Agencies still struggle to balance their books

Five years after a law was enacted requiring federal agencies to get their finances in order, effective financial management continues to elude most of them, according to a new General Accounting Office report. The 1996 Federal Financial Management Improvement Act (FFMIA) requires agencies to produce timely and reliable financial statements that demonstrate their compliance with federal financial management systems requirements, federal accounting standards and the U.S. government standard general ledger. If an agency believes its systems are not FFMIA-compliant, it must develop a remediation plan to achieve compliance within three years. In its report "Financial Management: FFMIA Implementation Critical for Federal Accountability" (GAO-02-29), GAO found that 19 of the 24 agencies covered under the legislation reported that their financial management systems were not in compliance with FFMIA in fiscal 2000. In fiscal 1999, 21 agencies reported noncompliance. But according to GAO, the remaining five agencies--the Energy Department, NASA, the National Science Foundation, the Small Business Administration and the General Services Administration--did not say they were in compliance, but rather reported that there were "no instances in which the agencies' systems did not substantially comply" with the requirements of FFMIA. Agencies listed several reasons for their noncompliance, including:

• Nonintegrated financial management systems. Without a central, reliable financial system, errors in data entry can occur with information not reported in a timely manner. Thirteen of the 19 noncompliant agencies reported that nonintegrated systems were a problem in meeting FFMIA requirements.
• Inadequate reconciliation procedures. Such procedures serve as a checklist for verifying financial data. Just as people balance their checkbooks, agencies must make sure that their own balances are accurate. Sixteen of the 19 noncompliant agencies reported problems meeting this criterion.
• Lack of accurate and timely reporting. Recording transactions in the general ledger in a timely manner can facilitate accurate reporting in agencies' financial reports and other management reports that are used to guide managerial decision-making. Fourteen of the 19 noncompliant agencies listed this an issue in meeting FFMIA requirements.
• Noncompliance with the Standard General Ledger (SGL). The general ledger provides a uniform chart of accounts and technical guidance used to standardize agency accounting. Agencies that do not properly use these standards to collect their financial information run the risk of producing unreliable and inaccurate data. Eight of the 19 noncompliant agencies could not meet the SGL standard.
• Lack of adherence to federal accounting standards. There are 17 federal financial accounting standards, but emerging accounting issues mean agencies need to be able to accommodate new standards continually. Twelve of the 19 noncompliant agencies failed to meet one or more federal accounting standards.
• Weak security over information systems. The recent onslaught of hacker attacks has demonstrated the vulnerability of many federal information systems, putting the reliability and availability of financial data at risk. All 19 noncompliant agencies failed to meet information security standards.

Sen. Fred Thompson, R-Tenn., lamented the slow progress of agencies in meeting financial management requirements. "Agencies simply aren't able to tell us on a regular basis where taxpayer dollars are going and whether we're getting what we paid for," Thompson said. "At a time like this, where every dollar, every asset, every resource counts, sound financial management is more important than ever." Compounding the problem, GAO found that the agencies' required remediation plans lacked the specifics needed for executing the plans, with many not even fully addressing the problems they were supposed to correct. Though the Joint Financial Management Improvement Program, a panel associated with the federal Chief Financial Officers Council, is working on an action plan for a governmentwide overhaul of financial management practices, GAO made several recommendations to correct the situation. The watchdog agency suggested that Office of Management and Budget Director Mitch Daniels revise audit guidance and require agencies to either affirm or deny compliance with FFMIA and add to guidance directing agency auditors how to assess compliance. In a written response, OMB agreed with GAO's conclusions and said it is re-examining its approach to FFMIA implementation guidance.