The promised land

Imagine that you are a speechwriter for Moses just after he led the Israelites out of slavery in Egypt and, having parted the waters, crossed the Red Sea. Now he and his followers stand on the edge of a vast desert. What should he tell them? First, the good news: "We've just seen not one, but several miracles. We are no longer slaves and have escaped from Egypt." But then there's the bad news: "However, we've got 40 years in the desert before we get to the promised land. And, by the way, not all of us will make it."

Federal financial management is in a similar situation. In the past 10 years, there has been enormous progress. A decade ago, the only financial question most agencies could answer was, "Have you made sure not to overspend your appropriation?" Most could only guess at what they had spent; there was almost no real-time reporting of any financial information. There were no agency chief financial officers. There were no financial reports prepared according to generally accepted accounting practice standards-in fact, there were no standards by which to report. At the time, most outsiders thought the way the federal government handled its financial affairs would be a scandal if anyone understood it-but almost no one did.

Happily, things have changed. Ten years later, we have agency CFOs. We have annual financial reports and, thanks to the Federal Accounting Standards Advisory Board, we have standards with which to produce these reports. Agencies are beginning to integrate performance information into their reports, and are producing annual performance reports, thereby providing the most basic form of accountability: telling people exactly what they get and how much they have paid for it.

A Long Way Here, a Long Way to Go

The federal government is now beginning-but just beginning-to get timely, reliable financial reports. This year, for the first time, all 24 agencies covered by the 1990 Chief Financial Officers Act met the March 1 reporting deadline for their 2000 financial statements. Just four years ago, only six agencies were able to deliver their statements on time. Furthermore, 18 of the 24 agencies received clean opinions for 2000, up from six in 1996. Perhaps most important, only three agencies received disclaimers on their 2000 financial statements, down from 13 in 1996.

This is an enormous accomplishment, and it has taken a ton of work, because the federal government has never done this before. Accounting staffs needed to be hired and trained. Auditors needed both to learn the new standards and how to audit them. Systems that never had produced consistent data, much less accounting quality data, had to be reviewed, reconciled, repaired and replaced. The process certainly is not finished, but like the Israelites who crossed the Red Sea, the federal government has come a long way.

Nonetheless, there's a long, long way to go. Clean annual financial reports are an important first step, but the real value in financial information is getting it used. The rise of CFOs in modern business did not come from annual reports, but from their ability to provide information on a routine, automated basis that helps executives understand, benchmark and manage complex organizations. In order to achieve this in government, agencies need to move beyond annual reports limited to financial accounting data. What business executives and their shareholders want to know isn't much different from what agency heads and their overseers want to know, and that is:

• How are programs working? Since government is different from private business (where net profit is the goal), merely reporting net receipts and outlays is not enough. We need to marry this with performance data. This is why the 1993 Government Performance and Results Act is so important and why annual accountability reports-which combine performance and financial information-matter. People need to know what they are getting for their tax dollars, not just how much is spent.
• What do these programs actually cost? This requires that the kind of cost accounting that is widely used outside the federal government be applied rigorously within it. It means we also will have to change the way we present our budgets. Outside the government, no one is satisfied until they know how well a product or service is performing and what it costs. No one inside the government should be satisfied without that knowledge.
• Is program performance improving? Ongoing programs can and will be evaluated by past and present performance. But it is impossible to do this unless information is provided routinely, automatically and consistently.

Without Systems, We're Still Lost in the Desert

Significantly improving financial systems is the next big step, and it's one that will make the task of producing audited financial statements look easy by comparison. Improving systems is the single most important and most difficult challenge facing federal financial managers.

The need is very clear. Agencies need information they can use for program management, budget decisions, budget execution and audit reports. Outside government, whether it's Wal-Mart, Kmart, Ford Motor Co. or Microsoft, businesses need and demand useful information from their systems on an automated, timely and reliable basis. Do we really think the Veterans Affairs Department deserves any less?

The challenge is daunting. The 24 CFO Act agencies have more than 500 financial systems. Most of these are not commercial-off-the-shelf systems. These systems were designed, for the most part, to provide only very limited financial informatio--and certainly were not designed to produce this information in a way that conforms to Federal Accounting Standards Advisory Board standards, which did not yet exist. And even within most agencies, almost none of these systems talked to each other.

In 1996, Congress passed the Federal Financial Management Improvement Act. It is a simple piece of legislation. It says that agency financial systems should:

• Use approved federal financial accounting standards.
• Conform to the U.S. Standard General Ledger at the transaction level.
• Meet whatever standards OMB imposes on federal financial systems.

Four years later, only about half of the CFO Act agencies conform to federal financial accounting standards and meet the law's standard general ledger requirement; one-third meet financial systems requirements. Clearly, there's much yet to do.

Fortunately, agencies across government are making progress. The General Services Administration is putting in a new consolidated financial system, as is the Education Department. The State and Interior departments also are implementing new systems. VA is selecting a unified core financial system for the entire department, one of the most diverse and geographically dispersed in the federal government. Even the Defense Department, which throughout its history was designed to operate on a decentralized basis, is consolidating its systems while it modernizes them. The Labor Department is developing a new personnel system to work with its core financial system. These initiatives involve major budgetary commitments to financial systems.

Four Challenges

Despite tremendous progress, agencies face at least four major challenges in financial management. First, they need to integrate budget, accounting and performance information to make financial data useful to agency decision-makers and their overseers in the executive branch, Congress and the public. The second challenge is to attract, compensate and train professional staffs. Once upon a time, the vast majority of federal financial personnel were clerks. Today, the tasks are very different. We need to move beyond clerical activities, even beyond simple accountancy. Today we need MBAs, CPAs, risk management specialists, information technology professionals and systems engineers. This will require both retraining existing employees and attracting new ones-at a time when job markets nationwide are very competitive.

Third, agencies must build on the progress they've already made in upgrading or replacing their systems.

All of these are but a means to the real challenge-better management. The most powerful lesson in finance in the entire last half-century is that reporting is not enough. Financial professionals should provide analysis and direction about policy and operations. They should take responsibility for management in general and for delivering financial services in particular. In government, this means agencies can provide timely analysis to foster better program management and more intelligent program oversight. They can take advantage of technology to administer grants and loans in ways that are at once both more businesslike and provide more help to more people at lower cost. And agencies can reduce the costs of federal procurement, offering opportunities for more businesses, large and small.

Avoiding the Sand Traps

This path is ambitious, but it is entirely achievable. Nonetheless, like wanderers in the desert, agencies can fail by exercising poor judgment or imposing unwise standards. As agency leaders proceed, they must avoid several pitfalls:

• Irrelevance. Accounting cannot exist simply for accounting's sake. In business, financial reports were designed to answer the central question of business performance; in government, by themselves they do not. Government accounting information must be made relevant to program decisions and program execution by tying performance to cost.
• Setting the bar too high too fast. In their rush to develop legitimate accounting and auditing standards for government, some folks want standards that exceed current private sector standards. This is a mistake: Why try to exceed commercial standards before agencies even can meet them? However well-intentioned, raising the bar too high too fast is a recipe for frustration: If agencies decide they cannot win the game, they won't play.
• Premature auditing. It is important that we not freeze agency practices prematurely by establishing audit requirements that are too prescriptive. For example, in order to encourage agencies to change and improve their performance measures, we now specifically limit audit requirements, asking whether agencies have measures, but not auditing which ones they choose. In order for performance reporting to be useful, agencies must be encouraged to experiment and find the right measures, not be locked into those that are easy to quantify or audit.
• Forgetting the differences between business and government. In developing standards and systems for use by government, it is hardly surprising that we rely heavily on the work of financial managers in the private sector. Nonetheless, sometimes we risk too quickly adopting the private sector model without sufficient consideration of the many differences between the sectors. Government agencies are not in the business of generating a profit. They have not kept their records on a cost basis, nor is it always easy to do so. For many programs, funding is contributed at one level of government, but implementation performed by another.
  

If we avoid these traps and surmount these challenges, our gift to future generations will be a better, more competent, more accountable government. They will look back at our "40 years in the desert" and say it was worth the journey.