Money Matters

"Significant financial systems weaknesses, problems with fundamental recordkeeping, incomplete documentation, and weak internal controls, including computer controls," contributed to GAO's inability to render an opinion on the consolidated statement, auditors wrote in a September 1998 report, "Financial Management: Federal Financial Management Improvement Act Results for Fiscal Year 1997," (AIMD-98-268).

Of the 24 major departments and agencies required to file financial statements with Treasury for the consolidated statement, GAO found 19 were using financial systems that did not comply with federal law. Twelve agencies' systems did not meet federal accounting standards, and nine did not comply with the U.S. Government Standard General Ledger, which was developed by the Treasury Department in 1986 to standardize financial data reporting governmentwide. Only 10 of the 23 agencies that did file reports passed GAO's audit without qualifications. Even those agencies usually found it difficult, if not impossible, to produce accurate, useful financial data on an ongoing basis.

The good news, if it can be called that, is that agencies generally recognize what their problems are and are working toward solving them. The bad news is it will take years of diligent work before many problems are fixed.

New Mandates

The government's inability to balance its year-end books is more than a failed paper exercise. It contributes to a much deeper problem--federal managers' inability to make informed decisions day to day, based on sound financial and budget data. Producing timely, accurate and useful financial data is the fundamental financial management challenge facing federal agencies, including most of the 15 evaluated in the Government Performance Project.

While their problems vary in severity, all 15 agencies surveyed in the Government Performance Project are in the process of upgrading their financial management systems. Some, such as the Immigration and Naturalization Service, which has yet to produce an audited financial statement that meets federal requirements, are in the middle of installing entirely new systems that will integrate financial operations across the agency. Other agencies, such as the Social Security Administration, which has produced audited financial statements for the last 11 years, have less pressing needs, but are nonetheless pursuing programs that will further integrate existing systems and improve fiscal management.

All agencies are improving their financial management systems in the midst of other management reforms. As agencies refine their contracting processes and capital management planning, for instance, those reforms will affect the financial management solutions they pursue.

Until the mid-1990s, agencies' fin-ancial management systems were de-signed to keep track of how money was spent, much as consumers do with their checkbooks. But now, under a collection of new financial management laws, the requirements are much broader. Not only must agencies keep track of spending, but they must also account for the value and depreciation of assets, account for and justify inventory levels, plan for capital purchases, assess environmental liabilities and estimate future costs such as post-retirement health care benefits. In short, it is no longer enough to simply track spending. Agencies must manage their finances.

To promote better management and gain control of runaway federal spending, in 1990 Congress launched a series of reforms, beginning with the Chief Financial Officers Act, the most far-reaching financial management legislation in 40 years. The CFO Act established a financial management leadership structure for agencies, required audited financial statements and strengthened accountability reporting. The CFO Act was expanded under the 1994 Government Management Reform Act (GMRA) to require the 24 agencies responsible for 99 percent of federal spending to prepare audited annual financial statements. GMRA came on the heels of the 1993 Government Performance and Results Act, which required agencies in 1997 to establish performance-measurement strategies tied to specific budget requests.

Most recently, the 1996 Federal Financial Management Improvement Act (FFMIA) requires agency inspectors general to report on whether their agencies' financial systems comply with federal requirements, federal accounting standards and the Standard General Ledger. Ultimately, all federal agencies must produce annual accountability reports intended to provide snap- shots of overall performance. Modeled after corporate annual reports, accountability reports will serve as a single source for gauging an agency's fiscal health. Taken together, these new laws are forcing agencies to manage their resources and justify expenditures in fundamentally new ways.

At the same time, many managers are coping with unprecedented personnel and budget cuts. Even agencies with robust technology budgets often find a high percentage of those funds are earmarked for mission-essential programs, making it difficult for agency managers to afford improvements to financial systems and other management programs that are invisible to the public. And if that's not enough, the year 2000 computer conversion will continue to compete for management attention and resources. As GAO auditors noted in the September report, "Agencies are necessarily making Year 2000 compliance a priority, and longer term efforts to address financial management systems are expected to be delayed."

Old Systems

Part of the problem federal financial managers face is the fact that the systems and software they rely on often are not integrated across organizations and were never intended to provide the kind of information now required. Many agencies' current finance and accounting systems represent the accumulation of decades of ad hoc technology solutions and reporting procedures.

When the Defense Finance and Accounting Service was established in 1991 to consolidate and improve defense financial management, the Defense Department had 127 separate finance systems to make payments, 197 different accounting systems to record contract data, and hundreds of "feeder" systems that relayed information to the finance and accounting systems. Each service and Defense agency had created its own fiefdom for managing finances. The task of consolidating systems, standardizing procedures and otherwise imposing order on Defense Department finances promises to stretch well into the next decade, at least. And while the size and scope of DoD's financial management challenges may be unique (DoD accounts for about half of the government's discretionary spending), the nature of those challenges is fairly common.

"It's more the rule than the exception that these systems weren't designed with financial management in mind," says Dianne Guensberg, a GAO auditor who was temporarily assigned to the House Government Reform and Oversight Committee last year to help evaluate agencies' compliance with the new financial management laws. "The IRS, for example, mainly programmed their systems to be a tax-return factory. That's basically what they do and they do that pretty well. But in terms of getting information to Congress or their managers, it's not always as easy to pull that financial data together as you would hope."

Because IRS, like many agencies, does not have a comprehensive general ledger system in compliance with the Standard General Ledger, which establishes the accounting structure for federal agencies as well as the rules for recording financial information, IRS must extract data from master files to produce the financial statements required under GMRA. The process is cumbersome and not easily duplicated, making it impossible to produce the kind of monthly or quarterly reports most businesses produce to manage their operations.

GAO's financial audits from 1992 through 1995 found that IRS had serious problems. Among other things, the agency could not properly account for its reported $1.5 trillion in tax revenues, both in total and by reported type of tax, and could not reliably determine the amount of unpaid taxes owed the government. The problems were serious enough that in 1995, and again in 1997, GAO put IRS on its "high risk" list of agencies susceptible to waste, fraud and abuse. Since then, "despite significant financial management system limitations, IRS has taken positive steps and made some progress in improving the accuracy of information reported in its custodial financial statements," GAO reported.

Interim Solutions

While IRS has refined its financial reporting systems to more accurately classify taxes received and made other improvements, the fundamental limitations of its financial systems have not changed significantly.

"IRS has found it necessary to rely on short-term solutions to its fundamental systems limitations, such as utilizing specialized computer programs to extract receipt and receivable information from an IRS database for financial reporting purposes. However, while this approach may enable IRS to produce verifiable financial statement balances, it cannot provide IRS the information necessary to properly manage and control these resources on an ongoing basis," GAO found.

According to GAO, most agencies can't comply with FFMIA's financial management systems requirements because they have inadequate general controls over their automated information systems.

Agencies lack controls to ensure data security. They can't ensure data is updated or reconciled in a timely fashion. Their systems are not integrated and therefore require manual adjustments to prepare financial statements. In addition, agencies are often unable to properly account for billions of dollars of property, equipment and supplies. They cannot estimate the cost of federal credit programs and related liabilities. Nor can they estimate other liabilities, such as retirement health benefits, or account for basic transactions with other agencies. Further, they cannot adequately estimate costs associated with environmental cleanup.

Agencies cannot comply with the Standard General Ledger at the transaction level because they are inconsistent in tracking and reporting data. GAO found that core finance and accounting data could not be reconciled with data provided by "feeder" systems--those systems that provide inventory and contract data, for instance. In addition, agencies lacked sufficient transaction de-tails to support their account data, and their financial data was not posted accurately.

These weaknesses prevent government managers from receiving the timely, uniform, reliable information they need to oversee programs, reduce costs and make resource decisions, said Gene Dodaro, assistant comptroller general at GAO's Accounting and Information Management Division, testifying before the House Government Reform and Oversight Committee last April.

Like IRS, the Customs Service and other agencies have had to set up interim financial systems and establish special reporting systems and controls to ensure data integrity until they establish integrated financial systems. Customs financial managers found a way to work around some of the shortcomings of existing financial management systems by implementing the Enterprise Information System (EIS), a graphical information presentation application. Through EIS, senior managers can access summary information on Customs' budget, financial management, human resources and international trade from their desktop computers.

The success of EIS notwithstanding, financial managers at Customs have faced tremendous challenges. Before 1995 the agency's problems were so severe that its books couldn't even be audited, says Vincette Goerl, the agency's chief financial officer until last summer, when she moved to the CFO post at the U.S. Forest Service. As recently as 1992, Customs, which collects about $22 billion a year in revenue, could not validate that it had collected all it was supposed to have collected. Customs could not account for its property nor be sure it was correctly refunding import duties.

"We could not even complete an inventory of our seized property. That involves some very sensitive issues, because we seize drugs," Goerl says. "It's pretty dangerous to not know where every bit of those drugs are until we dispose of them. It's a control issue."

But Customs has made clear progress. In the past three years, the agency has inventoried and reconciled all of its seized property, including about a million pounds of drugs and $380 million worth of property. And by executing a multiyear compliance measurement program, Customs was able to validate its enforcement of approximately 10,000 tariff laws, and see that its revenue collection and inspections programs were in order.

"Until you know whether or not you're compliant, you don't know what you're losing," Goerl says. "We estimated our loss of revenue was less than 1 percent--not a material loss, but around $200 million. It also told us where that was so we could target enforcement efforts. It changed the way we did business, which was a good thing," she says. The changes have paid off. In 1996 and 1997, Customs received clean audits from GAO.

Replacing Legacy Systems

Managers at the INS are in the process of replacing their 18-year-old accounting system. Among other shortcomings, the current system does not allocate costs, does not allow INS to comply with the Standard General Ledger, does not give managers the means to ensure prompt contractor payments, and does not provide INS with the information it needs to produce auditable financial statements. INS' poor financial record-keeping has had effects beyond INS. Auditors in the inspector general's office at the Justice Department, INS' parent organization, could not audit the department's Violent Crime Reduction Trust Fund because it depended on INS financial records that contained inaccurate information.

While INS officials believe the new system will solve these problems, GAO took the agency to task for neglecting to define its business processes before it selected a new financial management system, a requirement under the 1996 Clinger-Cohen information technology management law. Responding to the July 1997 GAO report, "INS Management: Follow-up on Selected Problems," (GGD-97-132), INS Commissioner Doris Meissner told auditors that INS' urgent need for a new system outweighed the benefits of reengineering first. "Faced with the alternatives of continuing to invest in out-dated legacy software systems or to migrate in a controlled manner to the use of a commercial off-the-shelf system, we chose the latter," Meissner wrote.

Measuring Results

Financial management reform is inextricably linked to other reforms sweeping the federal government. For example, as managers at the Environmental Protection Agency plan for a new financial management system, they want to make sure it supports other management goals as well. "We are looking for a flexible system that's affordable. It will be GPRA-driven," EPA's chief financial officer Sallyanne Harper told attendees at a management conference sponsored by the National Academy of Public Administration in July. "You cannot have a rigid budget structure and a rigid accounting structure under GPRA."

In the spirit of broad management reform, EPA is seeking Congress' support in restructuring the agency and its budget process to better manage operations. EPA is now funded through 10 appropriations ac-counts that support different aspects of the agency's mission. For instance, air quality and water quality programs are funded by separate accounts, governed by different statutes and managed through different stovepipe organizations. While changes in air quality can affect water quality and vice versa, EPA's current structure makes planning and measuring results difficult across programs.

In addition to restructuring, some agencies have turned to technology to reengineer financial management processes. At SSA, for example, managers replaced a paper process for paying local phone bills with an electronic process that updates accounting records automatically.

Most of the agencies evaluated in the Government Performance Project have turned with varying success to managerial cost accounting to justify fees, discern costly operations and otherwise improve management, at least in specific business areas, if not across the entire agency.

One cost-accounting methodology promoted by the Federal Accounting Standards Advisory Board is activity-based costing. With activity-based costing, managers attempt to determine the exact cost of performing specific functions by taking into consideration all factors that influence those costs, such as labor, maintenance and building costs.

EPA has long used activity-based costing in its Superfund operations to justify costs associated with massive environmental cleanup projects. EPA is also expanding the process to other areas, although Harper is not yet convinced it should be used across the agency.

No Choice But Reform

INS also performs activity-based costing to estimate costs and justify the fees it charges immigrants for services. However, the agency's efforts to apply the methodology have been hampered by the limitations of its financial management system. For instance, the current system, which INS has begun to replace, does not track costs of support services that one INS division might provide to another, according to GAO's September report "INS User Fee Revisions: INS Complied with Guidance but Could Make Improvements," (GGD-98-197).

Also, when calculating new user fees, INS did not include certain cost items, such as unfunded pension liability and post-retirement life insurance and health benefits costs of employees. Had the agency been able to determine those costs and included them in its fee computation, it could have justified setting user fees at a higher level, GAO concluded.

Managers at the Patent and Trademark Office can measure productivity down to the hour, Edward Kazenske, PTO's chief financial officer, told federal managers attending the Association of Government Accountants annual conference in June. PTO is one of the few federal agencies using activity-based costing agencywide. The cost data will be critical if PTO, which is fully funded by the fees it charges for patents and trademarks, decides to revise its fee structure to reflect more closely the costs of processing applications. Kazenske says some patents are much more complicated and time-consuming, and thereby more costly to process, than others, and a new fee structure may reflect that.

Agencies must learn to consider all their costs, including things that aren't always obvious or easy to predict, such as dealing with Equal Employment Opportunity complaints or responding to Freedom of Information Act requests, Kazenske says. "We can't manage what we don't know," he says. "Managers who are legally and technically competent have to become financially competent," he adds. "Don't ever think you have a choice."

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