Fiscal Responsibility

Chief financial officers have their hands full accounting for agency spending.

The challenges facing chief financial officers are as diverse as the agencies they serve. Whether administering grants, collecting fees for services, paying benefits or deploying troops to war, agencies have few private sector equivalents in the complexity of their missions. Instead of answering to boards of directors, they answer to a Congress rife with conflicting priorities. An agency's performance and its annual appropriation sometimes seem unconnected, making it difficult for senior leaders to reward managers for successful programs and hold them accountable for failures.

The Defense Department is a case in point. Its deficiencies represent the largest obstacle to producing reliable, governmentwide financial statements, according to Comptroller General David M. Walker. Sixteen years after the 1990 Chief Financial Officers Act required agencies to produce auditable financial statements, none of the military services can do so; nor can any other major Defense component.

The consequences of Defense's financial management failures are widespread, Walker told members of the Senate Homeland Security and Governmental Affairs Committee in August. Among the problems uncovered by Walker's Government Accountability Office:

• The department overpaid hundreds of troops who were injured in battle and then released from service. Defense pursued the soldiers for repayment, reporting dozens to collection agencies and credit bureaus.
• The Army paid dozens of Army Reserve and National Guard troops classified as deserters. At least seven reservists received a total of $195,000 in improper pay. Eight months after GAO notified the service, one reservist continued to be paid.
• Neither Defense nor Congress knows how much the global war on terrorism is costing or how funds appropriated for the war have been spent, nor do they have historical data that would be useful in determining future funding requirements.
• The Army cannot accurately account for equipment shipped to contractors for repair, limiting the utility of inventory records and the service's knowledge of where equipment is at any given time.

Defense's problems have been decades in the making, and will take years to resolve, Walker said. The scope of the department's operations makes quick fixes impossible. In 2005, for example, Defense recorded $1.3 trillion in assets and $1.9 trillion in liabilities, and reported more than 2.9 million military and civilian employees with a net cost of operations of $635 billion. For the same year, the department received about $525 billion in appropriations, a $110 billion shortfall.

Differences between operating costs and appropriations aren't unusual at Defense, Walker said, and can be attributed to timing differences. "For example, net cost is calculated using an accrual basis of accounting [revenues and expenses are recorded when earned or owed, respectively] whereas appropriations are recorded on a cash basis [revenues and expenses are recorded when cash is received or paid]."

Unusual or not, funding gaps take a toll on the military services and their ability to plan. In July, Pentagon comptroller Tina W. Jonas submitted a request to Congress to reprogram $608 million from Army and Marine Corps procurement and operation and maintenance accounts to cover payroll. While procurement funds were to be restored through supplemental funding, operations and maintenance cuts weren't. Those accounts habitually are hit when the services run short, exacerbating maintenance account shortages. With the services fighting in Iraq and Afghanistan, Army Chief of Staff Gen. Peter Schoomaker repeatedly has warned that such cutbacks can hurt training and readiness.

Nelson M. Ford, who was awaiting Senate confirmation as the Army's new CFO at press time, told lawmakers in September that the Army must find a way to cover more operating expenses in its base budget, which must realistically reflect the costs of running the Army in wartime.

Concern about the size of the base budget prompted the service earlier this year to decline to submit its Program Objective Memorandum, a multiyear planning document, to Defense budget officials until the service and the department and the White House can all agree on what it costs to maintain and operate the Army. It was an unprecedented move and a sign of how concerned Army leaders are about their ability to fund operations while the service undergoes a massive reorganization.

Ford, who served as deputy to outgoing Army CFO Valerie Lynn Baldwin, acknowledged that the Army has serious financial management problems, but said substantial progress in updating data management systems will improve re-source management. "I know what is at stake," Ford said, referring to one of his sons who serves in the 82nd Airborne Division and is preparing for his second tour of duty in Afghanistan.

Beyond Audits

While an army of accountants and managers have struggled in vain for years to bring Defense into compliance with financial reporting requirements, Homeland Security still is mustering its troops. From its creation in 2003 through the consolidation of 22 agencies, DHS has suffered staffing shortages that worsened its financial management problems. The CFO's office, which initially was buried in the management directorate, had a dozen employees, most of them detailed from other agencies, according to David L. Norquist, who became the DHS' second CFO in June. The office now has a staff of 80 and is focused on moving the department beyond its beginnings, when a financial management system was created from scratch.

Nowhere have funding problems been more apparent than in the Immigration and Customs Enforcement bureau, where last year, managers found themselves releasing people found to be in the country illegally because ICE detention facilities were full and it couldn't afford to lease space elsewhere.

In late 2004, Congress passed the DHS Financial Accountability Act, requiring Homeland Security to comply with the Chief Financial Officers Act. The law also called for the department to audit internal controls-something other agencies are not obligated to do-in order to identify the causes of its financial management problems. The department failed to receive a clean audit opinion in 2005, and auditors noted the same 10 material weaknesses in internal controls reported the previous year. They ranged from shortcomings in financial management oversight and reporting at the department level to problematic account balance reporting in the bureaus.

"DHS must have in place a means by which we can test whether our internal controls are well designed and operating effectively. This means that management must move away from reliance on what outside auditors tell us is wrong with DHS, and for management to be in a position to find what is wrong and fix it before it becomes a major problem," Norquist told the House Government Reform Committee in September. "Management cannot assume that controls are working well just because the auditors don't tell us to the contrary."

At the Controls

It's not just the large, complex agencies where financial hurdles loom. Across government, CFO portfolios are dominated by new accounting requirements.

Last year, agencies had only 45 days from the end of the fiscal year to submit Performance and Accountability Reports and audits. "It was really a historic achievement that each of those was submitted [on time]," says Office of Management and Budget Comptroller Linda Combs, who helped establish principles for fiscal accountability governmentwide. "It was taking us, on an average, five months to do that just five years ago. That timing element has made a large impact on our CFOs."

Another big focus for CFOs has been OMB's Circular A-123, a directive re-quiring management to guarantee the accuracy and effectiveness of controls over financial reporting. Modeled on the 2002 Sarbanes-Oxley Act, A-123 stops short of asking for formal audit opinions, but ensures that top brass really will get their hands dirty verifying the procedures and technology that undergird their assessment of agency finances.

In May, six weeks before the end-of-June management assurance deadline, the Education Department's then-acting CFO, Bill McCabe, described the process as "very manually intensive." He said Education held frequent meetings, and Secretary Margaret Spellings regularly was involved, to ensure the agency's 13 key financial processes were appropriately verified and myriad pieces of the system were accounted for.

Kathleen Turco, CFO of the General Services Administration, says her agency took advantage of an option in the circular that allowed agencies to break down the compliance burden into bite-sized targets, with a clear plan for full implementation within three years.

GSA focused this year on documenting financial reporting in about half the agency's 11 regions, and on the lines of business initiatives. "This year, I, as the CFO, and the deputy CFO put a tremendous drive and emphasis on implementing A-123," Turco says. "During fiscal 2007, we're going to step up that process." Next year, she plans to address the other half of the geographical regions and the areas where the agency has problems.

The lessons learned should help in tackling those challenges. Turco says this year's process showed the value of standardized processes for documenting internal controls. The exercise highlighted potential operational and policy changes.

Data Drivers

As hard as it might be for CFOs to clean up financial reporting, getting clean audits is only the beginning. For agencies to win the coveted green status for financial performance on the traffic-light-style President's Management Agenda score card, agencies must show that they are using financial data to inform management decisions on an ongoing and expanding basis. Receiving a clean audit opinion merely merits a yellow on the score card, and that's only if an agency doesn't have any repeat material weaknesses in internal controls. On the June 30 score card, only eight of the 26 graded agencies had reached the top rung.

"The biggest challenge that CFOs face is providing useful, timely information for decision-makers," Combs says. "I think CFOs are called upon more and more right now to identify tough problems that need to be addressed." Noting that agencies have differing degrees of financial maturity, she says senior leaders look to CFOs not only to pinpoint problems, but also to draw on newly available data to find solutions.

The Social Security Administration often is lauded as a paragon of financial management. With a 30-year-old managerial cost accounting system, the agency won kudos from GAO in an April report for routinely using cost information to assist in budgeting and resource allocation and using unit costs and production rates to inform operations management.

CFOs might be more comfortable than anyone in government with the red-yellow-green judgment system imposed by President Bush's management score card, familiar as they are with the pass-fail standards of traditional audit work. But the full integration of financial information promises to bring new challenges and requires greater creativity and flexibility in how CFOs view their role on the agency leadership team.

"Regardless of whether you're in a large top 24 agency that was mentioned in the CFO Act, or you're in a small agency, you still are working basically toward the same goals, and addressing some of the same fundamental challenges," Combs says. "Even in the smallest agency you could find, the CFO there would tell you they are constantly called upon to improve the accuracy and timely information that their agency is called on to provide."

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