Financial Management

The inability of many federal agencies to accurately record and report financial management data on both a year-end and interim basis for decision-making purposes has been a serious, long-standing weakness. To help improve federal accounting practices and strengthen the government's ability to routinely provide reliable financial management information, Congress passed legislation--the Federal Financial Management Improvement Act of 1996--requiring auditors of 24 major agencies to report on whether financial management systems comply substantially with three requirements: federal financial management systems requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level. Agencies not in substantial compliance must prepare remediation plans to bring their systems into substantial compliance, generally within three years. This report provides information on (1) compliance with the act's requirements, including whether the agencies' financial statements have been prepared in accordance with applicable accounting standards, and (2) the adequacy of applicable accounting standards for the federal government.

GAO noted that: (1) in their fiscal year (FY) 1997 audit reports, auditors for 19 of the 23 CFO agencies reported that the agencies' financial systems did not comply substantially with FFMIA's requirements, primarily due to noncompliance with systems requirements; (2) auditors reported that the financial systems of 9 of those 19 agencies were noncompliant with all three FFMIA requirements; (3) the serious problems described in the auditors' reports limit the reliability, usefulness, and timeliness of financial information needed to effectively manage government operations; (4) the first-ever audit of the governmentwide consolidated financial statements indicates that many agencies are not yet meeting applicable accounting standards; (5) it was unable to render an opinion on the FY 1997 consolidated financial statements for the government due to significant financial systems weaknesses, problems with fundamental recordkeeping, incomplete documentation, and weak internal controls, including computer controls; (6) agencies generally recognize the extent and severity of their financial management deficiencies, and there are several efforts under way to address these problems across government; (7) the Federal Accounting Standards Advisory Board (FASAB) has sucessfully developed a set of accounting standards; (8) FASAB is also considering additional accounting matters relevant to financial statements for the federal government, including liabilities associated with social insurance entitlement programs; (9) agencies' efforts to improve financial management are challenged by implementing new accounting standards and updating financial management systems; (10) several agencies have expressed concerns regarding their ability to effectively implement the accounting requirements, which became effective in FY 1998; (11) in addition, as the CFO agencies move toward a more effective system of financial management, a significant challenge is the poor status of financial management systems, which were not designed to meet current accounting standards and systems requirements; (12) agencies' progress in implementing new accounting standards and improving reported financial management weaknesses will be affected by competing demands associated with year 2000 computer conversion issues; and (13) agencies are necessarily making year 2000 compliance a priority, and longer-term efforts to address financial management systems are expected to be delayed.