Balancing the Books

Across government, agencies' financial health is being measured against the pass/fail standard of year-end audits of financial statements. While the audits are important, they are not necessarily a good indication of an agency's ability to manage its finances. Some agencies that earn consistently clean opinions do so only by taking extraordinary measures-in some cases by hiring contractors and working overtime to reconcile accounts manually because automated systems cannot handle the workload. Some agencies that have never received a clean audit, such as the Defense Department, have, in fact, made remarkable improvements in the way they manage money. Transportation's downgraded audit status was particularly ironic, because the agency had made substantial progress in improving its financial management systems over the past year. In fact, it was the predictable hurdles encountered in the department's implementation of a new computer system to track property management-a system needed to meet stricter financial management criteria-that largely accounted for the lower rating this year.

Transportation isn't the first agency to lose its clean audit status, and it isn't likely to be the last. As agencies change their finance and accounting processes to meet higher standards and upgrade and integrate the various computer systems that track financial data, there are inevitable glitches and setbacks. While those setbacks can indicate an agency is heading down the wrong road, even the right road to improved financial management is often filled with detours.

Since passage of the 1990 Chief Financial Officers Act and subsequent laws designed to force agencies to operate more like commercial businesses, agencies have been under increasing pressure from Congress to meet higher standards of accountability and to tie spending to agency performance. Before 1990, virtually all agencies were reliant on legacy systems designed to track appropriations and keep managers apprised of spending. The systems were not set up to keep anybody apprised of how well programs were being managed or the cost of providing goods and services. Consequently, most agencies have invested considerable resources to make wholesale changes in they way they collect, report and use financial data. The Office of Management and Budget, in its most recent Federal Financial Management Report, estimates that federal agencies spent about $7.6 billion improving finance and accounting systems last year.

Although most agencies still have a long way to go before they can produce timely, reliable financial reports of the sort that are useful to program managers, most are producing and using financial data far more reliably than they were just a few years ago.

'Sticker Shock'

Improved financial data isn't always entirely welcome, though. Just ask Paul Graver, the business manager for the CIA's Directorate of Administration, the organization that supports the agency's operating units in the areas of building maintenance, transportation, telephone service, printing, shipping, payroll accounting and medical services.

Last fall, Graver went to the directorate's printing and photography group to have about 200 copies of a report produced. As he expected, the group did a great job with the report, which was a classified document with large graphics. Several weeks later, the printing operation joined the directorate's working capital fund, which meant that the group would begin charging for services based on the cost of operations. Out of curiosity, Graver asked what it had cost to produce the report he had just received a few weeks earlier for "free," before the new billing arrangements were in place.

"They said it had cost about $125 apiece to do that report," recalls Graver. "So I had just spent about $25,000 without realizing it"-just the sort of behavior the directorate is trying to discourage through the working capital fund, a revolving account that allows participating business units to charge fees to recover the costs of providing goods and services. While the business units cannot make a profit, they can accumulate funds over time to cover recapitalization costs, such as the replacement of buildings or elevators or hardware or anything else associated with those services that wears out and needs to be repaired or replaced.

Since it began charging for services, the printing and photography group has seen a dramatic reduction in demand for its services, says Graver. While the number of employees in the group is classified, Graver says the reduction warranted cutting staff about 60 percent after just a few months of the group's participation in the working capital fund. While other factors have contributed to the drop in demand, such as the increasing ease with which managers can distribute information electronically, the cost of providing the service has been an eye-opener for many.

"Sticker shock is one of the things that contributed to that rapid decline," Graver says. "Managers are now in the position of having good data where they're able to make those opportunity cost trade-offs. They're able to say to themselves 'Do I want to spend $25,000 to make copies of a report or do I want to use that money elsewhere in my mission?' The budget and the organization demand that mission managers try to make the best possible choices."

Congress authorized the CIA's use of a working capital fund in the 1998 Intelligence Authorization Act (PL 105-107), under the urging of Richard Calder, head of the directorate. Calder wanted to improve the efficiency of the directorate's operations as well as change the behavior of CIA managers outside the directorate, who had become used to receiving support operations for free because those services weren't part of their budget allocation.

So far, six "businesses" have moved into the working capital fund: logistics operations, facilities management, transportation services, the agency's telephone company, a software applications group, and the printing and photography group. All of the business units that operate within the fund must first go through a rigorous business planning process, which can take as long as two years to complete. Also, each of the units must be able to accurately track costs with an automated system. The directorate hasn't forced a single system on the units because they vary tremendously in size, complexity and the nature of the services they perform. The automated systems the units use range from large commercial cost accounting systems to Excel spreadsheets and Microsoft Access databases, says Graver. In addition, the business units must be able to integrate their accounting systems with the agency's central financial management system, called the financial management system of record.

"It's not easy," says Graver. "The ability to interface these subsidiary systems to the financial system of record is generally difficult to do. Like many organizations, our financial system is a legacy system. Some of the new software packages we're using in the new businesses don't interface directly with the agency's financial system and we have to work around that in a variety of ways."

Data Validation

The CIA inspector general gave the working capital fund a clean audit opinion this year, a critical boost to the legitimacy of the operating units that participate in the fund. "This only works if the fund has a high degree of financial integrity," says Graver. Without a clean opinion from the IG, "Our customers won't believe our pricing and they will not have confidence that the money they're giving us is being used in the way in which we say it's being used. We will not be able to tell if we're losing money or recovering our costs. All of that depends very heavily on whether or not we've maintained the financial integrity of the fund."

The ability to demonstrate the integrity of financial data, whether for others within the agency or for members of Congress, is essential, no matter where an agency stands in the financial management improvement process-a reality financial managers at the Forest Service have been grappling with for several years now. The Forest Service's increasingly controversial mission, which includes both ecosystems management and timber production, has made it a target of both liberals and conservatives unhappy with agency operations-and its historic inability to correctly account for billions of dollars worth of assets has only contributed to the agency's political vulnerability, a factor agency leaders have been working hard to correct.

After a failed attempt to implement a pilot financial management system in 1997 and 1998, the agency scrapped the project and took the ambitious step of implementing an entirely new, agencywide financial management system, completely revamping its financial procedures in the process. Despite enormous change-and enormous growing pains as managers in the formerly autonomous field offices made radical changes in the way they operate-early indications from the General Accounting Office suggest the agency is beginning to get its finances on track. Edna Decker, director of financial management systems at the Forest Service, says the change has been tremendous-and tremendously difficult. "We had a very aggressive time schedule. Not only did we implement the system, but there were business processes changed along the way. A lot of things changed and it's still taking people a while to catch up to that change. I wouldn't tell you it's been easy."

"The reason for the change, and the rate of change, had to do with accountability-and the understanding that Congress gave us money and we had to be able to tell them what that money bought us," says Decker. The pressure on the Forest Service to improve financial management has been high, say agency leaders. Barry Hill, director of the General Accounting Office's natural resources and environment division, says that while the Forest Service has far to go, it has made significant progress in the last several months. A primary challenge for the agency will be linking its strategic goals and objectives to its budget allocation process.

This year, the Forest Service will begin moving to a new budget formulation system, which will give field offices much more input into the budget process. Instead of basing future budget allocations on historical budget allocations as the agency has done, the field offices will be able to show clearly how their budgets directly affect the mission on the ground. "We've really tried to go for a performance-based system here," says Hank Kashdan, director of program and budget analysis for the Forest Service.

Field offices essentially will construct their own budgets, based on what they need to accomplish, from an unconstrained "bucket of money" allocated to them, Kashdan says. "We've tried this 'bucket of money' approach before, several years ago, and failed miserably. But in the past we didn't have any tie to performance measures and accountability-something we'll have now."

While the verdict still is out on the new budget formulation system, several financial managers at the forest level expressed optimism about it.

A simple-to-use spreadsheet analysis tool will help managers make trade-offs in spending by illustrating how budget fluctuations will affect program outcomes. Kashdan has tried hard to include stakeholders throughout the agency in the planning process. In addition, the Pricewater-houseCoopers consulting firm has played a key role in developing the program, he says. Get Help

Good contractor assistance can be invaluable in improving financial management. David Kleinberg, deputy CFO at Transportation, urges his colleagues in other departments to seek professional help as they upgrade and improve their financial management systems. Speaking at a March conference sponsored by the Joint Financial Management Improvement Program, a cooperative organization of agency CFOs, the Office of Management and Budget and the General Accounting Office, Kleinberg was blunt: "We don't know what we're doing-we only put a new financial management system in every 20 years or so.

Kleinberg recommends agencies find reliable business partners for systems implementation and develop a long-term relationship, then hire an outside analyst to oversee and critique the entire process. The complexity of most agencies-from the hardware and software they use to the way they're organized to the political pressure they experience-ensures that transforming financial management won't be simple. Kleinberg likens Transportation to a holding company, with such disparate agencies as the Coast Guard and the Federal Aviation Administration.

Agencies also need to be prepared to change the way they operate, he says. "If you think you're going to get a system that adapts to your culture, you're wrong. Your culture will have to change."