Accounting for Success

y the end of this month, the Treasury Department will produce its third annual governmentwide fin-ancial statement. And while the General Accounting Office will soon weigh in with a report on the statement, GAO's conclusion won't be a cliffhanger for federal managers. In fact, GAO will find much of the data so unreliable it will be impossible to audit.

Of the 24 major departments and agencies that were required to file financial statements with Treasury beginning in 1998, only about half will be able to garner unqualified, or clean, audit opinions three years into the effort. And while many agencies predict they will soon have finance and accounting systems capable of producing auditable reports, the biggest spender of all-the Defense Department, which accounts for about half of all federal discretionary spending-estimates it will be at least another four years before it will be able to produce such a report.

Of the five agencies rated this year by the Government Performance Project, all have problems managing their finances, although all are working toward improvement. The Coast Guard, through a Herculean effort to account for all its property, expects to receive its first unqualified audit opinion when 1999 audits are completed this month. While the Army Corps of Engineers has a robust financial management system that is serving as the model for a defense-wide system, it still cannot produce an unqualified agencywide statement, due in part to problems accounting for property and equipment. The Veterans Affairs Department has a serious problem with the integrity of the data upon which Veterans Benefits Administration systems must rely. Financial management systems and practices are not consistent across the National Park Service, making it difficult for managers at headquarters to make informed financial decisions. The accounting systems at the Office of Student Financial Assistance are not integrated with other Education Department systems, forcing the agency to rely on ad hoc reporting methods.

Getting a clean opinion is important because it is an indicator of whether an agency is managing by an accepted standard, says Coast Guard CFO William Campbell. And if you're not managing well, "you can make boneheaded decisions." But by itself, a clean audit is not enough, he concedes. "Though we're fixated on our audit opinion, the real meat is in managing better."

GAO auditors closely follow agencies' efforts to improve their finance and accounting systems to comply with recent federal financial management laws. GAO reported "little discernable progress" in the audit of agencies 1998 statements, and predicts little progress in the near future.

Ongoing Problems

The problems GAO identified last year in the government's books were similar to those reported the year before-and will likely be those reported again this year. Last March, Comptroller General David Walker outlined for lawmakers on the House Government Reform management, information and technology subcommittee the most significant deficiencies:

• The government cannot account for billions of dollars in property and equipment.
• It cannot estimate the cost of most major federal credit and loan programs.
• It cannot determine the proper amount of such reported liabilities as post-retirement health benefits for military employees.
• It cannot estimate environmental liability.
• It cannot guarantee disbursements are properly recorded.

Walker attributes the poor state of affairs to "the government's longstanding inattention to financial issues, combined with the size and complexity of government operations." Until the last decade, lawmakers and agency managers paid relatively little attention to finance and accounting practices. Compounding the problem, agency financial management systems were not designed to capture the full cost of managing activities and programs. In some cases systems were designed to obscure such information, says one Defense manager.

But if lawmakers have historically shown a lack of interest in financial management, that trend has been reversed in the past decade. Beginning with the 1990 CFO Act, which forced the 24 agencies responsible for nearly all federal spending to reorganize their financial management staffs and establish chief financial officers to focus on reform, lawmakers have become increasingly interested in fiduciary matters. In 1994, the Government Management Reform Act built on the CFO Act, requiring the 24 agencies to produce annual audited financial statements and accurate cost and performance information as well as to integrate budget, accounting and program data. The 1996 Federal Financial Management Improvement Act required agency inspectors general to annually report on whether their agencies' financial systems comply with federal requirements, federal accounting standards and the Standard General Ledger.

At the same time lawmakers have been pushing for better financial management, they also have been exhorting federal programs to perform as advertised. The 1993 Government Performance and Results Act (GPRA) holds agencies accountable for achieving program objectives. And to make sure agencies invest in the right information technology tools to meet program objectives, including financial management objectives, the 1996 Clinger-Cohen Act required agencies to use investment and capital planning processes to manage their technology portfolios.

The net result of these laws has been to force agencies to confront their financial management shortcomings, because without accurate and timely financial data, the objectives of the Results Act and the Clinger-Cohen Act cannot be achieved.

'Billions at Risk'

Those shortcomings are considerable. The CFO Council, an organization that works to improve federal financial management practices, identified the following reasons why agencies failed to receive unqualified opinions on the 1998 governmentwide financial statement:

Most agencies cannot properly identify and account for transactions with other federal entities.

• The Defense and Transportation departments do not have auditable information about the dollar value of assets held to support domestic and global operations.
• Most departments responsible for federal lending programs-especially the Agriculture, Education, Housing and Urban Development and Veterans Affairs departments-do not properly report the costs of loan programs.
• Environmental and disposal liabilities at Defense and Energy are materially understated. No estimate was reported for liabilities associated with certain major weapons programs. Also, significant portions of the reported liability for waste-related nuclear weapons lack adequate documentation.
• Data is not available to support liabilities estimates for Defense post-retirement benefits, such as military health care, and various agencies improperly calculate estimates of accounts payable and other liabilities, such as those associated with litigation.
• Most agencies could not resolve differences between their records and Treasury's records of cash disbursements; and grant-making agencies have not yet determined the extent of improper payments.

The cost of these inefficiencies is enormous. In their fiscal 1998 financial statements, nine agencies reported making more than $19.1 billion in improper payments. GAO found that "agencies are not performing comprehensive quality control reviews for certain programs to determine the propriety of program spending. As a result, the full extent of the problem-and possible solutions to it-is unknown." (AIMD-00-10)

Economic and demographic projections indicate that federal outlays will increase significantly over the next few years, according to GAO, and this will put "billions of dollars at risk." Unless agencies get a handle on the extent of the problem, and develop reliable ways to estimate and document the improper payments, they cannot hope to solve the problems.

Data vs. Information

A clean opinion is like getting the Good Housekeeping Seal of Approval. It means the agency is producing reliable financial data and is moving in the right direction. But it is not an end in itself. It is no longer enough for financial managers to just produce accurate data to meet reporting requirements. Increasingly, financial managers are an integral part of agency operations, as they must be able to produce the data that justifies management decisions.

GAO, in a study of successful financial management organizations in both the public and private sectors, reported, "Senior executives at leading organizations recognize that the financial information demanded by decision-makers to measure and manage performance requires greater precision and more timely access than that required to receive an unqualified opinion on the entity's financial statements ... leading finance organizations establish accountability goals that extend well beyond receiving an unqualified audit opinion." (AIMD-99-45).

Indeed, a good financial management system will give managers much more than just cost data and do more than fulfill year-end reporting requirements. It will give them information that provides a window on their organization's performance on an ongoing basis-How many airplanes landed safely last month? How many of the elderly received flu shots this season? How many employees will it take to accomplish a particular outcome, and how much will that cost?

"This isn't about keeping books," agrees Frank DerVille, a senior consultant at American Management Systems, Inc., and former deputy CFO at Veterans Affairs. "It is about giving managers good, reliable and timely data." And even where some agencies aren't yet able to get a clean opinion, they still have been making progress, he says.

The Health Care Financing Administration's progress in reducing the number of improper payments is a good example of the increasing reliability of financial information. While auditing HCFA financial statements for 1996, 1997 and 1998, the Health and Human Services Department inspector general analyzed the extent and causes of improper Medicare payments. As a result, in 1998 HCFA estimated improper payments were $12.6 billion, down from $20.3 billion in 1997 and $23.2 billion in 1996, according to the CFO Council's 1999 Federal Financial Management Status Report. While HCFA can hardly claim victory with $12.6 billion in improper payments, it certainly can claim progress.

The Treasury Department made dramatic progress in clearing up misstatements in governmentwide financial statements. If transactions between agencies are not properly eliminated from the statements, then assets, revenues, liabilities and expenses will be misstated by the amount of those transactions. Treasury eliminated a significant proportion of intra-governmental transactions between 1997 and 1998 and expects to report further success when the 1999 audits are complete. In 1997, Treasury could not properly reconcile interest-receivable and interest-payable transactions worth $3.2 billion; in 1998 the amount that couldn't be reconciled fell to $855 million. Other categories of intra-governmental transactions were improved even further, according to Treasury Fiscal Assistant Secretary Donald Hammond.

"We are working hard to resolve these problems," Hammond told the House Government Reform Committee last March. In addition to eliminating intra-government transactions, Treasury also is working to make data reported by agencies to Treasury consistent with agencies' own statements and internal reporting.

Positive Steps

As part of its ongoing effort to help agencies get a better grip on their financial management needs, the CFO Council published a five-year plan that establishes six priorities and provides step-by-step guidance for achieving them. The priorities, in order, are:

1. Improve financial accountability.

2. Improve financial management systems.

3. Develop human resources.

4. Improve management of receivables.

5. Use electronic commerce to improve financial management.

6. Improve administration of federal grant programs.

No matter how much guidance the council provides, however, the priorities won't be easy to achieve. A key challenge is finding the right technology to support financial management needs. While agencies are turning to commercial systems to solve their problems, "there is not a (commercial) payroll system out there that meets the federal government's needs," says one council member. At the same time, few agencies have the money or the expertise to build their own systems.

The Army Corps of Engineers is one exception. Financial management is critical to the agency, whose 41 district offices and five research and development labs operate like small businesses, performing the bulk of their work on a reimbursable basis. Stephen Coakley, director of resource management at the Corps, attributes the success of the Corps' financial management system, which is integrated with its payroll system, to the fact that the Corps built it and maintains it.

In the early 1990s, when the Corps began development of the Corps of Engineers Financial Management System, or CEFMS, there were no commercial systems that satisfied the Corps' needs, says Coakley. "The Corps undertook to develop this on its own." While most agencies are moving away from proprietary systems, usually after sinking millions of dollars into them, CEFMS has been a success. The $76 million system, which was fully fielded in 1998, provides essential cost accounting capability and gives project managers a level of visibility into their operations that is rare in government.

"We can provide management with real-time, or near-real-time, data," Coakley says. Also, because data is entered only once and then shared across the system, accuracy is very high. This single-data-entry feature eliminates a problem many agencies have when data is entered into the system at numerous points, increasing the chances for error.

'Everybody Is a Customer'

As with most management problems, fixing fouled-up finances means hiring, training, motivating and retaining the right people. Veterans Affairs CFO Edward Powell says bureaucracies are like elephants: "You have to kick them a number of times before they get annoyed enough to move."

VA's financial management bureaucracy is no different, he says. "We have a very serious data quality problem," he says. Turning around the agency's data problems will require more than new technology systems. It will mean changing VA's culture. Employees naturally resist changes to their organizations and business processes, but without such changes, reform is unlikely, Powell says.

Employee education and training will be key to such changes. The CFO Council has begun several initiatives to help agencies improve the human resources side of financial management. Last year, the council published training guidelines for financial management personnel and it now is working to implement job qualification and classification standards through a pilot program. The council also is developing recruitment and retention and professional education initiatives.

Agencies need to raise the qualifying bar for jobs in financial management, says Kenneth Bresnahan, deputy CFO at the Labor Department and proponent of the council's efforts to improve employee training. They also need to have recruiting strategies and establish professional development training plans, which in turn will help retain good employees, he says.

But many agencies lack the requisite in-house financial management expertise to improve performance. Recognizing this weakness, National Park Service officials in 1997 launched a business planning initiative, now in the pilot stage at 12 parks. The effort uses private funds to pay graduate business students to spend summers at parks developing business plans. The goal of the pilot is to develop a central database of each park's financial activity, which will allow both managers at individual parks and headquarters officials to make more informed business decisions.

Even at agencies that have invested a great deal of time and money in improving their financial management systems, the pressure on financial managers won't let up anytime soon. Staff reductions, increased expectations stemming from the Results Act and other legislation, and budgetary pressures all will force agencies to become better stewards of their resources.

At the Coast Guard, where managers have mastered the art of doing more with less, strong financial management systems and procedures have been key to much of the agency's success. Necessity has been the mother of invention, says Coast Guard CFO Campbell: "Everybody is a customer of the financial system-everything ends in a financial transaction. We're like utility systems under the streets. If we're doing our jobs properly, you never notice us. If not, your toilet backs up."

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