Creative Thinking in Financial Management

Published by the Government Accountability Office on 1971-06-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                           ADDRESS BY
                                            BEFORE THE
                               2oTH   ANMUAL w 1 0 m     SYMPOSIUM

                       FEDERAL GOVERNMENT ACCOUNTANTS ASSOCIATION                     '

                                          JUNE   2U,   1971
                                        WASHINGTON, D. C.


      A s most of you know by now, the General Accounting Office observed

i t s 50th anniversary t h i s month.      In commemorating t h i s milestone    -0

important especially t o t h e Federal Government, t h e Congress, and t o t h e

taxpayers who provide t h e public funds f o r government aperations           -- we
have paid t r a d i t i o n a l respect t o GAO's accomplishments which, l e t m e say

without going i n t o d e t a i l , have been considerable.      But t h e GAO, like any

other organization, cannot r e s t on i t s l a u r e l s .   AccordingLy, t h e events

through which we observed GAO's h a l f century of s e r v i c e , w e r e coordinated,

as far as it was appropriate, t o a c e n t r a l theme which we c a l l e d "improving

management foramore e f f e c t i v e government   ."
      I want to-emphasize t h e same theme t o you all today on t h e occasion
of t h i s 20th Annual National Symposium of the Federal Government Accountants

Association.     T h i s , too, is an important milestone.        But our business

today i s t o look t o the f u t u r e while honoring t h e past.     Accordingly, my

theme t h i s afternoon is b u i l t on the c e n t r a l message of improving
accounting      -- through t h e services of i t s accountants -- t o a t t a i n more
effective management of all t n e s i n the Federal Government i n t h e decade

of challenge which we a l l face.

         Improvement f i r s t of all requires innovation.           The creative thinker

i s t h e innovator.         H i s a t t r i b u t e s include both inquisitiveness and

imgination.        H e i s the challenger of the present, the architect of things

t o come.      George Bernard Shaw expressed w e l l the Function of imagination.

"Imagination," he wrote, " i s the beginning of creation.                  You imagine what

you desire, you w i l l what you imagine; and a t l a s t you create what you

will..   ''
         The innovator i n t h e f i e l d of financial management must not r e s t r i c t

h i s vision t o what he can acconplish alone i n h i s special f i e l d ,            H e must

.visualize h i s role as one of coordinating h i s financial management

expertise with the i n t e r e s t s of a l l who use h i s data t o achieve b e t t e r

nanagement r e s u l t s .     Financial management i s not t h e sole responsibility

of those having t h a t f i e l d as t h e i r special competence; it i s m i n t r i n s i c

p a r t of t h e r e s p o n s i b i l i t i e s of all governrent nmagers, whatever t h e i r

function.       Conversely, the financial managenent s p e c i a l i s t must also concern

himself with the management of personnel, of supply, and of f a c i l i t i e s .

These management f'unctions and financial management a r e d i r e c t l y related.

         The need is f o r all types of managers t o combine ;heir             respective

s k i l l s imaginatively, taking advantage of every financial data resource

t o improve operating r e s u l t s .       Innovative opportunities abound.          Let me

list and then elaborate on a few of them:

                                                                                          -   2-
     --The f'unctions of t h e accountant should be extended beyond

       those of "scorekeeping" and "attention directing" into the
       r o l e of participant i n making decisions and solving problems.

     --Productivity and work standards and measurements should be
       coordinated with cost accounting t o improve the budgeting and

       management processes.
     --Full integration of accounting support with the planning=

       programminpbudgeting system should be required t o add
       c r e d i b i l i t y t o the system by bolstering i t s validation

       techniques and disclosing results.
     --The,interdisciplinary             significance of data and i t s impact

       upon conduct and structure of financial management functions
       should be recognized.
     --The Azll potential of operational audits and program effective-

       ness reviews should be developed as a financial management tool,
       and l a s t l y

     --Consideration should,be given t o t h e significant financial

       management implications of the moves toward regionalization
       of agency a c t i v i t i e s .
Extension of the Functions of the Accountant

     The majority of a r t i c l e s i n current publications of t h e academic

accounting community are mathematically oriented.               Many, i f not most,

relate t o t h e use of financial data i n predictive and projective anilyses,

Perhaps predictive analysis will become a function of accountants i n

private industry long before that of Federal accountants, since accounting

in private industry is associated more directly with the planning and
budgeting functions.   It is possible, however, that these influences
may soon be reflected in governmental financial management.
     In the Federal Government the accounting function is laxgely
separated from the budgeting function.    In many agencies the budgeting
functions a r e separated from the financial planning f’unctions.   There

has been little professional yapport between the functions in many cases.
In some agencies, the role of the accountant is principally. that of
scorekeeper. More often than desirable, he has little or inadequate
knowledge of, and concern with, the analytical processes of budget
formulation and execution.

     In the American financial and business community we are seeing
adaptations of the scientific method to the decision-making processes
of management. Concepts of system analyses, cybernetics, infomation
economics, communications, measurement, and decision theory: are being
added to mmagementts tools,. At the    same   time we are witnessing the
development of more inclusive, if not total, information-systemsin
recognition of the increasing interdisciplinary significance of data,
abetted by advances in computer technology.
     -Accounting is one of the many disciplines making up the t o t a l infoma-
tion systems. Albeit an important information system, accounting is less
prima,ry than heretofore. Other information systems are arising to
embrace data-structures and outputs of their owns These challenge the
significance of the accounting structure, its contents and outputs.
     The accountant must be aware of these phenomena.         They affect hoi?
                                                                                 1   ,

he operates. They determine how he should operate. A s the products gf

the accounting system change in the relationships of their use to the

products of other information systems, the accountant must change his
outlook to reassess his role in the totd infomation systems
     These are not solely phenomena of t h e American financial and business
community. A recent research study of accounting controls by Professor
Bertrand Honcritz of Syracuse University, published by the American
Accounting Association concludes that in the framework of central planning
in the Soviet Union following the economic reforms of 1966, economics and
business administration   -- which includes accounting   0-    are intertwined

inseparate l y   .
     If the academic accounting profession is a reliable forecaster, the
developing role of the Federal accountant may be that of "information
manager."   In assuming that role, the Federal accountant faces real
challenges. With the greater utilization of mathematical decision
models, there w i l l be complex problems of coordinating the models with
the traditional accounting reports. The Federal accountant must learn)
to t u the language and use the concepts of marginal and regression
analysis, cash fluws and opportunity costs, to mention,a few.         This is
t h e time t o consider whether performance monitored by only conventional

malytical techniques may not lead to impaired f'unctioning of t h e
processes of making decisions.

Productivity, Work Measurement, and Cost

      The matching principle-the           association of revenues and expenses i n

comercial accounting and the association of productivity axd work measure-

ments w i t h costs i n govemnental accounting-is                mch of the essence of the

a c c r u d concept of accounting.       The sole purpose of accrv.al accou?ting i s

t o provide management and others interested i n the quality of agency

perfommce with improved, and more meaningful financial data.

      The basics of these relationships &re expressed i n the Accounting

Principles and Standards f o r Federal Agencies of the C o q t r o l l e r General

(Section 1 6 A , T i t l e 2 ) .   It provides f o r t h e use of cost accounting

techniques, wherever appropriate and feasible, t o produce quantity data

r e l a t i n g t o performance and output; t o r e l a t e costs w i t h accoxqlishents;

and t o disclose u n i t costs.       It s t a t e s t h a t these data a r e e s s e n t i a l t o

the proper functioning of the planning-programmin~~budgetingsystem and

indicates t h e i r u t i l i t y i n s e t t i n g perfom-arlce standards &?d n;anaging

current performance       .
      OMB Circular A - l l provides f o r the association of productivity and
work standards and measurements w i t h operational costs t o produce unit

costs i n support of the budgetary processes.                 These relationships are

recognized also i n the current joint project of the Office of Management and                         17
Budget, t h e Civil Service Commission, and t3e General Accounting Office.                            4
The objectives of t h i s project i s t o deternine the extert;and                     feasibility,

of   expanding t h e use of productivity and work neasurement systems i n

the Federal. Government.

      Another view of these associations was expressed i n a recent report of

a consulting firm t o the Office of Management and Budget.                    In i t s
discussion of t h e "building block" concept under systems for program

planning, budgeting, and management, t h e report s t a t e s :          ~...
      "Agency accounting and program management systems shokd

       measure both r e s u l t s and resource performance f o r each

       building block, thereby allowing progress toward agency

       goals and objectives t o be reviewed and variations from

       plan t o be idgntified and corrected."

      The implementation of t h e matching principle to make u n i t cost data

credible i n the budgeting and nianagement decision processes requires the

close coordination of the e f f o r t s of all concerned.          Manageme

who devise the performance and work standards and measures and?who a s s i s t s

i n identifying t h e responsibility and work centers; systems accountants

who s e t up the cost centers and cost accounts; and t h e planners and the

budgeteers-these      four groups who use t h e products must work j o i n t l y o If

these groups do not p a r t i c i p a t e effectively i n functions of t n i l y j o i n t

concern, there w i l l not be an adequate integration of systems of planning,

programing, budgeting, accounting and reporting.

Closing t h e Loop of t h e PPB System                                           e
      Early pioneers i n the development of the planning-progrmrriing-budgetin
systems soon saw t h e need for "closing the loop" by providing f o r accounti
support of t h e execution of programs.          In 1965 Charles J. Hitch, former

Assistant Secretary of Defense (Comptroller) and now President of t h e                      . .
                      ,    University of California wrote with reference t o his experiences i n the
                     , -                                                                                                  ?<.---

                           Department of Defense :
.. , .

i..<     -
                                 "Costs a r e measured i n terms of ' t o t a l obligational authority-----'.

                                Now, admittedly t h i s i s something of a compromise,              It would be

                                preferable t o cost the program-----ideally            i n terms of resources

                                consumed.        However, the accounting d i f f i c u l t i e s were so great we
                 8              did not attempt t h a t approach-----        .I'

                           A t another point, M r , Hitch remarked:

                                "The---=--less- than- satisfactory aspect of t h e grogamming system

                                 is   QI.W   machinery for measuring and estimating costs."

                                "Our appropriation accounting systems do not d i r e c t l y yield. operating

                                costs by program elements, e.g.,           by aircyaft tme,-----Since        these

                                  actuds        (allocation of budget categories ) constitute t h e base

                                f o r projecting future operating costs, some parts of t h e finarmciaL
                                program axe not too meaningrul."

                                More recent reports by consultants t o the Office of Management and

                           Budget have espoused the "building block" concept,               This embraces t h e need

                           f o r accounting support in t h e i n t e m e l a t e d data structure' of program

                           planning, budgeting, and management systems.

                                "he failure t o provide f o r evaluation of how program are executed
             3                                                                                  i

                           i s one of t h e fundamental weaknesses of the PPB system t o date.              Accountants

                           and auditors need to devote much thought to the p a r t they can and should

                           contribute t o accounting and reporting on the execution phases of the

                           F'PB system.
        Recognition of t h e Interdisciplinary Significances of Data

             As has often been said, the computer revolution has resulted i n
I   ,

        an explosion of data.       B i t s and pieces of Inforrcation unknown before the

        computer o r too costly t o identify, segregate, and i n t e r r e l a t e have been

        uncovered.    The computer has provided t h e means of r e l a t i n g P i n a n c i a and

        nonfinancial data i n more current and meaningful modes.             Aggregates of

        data have the potentials f o r subdivision and recomposition i n t o different
        data arrangements.      Thus new behavioral relationships are surfaced which
        may be the i n t e r e s t and concern of such other disciplines as economists,

        sociologists, program and personnel managers, f o r example, All those

        engaged i n f i n a n c i a l management are faced w i t h the need f o r providing

        more and more data t o serve an increasing number of needs.
              This phenomenon has opened up t o management new v i s t a s .        Those working

        with financial data now need t o know a great deal. more about t h e uses t o

        which such data may be put i n other disciplines, i n order t o b e t t e r
        prepare t h e i r data f o r these uses.    For example, the f i n a n c i a l manager
        needs t o know i n what contexts personnel data will or should be presented

        i n order t o synchronize h i s f i n a n c i d data.
              These aspects of data relationships w i l l affect not only the account

        structure, but a l s o i t s contents and output.       As never before the
        accountant must join all those devoted t o classifying financial and

        related nonfinancial information.

              The interdisciplinary q u a l i t i e s of data r a i s e the question whether
        and how the organizational structure should be reoriented, both within
the f i e l d o f financial mmage.n,er.t and ir. its relationship t c other

h c - l i o n a l %magernent areas, i n order t o be nore responslve t o t'nese

newly recognized data relationships.                      There is need t o consider kow the

i n t e r r e l a t e d aspects of data ixpinge upon t h e nz-n-ller ir. xhick! t k e fifiancial

nanagement organization should be prepared t o F-eet the chLler.ses of

providing infornation 'to W f i U Dmagement needs.

The ExDanding Role of t h e Auditor

       The future r o l e of t h e auditor          ir,    the Federal Government, is d i r e c t l y

related t o h i s capab,ilities t o rise t o the everchmging and expanding

demands f o r h i s services.

       The f'undamental nature of requests f o r h i s services has evolved far

beyond those devoted t o fiscal accountabillty audits.                        Operational and

management audits are common today in many of the agemies of the
Executive Branch.          Reviews of program results              -- i.e.,   those concerned

with evaluating the extent of attainment of program ob2clctives                         -0   recently

have been added t o t h e audit objectives of GAO auditors.

       This has been the natural result of the developnent of t h e program

budget w i t h i t s broad output orientation, neasuring actual against planned

effectiveness and timing.

       The managements of some agencies see2 inclined t o zssign reviews of

p r o g r c r e s u l t s - t o t h e i r audit staffs.     Other agency managements appear t o

veer i n t h e direction of assigning these types of reviews t o management

evaluation groups within f'unctional management areas.

       The broadening of agency audit aRd evaluation f m c t i o r s suggests a

s e r i e s of questions.
     --As reviews of progrm results brozden beyofid the areas
       of f i s c a l accountability and nanagenent audits, are present

        agency audit staffs prepared-by          trainicg, orientation, a d

        approaches-to     produce accepta3le products?

     --Should the auditor l i m i t hirnself--an.d should ageocy management

       l i m i t the a u d i t o r - t o reviews of financial rmnagement, t h e

        area i n which most auditors are trained i n colleges and


     --Should t h e aaditor broaden h i s training i n h i s career develop-
       ment t o encompass t h e nonfinancial areas? Should colleges and

       u n i v e r s i t i e s broaden the accounting CuTicUlum t o prepare the

        graduate f o r t h i s enlarging r o l e ?

     --Should the Federal auditor be trained t o know when and how t o

        seek the advice of other disciplines t o improve the products of

        h i s audits?

     --And,   finally, should audittng and evaluation be perforned as a

        joint-teaz e f f o r t including all disciplines appropriate to a

        given assignment?

     These questions cannot be answered vithout additional research.

The assignment of reviews of program results t o sgency audit staffs w i l l

not come automatically.        Auditors w i l l have t o prove themelves i n this

extended area.     Each audit s t a f f w i l l have t o decide haw best it can
persuade agency management t o pernit it t o i n i t i a t e introductory

assignments i n t h i s mea.
      If any cf you t h i n k T an looking tm far i n t o the future, it ;'noulc
h e noted that in     %he General Accounting Office, t h e e x p m d e d scope of
                            .   r

auc5ting has become a matter of' law.             The xost recent congressione-l

expressilon.came with t h e enactnent of the Legislative Reorganization Act

of 1970. This act specifically directs the Comptroller General t o review

and analyze the r e s u l t s of Govement programs and a c t i v i t i e s including

the making of cost/benefit stuaies           .
Regionalization and Financial $Iana,genent

     Regionalization or decentralization of t h e activities of a department

disperses the decision-making processes of i t s c o m t i t u e n t agencies.              The

f u l l benefits of regionalization are not experienced u%il
                                                           613. f a c e t s of

f i n a n c i a l management axe reexamined and brought into harmony with the

objectives of organizational changes.

     Elany aspects of f i n a n c i a l management need reconsideration coincident

wi%h plans t o regionalize.         To name a few:

     --How w i l l the types of decisions which are t o be made a t the

         regional l e v e l be synchronized wit:? fheir data?

     --What should, o r will, be the form of comunication between the

         regions and the depastn-ent and with the c e n t r a l constituent agencies?

     --Will    regionalization be accompanied by a nove toward exception

     -   reporting to c e n t r a management?
     --W5ll    t h e communication network give ample consideration t o the

         greater need f o r t i m e . l y d a t a , a t the regional l e v e l s than a t the

         central levels?

      --Will    t h e regional offices be given conputer capabilities of t h e i r

         own o r w i l l they depend upon central computer capabilities m d ' t o

         what extent?

      --Is t h e trend toward centralization of computer facilities compatible
         w i t h the decentralization of management?

      --Will    regionalization increase o r decrease the need f o r f'urther
         centralization of computer f a c i l i t i e s by substituting transmission
         of regional reports i n place of transactions?

      --Should o r w i l l regionalization r e s u l t i n the building of greater

         f l e x i b i l i t y i n the accounting system t o accommodate the differing

         needs of regional offices?

      Answers t o these questions w i l l not be found i n any single document.
They w i l l be found i n the resemch of t h e basic l e g i s l a t i o n .and l e g i s l a t i v e

i n t e n t , agency administrative regulations and the aperating characteristics
of each agency's management,            Understandtng the management philosophy of

an agency is essential t o a successfully synchronized systems e f f o r t .
The Joint Financial Management Improvement Program

      I turn now t o another milestone--the nearly quarter century of

service of the Joint Financial Management Improvement Program.                        This

program has spearheaded many significant fir,aslcia,l management improvements

i n the Federal Government.
      The essence of t h i s program i s to encourage creative thinking i n

f i n a n c i a management i n the Federal Government ap?c?.toc o n t i n u d l y
stimulate improvements.          It i s essentially i n a catalytic role.

                                                                                                                   ,                             ,                    .,                 .8 ,
                       I n i t s fir t t e n y w s of service t h e prograx stressed t n e need for,          ,
                                                                                                                                  ,, ,I      ,:
                                                                                                                                                             , :j                    :+
                                                                                                                   ,          8                  ,,               ^'.,.I

                 accounting improvements.        Since 1959. it has been associated with almost           ,,": '
                                                                                                              ,          ,
                                                                                                                                  ;,           #).        '       f,           1
                                                                                                                                                                               , ' (

                                                                                                                   .I/                         2:r
                                                                                                                                      ,                               , ' . I

                 every major development i n t h e broadening f i e l d of f i n a n c i a l management                      1

,       ..       improvements.     I n 1966, t h e C i v i l Service Commission joined t h e Office
' , I,

    .:   i
                 of Management and Budget (then t h e Bureau of t h e Budget), t h e Treasury
    ,        ,

                 Department and t h e General Accounting Office as an a c t i v e p a r t i c i p a n t i n

                 t h e leadership of t h e program.                                                                 '                      1         ,                1 ,
                                                                                                                              .            I .
                                                                                                                                                 ..'                     .\,',.I?.
                                                                                                                                          ''I                      !,,'*,;I(
                       Recent p r o j e c t s are indicative of the creative leadership d i r e c t i n g                          : .I:''                    ' , , ' ')' , ' ' ., ':
                                                                                                                                          "', '               '   a,           ! 3,;             :.

                                                                                                                                  ,,             I       I
                                                                                                                                                                                ,:':          ;s'.
                         a d f o r more orderly and current payment of transportation b i l l s .                                                                  2,
                                                                                                                                                                       : ,:,
                                                                                                                                                             ;;;                          "
                                                                                                                         ~                       I                ,
                                                                                                                                                                               I .
                                                                                                                                                                               ,       ':<',
                                                                                                                                                         1 )

                       --Studies i n f i n a n c i a l administration of grants-in-aid t o Bring all

                                                                                                                                                             - ,:!, ';,
                         by Federal agencies on State a-nd l o c a l governments i n t h e                                            .
                                                                                                                                                             i ':              ;'y,;';
                                                                                                                                                                                        , II
                                                                                                                                                                                        .  ,!i

                                                                                                                                       '                                        , .'
                                                                                                                                                         ', , '1, 6 .il
                                                                                                                                           '             ;,I               ,I.                  -'I
                         f i n a n c i a l management of grant-in-aid programs.                                                                          :
                                                                                                                                                                   ,l          p
                                                                                                                                                                               i    c:''rl


                       --Development of an expanded body of audit standards pertaining                                            ,
                                                                                                                                                         I             -,:; !,/,i!
                                                                                                                                                          ,                      ,; ,.',:
                                                                                                                              .                              , . . , T                   :/i          I

                         t o t h e grant-in-aid program which currently involve Federal
                                                                                                                                                                      I' .:.i,
                                                                                                                                      , , ,,. ?.$;':,:'
                         expenditures of about $30 b i l l i o n a year.       These standards a r e                                                          ,    :,,>;,;,,l:,                       ,
                                                                                                                                                         ,., ,             . I
                                                                                                                                                                                3        ;,.,),
                                                                                                                                  :               ;,.. i:'; :.t.
                                                                                                                                                 , .,.                                                ,
                         needed t o strengthen t h e management control systems f o r t h i s             1                            , ,
                                                                                                                                                             i ,
                                                                                                                                                                      , , , ,1.1



                         complex intergovernmental area.
                                                                                                                                                                         ,              I , , , , '

                       -.-Elimination   of f i d e l i t y bonding of Federal employees in the

                         t h e i n t e r e s t s of econorny and i n recogpition of other safeguards

                         i n protecting t h e Government.

          --A   study of the f e a s i b i l i t y of a uniforni payrol.1 system f o r Federal

             c i v i l i a n agencies, i n view of advances i n computer and communications


          --Simplifying and expediting the closing of appropriation accounts.

          Future pso4ects of the program and i t s organization will be zffected

    by furtlner innovations i n f i n a n c i a l rmnagernent.    For example, recognition

    of t h e i n t e r d i s c i p l i n a r y aspects of data should bear substantially upon

    the conventional budgeting and accounting processes and reports.

          Further, t h e r e will be a need to consider how all areas of management

    can be united toward a common goal of improving f i n a n c i a l mnagement i n

    the Federal government.          If, indeed, improved f i n a n c i a l nianagernent i s

    a responsibility, or a t least a r e a l concern, of all functional and l i n e

    managers as well as top management, some n e m s should. be found f o r

    bringing their continuing views and influences t o bear upon the progran.


          Creative thinking i n Federal f i n a n c i a l management includes a constant

    reexmination of conventional o r t r a d i t i o n a l p o l i c i e s , methods, procedures

    and f i n a n c i a l organization.   All ideas, even those apparently impractical,

    should be examined for constructive p o s s i b i l i t i e s .

          A l l f i n a n c i a l managers should remember t h s t financ$al accounting and

    reporting r e s e t s , h i s t o r i c a l as well as predictive, i s t o improve the

    q u a l i t i e s of the management of people and t'nings, not merely t h e i r

                     Albert Einstein has been quoted as saying "Lmagination i s more
    /. ,
               ixportant than knowledge".       Adolph A . Berle, Jr., cautioned that "Gre'at

               ideas need landing gears as w e l l as wings".        We w i l l need t o heed these

               wise admonitions.      In t h e decade of t h e Seventies, every day of our l i v e s
               w i l l be a t e s t i n g time f o r t h e Federal Government, and all of i t s managers,
               i n whatever areas and' at whatever l e v e l s e