FINANCE: Clean Audits Weak Systems

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Government Leader home > November 2005 issue

November 2005; Vol. 1 No. 4

FINANCE: Clean Audits, Weak Systems

By Richard W. Walker

The good news: More agencies are receiving clean audits on the their financial statements. The bad news: Their financial systems can’t generate the comprehensive data needed for day-to-day financial management.

“The underlying financial systems are a serious problem,” the Government Accountability Office said in a recent report (GAO-05-881 at www.gao.gov). “Systems of most agencies are still unable to routinely produce reliable, useful and timely financial information,” as required by the Federal Financial Management Improvement Act of 1996.

Ultimately, this shortcoming prevents agencies from effectively managing major programs, according to GAO.

For fiscal 2004, auditors for 16 of the 23 agencies covered by the Chief Information Officers Act of 1990 reported that the agencies’ financial management systems failed to comply with FFMIA. In reviewing the reports, GAO criticized auditors for six of the seven other agencies for providing only “negative assurance,” meaning nothing came to the auditors’ attention during their investigations to indicate that the systems didn’t meet FFMIA standards.

The lone exception was the Labor Department, where officials provided “positive assurance” that their systems were in compliance by having an independent public accounting firm perform the FFMIA examination.

The issue of positive versus negative assurance is a point of contention between GAO and the Office of Management and Budget. GAO officials believe a statement of positive assurance is a statutory requirement under FFMIA.

They recommend that OMB require such a statement when reporting an agency’s systems to be in compliance with the act. Positive assurance provides “a clear ‘bottom line,’ whereas negative assurance does not do so,” the report said.

But in a letter responding to the report, OMB controller Linda Combs said requiring a statement of positive assurance “would prove only marginally useful.”

She contended that the standards of success under the President’s Management Agenda’s financial performance initiative already “provide a vigorous corroborative mechanism” for assessing FFMIA compliance and, moreover, OMB’s revised Circular 123 requires proactive assessment of financial reporting.

Combs commended the Labor Department for taking the extra steps to provide positive assurance of compliance. “Nevertheless,” she added, “while encouraging similar efforts at other agencies, we believe that mandating positive assurance of systems’ compliance with FFMIA ... is not necessary.”

Regardless of the kerfuffle over assessment procedures, the bottom line is that government needs to improve its financial management systems.

How is that to be done? GAO officials concluded that improving government financial systems requires a “concerted and coordinated effort” at the highest levels of government, including attention from top agency management and Congress.

But financial management systems represent an intersection of the finance and IT jurisdictions, so their improvement also demands stronger collaboration between CFOs and CIOs.

“CFOs and CIOs have a lot of area for working together in a more holistic way,” said Labor Department CFO Sam Mok.

Where agency financial management systems fall short

Number of the 23 CFO Act agencies where GAO identified weaknesses

Non-integrated financial management systems
FY2003: 11
FY2004: 12

Inadequate reconciliation procedures
FY2003: 11
FY2004: 11

Lack of timely and accurate reporting
FY2003: 15
FY2004: 16

Noncompliance with Standard General Ledger
FY2003: 10
FY2004: 11

Lack of adherence to federal accounting standards
FY2003: 11
FY2004: 11

Weak security over injunction systems
FY2003: 17
FY2004: 15

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Getting real about real property: PMA is transforming federal property management

Improvement in financial management systems demands stronger collaboration between CFOs and CIOs.

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