Money Pit
f you want to see the human consequences of poor federal financial management, visit an Indian reservation. With a few notable exceptions, almost any reservation will do. What you'll find are the poorest people in America. A legacy of oppression and misguided federal policies has left American Indians and Alaska Natives with the highest disease and mortality rates, the highest rates of unemployment and alcohol addiction and the poorest education levels in the country.
What does this have to do with federal financial management? Quite a lot, actually. Because of serious accounting problems at several agencies, hundreds of thousands of Indians likely are owed hundreds of millions of dollars earned from leases of Indian land held in trust by the federal government, according to federal officials. Lawyers for Indians put the figure at tens of billions of dollars, and have filed a class action lawsuit against the government seeking reform of the trust system and an accurate accounting of the money owed. Whether the total owed is hundreds of millions or tens of billions, such a cash infusion could go a long way toward alleviating the chronic pain Indians have experienced for generations. While financial management might seem an esoteric discipline, mismanagement of finances has real consequences in the lives of citizens and federal officials. U.S. District Judge Royce C. Lamberth was so disgusted by the failure of federal officials to turn over documents on how they have handled Indian trust monies that in February 2000 he held the Secretaries of Interior and Treasury, along with the assistant secretary of Interior for Indian Affairs, in contempt of court. "I have never seen more egregious conduct by the federal government," Lamberth wrote.
Indians aren't the only citizens affected by the government's disordered finance and accounting practices. Federal agencies are involved in virtually every aspect of Americans' lives: delivering the mail, educating children, exploring space, and ensuring the safety of the water Americans drink, the air they breathe, the food they eat, the drugs they take and the planes they fly in. The government invests in defense technologies, manages public land and predicts the weather-all of which affect the economic and physical well-being of Americans. How well or how poorly Americans are served by these functions has a great deal to do with how well agencies manage their money.
Too often, agencies do a poor job accounting for the resources they manage. In recent years, the General Accounting Office has issued hundreds of reports cataloging billions of dollars in wasted resources resulting from federal agencies' outdated computer systems, failed accounting practices, poorly maintained records and what has historically been a lax approach to financial management. While a handful of agencies are complying with laws governing accounting practices and reporting requirements, most are not. Many government employees struggle valiantly to render order from the decades-old chaos in agency finance offices, but theirs is a complex, arduous and largely thankless task.
The agencies reviewed in this year's Federal Performance Project illustrate the tremendous range of problems financial stewardship poses for most agencies. The Bureau of Indian Affairs, while managing its operating budget fairly well, has so badly bungled the job of managing the leases of Indian lands that in 1994, Congress appointed a special trustee at the Interior Department, independent of the bureau, to take over managing the trust funds. The Forest Service in recent years has become a poster child for poor financial management, with the GAO regularly taking the agency to task for its failure to reliably report on assets worth billions of dollars. Even agencies that earn a clean bill of health from independent auditors aren't as well-managed as they might be. Despite receiving unqualified audits for six years running, NASA has tremendous problems maintaining outdated finance systems and officials must reconcile accounts manually. The Administration for Children and Families, despite receiving its first clean audit last year, still doesn't have a fully functional process for producing financial statements in a timely, efficient manner, according to auditors.
A Decade of Reform
The fact that agencies are even aware of their shortcomings in financial management is progress. Until the 1990 Chief Financial Officers Act became law, legislators and agency executives paid relatively little attention to the minutiae of federal finance and accounting. Financial management consisted of something akin to checkbook accounting: Agencies basically kept track of appropriations and expenditures to avoid overspending. Most finance and accounting systems were not designed to capture the costs of operations and there were few standardized requirements.
All that changed with the CFO Act, which required the 24 agencies responsible for almost all federal spending to reorganize their financial management staffs and establish chief financial officers to oversee major reforms. The CFO Act was bolstered by the 1994 Government Management Reform Act (GMRA), which required agencies to produce annual financial statements to be validated by independent auditors. GMRA also required agencies to provide accurate cost and performance information and to integrate budget, accounting and program data. In 1996, Congress passed the Federal Financial Management Improvement Act (FFMIA), requiring agency inspectors general to report annually on whether financial systems meet federal requirements, federal accounting standards and the Standard General Ledger.
Now that the message is clear-Congress expects agencies to meet the sort of financial management criteria private companies are required to meet-results are improving. This year, all 24 agencies covered by the CFO Act met the March 1 deadline for turning in audited fiscal 2000 financial statements. Eighteen of the agencies received clean, or unqualified, audit opinions from agency inspectors general and independent auditors, up from 15 last year.
While this year's news was positive, it doesn't mean agencies are able to produce accurate financial data on a timely, recurring basis. In fact, to earn a clean audit opinion, finance and accounting personnel at many agencies are forced to work overtime, sometimes with contractor support, to pull data from disparate computer systems and to reconcile accounts manually-hardly the reliable, routine process envisioned in the recent legislation, and certainly not a process that provides managers with real-time, accurate financial data. Stephen Varholy, chief of the financial management division at NASA, says his agency's clean opinions six years in a row have only been possible because of "heroic" work on the part of finance and accounting personnel who must reconcile data manually. "It's only through their efforts that we can actually pull the financial statements together and pass the audit."
The agency runs nine separate finance and accounting systems, which are older than most of the employees who operate them. "There is no similarity between the systems at all," he says. The nine systems feed data to two computer systems at headquarters, a general ledger system and one that tracks finance and contractual data. "That's the only way we can do our reporting internally and externally. And [there is] a tremendous amount of handwork that has to be done," Varholy says. "We have people sitting there with Excel spreadsheets. Every month, our centers are required to reconcile their property data in the accounting system with the property data that the property officer has, because there is no single system. Just think of it as nine times simultaneously reconciling your checkbook."
NASA, like many agencies, is in the process of implementing a new financial management system to replace its legacy systems. "To be very honest, if we don't get the new system in place our luck's going to run out on us," Varholy adds. "What will happen is one of the systems will fail."
Major Hurdles
In its assessment of agencies' compliance with FFMIA, the General Accounting Office reported last September that 21 agencies did not meet the law's requirements, mainly because their computer systems for collecting and reporting financial data were not integrated, reconciliation procedures were not adequate, information systems security was weak, accounting standards were inadequate and agencies weren't in compliance with the Standard General Ledger. "The vast majority of agencies' financial management systems fall short of the CFO Act and FFMIA goal to provide reliable, useful and timely information on an ongoing basis for day-to-day management and decision-making," GAO reported (AIMD-00-307). In addition, the time-consuming, ad hoc programming and reconciling that finance staff must do to meet auditing requirements prevent them from doing the sort of financial analysis and planning that could directly support strategic decision-making, and ultimately improve overall business performance, GAO noted.
Agencies' financial management failures aren't for lack of effort and investment. In its 2000 Federal Financial Management Report, the Office of Management and Budget estimated that federal agencies spent about $7.6 billion improving finance and accounting systems last year. Despite the huge investment in new systems, most agencies still are working through various stages of installing new hardware and software and implementing new finance and accounting procedures. Add to all this change the lack of appropriately skilled personnel in some areas and it's easy to understand why true financial accountability eludes many agencies.
The OMB report identified significant challenges to improving federal financial reporting in the following areas: ‰ Property, plant and equipment, and inventories: Agencies, particularly the Defense Department, don't have adequate systems and controls to ensure the accuracy of information about assets, lack supporting financial documentation, and cannot be sure all assets are even reported.
‰ Loans receivable and loan guarantee liabilities: Agencies, particularly the Agriculture Department, are unable to properly estimate the cost of some federal lending programs.
‰ Cash disbursement activity: Several major agencies are not reconciling cash disbursements.
‰ Cost of government operations: Agencies cannot support significant portions of the total net cost of operations due to deficiencies in reporting assets and liabilities and ineffective disbursement reconciliation.
‰ Preparation of governmentwide financial statements: The government does not have sufficient systems, controls or procedures to properly prepare consolidated financial statements. The government cannot reconcile some financial transactions between agen- cies; cannot ensure information in the financial statements is properly and consistently compiled; and does not yet have a process to obtain information to effectively reconcile operation results with budget results.
Changing a Culture
Bringing financial management systems into compliance with FFMIA is a formidable challenge for many agencies. It's a challenge that has landed the Forest Service on GAO's list of agencies at high risk for waste, fraud, abuse and mismanagement. In dozens of reports over the last 10 years, GAO has taken the agency to task for weak management and reporting systems, poor inventory records and its overall inability to account for billions of dollars worth of assets. "I think part of the problem is the way money is allocated versus the way money is being used," says Barry Hill, director of GAO's natural resources and environment division. The Forest Service's budget classification system is not consistent with the agency's field operations, which often are difficult to categorize. "When you go into the forest and do some forest-health work, maybe thinning and removing dead wood off the ground, you could be doing other things at the same time. The money might be allocated for thinning, when in fact you're not only thinning, but you're doing some disease control or some other things. So it's not clean from a budgetary standpoint."
Forest Service Chief Financial Officer Vincette Goerl arrived at the agency in the fall of 1998, just as GAO was deciding to add the Forest Service to the 1999 high-risk list. What she found was an agency with a highly autonomous field structure where each region had its own financial management policies and procedures. The regional offices even defined direct and indirect costs differently. The agency was also in the middle of implementing a new pilot financial management system in two regions and one research center, an effort that was shaping up to be an "unmitigated disaster," Goerl says. "The first thing I focused on was 'What's wrong with the pilot?' We really needed a new financial system and we needed a good one," she says. Goerl was familiar with the software the Forest Service was attempting to use in the pilot test-it was the Federal Financial System, developed by American Management Systems, a Fairfax, Va., firm-because she had worked at other agencies that had successfully used it, including Customs, where she had previously served as CFO. "I was very familiar with this software tool because it has been around for many years and it's implemented in many agencies. I was a little perplexed as to why they were having so much trouble."
She found that the Forest Service had been customizing the software to conform to the complex accounting code structure that existed in its current financial system. "They were really replicating what they already had in the old system, which didn't meet financial standards [established by the CFO Act and FFMIA]. They also didn't have adequate staff who understood how to implement a new system," Goerl says. "Once you understood how they had taken a very complex budget structure and made it even more complex in the accounting system, you could see that they only saw one way to do business and they were just trying to replicate that in the new software."
As a result, Goerl decided to strip out all the customization, reengineer financial management processes and standardize finance and accounting procedures and policies across the agency. In addition, she decided to implement the non-customized AMS system across the agency in the course of the following year. It was an ambitious goal: redesign management practices and install a new system in 12 months.
From Goerl's perspective, the implementation has been a success. "When I came here, I could not pull up information and look across the country easily. In the new financial management system, I can pull it up any day." But the new system and new procedures haven't gone over well in the field. In dozens of interviews across the agency, managers at the forest and research center level said they have no idea how much money they have in their budgets at any given time and they cannot trust the accuracy of the data they do have.
During the first year of implementation, the financial system was down much of the time, making it impossible for field offices to enter data and retrieve information when needed. Also, the new system has yet to be integrated with feeder systems, which provide financial data on purchasing, travel, timber sales and inventory management, among other things. Consequently, field offices use off-the-shelf finance software to keep track of their operations in what are known as "cuff records."
"If we didn't keep cuff records, I'd have no idea where we stand budget-wise. The level of frustration with this is intense," says one forest supervisor, echoing the sentiments of others interviewed for this story.
Goerl is aware of the concerns, but says the agency is making headway in financial accountability. "The data [that] people believed was accurate [in the past] was in fact, not accurate," she says. She is confident that field managers will come around once they learn to use the new system more effectively. Edna Decker, director of the financial management system, agrees. "I'm not going to sit here and say the system hasn't had its share of problems. It has," she says. "One of the biggest things has been the interface with our purchase card system and not getting that up and running right. That's been a constant cry in the field-not being able to enter those transactions into the accounting system for probably the first six months [of the implementation]." But Decker also believes officials in the field will see the benefits of the new system, particularly as more staff are trained on how to use it most efficiently, as more reports are developed to produce the records field personnel need and as the feeder systems are integrated into the main finance system.
GAO's Hill credits the Forest Service with making significant strides in straightening out financial management over the last year. "One of the concerns we still have is there's this lack of linkage between their strategic goals and objectives and their budget allocation process," he says. "The budget is basically not linked to their programmatic objectives. In fairness, it's a difficult thing to do and they're working on it, but they're not there yet. The employees out in the field are still feeling this disconnect and it's difficult for them to operate."
Overcoming the Past
If most agencies are finding financial management difficult, the Interior Department has found it nearly impossible when it comes to Indian trust fund management. For more than 120 years, Interior agencies -primarily the Bureau of Indian Affairs-have been mismanaging the income from lands held in trust for individual Indians. The trust lands date to the 1887 Dawes Act, which allotted some 11 million acres of tribal reservation land to individual Indians in an effort to more quickly assimilate Indians into mainstream American life and break up tribal lands for development by non-Indians. The 1937 Indian Reorganization Act ended the allotments, but extended indefinitely the government's responsibility for managing what are called the Individual Indian Money trust accounts. But "management" of the lands has been loose at best. Poor record-keeping, incompetent oversight and outright fraud over the last century all have contributed to what has become possibly an impossible task-reconciling trust records with Indian landowners.
After attempts to reform the trust system in the 1980s failed, Congress in 1994 passed the American Indian Trust Fund Reform Act (P.L. 103-412), which created a special trustee at the Interior Department to oversee trust reform. BIA's Office of Trust Funds Management subsequently was transferred to the special trustee's office. But progress has been slow. In 1996, banker Elouise Cobell, a member of the Blackfeet Tribe in Billings, Mont., filed a class action suit against the government on behalf of Indians whose lands are administered by the trust system. In many cases the lands are leased for oil and gas production, mineral mining, timber harvesting, grazing and other uses. Yet the agencies responsible for tracking the income and paying royalties in many cases can't account for the most basic information: which Indians own land, which parcels they own and how much income the land generates. While the Treasury Department issues checks to thousands of Indians a year in amounts ranging from a few cents to thousands of dollars, hundreds of the checks are returned because the payee cannot be located. And when Indians request information on what leases their land supports, or even what land they actually own, there are few records to document and support those transactions. Even the number of Indians owed money is in dispute-Interior Department officials say it's about 300,000; Cobell believes the number is closer to 500,000.
What's clear is that more than a century of financial mismanagement will be hard, if not impossible, to undo. Judge Lamberth, in a 126-page opinion issued in December 1999, wrote, "It would be difficult to find a more historically mismanaged federal program." Kevin Gover, the assistant secretary for Indian affairs at the Interior Department during the Clinton administration and one of three public officials held in contempt of court by Lamberth, says federal officials should be held accountable for the operations of their agencies. Before leaving office in January, Gover said, "I really don't complain about being the one holding the bag. That's the job. And the guy that comes after me is going to be holding the bag on the things I can't resolve, and maybe even on things I screwed up." Gover acknowledged that reforming the trust system and reconciling accounts will take many years and focused political and managerial attention.
"The lawsuit helped to create the momentum that was required for us to get the resources we needed to fix the problem," Gover says. While the Interior Department's trust management problems are perhaps one of the most complex financial management challenges in government today, other federal executives would do well to take a lesson from Interior's experience: Don't put off reforms until someone files a lawsuit.