 executive order instructed OMB to provide guidance to agencies to help them crack down on waste, fraud and abuse in financial management.

Chief of the Year: Finance "Agencies really are under constant pressure to do more with less," Kay Daly, director of financial management and assurance at the Government Accountability Office, said during a March conference on preventing and recovering improper payments. Cracking down on such payments, achieving clean audits, strengthening internal controls, integrating technology systems and training people to use them effectively are just a few of the items on a CFO's checklist.

But instead of putting all their precious resources into every major project, CFOs are concentrating on achievable goals along the way with an eye toward attaining long-term fiscal health.

Control Switch

Grams came to VA in 2009 after serving as chief financial officer at the Commerce Department's National Institute of Standards and Technology, and chief information officer at the Internal Revenue Service. This is his second tour at VA: From 1994 to 2000, he was the first CFO at the Veterans Health Administration. Grams' experience in federal financial management and information technology taught him to prioritize, and to stick with those priorities. "Shortly after I got here, I asked for an evaluation of what our priorities should be at VA," says Grams. One of the recommendations that came out of the analysis was to terminate a $500 million IT project that would have replaced the department's core accounting system because, as Grams puts it: "We were not going to get the kind of benefit than if we took a fraction of that money and spent it on smaller projects."

So Grams and his team trained their focus on eliminating material weaknesses and instituting better internal controls, for example, on a multibillion-dollar program used to procure goods and services for veterans through "miscellaneous obligations." VHA has been using such obligations for decades to record estimates of debts to be incurred at a later date. The obligations are used to facilitate payment for goods and services when the quantities and delivery dates are not known, and traditionally give contracting officials more flexibility.

According to a September 2008 report, GAO recommended the department strengthen its oversight of miscellaneous obligations, as they can be susceptible to waste, fraud and abuse. According to Grams, the compliance rate in 2009 was about 40 percent; today it's around 90 percent, and he expects it to hit 100 percent in June. Field managers are required to alert the department of violations and identify ways to correct them through a quarterly certification process. "We tightened overall policy of when and how purchases could be made," Grams says.

Strong internal controls within financial management systems are the foundation to improving the federal government's fiscal health, says Rep. Todd Platts, R-Pa., chairman of the House Oversight and Government Reform Subcommittee on Government Organization, Efficiency and Financial Management. It's important for agencies to obtain clean audits on their books, but that stamp of approval does not necessarily mean agencies are managing money appropriately, "or ensuring taxpayer funds are being properly accounted for," he says. Platts shepherded the 2006 Department of Homeland Security Financial Accountability Act into law, which requires DHS to perform audits of its internal controls for financial reporting. DHS was the first-and remains the only department-with such a mandate. The internal control audit is in addition to an annual financial management audit required of DHS and 23 other agencies covered by the 1990 Chief Financial Officers Act. Platts, who would like to see the internal control requirement extended to other departments, says the 2006 law has helped DHS identify its strengths and weaknesses and will improve the department's financial management in the long run.

For Mark Easton, deputy chief financial officer at the Defense Department, moving the government's largest agency to a more standardized system of internal controls is a key priority. "Over the years, we've developed a lot of nonstandard processes," says the former career Navy logistician, who can understand the tendency to develop different procedures to expedite the department's mission. But since entering the financial management realm, Easton knows that a well-designed, uniform network of controls is essential to helping Defense achieve an overall clean audit. "We're entering a period where we will expect to have fewer resources, but at the same time we want to have the right kind," he says.

Better internal controls within departments also would help the federal government chip away at that staggering $125 billion in improper payments. The amount of such payments on record has risen steadily during the past decade, in part, because agencies have improved how they track and recover billions of dollars in wasted taxpayer funds. The reported governmentwide improper payment rate, however, has decreased slightly from 5.7 percent in fiscal 2009 to 5.5 percent in fiscal 2010.

"Most relevant to improper payments is the need to focus audit scrutiny on internal controls to mitigate error," Danny Werfel, controller of the Office of Management and Budget, said during an April hearing on Capitol Hill. "Today, our financial statement audit results address whether the agency has appropriate accounting in place to successfully record that a payment has occurred. However, the audit opinion often stops short of scrutinizing the integrity of that payment. This leads to a result where there is no correlation between an agency's ability to obtain a clean opinion and an agency's ability to mitigate instances of improper payments."

There are some attractive carrots for agencies in the 2010 Improper Payments Elimination and Recovery Act. For example, agencies can use up to 25 percent of recovered funds for improving financial management; up to 25 percent for the program or fund linked to the overpayment; and up to 5 percent for inspector general activities. So, agencies can keep as much as 55 percent of the recaptured money, and the rest is returned to the general treasury.

But CFOs say reducing improper payments requires a sophisticated juggling act.

The Housing and Urban Development Department, for example, reduced its improper payments from 17 percent to 3 percent during the past decade, David Sidari, HUD's deputy chief financial officer, said during a March conference in Washington. But efforts to improve internal controls and institute reform slowed the rate of payments to people who were eligible for assistance, he added.

Sidari noted agencies must individually measure their own risk as it relates to preventing and recovering improper payments while ensuring that proper payments are processed expeditiously. "Do you let the money flow to achieve your mission, or slow it down while you retool?" he said.

Technology and Training

Jim Taylor, chief financial officer at the Labor Department, knows about juggling and prioritizing. He arrived at Labor in June 2010, and faced an enormous challenge: ensuring the successful transition of the department's financial applications to a cloud-based system. "This model is the absolute right model, I think, going forward for federal agencies," says Taylor. "There's no reason in this age that we need to reach out and touch our servers." Labor is the first department to move its financial applications to the cloud.

Between 2003 and 2008, Labor spent $35 million on a major financial management overhaul, which failed. New Core, the new financial management system that Taylor nurtured, is up and running now, but problems, including delays in implementation due to inadequate information about the system and data migration challenges, helped cost the department an original clean audit in fiscal 2010.

The commitment to train financial management employees on the new system also sucked up time and resources, but Taylor says that sacrifice was made to ensure the new system is as efficient and effective as it can be. The bet seems to have paid off. "Our issuance of grants, travel payments and procurements is consistently performed accurately and timely by New Core, nearly eliminating the need for manual workarounds previously necessary to release funds due to system integration and data migration issues," Taylor testified during a December 2010 congressional hearing. In May, Labor received an unqualified opinion on its revised fiscal 2010 financial statements.

At VA, Grams says technology has been important in enabling the department to increase its compliance rate with respect to miscellaneous obligations, while Defense's Easton talks about people, processes and systems as the three major components of financial management.

The Pentagon's business activity monitoring tool has helped to flag potential improper payments, and has prevented more than $2 billion in such payments to vendors since 2008.

Officials, including OMB's Werfel, have praised the Recovery Accountability and Transparency Board, which has monitored the disbursement of stimulus money, for its success in tracking and uncovering improper payments through innovative mapping tools and data matching. During an April congressional hearing, Werfel said the government would like to emulate the board's approach and techniques.

"We were basically wowed by what they were able to do," he said.

OMB and the Treasury Department also are implementing a Do Not Pay List, which will link agencies to various databases such as the Social Security Administration's Death Master File, and allow them to check the status of a potential contractor, grantee or individual beneficiary. The project is in the pilot phase and scheduled for completion by the end of fiscal 2012.

The right technology can take financial management to a new and much improved level. But even the best IT system is useless if people don't know how to use it. VA has more than 5,000 financial management workers, and training them is a priority, says Grams. The department launched a program in 2010, training more than 2,600 employees that year, and another 1,500 so far this year.

People and savvy financial management are particularly important at the U.S. Postal Service, which is so strapped for cash that it likely will not have enough money to pay for all of its obligations, including a multibillion-dollar retiree health payment, at the end of the year. USPS is restructuring its workforce and cutting 7,500 jobs, including 20 percent of administrative positions and 10 percent of postmasters. Joe Corbett, chief financial officer and executive vice president of the Postal Service, says keeping employees motivated in the face of rapidly dwindling resources and layoffs is critical.

Corbett works closely with Chief Human Resources Officer and Executive Vice President Anthony Vegliante, since labor costs account for nearly 80 percent of the agency's expenses. In addition to slashing costs while simultaneously maintaining productivity, the Postal Service is required to report its financial data under the 2002 Sarbanes-Oxley Act. "Over the last three years, we analyzed and tested to make sure we could do that," says Corbett, who notes USPS has received clean opinions from its auditors.

CFOs across government are expected now more than ever to make those kinds of smart, cost-conscious decisions that help achieve the seemingly impossible goal of making Uncle Sam fiscally responsible.

GAO and many other observers believe the federal government is on an unsustainable fiscal path. Keeping a sharp focus on what's feasible now to improve the bottom line is the tack most successful financial managers are taking. But the power of dreaming big and keeping the faith shouldn't be discounted. As Easton puts it, "We're still on our journey, but I think we're making progress."