Federal financial reporting system is broken, CFOs say

The system federal agencies use to prepare, present and audit financial statements is broken. That's the take-away message from a recent survey of 239 financial management executives across government.

"The current financial reporting model costs too much and delivers little useful information to government decision-makers," accounting firm Grant Thornton LLP and the Association of Government Accountants concluded from the survey. "Many of our survey respondents question the value of much of the work that they must do, especially in meeting compliance mandates."

The report noted, "All signs point toward a bleak fiscal future for the federal government. Massive deficits and the costs of overseas conflicts mean fewer resources for programs and some tough budget decisions. If [CFOs] stay on the present path of financial management, they will be of little use in making those decisions."

While agencies have made significant progress in achieving clean audit opinions on financial statements, few people actually read those statements and even fewer regard the data as useful in making executive-level decisions. As one survey respondent noted: "We are getting As on our tests but not learning anything."

One reason for this is that financial officials are so focused on complying with reporting and auditing requirements under various laws that broader management goals get lost in the process. The survey found that less than 25 percent of a CFO's time and resources was spent on executive functions that support strategic and program decision-making.

"There is a sense in the federal community that CFOs are not relevant because they are consumed with issues that have nothing to do with managing the mission of an entity," one respondent said. "If compliance requirements are about things that are not important to running an entity and they consume a lot of time, then the system is broken."

Since 2000, six separate financial reporting laws have taken effect, along with a number of requirements promulgated by the Office of Management and Budget and the Federal Accounting Standards Advisory Board. Those were in addition to several major laws governing federal financial reporting already on the books. While the net result is most agencies now are getting clean audit opinions and the government is a better steward of taxpayer money, the effect on management is far less clear.

"What a hollow victory it would be if, in the future, more entities succeeded in meeting more and tougher financial compliance requirements, yet added little value to government missions and operations," Grant Thornton and AGA concluded. "It's time to go in a new direction, one in which program offices and nonfinancial executives are the main customers for financial information, not just auditors."

The survey pointed to a number of things CFOs and senior executives can do to improve the relationship between financial reporting and mission performance, such as using more activity-based costing and requiring more integration between financial and acquisition systems.

But not everything needed is within agencies' control. A significant impediment to improving governmentwide financial management is the frequency with which agencies find themselves operating under continuing resolutions, which happens when Congress fails to pass appropriations bills on time. Lawmakers have approved all appropriations bills on time in only four of the past 30 years.

Ninety-five percent of survey respondents said their agency had to operate under a continuing resolution in at least one of the past three fiscal years. As a result, nearly 80 percent of respondents said acquisition and contracting programs were delayed or cut back, 66 percent said financial management initiatives were delayed or cut back, and 60 percent said other significant mission-oriented programs were delayed or cut back.

Said one respondent: "[Continuing resolutions] hurt us the most in the area of program integrity, which is funded last in priority. Program integrity includes risk management, facility maintenance, etc. In [continuing resolutions], people abandon looking at return on investment and do the immediate thing, rather than what will be important in the long term."

The survey entailed 121 in-person interviews and 118 online responses from CFOs, deputy CFOs, other financial executives and some senior managers. To encourage respondents to speak freely, Grant Thornton and AGA did not release the identities of survey participants.