oversight

Financial Management: Recurring Financial Systems Problems Hinder FFMIA Compliance

Published by the Government Accountability Office on 2003-10-29.

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

                              United States General Accounting Office

GAO                           Testimony
                              Before the Subcommittee on Government Efficiency and
                              Financial Management, Committee on Government
                              Reform, House of Representatives


For Release on Delivery
Expected at 2:30 p.m. EST
Wednesday, October 29, 2003
                              FINANCIAL
                              MANAGEMENT
                              Recurring Financial
                              Systems Problems Hinder
                              FFMIA Compliance
                              Statement of Sally E. Thompson 

                              Director, Financial Management and Assurance





GAO-04-209T

                              A

                                                October 29, 2003


                                                FINANCIAL MANAGEMENT

                                                Recurring Financial Systems Problems
Highlights of GAO-04-209T, a testimony          Hinder FFMIA Compliance
before the Subcommittee on Government
Efficiency and Financial Management,
Committee on Government Reform,
House of Representatives




The Federal Financial Management                The results of the fiscal year 2002 FFMIA assessments performed by agency
Improvement Act of 1996 (FFMIA)                 inspectors general or their contract auditors again show that the same types
requires Chief Financial Officers               of problems continue to plague the financial management systems used by
(CFO) Act agencies to implement                 the CFO Act agencies. While much more severe at some agencies than
and maintain financial management               others, the nature and severity of the problems indicate that overall, agency
systems that comply substantially
with (1) federal financial
                                                management lacks the full range of information needed for accountability,
management systems                              performance reporting, and decision making. As shown in the figure below,
requirements, (2) federal                       audit reports highlight six recurring problems that have been consistently
accounting standards, and (3) the               reported for those agencies whose auditors reported noncompliant systems.
U.S. Government Standard General
Ledger. Most federal agencies face              Problems Reported by Auditors for Fiscal Years 2000 through 2002
long-standing challenges, which are
discussed in greater detail in our
mandated September 2003 report,
Sustained Efforts Needed to
Achieve FFMIA Accountability
(GAO-03-1062). In light of these
circumstances, the Subcommittee
asked GAO to testify about
recurring financial management
systems problems and agencies’
efforts to upgrade their systems.



GAO is not making new
recommendations in this                         Agencies have recognized the seriousness of the financial systems
testimony, but in a past report has             weaknesses, and have many efforts underway to implement or upgrade
made specific recommendations                   financial systems to alleviate long-standing problems. As of September 30,
aimed at addressing the problems                2002, 17 CFO Act agencies advised us they were planning to or were in the
hindering agencies’ compliance                  process of implementing a new core financial system. It is imperative that
with FFMIA.                                     agencies adopt leading practices, such as top management commitment and
                                                business process reengineering, to ensure successful systems
                                                implementation and to avoid complicating factors, such as poor
                                                communication and inadequate project planning, that have hampered some
                                                agencies’ efforts in the past.

                                                Congressional oversight, the Joint Financial Management Improvement
                                                Program Principals, and the President’s Management Agenda are driving
                                                forces behind several governmentwide efforts now underway to improve
                                                federal financial management. Continued attention by these key drivers is
                                                critical to sustaining agencies efforts to improve their financial management
                                                systems.
www.gao.gov/cgi-bin/getrpt?GAO-04-209T.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Sally
Thompson, (202)512-9450,
thompsons@gao.gov.
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here to discuss the challenges most of the federal
departments and agencies still face in meeting the primary goals of the
Congress in enacting the Federal Financial Management Improvement Act
of 1996 (FFMIA).1 As you requested, our testimony today addresses the
recurring financial management systems problems that agencies are facing
and the status of their efforts to implement systems that substantially
comply with FFMIA.

As you know, FFMIA builds on the foundation laid by the Chief Financial
Officers (CFO) Act of 19902 by reflecting the need for agencies to have
financial management systems that can generate timely, accurate, and
useful information with which to make informed decisions and to ensure
accountability on an ongoing basis. FFMIA requires the major departments
and agencies covered by the CFO Act3 to implement and maintain financial
management systems that comply substantially with the (1) federal
financial management systems requirements, (2) applicable federal
accounting standards, and (3) U.S. Government Standard General Ledger
(SGL) at the transaction level. Further, FFMIA requires auditors to report
in their CFO Act financial statement audit reports whether the agencies’
financial management systems comply with FFMIA’s requirements. We are
also required to report annually on the implementation of the act.




1
Pub. L. No. 104-208, sec.101(f)(title VIII), 110 Stat. 3009-389.
2
Pub. L. No. 101-576, 104 Stat. 2838 (1990).
3
 There were initially 24 CFO Act agencies (see footnote 2 above). The Federal Emergency
Management Agency (FEMA), one of the 24 CFO Act agencies, was subsequently
transferred to the new Department of Homeland Security (DHS) effective March 1, 2003.
With this transfer, FEMA will no longer be statutorily required to prepare audited stand-
alone financial statements. We included FEMA in our review because FEMA was a CFO Act
agency as of September 30, 2002. DHS must prepare audited financial statements under the
Accountability of Tax Dollars Act of 2002, because it is a “covered executive agency” for
purposes of 31 U.S.C. 3515. However, DHS was not established as a CFO Act agency and
therefore is not statutorily subject to FFMIA. Consideration is now being given to making
DHS a CFO Act agency and therefore subject to FFMIA in the Department of Homeland
Security Financial Accountability Act, H.R. 2886, 108th Congress.




Page 1                                                                      GAO-04-209T
As discussed in our recently issued annual report on FFMIA,4 the results of
the fiscal year 2002 FFMIA assessments performed by agency inspectors
general (IG) or their contract auditors again show that the same types of
problems still plague the financial management systems used by the CFO
Act agencies. While much more severe at some agencies than others, the
nature and severity of the problems indicate that overall, agency
management lacks the full range of information needed for accountability,
performance reporting, and decision making. While the CFO Act agencies
have obtained more clean or unqualified audit opinions on their financial
statements, often through extraordinary, labor-intensive measures, there is
little evidence of marked improvements in agencies’ capacities to create
the full range of information needed to manage day-to-day operations. As
we have previously testified5 before this Subcommittee, if agencies
continue year after year to rely on significant costly and time-intensive
manual efforts to achieve or maintain unqualified opinions without
improving underlying financial management systems, it can mislead the
public about the true status of the agencies’ financial management
capabilities.




4
U.S. General Accounting Office, Financial Management: Sustained Efforts Needed to
Achieve FFMIA Accountability, GAO-03-1062 (Washington, D.C.: Sept. 30, 2003).
5
 U.S. General Accounting Office, Financial Management: Effective Implementation of
FFMIA is Key to Providing Reliable, Useful, and Timely Data, GAO-02-791T (Washington,
D.C.: June 6, 2002) and Financial Management: Agencies Face Many Challenges in
Meeting the Goals of the Federal Financial Management Improvement Act, GAO/T-AIMD-
00-178 (Washington, D.C.: June 6, 2000).




Page 2                                                                   GAO-04-209T
Agencies have recognized the seriousness of the financial systems
weaknesses, and have many efforts underway to implement or upgrade
financial systems to alleviate long-standing problems. As of September 30,
2002, 17 CFO Act agencies advised us they were planning to or were in the
process of implementing a new core financial system. Under the Office of
Management and Budget’s (OMB) Circular A-127, Financial Management
Systems, agencies are required to purchase commercial off-the-shelf
(COTS) packages sold by vendors whose core financial systems software
has been certified.6 Some of the key factors that affect FFMIA compliance
of an implemented COTS package include how the software works in the
agency’s environment, whether any customizations or modifications7 have
been made to the software, and the success of converting data from legacy
systems to new systems.

Successful implementation efforts of financial management systems are
supported by the presence of several key characteristics, which apply to
both the public and private sectors. These characteristics include, among
others, (1) involvement by the users, (2) support of executive management,
(3) leadership provided by experienced project managers, (4) clear
definition and management of project requirements, (5) proper planning,
and (6) realistic expectations. Conversely, financial systems
implementation projects are often hindered by the lack of executive
support, poor communication between managers and stakeholders, poor
estimations and planning, and poor documentation and updating of user
requirements.

To provide impetus for upgrading financial management systems that
provide reliable, timely, and useful data, congressional oversight, the Joint
Financial Management Improvement Program (JFMIP) Principals,8 and the
President’s Management Agenda (PMA) are driving forces behind several


6
 The Program Management Office, managed by the Executive Director of the Joint Financial
Management Improvement Program (JFMIP), with funds provided by the CFO Council
agencies, tests vendor COTS packages and certifies that they meet certain federal financial
management systems requirements for core financial systems.
7
 Customization is the process of setting parameters within an application to make it operate
in accordance with the entity’s business rules. Customizations are normally supported by
vendors in subsequent upgrades. Modification is the process of writing or changing code
and modifications are not supported by vendors in subsequent upgrades.
8
The JFMIP Principals are the Secretary of the Treasury, the Directors of OMB and the
Office of Personnel Management (OPM), and the Comptroller General of the United States.




Page 3                                                                         GAO-04-209T
                        governmentwide efforts now underway to improve federal financial
                        management. The Congress has demonstrated leadership in improving
                        federal financial management by enacting financial management reform
                        laws and through oversight hearings, such as this one today. The JFMIP
                        Principals have continued the series of regular deliberative meetings that
                        focus on key financial management reform issues. The PMA, being
                        implemented by the administration as an agenda for improving the
                        management and performance of the federal government, includes five
                        crosscutting initiatives, including improved financial performance.
                        Continued attention by these key drivers is critical to sustaining agencies’
                        efforts to improve their financial management systems.

                        My statement today will focus on these issues and discuss (1) auditors’
                        determinations of FFMIA compliance for fiscal year 2002, (2) problems that
                        affect agency systems’ compliance with FFMIA, (3) agency efforts to
                        implement new core financial systems, (4) key characteristics of successful
                        systems implementation and the challenges federal agencies face, and
                        (5) the status of governmentwide financial management improvement
                        efforts.



Auditors’ Assessments   For fiscal year 2002, Inspectors General and their contract auditors
                        reported that the systems for 19 of the 24 CFO Act agencies did not comply
of FFMIA Compliance     substantially with at least one of the FFMIA requirements—federal
for Fiscal Year 2002    financial management systems requirements, applicable federal accounting
                        standards, or the SGL. Auditors’ assessments of financial systems’
                        compliance with FFMIA for 3 agencies—the Department of Labor (DOL),
                        Environmental Protection Agency (EPA), and the National Science
                        Foundation (NSF)—changed from fiscal years 2001 to 2002. For fiscal year
                        2002, the auditors for DOL concluded that its systems were not in
                        substantial compliance with the managerial cost standard and thus were
                        not in compliance with FFMIA. Auditors for EPA and NSF found the
                        agencies’ respective systems to be in substantial compliance, a change
                        from the fiscal year 2001 assessments.




                        Page 4                                                            GAO-04-209T
As we have testified previously,9 while the number of agencies receiving
clean opinions increased over the past 6 years from 11 in fiscal year 1997 to
21 for fiscal year 2002, the number of agencies reported to have systems
that lacked substantial compliance with FFMIA has remained steady.
While the increase in unqualified opinions is noteworthy, a more important
barometer of financial systems’ capability and reliability is that the number
of agencies for which auditors provided negative assurance10 of FFMIA
compliance has remained relatively constant throughout this same period.
In our view, this has led to an expectation gap. When more agencies
receive clean opinions, expectations are raised that the government has
sound financial management and can produce reliable, useful, and timely
information on demand throughout the year, whereas FFMIA assessments
offer a different perspective. For agencies equipped with modern, fully
integrated financial management systems, preparation of financial
statements would be more routine and much less costly.

Auditors for the remaining five agencies—the Department of Energy, EPA,
the General Services Administration (GSA), NSF, and the Social Security
Administration (SSA)—provided negative assurance in reporting on FFMIA
compliance for fiscal year 2002. In their respective reports, they included
language stating that while they did not opine as to FFMIA compliance,
nothing came to their attention during the course of their planned
procedures indicating that these agencies’ financial management systems
did not meet FFMIA requirements. If readers do not understand the
concept of negative assurance, they may have gained an incorrect
impression that these systems have been fully tested by the auditors and
found to be substantially compliant. Because the act requires auditors to
“report whether” agency systems are substantially compliant, we believe
the auditor needs to provide positive assurance, which would be a
definitive statement as to whether agency financial management systems
substantially comply with FFMIA, as required under the statute. This is
what we will do for the financial statement audits we perform when
reporting that an entity’s financial management systems were in substantial
compliance. To provide positive assurance, auditors need to consider
many other aspects of financial management systems than those applicable
to the purposes of rendering an opinion on the financial statements.


9
GAO-02-791T.
10
   In providing negative assurance, auditors are stating that nothing came to their attention
indicating that an agency’s financial management systems do not meet FFMIA requirements.




Page 5                                                                         GAO-04-209T
Widespread Systems   Based on our review of the fiscal year 2002 audit reports for the 19 agencies
                     reported to have systems not in substantial compliance with one or more of
Problems Affect      FFMIA’s three requirements, we identified six primary problems11 affecting
FFMIA Compliance     FFMIA noncompliance:

                     • nonintegrated financial management systems,

                     • inadequate reconciliation procedures,

                     • lack of accurate and timely recording of financial information,

                     • noncompliance with the SGL,

                     • lack of adherence to federal accounting standards, and

                     • weak security controls over information systems.

                     The relative frequency of these problems12 at the 19 agencies reported as
                     having noncompliant systems is shown in figure 1. In addition, we caution
                     that the occurrence of problems in a particular category may be even
                     greater than auditors’ reports of FFMIA noncompliance would suggest
                     because auditors may not have included all problems in their reports.
                     FFMIA testing may not be comprehensive and other problems may exist
                     that were not identified and reported. For example, at some agencies, the
                     problems are so serious and well known that the auditor can readily
                     determine that the systems are not substantially compliant without
                     examining every facet of FFMIA compliance.




                     11
                        The same six types of problems were cited by auditors in their audit reports for fiscal years
                     2000 and 2001.
                     12
                        Auditors may not have reported these problems as specific reasons for lack of substantial
                     compliance with FFMIA.




                     Page 6                                                                            GAO-04-209T
Figure 1: Problems Reported by Auditors for Fiscal Years 2000 through 2002




Nonintegrated Financial                   The CFO Act calls for agencies to develop and maintain an integrated
Management Systems                        accounting and financial management system13 that complies with federal
                                          systems requirements and provides for (1) complete, reliable, consistent,
                                          and timely information that is responsive to the financial information needs
                                          of the agency and facilitates the systematic measurement of performance,
                                          (2) the development and reporting of cost management information, and
                                          (3) the integration of accounting and budgeting information. In this regard,
                                          OMB Circular A-127, Financial Management Systems, requires agencies to



                                          13
                                             Federal financial system requirements define an integrated financial system as one that
                                          coordinates a number of previously unconnected functions to improve overall efficiency
                                          and control. Characteristics of such a system include (1) standard data classifications for
                                          recording financial events, (2) common processes for processing similar transactions,
                                          (3) consistent control over data entry, transaction processing, and reporting, and (4) a
                                          system design that eliminates unnecessary duplication of transaction entry.




                                          Page 7                                                                         GAO-04-209T
establish and maintain a single integrated financial management system
that conforms with functional requirements published by JFMIP.

An integrated financial system coordinates a number of functions to
improve overall efficiency and control. For example, integrated financial
management systems are designed to avoid unnecessary duplication of
transaction entry and greatly lessen reconciliation issues. With integrated
systems, transactions are entered only once and are available for multiple
purposes or functions. Moreover, with an integrated financial management
system, an agency is more likely to have reliable, useful, and timely
financial information for day-to-day decision making as well as external
reporting.

Agencies that do not have integrated financial management systems
typically must expend major effort and resources, including in some cases
hiring external consultants, to develop information that their systems
should be able to provide on a daily or recurring basis. In addition,
opportunities for errors are increased when agencies’ systems are not
integrated. Agencies with nonintegrated financial systems are more likely
to be required to devote more resources to collecting information than
those with integrated systems.

Auditors frequently mentioned the lack of modern, integrated financial
management systems in their fiscal year 2002 audit reports. As shown in
figure 1, auditors for 12 of the 19 agencies with noncompliant systems
reported this as a problem. For example, auditors for the Department of
Transportation (DOT) reported that its major agencies still use the
Departmental Accounting and Financial Information System (DAFIS), the
existing departmentwide accounting system14 and cannot produce
auditable financial statements based on the information in DAFIS. For
example, DOT’s IG reported that DOT made about 860 adjustments outside
of DAFIS totaling $51 billion in order to prepare the financial statements.15
DOT’s IG also reported that there were problems linking some information
between DAFIS and the Federal Highway Administration’s Fiscal
Management Information System (FMIS). DOT uses FMIS to record initial
obligations for federal aid grants to states. However, due to problems

14
 DOT is implementing a COTS-based core financial system called Delphi. DOT
management projects that the implementation will be complete in fiscal year 2004.
15
   Office of Inspector General, Department of Transportation, Consolidated Financial
Statements for Fiscal Years 2002 and 2001, FI-2003-018 (Jan. 27, 2003).




Page 8                                                                       GAO-04-209T
                            resulting from upgrades and changes made to the FMIS system, all
                            obligations are not electronically transferred from FMIS to DAFIS. As of
                            September 30, 2002, valid obligations of about $388 million were
                            understated. Moreover, problems linking information also existed between
                            Delphi, DOT’s new financial management system, and the Federal Transit
                            Administration’s (FTA) financial feeder systems that prevented FTA from
                            electronically processing about $350 million in payments related to its
                            Electronic Clearing House Operation. These transactions had to be
                            manually processed into Delphi. What is important here is that the
                            information developed to prepare auditable annual financial statements is
                            not available on an ongoing basis for day-to-day management of DOT’s
                            programs and operations.

                            As we have reported,16 cultural resistance to change, military service
                            parochialism, and stovepiped operations have played a significant role in
                            impeding previous attempts to implement broad-based reforms at the
                            Department of Defense (DOD). The department’s stovepiped approach is
                            most evident in its current financial management systems environment,
                            which DOD recently estimated to include approximately 2,300 systems and
                            systems development projects—many of which were developed in
                            piecemeal fashion and evolved to accommodate different organizations,
                            each with its own policies and procedures. As DOD management has
                            acknowledged,17 the department’s current financial environment is
                            comprised of many discrete systems characterized by poor integration and
                            minimal data standardization and prevents managers from making more
                            timely and cost-effective decisions.



Inadequate Reconciliation   A reconciliation process, even if performed manually, is a valuable part of a
Procedures                  sound financial management system. In fact, the less integrated the
                            financial management system, the greater the need for adequate
                            reconciliations because data are accumulated from various sources. For
                            example, the Department of Health and Human Services (HHS) IG




                            16
                               U.S. General Accounting Office, Department of Defense: Status of Financial Management
                            Weaknesses and Progress Toward Reform, GAO-03-931T (Washington, D.C.: June 25, 2003).
                            17
                               Department of Defense, Performance and Accountability Report, Fiscal Year 2002 (Jan.
                            31, 2003).




                            Page 9                                                                     GAO-04-209T
reported18 that the department’s lack of an integrated financial
management system continues to impair the ability of certain operating
divisions to prepare timely information. Moreover, certain reconciliation
processes were not adequately performed to ensure that differences were
properly identified, researched, and resolved in a timely manner and that
account balances were complete and accurate. Reconciliations are needed
to ensure that data have been recorded properly between the various
systems and manual records. The Comptroller General’s Standards for
Internal Control in the Federal Government highlights reconciliation as a
key control activity.

As shown in figure 1, auditors for 11 of the 19 agencies with noncompliant
systems reported that the agencies had reconciliation problems, including
difficulty reconciling their fund balance with Treasury accounts19 with
Treasury’s records. Treasury policy requires agencies to reconcile their
accounting records with Treasury records monthly, which is comparable to
individuals reconciling their checkbooks to their monthly bank statements.
As we recently testified,20 DOD had at least $7.5 billion in unexplained
differences between Treasury and DOD fund activity records. Many of
these differences represent disbursements made and reported to Treasury
that had not yet been properly matched to obligations and recorded in DOD
accounting records. In addition to these unreconciled amounts, DOD
identified and reported an additional $3.6 billion in payment recording
errors. These include disbursements that DOD has specifically identified
as containing erroneous or missing information and that cannot be
properly recorded and charged against the correct, valid fund account.
DOD records many of these payment problems in suspense accounts.
While DOD made $1.6 billion in unsupported adjustments to its fund
balances at the end of fiscal year 2002 to account for a portion of these
payment recording errors, these adjustments did not resolve the related
errors.




18
 Office of Inspector General, Independent Auditor’s Report on Financial Statements, A-17-
02-0001, Fiscal Year 2002 Performance and Accountability Report, U.S. Department of
Health and Human Services.
19
 Agencies record their budget spending authorizations in their fund balance with Treasury
accounts. Agencies increase or decrease these accounts as they collect or disburse funds.
20
     GAO-03-931T.




Page 10                                                                      GAO-04-209T
                              Inadequate reconciliation procedures also complicate the identification
                              and elimination of intragovernmental activity and balances, which is one of
                              the principal reasons we continue to disclaim on the government’s
                              consolidated financial statements. As we testified in April 2003,21 agencies
                              had not reconciled intragovernmental activity and balances with their
                              trading partners22 and, as a result, information reported to Treasury is not
                              reliable. For several years, OMB and Treasury have required CFO Act
                              agencies to reconcile selected intragovernmental activity and balances
                              with their trading partners. However, a substantial number of CFO Act
                              agencies did not perform such reconciliations for fiscal years 2002 and
                              2001, citing such reasons as (1) trading partners not providing needed data,
                              (2) limitations and incompatibility of agency and trading partner systems,
                              and (3) human resource issues. For both of these years, amounts reported
                              for federal trading partners for certain intragovernmental accounts were
                              significantly out of balance. Actions are being taken governmentwide
                              under OMB’s leadership to address problems associated with
                              intragovernmental activity and balances.



Lack of Accurate and Timely   Auditors for 17 agencies reported the lack of accurate and timely recording
Recording of Financial        of financial information for fiscal year 2002 compared to the 14 agencies23
                              for which auditors noted similar problems in their 2001 reports. Accurate
Information
                              and timely recording of financial information is key to successful financial
                              management. Timely recording of transactions can facilitate accurate
                              reporting in agencies’ financial reports and other management reports that
                              are used to guide managerial decision making. The Comptroller General’s
                              Standards for Internal Control in the Federal Government states that
                              transactions should be promptly recorded to maintain their relevance and
                              value to management in controlling operations and making decisions.



                              21
                                 U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial
                              Statements: Sustained Leadership and Oversight Needed for Effective Implementation of
                              Financial Management Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003).
                              22
                               Trading partners are U.S. government agencies, departments, or other components that do
                              business with each other.
                              23
                               In our October 2002 FFMIA report, we stated that auditors had discussed the lack of
                              accurate and timely recording of transactions at 12 agencies. As part of our analysis of most
                              recent agency audit reports, it became apparent that these problems were reported in prior
                              years for 2 additional agencies, but the earlier audit reports did not include sufficient detail
                              to make these assessments.




                              Page 11                                                                           GAO-04-209T
                         Untimely recording of transactions during the fiscal year can result in
                         agencies making substantial efforts at fiscal year-end to perform extensive
                         manual financial statement preparation efforts that are susceptible to error
                         and increase the risk of misstatements. Gathering financial data only at
                         year-end does not provide adequate time to analyze transactions or account
                         balances. Further, it impedes management’s ability throughout the year to
                         have timely and useful information for decision making. For example,
                         auditors reported24 that, for fiscal year 2002, Department of Justice
                         (Justice) components did not adjust the status of obligations on a quarterly
                         basis as required, and as a result, extensive manual efforts had to be
                         performed at year-end to correct the status of obligation records. This
                         process of reviewing the status of obligations only at the end of the year
                         increases the risk that errors will go undetected, does not provide
                         managers with accurate information during the year for decision making,
                         and results in misstatements in the financial statements.



Noncompliance with the   Implementing the SGL at the transaction level is one of the specific
SGL                      requirements of FFMIA. However, as shown in figure 1, auditors for 9 of
                         the 19 noncompliant agencies reported that the agencies’ systems did not
                         comply with SGL requirements. The SGL promotes consistency in financial
                         transaction processing and reporting by providing a uniform chart of
                         accounts and pro forma transactions. Use of the SGL also provides a basis
                         for comparison at agency and governmentwide levels. These defined
                         accounts and pro forma transactions are used to standardize the
                         accumulation of agency financial information, as well as enhance financial
                         control and support financial statement preparation and other external
                         reporting. By not implementing the SGL, agencies are challenged to
                         provide consistent financial information across their components and
                         functions.




                         24
                            PricewaterhouseCoopers, Report of Independent Accountants, January 15, 2003, FY 2002
                         Performance & Accountability Report, U.S. Department of Justice.




                         Page 12                                                                    GAO-04-209T
                       As in previous years, the Department of Housing and Urban Development’s
                       (HUD) auditors reported that the Federal Housing Administration’s (FHA)
                       systems were noncompliant with the SGL for fiscal year 2002 because FHA
                       must use several manual processing steps to convert its commercial
                       accounts to SGL accounts.25 FHA’s 19 legacy insurance systems, which fed
                       transactions to its commercial general ledger system, lacked the
                       capabilities to process transactions in the SGL format. Therefore, FHA
                       provided only consolidated summary-level data to HUD’s Central
                       Accounting and Program System (HUDCAPS). As we reported,26 FHA used
                       several manual processing steps to provide summary-level data, including
                       the use of personal-computer-based software to convert the summary-level
                       commercial accounts to government SGL, and transfer the balances to
                       HUDCAPS. This process did not comply with JFMIP requirements that the
                       core financial system provide for automated month- and year-end closing of
                       SGL accounts and the roll-over of the SGL account balances.



Lack of Adherence to   One of FFMIA’s requirements is that agencies’ financial management
Federal Accounting     systems account for transactions in accordance with federal accounting
                       standards. Agencies face significant challenges implementing these
Standards              standards. As shown in figure 1, auditors for 13 of the 19 agencies with
                       noncompliant systems reported that these agencies had problems
                       complying with one or more federal accounting standards. Auditors
                       reported that agencies are having problems implementing standards that
                       have been in effect for some time, as well as standards that have been
                       promulgated in the last few years. For example, auditors for three
                       agencies—DOD, Justice, and the Federal Emergency Management Agency
                       (FEMA)—reported weaknesses in compliance with Statement of Federal
                       Financial Accounting Standards (SFFAS) No. 6, Accounting for Property,
                       Plant, and Equipment, which became effective for fiscal year 1998.
                       Auditors for DOD reported that DOD did not capture the correct



                       25
                        To help address deficiencies with its legacy general ledger system, as a first step in
                       upgrading its overall financial management system, FHA implemented the general ledger
                       module of a COTS software package on October 1, 2002. This module automates the
                       monthly interface of summary-level balances with HUD’s Central Accounting and Program
                       System (HUDCAPS).
                       26
                          U.S. General Accounting Office, Department of Housing and Urban Development: Status
                       of Efforts to Implement an Integrated Financial Management System, GAO-03-447R
                       (Washington, D.C.: Apr. 9, 2003).




                       Page 13                                                                    GAO-04-209T
acquisition date and cost of its property, plant, and equipment, due to
system limitations.

Therefore, DOD could not provide reliable information for reporting
account balances and computing depreciation. Auditors for two
agencies—HUD and Justice—reported weaknesses in compliance with
SFFAS No. 7, Revenue and Other Financing Sources, which also became
effective for fiscal year 1998. For example, auditors reported a material
weakness for FHA’s budget execution and fund control. According to the
auditors, FHA’s financial systems and processes are not capable of fully
monitoring and controlling budgetary resources. Finally, auditors for three
agencies—the Agency for International Development (AID), the National
Aeronautics and Space Administration (NASA), and the Nuclear Regulatory
Commission (NRC)—reported trouble with implementing SFFAS No. 10,
Accounting for Internal Use Software, which became effective at the
beginning of fiscal year 2001. For example, auditors reported that NASA’s
policies and procedures do not specifically address purchasing software as
part of a package of products and services. In their testing, NASA’s auditors
identified errors for costs that were originally recorded as expenses, but
instead should have been capitalized as assets.

Managerial cost information is required by the CFO Act of 1990, and since
1998 by a federal accounting standard. Auditors for five agencies reported
problems implementing SFFAS No. 4, Managerial Cost Accounting
Concepts and Standards. For example, auditors for DOL reported that the
department has not developed the capability to routinely report the cost of
outputs used to manage program operations at the operating program and
activity levels. Moreover, DOL does not use managerial cost information
for purposes of performance measurement, planning, budgeting, or
forecasting. At DOT, auditors stated that its agencies, other than the
Federal Aviation Administration (FAA) and the U.S. Coast Guard,27 have
begun to identify requirements for implementing cost accounting systems.
DOT’s existing accounting system, DAFIS, does not have the capability to
capture full costs, including direct and indirect costs assigned to DOT
programs. The Secretary recently advised OMB that as the remaining DOT




27
 FAA has efforts underway to implement a cost accounting system as required by the
Federal Aviation Reauthorization Act of 1996 (Pub. L. No. 104-264, 110 Stat. 3213, 3248
(1996)). The U.S. Coast Guard has a cost accounting system used for determining vessel
documentation user fees.




Page 14                                                                      GAO-04-209T
agencies migrate to Delphi, DOT’s new core financial system, Delphi will
provide them with enhanced cost accounting capabilities.

Managerial cost information is critical for implementing the PMA.
According to the PMA, the accomplishment of the other four crosscutting
initiatives28 will matter little without the integration of agency budgets with
performance. Although the lack of a consistent information and reporting
framework for performance, budgeting, and accounting may obscure how
well government programs are performing as well as inhibit comparisons,
no one presentation can meet all users’ needs. Any framework should
support an understanding of the links between performance, budgeting,
and accounting information measured and reported for different purposes.
However, even the most meaningful links between performance results and
resources consumed are only as good as the underlying data. Moreover,
this link between resources consumed and performance results is
necessary to make public-private competition decisions as part of
competitive sourcing. Therefore, agencies must address long-standing
problems within their financial systems. As agencies implement and
upgrade their financial management systems, opportunities exist for
developing cost management information as an integral part of these
systems to provide important information that is timely, reliable, and
useful.

As we recently reported,29 DOD’s continuing inability to capture and report
the full cost of its programs represents one of the most significant
impediments facing the department. DOD does not have the systems and
processes in place to capture the required cost information from the
hundreds of millions of transactions it processes each year. Lacking
complete and accurate overall life-cycle cost information for weapons
systems impairs DOD’s and congressional decisionmakers’ ability to make
fully informed decisions about which weapons, or how many, to buy. DOD
has acknowledged that the lack of a cost accounting system is its largest
impediment to controlling and managing weapon systems costs.




28
 The other four crosscutting initiatives are improved financial performance, strategic
human capital management, competitive sourcing, and expanded electronic government.
29
     GAO-03-931T.




Page 15                                                                     GAO-04-209T
Weak Security Controls over   Information security weaknesses are one of the frequently cited reasons
Information Systems           for noncompliance with FFMIA and are a major concern for federal
                              agencies and the general public. These weaknesses are placing enormous
                              amounts of government assets at risk of inadvertent or deliberate misuse,
                              financial information at risk of unauthorized modification or destruction,
                              sensitive information at risk of inappropriate disclosure, and critical
                              operations at risk of disruption. Auditors for all 19 of the agencies reported
                              as noncompliant with FFMIA identified weaknesses in security controls
                              over information systems. Unresolved information security weaknesses
                              could adversely affect the ability of agencies to produce accurate data for
                              decision making and financial reporting because such weaknesses could
                              compromise the reliability and availability of data that are recorded in or
                              transmitted by an agency’s financial management system.

                              General controls are the policies, procedures, and technical controls that
                              apply to all or a large segment of an entity’s information systems and help
                              ensure their proper operation. The six major areas are (1) security
                              program management, which provides the framework for ensuring that
                              risks are understood and that effective controls are selected and properly
                              implemented, (2) access controls, which ensure that only authorized
                              individuals can read, alter, or delete data, (3) software development and
                              change controls, which ensure that only authorized software programs are
                              implemented, (4) segregation of duties, which reduces the risk that one
                              individual can independently perform inappropriate actions without
                              detection, (5) operating systems controls, which protect sensitive
                              programs that support multiple applications from tampering and misuse,
                              and (6) service continuity, which ensures that computer-dependent
                              operations experience no significant disruption. As we discussed in our
                              April 2003 testimony,30 our analyses of audit reports issued from October
                              2001 through October 2002 for 24 of the largest federal agencies31


                              30
                               U.S. General Accounting Office, Information Security: Progress Made, But Challenges
                              Remain to Protect Federal Systems and the Nation’s Critical Infrastructures, GAO-03-
                              564T (Washington, D.C.: Apr. 8, 2003).
                              31
                                 These are the Departments of Agriculture, Commerce, Defense, Education, Energy, Health
                              and Human Services, Housing and Urban Development, Interior, Justice, Labor, State,
                              Transportation, Treasury, and Veterans Affairs, the Environmental Protection Agency,
                              Federal Emergency Management Agency, General Services Administration, Office of
                              Personnel Management, National Aeronautics and Space Administration, National Science
                              Foundation, Nuclear Regulatory Commission, Small Business Administration, Social
                              Security Administration, and U.S. Agency for International Development.




                              Page 16                                                                     GAO-04-209T
continued to show significant weaknesses in federal computer systems that
put critical operations and assets at risk. Weaknesses continued to be
reported in each of the 24 agencies included in our review, and they
covered all six major areas of general controls. Although our analyses
showed that most agencies had significant weaknesses in these six control
areas, weaknesses were most often cited for access controls and security
program management.

Since 1997, GAO has considered information security a governmentwide
high-risk area.32 As shown by our work and work performed by the IGs,
security program management continues to be a widespread problem.
Concerned with reports of significant weaknesses in federal computer
systems that make them vulnerable to attack, the Congress enacted
Government Information Security Reform provisions33 (commonly known
as GISRA) to reduce these risks and provide more effective oversight of
federal information security. GISRA required agencies to implement an
information security program that is founded on a continuing risk
management cycle and largely incorporates existing security policies found
in OMB Circular A-130, Management of Federal Information Resources.
GISRA provided an overall framework for managing information security
and established new annual review, independent evaluation, and reporting
requirements to help ensure agency implementation and both OMB and
congressional oversight.

In its required fiscal year 2002 GISRA report to the Congress, OMB stated
that the federal government had made significant strides in addressing
serious and pervasive information technology security problems, but that
more needed to be done, particularly to address both the governmentwide
weaknesses identified in its fiscal year 2001 report to the Congress and new
challenges.34 Also, OMB reported significant progress in agencies’
information technology security performance, primarily as indicated by
quantitative governmentwide performance measures that OMB required
agencies to disclose beginning with their fiscal year 2002 reports. These


32
   U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington,
D.C.: January 2001).
33
 These provisions are part of the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001, Pub. L. No. 106-398, 114 Stat. 1654, 1654A-266 (2000).
34
 Office of Management and Budget, FY 2002 Report to Congress on Federal Government
Information Security Reform (May 16, 2003).




Page 17                                                                      GAO-04-209T
include measures such as the number of systems that have been assessed
for risk, have an up-to-date security plan, and for which security controls
have been tested.

As discussed in our June 2003 testimony,35 the governmentwide
weaknesses identified by OMB, as well as the limited progress in
implementing key information security requirements, continue to
emphasize that, overall, agencies are not effectively implementing and
managing their information security programs. For example, of the 24
large federal agencies we reviewed, 11 reported that they had assessed risk
for 90 to 100 percent of their systems for fiscal year 2002, but 8 reported
that they had assessed risk for less than half of their systems.

The information security program, evaluation, and reporting requirements
established by GISRA have been permanently authorized and strengthened
through the recently enacted Federal Information Security Management
Act of 2002 (FISMA).36 In addition, FISMA provisions establish additional
requirements that can assist the agencies in implementing effective
information security programs, help ensure that agency systems
incorporate appropriate controls, and provide information for
administration and congressional oversight. These requirements include
the designation and establishment of specific responsibilities for an agency
senior information security officer, implementation of minimum
information security requirements for agency information and information
systems, and required agency reporting to the Congress.

Agencies’ fiscal year 2003 FISMA reports, due to OMB in September 2003,
should provide additional information on the status of agencies’ efforts to
implement federal information security requirements. In addition, FISMA
requires each agency to report any significant deficiency in an information
security policy, procedure, or practice relating to financial management
systems as an instance of a lack of substantial compliance under FFMIA.37




35
   U.S. General Accounting Office, Information Security: Continued Efforts Needed to Fully
Implement Statutory Requirements, GAO-03-852T (Washington, D.C.: June 24, 2003).
36
     Pub. L. No. 107-347, title III, 116 Stat. 2899, 2946 (2002).
37
     44 U.S.C. 3544(c)(3).




Page 18                                                                      GAO-04-209T
Agency Efforts to    The continuing trend of noncompliance with FFMIA indicates the overall
                     long-standing poor condition of agency financial systems. Correcting the
Implement New Core   systems problems is a difficult challenge for agencies because of the age
Financial Systems    and poor condition of their critical financial systems. Some of the federal
                     government’s computer systems were originally designed and developed
                     years ago and do not meet current systems requirements. These legacy
                     systems cannot provide reliable financial information for key
                     governmentwide initiatives, such as integrating budget and performance
                     information.

                     Across government, agencies have many efforts underway to implement or
                     upgrade financial systems to alleviate long-standing weaknesses in
                     financial management. As we recently reported,38 as of September 30, 2002,
                     17 agencies advised us that they were planning to or were in the process of
                     implementing a new core financial system.39 Of these 17 agencies, 11 had
                     selected certified40 software. The other 6 agencies have not reached the
                     software selection phase of their acquisition process.




                     38
                        U.S. General Accounting Office, Core Financial Systems at the 24 Chief Financial
                     Officers Act Agencies, GAO-03-903R (Washington, D.C.: June 27, 2003).
                     39
                       Core financial systems, as defined by JFMIP, include managing general ledger, funding,
                     payments, receivables, and certain basic cost functions. Core financial systems receive data
                     from other financial and feeder systems—such as acquisition, grant, and human resource
                     and payroll systems—as well as from direct user input, and provide data for financial
                     performance measurement and analysis and for financial statement preparation.
                     40
                      The Program Management Office, which is managed by JFMIP’s Executive Director with
                     funds provided by the CFO Council agencies, tests vendor COTS packages and certifies
                     those that meet certain financial management system requirements for core financial
                     systems.




                     Page 19                                                                        GAO-04-209T
Implementing a core financial system that has been certified does not
guarantee that these agencies will have financial systems that are
compliant with FFMIA. Certification of core financial systems and testing
vendor COTS packages help ensure that financial management system
requirements and the vendor software remain aligned. One critical factor
affecting FFMIA compliance is the integration of the core financial system
with the agency’s administrative41 and programmatic42 systems and the
validity and completeness of data from these systems. Other factors
affecting a COTS core financial system’s ability to comply with FFMIA
include how the software package works in the agency’s environment,
whether any modifications or customizations have been made to the
software, and the success of converting data from legacy systems to new
systems. As of September 30, 2002, target implementation dates for 16 of
the 17 agencies planning to implement new core financial systems ranged
from fiscal years 2003 to 2008. One agency—DOD—had not yet
determined its target date for full implementation. As shown in figure 2, 3
of the 16 agencies—Agriculture, GSA, and NASA—planned to complete
implementation in fiscal year 2003. Three other agencies—SSA,
Commerce, and DOT—planned to complete their implementations in fiscal
year 2004. The Department of Energy established fiscal year 2005 as its
target implementation date and 3 agencies—the departments of State and
Veterans Affairs and AID—have targeted fiscal year 2006 for completion.
Moreover, as shown in figure 2, 4 agencies—DOL, HHS, EPA, and HUD—
have set fiscal year 2007 as their implementation target date. Finally, 2
agencies—the Departments of the Interior and Justice43—projected fiscal
year 2008 for completion of their core financial systems implementation.




41
   Examples of administrative systems are those common to all agencies such as budget,
acquisition, travel, property, and payroll.
42
 Programmatic systems are those needed to carry out an agency’s mission. For example,
HHS needs a grants management system to carry out its mission.
43
   Justice plans a staggered implementation of its new core financial system in its component
agencies with target completion dates ranging from October 2004 to October 2007.




Page 20                                                                        GAO-04-209T
Figure 2: Agency Target Dates for Implementation of Core Financial Systems as of September 30, 2002


                                                                                                       HUD



                          NASA                 Commerce                            VA                  EPA



                          GSA                  SSA                                 State               HHS                                           Interior
       GENERAL SERVICES
        ADMINISTRATION




                                                                                                                                 E NT O F J
                                                                                                                             M
                                                                                                                         T




                                                                                                                                          U
                                                                                                                   R




                                                                                                                                              ST
                                                                                                                  DEPA




                                                                                                                                              I CE
                          Agriculture          DOT               Energy            AID                 Labor                                         Justice             Defense



      2003                              2004              2005              2006                2007                     2008                                     Not yet
                                                                                                                                                                determined

Source: GAO.



                                                            The remaining 7 of the 24 CFO Act agencies that advised us that they had
                                                            no plans to implement a new system had either recently implemented a
                                                            new core financial system in the last several years or were not planning to
                                                            implement an agencywide core financial system. Five of the 7 agencies had
                                                            fully implemented new core financial systems since the beginning of fiscal
                                                            year 2001—including the Department of Education, NSF,44 NRC, the Small
                                                            Business Administration (SBA), and OPM. FEMA had implemented a new
                                                            system prior to fiscal year 2001. The remaining agency, Treasury,45 is not
                                                            planning to implement an agencywide core financial system, but several of
                                                            its subcomponent agencies—including the Internal Revenue Service and
                                                            the Office of the Comptroller of the Currency—are in the process of
                                                            implementing core financial system software packages.

                                                            In their performance and accountability reports, management for some
                                                            agencies stated that full implementation of these new systems will address
                                                            their systems’ substantial noncompliance with FFMIA. However, as
                                                            previously mentioned, implementation of a new core financial system may
                                                            not resolve all of an agency’s financial management weaknesses because of
                                                            the myriad of problems affecting agencies beyond their core financial

                                                            44
                                                             NSF’s core financial system was implemented in 1992. The maintenance needed to migrate
                                                            the system to a client-server platform was completed in April 2001.
                                                            45
                                                             Although Treasury does not have an agencywide core financial system, it does utilize
                                                            automated tools and a central data warehouse for analysis and reporting.




                                                            Page 21                                                                                                  GAO-04-209T
                       systems. Nevertheless, it is imperative that agencies adopt leading
                       practices to help ensure successful systems implementation.



Successful             Implementing new financial management systems provides a foundation
                       for improved financial management, including enhanced financial
Implementation of      reporting capabilities that will help financial managers meet OMB’s
Financial Management   accelerated reporting deadlines46 and make better financial management
                       decisions due to more timely information. Successful implementation of
Systems Is Key for     financial management systems has been a continuous challenge for both
Improved Financial     federal agencies and private sector entities. In the past, federal agencies
Reporting              have experienced setbacks and delays in their implementation processes.
                       These delays were caused by various factors, including a lack of executive-
                       level involvement, poor communication between managers and users, and
                       inadequate project planning. For example, our work at NASA has shown
                       the need for consistent executive support, communication with all
                       stakeholders, full identification of user requirements, and adequate
                       planning.

                       Recent work at NASA illustrates some of the specific problems agencies
                       are encountering in implementing JFMIP-certified financial systems. In
                       April 2000, NASA began its Integrated Financial Management Program
                       (IFMP), its third attempt in recent years at modernizing financial processes
                       and systems. NASA’s previous two efforts were eventually abandoned after
                       a total of 12 years and a reported $180 million in spending. As part of this
                       third effort, NASA recently implemented a new core financial module that
                       was expected to provide financial and program managers with timely,
                       consistent, and reliable cost and performance information for management
                       decisions. However, earlier this year we reported47 that NASA’s core
                       financial module was not being implemented to accommodate the
                       information needed by program managers, cost estimators, and the
                       Congress. The need for ongoing communication between project


                       46
                          In order to have timely, reliable and useful information OMB has required agencies to
                       prepare financial statements closer to the end of the reporting period. Under the
                       accelerated reporting requirements, agency performance and accountability reports for
                       fiscal year 2004 are due to OMB by November 15, 2004, just 45 days after the close of the
                       fiscal year.
                       47
                          U.S. General Accounting Office, Business Modernization: Improvements Needed in
                       Management of NASA’s Integrated Financial Management Program, GAO-03-507
                       (Washington, D.C.: Apr. 2003).




                       Page 22                                                                        GAO-04-209T
managers and systems users is crucial to any successful systems
implementation project. Project managers need to understand the basic
requirements of users, while users should be involved in the project’s
planning process. NASA’s program officials chose to defer the
development of some functions and related user requirements in order to
expedite the systems implementation process. As a result, the new system
will not meet the needs of some key users who will continue to rely on
information from nonintegrated programs outside of the core financial
module, or use other labor-intensive means, to capture the data they need
to manage programs.

NASA has also not followed certain other best practices for acquiring and
implementing its new financial management system. NASA’s
implementation plan calls for the system to be constructed using
commercial components; however, NASA has not analyzed the
interdependencies of the various subsystems. When constructing a system
from commercial components, it is essential to understand the features and
characteristics of each component in order to select compatible systems
that can be integrated without having to build and maintain expensive
interfaces. By acquiring components without first understanding their
relationships, NASA has increased its risks of implementing a system that
will not optimize mission performance, and that will cost more and take
longer to implement than necessary.

Private sector entities have also encountered a number of challenges and
setbacks when implementing new systems. These challenges have
included competition between internal organizational units, user resistance
to the new systems, and frequent changes in management and to
underlying corporate strategy. Entities are overcoming their challenges
because better tools have been created to monitor and control progress
and skilled project managers with better management processes are being
used.




Page 23                                                         GAO-04-209T
The Standish Group International, Inc.48 (Standish Group) has reported that
the number of successful systems implementation projects in the private
sector is increasing. From 1994 to 2000, successful projects increased from
28,000 to 78,000. The Standish Group, through its research,49 has identified
10 project success factors. These factors include user involvement,
executive support, experienced project managers, firm basic requirements,
clear business objectives, minimized scope, standard software
infrastructure, formal methodology, reliable estimates, and other.50

Also, according to the Standish Group, although no project requires all 10
factors to be successful,51 the more factors that are present in the project
strategy, the higher the chance of a successful implementation. As
discussed above, many of these factors have been challenges for both
private sector and federal entities. By its very nature, the implementation
of a new financial management system is a risky proposition. Therefore, it
is crucial that federal departments and agencies follow accepted best
practices and embrace as many of the key characteristics for successful
implementation projects as possible to help minimize the risk of failed
projects and result in systems that provide the necessary data for
management’s needs.

Our executive guide52 on creating value through world-class financial
management describes 11 practices critical for establishing and
maintaining sound financial operations. These practices include
reengineering processes in conjunction with new technology. As a result,
using commercial components such as COTS packages may require
significant changes in the way federal departments conduct their business.
According to the leading finance organizations that formed the basis for
our executive guide, a key to successful implementation of COTS systems
is reengineering business processes to fit the new software applications

48
 The Standish Group is a well-known research advisory firm that focuses on mission-
critical software applications, management techniques, and technologies.
49
 The Standish Group’s research is done through focus groups, in-depth surveys, and
extensive interviews with Fortune 500 companies.
50
     Other includes small milestones, proper planning, competent staff, and ownership.
51
   Successful implementation is defined as a project that is completed on time, on budget,
and with all the features and functions originally specified.
52
   U.S. General Accounting Office, Executive Guide: Creating Value Through World-class
Financial Management, GAO/AIMD-00-134 (Washington, D.C.: April 2000).




Page 24                                                                         GAO-04-209T
                       that are based on best practices. Moreover, OMB’s former Associate
                       Director for Information Technology and e-Government has stated that “IT
                       will not solve management problems—re-engineering processes will.”

                       The conversion of data from an old system to a new system is also critical.
                       In December 2002, JFMIP issued its White Paper: Financial Systems Data
                       Conversion – Considerations. The purpose of this JFMIP document is to
                       raise awareness of financial systems data conversion considerations to be
                       addressed by financial management executives and project managers when
                       planning or implementing a new financial management system. The JFMIP
                       paper addresses (1) key considerations regarding data conversion and
                       cutover to the new system, (2) best approaches for completing the data
                       conversion and cutover, and (3) ways to reduce the risks associated with
                       these approaches.



Status of              As we have discussed, the goal of FFMIA is for agencies to have timely,
                       reliable, and accurate information with which to make informed decisions
Governmentwide         and to ensure accountability on an ongoing basis. Figure 3 shows the three
Financial Management   levels of the pyramid that result in the end goal, accountability and useful
                       management information. The bottom level of the pyramid is the
Improvement Efforts    legislative framework that underpins the improvement of the general and
                       financial management of the federal government. The second level shows
                       the drivers that build on the legislative requirements and influence agency
                       actions to meet these requirements. The three drivers are
                       (1) congressional and other oversight, (2) the activities of the JFMIP
                       Principals, and (3) the PMA. The third level of the pyramid represents the
                       key success factors for accountability and meaningful management
                       information—integrating core and feeder financial systems, producing
                       reliable financial and performance data for reporting, and ensuring
                       effective internal control. The result of these three levels, as shown at the
                       top of the pyramid, is accountability and meaningful management
                       information needed to assess and improve the government’s effectiveness,
                       financial condition, and operating performance.




                       Page 25                                                           GAO-04-209T
                           Figure 3: Pyramid to Accountability and Useful Management Information
                           Congressional Oversight



                                 End goal                                        Accountability
                                                                                   and useful
                                                                                 management
                                                                                  information



                                 Key success
                                 factors                                            Reliable
                                                                                 financial and       Effective
                                                                 Integrated    performance data      internal
                                                                  systems        for reporting        control




                                Drivers

                                                                              Congressional and                   JFMIP
                                                           PMA                 other oversight                   Principals



                                 Legislative
                                 framework
                                                       Government     Accountability                          Government
                                               CFO     Management     of Tax Dollars                          Performance      Clinger-Cohen
                                               Act      Reform Act     Act of 2002           FFMIA           and Results Act        Act


                           Source: GAO.




Congressional Oversight	   The leadership demonstrated by the Congress has been an important
                           catalyst to reforming financial management in the federal government. As
                           previously discussed, the legislative framework provided by the CFO Act
                           and FFMIA, among others, produced a solid foundation to stimulate
                           needed change. For example, in November 2002, the Congress enacted the
                           Accountability of Tax Dollars Act of 200253 to extend the financial
                           statement audit requirements for CFO Act agencies to most executive
                           branch agencies. In addition, there is value in sustained congressional
                           interest in these issues, as demonstrated by hearings on federal financial
                           management and reform held over the past several years. It will be key that
                           the appropriations, budget, authorizing, and oversight committees hold
                           agency top management accountable for resolving these problems and that
                           they support improvement efforts. The continued attention by the


                           53
                                Pub. L. No. 107-289, 116 Stat. 2049 (2002).




                           Page 26                                                                                             GAO-04-209T
                           Congress to these issues will be critical to sustaining momentum for
                           financial management reform.



JFMIP Principals	          Starting in August 2001, the JFMIP Principals have been meeting regularly
                           to deliberate and reach agreements focused on financial management
                           reform issues including (1) defining success measures for financial
                           performance that go far beyond an unqualified audit opinion,54
                           (2) significantly accelerating financial statement reporting to improve
                           timeliness for decision making, and (3) addressing difficult accounting and
                           reporting issues, including impediments to an audit opinion on the federal
                           government’s consolidated financial statements. This forum has provided
                           an opportunity to reach decisions on key issues and undertake strategic
                           activities that reinforce the effectiveness of groups such as the CFO
                           Council in making progress toward federal financial management. In fiscal
                           year 2002, the JFMIP Principals continued the series of these deliberative
                           meetings. Continued personal involvement of the JFMIP Principals is
                           critical to the full and successful implementation of federal financial
                           management reform and to providing greater transparency and
                           accountability in managing federal programs and resources.



President’s Management     The PMA, being implemented by the administration as an agenda for
Agenda and the Executive   improving the management and performance of the federal government,
                           targets the most apparent deficiencies where the opportunity to improve
Branch Management          performance is the greatest. While FFMIA implementation relates directly
Scorecard                  to the improved financial performance initiative, development and
                           maintenance of FFMIA-compliant systems will also affect the
                           implementation of the other four initiatives. Furthermore, the
                           modernization of agency financial management systems, as envisioned by
                           FFMIA, is critical to the success of all of these initiatives. Notably, OMB is
                           developing a federal enterprise architecture that will affect the
                           government’s ability to make significant progress across the PMA. For
                           example, as part of the e-gov initiative, the number of federal payroll
                           providers is being consolidated. Numerous agencies had targeted their
                           payroll operations for costly modernization efforts. According to OMB,
                           millions of dollars will be saved through shared resources and processes

                           54
                             These success measures include financial management systems that routinely provide
                           timely, reliable, and useful financial information and no material control weaknesses or
                           material noncompliance with laws and regulations as well as FFMIA.




                           Page 27                                                                        GAO-04-209T
                    and by modernizing on a cross-agency and governmentwide basis. The
                    administration’s implementation of its Program Assessment Rating Tool
                    (PART) relates specifically to the PMA initiative of integration of budget
                    and performance information. Reliable cost data, so crucial to effective
                    FFMIA implementation, is critical not only for the improved financial
                    performance and budget and performance integration initiatives, but also
                    for competitive sourcing. For effective management, this cost information
                    must not only be timely and reliable, but also both useful and used.

                    The administration is using the Executive Branch Management Scorecard,
                    based on governmentwide standards for success, to highlight agencies’
                    progress in achieving the improvements embodied in the PMA. OMB uses a
                    grading system of red, yellow, and green to indicate agencies’ status in
                    achieving the standards for success for each of the five crosscutting
                    initiatives. It also assesses and reports progress using a similar “stoplight”
                    system.

                    The focus that the administration’s scorecard approach brings to improving
                    management and performance, including financial management
                    performance, is certainly a step in the right direction. The value of the
                    scorecard is not in the scoring per se, but the degree to which the scores
                    lead to sustained focus and demonstrable improvements. This will depend
                    on continued efforts to assess progress and maintain accountability to
                    ensure that the agencies are able to, in fact, improve their performance. It
                    will be important that there be continuous rigor in the scoring process for
                    this approach to be credible and effective in providing incentives that
                    produce lasting results. Also, it is important to recognize that many of the
                    challenges the federal government faces, such as improving financial
                    management, are long-standing and complex, and will require sustained
                    attention.



Closing Comments	   The primary purpose of FFMIA is to ensure that agency financial
                    management systems routinely provide reliable, useful, and timely financial
                    information so that government leaders will be better positioned to invest
                    resources, reduce costs, oversee programs, and hold agency managers
                    accountable for the way they run programs. While many agencies are
                    receiving unqualified opinions on their financial statements, auditor
                    determinations of FFMIA compliance are lagging behind. To achieve the
                    financial management improvements envisioned by the CFO Act, FFMIA,
                    and more recently, the President’s Management Agenda, agencies need to
                    modernize their financial systems to generate reliable, useful, and timely



                    Page 28                                                            GAO-04-209T
                  financial information throughout the year and at year-end. However, as we
                  have discussed today, agencies are facing significant challenges in
                  implementing new financial management systems. We are seeing a strong
                  commitment from the President, the JFMIP Principals, and the Secretaries
                  of major departments to ensure that these needed modernizations come to
                  fruition. This commitment is critical to the success of the efforts under
                  way as well as those still in a formative stage, and must be sustained.
                  Finally, Mr. Chairman, the leadership demonstrated by you and the
                  members of this Subcommittee is an important catalyst to reforming
                  financial management in the federal government. Continued attention to
                  these issues will be critical to sustaining momentum on financial
                  management reforms.

                  Mr. Chairman, this concludes my statement. I would be pleased to answer
                  any questions you or other members of the Subcommittee may have at this
                  time.



Contacts and 	    For further information about this statement, please contact Kay L. Daly at
                  (202) 512-9312. Other key contributors to this testimony include Sandra S.
Acknowledgments   Silzer and Bridget A. Skjoldal.




(193052)          Page 29                                                         GAO-04-209T
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