Aiming For Accuracy

s the top finance official of the U.S. government's $2 trillion enterprise, Mark Everson wishes federal executives had the management tools he used in his last job as an executive of a $2 billion food services company. Wistfully he recalls his ability to call up, on any given morning, key data about his company's performance as the country's top airline catering company, viewing the number of coach, business and first class meals served on various airlines. Such up-to-the-minute financial information was vital to the company's operations.

"I could pull up information that showed what our revenues were by flight kitchen and by customer," says Everson, who serves as the controller of the Office of Federal Financial Management within the Office of Management and Budget pending Senate action on his nomination to be OMB's deputy director for management. "We could analyze the data by the number of flights, the number of passengers and the different classes of service," he says. "All of that could be related to the dollars that came in from revenue and the dollars we were expending on everything from labor to products."

Everson laments that the government doesn't operate in a similar fashion. "Government is about looking at where we are on appropriations. How much have we spent of our appropriated dollars," he says. "Until we get to a point where budgets are established and connected to the activities that are being undertaken by the managers, you are not managing in the sense that a good business does."

He is hardly the first to say that financial management in the federal government is an oxymoron. With very few exceptions, managers at federal agencies don't accurately track the flow of money through their organization on an ongoing basis and most cannot directly link the money they spend to meaningful performance measures. Since the 1990s, Congress, the General Accounting Office and others have been pressing federal agencies to provide more accurate and useful financial information. Congress officially declared war on the problem in 1990 with passage of the Chief Financial Officers Act, which required agencies to reorganize their financial staffs and created CFOs in the 24 agencies that account for 99 percent of federal spending. The law was strengthened in 1994 with enactment of the Government Management Reform Act, which required those agencies to produce financial statements. Then, in 1996, Congress passed the Federal Financial Management Improvement Act, which directed inspectors general to report on whether agencies' financial systems comply with federal requirements, federal accounting standards and the Standard General Ledger.

While there's been some modest improvement-18 of 24 agencies earned clean audit opinions for fiscal 2001, up from 10 in 1997-there is continued frustration that financial statements and the information within them are essentially useless. After all, the reports are not published until March-six months after the fiscal year has ended. And Everson says agencies shouldn't be too boastful of the Herculean efforts many go through to produce their statements.

"What we need is a greater focus on financial management and greater visibility," he says. "That is what we are trying to do. You can't get there by incremental progress. You need dramatic change."

Dramatic change is on the way. In a move that is sure to create headaches in many government finance and accounting offices, OMB shortened the reporting deadline for annual reports. Fiscal 2002 and 2003 financial statements are due to OMB by Feb. 1 as opposed to the current deadline of March 1. Starting in 2004, year-end reports will be due Nov. 15, just a month and a half after the end of the fiscal year. Agencies also will be required to produce quarterly statements. The push for accelerated and increased reporting is a central part of the president's management agenda, which established criteria for agencies in five categories in which they are to be evaluated each year: human capital management, competitive sourcing, financial management, e-government and integrating budget and program performance.

Putting a gimmicky spin on otherwise worthy goals, OMB, in its annual budget request to Congress, has begun to award agencies red, yellow, or green lights depending on their performance in each of these categories. A red light signals that an agency is deficient and is presumably standing still despite every encouragement to move forward. A green light means an agency is meeting the criteria for strong management and continues to move in the right direction. In financial management, the criteria for getting a green light include:

• Having financial management systems that meet federal accounting and transaction standards.
• Producing timely and accurate information.
• Integrating financial and performance systems.
• Obtaining an unqualified and timely audit on annual financial statements and showing no weaknesses in internal controls.

"We're at war and I'm saying I'm not going to look military personnel in the eye and say I voted against their budget," Rep. Christopher Shays, R-Conn., said at a June 4 congressional hearing on Defense's financial management system. Chairman of the House Government Reform Subcommittee on National Security, Veterans Affairs and International Relations, Shays said he has voted against previous Defense budgets because the department cannot audit its books. The subcommittee's ranking Democrat, Rep. Dennis Kucinich, D-Ohio, said Congress should freeze Defense spending until the department gets its financial house in order.

Timely and Accurate

Take the Defense Department as an example. In fiscal 2001, its environmental liabilities-the amount of money officials estimate it will cost to clean up waste sites and other environmental problems totaled $63.3 billion. That ranks among the largest liabilities on Defense's books. But those totals are not tallied until six months after the fiscal year ends. If Pentagon officials and congressional appropriators had accurate information about the liabilities on an ongoing basis, they might make better decisions about how to spend scarce resources, says Hammond.

Federal managers don't fully understand the value of having timely, accurate financial data, says Hammond. "Once they see it, though, they'll be banging down the doors to get it. With the accelerated deadlines, we'll create a culture that feeds on itself and demands more information and different kinds of information," he says.

Indeed, the realization that the lack of useful financial information impedes management seems to be gaining currency. In a recent survey by the Association of Government Accountants (AGA), 74 percent of respondents said they would like more access to information that ties costs to performance. The survey, a joint project of Government Executive and AGA, with support from Arthur Andersen, American Management Systems Inc., Booz Allen & Hamilton, PricewaterhouseCoopers, KPMG and Grant Thornton that was conducted this spring, queried more than 800 senior executives and managers about their need for better financial information. About 44 percent of respondents had a role in program management. Another 50 percent were involved in finance, budget or administration. The majority-73 percent-work in agencies funded through the appropriations process. About 20 percent work in fee-for-service organizations.

Although respondents want more financial information, many said that the data included in financial statements is not timely and offers little value for making operational and strategic decisions. While managers are not interested in every nugget of financial information, the survey suggests that there are morsels that could prove useful if they were more timely. Nearly 60 percent of survey respondents said information on operating revenues was important to them, yet just 30 percent believe the data they currently get is timely. And, only 34 percent said it is accurate.

An Education Department official responding to the survey noted that financial statements often are "focused at too high a level" to be useful to program managers. Speaking to Government Executive on the condition of anonymity, he says program managers cannot track the day-to-day use of funds. Armed with such data, they could better control spending and ensure that grant money, for instance, is not being wasted or spent inappropriately, he adds.

"People will only use or be interested in the data if it is related to their business," explains Irwin "Ted" David, chief financial officer of the National Weather Service. David, an AGA member, was the principal driver behind the survey. "You have to ask a lot of questions to figure out what it means for the information to be useful. It is going to vary from agency to agency. There's no silver bullet," he says.

Changing Systems

The challenges at Defense don't just revolve around figuring out what kind of information managers want, but also developing a reliable computer system. The department's financial management has been in disarray for years. For instance, in June 2001, GAO reported that Defense's financial system could not track the flow of $1.1 billion earmarked for spare parts and other logistical support. The funds initially were appropriated to Defense but then transferred to the military services. Once that happened, accountants at the Pentagon could not determine whether the money was spent on spare parts or used for other purposes.

Defense has launched several attempts to fix its shortcomings. In 1989, there was an attempt to streamline operations and develop standard information systems across the services. The effort went on for about 10 years, costing upwards of $20 billion. It never lived up to its promise of saving the department billions and eventually was scrapped. In 1993, the Clinton administration came in with a focus on correcting long-standing problems, including overpayments and internal control weaknesses.

With the Bush administration came yet another focus. The Bush team is intent on getting at what it views to be the root cause of Defense's financial management failures: too many computer systems handling data in different ways and, in most cases, not exchanging it. The emphasis in previous administrations was getting a clean audit through sheer labor, says Tina Jonas, deputy undersecretary for financial management at Defense. "That is just not going to work. We didn't know why it wasn't going to work until we asked the fundamental question of what was wrong."

Last spring, Defense Secretary Donald Rumsfeld formed a task force to investigate the question. The panel, chaired by Stephen Friedman of Columbia University's board of trustees and a retired chairman of Goldman, Sachs and Co., found what many previous investigations already had uncovered: Defense's financial systems aren't set up to use generally accepted accounting principles or to properly interface with management information systems. The current system takes too long to reconcile accounts and is too cumbersome.

A year ago, at a press briefing to release the report, Friedman further detailed the problems: "If I'm running a military base, and I have good data as to what it costs for my uniformed personnel, what it costs for my civilian personnel, what it costs for my energy, my parts and supplies throughout the base, but I can't extract the data as to how many of those costs should be laid against maintaining my fleet of vehicles . . . I have no ability to benchmark against the costs of other bases running fleets. And then I don't know what effective improvement steps to take."

The task force recommended a major overhaul of the financial management system. Defense has 1,127 different computer systems that generate financial information. Few of them are able to share data, making it virtually impossible to follow transactions and the flow of money. In April, Defense hired IBM to reduce the number of systems to roughly 100 and ensure that they can all talk to one another. This is not the first attempt to streamline the systems. Al Tucker, who served as Defense's deputy CFO from 1991 to 1997, recalls that the Clinton administration undertook a similar effort.

At that time, officials did not know there were 1,000-plus systems, according to Tucker, now a consultant with Grant Thornton. They thought there were a few hundred. Because Defense is so big and so diffuse, it was difficult to figure out exactly where the financial information was coming from.

As the project moves forward, Jonas says her office will be in constant contact with program officers, procurement personnel and others to determine what type of information they need. Starting next year, the IBM team is expected to test the new system in six yet-to-be determined areas. Health care, inventory and payroll are likely to be among the first pilot tests.

Eventually, says Jonas, the goal is to provide Secretary Rumsfeld with a set of "dashboard" indicators that show how efficiently-or inefficiently-the department is using its assets. Jonas has developed 129 measures of her own, but it's not clear whether Rumsfeld will demand different measures. For example, Jonas tracks the amount of interest Defense pays on its contracts. The 1989 Prompt Payment Act requires agencies to pay contractors within 30 days of receiving a product or service. But, in many instances, Defense is unable to do so. The department pays about $2 million in interest every month because of late payments to contractors.

"It's money out of the door that we could be using, particularly in a wartime environment when we are asking Congress for additional funds," Jonas says. "Why, because of a bad process, should we be throwing money out of the window? We don't want to be doing that." Manage to the Penny

In the mid-1980s, NSF's leaders wanted to create a paperless business environment. Doing so, they thought, would make it easier to track the tens of thousands of proposals that come through the doors each year. It also would allow program managers to better follow the flow of money, says Cooley. The agency receives roughly 30,000 proposals a year and awards 10,000 new grants.

"The other impetus was budgetary," he explains. "There's always a concern at this agency and others that if you can't spend all the money Congress gives you, then why should you get more next year. So program managers manage to the penny. They are very concerned about knowing how much money is available in their accounts so they can squeeze out as many proposals as possible. The underlying management issue is that in order to feel like you are maximizing your dollars, you need to know exactly what the bottom line is."

Martha Rubenstein, director of the agency's budget division, adds, "On an hourly basis, or every couple of hours, we can get a status check of where the funds are and how much is left. Therefore we can manage every single penny and make sure they are obligated correctly."

Those who question whether NSF merited a green light for financial management say the agency does not have to contend with the complexities of a major department. It doesn't have regional offices, thousands of procurement invoices, depreciating assets or environmental liabilities. Ruben-stein acknowledges as much, but is quick to point out: "We could have done nothing and just sat around. But we took the initiative and pushed hard for change."

To be sure, there is room for improvement. The agency still is striving to become totally paperless. Not every function is automated. Additionally, NSF recently came under fire from its inspector general and Congress for using multiple appropriation accounts to fund the construction of major research equipment and facilities. In 1995, NSF established a specific account for this purpose. The agency spent just $600 million between 1995 and 2001. In fiscal 2002, Congress appropriated $139 million to the account.

Because it uses multiple accounts to fund construction, "NSF cannot ensure that it stays within its authorized funding limits or that it provides accurate and complete information on the total costs of major research equipment and facilities to decision-makers for use in evaluating performance," the IG reported in "Audit of Funding for Major Research Equipment and Facilities," on May 1. The report noted that NSF policies do not provide "adequate guidance for program managers to oversee and manage the financial aspects of major research equipment and facilities."

NSF Director Rita Colwell acknowledged the validity of the IG's findings and said the agency is working to correct the situation. "NSF needs continual improvement of financial management," she told a Senate committee in May. At press time, agency officials were working on a detailed response to the IG's report.

Paying Attention

The CFO Council will provide some technical assistance, says Hammond, who chairs the council's task force on accelerated reporting. For starters, the council is collecting best practices in accelerated reporting and is holding open forums to educate agencies that are having trouble getting up to speed. The council also plans to identify intergovernmental barriers, such as choke points in the flow of critical budgetary and other financial information from OMB and Treasury to agencies.

"I hope this all forces agencies to develop and implement financial systems that will provide information to operating managers continually throughout the year," says David. "[I hope] that it really gets into the guts of financial operations so the information is accurate and timely from the bottom up [and] it's not only useful for financial statements, but also for day-to-day activity."