Government Executive - Authors - David M. Walker

How the Service Academies Could Improve Defense Management

David M. Walker and Bill Bergman — Wed, 07 Jul 2021 16:31:47 -0400

Every year, the federal government issues audited consolidated financial statements. And for more than 20 years now, the Government Accountability Office has delivered a “disclaimer” of opinion on those statements. That’s because the auditors lack sufficient evidence to certify whether the statements are fairly presented and consistent with generally accepted accounting principles. The primary reason for this disclaimer? The Defense Department’s abysmal accounting systems and processes.

The Pentagon needs to prioritize improving its accounting and financial management capacity to inspire greater confidence in how it manages taxpayer resources. While Defense has made positive strides in this direction, much remains to be done. Last year, for example, the number of department entities that earned an opinion on their financial statements increased, but the number of identified material control weaknesses continued to rise.

While obtaining an unqualified opinion on the department’s consolidated financial statements is a worthy goal, it’s only part of the equation. The ultimate point is to increase the timeliness, completeness, integrity and usefulness of overall financial and management information to improve Defense operations. It shouldn’t just be trying to get good grades on a single annual financial report.

This is a broad, deep, challenging and continuous mission. Therefore, we propose a foundational step forward on the quest to achieve sustainable success.

Three years after the Pentagon underwent its first full departmentwide audit, a review of the core academic requirements at the military service academies suggests they lack adequate emphasis on basic economics, accounting, public finance, financial management and other key management principles and practices.

Given the criticality of sound financial management to the integrity and efficiency of military operations, the service academies should collaborate to develop a required core course in basic economics and public finance. The objective should be to inspire future service leaders to care about managing resources in a manner that will maximize the economy and effectiveness of defense spending.

The new core course would provide a solid interdisciplinary foundation for future senior leaders. It could be titled “The Economics of National Security.” This course would provide basic lessons from microeconomics, macroeconomics, accounting, finance, acquisition/contracting practices, human capital policies, information systems, applicable constitutional provisions, and other relevant subjects. It should also include historical lessons for the contribution of public finance to the success (and failure) of nations and past great powers.

This core course should be required for any student to graduate. Communities of scholars and practitioners could be recruited for the mission, and other Defense educational institutions, such as the National Defense University, could provide additional post-graduate required courses for selected personnel.

We believe the development of required core economic and public finance-related courses at all service academies can help to increase the esprit de corps and respect for those charged with stewardship of the department’s resources. The initiative would emphasize the relevance to the mission, and offer more advanced accounting and finance educational opportunities for selected officers. Given evolving security threats and the country’s current unsustainable fiscal path, the time for action is now.

Bill Bergman is the director of research at Truth in Accounting. David Walker is a former U.S. Comptroller General.

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Transforming Federal Financial Reporting and Auditing

David M. Walker — Mon, 22 Feb 2016 08:00:00 -0500

Although The U.S. Constitution stipulated that “a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time,” it took more than 200 years to pass a law that was intended to vigorously meet that intent.

The Chief Financial Officers Act of 1990 represented a significant leap forward for federal financial management, reporting and auditing.

It authorized two new positions in the Office of Management and Budget--Deputy Director for Management and Controller--and also created Chief Financial Officer posts within major federal agencies.

It required annual accrual-based financial statements for certain federal funds and accounts and required that they be audited. Reporting requirements have been expanded over the years, and at last count some 151 different agencies and accounts were included in the consolidated financial statements of the U.S. Government. Today, most federal agencies issue their audited financial reports within 45 days of fiscal year end and the government’s consolidated financial report is targeted for issuance 30 days later.

Most of the departmental and agency financial statements are audited by their inspector generals (IGs) or an independent public accounting firm hired by the IG. The U.S. Government Accountability Office (GAO) currently audits the Internal Revenue Service, the Bureau of Public Debt, the Federal Deposit Insurance Corporation and the consolidated financial statements of the U.S. Government.

The Act also established a CFO Council chaired by the new Deputy Director for Management at OMB. To facilitate effective adoption of the Act, a new nine-member Federal Accounting Standards Advisory Board (FASAB) was established in 1990 and charged with proposing generally accepted accounting principles for the federal government.

Twenty one of the 24 CFO Act agencies achieved an unmodified opinion on their financial statements for fiscal 2014. To date, GAO has been unable to express an opinion on the consolidated financial statements, largely because the Defense Department hasn’t been able to pass an audit.

In annual reports, GAO notes numerous weaknesses in financial controls, and since 2003 it has also remarked that the U.S. government is on an unsustainable fiscal path that will ultimately require major spending and tax reforms.

Federal financial reporting has markedly improved since passage of the CFO Act. But it’s time to ask what kinds of new reforms make sense in the realm of financial reporting and auditing. Based on my experience as U.S. Comptroller General and in dealing with officials in government, the media, business, labor, the social sector and the general public, I believe that the following 10 transformational reforms should be seriously considered.

If adopted, they would result in more meaningful information and a much more cost-effective approach to federal auditing.

FINANCIAL AND PERFORMANCE REPORTING

1. Federal financial statement reporting should focus on financial assets that have an expected and realizable economic value.

Current federal financial reporting excludes certain types real estate, capital and other assets owned and controlled by the federal government that have significant potential value. Specifically, “Heritage Assets,” such as The Capitol, the White House, the Washington Monument and national parks, are excluded, but the list needs to be expanded to include weapons systems and related military support inventory. The federal government has no intention of disposing of or realizing any meaningful economic value for these items. The costs associated with obtaining and retaining historical cost and related depreciation information for these assets exceed the benefits.

2. Federal financial statements should recognize additional liabilities and unfunded obligations: thus a new “Statement of Financial Assets, Liabilities and Obligations” would replace the current Balance Sheet.

In the Social Security and Medicare programs, the federal government spent “excess” payroll tax receipts on other government expenses, and replaced them with government bonds that are not readily marketable but are backed by the full faith and credit of the U.S. Government. The resulting obligations should be acknowledged and represented as a liability on the face of this new balance-sheet-style statement.

The new statement would include Assets, Liabilities and Unfunded Social Insurance Obligations. Government bonds held in various trust funds (e.g., Social Security, Medicare, Railroad Retirement and Black Lung), currently characterized as intra-governmental debt and disclosed in the footnotes to the financial statements, would be shown as a liability in this new financial statement.

The discounted present value of unfunded obligations relating to Social Security and Medicare should also be displayed under a new category of “Unfunded Obligations.” They should not be deemed a liability particularly because the Supreme Court has ruled that promised benefits are not protected by the Constitution and can be changed at any time and in any way the Congress deems appropriate.

3. There should be a new “Statement of Fiscal Sustainability and Intergenerational Equity.”

As CBO, GAO and others have noted, current fiscal policy is unsustainable. It also has serious intergenerational implications. So a separate statement is needed to show implied tax and spending levels in the longer term as a percentage and as a share of gross domestic product.

4. There should be a new ‘Statement of Key Performance Indicators.”

Current annual reporting focuses primarily on financial and activity-based information. Much greater attention needs to be placed on reporting outcome-based information based on key performance indicators of federal activities in such important categories as economic health, safety/security, energy/environment, transportation/infrastructure, education/training, health, housing, income security. This information could be hugely helpful in assessing the results achieved with the resources and authorities provided to the federal government.

5. There should be additional financial statement disclosures about major classes of military assets and supplies, major tax preferences/expenditures, budget categories, and key financial metrics.

Quantity and condition of military assets and supplies is much more meaningful than historical cost and accumulated depreciation information, and clearly passes a cost/benefit test.

Tax preferences/expenditures, including individual and business deductions, exemptions, credits and exclusions, aggregated to about $1.2 trillion in fiscal 2015--about $100 billion greater than total discretionary spending. They represent indirect spending and need to be subjected to additional transparency and accountability. As a result, all individual and corporate tax preferences that amount to 5 percent or greater of total tax preferences should be disclosed in the notes to the financial statements.

Reporting by major budget category component and/or programs acknowledges the reality that OMB and the Congress focus most of their management and oversight activities at these levels rather than at the consolidated Department level. Budgets are typically built from the bottom up rather than the top down. As a result, there should be additional disclosure of financial information by major component such as sub-department level agencies.

Most people have difficulty relating to numbers in the billions and trillions. As a result, given the size and scope of the U.S. Government, we should provide additional information for major revenue, expenditure and debt levels on a per-capita basis and as a percent of the economy, or GDP. This information can be compared with other major industrialized countries, such as those included in the Organization for Economic Development and Cooperation (OECD), providing a clearer picture of U.S. performance.

FINANCIAL AUDITS

6. Financial statement audits below the Department-wide level should not be required, including in the Defense Department.

The hard truth is very few people take the time to read the consolidated financial statements of the federal government much less the financial statements of major departments and agencies. Sub-departmental or segment financial statement audits can be costly and are of little use to the public. As a result, they should be eliminated as a requirement.

7. GAO should assume responsibility for auditing the Defense Department.

DoD is the largest and most complex entity in the federal government. It is also the largest single obstacle to GAO’s ability to express an opinion on the consolidated financial statements of the U.S. Government. GAO should assume the principal auditor role and use the IG and independent public audit firms (IPAs) as it deems appropriate. DoD should assume the full cost of the audit.

8. After all major departments and agencies have achieved unqualified opinions on their financial statements, the annual financial statement audit requirement should only apply for the consolidated financial statements of the U.S. Government and federal entities that are intended to be self-supporting (e.g., Federal Reserve, Social Security, Medicare, Federal Deposit Insurance Corporation, Pension Benefit Guaranty Corporation, U.S. Postal Service, Securities and Exchange Commission).

Savings from eliminating other audits could be applied to improving internal controls, information systems, cost accounting and performance management activities in the federal government.

9. GAO should continue to perform the audit of the Consolidated Financial Statements of the U.S. Government.

GAO remains best positioned to perform the audit of the consolidated financial statements of the U.S. Government, and it should be able to use the Inspectors General and select IPAs as needed. To the extent that auditing is needed for departments or agencies, they should pay the costs.

10. Audit report language should be revised to reduce expectation gaps, require an expression of opinion on internal controls over financial and performance reporting, and encourage appropriate use of “emphasis paragraphs.”

Too many people still believe that an unmodified opinion on an entity’s financial statements means that it is operating in an economical, efficient and effective manner, and in compliance with all major laws and regulations. Such is not the case--and the auditor’s report should make that clear. And external auditors for federal government entities should be required to express an opinion on the quality of internal controls over both financial reporting, as is required by federal law with audits of public companies, and performance reporting. They should also be encouraged to use “emphasis paragraphs,” as appropriate.

The Hon. David M. Walker served as U.S. Comptroller General from 1998 to 2008.

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Three Keys to Change

David M. Walker — Wed, 15 Mar 2006 00:00:00 -0500

Reform efforts can't get off the ground without a clear cause, supporters and a plan.

As comptroller general, I have worked with others to make the Government Accountability Office a model federal agency by transforming its organization and operations to address the challenges and opportunities of the 21st century. In other presidentially appointed posts, including public trustee for Social Security and Medicare, I have seen the federal government falter in its attempts at major public policy reforms in those areas.

The process one employs to advance major initiatives is critical. Based on my experience, three key elements maximize the chances for success.

Principles. Before leaders can achieve major internal or external changes, they need to make a clear and compelling case that the status quo is unacceptable and unsustainable. But that's not enough. Leaders also must provide a set of clear, comprehensive and compelling principles to frame the debate and help others understand the overall direction and objectives.
Players. Any major reform effort requires the direct and sustained involvement of an organization's chief executive officer. But the CEO also must recruit champions from various stakeholder groups. For internal reforms, this includes managers, employees and employee organizations. For legislative reforms, it includes businesses, unions, citizen groups, think tanks, the media and members of both major political parties. Champions should be capable, credible, committed and effective communicators. These individuals also should be part of a broad-based "big tent" approach to both crafting and selling reform proposals.
Proposals. A detailed plan should be developed and presented or endorsed for action. The proposal should be consistent with the articulated principles, supported by applicable champions and informed by the "big tent" process. There is always risk in presenting a specific plan, especially in politically charged environments. But realistic leaders recognize that any major reform proposal is likely to be revised before it is enacted. Revisions could include desirable improvements or necessary compromises, but as the old saying goes, "Don't let the perfect be the enemy of the good."

These three steps to reform do not guarantee success, but failure to effectively address one or more would likely ensure defeat. They do not have to be addressed in a particular order. For example, the initial outreach effort could include a straw proposal to jump-start the discussion and help enlist champions.

GAO's transformation and legislative efforts have consistently incorporated all three elements. The past two presidents, however, failed to achieve several major public policy reforms in part because they left out critical steps in the process. For example, early in his first term, President Clinton tapped then-first lady Hillary Rodham Clinton to lead a comprehensive and much needed health care reform effort. But their initiative did not incorporate the players-they underestimated the need to involve a broad range of stakeholders in developing and championing a reform plan.

During his second term, President Clinton sought to make Social Security reform one of his legacies. Although he initiated several important process changes based on the health care reform experience, Clinton never produced a specific Social Security reform proposal to present to Congress.

Last year, President Bush announced his major push to reform Social Security. He, along with Clinton, deserves credit for pursuing changes sooner rather than later. Unfortunately, President Bush failed to follow any of the key steps to transformation. He never effectively articulated a set of clear and compelling principles to frame the debate, and his public events typically did not involve nonpartisan fact providers, champions from both parties, or a broad cross-section of key stakeholders. Also, the president never developed a comprehensive proposal or formally endorsed an alternative. The result after more than 60 events was a decline of public support for Bush's Social Security reforms.

The three key elements of transformation are not a panacea, but they can work. Internal operational improvements or external public policy changes can be complex, challenging and controversial. But if you don't get started, you have no chance of success. As President Theodore Roosevelt said, "Aggressive fighting for the right [cause] is the noblest sport the world affords." We need more people with Roosevelt's vision, courage, integrity, creativity and stewardship mentality. Please join me in finding a worthy transformation cause and fighting for it.

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