Reliable Financial Information: A Key to Effective Program Management and Accountability

Published by the Government Accountability Office on 1997-01-01.

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

               United   States   General   Accounting   Office

               Accounting and Information
GAO            Management Division

January 1997
               Reliable Financial
               Information:, A Key
               to Effective Program
               Management and

Reliable F’inancial Information:
A Key to Effective Program
Management and Accountability

                      Our nation’s     leaders make decisions
                      almost daily     that affect the lives and
                      livelihoodsof      virtually every American   ,
                      citizen. Their    choices, for example, can

               set the level of government debt we

               expand or cut the funding of

               government programs to support our
               health, safely, education, and
               recreation needs;
             : add to or restrict money made
               available to maintain the quality and
               readiness of our nation’s defense; and
             l determine the amount of taxes we pay.

                     Reliable linancial information can
                     provide a foundation for formulating
                     budgets, managing government
                     program operations, and making
                     difficult policy choices. However,
                     financial data alone do not usually
                     provide hard and fast answers. Policy
                     decisions involve many considerations.

                      But the difficulty of making informed
                      decisions is increased when complete
                      and reliable information on the cost
                      and consequences of government
                     programs and activities is unavailable.
                     For example, efforts to deal with the
                     deficit or make tough decisions among
                     competing options may be undermined
                     when bad or missing financial
                     information masks huge, hidden costs.
                     It is also difficult to make fully ’
                     informed budget decisions when
                     information on actual costs for
                     programs is incorrect or unlmown.

                     Page   1
                               Reliable Financial Information:
                               A Key to Effective Program
                               Management and Accountability

           Financial           The federal government has a
                               .responsibility-and    an obligation-to
           Systems Have        American citizens to be a good
           Become.             financial steward of and properly
           Outdated and        account for their tax dollars. Decades
           Controls Have       of neglect and failed attempts to
           Seriously           improve financial management and
                               modernize outdated financial systems
           Deteriorated        have left the federal government
                               ill-equipped and unprepared to
                               adequately fulfill this responsibility.

                               Audits have shown that federal
                               financial management is in serious

                           l ‘recordkeeping is sloppy,
                           l  financial reports are inaccurate,
                           0 rudimentary accounting operations are
                              not effectively performed, and”’
                           l  basic controls are not in place.
                               The poor state of federal’financial
                               systems and controls results in
                               incorrect financial information’being
                               provided to the Congress and the
                               administratior+ Without reliable
                               financial information, government
                               leaders do not have the full facts
                               necessary to make investments of
                               scarce resources, reduce the deficit, or
                               direct programs.

                               The lack of reliable financial
                               information also impairs the
                               government’s ability to adequately
                               fulfill another fundamental obligation
                               to taxpayers-holding     agency
                               managers accountable for the way they
                               run government programs.

                               Page 2
                     Reliable Financial4nformation:
                     A Key to Effective Program
                     Management and Accountability

                     Today, taxpayers doubt the
                     government’s ability to be a good
                     financial steward. Time and again, they
                     see media reports of mismanagement,
                     rampant waste, and scandalous fraud.
                     Each of these reports has a price tag,
                     adding up to billions of dollars in lost
                     taxpayer dollars each year and
                     undermining confidence in government

At Long Last,        The Chief Financial Officers (CFO) Act -
                     of 1990 laid the legislative foundation
Federal              for the federal government-the
Financial            world’s largest and most complex
Statements Are       ,operation-to   provide taxpayers, the
Becoming a           nation’s leaders, and agency program
Priority             managers with reliable financial
                     information through audited financial
                     statements. This kind of financial
                     information has been required in the
                     private sector for over 60 years and in
                     state and local governments since the
                     early 1980s.

                     Under theCF0 Act, as expanded in
                     1994, the government’s 24 major
                     agencies will each prepare annual
                     financial statements, beginning with
                     those for fiscal year 1996. Together,
                     these agencies account for virtually the
                     entire federal budget.

                     The agencywide financial statements
                     will be subjected to independent audit.
                     These financial audits will

                 l   determine the reliability   of the financial
                     information reported,

                     Page 3
             Reliable Financial  Information:
             A Key to Effective Program
             Management     and Accountability

         l   report on agencies’ compliance with
             laws and regulations, and
         l   provide information on the adequacy of
             systems and controls used to ensure
             accurate financial reports and
             safeguard assets.

             Also, recent legislation requires
             auditors performing CFO Act financial
             audits to report whether agencies’ ’
             financial management systems comply
             with federal accounting standards and
             other requirements.

     /       Reliable fmancial statements would
             show the financial results of these
             agencies’ entire operations and
             interpret, analyze, and provide relevant
             information on the government’s true
             financial status-information     that has
             never before been available. In
             addition, reliable financial statements
             could result in increased accuracy of
             the numbers reported in the budget as

             The Social Security Administration
              (SSA), for example, has prepared and
             had audited annual financial
             statements showing the status of social
             security trust funds’ since 1987. SSA is
             now starting to report performance
             information with its financial
             statements, including information on
             the adequacy of service satisfaction
             and promptness in issuing earnings
             statements and processing claims.
             Reliable performance and financial
             data are also necessary in SSA’s efforts
             to reengineer its business processes,
             such as efforts to reengineer its

                                                                                                                                                                               Reliable Financial  Information:
                                                                                                                                                                               A Key to Effective Program
                                                                                                                                                                               Management     and Accountability

                                                                                                                                                                               disability determination process to
                                                                                                                                                                               reduce the average waiting time.

                                                                                                                                                                               Beginning with fiscal year 1997, the
                                                                                                                                                                               Secretary of the Treasury, in
                                                                                                                                                                               coordination with the Director of the
                                                                                                                                                                               Office of Management and Budget
                                                                                                                                                                               (OMB), is to annually prepare and
                                                                                                                                                                               submit to the .President and the
                                                                                                                                                                               Congress audited governmentwide
                                                                                                                                                                               financial statements. These fkukcial
,,.                                                                                                                                                                            statements, which GAO will audit, will
                                                                                                                                                                               encompass the entire federal

                                                                                                                                                                               For the first time, the American public
                                                                                                                                                                               will have an annual scorecard on the
                                                                                                                                                                               national government’s financial

                                                                                           .,                                                   -,             Providing        The challenge of developing reports
                                                                                                                                                                               ,specifically tailored to meet
                                 .\          *
                                                                                                     .;                          ”                         !
                                                                                                                                                               Reports          decisionmakers’ needs and based on
..’                                                    ,            ,             ;’            :

                                                                                                    ,,                :.-,
                                                                                                                                 I        , i
                                                                                                                                                               Tailored to      appropriate accounting standards is

                                                                i            :,

                                                                                                                                                               Users’ Needs     being met by the Federal Accounting      i
          >(’              (,’                    ,;                                                          ,                            ‘,
                                                                                                                                                               and Based on     Standards Advisory Board (FASAB).
                :,.   ,;              ,,I                  .:           .’                                                           ri              .,(       New Standards    FASAB was created in October 1990 by
                                                                                                          I                  I                                                  the Secretary of the Treasury, the
                                                                                                                                                                                Director of OMB, and the Comptroller
                                                                                                                                                                                General to consider and recommend
                                                                                                                                                                                accounting principles for the federal

                                                                                                                                                                               FASAB has put together a new set of
                                                                                                                                                                                accounting concepts and standards to
                                                                                                                                                                                meet the special needs of the U.S.
                                                                                                                  :                        .,                                  government. These concepts and
                                                                                       ~                                                                                       standards, which are listed in appendix
                                                                                                                                                                               .I, underpin OMB’s guidance to agencies

                                                                                                                                                       Reliable Financial  Information:
                                ,.             ‘:.,_.                                                    8’              .,        ;
                                                                                                                                                       A Key to Effective Program
                                           ,, “,               ? ,        ,.                                                      : .“,
                                                                                                                                                       Management     and Accountaliility
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                                                                                                                                               1       on the form and content of their
                                                                                                                                                       agencywide financial statements.

                                                                                                                                                       The objectives of federal financial
                                                                                                                                                       reporting are to provide users with
                                                                                                                                                       information about

                                                                                                                                                   l   budgetary  integrity,
                                                                                                                                                   l   Operating  performance,
                                                                                                                                                   l   stewardship, and
                                                                                                                                                   l   systems and controls.

                                                                                                                                                       With these as the objectives of federal
                                                                                                                                                       financiaj reporting, FASAB has
                                                                                                                                                       developed a new reporting model for
                                                                                                                                                       federal government entities. Now
./        .”                                                                                     ,
                                                                                                                                                       decisionmakers and others will have
                                                                                                                                                       available an annual report on the
                                                        .‘.:         (,
                                                                                                                                                       government’s financial condition and
                                                                                                                                                       financial statements for each major
                                                                                                                                                       agency that, for example, will

                                                                                                                                                   0 present a top-level overview discussion
                                                                                                                                                     of the significance of the financial
                                                                                                                                                     information in the accounting reports
                                                                                                                                                     and commentary on performance,
                                                                                                                                                     goals, and results consistent with
                                                                                                                                                     measures an agency uses under the
                                                                                                                                                     Government Performance and Results
     i,        :.:
                                                                                                                                       ,             Act of 1993;
                                                                                    ‘.   <

                                                                                                                                                   l   report and thus’enable the audit of
                                                                                                                                                       (1) budgetary resources made
                                                                                                                                                       available, (2) obligations incurred,
                                                                                                                                                       (3) the year-end balances of budgetary
                                                                                                                                                       resources available and obligations
                                                                                                                                                       outstanding, and (4) outlays;

                                                                                                                                                   l   reconcile budgetary obligations
                                                                                                                                                       incurred to the net costs presented in

                                                                                                                                                       Page 6
    Reliable Financial Information:
    A Key to Effective Program
    Management    and Accountability

    the financial statements and explain
    the differences;

l   show total cost, earned revenues (if
    any), and net cost of an agency’s
    organizations and programs in a
    manner that enables users to relate
    costs to outputs and outcomes;

l   display the sources of financing for an
    entity’s net cost-including   those paid
    by taxpayers through appropriations
    and taxes-and the change in financial
    position for an agency and its

l   report (1) unspent funds, (2) other
    operating assets available for use in
    providing government goods, services,
    and benefits, and (3) all liabilities
    incurred, with seIjarate display of those
    which require future funding by the

l   depict the various taxes and other
    nonearned revenues collected and
    collectible by the IRS and other
    collection agencies, as well as the
    amounts transferred to the general
    fund and trust funds; and

l   reflect the nation’s assets and
    investments for which the federal
    government has a stewardship

    Page 7
                     Reliable Financial  Information:
                     A Key to Effective Program
                     Management     and Accountability

Audited              Financial statements prepared using
                     the new accounting standards will
Financial            provide essential facts for more
Information          informed decision-making       and better
Will Make a. -       accountability in practically every
Difference in        major aspect of the,government’s
Program              operations. While providing this
Operations           information will require substantially
                     improved accounting systems, the new
                     data will be available to gauge progress
                     in meeting program goals, improving
                     program performance, and establishing
                     accountability. The reliability or
                     reasonableness of financial information
                     reported in the financial statements
                     will be determined through the annual

                     The following are just a few examples
                     of areas where audited financial
                     information will make a difference in
                     program operations.

                 l   Better financial information A
                     help to improve the collection of
                     revenue used to fund the

                     Our financial audits at IRS have
                     identified fundamental, persistent
                     problems, including the following. The
                     amounts of total revenue (reported to
                     be $1.4 trillion for fiscal year 1995) and
                     tax refunds (reported to be $122 billion
                     for fiscal year 1995) cannot be verified
                     or reconciled to accounting records
                     maintained for individual taxpayers in
                     the aggregate. The amounts reported
                     for various types of taxes collected
                     (such as social security, income, and
                     excise taxes) cannot be substantiated.

                     Page 8

                                       Reliable Financial  Information:
.>I,,_,   (,        :
                                       A Key to Effective Pro&am
                                       Management     and Accountability

                                       The reliability of reported estimates ,for
                                       fiscal year 1995 of $113 billion for valid
                                       accounts receivable and of $46 billion
                                       for collectible accounts receivable
                                       cannot be determined.

                                  l    Better financial data can help to
                                       provide accountability  for national
                                       defense expenditures.

                                       No single military service or major
                                       component has been able to withstand
                                       the scrutiny of a financial statement ’
                                       audit. Billions of dollars of needed
                                       adjustments to financial reports are
                                      routinely identified. The stakes are
                                      high-DOD,has       over a trillion dollars in
                                      assets and a $250 billion annual budget.
                                      Using the new accounting standards,
                                      DOD could have available (1) financial
                                      information essential for properly
                                      managing billions of dollars in
                                      inventories and (2) managerial cost
                                      data for assessing activities, such as
                                      infrastructure modernization and
                                      specific military operations.

                              l       Improved reporting can help to
                                      institute better management of
                                      federal lending programs.

                                      Financial audits have consistently
                                      disclosed serious weaknesses in
                                      financial systems and reporting for the
                                      government’s multi-billion   dollar loan
                                      and loan guarantee portfolios.
                                      Decisionmakers can now have a
                                      clearer picture of the government’s
                                      performance and loss estimates for its
                                      lending programs for farmers, home
                                      buyers, and students.

    Reliable Financial  Information:
    A Key to Effective Program
    Management     and Accountability

0 Cost accounting information will
  be collected to show the full costs
  of goods and setices provided by
  an agency.

    Today, only a few federal agencies do
    iu-ty form of cost accounting. This is
    unfortunate, considering the enormity
    of the federal government’s spending.
    Better cost information can help
    agency managers determine the areas
    where costs are disproportionate    to
    benefits received and where prudent
    investment can yield the greatest
    benefits in relation to the costs. Cost
    accounting information can also cast
    new light on the efficiency and
    effectiveness of a host of
    government-run programs.

l   Environmental    damage resulting
    from government activity will be
    reported as a liability and
    recognized as an expense when the
    damage occurs.

    Currently, the full magnitude of the
    government’s environmental cleanup
    liability is unknown. F’inancial
    statements will provide information on
    the nature, location, and’magnitude of
    this exposure, tihich, at a minimum,
    will be in the hundreds of billions of

    Page   10
                                                                                                                                                                         Reliable Financial  Information:
                                                                                                                                                                         A Key to Effective Program
                                                                                                                                                                         Management     +nd Accountability

                                                                                                                                                                     l   Information will be provided on the
                                                                                                                                                                         condition and the-future
                                                                                                                                                                         maintenance requirements for
                                                                                                                                                                         Plant, property, and equipment.

                                                      ,                                     .‘.
                                                                                                                                                                         With today’s budgetary constraints,
                                                                        .(..                      .:’
                                                                                                                                              :                          agencies often cut comers by failing to
                                                                                                                                                                         maintain the federal govemment’s
                                            ‘_                                                                   f,
                                                                                                                                                                         buildings, equipment, and other
                         I,.:                    /,                 ”                                                          <‘,.
                                                                                                                                                                         property. While deferring maintenance
         ,:                                      *.                            .                                                              .;’
                                                                                                                                                                         can squeeze scarce resources for other
                                                                                                                                                                         uses, over time it can have an eroding
         ,.                                                     ,                      ‘_                        ::                   1.’
                                                                                                                                                                         and costly effect on the government’s
                     i                ;..                                                                    L
                                                                                                                                                                         assets. Agencies’ financial statements
                                                                                                                                                                         will now report the amount of deferred
                                                                                                                                                                         maintenance on a potentially wide
                                                                                                                                                                         range of assets from our military
                                                                                   :                                  /                 .;.


                                                                                                                                                                         weapons, embassies around.the world,
                                                                                                                                                                         and veterans hospitals to our national


                                                                                                                                                    The Next             What are the American people getting
                                                                                                                                                                         for their investment in the federal
                                                                                                                                                    Step-Linking         government? Addressing this question
                                                                                                                                                    Performance,         by measuring performance is central to
                                                                                                                                                    Costs, and the       the 1993 Government Performance and
                                ;,,                                                                                       ,’            a:
                                                                                                                                                    Budget               Results Act’s goal of focusing on the
              *_,.                                                                                      .’
                                                                                                                                                                         results and outcomes of federal

                                                                                                                                                                          The accounting standards can lead to
                                                                                                                                                                          and support linking costs with
                                                                                                                                                                         ,achieving performance levels. This can
                                                                                                                                                                          give agency managers information for
                                                                                                                                                                          assessing the full costs of goods,
                                                                                                                                                                          services, and benefits compared to
                                                                                                                                                                          program outputs a&results; Also, the
                                                                                                                                                                          accounting standards for investments
                                                                                                                                                                         in education, training, and research and
                                                                                                                                                                          development require agencies to
                                                                                                                                                                          develop performance indicators for the

                                                                                                                                                                         Page 11
            /’        I,’

                                 ‘.   *::                                                  Reliable Financial  Information:
,,’    -.                              ,?                        ,: :’                     A Key to Effective Program
                                                                                           Management     and Accountability

                                                 ‘,        .i,

                 ,.                                                                        annual costs of these programs and to
_“,,        j     :                         .’        _’
                                                                                           present the amount invested annually
                                                                                           over a period of years.

                                                                                           Another future challenge is to more
                                                                                           tightly tie financial reports with the
                                                                                           budget. This would enhance the utility
                                                                                           and quality of the data considered in
                                                                                           budgetdeliberations     because numbers
                                                                                           representing the execution of the
                                                                                           previous fiscal year’s budget would be
                                                                                           presented in financial statements and
                                                                                           reconciled to audited accounting data.

                                                                                           Also, budget data would be enhanced,
                                                                                           for example, by bringing accrual
                                                                                           accounting concepts to some areas of
                                                                                           the cash-based budget. This new way
                                                                                           of thinking is already being tried, for
                                                                                           instance, in budgeting for credit
                                                                                           programs, as required by the Credit
                                                                                           Reform Act.

                                                                                           Ultimately, decisionmakers will have
                                                                                           available reliable information on the
                                                                                           financial condition of programs and
                                                                                           operations as well as the performance
                                                                                           and costs of these activities.

                                                                         In Taxpayers’     The elements are now in place for a
                                                                                           greatly changed accountabiiity system
                                                                         Eyes There Is     that (1) measures results linked to
                                                                         No Substitute     costs, (2) is based on credible
                                                                         for Credibility   information, and (3) will enable annual
                                                                         and               reporting to the American public of the
                                                                         Accountability    national .government’s financial
                                                                                           stewardship. Nonetheless, making
                                                                                           federal financial management reform a
                                                                                           reality remains a challenge.

                                                                                           Page   12
               Reliable Financial Information:
               A Key to Effective Program
               Management    and Accountability

               But the result should be meaningful
               financial information showing what the
               public gets for the taxpayer money the
               government spends. This information is
               essential to put the government’s
               financial house in order and to realize
               broader iiianagement improvements.

               The American public wants to believe
               in our government and trust its
               decisions. Reliable’linancial  reporting
               that is easy to understand could
               provide the credible information
               needed to help restore confidence in


               The matters presented ‘in khis
               document are further discussed in
               the related GAO products listed at
     ,’        the end of this document. For
               additional information, contact:

               Gene L. Dodaro, (202) 512-2600
               Assistant Comptroller General
                 for Accounting and Information

               Jeffrey  C. Steinhoff, (202) 512-9450
               Director for Planning and Reporting
                  Accounting and Information
                  Management Division

               Philip T. Calder, (202) 512-7353
               Acting Chief Accountant

               Page   13

,        Appendix I

         Statements of Federal Financial
         Accounting Concepts and

         Statements of        Objectives       of Federal      Financial
         Federal Financial    Reporting’       (SFF’AC 1, September 2,
         Accounting           1993)
         Concepts (SFFAC)
                              Entity      and Display’      (SF’FAC2,
    .:                        June 6,1995)

         Statements of        Accounting        for Selected Assets and
         Federal Financial    .Liabilitks     (SFFAS 1, March 30,1993,
         Accounting           effective for fiscal year 1994)
         Standards (SFFAS)
                             Accounting   for Direct Loans               and
                             Loan Guarantees     (SFFAS 2,
                             August 23,1993, effective for fiscal year

                             Accounting  for Inventory   and
                             Related Property   (SFF’AS 3,
                             October 27,1993, effective for fiscal
                             year 1994)

                             Managerial   Cost Accounting
                             Concepts   and Standards   (SF’F’AS 4,
                             July 31; 1995,effective for fiscal year

                             Accounting‘ for Liabilities    of the
                             Federal Government       (SFF’AS 5,
                             December 20,1995, effective for fiscal
                             year 1997)

                             Accounting        for Property,        Plant,   and
                             Equipment     (SFF’AS6, November 30,
                             1995, effective for fiscal year 1998)

                             ‘Effective dates do not apply to Statements
                             of Federal Financial Accounting Concepts.
                             Page   14’
                  Appendix I
                  Statements of Federal    Financial
                  Accounting   Concepts   and

                  Accounting     for Revenue and Other
                  Financing Sources (SFF’AS 7, May 10,
                  1996, effective for fiscal year 1998)
         _   :

                  Supplementary      Stewardship
                  Reporting    (SFF’AS 8, effective for
                  fiscal year 1998)


                 Page   15
Related GAO Products

             Financial Audit: Examination of IRS
             Fiscal Year 1995 Financial Statements
             (GAO/AIMD-96101,     July 11,1996).

             Budget and Financial Management:
             Progress and Agenda for the Future
             (GAO/T-AIMD-9680,    April 23,1996).

             CFO Act Financial Audits: Increased
             Attention Must Be Given to Preparing
             Navy’s Financial Reports
             (GAO/AIMD-96-7, March 27; 1996).

             Financial Audit: Federal Family
             Education Loan Program’s Financial
             Statements for Fiscal Years 1994 and
             1993 (GAO/AIMD-96-22, February 26,

             Financial Management: Continued
             Momentum Essential to Achieve CFO
             Act Goals (GAO/T-AIMD-96-10,
             December 14,1995).

             Financial Management: Momentum
             Must Be Sustained to Achieve the
             Reform Goals of the Chief Financial
             Officers Act IGAO/TAAIMD-95-204. I
             Jdy 25,1995 j.

             Managing for Results: Strengthening
             Financial and Budgetary Reporting
             (GAO/T+UMD>95-181, July.11, 1995).-     -

             Managing for Results: Steps for
             Strengthening Federal Management
             (GAO/T-GGD/AIMD-95-158,     May 9,

,,   .

         Related   GAO Products

         Financial Management: CFO Act Is
         Achieving Meaningful Progress
         (GAO/T-AIMD-94-149, June 21,1994).

         Improving Government: Actions
         Needed to Sustain and Enhance
         Management Reforms          ’
         (GAO/T-OCG-941, January 27,1994).

         Financial Management: Strong
         Leadership Needed to Iniprove Army’s
         Financial Accountability
         (GAO/AIMD-94-12, December 22,1993).

         The Chief Financial Officers Act: A
         Maqclate for Federal Financial
         Management Reform
         (GAO/AFMD-12.19.4, September 1991);

         Managing the Cost of Government:
         Building an Effective Financial
         Management Structure
         (GAOkFMD-8535        and 35A,
         February ‘1985).