Making Change

irst, the good news: This year, 19 of the 24 federal agencies required to file year-end financial statements with the Treasury Department did so on time, and more than half received unqualified opinions from auditors. Now the bad news: Many agencies managed to pull it off only through extraordinary effort. Few agencies, including most of those that have garnered unqualified opinions (meaning auditors made no qualifications when issuing the agency's fiscal bill of health), are able to reliably produce on an ongoing basis the financial data necessary for making sound management decisions.

"Some agencies have only been able to obtain unqualified audit opinions through heroic efforts, which include using consultants, statistical sampling and other ad hoc procedures to derive numbers as of a single point in time-the end of the fiscal year," David Walker, comptroller general of the United States, told the House Government Reform Committee in March. "These efforts are often completed months after the end of the fiscal year. The fundamental problem is that their financial systems cannot routinely provide this information."

But the fact that most agencies can even issue reports at all is remarkable, says Joshua Gotbaum, comptroller for the Office of Federal Financial Management at the Office of Management and Budget. "Ten years ago most agencies didn't even produce financial statements. There weren't the accounting systems that could do it. There weren't the accounting standards. Now we have standards, we have [chief financial officers] and agencies have been producing reports for four years now. We think there has been extraordinary progress."

Beginning with passage of the 1990 Chief Financial Officers Act, Congress launched a long-overdue series of reforms aimed at improving management of federal programs. The CFO Act was the most far-reaching financial management legislation in 40 years. It established a financial management leadership structure for agencies, required them to produce audited financial statements and strengthened accountability reporting. The law was expanded in 1994 through the Government Management Reform Act, which required the 24 agencies responsible for 99 percent of federal spending to prepare annual financial statements. That requirement was further strengthened in 1996 with passage of the Federal Financial Management Improvement Act, which required inspectors general to report on whether their agencies' financial systems comply with federal requirements, federal accounting standards and the Standard General Ledger.

Decade of Reform

Despite the tremendous hurdles agencies continue to face-inadequate finance and accounting systems being chief among them-progress over the last 10 years has been enormous. Among the accomplishments agencies can claim:

• Most agencies have significantly improved the accuracy and timeliness of financial reporting. The best example of this is arguably the Social Security Administration, which, for two years running, has managed to issue annual reports in November-four months before the March 1 statutory deadline-and has received clean audits to boot.
• Agencies are modernizing business operations to save money and become more efficient. The Department of Veterans Affairs, for example, saved millions of dollars after implementing an electronic vendor payment system. The improved efficiency under the new system resulted in decreased interest payments and increased rebates.
• Hundreds of finance and accounting systems have been consolidated across government, improving service and productivity, cutting costs and reducing redundancy. The Defense Department has made the most dramatic improvements. Since 1991, DoD has eliminated 26 civilian payroll systems. The department still maintains 98 separate finance and accounting systems, but that's a marked improvement over the 348 systems the agency had in 1991.
• When the CFO Act was passed, there was no set of official governmentwide accounting standards. Since then, the Federal Accounting Standards Advisory Board has issued a complete set of accounting standards and concepts, which were validated by the American Institute of Certified Public Accountants last October. The organization's recognition of the FASAB standards as generally accepted accounting principles signaled a turning point in federal financial management.

Much of the credit for progress in financial management goes to agencies' chief financial officers and their finance and accounting staffs-the "thousands of people across government working very hard to improve financial management," says Gotbaum.

Exercising Influence

In the private sector, CFOs are typically responsible for all major staff functions-planning, information technology investment, human resources, procurement and budgeting. As such, corporate CFOs tend to be among their organization's top power brokers and their fortunes rise and fall with their companies. While they are held accountable for corporate performance, they also have the tools and the authority to affect that performance.

Life is very different for federal CFOs. "In the private sector, about 50 percent of the time a CFO might reasonably aspire to become the [chief executive officer]," says Bert Edwards, CFO at the State Department. "In the federal government, your chances of that happening are 0 percent. The CFO shop is a production shop no matter where you go."

While some federal CFOs exercise broad authority across their agencies and are among their agencies' power elite, many CFOs play more circumscribed roles, due to organizational limitations placed on their authority within the agency, or due to what one CFO politely describes as "a lack of interest in management" on the part of the department secretary. In terms of organizational structure, for instance, CFOs at the departments of Agriculture, Education and Labor and at the Agency for International Development do not have budget formulation and execution authority; similarly, the CFO at the National Science Foundation does not have direct authority for financial computer systems.

But several CFOs say their effectiveness as stewards of their agencies' resources has less to do with their portfolio or their place on the organization chart than with the personal relationships they cultivate with other senior managers. Kenneth Bresnahan, CFO at the Labor Department, acknowledges that "no CFO directly controls all the operations that affect financial management." The critical factor in improving financial management at Labor is the support for management reform provided by Labor Secretary Alexis Herman, Bresnahan says.

Edwards agrees. "Whether you meet regularly with the Secretary or not depends partly on whether or not the Secretary is interested in business affairs," he says. Edwards gives Secretary of State Madeleine Albright credit for taking State's financial needs seriously. "My Secretary went over to the White House on Christmas Eve to raise hell over funding issues. Support doesn't get any stronger than that."

Without support from agency chief executives, even CFOs who technically have authority over budget and financial systems say they cannot function effectively. One CFO says the fact that he lacks such support means that submitting year-end financial statements "is a bit like signing your tax return without knowing where the data came from. I'm responsible for this information, but I don't have the authority to properly manage it."

Interviews with senior financial managers across government showed considerable latitude in the level of influence CFOs exert in their agencies. John Callahan, CFO at the Department of Health and Human Services, says he typically talks to HHS Secretary Donna Shalala several times throughout the day about a range of management issues. It helps that Callahan's position at HHS, in addition to being CFO, is assistant secretary for management and budget-a position just below the agency deputy director on the organization chart. Callahan also serves as the agency's chief information officer, ensuring he has oversight of critical assets that affect financial management.

"The CFO should have a very close relationship with the deputy secretary," Callahan says. "In the private sector, the CFO operates very closely with the chief operating officer. In many federal agencies, the deputy secretary position is analogous to the [chief operating officer] in the private sector," he says. Not all CFOs have as much influence on agency management as Callahan, though. One CFO at a major department hasn't met with the department secretary in more than a year and describes the relationship as "very tense." Another CFO describes his role as one of "reporting" as opposed to "managing."

Callahan is working with other CFOs through the CFO Council-an organization of federal CFOs and their deputies that works to address financial management issues-to recommend legislative changes that would improve the effectiveness of CFOs. "We're talking to all of our members," Callahan says, adding it's too early to say what changes the group might recommend.

Sallyanne Harper, former CFO at the Environmental Protection Agency, strongly believes CFOs should have control over agency purse strings. "CFOs need to have both budget formulation and budget execution under them. Period." Such authority would ensure that CFOs are taken seriously during internal management debates, says Harper, who is now the chief mission support officer at the General Accounting Office.

Edward Powell, CFO at the Veterans Affairs Department, would like to see agency CFOs elevated to the level of undersecretary-most, including Powell, are serving at the assistant secretary level, two or three management rungs below the department head, depending on how the agency is structured. "In this town, where you rank is a very big deal," says Powell. "If you're an undersecretary, the program people can't ignore you." While Powell says he has good relations with other managers at VA, as an undersecretary he would be able to exercise more influence over agency performance plans.

"If you were really serious about financial management-driven government, then this is something that would be done," Powell says. Elevating the status of CFOs "would make financial management that much more visible and send a message that you are serious."

Critical Technology

The CFO's ability to influence technology investment decisions is also critical. At some agencies, the function of chief information officer, or CIO, is part of the CFO's portfolio. At other agencies, CFOs and CIOs occupy the same rung on the bureaucratic ladder and exercise equal power. But wherever CFOs and CIOs sit in relation to one another, it is crucial that they develop strong partnerships, says Powell.

At the Veterans Affairs Department, the CIO position was subordinate to the CFO until Secretary of Veterans Affairs Togo West decided to elevate the CIO to give information technology issues more visibility within the agency. According to Powell, the move initially hampered coordination of the agency's implementation of a new financial management system.

To improve coordination between the finance and information technology operations, senior managers at VA established a management information board to oversee major IT projects. The board, which was to hold its first meeting in April, is co-chaired by the CIO and CFO. It has four objectives, Powell says: "First, we want to make sure we don't have rogue projects out there-either people doing things they shouldn't be doing or burying problems on projects that need attention. Second, we want to make sure we have seamless integration. Third, we want to make sure communications issues are being addressed-we don't want a local manager installing an e-mail system that can't communicate throughout the agency, for example. And lastly, we want to make sure things are delivered as advertised, on time and on budget."

The impetus for establishing the board was to manage the core financial reporting system VA is implementing to replace 48 existing finance and accounting systems. The board is designed to keep VA's senior leaders focused on the project. "You have got to have senior executives' commitment to make this go. We're trying to bring discipline to the overall management of these things," Powell says.

Close coordination between financial management and information technology staffs is essential if agencies are to make further progress in financial systems. Of the 24 agencies covered by the CFO Act, only two, the Nuclear Regulatory Commission and the National Science Foundation, have systems in full compliance with the standards established by the Federal Financial Management Improvement Act. Because agencies across government have run into problems with information technology projects that did not meet agency needs, including financial management requirements, Congress in 1996 passed the Clinger-Cohen Act, which required agencies to use investment and capital-planning processes to manage their technology portfolios.

"Agency financial systems overall are in poor condition and cannot provide reliable financial information for managing day-to-day government operations and holding managers accountable," Walker told members of Congress in March. "Over the longer term, improving financial systems will involve harnessing technology and applying the information technology management framework outlined in the Clinger-Cohen Act. A crucial aspect of this will be to strengthen internal controls, particularly computer controls.

"Continuing serious and widespread computer security weaknesses are placing enormous amounts of federal assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption," Walker said.

Long-Term Hurdles

For three years now, the Treasury Department has produced a consolidated governmentwide financial statement. While that achievement is in itself a measure of progress, each year GAO has found it impossible to audit the statement, due largely to shortcomings in agency financial systems, problems with recordkeeping and reporting, incomplete documentation and weak internal controls-especially computer controls. While GAO has acknowledged agencies' continuing progress in improving financial management and complying with the reporting laws passed over the last 10 years, auditors report that serious problems continue to hamper fiscal accountability.

Among the most difficult problems facing financial managers is accounting for property and equipment. GAO found that a majority of the $472 billion worth of the reported assets on the governmentwide financial statement was not adequately supported by financial or logistical records. Such assets include buildings, equipment and military supplies, such as ammunition. What's more, the government cannot ensure that all assets are even reported. For example, no Defense Department contractor-held property was reported.

The Pentagon is unlikely to have adequate financial systems in place for at least several more years, says Defense Comptroller William Lynn. "The department has always had accountability," he says. "What's changed over the last 10 years is how Congress wants us to account [for spending and asset management]. We've tried to lay the foundation in this administration that will allow the next administration to get a clean audit at DoD."

None of the military services have yet produced auditable financial statements. In 1991, DoD created the Defense Finance and Accounting Service to consolidate hundreds of incompatible systems. By consolidating more than 330 financial management field sites into five regional centers and 20 operating locations, the department has standardized operations and eliminated redundancy, saving about $1 billion in operating costs alone.

While few observers would dispute the progress the Defense Department has made in financial management, glitches still occur on a fairly regular basis. In March, for example, thousands of Navy reservists failed to receive their paychecks thanks to a computer glitch in the Navy Standard Integrated Pay and Personnel System installed the month before.

Even when an agency succeeds in getting a clean year-end audit, much more remains to be done. While the Department of Health and Human Services received its first clean audit for its 1999 financial statement, "We feel this is really just the beginning," Callahan says. He rattles off a list of future financial management priorities: computer security, properly accounting for receivables, improving debt collection. "There's a lot to do," he says.

Dale Geiger, a cost-management consultant who has a decade of experience working with federal agencies, says some financial managers have become so focused on the statutory requirements for external reporting that meeting those mandates has become an end in itself. While few would disagree that agencies need to have the systems in place to be able to produce accurate year-end financial reports, simply being able to do so hardly qualifies as sound financial management, Geiger says. An unintended side effect of the CFO Act may be that financial reporting has been accomplished at the cost of financial management, Geiger says.

GAO's Harper agrees that the financial management community has focused on meeting the new reporting requirements, but she believes it is important for agencies to establish those fundamental reporting mechanisms before they can effectively address larger financial management goals. At the same time, if financial managers are to have any credibility with agency program managers, they must be able to render finance and accounting data useful to those managers. "Program managers are in the main becoming frustrated with financial reporting that doesn't give them the data they need," and increasingly, they need better data to accomplish their missions on smaller budgets, she says.

The relationship between an agency's operations managers and finance managers should be mutually beneficial, she says. "CFOs have got to make the case to program managers about what's in it for them" to improve financial management.

It's a case Geiger makes in his new book, Winning the Cost War-Applying Battlefield Management Doctrine to Management of Government (iUniverse.com). Program managers-not accountants and financial managers-are the ones pushing for better cost accounting methods, he says.

"As budgets are getting tighter, [program managers] can no longer afford the old ways of doing business. They are the folks really pushing for financial management."