Financial Management
Persistent Financial Management Systems Issues Remain for Many CFO Act Agencies Gao ID: GAO-08-1018 September 30, 2008The ability to produce the financial information needed to efficiently and effectively manage the day-today operations of the federal government and provide accountability to taxpayers continues to be a challenge for many federal agencies. To help address this challenge, the Federal Financial Management Improvement Act of 1996 (FFMIA) requires the 24 Chief Financial Officers (CFO) Act agencies to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) federal accounting standards, and (3) the U.S. Government Standard General Ledger (SGL). FFMIA also requires GAO to report annually on the implementation of the act. This report, primarily based on GAO and inspectors general reports and agencies' performance and accountability reports, discusses (1) the reported status of agencies' systems compliance with FFMIA and overall federal financial management improvement efforts and (2) the remaining challenges to achieving the goals of FFMIA.
For fiscal year 2007, auditors reported 13 of 24 CFO Act agencies' financial management systems were not in substantial compliance with FFMIA requirements. For these 13 agencies, auditors reported a number of problems, as shown below, that illustrate how agency financial management systems-- including processes, procedures, and controls--are not providing reliable, useful, and timely information to help manage agency programs more effectively. As discussed in prior FFMIA reports, GAO remains concerned that the criteria for assessing substantial compliance with FFMIA are not well defined or consistently implemented across agencies. In addition, the majority of participants at a Comptroller General's forum on improving federal financial management systems said there is little agreement on the definition of "substantial compliance." To address GAO's prior recommendation, OMB is in the process of revising its guidance, and GAO has reemphasized its concerns with the need for an appropriate definition of substantial compliance that focuses on financial management systems' capabilities beyond financial statement preparation. Agencies' efforts to implement new systems far too often result in systems that do not meet cost, schedule, and performance goals. Recent modernization efforts by some agencies have been hampered by not following disciplined processes. To help avoid implementation problems, OMB continues to make progress on its financial management line of business initiative, which promotes business-driven, common solutions for agencies to enhance federal financial management, but additional efforts are needed.
GAO-08-1018, Financial Management: Persistent Financial Management Systems Issues Remain for Many CFO Act Agencies
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
September 2008:
Financial Management:
Persistent Financial Management Systems Issues Remain for Many CFO Act
Agencies:
FFMIA Fiscal Year 2007 Results:
GAO-08-1018:
GAO Highlights:
Highlights of GAO-08-1018, a report to congressional committees.
Why GAO Did This Study:
The ability to produce the financial information needed to efficiently
and effectively manage the day-to-day operations of the federal
government and provide accountability to taxpayers continues to be a
challenge for many federal agencies. To help address this challenge,
the Federal Financial Management Improvement Act of 1996 (FFMIA)
requires the 24 Chief Financial Officers (CFO) Act agencies to
implement and maintain financial management systems that comply
substantially with (1) federal financial management systems
requirements, (2) federal accounting standards, and (3) the U.S.
Government Standard General Ledger (SGL). FFMIA also requires GAO to
report annually on the implementation of the act.
This report, primarily based on GAO and inspectors general reports and
agencies‘ performance and accountability reports, discusses (1) the
reported status of agencies‘ systems compliance with FFMIA and overall
federal financial management improvement efforts and (2) the remaining
challenges to achieving the goals of FFMIA.
What GAO Found:
For fiscal year 2007, auditors reported 13 of 24 CFO Act agencies‘
financial management systems were not in substantial compliance with
FFMIA requirements. For these 13 agencies, auditors reported a number
of problems, as shown below, that illustrate how agency financial
management systems”including processes, procedures, and controls”are
not providing reliable, useful, and timely information to help manage
agency programs more effectively. As discussed in prior FFMIA reports,
GAO remains concerned that the criteria for assessing substantial
compliance with FFMIA are not well defined or consistently implemented
across agencies. In addition, the majority of participants at a
Comptroller General‘s forum on improving federal financial management
systems said there is little agreement on the definition of
’substantial compliance.“ To address GAO‘s prior recommendation, OMB is
in the process of revising its guidance, and GAO has reemphasized its
concerns with the need for an appropriate definition of substantial
compliance that focuses on financial management systems‘ capabilities
beyond financial statement preparation.
Figure:
[See PDF for image]
Source: GAO analysis based on independent auditors' financial statement
audit reports prepared by agency inspectors general and contract
auditors for fiscal year 2007.
[End of figure]
Agencies‘ efforts to implement new systems far too often result in
systems that do not meet cost, schedule, and performance goals. Recent
modernization efforts by some agencies have been hampered by not
following disciplined processes. To help avoid implementation problems,
OMB continues to make progress on its financial management line of
business initiative, which promotes business-driven, common solutions
for agencies to enhance federal financial management, but additional
efforts are needed.
What GAO Recommends:
Although no new recommendations are being made in this report, GAO
reaffirms its prior recommendation that the Office of Management and
Budget (OMB) revise its guidance to clarify the meaning of ’substantial
compliance“ to provide consistency when assessing FFMIA compliance. GAO
will continue to work with OMB on this issue.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1018]. For more
information, contact Kay L. Daly at (202) 512-9095 or dalykl@gao.gov
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Continued Emphasis Needed on Federal Financial Management and FFMIA
Compliance:
Challenges Remain to Achieve Goals of FFMIA:
Conclusion:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Requirements and Standards Supporting Federal Financial
Management:
Federal Financial Management Systems Requirements:
Federal Accounting Standards:
U.S. Government Standard General Ledger (SGL):
Appendix III: Publications in the Federal Financial Management Systems
Requirements Series:
Appendix IV: Statements of Federal Financial Accounting Concepts,
Standards, Interpretations, and Technical Bulletins:
Appendix V: Accounting and Auditing Policy Committee Technical
Releases:
Appendix VI: Checklists for Reviewing Systems under the Federal
Financial Management Improvement Act:
Appendix VII: Comments from the Office of Management and Budget:
Appendix VIII: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Table:
Table 1: Six Problem Areas and the Potential Effect on Agency Financial
Management:
Figures:
Figure 1: Comparison of 2007 Financial Statement Audit Results to FFMIA
Assessments:
Figure 2: Auditors' FFMIA Assessments for Fiscal Years 1998 through
2007:
Figure 3: Number of Reported Problems for 13 Agencies with FFMIA
Noncompliant Systems for Fiscal Year 2007:
Figure 4: Agency Systems Architecture:
Abbreviations:
AAPC: Accounting and Auditing Policy Committee:
CFO: Chief Financial Officer:
DHS: Department of Homeland Security:
DOD: Department of Defense:
FAM: Financial Audit Manual:
FASAB: Federal Accounting Standards Advisory Board:
FFMIA: Federal Financial Management Improvement Act:
FFMSR: federal financial management systems requirements:
FISMA: Federal Information Security Management Act:
FMFIA: Federal Managers' Financial Integrity Act:
FMLOB: financial management line of business:
FSIO: Financial Systems Integration Office:
HHS: Department of Health and Human Services:
IG: inspector general:
IRS: Internal Revenue Service:
JFMIP: Joint Financial Management Improvement Program:
OFFM: Office of Federal Financial Management:
OMB: Office of Management and Budget:
OPM: Office of Personnel Management:
PCIE: President's Council on Integrity and Efficiency:
SBA: Small Business Administration:
SFFAC: Statements of Federal Financial Accounting Concepts:
SFFAS: Statements of Federal Financial Accounting Standards:
SGL: U.S. Government Standard General Ledger:
UFMS: Unified Financial Management System:
United States Government Accountability Office:
Washington, DC 20548:
September 30, 2008:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Henry A. Waxman:
Chairman:
The Honorable Tom Davis:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
Reliable, useful, and timely financial data are needed to efficiently
and effectively manage the day-to-day operations of the federal
government and ultimately provide accountability to taxpayers and the
Congress. The value of reliable financial information for prudent and
forward-thinking decision making cannot be overstated, especially given
our nation's current fiscal environment. As we have reported for a
number of years,[Footnote 1] the federal government faces large and
growing structural deficits primarily because of known demographic
trends and rising health care costs. These long-term challenges have
profound implications for our future economic growth, standard of
living, and national security. Significant resources will be needed to
address many of these areas, and difficult choices and trade-offs are
unavoidable. It is within this scenario that the implications of
ongoing weaknesses in agencies' ability to produce reliable and timely
financial information become clear. Accurate data on which to base
crucial program and resource decisions are critical to meeting the
challenges our nation faces in the 21st century.
To address these long-standing weaknesses, the Congress mandated
financial management systems reform within the federal government by
enacting the Federal Financial Management Improvement Act of 1996
(FFMIA).[Footnote 2] FFMIA requires the departments and agencies
covered by the Chief Financial Officers (CFO) Act of 1990[Footnote 3]
to implement and maintain financial management systems,[Footnote 4]
that comply substantially with (1) federal financial management systems
requirements, (2) applicable federal accounting standards, and (3) the
U.S. Government Standard General Ledger (SGL) at the transaction level.
FFMIA builds on the foundation laid by the CFO Act, which has the goal
of modern financial management systems that enable the systematic
measurement of performance; the development of cost information; and
the integration of program, budget, and financial information for
management reporting. FFMIA also requires auditors to state in their
audit reports whether the agencies' financial management systems comply
with the act's requirements. In addition, we are required to report
annually on the implementation status of the act. (See the Related GAO
Products list at the end of this report for our prior reports and
testimonies under this mandate.)
This report discusses (1) the reported status of agencies' systems
compliance with FFMIA and overall federal financial management
improvement efforts and (2) the remaining challenges to achieving the
goals of FFMIA. This report incorporates historical information from
our prior FFMIA reports, as well as financial management systems issues
from other GAO reports, agency inspectors general (IG) reports, and
agencies' performance and accountability reports for fiscal year 2007.
We analyzed and compiled data from these reports; conducted interviews
of agency officials, IG officials, and agency auditors; and obtained
selected documentation. To assess data reliability for the purposes of
this report, we performed procedures to assure ourselves of the
independence and qualifications of the auditors for the 24 CFO Act
agencies. We did not re-perform the auditors' work as it was beyond the
scope of this engagement. We analyzed applicable results from a
Comptroller General's forum[Footnote 5] held in December 2007 on
improving the federal government's financial management systems. We
also met with Office of Management and Budget (OMB) officials to
discuss their current efforts to improve federal financial management
and address our prior recommendations related to FFMIA.
We conducted this performance audit from December 2007 to September
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Details on
our scope and methodology are included in appendix I.
Results in Brief:
The auditors' FFMIA assessments for the 24 CFO Act agencies for fiscal
year 2007 illustrate that many agencies still do not have effective
financial management systems, including processes, procedures, and
controls in place that can routinely produce reliable, useful, and
timely financial information that federal managers can use for day-to-
day decision-making purposes. The primary goal of FFMIA is for agencies
to improve financial management systems so that financial information
from these systems can be used to help manage agency programs more
effectively and enhance the ability to prepare auditable financial
statements. For fiscal year 2007, agency auditors reported that 13 of
the 24 CFO Act agencies' systems did not substantially comply with one
or more of the three FFMIA requirements. This compares with 17 agencies
reported as not substantially compliant with one or more of these FFMIA
requirements for fiscal year 2006. FFMIA assessments for six CFO Act
agencies changed, with auditors reporting one agency's financial
management systems as no longer in substantial compliance, and the
other five as no longer substantially noncompliant with FFMIA
requirements for fiscal year 2007.[Footnote 6] While auditors reported
that improvements at those five agencies were largely because of agency-
implemented corrective actions, in some cases, varying interpretations
of OMB's FFMIA guidance on the definition of "substantial compliance"
may have also played a role. In addition, the majority of participants
at a recent Comptroller General's forum on improving federal financial
management systems said there is little agreement on the definition of
substantial compliance. Furthermore, auditors for the Department of
Justice told us that the reduction of certain material
weaknesses[Footnote 7] to significant deficiencies[Footnote 8] was a
factor for the change in their FFMIA assessment of substantial
compliance. We are concerned that agencies and auditors are
interpreting OMB's FFMIA guidance to mean that if an agency has no
material weaknesses, its systems are substantially compliant with the
three FFMIA requirements. Although current FFMIA guidance includes
examples of compliance indicators, we have found, in the past, that
several agency auditors used the indicators as a checklist for
determining an agency's systems compliance. In our view, a checklist
approach is not appropriate for assessing whether agency financial
management systems--including processes, procedures, and controls--are
substantially compliant with FFMIA and does not meet the expectations
of the Congress[Footnote 9] in requiring auditor reporting under FFMIA.
OMB recently provided a draft of its revised Circular No. A-127,
Financial Management Systems, to the CFO Council to review and provide
comments. We provided comments on the draft that highlighted and
reemphasized some of our previous concerns expressed in our prior
reports and recommendations to OMB on improving its FFMIA audit
guidance and clarifying the definition of "substantial
compliance."[Footnote 10]
The modernization of federal financial management systems has been a
long-standing challenge at many federal agencies. For agencies to
achieve FFMIA compliance, they need to implement systems that give them
reliable, useful, and timely information and do so using disciplined
processes. However, these efforts far too often result in systems that
do not meet their cost, schedule, and performance goals. For example,
financial management system implementation problems continue at the
Department of Defense (DOD), the Department of Health and Human
Services (HHS), and the Department of Homeland Security (DHS). In part,
to improve the outcome of financial management systems implementation
and FFMIA compliance, OMB continues to move forward on a key
initiative--the financial management line of business (FMLOB) which
involves standardizing business processes and data elements
governmentwide, incorporating these standards into core financial
system requirements and software, and leveraging common solutions
through a competitive environment of shared service providers. Although
some aspects of the initiative have taken longer than OMB expected, OMB
and the Financial Systems Integration Office (FSIO) have demonstrated
continued progress toward implementation of the FMLOB initiative by
issuing a common governmentwide accounting classification structure,
financial services assessment guide, and standard business processes
for funds and payment management. However, as we previously
recommended,[Footnote 11] additional efforts, such as developing an
overall concept of operations and identifying and defining additional
standard business processes, are needed to address key aspects of this
initiative. OMB officials told us their efforts on these aspects of
this initiative are continuing, and we are working with OMB to gain a
more in-depth understanding of its progress.
While we are not making any new recommendations in this report, we
reaffirm our prior recommendation aimed at enhancing OMB's audit
guidance related to FFMIA assessments. Specifically, we recommended
that OMB explore further clarification of the definition of
"substantial compliance" to assist auditors and agency management to
consistently apply criteria and evaluate FFMIA compliance. In
commenting on a draft of this report, OMB agreed with our assessment
that federal agencies still need to improve their financial systems so
that reliable, useful, and timely financial management information is
available for decision making. OMB stated that it was working
aggressively to assist agencies in building a strong foundation of
financial management practices. With regard to our prior recommendation
for guidance clarifying the definition of substantial compliance, OMB
has begun a significant re-write of OMB Circular No. A-127, Financial
Management Systems, as well as an update to OMB's implementation
guidance for FFMIA. OMB stated the re-write of OMB Circular No. A-127
will clarify the definition of substantial compliance so that auditors
and agency heads interpret the guidance more consistently. We will
continue to work with OMB so that a clear definition of substantial
compliance with FFMIA is developed and to address other concerns. Our
detailed discussion of OMB's comments can be found in the Agency
Comments and Our Evaluation section. We have reprinted OMB's comments
in appendix VII.
Background:
FFMIA is part of a series of financial management reform legislation
enacted since the early 1980s. This series of legislation started with
the Federal Managers' Financial Integrity Act of 1982[Footnote 12]
(FMFIA), which the Congress passed to strengthen internal controls and
accounting systems throughout the federal government, among other
purposes. Issued pursuant to FMFIA, the Comptroller General's Standards
for Internal Control in the Federal Government[Footnote 13] provides
the standards that are directed at helping agency managers implement
effective internal control, an integral part of improving financial
management systems. Internal control plays a major role in managing an
organization and comprises the plans, methods, and procedures used to
meet missions, goals, and objectives. In summary, internal control
helps government program managers achieve desired results through
effective management of public resources.
Effective internal control also helps in managing change to cope with
shifting environments and evolving demands and priorities. As programs
change and agencies strive to enhance operational processes and
implement new technological developments, management must continually
assess and evaluate its internal control to ensure that the control
activities being used are effective and updated when necessary. While
agencies had achieved some early success in identifying and correcting
material internal control and accounting system weaknesses, their
efforts to implement FMFIA had not produced the results intended by the
Congress and sufficiently improved general and financial management in
the federal government.
Therefore, beginning in the 1990s, the Congress passed additional
management reform legislation to achieve these management improvements
in the federal government. This legislation includes the (1) CFO Act of
1990, (2) Government Performance and Results Act of 1993,[Footnote 14]
(3) Government Management Reform Act of 1994,[Footnote 15] (4) FFMIA,
(5) Clinger-Cohen Act of 1996,[Footnote 16] (6) Accountability of Tax
Dollars Act of 2002,[Footnote 17] (7) Improper Payments Information Act
of 2002,[Footnote 18] (8) Federal Information Security Management Act
of 2002 (FISMA),[Footnote 19] and (9) Department of Homeland Security
Financial Accountability Act of 2004.[Footnote 20] The combination of
reforms ushered in by these laws, if successfully implemented, provides
a solid foundation to improve the accountability of government programs
and operations as well as to routinely produce valuable cost and
operating performance information. These financial management reform
laws reflect the importance of improving financial management of the
federal government. Appendixes II through VI include details on the
various requirements, guidance, standards, and checklists that support
federal financial management.
Guidance Related to FFMIA:
OMB sets governmentwide financial management policies and requirements,
as well as guidance related to FFMIA. OMB Circular No. A-127, Financial
Management Systems, defines the policies and standards prescribed for
executive agencies to follow in developing, operating, evaluating, and
reporting on financial management systems. OMB Circular No. A-127
references the series of publications entitled federal financial
management systems requirements, issued by the Joint Financial
Management Improvement Program (JFMIP)[Footnote 21] as the primary
source of governmentwide requirements for financial management systems.
Federal financial management systems requirements, among other things,
provide a framework for establishing integrated financial management
systems to support program and financial managers. Appendix III lists
the series of federal financial management systems requirements
published to date.
In a January 4, 2001, memorandum, Revised Implementation Guidance for
the Federal Financial Management Improvement Act, OMB provided guidance
for agencies and auditors to use in assessing substantial compliance.
The guidance describes the factors that should be considered in
determining whether an agency's systems substantially comply with
FFMIA's three requirements and provides guidance to agency heads to
assist in developing corrective action plans for bringing their systems
into compliance with FFMIA. There are examples included in the guidance
on the types of indicators that should be used as a basis in assessing
whether an agency's systems are in substantial compliance with FFMIA
requirements.
In addition, we have worked in partnership with the President's Council
on Integrity and Efficiency[Footnote 22] (PCIE) to develop and maintain
the joint GAO/PCIE Financial Audit Manual (FAM). The FAM presents a
methodology that auditors may, but are not required to, use to perform
financial statement audits of federal entities in accordance with
professional standards and includes sections that provide specific
procedures auditors should perform when assessing FFMIA
compliance.[Footnote 23] These sections include guidance and detailed
audit steps for testing agency financial management systems'
substantial compliance with the requirements of FFMIA. The FAM guidance
on FFMIA assessments recognizes that while financial statement audits
offer some assurance on FFMIA compliance, auditors should design and
implement additional testing to satisfy FFMIA criteria. Testing for
compliance with FFMIA is efficiently accomplished, for the most part,
as part of the work done in understanding agency systems in the
internal control phase of the audit, and the FAM provides specific
guidance on what additional testing should be performed, such as tests
of information system controls and nonsampling control tests.
Continued Emphasis Needed on Federal Financial Management and FFMIA
Compliance:
The purpose of financial management systems goes beyond providing the
data necessary to comply with various financial reporting requirements
to focus on routinely producing reliable, useful, and timely financial
information that federal managers can use for day-to-day decision-
making purposes. Recognizing that decision makers can benefit from a
better understanding of the challenges and opportunities associated
with federal financial management systems, the Comptroller General
convened a forum[Footnote 24] on improving federal financial management
systems in December 2007. According to several participants, producing
accurate financial statements should be viewed as a by-product of
effective business processes and financial management systems. We have
consistently provided this perspective for a number of years in our
prior reports. As in prior years, the auditors' fiscal year 2007 FFMIA
assessments for the 24 CFO Act agencies illustrate that many agencies
still do not have effective financial management systems, including
processes, procedures, and controls in place that can produce reliable,
useful, and timely financial information with which to make informed
decisions on an ongoing basis. The primary goal of FFMIA is for
agencies to improve financial management systems so that financial
information from these systems can be used to help manage agency
programs more effectively and enhance the ability to prepare auditable
financial statements. Auditors reported a change in their FFMIA
assessment for five agencies' systems that they determined are no
longer in substantial noncompliance for fiscal year 2007. The auditors
noted these agencies took corrective action in the areas of compliance
with federal accounting standards and federal financial management
systems requirements. However, in light of the significant deficiencies
and problems that auditors are still reporting, we remain concerned
that criteria for substantial compliance with FFMIA requirements are
not well defined or consistently implemented across the 24 CFO Act
agencies.
Comptroller General's Forum Provides Useful Insight to FFMIA
Implementation:
Recognizing that decision makers can benefit from a better
understanding of the challenges and opportunities associated with
federal financial management systems, the Comptroller General convened
a forum on December 11, 2007. The forum brought together knowledgeable
and recognized financial management leaders from the federal
government, including the CFO, Chief Information Officer, and IG
communities, and selected other officials with extensive experience in
financial management from both the public and private sectors. One of
the themes from the forum was that federal financial management leaders
should refocus their efforts on comprehending and meeting program
managers' financial information requirements and not simply on meeting
financial reporting compliance requirements. Despite agencies' emphasis
on meeting financial reporting compliance requirements, about two
thirds of forum participants (21 of 33 respondents) agreed that
financial management systems are not able to provide or provide little
information that is reliable, useful, and timely to assist managers in
their day-to-day decision-making, which is the ultimate goal of FFMIA.
Figure 1 shows 19 of the 24 CFO Act agencies received an unqualified
opinion on their financial statements in fiscal year 2007. However, for
8 of these 19 agencies, auditors reported that systems did not
substantially comply with one or more of the three FFMIA requirements
and that significant problems exist, as discussed later.
Figure 1: Comparison of 2007 Financial Statement Audit Results to FFMIA
Assessments:
This figure is a combination of two charts showing comparison of 2007
financial statement audit results to FFMIA assessments.
24 CFO Act agencies' financial statement audit results:
19 agencies: Unqualified opinion;
5 agencies: Disclaimer or qualified opinion.
13 CFO Act agencies' systems not substantially compliant with FFMIA:
5 agencies: Disclaimer or qualified opinion;
8 agencies: Unqualified opinion.
[See PDF for image]
Source: GAO analysis based on independent auditors financial statement
audit reports prepared by agency inspectors general and contract
auditors for fiscal year 2007.
[End of figure]
According to auditors, some of these 8 agencies have been able to
obtain unqualified audit opinions through extensive labor-intensive
efforts, which include using ad hoc procedures, expending significant
resources, and making billions of dollars in adjustments to derive
financial statements. This is usually the case when agencies have
inadequate systems that are not integrated and routinely reconciled.
These time-consuming procedures must be combined with sustained efforts
to improve agencies' underlying financial management systems and
controls. Forum participants said that producing accurate financial
statements should be viewed as a byproduct of effective business
processes and financial management systems. We have expressed a similar
viewpoint in the past.[Footnote 25] If agencies continue year after
year to rely on costly and time-intensive manual efforts to achieve or
maintain unqualified opinions, the Congress and others may be misled as
to the true status of agencies' financial management systems
capabilities.
While work performed in auditing financial statements would naturally
offer some perspective regarding FFMIA compliance, the work necessary
to assess substantial compliance of systems with the FFMIA requirements
has a complementary but broader focus than that performed for purposes
of rendering an opinion on the financial statements. In performing
financial statement audits, auditors generally focus on the capability
of the financial management systems to process and summarize financial
information that flows into the financial statements. For purposes of
FFMIA, financial management systems include systems, processes,
procedures, and controls that produce the information management uses
day to day, not just systems that produce annual financial statements.
Thus, according to the FAM, to report on system compliance with FFMIA,
the auditor should understand the design of and test, as needed, the
financial management systems (including the financial portion of any
mixed systems[Footnote 26]) used for managing financial operations,
supporting financial planning, management reporting, budgeting
activities, and systems accumulating and reporting cost information.
Several forum participants expressed concern that because of the
efforts devoted to preparing financial reports and meeting financial
reporting compliance requirements, finance organizations have not
focused sufficient attention on understanding and meeting the financial
management needs of their own program managers. FFMIA was designed to
lead to system improvements that would result in agency managers
routinely having access to reliable, useful, and timely financial-
related information to measure performance and increase accountability
throughout the year. If significant adjustments are made at year end
for financial statement reporting purposes, then management has more
than likely been operating with inaccurate data throughout the year.
FFMIA Assessments Disclose Continued Noncompliance and System
Weaknesses:
According to auditors, the majority of federal agencies' financial
management systems are still not in substantial compliance with FFMIA
requirements. As shown in figure 2, auditors reported that 13 of the 24
CFO Act agencies' systems did not substantially comply with one or more
of the three FFMIA requirements for fiscal year 2007. This compares
with 17 agencies whose systems were reported as not substantially
compliant with FFMIA requirements for fiscal year 2006. Based on our
review of the fiscal year 2007 audit reports for the 13 agencies
reported to have systems not in substantial compliance with one or more
of FFMIA's three requirements, noncompliance with federal financial
management systems requirements was the most frequently auditor-cited
deficiency of the three FFMIA requirements.
Figure 2: Auditors' FFMIA Assessments for Fiscal Years 1998 through
2007:
This figure is a bar graph showing auditors' FFMIA assessments for
fiscal years 1998 through 2007. The X axis represents the fiscal year,
and the Y axis represents CFO Act agencies not in compliance.
Fiscal year: 1998;
CFO Act agencies not in compliance: 21.
Fiscal year: 1999;
CFO Act agencies not in compliance: 21.
Fiscal year: 2000;
CFO Act agencies not in compliance: 19.
Fiscal year: 2001;
CFO Act agencies not in compliance: 20.
Fiscal year: 2002;
CFO Act agencies not in compliance: 19.
Fiscal year: 2003;
CFO Act agencies not in compliance: 17.
Fiscal year: 2004;
CFO Act agencies not in compliance: 16.
Fiscal year: 2005;
CFO Act agencies not in compliance: 18.
Fiscal year: 2006;
CFO Act agencies not in compliance: 17.
Fiscal year: 2007;
CFO Act agencies not in compliance: 13.
[See PDF for image]
Source: GAO complied from independent auditors' financial statement
audit reports prepared by agency inspectors general and contract
auditors for fiscal year 1998 through 2007.
[End of figure]
Auditors for six CFO Act agencies reported a change in the FFMIA
assessment for fiscal year 2007. The auditor for one agency, EPA,
changed its FFMIA assessment from no instances of substantial
noncompliance in fiscal year 2006, to not being in substantial
compliance with FFMIA requirements for fiscal year 2007 because of
problems related to security over certain information systems. The
auditors for five agencies reported agencies' financial management
systems[Footnote 27] were no longer in substantial noncompliance. As
discussed later, auditors for these five agencies noted that the
agencies took corrective action in the areas of federal accounting
standards and federal financial management systems requirements.
However, as we have previously reported,[Footnote 28] we are still
concerned that criteria for substantial compliance are not well defined
or consistently implemented across the 24 CFO Act agencies. In light of
the significant deficiencies and problems that auditors are still
reporting, it appears that agencies and auditors may be interpreting
OMB's January 4, 2001, FFMIA guidance to mean that if an agency has no
material weaknesses, it is in substantial compliance with the three
FFMIA requirements. Further, we caution that the number of agencies
reported as noncompliant may be even greater because all but one
auditor provided negative assurance.[Footnote 29] As we have previously
reported,[Footnote 30] when auditors express negative assurance, the
auditors are not saying that they determined the systems to be
substantially compliant, but that the work performed did not identify
instances of noncompliance. Therefore, the auditors may not have
identified all instances of noncompliance with FFMIA requirements and
included all problems in their reports.
Based on our review of the fiscal year 2007 audit reports for the 13
agencies reported to have systems not in substantial compliance with
one or more of FFMIA's three requirements, noncompliance with federal
financial management systems requirements was the deficiency auditors
most frequently cited of the three FFMIA requirements. To better
understand the underlying issues regarding agencies' noncompliance with
federal financial management systems requirements, we divided this
requirement into four problem areas including nonintegrated systems,
inadequate reconciliation procedures, lack of accurate and timely
recording, and weak security over information systems. These four
problem areas related to federal financial management systems
requirements, plus the two areas related to noncompliance with the SGL
and lack of adherence to federal accounting standards result in six
problem areas. Figure 3 shows the number of agencies with problems
reported in each of the six areas for fiscal year 2007.
Figure 3: Number of Reported Problems for 13 Agencies with FFMIA
Noncompliant Systems for Fiscal Year 2007:
This figure is a bar graph showing the number of reported problems for
13 agencies with FFMIA noncompliant systems for fiscal year 2007. The X
axis represents problem areas, and the Y axis represents CFO Act
agencies.
Problem area: Nonintegrated financial management systems;
CFO Act agencies: 8.
Problem area: Inadequate reconciliation procedures;
CFO Act agencies: 10.
Problem area: Lack of accurate and timely recording;
CFO Act agencies: 11.
Problem area: Weak security over information systems;
CFO Act agencies: 11.
Problem area: Lack of adherence to federal accounting standards;
CFO Act agencies: 7.
Problem area: Noncompliance with the SGL;
CFO Act agencies: 5.
[See PDF for image]
Source: GAO analysis based on independent auditors' financial statement
audit reports prepared by agency inspectors general and contract
auditors for fiscal year 2007.
[A] Problem reflects noncompliance with federal financial management
systems requirements.
[End of figure]
The weaknesses reported by the auditors ranged from serious, pervasive
systems problems to less serious problems that may affect only one
aspect of an agency's accounting operation. While at some agencies, the
problems were so serious that they affected the auditor's opinion on
the agency's financial statements, at other agencies, the auditors
cited problems that represented significant deficiencies in the design
or operation of internal control, but were determined not to be
material to the financial statements taken as a whole.
Table 1 illustrates the potential effect these six types of problems
can have on an agency's financial management. For example, the auditor
for the Department of the Treasury reported that IRS personnel rely on
resource-intensive compensating procedures to prepare its financial
statements in a timely manner because of serious internal control and
financial management systems deficiencies. These challenges affect
IRS's ability to fulfill its responsibilities as the nation's tax
collector because its managers lack accurate, useful, and timely
financial information and sound controls with which to make fully
informed decisions day-to-day and to ensure ongoing accountability.
Table 1: Six Problem Areas and the Potential Effect on Agency Financial
Management:
Problem area: Nonintegrated financial management systems[A];
Effect: When agencies do not have an integrated financial management
system, they are often forced to rely on ad hoc programming, analysis,
or actions such as duplicative transaction entries. In these
situations, agencies must either expend major efforts and resources to
generate financial information that their systems should be able to
provide on a recurring basis or not have it.
Problem area: Inadequate reconciliation procedures[A];
Effect: Failure to perform reconciliations puts agencies at risk of
operating with incomplete and inaccurate financial data on which to
base decisions.
Problem area: Lack of accurate and timely recording of financial
information[A];
Effect: Recording transactions in the general ledger in an untimely
manner can result in inaccurate reporting in agencies' financial
reports and other management reports that are used to guide managerial
decision-making.
Problem area: Weak security controls over information systems[A];
Effect: Significant computer security weaknesses in systems results in
federal data at risk of inadvertent or deliberate misuse, financial
information at risk of unauthorized modification or destruction,
sensitive information at risk of inappropriate disclosure, and critical
operations at risk of disruption.
Problem area: Lack of adherence to federal accounting standards;
Effect: Federal accounting standards form the foundation for preparing
consistent and meaningful financial statements and other financial
reports both for individual agencies and the government as a whole.
Without adherence to federal accounting standards, agencies cannot be
assured that the financial reports contain reliable information about
the financial position, activities, and results of operations of their
programs and activities on an ongoing basis.
Problem area: Noncompliance with the SGL;
Effect: The SGL is intended to improve data stewardship throughout the
federal government; enabling consistent reporting at all levels within
the agencies and providing comparable data and financial analysis
governmentwide. If the SGL is not properly implemented, agencies cannot
be assured that information in their financial statements is properly
and consistently compiled and reported.
Source: GAO analysis of federal financial management systems
requirements, related laws, and guidance.
[A] Problem reflects noncompliance with federal financial management
systems requirements.
[End of table]
Although Improvements Reported in FFMIA Compliance, Concerns Remain
with FFMIA Guidance:
For fiscal year 2007, auditors for five agencies no longer reported a
lack of substantial compliance with FFMIA requirements. While auditors
reported that improvements at those five agencies were because of
agency-implemented corrective actions, in some cases, it appears that
varying interpretations of OMB's FFMIA guidance on the definition of
"substantial compliance" may have played a role. The implementation
guidance provides indicators of substantial compliance, such as whether
an agency's "audit disclosed no material weaknesses in internal control
that affect the agency's ability to prepare financial statements and
related disclosures."[Footnote 31] However, this indicator only
addresses the federal accounting standards requirement of FFMIA, not
the federal financial management systems or the SGL requirement.
We are concerned that auditors are interpreting OMB's FFMIA
implementation guidance to mean that if an agency has no material
weaknesses in controls over the area of financial reporting, it is
compliant with FFMIA. For example, the auditor for Justice told us that
the reduction of certain material weaknesses to significant
deficiencies was a factor for the change in its FFMIA assessment of
substantial compliance. Based primarily on the information contained in
the agencies' performance and accountability reports, the following
summarizes how auditors determined that five agencies were no longer
substantially noncompliant in fiscal year 2007.
* Department of Energy--The Department of Energy's auditor reported one
material weakness related to FFMIA noncompliance in the area of federal
accounting standards at the end of fiscal year 2006. For 2006, the
auditor reported that the department did not properly account for
obligations and undelivered orders, which affected the accuracy,
validity, and completeness of these account balances. During fiscal
year 2007, the department reported it took corrective actions
including, but not limited to, improving several reports and related
reconciliation processes. Because of these efforts, the auditor
reported that the corrective actions related to the material weakness
on obligations and undelivered orders were fully implemented and
considered the finding closed in fiscal year 2007. In fiscal year 2007,
Energy had a significant deficiency related to network vulnerabilities
and weaknesses in access and other security controls in the
department's unclassified computer information systems. The auditor
concluded that its tests disclosed no instances in which the
department's financial management systems did not substantially comply
with the three FFMIA requirements for fiscal year 2007.
* Department of the Interior--At the end of fiscal year 2006, the
Department of the Interior's auditor reported FFMIA-related findings in
the area of federal accounting standards, that resulted in the
department not being in substantial compliance with FFMIA requirements.
The findings included a material weakness related to controls over
Indian Trust Funds and a reportable condition on the improper
disclosure of the condition of museum collections. According to
management, Interior implemented corrective actions during fiscal year
2007, including closing 9,400 probate cases and deploying the Trust
Asset and Accounting Management System. As a result, the auditor
reduced the Indian Trust Fund finding to a significant deficiency and
closed the museum collection finding entirely in fiscal year 2007.
While the department invested a significant amount of resources to
improve its controls over Indian Trust Funds, the auditor noted that
Interior needs to continue its efforts to resolve historical
differences and to improve procedures and internal controls for
entering and maintaining Trust Fund information. In addition, a repeat
significant deficiency was reported by the auditor on general and
application controls over financial management systems. The auditor
stated that the previously mentioned findings were not significant
enough to warrant concluding that the department was substantially
noncompliant with FFMIA requirements for fiscal year 2007.
* Department of Justice--Justice's auditor reported FFMIA-related
findings in the area of federal financial management systems
requirements that resulted in the department not being in substantial
compliance with FFMIA requirements at the end of fiscal year 2006. One
of these findings was a repeat material weakness related to the
department's financial management systems' general and application
controls. According to the auditor, during fiscal year 2007, three out
of the four components that had long-standing material weaknesses in
this area--United States Marshals Service, Office of Justice Programs,
and the Bureau of Alcohol, Tobacco, Firearms and Explosives--made
enough improvements to internal controls over their information system
environment to reduce the finding from a material weakness to a
significant deficiency. Some of the reported corrective actions
included increasing security awareness and training, and implementing
stronger password setting policy. In its commentary and summary of
Justice's annual financial statement for fiscal year 2007,[Footnote 32]
the Justice IG made the following comment about Justice's financial
system environment: "Inadequate, outdated, and in some cases non-
integrated financial management systems do not provide certain
automated financial transaction processing activities that are
necessary to support management's need for timely and accurate
financial information throughout the year."
In the IG's 2007 list of top management and performance challenges
facing Justice,[Footnote 33] the IG also reported that "the
Department's efforts over the past few years to implement the Unified
Financial Management System (UFMS) to replace the seven major
accounting systems currently used throughout the Department have been
subject to fits and starts. Three years after the Department selected a
vendor for the unified system it has made little progress in deploying
the UFMS. The Department notes that problems with funding, staff
turnover, and other competing priorities have caused the delays in
implementing the UFMS. Until that time, Department-wide accounting
information will have to continue to be produced manually, a costly
process that undermines the Department's ability to prepare financial
statements that are timely and in accordance with generally accepted
accounting principles. Furthermore, the Federal Bureau of Investigation
and United States Marshals Service will not be able to achieve
compliance with the FFMIA requirement to record all activity at the
United States Standard General Ledger transaction level until the UFMS
has been fully implemented." We also noted that all nine of Justice's
components still had at least one significant deficiency or material
weakness related to general and application controls, and five out of
the nine components had findings related to a second significant
deficiency on improving internal controls to ensure that transactions
are properly recorded, processed, and summarized to permit the
preparation of financial statements in accordance with generally
accepted accounting principles. Justice's auditor concluded that its
tests disclosed no instances in which the department's financial
management systems did not substantially comply with the three
requirements of FFMIA for fiscal year 2007.
* Department of Labor--Labor's auditor reported FFMIA-related
reportable conditions in the area of federal financial management
systems requirements, which resulted in the department not being in
substantial compliance with FFMIA requirements at the end of fiscal
year 2006. These reportable conditions related to lack of strong
application controls over access to and protection of financial
information, lack of strong logical security controls to secure Labor's
networks and information, and weaknesses noted in the change control
process for a benefits system. In addition, Labor's fiscal year 2006
FISMA report identified a significant deficiency related to a mixed
system. According to management, Labor pursued an aggressive
remediation process during fiscal year 2007 by revising computer
security guidance and performing access controls testing and evaluation
for all major information systems. Labor's auditors noted improvements
in the areas of general computer controls related to a Labor benefits
system, controls over the mixed system cited in the fiscal year 2006
FISMA report, and updated policies and procedures.
For fiscal year 2007, auditors for Labor reported 2 prior year
reportable conditions as one significant deficiency related to the lack
of adequate controls over access to key financial and support systems.
Specifically, the auditor noted issues that were present in multiple
financial systems across the department such as inactive accounts were
not disabled or deleted in a timely manner; generic accounts existed on
systems; and access to sensitive files, directories, or software was
not restricted. According to the auditor, each access control issue
mentioned presented a reasonably possible chance to adversely affect
Labor's ability to initiate, authorize, record, process, or report
financial data. The auditor also reported that these access control
weaknesses could lead to users with inappropriate access to financial
systems; inefficient processes, lack of completeness, accuracy, or
integrity of financial data; and/or the lack of detection of unusual
activity within financial systems.
As a result of the access control weaknesses identified, the IG
reported an access control significant deficiency in conjunction with
its testing of compliance with FISMA for fiscal year 2007. However, the
IG's fiscal year 2007 FISMA report did not communicate significant
deficiencies for specific systems; instead, it reported significant
deficiencies by control type, grouping all impacted systems together in
each deficiency. Labor's auditors stated, as a result, they could not
determine the severity of deficiencies for any individual financial or
mixed system. Labor's auditor concluded that the department complied,
in all material respects, with the requirements of FFMIA as of
September 30, 2007.
* Small Business Administration (SBA)--At the end of fiscal year 2006,
auditors reported that SBA was not substantially compliant with FFMIA
requirements in the area of federal financial management systems
requirements. The related finding involving weak information technology
security controls was characterized as a reportable condition. During
fiscal year 2007, the auditor noted improvements in formalizing
policies and procedures over granting users emergency access,
documenting reviews of remote users, and formalizing continuity of
operations plans. Despite the identified improvements, the auditors
continued to report issues in the areas of security access controls,
software program changes, and end-user computing and reported the
condition as a significant deficiency. For fiscal year 2007, the
auditor reported no instances in which the department's financial
management systems did not substantially comply with the three
requirements of FFMIA.
We have previously reported[Footnote 34] that auditors have expressed a
need for clarification on the definition of "substantial compliance"
with FFMIA. Further, when asked to what extent agreement exists on the
definition of substantial compliance with FFMIA, 20 of 35 participants
at the December 2007 Comptroller General forum stated that agreement
exists to little or no extent while the other 15 of 35 believed
agreement exists to a moderate extent. We initially recommended that
OMB clarify its guidance on the meaning of substantial compliance in
our report[Footnote 35] covering FFMIA fiscal year 2000 results and
have reiterated this recommendation thereafter with OMB action starting
this year. In prior years, OMB has responded that it has been focusing
on various initiatives, and it agreed to consider clarifying the
definition of "substantial compliance" in future policy and guidance
updates. Last year OMB stated that in its update to Circular No. A-127,
Financial Management Systems, its goal would be to simplify FFMIA
compliance requirements as well as to better balance the FFMIA
objectives of generating audited financial statements and providing
meaningful information for decision makers. Accordingly, OMB agreed to
take this recommendation under advisement and is currently revising its
guidance. As we have previously reported,[Footnote 36] without a
consistent agreement and application of a common definition of
substantial compliance, the status of agency financial management
systems' compliance remains uncertain.
Although OMB's January 4, 2001, FFMIA implementation guidance includes
examples of compliance indicators, we found in the past that several
agency auditors used the indicators as a checklist for determining an
agency's systems compliance. In our view, a checklist approach is
inappropriate for assessing the substantial compliance of agency
systems, including processes, procedures, and controls with FFMIA. This
approach also does not meet the expectations of the Congress[Footnote
37] in requiring the auditor to insist on rigorous adherence to the
accounting standards in reporting whether the agency's financial
management systems substantially comply with the three requirements of
FFMIA. Congress also expected that the audit community would discharge
this compliance function consistent with established practices of the
profession and the exercise of sound professional judgment. A
comprehensive approach that considers key systems' functionalities,
such as tests of information system controls and nonsampling control
tests, is essential for auditors to obtain assurance that the agencies'
systems provide reliable, useful, and timely information for decision
makers on an ongoing basis throughout the year and not just for
preparing year-end financial statements.
OMB's guidance lays out the key factors that auditors should consider
when assessing whether an agency's systems are substantially compliant.
OMB's guidance calls for auditors to use their professional judgment
when considering factors such as providing reliable and timely
information for managing current operations; accounting for assets so
they can be properly protected from loss, misappropriation, or
destruction; and whether a system's performance prevents an agency from
meeting specific FFMIA requirements. Nonetheless, because auditors have
focused their consideration of FFMIA substantial compliance on issues
related to the financial statement audit, it is important that the
meaning of substantial compliance be clarified and refocused to include
other aspects in addition to financial statement audit results. While
we agree that the use of professional judgment is critical, we continue
to believe that a consensus is needed on what constitutes substantial
compliance.
In regard to our previous recommendation that OMB explore further
clarification of the definition of "substantial compliance," OMB is in
the process of revising OMB Circular No. A-127 and its FFMIA
implementation guidance. In May 2008, OMB issued a draft Circular No. A-
127 for CFO Council review and comment. In our comments on the draft
Circular No. A-127, we reemphasized our concerns with, among other
things, the need for an appropriate definition of substantial
compliance that focuses on financial management systems' capabilities
beyond financial statement preparation. OMB is considering the comments
received and had not issued a public draft as of August 2008, but is
planning to finalize the guidance in October 2008.
Challenges Remain to Achieve Goals of FFMIA:
Auditors' FFMIA assessments pointed out that many of the CFO Act
agencies have significant problems with the financial management
systems in use today. For agencies to achieve FFMIA compliance, they
need to implement systems that give them reliable, useful, and timely
information and do so using disciplined processes. The modernization of
federal financial management systems has been a long-standing challenge
at many federal agencies. Past systems implementation attempts have
failed to deliver the promised capability on time and within budget.
For example, we reported in September 2004[Footnote 38] that HHS did
not effectively implement the best practices needed to reduce the risks
associated with the implementation of a new system. Three years later,
auditors report HHS continues to experience problems converting to the
system.
In part, to combat the past failures of individual agencies' efforts,
OMB developed the FMLOB initiative, which involves standardizing
business processes and data elements governmentwide, and leveraging
common solutions through a competitive environment of shared service
providers to which agency financial management systems can be migrated.
The initiative is intended to enable seamless data integration across
agencies and avoid costly and redundant investment in "in-house"
financial management system solutions. Although OMB continues to make
progress on this initiative and priorities have been developed to focus
efforts through December 2009, some aspects of the initiative have
taken longer than OMB expected. We have previously reported[Footnote
39] concerns with this initiative, such as the lack of a concept of
operations and need for a clear plan for migrating agencies to shared
service providers. Similarly, participants at the forum expressed
uncertainties about the previous goal for migrating the majority of
agencies to a shared service provider by 2011.
System Implementation Problems Plague Agencies:
One of our ongoing and consistent reporting themes has been that the
modernization of federal financial management systems has been a long-
standing challenge at many federal agencies across the government.
While the development of a financial management system can never be
risk free, effective implementation of best practices in systems
development and implementation efforts (commonly referred to as
disciplined processes)[Footnote 40] can reduce those risks to
acceptable levels. Nevertheless, agency efforts far too often result in
systems that do not meet their cost, schedule, and performance goals.
While agencies anticipate that the new systems will provide reliable,
useful, and timely data to support managerial decision making, our work
and that of others has shown that has often not been the case. For
example, modernization efforts at DOD, HHS, and DHS have been hampered
by agencies not following disciplined processes.
* As we reported in July 2007,[Footnote 41] the Army's approach for
investing about $5 billion over the next several years in its General
Fund Enterprise Business System, Global Combat Support System-Army
Field/Tactical,[Footnote 42] and Logistics Modernization Program did
not include alignment with the Army enterprise architecture or use of a
portfolio-based business system investment review process. Moreover, we
reported that the Army's lack of a concept of operations has
contributed to its failure to take full advantage of business process
reengineering opportunities that are available when using an enterprise
resource planning solution. Further, the Army did not have reliable
processes--such as an independent verification and validation function,
or analyses, such as economic analyses--to support its management of
these programs. We concluded that until the Army adopts a business
system investment management approach that provides for reviewing
groups of systems and making enterprise decisions on how these groups
will collectively interoperate to provide a desired capability, it runs
the risk of investing significant resources in business systems that do
not provide the desired functionality and efficiency.
* As we previously reported in September 2004,[Footnote 43] HHS did not
follow key disciplined processes necessary to reduce the risks
associated with implementing the Unified Financial Management System
(UFMS) to acceptable levels. We identified problems in such key areas
as requirements management, including developing a concept of
operations, data conversion, and risk management. Three years later, in
fiscal year 2007, HHS's auditors reported[Footnote 44] that serious
financial system issues continue as a result of conversion problems.
For example, over 800 entries, exceeding $170 billion, had to be
manually recorded into the UFMS system; more than $1 billion in
transactions were inappropriately posted; and a cumbersome, manual
process is used to compile its financial statements. Sustained efforts
will be necessary to overcome these continuing serious weaknesses.
* In June 2007, we reported[Footnote 45] that DHS lacked a financial
management strategy that included a formal strategic financial
management plan to implement or migrate to an integrated system. In
addition, DHS's concept of operations did not contain an adequate
description of the legacy systems and a clear articulation of the
vision that should guide the department's improvement efforts, and key
requirements developed for the project were unclear and incomplete.
Since then, DHS has developed a strategy to consolidate the
department's financial systems down to two platforms--SAP and Oracle.
However, according to a recent DHS IG report,[Footnote 46] DHS did not
perform a complete analysis of all potential systems and service
providers as part of its process to select a financial systems
solution. As a result of a bid protest, in a March 17, 2008, ruling,
the United States Court of Federal Claims held that DHS's sole source
procurement for financial systems application software had violated a
provision in the Competition in Contracting Act requiring full and open
competition using competitive procedures[Footnote 47] and required DHS
to conduct a competitive procurement.[Footnote 48] In response to this
decision, DHS is revisiting its financial systems consolidation
strategy.
As illustrated by these examples, more discipline is needed in
implementation efforts to avoid the problems that can occur when best
practices are not followed. Similarly, participants at the forum stated
that it is time to start putting into practice the lessons learned from
previous implementation efforts. As part of an effort to begin
confronting these challenges, forum participants offered a range of
perspectives, insights, and examples. Experience related to financial
management, human capital management, systems ownership, customization
of commercial off-the-shelf software, and the purchase of shared
services has provided useful insights that should help financial
managers avoid some of the obstacles that impeded past projects.
Consistent with our long-held views, financial managers at the forum
also identified various useful system implementation practices,
including conducting independent verification and validation, and
periodically reevaluating system implementation projects.
Financial Management Line of Business Initiative Continues to Evolve:
In March 2004, OMB launched the FMLOB initiative, in part, to improve
the outcome of financial management system implementations so that
agencies have systems that ensure ongoing accountability and generate
reliable, useful, and timely information for decision-making purposes
emphasized by FFMIA. Since then, OMB and FSIO have continued to make
gradual progress toward achieving FMLOB goals[Footnote 49] by issuing a
common governmentwide accounting classification structure, a financial
services assessment guide, and standard business processes for funds
and payment management, as well as developing other planning tools
designed to leverage these standards and shared solutions.
However, additional efforts are needed to address recommendations
included in our March 2006 report regarding key aspects of this
initiative, such as developing an overall concept of operations,
identifying and defining additional standard business processes, and
ensuring that agencies do not continue to develop and implement their
own stove-piped systems.[Footnote 50] We are currently working with OMB
to gain a more in-depth understanding of FMLOB-related efforts and
progress toward addressing these recommendations. The following
provides an overview of the status of OMB's efforts and concerns
identified in these areas.
* Developing a concept of operations. A concept of operations would
provide a useful tool to explain how financial management systems can
operate cohesively in conjunction with other related systems and to
help minimize an agency's individualized, stove-piped efforts.
Participants attending the forum confirmed our concerns regarding the
need for this important tool, pointing out that OMB's various lines of
business initiatives are serving to preserve existing stovepipes. For
example, participants said it is unclear why separate lines of business
are needed for budget and financial management. Although OMB officials
told us that a draft concept of operations document is currently under
review, the extent to which these concerns will be addressed is
unclear.
* Identifying and implementing standard business processes. In a
January 2008 memo summarizing FMLOB efforts and priorities,[Footnote
51] OMB recognized the risk associated with implementing business
processes that are not standardized across government as well as the
need to develop additional guidance and other tools. Specifically, the
memo states that once business standards have been completed,
incorporated into core financial system requirements, and tested during
the FSIO software qualification and certification process, shared
service providers will only be permitted to utilize the certified
products as configured. To date, two standard business processes have
been issued, and OMB expects three additional standard business
processes to be finalized in December 2008.[Footnote 52] Recognizing
the need to further develop FMLOB guidance and tools, OMB identified
priorities for the remainder of 2008 and 2009, which include
identifying and developing additional business standards (e.g.,
interface data elements), expanding migration planning guidance,
finalizing and developing cost and performance measurements related to
FMLOB business standards, incorporating these standards into core
financial systems requirements and software, and updating related
testing methodology and scenarios.
* Establishing a clear migration path. To ensure that agencies migrate
to a shared service provider in accordance with OMB's stated approach
rather than attempt to develop and implement their own stove-piped
business systems, we previously recommended that OMB establish a clear
migration path or timetable for future migrations. OMB estimates for
when migrations will be completed are evolving and no firm timeframes
have been set. OMB's general guidance is that agencies should migrate
to a shared service provider when it is cost effective to do so and
they have maximized the return on investment in the current system.
Although OMB previously established a goal of migrating the majority of
agencies toward the use of shared service providers by 2011, more
recent information indicates that agency migrations will take longer
than OMB expected. For example, participants attending the forum
appeared uncertain regarding the ability of their respective
organizations to reach this goal by 2011. OMB's more recent
estimate[Footnote 53] indicates that many migrations are scheduled
through fiscal year 2015 and that some agency migrations have not yet
been scheduled. Agency migrations to a shared service provider are an
important aspect to achieving FMLOB goals. Even without a clear
migration path, some agencies may readily migrate to a shared service
provider to minimize the tremendous undertaking of implementing or
significantly upgrading a financial system. However, other agencies may
continue efforts to implement stand-alone systems that place additional
resources at risk because of potential financial system implementation
failures.
Further, other concerns that exist within the federal financial
management community include the availability of sufficient resources,
the viability of the initiative on a governmentwide basis, and the
potential loss of control of critical financial functions. For example,
none of the forum participants believed the resources available to
implement the initiative are fully adequate. Some participants also
indicated that some financial leaders may be reluctant to transition
their agencies' financial management activities on a wholesale basis
because of their fear of losing control of critical functions and lack
of trust in a shared service providers' ability to effectively meet
their needs.
Conclusion:
Shifting financial management leaders' focus from meeting financial
reporting compliance requirements to comprehending and meeting program
managers' financial information requirements is key to more meaningful,
value-added financial management. Given our nation's current fiscal
environment, reliable financial information for prudent and forward-
thinking decision making is imperative. If properly developed,
implemented, and managed, financial management systems can provide
essential financial data in support of day-to-day managerial decision
making--the ultimate goal of FFMIA. To accomplish this goal, CFO Act
agencies must continue to strive toward routinely producing not only
annual financial statements that can pass the scrutiny of a financial
audit, but also other meaningful financial and performance data. Over a
decade has passed since the enactment of FFMIA, and the majority of
agencies continue to lack financial management systems--including
processes, procedures, and controls--that substantially comply with the
requirements of the act, even though the majority of agencies are
achieving "clean" audit opinions. Consistent and diligent OMB
commitment and oversight toward achieving financial management system
capabilities and the common goals of the FMLOB initiative and FFMIA are
essential. In our view, the indicators included in OMB's guidance are
not a substitute for the rigorous criteria needed for assessing
substantial compliance with FFMIA. While we are not making any new
recommendations in this report, we will continue to work with OMB to
help ensure that it provides agency management and auditors with the
guidance needed to bring about reliable and consistent assessments of,
and meaningful improvements in, financial management systems as
envisioned by FFMIA. Accordingly, we reiterate our prior recommendation
for OMB to clarify its guidance on the meaning of "substantial
compliance" with FFMIA. Significant and long-standing obstacles remain
for developing and implementing effective financial management systems,
including processes, procedures, and controls. It is important that
emphasis on correcting these deficiencies be sustained by the current
administration as well as the new administration that will be taking
office next year. Continued congressional oversight will also be
crucial in transforming federal financial management systems.
Agency Comments and Our Evaluation:
We received written comments (reprinted in app. VII) from the Deputy
Controller, Office of Federal Financial Management, Office of
Management and Budget on a draft of this report. In its comments, OMB
agreed with our assessment that federal agencies still need to improve
their financial systems so that reliable, useful, and timely financial
management information is available for decision making. OMB stated
that it was working aggressively to assist agencies in building a
strong foundation of financial management practices through OMB's
financial management and systems oversight and under the FMLOB
initiative. According to OMB, both efforts support the goals of FFMIA
to improve governmentwide financial management and to facilitate timely
and reliable information for day-to-day management. While OMB stated
that the number of noncompliances with FFMIA was reduced to 10,
compared to 12 for the previous year, that number differed from our
report findings due to the fact that OMB's number was based on the
assessments made by the 24 CFO Act agency heads rather than by the
independent auditors as we reported.
With regard to our prior recommendation for guidance that clarifies the
definition of substantial compliance, OMB has begun a significant re-
write of OMB Circular No. A-127, Financial Management Systems, as well
as an update to OMB's implementation guidance for FFMIA. OMB stated the
re-write of OMB Circular No. A-127 will clarify the definition of
substantial compliance so that auditors and agency heads interpret the
guidance more consistently. We will continue to work with OMB by
providing comments and recommendations on the draft so that a clear
definition of substantial compliance with FFMIA is developed and to
address other concerns. OMB also provided technical comments on a draft
of this report that we incorporated as appropriate. In addition, we
also received technical comments from several agencies cited in the
report and incorporated them as appropriate.
We are sending copies of this report to the Chairman and Ranking
Member, Subcommittee on Federal Financial Management, Government
Information, Federal Services, and International Security, Senate
Committee on Homeland Security and Governmental Affairs, and to the
Chairman and Ranking Member, Subcommittee on Government Management,
Organization, and Procurement, House Committee on Oversight and
Government Reform. We are also sending copies to the Director, Office
of Management and Budget; the heads of the 24 CFO Act agencies in our
review; and agency CFOs and Inspectors General. Copies will be made
available to others upon request. In addition, this report will be
available at no charge on the GAO web site at [hyperlink,
http://www.gao.gov].
This report was prepared under the direction of Kay L. Daly, Acting
Director, Financial Management and Assurance, who may be reached at
(202) 512-9095 or dalykl@gao.gov if you have any questions. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff that made key
contributions to this report are listed in appendix VIII.
Signed by:
Kay L. Daly:
Acting Director, Financial Management and Assurance:
[End of section]
Appendix I: Scope and Methodology:
We reviewed the fiscal year 2007 financial statement audit reports for
the 24 Chief Financial Officer (CFO) Act agencies contained in their
performance and accountability reports. We further analyzed and
compiled the auditors' assessments of agency financial systems'
compliance and the problems that affect Federal Financial Management
Improvement Act (FFMIA) compliance. We did not re-perform the auditors'
work as it was beyond the scope of this engagement. To determine
whether the data were sufficiently reliable, we performed the following
procedures. We gained an understanding of the independence and quality
control environments at the respective auditors that made the agencies'
FFMIA assessment; leveraged our understanding of the methodology used
by the inspectors general (IG) and their contract auditors in past
years to reach conclusions on FFMIA compliance at the respective
agencies; considered management responses to the auditor's findings and
conclusions; and conducted interviews to improve our understanding of
the procedures applied and/or conclusions drawn, where appropriate. We
also reviewed the data for obvious inconsistencies or errors,
completeness, and changes from the prior year. When we found data which
were inconsistent or incomplete we brought them to the attention of the
cognizant IG staff or contract auditor and worked with them to resolve
any issues before using the data as a basis for this report. When we
encountered data that varied from the prior year, we reviewed the
performance and accountability report and auditor's report to determine
the reason for the change. We conducted interviews with the auditors
and IG staffs, and obtained selected supporting documentation. Based on
these actions, we determined that the data from these reports were
sufficiently reliable for the purposes of using the work of other
auditors in our report.
Using the auditors' reports for 13 of the 24 CFO Act agencies that
auditors reported as noncompliant with FFMIA for fiscal year 2007, we
identified problems reported by the auditors that affected agency
systems' compliance with FFMIA. The problems identified in these
reports are consistent with long-standing financial management
weaknesses we have reported based on our work at a number of agencies.
Further, we identified other GAO and IG reports that discussed
financial management systems issues and analyzed and summarized the
reports. In addition, we analyzed the results and information obtained
from the recent Comptroller General's forum on improving the federal
government's financial management systems.[Footnote 54] We also met
with the Office of Management and Budget (OMB) officials to discuss
their current efforts to improve federal financial management and
address our prior recommendations related to FFMIA. In addition, we
reviewed documentation provided by OMB regarding its current
initiatives.
We conducted this performance audit from December 2007 to September
2008, in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
We requested comments on a draft of this report from the Director,
Office of Management and Budget, or his designee. We received written
comments from the Deputy Controller. OMB's comments are discussed in
the Agency Comments and Our Evaluation section and reprinted in
appendix VII. We also received technical comments from OMB, which we
incorporated as appropriate. In addition, we provided relevant excerpts
from a draft of this report to agencies specifically cited in the
report. Several agencies provided technical comments which we
incorporated as appropriate.
[End of section]
Appendix II: Requirements and Standards Supporting Federal Financial
Management:
Congress enacted the Federal Financial Management Improvement Act
(FFMIA)[Footnote 55] in 1996 to obtain the benefits of effective
financial management of the federal government that would flow from
enforced implementation of three earlier 1990s financial management
developments. First, the Chief Financial Officers (CFO) Act of 1990
(CFO Act),[Footnote 56] as expanded by the Government Management Reform
Act of 1994,[Footnote 57] initiated significant financial management
reform at 24 major agencies by establishing a centralized agency
financial management leadership structure and imposing financial
discipline through required annual agencywide audited financial
statements. Second, the Joint Financial Management Improvement Program
(JFMIP)[Footnote 58] in 1995 issued revised Core Financial System
Requirements, which set out the functional and technical requirements
for an agency's core financial system.[Footnote 59] Third, the Federal
Accounting Standards Advisory Board (FASAB), which was established in
1990, had made significant progress after 6 years of work in developing
the federal government's first set of comprehensive financial
accounting standards and concepts[Footnote 60] designed to meet the
needs of federal agencies and users of federal financial information.
Moreover, FFMIA requires implementation of the U.S. Government Standard
General Ledger (SGL). The SGL is intended to improve data stewardship
throughout the federal government enabling consistent reporting at all
levels within the agencies and providing comparable data and financial
analysis governmentwide. Even with these improvements, the Senate
Committee on Governmental Affairs, which considered the legislation
resulting in FFMIA, stated that federal agencies' financial management
systems were inadequate and could be improved by creating a means to
use the audit process established by the CFO Act to assure that federal
agencies would implement and maintain financial management systems that
use the applicable federal financial management systems requirements
and federal accounting standards.[Footnote 61]
Federal Financial Management Systems Requirements:
The policies and standards prescribed for executive agencies to follow
in developing, operating, evaluating, and reporting on financial
management systems are defined in the OMB Circular No. A-127, Financial
Management Systems. The components of an integrated financial
management system include the core financial system, managerial cost
accounting system, administrative systems, and certain programmatic
systems. Administrative systems are those that are common to all
federal agency operations,[Footnote 62] and programmatic systems are
those needed to fulfill an agency's mission. OMB Circular No. A-127
refers to the series of publications entitled federal financial
management systems requirements, initially issued by the Joint
Financial Management Improvement Program's (JFMIP) Program Management
Office as the primary source of governmentwide requirements for
financial management systems. However, as of December 2004, the
Financial Systems Integration Office (FSIO) assumed responsibility for
coordinating the work related to federal financial management systems
requirements and OMB's Office of Federal Financial Management (OFFM) is
responsible for issuing the new or revised regulations. In December
2004, the JFMIP Principals--the Comptroller General of the United
States, the Secretary of the Treasury, and the Directors of OMB and the
Office of Personnel Management--voted to modify the roles and
responsibilities of JFMIP, resulting in the creation of FSIO. Appendix
III lists the federal financial management systems requirements
published to date. Figure 4 is the current model that illustrates how
these systems interrelate in an agency's overall systems architecture.
Figure 4: Agency Systems Architecture:
This figure is a chart showing the agency systems architecture.
[See PDF for image]
Source: OMB.
[End of figure]
Federal Accounting Standards:
FASAB[Footnote 63] promulgates federal accounting standards and
concepts that agency chief financial officers use in developing
financial management systems and preparing financial statements. FASAB
develops the appropriate federal accounting standards and concepts
after considering the financial and budgetary information needs of the
Congress, executive agencies, and other users of federal financial
information and comments from the public. FASAB forwards the standards
and concepts to the Comptroller General, the Director of OMB, the
Secretary of the Treasury, and the Director of the Congressional Budget
Office for a 90-day review. If, within 90 days, neither the Comptroller
General nor the Director of OMB objects to the standard or concept,
then it is issued and becomes final. FASAB announces finalized concepts
and standards in The Federal Register.
The American Institute of Certified Public Accountants designated the
federal accounting standards promulgated by FASAB as being generally
accepted accounting principles for the federal government. This
recognition enhances the acceptability of the standards, which form the
foundation for preparing consistent and meaningful financial statements
both for individual agencies and the government as a whole. Currently,
there are 32 Statements of Federal Financial Accounting Standards
(SFFAS) and 5 Statements of Federal Financial Accounting Concepts
(SFFAC).[Footnote 64] The concepts and standards are the basis for
OMB's guidance to agencies on the form and content of their financial
statements and for the government's consolidated financial statements.
Appendix IV lists the concepts, standards, interpretations,[Footnote
65] and technical bulletins, along with their respective effective
dates.
FASAB's Accounting and Auditing Policy Committee (AAPC)[Footnote 66]
assists in resolving issues related to the implementation of federal
accounting standards. AAPC's efforts result in guidance for preparers
and auditors of federal financial statements in connection with
implementation of federal accounting standards. To date, AAPC has
issued nine technical releases, which are listed in appendix V along
with their release dates.
U.S. Government Standard General Ledger (SGL):
The SGL was established by an interagency task force under the
direction of OMB and mandated for use by agencies in OMB and Treasury
regulations in 1986. The SGL promotes consistency in financial
transaction processing and reporting by providing a uniform chart of
accounts and pro forma transactions used to standardize federal
agencies' financial information accumulation and processing throughout
the year, enhance financial control, and support budget and external
reporting, including financial statement preparation. The SGL is
intended to improve data stewardship throughout the federal government,
enabling consistent reporting at all levels within the agencies and
providing comparable data and financial analysis
governmentwide.[Footnote 67]
[End of section]
Appendix III: Publications in the Federal Financial Management Systems
Requirements Series:
Federal financial management systems requirements (FFMSR) document:
FFMSR-8 System Requirements for Managerial Cost Accounting;
Issue date: February 1998.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-99-5 Human Resources & Payroll Systems Requirements;
Issue date: April 1999.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-99-8 Direct Loan System Requirements;
Issue date: June 1999.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-99-9 Travel System Requirements;
Issue date: July 1999.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-99-14 Seized Property and Forfeited Assets Systems
Requirements;
Issue date: December 1999.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-00-01 Guaranteed Loan System Requirements;
Issue date: March 2000.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-00-3 Grant Financial System Requirements;
Issue date: June 2000.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-00-4 Property Management Systems Requirements;
Issue date: October 2000.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-01-01 Benefit System Requirements;
Issue date: September 2001.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-02-02 Acquisition/Financial Systems Interface Requirements;
Issue date: June 2002.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-03-01 Revenue System Requirements;
Issue date: January 2003.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-03-02 Inventory, Supplies and Materials System Requirements;
Issue date: August 2003.
Federal financial management systems requirements (FFMSR) document:
JFMIP-SR-01-04 Framework for Federal Financial Management Systems;
Issue date: April 2004.
Federal financial management systems requirements (FFMSR) document:
OFFM-NO-0106 Core Financial System Requirements;
Issue date: January 2006.
Federal financial management systems requirements (FFMSR) document:
OFFM-NO-0206 Insurance System Requirements;
Issue date: June 2006.
Source: OMB's Office of Federal Financial Management (OFFM).
Note: Effective December 1, 2004 all financial management system
requirements documents and other guidance initially issued by the JFMIP
were transferred to OFFM and remain in effect until modified.
[End of table]
[End of section]
Appendix IV: Statements of Federal Financial Accounting Concepts,
Standards, Interpretations, and Technical Bulletins:
Concepts: SFFAC No. 1 Objectives of Federal Financial Reporting.
Concepts: SFFAC No. 2 Entity and Display.
Concepts: SFFAC No. 3 Management's Discussion and Analysis.
Concepts: SFFAC No. 4 Intended Audience and Qualitative Characteristics
for the Consolidated Financial Report of the United States Government.
Concepts: SFFAC No. 5 Definitions of Elements and Basic Recognition
Criteria for Accrual-Basis Financial Statements.
Standards: SFFAS No. 1 Accounting for Selected Assets and Liabilities;
Effective for fiscal year[A]: 1994.
Standards: SFFAS No. 2 Accounting for Direct Loans and Loan Guarantees;
Effective for fiscal year[A]: 1994.
Standards: SFFAS No. 3 Accounting for Inventory and Related Property;
Effective for fiscal year[A]: 1994.
Standards: SFFAS No. 4 Managerial Cost Accounting Standards and
Concepts;
Effective for fiscal year[A]: 1998.
Standards: SFFAS No. 5 Accounting for Liabilities of the Federal
Government;
Effective for fiscal year[A]: 1997.
Standards: SFFAS No. 6 Accounting for Property, Plant, and Equipment;
Effective for fiscal year[A]: 1998.
Standards: SFFAS No. 7 Accounting for Revenue and Other Financing
Sources and Concepts for Reconciling Budgetary and Financial
Accounting;
Effective for fiscal year[A]: 1998.
Standards: SFFAS No. 8 Supplementary Stewardship Reporting;
Effective for fiscal year[A]: 1998.
Standards: SFFAS No. 9 Deferral of the Effective Date of Managerial
Cost Accounting Standards for the Federal Government in SFFAS No. 4;
Effective for fiscal year[A]: 1998.
Standards: SFFAS No. 10 Accounting for Internal Use Software;
Effective for fiscal year[A]: 2001.
Standards: SFFAS No. 11 Amendments to Accounting for Property, Plant,
and Equipment- - Definitional Changes-Amending SFFAS 6 and SFFAS 8
Accounting for Property, Plant, and Equipment and Supplementary
Stewardship Reporting;
Effective for fiscal year[A]: 1999.
Standards: SFFAS No. 12 Recognition of Contingent Liabilities Arising
from Litigation: An Amendment of SFFAS 5, Accounting for Liabilities of
the Federal Government;
Effective for fiscal year[A]: 1998.
Standards: SFFAS No. 13 Deferral of Paragraph 65.2 - Material Revenue-
Related Transactions Disclosures;
Effective for fiscal year[A]: 1999.
Standards: SFFAS No. 14 Amendments to Deferred Maintenance Reporting
Amending SFFAS 6, Accounting for Property, Plant and Equipment and
SFFAS 8, Supplementary Stewardship Reporting;
Effective for fiscal year[A]: 1999.
Standards: SFFAS No. 15 Management's Discussion and Analysis;
Effective for fiscal year[A]: 2000.
Standards: SFFAS No. 16 Amendments to Accounting for Property, Plant,
and Equipment - Measurement and Reporting for Multi-Use Heritage
Assets: Amending SFFAS 6 and SFFAS 8 Accounting for Property, Plant,
and Equipment and Supplementary Stewardship Reporting;
Effective for fiscal year[A]: 2000.
Standards: SFFAS No. 17 Accounting for Social Insurance;
Effective for fiscal year[A]: 2000.
Standards: SFFAS No. 18 Amendments to Accounting Standards for Direct
Loans and Loan Guarantees in Statement of Federal Financial Accounting
Standards No. 2;
Effective for fiscal year[A]: 2001.
Standards: SFFAS No. 19 Technical Amendments to Accounting Standards
for Direct Loans and Loan Guarantees in Statement of Federal Financial
Accounting Standards No. 2;
Effective for fiscal year[A]: 2003.
Standards: SFFAS No. 20 Elimination of Certain Disclosures Related to
Tax Revenue Transactions by the Internal Revenue Service, Customs, and
Others, Amending SFFAS 7, Accounting for Revenue and Other Financing
Sources;
Effective for fiscal year[A]: 2001.
Standards: SFFAS No. 21 Reporting Corrections of Errors and Changes in
Accounting Principles, Amendment of SFFAS 7, Accounting for Revenue and
Other Financing Sources;
Effective for fiscal year[A]: 2002.
Standards: SFFAS No. 22 Change in Certain Requirements for Reconciling
Obligations and Net Cost of Operations, Amendment of SFFAS 7,
Accounting for Revenue and Other Financing Sources;
Effective for fiscal year[A]: 2001.
Standards: SFFAS No. 23 Eliminating the Category National Defense
Property, Plant, and Equipment;
Effective for fiscal year[A]: 2003.
Standards: SFFAS No. 24 Selected Standards for the Consolidated
Financial Report of the United States Government;
Effective for fiscal year[A]: 2002.
Standards: SFFAS No. 25 Reclassification of Stewardship
Responsibilities and Eliminating the Current Services Assessment;
Effective for fiscal year[A]: 2003/2005.
Standards: SFFAS No. 26 Presentation of Significant Assumptions for the
Statement of Social Insurance: Amending SFFAS 25;
Effective for fiscal year[A]: 2009.
Standards: SFFAS No. 27 Identifying and Reporting Earmarked Funds;
Effective for fiscal year[A]: 2006.
Standards: SFFAS No. 28 Deferral of the Effective Date of
Reclassification of the Statement of Social Insurance: Amending SFFAS
25 and 26;
Effective for fiscal year[A]: 2005.
Standards: SFFAS No. 29 Heritage Assets and Stewardship Land;
Effective for fiscal year[A]: 2006.
Standards: SFFAS No. 30 Inter-Entity Cost Implementation Amending SFFAS
4, Managerial Cost Accounting Standards and Concepts;
Effective for fiscal year[A]: 2009.
Standards: SFFAS No. 31 Accounting for Fiduciary Activities;
Effective for fiscal year[A]: 2009.
Standards: SFFAS No. 32 Consolidated Financial Report of the United
States Government Requirements: Implementing Statement of Federal
Financial Accounting Concepts 4 "Intended Audience and Qualitative
Characteristics for the Consolidated Financial Report of the United
States Government";
Effective for fiscal year[A]: 2006.
Interpretations: No. 1 Reporting on Indian Trust Funds in General
Purpose Financial Reports of the Department of the Interior and in the
Consolidated Financial Statements of the United States Government: An
Interpretation of SFFAS 7;
Effective for fiscal year[A]: 1998.
Interpretations: No. 2 Accounting for Treasury Judgment Fund
Transactions: An Interpretation of SFFAS 4 and SFFAS 5;
Effective for fiscal year[A]: 1997.
Interpretations: No. 3 Measurement Date for Pension and Retirement
Health Care Liabilities;
Effective for fiscal year[A]: 1998.
Interpretations: No. 4 Accounting for Pension Payments in Excess of
Pension Expense;
Effective for fiscal year[A]: 1998.
Interpretations: No. 5 Recognition by Recipient Entities of Receivable
Nonexchange Revenue: An Interpretation of SFFAS 7;
Effective for fiscal year[A]: 1998.
Interpretations: No. 6 Accounting for Imputed Intra-departmental Costs:
An Interpretation of SFFAS No. 4;
Effective for fiscal year[A]: 2005.
Interpretations: No. 7 Items Held for Remanufacture;
Effective for fiscal year[A]: 2007.
Technical bulletins: TB 2000-1 Purpose and Scope of FASAB Technical
Bulletins and Procedures for Issuance;
Effective for fiscal year[A]: 2000.
Technical bulletins: TB 2002-1 Assigning to Component Entities Costs
and Liabilities that Result from Legal Claims Against the Federal
Government;
Effective for fiscal year[A]: 2002.
Technical bulletins: TB 2002-2 Disclosures Required by Paragraph 79(g)
of SFFAS 7 Accounting for Revenue and Other Financing Sources and
Concepts for Reconciling Budgetary and Financial Accounting;
Effective for fiscal year[A]: 2002.
Technical bulletins: TB 2003-1 Certain Questions and Answers Related to
the Homeland Security Act of 2002;
Effective for fiscal year[A]: 2003.
Technical bulletins: TB 2006-1 Recognition and Measurement of Asbestos-
Related Cleanup Costs;
Effective for fiscal year[A]: 2010.
Source: FASAB.
[A] Effective dates do not apply to Statements of Federal Financial
Accounting Concepts.
[End of table]
[End of section]
Appendix V: Accounting and Auditing Policy Committee Technical
Releases:
Technical Release: TR-1 Audit Legal Representation Letter Guidance;
Release date: March 1, 1998.
Technical Release: TR-2 Determining Probable and Reasonably Estimable
for Environmental Liabilities in the Federal Government;
Release date: March 15, 1998.
Technical Release: TR-3 Preparing and Auditing Direct Loan and Loan
Guarantee Subsidies Under the Federal Credit Reform Act;
Release date: July 31, 1999.
Technical Release: TR-4 Reporting on Non-Valued Seized and Forfeited
Property;
Release date: July 31, 1999.
Technical Release: TR-5 Implementation Guidance on SFFAS No. 10:
Accounting for Internal Use Software;
Release date: May 14, 2001.
Technical Release: TR-6 Preparing Estimates for Direct Loan and Loan
Guarantee Subsidies Under the Federal Credit Reform Act (Amendments to
TR-3);
Release date: January 2004.
Technical Release: TR-7 Clarification of Standards Relating to the
National Aeronautics and Space Administration's Space Exploration
Equipment;
Release date: May 25, 2007.
Technical Release: TR-8 Clarification of Standards Relating to Inter-
Entity Costs;
Release date: February 20, 2008.
Technical Release: TR-9 Implementation Guide for Statement of Federal
Financial Accounting Standards 29: Heritage Assets and Stewardship
Land;
Release date: February 20, 2008.
Source: FASAB.
[End of table]
[End of section]
Appendix VI: Checklists for Reviewing Systems under the Federal
Financial Management Improvement Act:
Checklist: GAO/AIMD-00-21.2.3;
Human Resources and Payroll Systems Requirements;
Issue date: March 2000.
Checklist: GAO-01-99G;
Seized Property and Forfeited Assets Systems Requirements;
Issue date: October 2000.
Checklist: GAO/AIMD-21.2.6;
Direct Loan System Requirements;
Issue date: April 2000.
Checklist: GAO/AIMD-21.2.8;
Travel System Requirements;
Issue date: May 2000.
Checklist: GAO/AIMD-99-21;
.2.9 System Requirements for Managerial Cost Accounting;
Issue date: January 1999.
Checklist: GAO-01-371G;
Guaranteed Loan System Requirements;
Issue date: March 2001.
Checklist: GAO-01-911G;
Grant Financial System Requirements;
Issue date: September 2001.
Checklist: GAO-02-171G;
Property Management Systems Requirements;
Issue date: December 2001.
Checklist: GAO-04-22G;
Benefit System Requirements;
Issue date: October 2003.
Checklist: GAO-04-650G;
Acquisition/Financial Systems Interface Requirements;
Issue date: June 2004.
Checklist: GAO-05-225G;
Core Financial System Requirements;
Issue date: February 2005.
Source: GAO.
[End of table]
[End of section]
Appendix VII: Comments from the Office of Management and Budget:
Executive Office Of The President:
Office Of Management And Budget:
Washington, D.C. 20503:
September 19, 2008:
Ms. Kay Daly:
Acting Director, Financial Management and Assurance:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Daly:
Thank you for the opportunity to comment on the Government
Accountability Office (GAO) draft report entitled "Persistent Financial
Management Systems Issues Remain for Many CFO Act Agencies (GAO-08-
1018)." We appreciate GAO's careful review and agree with your
assessment that federal agencies still need to improve their financial
systems so that reliable, useful, and timely financial management
information is available for decision making. While significant work
remains, we also want acknowledge that agencies are continuing to make
progress. Specifically, the number of noncompliances with the Federal
Financial Management Improvement Act of 1996 (FFMIA) was reduced to 10
from 12 over the previous year. Moreover, the number of disagreements
between auditors and agencies over the FFMIA compliance results has
declined to three from five compared to last year.
We are continuing to work aggressively to assist agencies in building a
strong foundation of financial management practices through OMB's
financial management and systems oversight and under the Financial
Management Line of Business (FMLoB) initiative. Both efforts support
the goals of FFMIA to improve government-wide financial management and
to facilitate timely and reliable information for day-to-day
management.
This past year, we began a significant re-write of OMB Circular No. A-
127, Financial Management Systems, as well as an update to OMB's
implementation guidance for FFMIA. These materials will address prior
GAO recommendations to clarify the definition of FFMIA substantial
compliance so that auditors and agency heads interpret the guidance
more consistently.
As you noted in your report, there have been significant
accomplishments this past year with regards to the FMLoB initiative.
Specifically, we finalized the Common Government Accounting
Classification structure and two major business process standards:
funds control and payment management. For the upcoming fiscal year, we
plan to continue that success by issuing additional business process
standards, receivable and reporting, and will make substantial progress
in developing a standard reimbursables process. The new standards will
be added to the core financial system requirements and become the
baseline that all agencies will follow when implementing their
financial systems.
Thank you again for the opportunity to review and provide comment on
your draft report.
Signed by:
Danny Werfel:
Deputy Controller:
[End of section]
Appendix VIII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Kay L. Daly, (202) 512-9095 or dalykl@gao.gov:
Acknowledgments:
In addition to the contact named above, Michael S. LaForge, Assistant
Director; F. Abe Dymond, Assistant General Counsel; Rosalinda
Cobarrubias; Francine DelVecchio; Tiffany Epperson; Lauren S. Fassler;
Jim Kernen; Sheila D. Miller; and Patrick Tobo made key contributions
to this report.
[End of section]
Related GAO Products:
Financial Management: Long-standing Financial Systems Weaknesses
Present a Formidable Challenge. GAO-07-914. Washington, D.C.: August 3,
2007.
Federal Financial Management: Critical Accountability and Fiscal
Stewardship Challenges Facing Our Nation. GAO-07-542T. Washington,
D.C.: March 1, 2007.
Financial Management: Improvements Under Way but Serious Financial
Systems Problems Persist. GAO-06-970. Washington, D.C.: September 26,
2006.
Financial Management: Achieving FFMIA Compliance Continues to Challenge
Agencies. GAO-05-881. Washington, D.C.: September 20, 2005.
Financial Management: Improved Financial Systems Are Key to FFMIA
Compliance. GAO-05-20. Washington, D.C.: October 1, 2004.
Financial Management: Recurring Financial Systems Problems Hinder FFMIA
Compliance. GAO-04-209T. Washington, D.C.: October 29, 2003.
Financial Management: Sustained Efforts Needed to Achieve FFMIA
Accountability. GAO-03-1062. Washington, D.C.: September 30, 2003.
Financial Management: FFMIA Implementation Necessary to Achieve
Accountability. GAO-03-31. Washington, D.C.: October 1, 2002.
Financial Management: Effective Implementation of FFMIA Is Key to
Providing Reliable, Useful, and Timely Data. GAO-02-791T. Washington,
D.C.: June 6, 2002.
Financial Management: FFMIA Implementation Critical for Federal
Accountability. GAO-02-29. Washington, D.C.: October 1, 2001.
Financial Management: Federal Financial Management Improvement Act
Results for Fiscal Year 1999. GAO/AIMD-00-307. Washington, D.C.:
September 29, 2000.
Financial Management: Federal Financial Management Improvement Act
Results for Fiscal Year 1998. GAO/AIMD-00-3. Washington, D.C.: October
1, 1999.
Financial Management: Federal Financial Management Improvement Act
Results for Fiscal Year 1997. GAO/AIMD-98-268. Washington, D.C.:
September 30, 1998.
Financial Management: Implementation of the Federal Financial
Management Improvement Act of 1996. GAO/AIMD-98-1. Washington, D.C.:
October 1, 1997.
[End of section]
Footnotes:
[1] GAO, Fiscal Stewardship: A Critical Challenge Facing Our Nation,
GAO-07-362SP (Washington, D.C.: January 2007); Suggested Areas for
Oversight for the 110th Congress, GAO-07-235R (Washington, D.C.: Nov.
17, 2006); 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[2] Federal Financial Management Improvement Act of 1996, Pub. L. No.
104-208, div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept.
30, 1996).
[3] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
[4] The term financial management systems includes the financial
systems and the financial portions of mixed systems necessary to
support financial management, including automated and manual processes,
procedures, controls, data, hardware, software, and support personnel
dedicated to the operation and maintenance of system functions.
[5] GAO, Highlights of a Forum Convened by the Comptroller General of
the United States: Improving the Federal Government's Financial
Management Systems, GAO-08-447SP (Washington D.C.: Apr. 16, 2008).
[6] The five CFO Act agencies whose auditors no longer reported lack of
substantial compliance with FFMIA requirements were the departments of
Energy, the Interior, Justice, and Labor, and the Small Business
Administration (SBA). The one agency that moved into noncompliance was
the Environmental Protection Agency.
[7] A "material weakness" is a significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood
that a material misstatement of the financial statements will not be
prevented or detected.
[8] A "significant deficiency" is a control deficiency, or combination
of deficiencies, that adversely affects the entity's ability to
initiate, authorize, record, process, or report financial data
reliability in accordance with generally accepted accounting principles
such that there is more than a remote likelihood that a misstatement of
the entity's financial statements that is more than inconsequential
will not be prevented or detected.
[9] S. Rep. No. 104-339, at 10 (July 30, 1996).
[10] GAO, Financial Management: FFMIA Implementation Critical for
Federal Accountability, GAO-02-29 (Washington, D.C.: Oct. 1, 2001) and
GAO, Financial Management: FFMIA Implementation Necessary to Achieve
Accountability, GAO-03-31 (Washington, D.C.: Oct. 1, 2002).
[11] GAO, Financial Management Systems: Additional Efforts Needed to
Address Key Causes of Modernization Failures, GAO-06-184 (Washington,
D.C.: Mar. 15, 2006).
[12] Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982) (codified at 31
U.S.C. § 3512 (c), (d)).
[13] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[14] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).
[15] Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).
[16] Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996).
[17] Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002) (codified at 31
U.S.C. § 3515). The Accountability of Tax Dollars Act of 2002 extends
the requirement to prepare and submit audited financial statements to
most executive agencies not subject to the CFO Act unless they are
exempted by OMB. However, these agencies are not required to have
systems that are compliant with FFMIA requirements.
[18] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).
[19] Pub L. No. 107-347, title III, 116 Stat. 2946 (Dec. 17, 2002).
[20] Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).
[21] In December 2004, the JFMIP Principals voted to modify the roles
and responsibilities of the JFMIP, resulting in the creation of FSIO.
FSIO assumed responsibility for coordinating the work related to
federal financial management systems requirements and OMB's Office of
Federal Financial Management (OFFM) is responsible for issuing the new
or revised regulations. See OMB, Update on the Financial Management
Line of Business and the Financial Systems Integration Office,
memorandum (Washington, D.C.: Dec. 16, 2005).
[22] The PCIE--which is governed by Executive Order No. 12805 of May
11, 1992--was established to (1) address integrity, economy, and
effectiveness issues that transcend individual government agencies and
(2) increase the professionalism and effectiveness of inspectors
general personnel throughout the government. The PCIE is composed
primarily of the presidentially appointed inspectors general. Officials
from OMB, the Federal Bureau of Investigation, Office of Government
Ethics, Office of Special Counsel, and the Office of Personnel
Management (OPM) serve on the PCIE as well.
[23] GAO/PCIE, Financial Audit Manual, Volume 1, GAO-08-585G
(Washington D.C.: July 2008) and GAO/PCIE, Financial Audit Manual,
Volume 2, GAO-08-586G (Washington D.C.: July 2008).
[24] GAO-08-447SP.
[25] GAO-02-29, GAO-03-31.
[26] The term mixed system means an information system that supports
both financial and nonfinancial functions of the federal government or
components thereof.
[27] Departments of Energy, the Interior, Justice, and Labor, and the
Small Business Administration.
[28] See, for example, GAO-02-29 and GAO, Financial Management: Long-
standing Financial Systems Weaknesses Present a Formidable Challenge,
GAO-07-914 (Washington, D.C.: Aug. 3, 2007).
[29] Auditors provide "negative assurance" when they state that nothing
came to their attention during the course of their planned procedures
to indicate that the agency's financial management systems did not meet
FFMIA requirements. Under generally accepted government auditing
standards, there are no requirements to perform additional testing
beyond that needed for a financial statement audit for an auditor to
give negative assurance. Testing that is not sufficient to support an
opinion means that an area of noncompliance may be missed. In contrast,
providing positive assurance of FFMIA compliance requires auditors to
perform more audit procedures than those needed to render an opinion on
the financial statements.
[30] GAO-02-29.
[31] OMB, Revised Implementation Guidance for the Federal Financial
Management Improvement Act, memorandum (Washington, D.C.: Jan. 4,
2001).
[32] U.S. Department of Justice, Office of the Inspector General, U.S.
Department of Justice Annual Financial Statement Fiscal Year 2007
Commentary and Summary, Audit Report 08-01 (Washington, D.C.: December
2007).
[33] U.S. Department of Justice Office of the Inspector General, Top
Management and Performance Challenges in the Department of Justice,
memorandum (Washington, D.C.: 2007).
[34] See, for example, GAO-07-914.
[35] GAO-02-29.
[36] See, for example, GAO-02-29 and GAO-07-914.
[37] S. Rep. No. 104-339, at 10 (July 30, 1996).
[38] GAO, Financial Management Systems: Lack of Disciplined Processes
Puts Implementation of HHS' Financial System at Risk, GAO-04-1008
(Washington, D.C.: Sept. 23, 2004).
[39] GAO-06-184.
[40] Disciplined processes have been shown to reduce the risks
associated with software development and acquisition efforts to
acceptable levels and are fundamental to successful system
implementations. Examples of some of the disciplined processes include
requirements management, testing, risk management, data conversion, and
project management.
[41] GAO, DOD Business Transformation: Lack of an Integrated Strategy
Puts the Army's Asset Visibility System Investments at Risk, GAO-07-860
(Washington, D.C.: July 27, 2007).
[42] Field/Tactical refers to Army units that are deployable to
locations around the world such as Iraq and Afghanistan.
[43] GAO-04-1008.
[44] Department of Health and Human Services, FY 2007 Agency Financial
Report (Washington, D.C.: Nov. 15, 2007).
[45] GAO, Homeland Security: Departmentwide Integrated Financial
Management Systems Remain a Challenge, GAO-07-536 (Washington, D.C.:
June 21, 2007).
[46] Department of Homeland Security Office of Inspector General,
Letter Report: Review of DHS' Financial Systems Consolidation Project,
OIG-08-47 (Washington, D.C.: May 9, 2008).
[47] See Savantage Financial Services, Inc. v. United States, 81 Fed.
Cl. 300, 308 (2008): see also Competition in Contracting Act, codified,
in part, as amended, at 41 U.S.C. § 253 (a).
[48] 81 Fed. Cl. 300, 311.
[49] According to OMB, the goals of the FMLOB initiative are to (1)
provide timely and accurate data for decision making; (2) facilitate
stronger internal controls that ensure integrity in accounting and
other stewardship activities; (3) reduce costs by providing a
competitive alternative for agencies to acquire, develop, implement,
and operate financial management systems through shared service
solutions; (4) standardize systems, business processes, and data
elements; and (5) provide for seamless data exchange between and among
federal agencies by implementing a common language and structure for
financial information and system interfaces.
[50] GAO-06-184.
[51] OMB, Update on the Financial Management Line of Business,
memorandum (Washington, D.C.: Jan. 28, 2008).
[52] FSIO, Financial Management Systems Standard Business Processes for
U.S. Government Agencies (Washington, D.C.: July 18, 2008). This
document presents governmentwide common processes and activities,
standard business rules, and data exchanges for core financial business
processes. It contains detailed descriptions of the funds and payment
management processes and indicates that the receivables management,
reimbursables, and reporting processes will be presented at a future
date.
[53] OMB, Budget of the United States Government Fiscal Year 2009,
Analytical Perspectives, Supplemental Materials, Table 9-9 (Washington,
D.C.: Feb. 4, 2008).
[54] GAO, Highlights of a Forum Convened by the Comptroller General of
the United States: Improving the Federal Government's Financial
Management Systems, GAO-08-447SP (Washington D.C.: Apr. 16, 2008).
[55] Federal Financial Management Improvement Act of 1996, Pub. L. No.
104-208, div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept.
30, 1996).
[56] Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990).
[57] Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).
[58] JFMIP was originally formed under the authority of the Budget and
Accounting Procedures Act of 1950 and was a joint and cooperative
undertaking of GAO, the Department of the Treasury, the Office of
Management and Budget (OMB), and the Office of Personnel Management
(OPM), working in cooperation with each other to improve financial
management practices in the federal government. As a result of a
realignment that OMB announced in December 2004, JFMIP's
responsibilities for financial management policy and oversight in the
federal government were transferred to OMB's Office of Federal
Financial Management (OFFM). Although JFMIP no longer exists as a
separate organization, its four Principals--the Comptroller General of
the United States, the Secretary of the Treasury, and the Directors of
OMB and OPM--continue to meet at their discretion.
[59] Core financial system capabilities, as defined by OFFM, include
managing general ledger, funding, payments, receivables, and certain
basic cost functions.
[60] Accounting standards are authoritative statements of how
particular types of transactions and other events should be reflected
in financial statements, while accounting concepts explain the
objectives and ideas upon which the standards were developed.
[61] S. Rep. No. 104-339, at 1-13 (July 30, 1996).
[62] Examples of administrative systems include budget, acquisition,
travel, property, and human resources and payroll.
[63] In October 1990, the Secretary of the Treasury, the Director of
OMB, and the Comptroller General established FASAB to develop a set of
generally accepted accounting standards and concepts for the federal
government. Effective October 1, 2003, FASAB is comprised of six
nonfederal or public members, one member from the Congressional Budget
Office, and the three sponsors.
[64] Accounting standards are authoritative statements of how
particular types of transactions and other events should be reflected
in financial statements. SFFACs explain the objectives and ideas upon
which FASAB develops the standards.
[65] An interpretation is a document of narrow scope that provides
clarifications of original meaning, additional definitions, or other
guidance pertaining to an existing federal accounting standard.
[66] In 1997, FASAB, in conjunction with OMB, Treasury, GAO, the Chief
Financial Officers Council, and the President's Council on Integrity
and Efficiency, established AAPC to assist the federal government in
improving financial reporting.
[67] SGL guidance is published in the Treasury Financial Manual.
Treasury's Financial Management Service is responsible for maintaining
the SGL and answering agency inquiries.
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