Evolution of Federal Financial Management Reforms

For 22 of the 24 largest federal agencies, they’ve achieved that status. Two agencies remain in financial statement purgatory – the Departments of Defense and Housing and Urban Development. Until they can meet muster with their auditors, the governmentwide financial statement will remain incomplete, as well.

The requirement to produce agency and governmentwide financial statements, and have them audited, stems from the early 1990s. At that time, no one had a clue how hard it would be to complete a “clean” or “unqualified” audit opinion.

How did the CFO Act get its start? What did Vice President Gore think about it? - John Kamensky describes.

Background. In 1990, Congress passed the Chief Financial Officers Act with the strong support of the General Accounting Office (now the Government Accountability Office), which had sounded the alarm that agencies were unable to properly manage programs or protect assets because they had weak internal controls and outdated financial systems that produced unreliable financial data.

The CFO Act created the roles of chief financial officer and deputy chief financial officer in each of the 24 largest agencies (which account for about 98 percent of all federal spending) and made them responsible for monitoring budget execution, preparing financial statements, and overseeing internal controls. Their most prominent responsibility under the Act is to prepare annual financial statements whose audits are overseen by their agency’s inspector general.

The 1990 Act only required financial statements and audits in selected agencies. In 1993, the National Performance Review recommended extending the requirement to all agencies and for the federal government to “Issue an annual financial report to the taxpayers.”  That recommendation was put into law in 1994 and governmentwide financial statements have been produced since 1996. The most recent was issued earlier this year, covering fiscal year 2019.

However, the goal was full auditability of the governmentwide statement by fiscal year 1997. That turned out to be wildly optimistic – the goal of an audited financial statement is still an aspiration today!

The Big Hold Out. The big holdout among agencies is the Defense Department, which accounts for about half of all discretionary federal spending. It is the only agency that has never had a clean opinion (HUD lost its standing back in 2012 but is soon approaching a clean opinion again). But it is not for want of trying.  Rolling Stone reported last year: “In April 2016, U.S. Comptroller General Gene Dodaro testified before the Senate that the Pentagon had spent up to $10 billion to modernize its accounting systems. Those attempts, he said, had ‘not yielded positive results.’”

Former Defense chief management officer Peter Levine (and former key Senate oversight staffer), in a 2018 study for the Institute for Defense Analysis, analyzed why – after a quarter century – the department hadn’t been able to produce an auditable financial statement.  He candidly wrote:

“The Department of Defense (DOD) developed plans, conducted training, built systems, and hired management consultants. It tried creating new offices, agencies, councils, committees, and cross-functional teams. It invested hundreds of millions of dollars in architectures, billions of dollars in the compilation and reconciliation of financial data, and tens of billions of dollars in new business systems. . . None of it worked. In 2018, the Department entered a new round of audits, knowing even before it started that the result would be a disclaimer—meaning that despite years of effort, DOD could not produce sufficient information to support an audit opinion [and]  that the audit effort would cost almost a billion dollars in the first year, more than $4 billion dollars over the five years of the Future Years Defense Program (FYDP) and was unlikely to result in a clean audit for at least ten years.”

Despite the seeming futility of producing a clean audit statement, Levine concluded: “Despite this decades-long record of failed financial reforms, the Department’s business systems and processes are in better shape today than they were in the 1990s.”

It’s Not Just Audited Financial Statements. But financial management is more than just audited financial statements. A dozen other pieces of legislation extend the financial management reforms begun under the CFO Act, including:

• Government Performance and Results Act of 1993
• Government Management Reform Act of 1994
• Federal Financial Management Improvement Act of 1996
• Accountability of Tax Dollars Act of 2002
• Improper Payments Information Act of 2002
• Federal Funding Accountability and Transparency Act of 2006
• GPRA Modernization Act of 2010
• Improper Payments Elimination and Recovery Act of 2010
• Improper Payments Elimination and Recovery Improvement Act of 2012
• Digital Accountability and Transparency Act of 2014
• Fraud Reduction and Data Analytics Act of 2015
• Foundations for Evidence-Based Policymaking Act of 2018
• Payment Integrity Information Act of 2019

In general, these laws help Increase transparency by putting performance and spending information on websites, and is beginning to create links between spending data and federal program activities in order to allow policymakers and the public to more effectively track federal spending and address the problem of improper payments.

Progress Made: A 30-Year Assessment by GAO. GAO recently conducted a broad assessment of the governmentwide progress toward better financial management systems, as part of a broader review of the CFO Act after 30 years.

It noted that agencies still struggle to meet the statutory reporting requirements and that the government lacks a long-term modernization plan for its financial systems.  It also noted that some systems still rely on outdated programming languages – such as the IRS’s system for taxpayer data, which is still based in COBAL (the Latin of the computer world).

However, GAO hopefully noted that “substantial progress” has been made and that “refinements would yield added benefits.” One such “refinement” is the ongoing shift from agency-based financial systems to cross-agency shared financial services, which GAO said may help the standardization and modernization efforts. For example, consolidated payroll services alone resulted in more than $1 billion in cost savings and avoidance over 10 years, according to a study by the Office of Personnel Management.

GAO highlighted several other areas of progress, including:

• Proactive Governmentwide leadership, such as steps taken in 2018 by Treasury, in coordination with the Office of Management and Budget, where it: “issued a 10-year vision for federal financial management, which provides details on (1) establishing a new role for CFOs, moving from transaction processors to strategic partners; (2) transforming federal collections; (3) optimizing federal disbursements; (4) strengthening financial reporting; and (5) expanding financial management services to agencies.”
• Improvements in financial reporting, such as governmentwide financial statements since fiscal year 1997, agency financial statements, and the issuance of governmentwide financial standards by the Federal Accounting Standards Advisory Board.
• Significant improvements in internal controls in agencies, thereby increasing the reliability of reported financial information, as reflected in agency audits.
• Improvements in financial management systems, such as the introduction and adoption of shared services and Treasury’s creation in 2010 of an Office of Financial Innovation and Transformation which “identifies and facilitates the implementation of innovative solutions to help agencies become more efficient and transparent.”

Next Steps in Modernizing Financial Management. Based on GAO’s assessment and reports by other organizations, there are new efforts to modernize the CFO Act.  For example, a governmentwide survey of agency CFOs conducted by Grant Thornton concludes that there is an “emerging consensus throughout the federal financial management community that the time for substantial reform is now.”  These include proposals to:

• Unify and broaden responsibilities assigned to the CFO
• Revise reporting requirements in favor of a more risk-based approach that focuses more on analyses that are more useful to stakeholders and decision makers.

A pending Senate bill, the CFO Vision Act of 2020, incorporates some of these recommendations, including the requirement that CFOs: “ . . . oversee and provide leadership in the areas of budget formulation and execution, planning and performance, risk management, internal controls, financial systems, and accounting.”

But beyond these proposed statutory changes, there is a potentially broader agenda that OMB and agencies could undertake, such as:

• Linking performance and cost information in agency reports
• Modernizing agency financial management systems (legacy systems are still used in half of the major agencies) by moving to shared services
• Closing the skills gap among the financial management workforce.
• Shifting financial managers’ efforts away from a laser focus on producing audited financial statements to placing a greater reliance on enterprise risk management approaches. 
• Making a greater investment in producing real-time financial data as opposed to just year-end audits.

Because of the Evidence and Open Data movement, there is already a revolution in agencies to make more granular data available to frontline managers along with analytic tools, in real time, in order to empower them to make better informed decisions. Adding financial data to that wealth of newly available program data may be a new way to better engage agency managers with the financial data that has traditionally been the purview of CFOs.