Federal Financial Management: Substantial Progress Made since the CFO Act of 1990 and Preliminary Observations on Opportunities for Enhancement

Prior to the enactment of the CFO Act, government reports found that agencies lost billions of dollars through fraud, waste, abuse, and mismanagement. These reports painted the picture of a government unable to properly manage its programs, protect its assets, or provide taxpayers with the effective and economical services they expected.

The CFO Act was enacted to address these problems—calling for comprehensive federal financial management reform. Among other things, the act established CFO positions, provided for long-range planning, and began the process of auditing federal agency financial statements. The act also called for integrating accounting and financial management systems and systematic performance measurement and cost information.

This statement is based on preliminary observations from GAO's ongoing review of the federal government's efforts to meet the requirements of the CFO Act. GAO reviewed federal financial management legislation, guidance, and reports. GAO also conducted interviews and a panel discussion with experts in federal financial management, and surveyed federal CFOs, inspectors general, and independent public accountants.

The federal government has made significant strides in improving financial management since enactment of the Chief Financial Officers Act of 1990 (CFO Act). Substantial progress has occurred in areas such as improved internal controls, reliable agency financial statements, and establishment of chief financial officer (CFO) positions. To help ensure that the CFO Act achieves its full potential, there are several opportunities for enhancement.

Standardize CFO and deputy CFO responsibilities across government. The responsibilities assigned to CFOs vary among agencies. Uniform and effective responsibilities of CFOs would help enhance strategic decision-making and correct inconsistencies across government. In addition, deputy CFOs should have appropriate responsibilities in order to be better prepared to act for CFOs when there are vacancies.

Prepare government-wide and agency-level financial management plans. Since 2009, the Office of Management and Budget (OMB) has not prepared the annual 5-year government-wide plans that the CFO Act requires. Instead, OMB has provided information in the President's Management Agenda, the U.S. government's consolidated financial statements, and other documents. A complete and integrated government-wide financial management plan and supporting agency plans, prepared every few years, could help ensure continuity in direction and a more comprehensive understanding of gauging progress toward addressing financial management challenges across government.

Better link performance and cost information for decision-making. While agencies have made efforts in this direction, opportunities exist for agencies to better link performance and cost information to effectively make financial management decisions that are based on dollars allocated and results achieved.

Develop a broader set of key selected financial management performance-based metrics. Agencies currently have limited performance-based metrics to help them assess the quality of financial management and ensure that the federal government better manages and uses the resources entrusted to it.

Rectify internal control issues in certain areas. The federal government faces many internal control problems. For example, assessments continue to identify long-standing, as well as new, material weaknesses. Improper payments continue to be a long-standing internal control issue. And finally, material weaknesses continue to prevent GAO from rendering an opinion on the U.S. government's consolidated financial statements.

Improve financial management systems. The federal government has made unsuccessful efforts to implement new financial management systems at several agencies and spent billions of dollars on failed systems. Moreover, in fiscal year 2018, eight of 24 CFO Act agencies' still did not substantially comply with federal systems requirements.

Strengthen the federal financial management workforce. With rapid changes, such as emerging technologies, it is critical for the government to identify and strategically plan for the future workforce.

GAO obtained comments from OMB, the Department of the Treasury, and the Office of Personnel Management and has incorporated their comments as appropriate. As GAO finalizes its work for issuance next year, it will consider feedback on its work in making recommendations related to the opportunities for enhancement, as appropriate.

Thank you for the opportunity to be here today to discuss the Chief  Financial Officers Act of 1990 (CFO Act). As you know, effective federal  financial management helps to ensure that taxpayer-provided and other  acquired resources are safeguarded and used lawfully, efficiently, and  effectively for the purposes intended. Since enactment of the CFO Act  almost 30 years ago, the federal government has made significant strides  in improving financial management. Today, I will highlight some of the  most significant achievements and offer some preliminary observations  on how federal financial management can be enhanced.

The information in this testimony is based on our ongoing review and  analysis of relevant legislation; federal financial management guidance  and reports; interviews and a panel discussion with experts in federal  financial management; and results of GAO surveys to federal chief  financial officers (CFO), inspectors general, and independent public  accountants. See appendix I for details.

We performed the work on which this statement is based from October  2018 to October 2019 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.

Prior to the enactment of the CFO Act, government reports found that  agencies lost billions of dollars through fraud, waste, abuse, and  mismanagement. These reports painted the picture of a government  unable to properly manage its programs, protect its assets, or provide  taxpayers with the effective and economical services they expected.  Reported financial management problems included (1) unreliable financial  information driven by widespread weaknesses in agency internal controls  over financial reporting and obsolete and inefficient agency financial  management systems and (2) financial reporting practices that did not  accurately disclose the current and probable future cost of operating,  permit adequate comparison of actual costs among executive branch  agencies, or provide the timely information required for efficient program  management.

For example,  in 1988, we reported on internal control problems such as  the Department of Defense being unable to account for hundreds of  millions of dollars in advances paid by foreign customers for equipment,  weak controls permitting things such as over $50 million in undetected  fraudulent insurance claims paid by the Federal Crop Insurance  Corporation, millions of dollars in interest penalties because agencies  paid 25 percent of their bills late, and over $350 million in lost interest  because agencies paid their bills too soon.

In 1990, Congress mandated financial management reform through  enactment of the CFO Act. The CFO Act was the most comprehensive  and far-reaching financial management improvement legislation enacted  since the Budget and Accounting Procedures Act of 1950. The CFO Act  established a Controller position at the government-wide level and a CFO  position for each of the agencies identified in the act (referred to as the  CFO Act agencies), provided for long-range planning, and began the  process of preparing and independently auditing federal agency financial  statements. The act aimed to strengthen internal controls, integration of  agency accounting and financial management systems, financial  reporting practices, and the financial management workforce. The act  also called for systematic performance measurement and cost  information.

As figure 1 shows, a number of other financial management reforms were  subsequently enacted to help improve federal financial management,  some of which I will briefly discuss in my statement today. A chronological  list of statutes cited in this report and selected additional financial  management reforms is included in appendix II.

Substantial Progress Has Been Made toward Achieving the Purposes of the CFO Act

The federal government has made substantial progress toward improving  financial management and achieving the purposes of the CFO Act. Table  1 highlights some of the progress that has been made.

Leadership: OMB, Agency CFOs, and Treasury Have Provided Notable Financial Management Leadership

The centralized leadership structures envisioned by the CFO Act—a  Controller position at the government-wide level and a CFO position at  each CFO Act agency—have been established. OMB’s Deputy Director  for Management and Office of Federal Financial Management, headed by  the Controller and Deputy Controller, have led reform efforts by  developing and periodically updating guidance and initiatives in areas  such as financial management systems, auditing, financial reporting,  internal control, and grants management.

The CFO Act also required OMB to submit to Congress, annually, a 5- year plan for improving financial management—mirrored in corresponding  CFO Act agency plans. Among other things, the plan required a  description of the existing financial management structure and changes  needed; a strategy for developing adequate, consistent, and timely  financial information; proposals for eliminating unneeded systems;  identification of workforce needs and actions to ensure that those needs  are met; a plan for the audit of financial statements of executive branch  agencies; and an estimate of the costs for implementing the plan. The  CFO Act also required annual financial management status reports  government-wide and for executive branch agencies. From 1992 to 2009,  OMB annually prepared comprehensive 5-year government-wide financial  management plans.

Agency CFOs have significantly contributed to improvements in financial  management. According to the survey we issued to CFOs and deputy  CFOs, some of these improvements include advising executive  leadership on financial management matters and direction for agency  financial operations and professional financial management personnel;  taking steps to develop and maintain financial management systems;  reducing duplicative financial management systems; resolving audit  findings; supporting audits of the agency’s financial statements; helping to  ensure the quality of financial information, and preparing the agency  financial report and other financial reports. In addition, the CFO Council  periodically met to advise and coordinate activities and initiatives,  including those related to internal controls, financial management  systems, and enterprise risk management. OMB stated that the CFO  Council is also working on a workforce plan.

In addition, the Department of the Treasury (Treasury) made contributions  to improving federal financial management. Among other things, Treasury  has developed and periodically updated government-wide guidance and  tools to support federal financial reporting; issued, in coordination with  OMB, the Financial Report of the U.S. Government since fiscal year  1997, which includes the government-wide consolidated financial  statements; and developed a long-term vision for improving federal  financial management. In 2010, Treasury established the Office of  Financial Innovation and Transformation, which identifies and facilitates  the implementation of innovative solutions to help agencies become more  efficient and transparent, and Treasury also issues an annual message to  agency CFOs to set the direction and goals of federal financial  management.

Financial Reporting: The Preparation and Audit of Financial Statements Have Provided Much- Needed Accountability and Transparency

In 1990, OMB, Treasury, and GAO jointly established the Federal  Accounting Standards Advisory Board (FASAB) to develop and  promulgate accounting standards and principles for financial reporting in  the federal government. In 1999, FASAB was recognized by the  American Institute of Certified Public Accountants as the standard setter  for generally accepted accounting principles for federal government  entities. FASAB has issued 57 statements of federal financial accounting  standards (SFFAS) that provide greater transparency and accountability  over the federal government’s operations and financial condition,  including SFFAS 36, Comprehensive Long-Term Projections for the U.S.  Government, which requires the Statement of Long-Term Fiscal  Projections as part of the government-wide consolidated financial  statements. In addition, OMB, Treasury, and GAO have regularly  provided guidance to agencies that improves transparency, consistency,  and usefulness of financial reporting.

Agencies have significantly improved the quality and timeliness of their  financial reporting since the enactment of the CFO Act. As expanded by  the Government Management Reform Act of 1994 (GMRA) and the  Accountability of Tax Dollars Act of 2002 (ATDA), federal law now  requires every CFO Act agency and most other executive agencies to  annually prepare audited financial statements no later than March 1—5  months after the end of the federal fiscal year. However, OMB has  accelerated this due date for audited financial statements. For the first  time, for fiscal year 2005, all CFO Act agencies completed their audited  financial statements by November 15, approximately 45 days after the  close of the fiscal year, compared to the 60–90 day requirement for public  companies filing with the Securities and Exchange Commission.

For fiscal year 1996, the first year that all CFO Act agencies were  required to prepare audited financial statements, six CFO Act agencies  received an unmodified (“clean”) audit opinion on their respective entities’  financial statements, compared with 22 CFO Act agencies that received  clean audit opinions for fiscal year 2018. Today, to demonstrate  transparency and accountability to Congress and citizens, the CFO Act  agencies make their annual performance reports and annual financial  reports, which include audited financial statements, available on their  websites. In addition, since fiscal year 1997, Treasury, in coordination  with OMB, has annually prepared government-wide consolidated financial  statements, which are available on Treasury’s website.

Substantial benefits have been achieved as a result of the preparation  and audit of financial statements, which provide useful and necessary  insight into government operations, including  federal agency accountability to Congress and citizens, including  independent assurance about the reliability of reported financial  information; greater confidence to stakeholders (governance officials, taxpayers,  consumers, or regulated entities) that federal funds are being properly  accounted for and assets are properly safeguarded; an assessment of the reliability and effectiveness of systems and  related internal controls, including identifying control deficiencies that  could lead to fraud, waste, and abuse; a focus on information security; early warnings of emerging financial management issues; and  identification of noncompliance with laws and regulations, which can  present challenges to agency operations.

Our CFO survey respondents (18 of 23) agreed that preparation and audit  of financial statements are greatly or moderately beneficial to federal  agencies, noting that the financial audit process helped identify and  eliminate material weaknesses in internal control, greatly strengthened  internal control processes, and led to more discipline and integrity in  federal accounting.

Continuation of annual agency financial statement audits is critical to  maintaining accountability and sustaining financial management  improvements. Also, independent assurance that financial management  information included in agency financial statements is fairly stated is an  important element of accountability and provides agency management,  OMB, Treasury, Congress, and citizens with assurances that the  information is reliable and properly accounted for.

Internal Control: Significant Improvements Have Been Made

A key goal of the CFO Act was to improve internal control to reasonably  assure that the federal government’s financial management information is  reliable, useful, and timely. Compared with 1990, internal control is  markedly stronger. The number of material weaknesses in internal control  over financial reporting—significant issues that create the potential for  inaccurate financial information that would change or influence the  judgment of a reasonable financial report user relying on the  information—reported as part of financial statement audits has been  significantly reduced. For fiscal year 2005, financial statement auditors  reported no identified material weaknesses for only seven of 24 CFO Act  agencies, based on their financial statement audits; by 2018, that number  had doubled to 14.

In addition, auditors identified and agencies fixed thousands of internal  control problems over the past 3 decades. Further, Treasury and OMB  have addressed many of the internal control problems related to the  processes used to prepare the U.S. government’s consolidated financial  statements. However, some internal control problems are long-standing,  complex, and not quickly resolved, such as accounting for transactions  between federal agencies.

Annual financial statement audits also uncovered the significance of  improper payments and prompted legislation to strengthen controls over  improper payments. Agencies have made progress in estimating the  amount of improper payments and implementing efforts to reduce them,  but this remains an area of concern. We have reported improper  payments as a material deficiency or weakness since the fiscal year 1997  initial audit of the U.S. government’s consolidated financial statements.  For fiscal year 2018, 79 programs across 20 agencies reported estimated  improper payments totaling about $151 billion. Since fiscal year 2003— when certain agencies were required to begin reporting estimated  improper payments—cumulative improper payment estimates have  totaled about $1.5 trillion.

The annual financial statement audits, which include an assessment of  information systems controls, surfaced widespread information security  weaknesses. Since fiscal year 1997, we have reported information  security as a material weakness in the audit of the U.S. government’s  consolidated financial statements. We have also reported information  security as a government-wide high-risk area since 1997. To address  information security challenges surfaced by federal agency audits,  Congress enacted the Federal Information Security Management Act of  2002 and its successor, the Federal Information Security Modernization  Act of 2014. These laws require agencies to develop, document, and  implement programs to provide security for the information and  information systems that support agency operations and assets.

Financial Management Systems: Steps Have Been Taken to Improve the Government’s Systems

One key purpose of the CFO Act and of the Federal Financial  Management Improvement Act of 1996 (FFMIA) that followed was to  improve federal agencies’ financial management systems. FFMIA  requires CFO Act agencies to maintain financial management systems  that substantially comply with (1) federal financial management systems  requirements, (2) applicable federal accounting standards, and (3) the  U.S. Government Standard General Ledger at the transaction level.  Agencies have improved their compliance with FFMIA requirements. For  fiscal year 2018, auditors reported that 16 of 24 CFO Act agencies’  financial systems substantially comply with FFMIA’s systems  requirements for fiscal year 2018, up from four agencies in fiscal year  1997.

Federal agencies have taken steps to implement new financial systems.  While progress has been made in modernizing financial management  systems, we have previously reported that efforts to modernize financial  management systems have often exceeded budgeted cost, resulted in  delays in delivery dates, and did not provide the anticipated system  functionality and performance. For example, one-half (12 of 24) of the  CFOs and deputy CFOs who responded to our survey indicated that they  still use old systems and use obsolete software or hardware to perform  financial management responsibilities.

Some agencies have used migration of financial systems to external  providers as part of their system modernization efforts, but others have  experienced challenges in using shared services. For example, some  CFO Act agencies have had difficulty in finding a provider with sufficient  capacity and decided to modernize their financial system internally.  Others that have attempted to move their financial system to a shared  service provider failed to meet their cost, schedule, and performance  goals.

The federal government also has taken action aimed at reducing  duplicative efforts by increasing agencies’ use of shared services for  commonly used computer applications—such as payroll or travel. Over  the past 15 years, there have been some notable shared services  successes. For example, consolidating payroll services resulted in more  than $1 billion in cost savings and cost avoidance over 10 years,  according to Office of Personnel Management (OPM) estimates. In April  2019, OMB issued Memorandum M-19-16 on shared services, which  among other things described the process and desired outcomes for  shared services and established a governance and accountability model  for achieving them.

Workforce: Steps Have Been Taken to Strengthen the Federal Financial Management Workforce

To help achieve the CFO Act’s purposes, the federal government  established a financial management workforce structure, improving the  quality of the federal workforce. Since then, steps have been taken to  strengthen the federal financial management workforce, including the  following:  In 2000, the CFO Council and OPM worked together to align  qualifications standards for accounting, auditing, and budget  competencies with emerging financial management position  requirements.

In 2002, Congress and the President enacted legislation to empower  OPM to provide agencies with additional authorities and flexibilities to  manage the federal workforce and created the chief human capital  officer (CHCO) positions and the CHCO Council to advise and assist  agency leaders in their human capital efforts.

In 2011, OPM and the CHCO Council created a working group that  identified critical skills gaps in six government-wide, mission-critical  occupations, including that of auditor.

In 2017, OPM published a regulation requiring each CFO Act agency  to develop a human capital operating plan describing agency-specific  skills and competency gaps that are selected for closure and the  strategies that will be implemented.

Preliminary Observations on Opportunities for Enhancements to Fulfill the Purposes of the CFO Act

While substantial progress has been made, additional attention is needed  in several areas to help fully achieve the vision of the CFO Act and, in  doing so, improve and modernize federal financial management. Based  on the preliminary results from our ongoing review, we have identified  several opportunities for enhancements that could help ensure that the  CFO Act reaches its full potential.  1.  To help ensure uniform responsibility, enhance strategic decision- making, and correct inconsistencies across government, amend  agency CFO’s statutory responsibilities to ensure that they include all  of the responsibilities necessary to effectively carry out financial  management activities. Currently, responsibilities vary across  agencies and do not include all key responsibilities that CFOs should  possess.  2.  To help ensure continuity in agency financial management operations  when CFO vacancies occur, establish appropriate statutory  responsibilities for deputy CFOs. This would minimize the effects of  inevitable turnover in CFO positions.   3.  Based on the maturity of federal financial management, extend the  reporting frequency of the government-wide and agency-level  financial management plans from annually to at least every 4 years  (with timing to match the Government Performance and Results Act  reporting requirements). In addition to the current government-wide  financial management plan requirements, the plans should include  actions for improving financial management systems, strengthening  the federal financial management workforce, and better linking  performance and cost information for decision-making. The  government-wide plan should also include key selected financial  management performance-based metrics. It is our view that OMB and  Treasury should consult with the CFO Council, the Chief Information  Officer Council, the Council of the Inspectors General on Integrity and  Efficiency, GAO, and other appropriate financial management experts  in preparing the government-wide plan.  4.  To provide more complete and consistent measurement of the quality  of agencies’ financial management, require OMB to develop, in  consultation with the CFO Council, key selected performance-based  metrics to assess the quality of an agency’s financial management,  and changes therein. Examples of potential metrics include the  number of internal control deficiencies, the number of internal control  deficiencies corrected during the year, and the number of  Antideficiency Act violations.The metrics should be included in the  government-wide and agency-level financial management plans  discussed above and agencies’ performance against the metrics  reported in the annual status reports. Also, consider requiring auditor  testing and reporting on the reliability of each agency’s reported  performance against the metrics.  5.  To reasonably assure that key financial management information that  an agency uses is reliable, require agency management to (1) identify  key financial management information, in addition to financial  statements, needed for effective financial management and decision- making and (2) annually assess and report on the effectiveness of  internal control over financial reporting and other key financial  management information. Also, consider requiring auditor testing and  reporting on internal control over financial reporting and other key  financial management information.

We provided a draft of the progress and opportunities for enhancements  to OMB, Treasury, and OPM. OPM provided technical comments. OMB  and Treasury generally agreed with enhancements 1 and 2, regarding  CFOs’ and deputy CFOs’ statutory responsibilities. OMB generally  disagreed with enhancement 3, regarding preparation of government- wide and agency-level financial management plans, stating that  developing government-wide plans poses an administrative burden and is  no longer relevant in light of the current state of financial management.  However, we believe that a complete and integrated government-wide  plan could help to ensure continuity in direction and a comprehensive  understanding of the status and financial management challenges across  government. Eight of the 10 financial experts we interviewed stated that  without a government-wide financial management plan, the government  lacks a clear strategic direction and agency improvement efforts may not  appropriately address government-wide priorities.

For enhancement 4, regarding performance metrics for agencies’  financial management, OMB generally disagreed, stating that it would be  difficult to develop additional metrics that would apply to all agencies. We  recognize the challenges in developing the metrics but continue to believe  that a limited number of key metrics can be developed to effectively  assess the quality of agencies’ financial management. For enhancement  5, regarding identifying key financial management information and  assessing, reporting, and auditing internal control, Treasury generally  agreed and OMB generally disagreed, noting that no action is needed  and these controls are adequately addressed under existing initiatives  and the enterprise risk management program contained in OMB  guidance. We believe that a separate assessment is needed to  reasonably assure that key agency financial management information  used by the agency is reliable.

Chairman Enzi, Ranking Member Sanders, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.

If you or your staff have any questions about this testimony, please  contact Dawn B. Simpson, Director, Financial Management and  Assurance, at (202) 512-3406 or simpsondb@gao.gov or Robert F.  Dacey, Chief Accountant, at (202) 512-3406 or daceyr@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. GAO staff who made key  contributions to this testimony are Phyllis Anderson (Assistant Director),  LaDonna Towler (Assistant Director), Beryl Davis (Director), David  Ballard, Jeremy Choi, Anthony Clark, Patrick Frey, Ryan Guthrie, Isabella  Hur, Jason Kelly, Jason Kirwan, Chris Klemmer, Michael LaForge, Jill  Lacey, Diana Lee, Christy Ley, Keegan Maguigan, Lisa Motley, Heena  Patel, Matthew Valenta, Walter Vance, and William Ye.

This testimony highlights some of the most significant achievements in  federal government financial management since enactment of the Chief  Financial Officers Act of 1990 (CFO Act) and some preliminary  observations on how federal financial management can be enhanced.  The information in this testimony is based on our ongoing review and  analysis of relevant legislation; federal financial management guidance,  such as Office of Management and Budget (OMB) circulars; reports on  financial management issued by the Government Accountability Office  (GAO), agency offices of inspector general, and others; summarization of  interviews and a panel discussion with experts in federal financial  management; and summarization of results of GAO surveys to federal  chief financial officers (CFO), inspectors general (IG), and independent  public accountants (IPA).

To obtain perspectives of agency personnel on federal financial  management, we developed and administered two web-based surveys  from May 22, 2019, through August 5, 2019. We administered one survey  to 47 individuals from the CFO offices of the CFO Act agencies and  included individuals holding the position of CFO, acting CFO, deputy  CFO, or equivalent at these agencies as of May 1, 2019. Of the 47  individuals we surveyed, 24 individuals responded, which resulted in a 51  percent response rate. We administered the other survey to 53 individuals  holding the position of IG, deputy IG, or counsel to the IG at the CFO Act  agencies as of May 1, 2019, and an additional 24 IPAs who have  performed financial statement audits for these agencies since fiscal year  2014. Of the 77 individuals we surveyed, 29 individuals responded, which  resulted in a 38 percent response rate. Results of both surveys only  represent the views of those individuals who responded to the surveys  and may not be representative of all individuals from the CFO offices, IG  offices, or IPA offices of the CFO Act agencies.

In May 2019, we hosted an expert meeting with the theme “CFO Act -  Progress and Challenges.” When planning the meeting, we considered  experts with a broad array of expertise. We had a total of eight experts  participate, representing both the federal and private sectors. They  included individuals who had served in auditing capacities and individuals  who had represented federal entities being audited. Some experts were  currently serving in their roles, and others had retired. Including experts  with both present and past experiences helped to ensure an examination  and discussion of the history of the CFO Act from its inception to the  present. Topics for discussion included progress and challenges since  enactment of the CFO Act, the role of the Department of the Treasury  (Treasury) and OMB with regard to the act, and suggestions for  improvements to financial management processes and systems. The  meeting transcript was categorized by key points, including progress,  challenges, OMB’s and Treasury’s roles, government-wide plans,  financial management systems, shared services, leading practices, and  proposed reforms or suggestions for improvements.

Appendix II: Selected Statutes Governing Federal Entity Financial Management and Reporting, Including Related Systems and Personnel

Budget and Accounting Procedures Act of 1950, ch. 946 §§ 110-118, 64  Stat. 834 (Sept. 12, 1950).

Federal Managers’ Financial Integrity Act of 1982, Pub. L. No. 97-255, 96  Stat. 814 (Sept. 8, 1982), codified at 31 U.S.C. § 3512(c), (d).

Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838  (Nov. 15, 1990).

Government Performance and Results Act of 1993, Pub. L. No. 103-62,  107 Stat. 287 (Aug. 3, 1993).

Government Management Reform Act of 1994, Pub. L. No. 103-356, title  IV, § 405, 108 Stat. 3410, 3415 (Oct. 13, 1994).

Clinger-Cohen Act of 1996, Pub. L. No. 104-106, div. D & E, 110 Stat.  642 (Feb. 10, 1996), codified as amended at 40 U.S.C. § 11101, et seq.

Federal Financial Management Improvement Act of 1996, Pub. L. No.  104-208, div. A, § 101(f), title VIII, 110 Stat. 3009-389 (Sept. 30, 1996),  codified at 31 U.S.C. § 3512 note.

Reports Consolidation Act of 2000, Pub. L. No. 106-531, 114 Stat. 2537  (Nov. 22, 2000), codified as amended at 31 U.S.C. § 3516.

Accountability of Tax Dollars Act of 2002, Pub. L. No. 107-289, 116 Stat.  2049 (Nov. 7, 2002).

Chief Human Capital Officers Act of 2002, Pub. L. No. 107-296, title XIII,  subtitle A, 116 Stat. 2135, 2287 (Nov. 25, 2002).

Improper Payments Information Act of 2002, Pub. L. No. 107-300, 116  Stat. 2350 (Nov. 26, 2002), codified as amended at 31 U.S.C. § 3321  note.

Federal Information Security Management Act of 2002, Pub. L. No. 107- 347, title III, 116 Stat. 2899, 2946 (Dec. 17, 2002), codified as amended  at 44 U.S.C. §§ 3551-3558.

Department of Homeland Security Financial Accountability Act, Pub. L.  No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).

Federal Funding Accountability and Transparency Act of 2006, Pub. L.  No. 109-282, 120 Stat. 1186 (Sept. 26, 2006), codified as amended at 31  U.S.C. § 6101 note.

Improper Payments Elimination and Recovery Act of 2010, Pub. L. No.  111-204, 124 Stat. 2224 (July 22, 2010), codified as amended at 31  U.S.C. § 3321 note.

GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 3866  (Jan. 4, 2011).

Improper Payments Elimination and Recovery Improvement Act of 2012,  Pub. L. No. 112-248, 126 Stat. 2390 (Jan. 10, 2013), codified as  amended at 31 U.S.C. § 3321 note.

Digital Accountability and Transparency Act of 2014, Pub. L. No. 113-101,  128 Stat. 1146 (May 9, 2014), codified at 31 U.S.C. § 6101 note.

Federal Information Security Modernization Act of 2014, Pub. L. No. 113- 283, (Dec. 18, 2014), codified at 44 U.S.C. §§ 3551-3558.

Carl Levin and Howard P. ‘Buck’ McKeon National Defense Authorization  Act for Fiscal Year 2015, Pub. L. No. 113-291, div. A, title VIII, subtitle D,  128 Stat. 3292, 3438-3450 (Dec. 19, 2014) (commonly referred to as the  Federal Information Technology Acquisition Reform Act).

Federal Improper Payments Coordination Act of 2015, Pub. L. No. 114- 109, 129 Stat. 2225 (Dec. 18, 2015).

Fraud Reduction and Data Analytics Act of 2015, Pub. L. No. 114-186,  130 Stat. 546 (June 30, 2016).

National Defense Authorization Act for Fiscal Year 2018, Pub. L. No. 115- 91, div. A, title X, subtitle G, 131 Stat. 1283, 1586 (Dec. 12, 2017),  codified at 40 U.S.C. § 11301 note (commonly referred to as the  Modernizing Government Technology Act).

Foundations for Evidence-Based Policymaking Act of 2018, Pub. L. No.  115-435, 132 Stat. 5529 (Jan. 14, 2019).

Appendix III: Opportunities for Enhancements to Fulfill the Purposes of the CFO Act

Standardize CFO and Deputy CFO Responsibilities across Government

The CFO Act provided agency CFOs with broad responsibilities for all  financial management activities of their respective agencies, including  financial management systems (including financial reporting and internal  controls); agency financial management personnel, activities, and  operations; preparation of financial statements; and monitoring of budget  execution. The specific responsibilities assigned to CFOs vary among  agencies and are inconsistent government-wide. We previously reported  that CFO Act agencies need to ensure that CFOs possess the necessary  authorities within their agencies to achieve change. For instance,  because of the interdependency of the budget and accounting functions,  some agencies have included both budget formulation and execution  functions under the CFO’s authority while others have not.

Most financial experts we interviewed agreed and the CFO Council and  the Council of the Inspectors General on Integrity and Efficiency (CIGIE)  reported that to allow for better strategic decision-making, CFO  responsibilities should include budget formulation and execution, planning  and performance, risk management and internal controls, financial  systems, and accounting. Most experts agreed that standardizing the  CFO portfolio across agencies would promote standardized financial  management training and education and consistent skill sets across  agencies, both at the executive and staff levels.

The CFO Council and CIGIE have identified turnover of agency CFOs,  even during the same administration, as a significant challenge. They  also stated that major financial management improvement initiatives can  take years to fully implement and realize, often outlasting the average  tenure of a political appointee to a CFO position. With frequent CFO  turnover and potentially lengthy intervals between official appointments,  long-term planning and leadership continuity can be affected because  career deputy CFOs, who frequently serve as acting CFOs during CFO  vacancies, do not always have the same breadth of responsibilities as  CFOs. Deputy CFOs can be better prepared to act for CFOs when there  are vacancies if appropriate responsibilities are established for deputy  CFOs. In our survey to CFOs and deputy CFOs, 17 of 24 respondents  stated that the deputy CFO position should include all, most, or many of  the same responsibilities as the CFO position. Additionally, some  respondents to our survey replied that it is important for the deputy CFO  to be able to step into the CFO position should there be a vacancy. CIGIE  also said that deputy CFOs should be sufficiently empowered with more  standard responsibilities to ensure effective succession planning.

Prepare Government- Wide and Agency-Level Financial Management Plans

The CFO Act called for annual comprehensive government-wide 5-year  plans for improving federal financial management. It also called for each  agency CFO to annually prepare a plan to implement the government- wide plan prepared by the Office of Management and Budget (OMB).  Moreover, it required annual government-wide and agency-level status  reports. The OMB plans and status reports were to be submitted to  Congress to enable comprehensive congressional oversight.

Since it issued the 2009 report, OMB has neither prepared nor submitted  to Congress the annual 5-year government-wide plans as required by the  CFO Act. Instead, OMB stated that it is meeting the intent of the  requirement by providing information in the President’s Management  Agenda (PMA), in the annual government-wide consolidated financial  statements, and in documents placed on Performance.gov and the CFO  Council’s website. For the consolidated financial statements, the  information is included in a section in the Management’s Discussion and  Analysis (MD&A) entitled Financial Management. This section discusses  several of the priorities and accomplishments in financial management for  the prior and current fiscal years and in some cases discusses goals for  the next fiscal year.

In addition, according to OMB, financial management elements are being  considered in implementing the 2018 PMA. The CFO Council, in  coordination with OMB, has identified six financial management cross- agency priorities and is developing detailed plans for each. Two of these  plans, results-oriented accountability for grants and getting payments  right, have been completed and posted on Performance.gov. The others  are being managed by executive steering committees comprising CFO  Council–approved members. While the various MD&A Financial  Management sections, the PMA, and other OMB documents contain  relevant information about improvements in financial management, these  documents do not provide a complete and integrated financial  management strategy for making continued improvements and for  reporting on the administration’s accomplishments in a comprehensive  manner.

In 2019, OMB proposed eliminating the CFO Act requirement for a  separate comprehensive plan, arguing that this change would provide it  with flexibility to report information that is most relevant to financial  management in a manner that is most efficient. However, having a  complete and integrated financial management plan would help to  address long-standing, costly, and challenging concerns in financial  management in a strategic, comprehensive, efficient, and cost-effective  manner. Eight of the 10 financial experts we interviewed stated that  without a government-wide financial management plan, the government  lacks a clear strategic direction and agency improvement efforts may not  appropriately address government-wide priorities. To hold people  accountable and facilitate congressional oversight, a complete and  integrated financial management plan should include the resources  required and measure progress through interim milestones with  completion dates. Several experts also stated that they believe that a  government-wide plan should be done every few years instead of  annually, but that the status report could continue to be prepared  annually. A complete and integrated government-wide financial  management plan and supporting agency plans, prepared every few  years, could help ensure continuity in direction and a more  comprehensive understanding of gauging progress toward addressing  financial management challenges across government.

Better Link Performance and Cost Information for Decision-making

The CFO Act calls for agencies to (1) develop and maintain integrated  accounting and financial management systems that provide for, among  other things, systematic measurement of performance and (2) develop  and report cost information. While the Government Performance and  Results Act of 1993 (GPRA) laid a foundation for results-oriented  management, we found that agencies’ reported use of performance data  to make decisions has generally not improved.

While agencies have made efforts in this direction, opportunity exists to  enhance the availability and reliability of performance and cost  information, and better link this information for decision-making. One  example of this is linking program performance to program cost. A  number of agencies have implemented activity-based costing, which  creates a cost model of an organization by identifying the activities  performed, the resources consumed, and the outputs (products and  services) that an organization produces. However, linking cost and  performance information for effective decision-making has been  challenging.

Respondents to our CFO survey noted that agencies face challenges in  (1) developing and maintaining an integrated agency accounting and  financial management system (19 of 24 respondents), (2) developing and  reporting cost information (19 of 24 respondents), and (3) having financial  management systems that produce the needed financial data to help  address agency performance goals (21 of 24 respondents). Agencies that  lack readily available, reliable, and linked performance and cost  information may not be able to effectively make financial management  decisions that are based on dollars allocated and results achieved and  thus may miss opportunities to reduce costs or enhance mission  effectiveness.

Develop a Broader Set of Key Selected Financial Management Performance-Based Metrics

Agencies have limited financial management performance-based metrics  (e.g., financial statement audit opinion and number of reported material  weaknesses in internal control over financial reporting) to help them  assess the quality of their financial management. A broader set of key  selected financial management performance-based metrics can provide  more complete analysis across the breadth of financial management  functions. Examples of potential metrics include the number of internal  control deficiencies, the number of internal control deficiencies corrected  during the year, and the number of Antideficiency Act violations. Key  selected financial management performance-based metrics, including  identifying metrics in the government-wide and agency-level plans  discussed above and reporting of agency performance against the  metrics in the annual status reports, can help ensure that the federal  government better manages and uses the resources entrusted to it. Also,  auditor testing and reporting on each agency’s reported performance  against the metrics can provide assurance that such information is  reliable.

Rectify Internal Control Issues in Certain Areas

The CFO Act required CFOs to develop and maintain an integrated  agency accounting and financial management system that provides for  complete, reliable, consistent, and timely information prepared on a  uniform basis and that responds to agency management’s financial  information needs. To ensure the reliability of financial information,  agencies need effective internal controls. While agencies have made  important progress in strengthening internal control, as noted earlier, the  federal government faces many internal control problems. The following  discusses three areas: assessing internal control over key financial  management information, government-wide improper payments, and  material weaknesses preventing an opinion on the U.S. government’s  consolidated financial statements.

Assessing Internal Control over Key Financial Management Information

Management may not have reasonable assurance that internal control  over financial reporting and other key financial management information  that the agency uses is reliable. Since fiscal year 1997, agency auditors’  assessments of the effectiveness of internal control over financial  reporting have identified long-standing, as well as new, material  weaknesses. As a result of new material weaknesses, a number of  agencies have not been able to sustain “clean” audit opinions on their  financial statements. In addition, continuing material weaknesses have  hindered two CFO Act agencies, the Departments of Defense and  Housing and Urban Development, and the government as a whole, from  achieving clean audit opinions. For fiscal year 2018, auditors of CFO Act  agencies reported a total of 41 material weaknesses.

One key to strengthening internal control over financial reporting at  federal entities has been OMB Circular No. A-123, which carries out  OMB’s responsibility to provide guidelines for agencies to follow in  evaluating their systems of internal control. In December 2004, OMB  issued A-123, Appendix A, Internal Controls over Financial Reporting,  which provided a methodology with which agency management could  assess, document, and report on internal control over financial reporting.  It emphasized management’s responsibility for establishing and  maintaining effective internal control over financial reporting. Appendix A  required CFO Act agency management to annually assess the adequacy  of internal control over financial reporting, provide a report on identified  material weaknesses and corrective actions, and provide separate  assurance on the effectiveness of the agency’s internal control over  financial reporting. The CFO Council subsequently issued the  Implementation Guide for Appendix A in 2005.

In 2018, OMB reported that since the issuance of OMB Circular No. A- 123’s Appendix A, federal agencies have made substantial progress in  improving their internal controls over financial reporting. OMB referred to  this as a rigorous process for agencies to separately assess internal  control over financial reporting.

Beginning in fiscal year 2018, however, OMB no longer requires such a  process. On June 6, 2018, OMB issued an updated Appendix A,  Management of Reporting and Data Integrity Risk. The revised Appendix  A integrates internal control over reporting, along with internal controls  over operations and compliance, in an overall assessment of the  agency’s internal control. This reporting guidance includes internal control  over financial reporting as well as over other financial and nonfinancial  information. It also requires that agencies develop and maintain a data  quality plan that considers the risks to data quality in federal spending  data required by the Digital Accountability and Transparency Act of 2014 (DATA Act) and any controls that would manage such risks in accordance  with OMB Circular No. A-123. Further, agency senior accountable officials  are required to certify each quarter, among other things, that their data  submissions under the DATA Act are valid and reliable. However, the  appendix does not require a separate management assessment of  internal controls over the reliability of federal spending data. As we  previously reported, there are significant data quality problems related to  the completeness and accuracy of DATA Act data.

In addition, the Federal Financial Management Improvement Act of 1996  (FFMIA) requires CFO Act agencies and their auditors to determine  whether agency financial management systems comply substantially with  federal financial management systems requirements. However, such  systems requirements are focused on preparing agency financial  statements and do not generally include system requirements related to  other key financial management information (e.g., performance  information and cost information) needed for management decision- making. We have expressed concerns about the adequacy of financial  management systems requirements contained in the Treasury Financial  Manual. In our survey of CFOs and deputy CFOs, most (20 of 24)  respondents said that ensuring data quality of financial information was  somewhat, very, or extremely challenging.

Without (1) identifying all key financial management information needed  for effective financial management and decision-making, (2) separately  assessing and reporting on the effectiveness of internal control over  financial reporting and other key financial management information, and  (3) independently assessing such controls, management may lack  reasonable assurance of the reliability of such information.

Improper payments have consistently been a government-wide issue,  despite efforts to reduce them. Since fiscal year 2003, cumulative  improper payment estimates have totaled about $1.5 trillion. Although  agencies have made progress identifying and reducing improper  payments, more work needs to be done to address this government-wide  material weakness in internal control.

We continue to report, as a government-wide material weakness in  internal control, that the federal government is unable to determine the full  extent to which improper payments occur and reasonably assure that  appropriate actions are taken to reduce them. OMB stopped reporting a  government-wide improper payment estimate in fiscal year 2017.  According to OMB, it stopped reporting a government-wide estimate  because program-by-program improper payment data were more useful.  However, we believe that the aggregation of improper payment estimates  is essential for transparency as without such the extent and magnitude of  the government-wide improper payments is not readily available to key  decision makers. As such, we support a key provision in the Payment  Integrity Information Act of 2019—a bill which has passed the Senate— to require OMB to report a government-wide improper payment estimate  amount. Implementing this provision would be a positive step in  determining the overall progress the federal government is making in the  improper payment area.

The federal government also needs to reasonably assure that agencies  take appropriate actions to reduce improper payments. For example, in  supplemental appropriations acts providing disaster relief funds in 2017  and 2018, Congress mandated an oversight framework for these funds by  requiring federal agencies to submit internal control plans to Congress,  based on OMB guidance. However, in June 2019, we reported that OMB  lacked a strategy for ensuring that federal agencies provide sufficient,  useful plans in a timely manner for oversight of disaster relief funds. As a  result, we found that selected agencies did not submit their disaster aid  internal control plans timely. The plans also lacked necessary information,  such as how the selected agencies plan to meet OMB guidance and  federal internal control standards. Such a strategy could help provide  Congress some assurance that agencies will establish effective and  efficient controls over disaster aid.

The federal government also needs to reasonably assure that states,  local governments, and nonprofit organizations take appropriate actions  to reduce their improper payments of federal funds. For example, OMB  recently revised its compliance supplement for Medicaid to enable  auditors, as part of the single audit of all federal financial assistance that  a state received or administered, to test beneficiaries for eligibility for the  program. If this expansion of the compliance supplement is successful for  Medicaid, other federal programs that states, local governments, and  nonprofit organizations administer may also benefit from such revisions.

Material Weaknesses Preventing an Opinion on the U.S. Government’s Consolidated Financial Statements

Since the federal government began preparing consolidated financial  statements over 20 years ago, three major impediments have continued  to prevent us from rendering an opinion on the federal government’s  accrual-based consolidated financial statements over this period.  1.  Serious financial management problems at the Department of  Defense (DOD) have prevented its financial statements from being  auditable. DOD’s strategy for achieving a clean opinion on its financial  statements and improving overall financial management has shifted  from preparing for audit readiness to undergoing financial statement  audits and remediating audit findings. In a positive development, DOD  underwent an audit of its entity-wide fiscal year 2018 financial  statements, which resulted in a disclaimer of opinion issued by the  DOD Office of Inspector General (OIG). The DOD OIG also reported  20 material weaknesses in internal control over financial reporting,  contributing to its disclaimer of opinion.

DOD has acknowledged that achieving a clean audit opinion will take  time. However, it stated that over the next several years, the  resolution of audit findings will serve as an objective measure of  progress toward that goal. DOD will need to develop and effectively  monitor corrective action plans to appropriately address audit findings  in a timely manner. Partially in response to our recommendations,  DOD recently developed a centralized database for tracking the audit  findings, recommendations, and related corrective action plans.  2.  While significant progress has been made over the past few years,  the federal government continues to be unable to adequately account  for intragovernmental activity and balances between federal entities.  Federal entities are responsible for properly accounting for and  reporting their intragovernmental activity and balances in their entity  financial statements. When preparing the consolidated financial  statements, intragovernmental activity and balances between federal  entities should be in agreement and must be subtracted out, or  eliminated, from the financial statements. OMB and the Department of  the Treasury (Treasury) have issued guidance directing component  entities to reconcile intragovernmental activity and balances with their  trading partners and resolve identified differences. In addition, the  guidance directs the CFOs of significant component entities to report  to Treasury, their respective inspectors general, and GAO on the  extent and results of intragovernmental activity and balance  reconciliation efforts as of the end of the fiscal year.  3.  The federal government has an ineffective process for preparing the  consolidated financial statements. Treasury, in coordination with  OMB, has implemented several corrective actions during the past few  years related to preparing the consolidated financial statements.  Corrective actions included improving systems used for compiling the  consolidated financial statements, enhancing guidance for collecting  data from component entities, and implementing procedures to  address certain internal control deficiencies. However, the federal  government’s systems, controls, and procedures were not adequate  to reasonably assure that the consolidated financial statements are  consistent with the underlying audited entity financial statements,  properly balanced, and in accordance with U.S. generally accepted  accounting principles.

Further, significant uncertainties, primarily related to achieving projected  reductions in Medicare cost growth, and a material weakness in internal  control prevented us from expressing an opinion on the sustainability  financial statements.

We, in connection with our audits, and agency auditors, in connection  with their audits, have identified numerous deficiencies underlying the  above weaknesses and have provided recommendations for corrective  action.

The federal government has made unsuccessful efforts to implement new  financial management systems, most notably at DOD, the Internal  Revenue Service, the Department of Homeland Security, and the  Department of Housing and Urban Development—which have spent  billions of dollars on failed systems. We have reported that the executive  branch has undertaken numerous initiatives to better manage the more  than $90 billion that the federal government annually invests in  information technology (IT). However, we reported that federal IT  investments too frequently fail or incur cost overruns and schedule  slippages, while contributing little to mission-related outcomes. These  investments often suffered from a lack of disciplined and effective  management, including inadequate project planning, clearly defined  requirements, and program oversight and governance. In 2015, we added  the government’s management of IT acquisitions and operations to our  High-Risk List, where it remains in 2019.

In fiscal year 2018, eight of 24 CFO Act agencies’ financial management  systems still did not substantially comply with FFMIA’s systems  requirements. Moreover, a number of agencies rely on critical legacy  systems that use outdated languages, have unsupported hardware and  software, and are operating with known security vulnerabilities. We  previously reported that some agencies have not established complete  modernization plans and face an increased risk of cost overruns,  schedule delays, and project failure. In addition, most respondents to  our CFO survey (15 of 24) stated that it has been extremely, very, or  somewhat challenging to work with financial management systems that  are old and use obsolete software or hardware.

Efforts to promote greater use of shared services in certain areas, such  as human resources and financial management activities, resulted in  some cost savings and efficiency gains, but challenges (e.g.,  implementation weaknesses, project scheduling, and project  management and costs) impede widespread adoption. Almost all  respondents to our CFO survey (22 of 24) indicated that they currently  use or plan to use shared services. Most of those respondents (16 of 24)  believed that use of shared services could help reduce costs. As noted  above, in April 2019, OMB issued Memorandum M-19-16 on shared  services, which among other things described the process and desired  outcomes for shared services and established a governance and  accountability model for achieving them. Also, OMB stated that, building  off of OMB’s and Treasury’s efforts to create a Quality Service  Management Office for Financial Management, they are establishing a  more centralized approach to standardize, consolidate, and automate  agency financial systems.

A government-wide plan for improving federal financial management  systems, including shared services, that is incorporated into the  government-wide and agency-level plans discussed above could help  ensure, among other things, that financial management system problems  are addressed.

Strengthen the Federal Financial Management Workforce

Insufficient numbers of staff, inadequate workforce planning, and a lack of  training in critical areas create gaps between what the federal  government needs and the skills federal employees have. We have made  a number of recommendations toward achieving a federal workforce with  the necessary skills, including in financial management. In a 2007  testimony, we reported that one key challenge to strong federal financial  management is building a financial management workforce for the  future. This holds true today.

Our CFO survey respondents (14 of 24) noted that CFO Act agencies do  not have all of the staff with the professional qualifications, capabilities,  and expertise needed to effectively support financial management  operations and practices. With rapid changes, such as emerging  technologies and growing availability of data, it is critical for the  government to identify and strategically plan for the future workforce to  achieve effective financial management. A comprehensive, long-term  plan to address the challenges in the federal financial management  workforce that is incorporated into the government-wide and agency-level  plans discussed above could help ensure that agencies are held  accountable for a long-term vision of attracting and retaining a workforce  that maintains the professional qualifications, capabilities, and expertise  that will meet current and future needs.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Prior to the Chief Financial Officers Act of 1990, government reports found that agencies lost billions of dollars through fraud, waste, abuse, and mismanagement. This painted a picture of a government unable to properly manage programs or effectively provide services.

The Act sought to address these problems with comprehensive federal financial management reform. Among other things, it established CFO positions, provided for long-range planning, and began the process of auditing agency financial statements.

We testified about the substantial progress made to improve financial management since the Act, as well as areas needing additional work.