Managers get advice on meeting new financial reporting requirement

IT and risk analysis are tools for CFO Act agencies facing June 30 deadline on internal control assurances.

As a June 30 Office of Management and Budget deadline approaches for agencies to issue assurances of their internal controls over financial reporting, experts have different ideas on how to secure immediate and long-term compliance.

At a Tuesday breakfast for members of the federal financial community, government and industry panelists made various recommendations for meeting the deadline, which is set in OMB's Circular A-123. These ranged from implementing information technology systems to winning buy-in from top management.

Fiscal 2006 is the first year in which agencies covered by the 1990 Chief Financial Officers Act must provide assurances that the internal processes that feed into financial reports are accurate and effective. Agency heads will be required to note any significant or "material" weaknesses in those controls and identify corrective actions.

The Circular A-123 rules are widely compared to the private sector's 2002 Sarbanes-Oxley Act accounting regulations, instituted in response to the WorldCom and Enron scandals. That law requires leaders of publicly traded companies to take responsibility for corporate financial statements. With a head start in complying with enhanced accounting rules, industry representatives offered advice to government managers.

"Documentation is the backbone, and the biggest pain point" in compliance, said McNamara Curtis, president and chief executive officer of Arlington, Va.-based Pearson Government Solutions, a large IT and management contractor that has instituted its own Sarbanes-Oxley compliance systems over the past several years.

Curtis said automatic updates to documentation are the key to avoiding overwhelming paperwork, noting that his company's latest compliance papers stack up to four and a half feet. He also said segregation of duties is important to the integrity of the process, and urged agencies to resist modifying off-the-shelf accounting software to match their business processes. Much better, Curtis said, is to reshape accounting processes to fit the strictures of the software, to take advantage of the compliance built into the solution.

Bill McCabe, acting CFO of the Education Department and formerly a senior manager with global accounting giant KPMG, pointed out a matrix the agency used to highlight key processes for attention on A-123 compliance. On one axis, the matrix evaluates 13 processes on their inherent risk. The second axis identifies the extent of potential damage resulting from a bad outcome through that procedure.

Outliers for risk or negative outcomes require extra attention, McCabe said. He spoke in a personal capacity rather than as a departmental representative.

While the matrix does not produce concrete data on the reliability of internal controls, McCabe emphasized that the OMB circular requires a standard of "reasonable assurance" -- not the full audit accountability to which inspectors general and financial management contractors are accustomed. Molly Dawson, an Education Department audit manager, warned that consultants often are happy to take agencies beyond the point they need to reach, incurring additional fees in the process.

Dawson and McCabe also highlighted the importance of upper management support to achieve compliance, noting that Education Secretary Margaret Spellings has sat in on A-123 meetings at least once per month.

To Anna Gowans Miller, director of research with the Association of Government Accountants, going beyond the minimum compliance requirements can be a good thing, especially when assisted by the right technology solutions.

"You throw a lot of bodies at the problem, and after the first year you find you can't sustain it without automating," Miller said of the process. The right software not only streamlines compliance, but can provide a "dashboard" to alert management when early signs of trouble arise, she said.

In an audience discussion, one participant asked whether agencies should realistically expect to see cost savings from their compliance systems. Government officials on the panel pointed out some of the benefits of improved internal controls, including reduced risk of audit setbacks and unexpected financial results.

But an industry participant was less optimistic. Based on initial Sarbanes-Oxley compliance costs, his company is budgeting for a threefold increase in auditing costs for at least a few more years, he said.

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