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Statement of
Joshua Gotbaum
Executive Associate Director and Controller
Office of Management and Budget
Before
U.S. House of Representatives
Committee on Government Reform
Subcommittee on Government Management, Information & Technology
March 31, 2000
Mr. Chairman and members of the Subcommittee, I am here today to
discuss
the progress made during the last year in Federal financial management and
to
describe the challenges that still face us.
Federal Financial Management: Real Progress, But Still Far To Go
In enacting the Chief Financial Officers (CFO) Act in 1990, the
Congress recognized that the Federal Government lagged far behind private
businesses and State and local governments in financial management. The
Government Management Reform Act extended this mandate by requiring annual
audited agency financial statements; that requirement took effect four
years
ago. Over this period, we have come a long way. Consider where we were then
and where we are now:
- Ten years ago, almost no agencies prepared and issued audited financial
statements. The Federal Government as a whole could not produce
consolidated
financial statements, let alone audited statements. Now, agencies issue
these
statements annually, and the Federal Government has just produced its third
Government-wide financial statement.
- In 1990, the Federal financial community did not have a set of
Government-wide accounting standards. The creation of the Federal
Accounting
Standards Advisory Board (FASAB) in 1990 paved the way for the development
and issuance of a complete set of basic accounting standards and concepts
by
1996.
- In October 1999, as validation of our process and progress, the
American
Institute of Certified Public Accountants (AICPA) recognized FASAB
standards
as "generally accepted accounting principles" (GAAP). This independent
acknowledgment by an internationally recognized standard setting authority
marks a significant milestone in improving public confidence in Federal
financial management.
- Financial management systems, such as they were, did not keep standard
accounts, could not communicate with each other, and could not provide
accurate, timely, and meaningful information. Many of these challenges
remain;
nonetheless, today we have developed standards for these systems and
established
a program of comprehensive testing of commercial systems to ensure that
they
meet them. Only those systems certified as compliant may be purchased by
Government agencies.
There is plenty yet to achieve, but the Federal financial community
has made great strides in just 10 years. This progress is due to hard work
by
thousands of people throughout the Government who:
- Tracked down financial information that the Federal Government had
never before kept;
- Recorded that information in standardized accounts, using standards we
never before had;
- Developed new computer systems to maintain these accounts;
- Created financial reports we never before made; and
- Had those reports independently audited.
1999 Financial Statements
Achieving an unqualified opinion on the financial statements of
individual Federal agencies and ultimately the consolidated Government-wide
financial statement is a major milestone toward putting our financial house
in order. Striving to get clean opinions leads to the development of better
financial information which, when provided to management on a timely basis,
provides the basis for producing better decisions. For the FY 1999
statements,
we made significant progress toward our goals of clean opinions for
individual
agencies and the Government as a whole.
The timeliness of financial reports improved. Last year, 15
of the 24
CFO Act agencies met the statutory March 1 deadline for producing financial
statements. This year, 19 did so, and we received an additional three
statements
during March. Two statements are still outstanding.
The quality of these financial statements also improved. Last
year by
this time, only 8 of the 24 CFO Act agencies had received clean opinions on
their financial statements; ultimately 12 did so. This year, 13 agencies
have
already received clean opinions, and we have hopes that the two who have
not
yet reported will do so as well, for a total of 15. Seven agencies improved
measurably over last year, moving from a disclaimer or a qualified opinion
to
a qualified or a clean opinion. The Departments of Commerce and
Transportation
jumped from disclaimers to clean opinions -- significant accomplishments
for
these departments whose financial records were in such poor shape the year
before that the auditors could not provide an opinion. The Departments of
Health
and Human Services, Energy, and Veterans Affairs advanced from qualified to
clean opinions. The Departments of Education and Justice moved from
disclaimers
to qualified opinions.
Work continued on efforts to resolve the two leading obstacles to a
Government-wide clean opinion -- accounting for property, plant, equipment
and
inventories at the Department of Defense, and accounting for
intra-governmental
transactions. The Department of Defense is investing significant contractor
support resources to resolve the difficulties in accounting for property,
plant, equipment, and inventories. An interagency task force with
representatives
from the Office of Management and Budget (OMB), the Department of the
Treasury,
and the General Accounting Office (GAO) continued to work with the CFO
Council
to develop short- and long-term solutions to the complex challenge of
identifying
and reporting transactions between Federal Government entities or
intra-governmental
transactions.
We had hoped to do even better. Throughout this process, OMB staff
remained in close contact with agency CFOs and Inspectors General on the
progress of the audited financial statements. As late as the end of
January,
all 24 agencies anticipated meeting the March 1 due date and 18 agencies
were
projecting clean opinions. In late January and February, however, as the
agencies
worked with the financial information and their auditors, some found that
their
accounts still did not meet standards. In some cases these could not be
resolved
by the March1 deadline; as a result, the opinions of two agencies slipped
from
the prior year.
OMB will continue to work with GAO and the other auditors, the
Department
of the Treasury, and the agencies that missed the statutory deadline or did
not
receive clean opinions to identify and eliminate the obstacles to timely
and
clean opinions for agencies and the Federal Government as a whole.
Despite undeniable progress, there is still much to do. Developing
financial reports in accordance with GAAP, then achieving clean audits of
those statements, is a major milestone, but it is nonetheless not the final
goal. Ultimately, we want financial systems that provide this information
in a reliable timely way, to
improve Government decision-making and provide accountability.
As we learned from our experience with the Year 2000 (Y2K)
challenge, improvement in
automated systems is an enormous task. There are hundreds of separate
systems used in the two
dozen major agencies. Many of these were developed before financial
reporting was required. In
1996, two years after requiring the preparation of financial statements,
Congress enacted the Federal
Financial Management Improvement Act (FFMIA) of 1996. Essentially, FFMIA
requires Federal
agencies to use financial management systems that support full disclosure
of Federal financial data,
including full costs of Federal programs and activities, to citizens,
Congress, and agency management,
so that programs and activities can be considered on their full costs and
merits. To achieve this goal,
we must plan, authorize, and fund the necessary investments to upgrade or
replace many deficient
financial management systems, as well as the human capital needed to manage
those systems.
Other Efforts to Strengthen Government Financial Management
In order to improve Government management, each year the
Director
of OMB, after consulting with the President, the Vice President, and others
in the Administration, designates a series of Priority Management
Objectives
(PMOs). Issues designated as PMOs receive coordinated, sustained, and
intensive
management attention. Last year, PMO #1 was the Y2K challenge.
It should come as no surprise to anyone that the first PMO in the FY
2001
Budget is to use performance information to improve program management and
make
better budget decisions. The Government Performance and Results Act (GPRA)
seeks
to integrate budget and financial information with performance and results.
Agencies and the Government as a whole must continue to work to implement
systems that report financial and program information quickly and reliably,
and then to use that information in our stewardship of the Nation's
resources.
Improving financial management information is PMO #2. This effort
includes not only improved and timely financial reporting, backed by
independent
audits, but also the achievement of the financial systems goals of FFMIA.
There are, in addition, other PMOs that are of importance to our
efforts to modernize and systematize financial management:
- To better manage Federal financial portfolios, we are working to
implement
the Debt Collection Improvement Act and other authorities to reduce
delinquencies
and defaults on obligations to the Government, through a combination of (1)
borrower pre-screening prior to extending credit, (2) reporting and
tracking
delinquent debt, (3) greater use by agencies of the full range of
collection
tools, including collection services provided by Treasury and the
Department
of Justice, and (4) sale of loan portfolios to private institutions that
can
manage them more effectively.
- Another PMO is devoted to verifying that the right person is getting
the
right benefit. This is a three-pronged effort to (1) prevent improper
payments
up-front; (2) measure existing improper payments; and (3) recover
identified
overpayments. Sharing data across agencies can help achieve these goals,
for
example, by allowing up-front verification of identity, location, and
income
when appropriate for benefits programs. Information sharing can reduce
underpayments
based on mistakes in location; and reduce overpayments and corresponding
costs
in audit and collection efforts. The benefits of these efforts must be
carefully
weighed to take into account intrusions into personal privacy and paperwork
burden.
- In addition to ensuring that agencies have adequate financial
management systems,
we also are concerned about the security of all Government systems. One of
our
PMOs focuses on computer security and protecting critical information
infrastructure.
OMB is working closely with the CFO Council, the Chief Information Officers
Council,
and the inspector general community to address cross-cutting issues in this
area.
- We are also working to ensure that capital planning and investment
control
are used properly to ensure that information technology decisions meet
Clinger-Cohen Act requirements.
Benchmarking Progress
As this Committee knows, these improvements are difficult and
progress requires great effort. We are making that effort. We have shown
steady progress in each of the four years that audited agency financial
statements have been required. Yet we have far to go. We expect much more
in the coming years, for this is a process of years, not months.
Modernizing
financial management and reporting is a long-term process.
Nonetheless, what has been accomplished by the Federal Government in
the past four years is extraordinary. Consider, for comparison, the
experience
of state governments, which began well before the Federal Government to
prepare timely financial reports backed by independent audits. With few
exceptions, individual states began issuing GAAP-based financial statements
in the 1970s. In 1980, Standard & Poors, a rating agency, issued a
policy
statement directing that all state bond issuers' financial reports should
be
prepared in conformity with GAAP, audited by independent auditors and
issued
within six months of year end, lest their ratings be affected. By 1990 --
ten years later -- 43 states issued GAAP-based statements; of those,
25 -- 50% of all state governments -- received an unqualified
opinion.
In 1995 -- fifteen years later -- 49 out of 50 states issued GAAP
statements;
however, only about three-quarters received clean opinions (information
obtained
from surveys conducted by the National Association of State Comptrollers,
State Comptrollers: Technical Activities and Functions in 1992 and 1996) By
comparison, more than half (54%) of the CFO Act agencies were able to
achieve clean
opinions in just four years.
We will continue our efforts. We remain convinced that accurate,
timely and complete financial statement information, supported by solid
financial management systems, can help identify issues, establish
priorities
and provide the basis for sound policy decisions. This information will
enable us to implement GPRA and integrate performance information into
resource decisions and program management. And it will help provide the
American people with the accountability they expect from their
Government.
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