THE WHITE HOUSE
Office of the Vice President
Accompanying Report of The National Performance Review Office of the Vice President Washington, DC September 1993
Executive Summary 1
Build a Strong Financial Management Infrastructure FM01: Accelerate the Issuance of Federal Accounting Standards 9
FM02: Clarify and Strengthen the Financial Management Roles of OMB and Treasury 15
FM03: Fully Integrate Budget, Financial, and Program Information 21
FM04: Increase the Use of Technology to Streamline Financial Services 27
FM05: Use the Chief Financial Officers (CFO) Act to Improve Financial Services 31
Adopt Good Business Practices
FM06: "Franchise" Internal Services 41
FM07: Create Innovation Funds 45
FM08: Reduce Financial Regulations and Requirements 51
FM09: Simplify the Financial Reporting Process 55
FM10: Provide an Annual Financial Report to the Public 59
FM11: Strengthen Debt Collection Programs 63
FM12: Manage Fixed Asset Investments for the Long Term 67
FM13: Charge Agencies for the Full Cost of Employee Benefits 73
Each action is followed by a number in parentheses that indicates the necessary avenue for effective implementation. Appendix A organizes all actions according to these categories.
(1) Agency heads can do themselves
(2) President, Executive Office of the President, or Office of Management and Budget can do
(3) Requires legislative action
(4) Good idea, but will require additional work, or may be better suited for future action
ACUS Administrative Conference of the United States
ADP Automated Data Processing
AGA Association of Government Accountants CAIVRS Credit Alert Interactive Voice Response System CBO Congressional Budget Office
CFO Chief Financial Officer
CG Comptroller General
COO Chief Operating Officer
CPA Certified Public Accountant
CPE Continuing Professional Education CSRS Civil Service Retirement System
DOC Department of Commerce
DOD Department of Defense
DRMO Defense Reutilization Marketing Organizations DVA Department of Veterans Affairs
EBT Electronic Benefit Transfer
EDI Electronic Data Interchange
EFT Electronic Funds Transfer
EO Executive Order
EPA Environmental Protection Agency
FAA Federal Aviation Administration
FASAB Federal Accounting Standards Advisory Board FASB Financial Accounting Standards Board FEDCAC Federal Computer Acquisition Center FEI Financial Executive Institute
FERS Federal Employees Retirement System FMFIA Federal Manager's Financial Integrity Act FMS Financial Management Service
FNMA Federal National Mortgage Association FNS Food and Nutrition Service
FTE Full-time Equivalent
GAAP Generally Accepted Accounting Principles GAO General Accounting Office
GASB Governmental Accounting Standards Board GSA General Services Administration
GSE Government Sponsored Enterprise
HHS Department of Health and Human Services HUD Department of Housing and Urban Development ICF Innovation Capital Funds
IG Inspector General
IMPAC International Merchant Purchase Authorization Card INS Immigration and Naturalization Service IRS Internal Revenue Service
JIRSG Joint Inter-service Regional Support Group JFMIP Joint Financial Management Improvement Program LAN Local Area Network
MCCR Medical Care Cost Recovery
MOU Memorandum of Understanding
NASA National Aeronautics and Space Administration NIST National Institute of Standards and Technology NOAA National Oceanic and Atmospheric Administration NPR National Performance Review
OFFM Office of Federal Financial Management OMB Office of Management and Budget
OPAC On-Line Payment and Collection System OPM Office of Personnel Management
PC Personal Computer
PMC President's Management Council
SEC Securities and Exchange Commission SSA Social Security Administration
USC United States Code
WCF Working Capital Funds
In the recent hit movie "Dave," a presidential look-alike finds himself in the Oval Office, acting as chief executive. He brings in an accountant friend to look over the federal government's books, hoping to find money for a favorite program. "Who does these books?" the friend exclaimed. "If I ran my business this way, I'd be out of business!" With a few hours' application of accounting know-how, they find the money and save the program.
In real life, it's not quite that simple. But the satire identified an all-too-true phenomenon--Washington's financial management practices are tangled and inadequate. They do not give managers good tools to govern. Nor do they save taxpayers money by using the best innovations of business.
And where government has the know-how, it uses it only sporadically. Take electronic funds transfer (EFT), which can speed the exchange of funds to and from government and reduce processing costs. With a 1992 cash flow of $2.5 trillion, the government accepted only 10 percent of its collections electronically and made just 42 percent of its payments that way. When some agencies sought to force employees to accept pay by EFT, rather than paper checks, as a condition of employment, they faced objections from unions.
Vastly improved financial management is a critical part of the overall effort to reinvent government. First, as we have said, it saves taxpayers money. Even a relatively small improvement in managing funds can recover billions of dollars. Second, we need accurate and timely financial information if we are to give managers greater authority to run agencies. Greater responsibility for line managers requires greater accountability through budgeting, or the best-intentioned reforms will only create new problems. Finally, better financial management is necessary to give the President, Congress, and other policymakers an accurate picture of the federal budget when they make broad policy decisions and to show Americans that their money is managed well.
The Nature of the Problem
Today, to put it simply, the federal books are a mess. Any business with separate, uncoordinated systems for budgeting, accounting, and product sales would soon be bankrupt. But the federal government has such systems. Indeed, our government requires companies, states, and localities to meet professional financial standards that it does not come close to meeting itself.
Consider, for instance, what the Office of Management and Budget (OMB) found in its 1992 survey of 878 agency financial systems: Over half don't meet agency financial processing requirements; nearly half don't meet their own internal automated data processing requirements; 40 percent don't meet internal reporting requirements; a third don't meet functional requirements for reporting to OMB and the Treasury Department; over 30 percent are more than 10 years old; and, perhaps most shocking, the age of nearly 20 percent couldn't be firmly established.
To be sure, OMB also found that a quarter of agencies say they're replacing their systems or planning to do so; another quarter have upgrades planned or under way. Many of these improvements, however, have been largely piecemeal and uncoordinated, lacking a governmentwide framework. Agencies with state-of-the-art approaches, such as the Internal Revenue Service's integrated data collection system, are "islands of best practices" in a sea of backwardness.
Hundreds of rules, 120,000 financial management employees, and millions of lines of reports have not produced useful, accurate information for line managers who actually decide to spend federal dollars. [Endnote 1] Why? Not due to the lack of hard work or dedication by financial employees or those line workers delivering direct services to the public. Rather, the problem is due to decades of uncoordinated, budget-obsessed focusing on cash flows that are unrelated to any measures of achieving a mission as well as to multiple procedures to create the illusion of control.
Currently, 60 percent of major federal agencies have one or more programs on OMB's high-risk list of programs particularly vulnerable to fraud or waste. Of course, policymakers have sought to ward off abuse. Over the years, scandals have prompted new laws, OMB has issued circulars to implement the laws, and agencies have then issued further guidance and regulations, including a growing burden of reporting requirements.[Endnote 2] But while each was well-intentioned, this profusion of laws and regulations is like having six thermostats in a room at different settings to maintain climate control, guaranteeing wasted energy without accomplishing a satisfactory result.
A Vision of the Future
The National Performance Review (NPR) envisions a much better day, not far off, when virtually all funds in and out of the government flow electronically and financial information is a normal byproduct of operations. This information would be accurate and readily available to line managers, financial staff, and auditors--enhancing probity and policymaking.
Technology now allows data to be collected as part of normal program operations--not as a separate task--and made available to all appropriate individuals. Automated systems can be programmed to alert supervisors to actions falling outside established norms. Such controls would allow program managers to make timely decisions, eliminating most staff approvals prior to action. The government could monitor accountability for program managers' decisions with an effective computer/telecommunications infrastructure, thus letting managers focus on performance, not process and paperwork.
In this report, the NPR offers recommendations that should result in a need for significantly fewer federal staff support employees, and shift the emphasis of financial management to timely and useful support for program delivery to the public. Notwithstanding large annual overhead savings, the real value to taxpayers will be much better stewardship of their tax dollars. Federal managers will be clearly accountable for measurable program results at the most efficient cost. Financial managers will be respected advisers to line program managers--effective members of a team ensuring excellent public services. And, due to clear reporting of tangible results, the government will earn Americans' trust that it is well managed.
Recommendations and Actions
This report provides the needed road map to change today's unsatisfactory status quo. The first part deals with the steps necessary to build a strong financial management infrastructure. The second concentrates on adopting good business practices. Key recommendations include the following:
--The President should issue an annual financial report to the citizens. The public deserves a clear, concise, accurate financial accounting of the nation's books. The public reads little of the deluge of official reports submitted to Congress. As a result, public perceptions of the federal financial condition result from fragmentary coverage in the media. As the steward of the taxpayers' dollars, the President can offer a simple and readable report each year to help the citizens receive a fair and balanced picture of the nation's financial condition.
--Legislation should be enacted to allow funds for debt collection activities to come from revenues generated from collections, letting agencies keep a portion of any increased collection amounts for further improvements. Compared to spending program money, agencies have not placed a high priority on debt collection. Based on experience at several agencies, paying for the activity on a self-funding basis would dramatically increase the dollars recovered. Letting agencies keep some funds would create an additional incentive.
--Issue all federal payments through Electronic Funds Transfer (EFT) or Electronic Benefits Transfer (EBT). EFT (commonly known as direct deposit) replaces checks and costs about a sixth as much. It has grown, on a voluntary basis, to over 40 percent of all federal payments over the last 15 years. EBT is a newer system to bring the same lower-cost distribution of funds and benefits to people without bank accounts. Now, the federal government should accelerate toward a full electronic system for payments to all businesses and individuals.
--Issue a comprehensive set of federal financial accounting standards within 18 months. The federal government's failure to adopt generally accepted accounting standards has contributed to the uneven quality of information as well as other problems. While the government has begun to correct this failing, it must take further action to produce an initial set of standards that would lay a foundation to meaningfully implement the Chief Financial Officers and Government Performance and Results Acts. Reports on value for the dollar need consistency across government.
--Allow agencies and departments to create "innovation capital funds" out of retained savings from operational funds as well as other sources. Without additional appropriations, agencies can effectively use a portion of money unspent at year-end to invest in major improvements that can cut future costs and improve services. These funds have worked in several agencies.
--The President should instruct agency heads to implement, at their discretion, franchising for service functions. Internal administrative support services, such as personnel, finance, and procurement, are duplicated in every federal agency as separate, inside monopolies. The franchising option will allow line program managers to control the money and obtain such services from whichever agency offers the best service at the lowest cost. The incentive of competition should increase responsiveness to the line customers in agencies and lower costs.
Implementing actions in two of the 13 recommendations should begin providing spending reductions or increased revenue quickly. During the next five years, the growth in electronic payments as a replacement for checks and the increase in electronic collections should reduce expenditures by over $350 million.
Recommendations for strengthening debt collection should result in $1.5 to $6.0 billion in additional collections during the same period.
The remaining recommendations will not provide immediate savings, but should provide the basis for hundreds of millions less in overhead dollars each year once the infrastructure is in place.
During the next three years, a strong financial management infrastructure needs to be built, and the spread of good business practices needs to take root. With the changes in place, significant redirection of financial staff into line program positions should occur. Ultimately, over one quarter of the financial management positions filled today would no longer be needed. All of the above figures have been incorporated in other accompanying reports.
The manner in which change of this nature is implemented is crucial to its success or failure. Until the investment and implementation in systems and changes in other processes are completed, these positions will still be needed. Reductions in personnel prior to these changes will likely result in more serious financial problems.
Build a Strong Financial Management Infrastructure
Travelers on the Pennsylvania Turnpike often remark about the narrow lanes and tunnels and other design features that are inferior to most of the segments of the interstate highway system today. Many are unaware that it was the earliest of the high- speed, limited access highways, on the leading edge of highway design at the time it was built over a half-century ago. As money was allocated in the 1950s through 1980s to build new interstate highways using the latest technology and following higher standards, the pioneering Pennsylvania Turnpike became outdated, but continued to serve tens of thousands of motorists.
A similar problem exists with federal financial management. Accounting systems were among the first applications of computer technology in the U.S. government. They were installed on large central computers in the 1960s and 1970s by individual agencies without much redesign of the manual practices or much thought given to consistency among agencies.
Leadership, planning, standards, experienced and fully trained managers and employees, the incentives of competition, and technology--these are the elements needed to build a strong financial management infrastructure. They are all within view but slightly out of focus. After many partially successful legislative and executive branch initiatives, most of the elements for fundamental change are present.
Generally accepted accounting principles (standards) for the federal government are being established, wide accessibility of data through technology is being developed, and the Chief Financial Officers Act of 1990 and the Government Performance and Results Act of 1993 offer a solid legislative foundation for progress. The Chief Financial Officers Act established chief financial officers in every department and major agency and required audited financial statements. The Government Performance and Results Act will require performance measures, focusing on the outcome of programs.
With information technology today permitting databases accessible through telecommunications, the opportunity for systems with clear standards, timely and accessible data, and stronger accountability is here. Leadership and a clearly defined plan can create a solid and modern financial infrastructure to replace the multitude of systems and standards that exist today. The recommendations in this section of the report can accomplish these objectives in the next several years.
Accelerate the Issuance of Federal Accounting Standards
The federal government is the only major entity in the United States operating without generally accepted accounting standards. This is so despite repeated legislative requirements for standards and numerous unsuccessful efforts by both the executive and legislative branches to develop standards, agree on them, and implement them.
The Budget and Accounting Procedures Act of 1950 directs the comptroller general--in consultation with the Office of Management and Budget (OMB) and the Department of the Treasury--to prescribe accounting principles, standards, and related requirements for executive agencies.[Endnote 1] In response to that legislation, the General Accounting Office (GAO) issued accounting standards in its Policy and Procedures Manual for Guidance to Federal Agencies (Title 2). Subsequently, the constitutional question of whether the legislative branch can issue standards for the executive branch to follow and then audit against those standards surfaced. As a result, GAO, OMB, and the Department of the Treasury never reached agreement on accounting standards.
Agency accounting procedures and systems have consequently evolved unevenly and inconsistently over the years, contributing to the financial management problems that exist today. Agency financial audits have been subject to varying and conflicting interpretations of accounting standards. Agency financial systems and processes have been developed by government employees with varying levels of accounting sophistication and expertise. Also, agencies have often been caught in the middle of the continuing arguments on standards between GAO, OMB, and the Department of the Treasury.
In the fall of 1990, even as the Chief Financial Officers (CFO) Act of 1990 was in the final stages of debate, agreement was finally reached between GAO, OMB, and the Department of the Treasury on a process to resolve this omission and establish federal government accounting standards and principles.[Endnote 2] A memorandum of understanding (MOU) was signed by the three parties in October of 1990 to establish a Federal Accounting Standards Advisory Board (FASAB).[Endnote 3] FASAB is composed of nine members selected from both the federal government and private industry; the MOU principalsGAO' s comptroller general, the Director of OMB, and the Secretary of the Treasury--provide oversight.[Endnote 4]
Subsequently, provisions were included in the CFO Act that require agency financial systems to comply with applicable accounting principles, standards, and requirements. OMB's deputy director for management was directed to establish governmentwide financial management policies and requirements for executive agencies. Further, the CFO Act requires that audits of financial statements prepared under the act are to be done in accordance with generally accepted government auditing standards. Those standards are issued by the GAO in its Government Auditing Standards.
Currently, FASAB plans to develop and recommend nine sets of standards and two concept statements that would address all federal assets and liabilities to be included in a consolidated financial statement for the federal government.[Endnote 5]
FASAB recommended its first set of standards--Accounting for Selected Assets and Liabilities--in December 1992. The MOU principals agreed to this recommendation by late March 1993. In May, OMB issued Circular A-134, Financial Accounting Principles and Standards, which established policies and procedures for approving, publishing, and interpreting federal financial accounting principles and standards. Finally, in June 1993, OMB transmitted this first set of accounting standards to the executive branch.
In June, the board approved two more sets of standards and one concept statement --Inventory and Related Properties, Direct Loans and Loan Guarantees, and Statement of Objectives of Federal Financial Reporting. FASAB principals were considering these recommended standards in the autumn of 1993. Four additional sets of standards and statements are under development and could be considered for issuance in 1994 to early 1995. They include Liabilities and Future Claims, Capital Expenditures, Financial Reporting Model, and Cost Accounting Standards.
NEED FOR CHANGE
Even with the establishment of FASAB and the cooperative efforts by GAO, OMB, and the Department of the Treasury, only three sets of accounting standards and one concept statement were recommended by the board in almost three years of existence. Moreover, plans published by OMB indicate that FASAB will not be done with its work until as late as 1997.[Endnote 6]
The ability to improve financial management depends on the establishment of a strong financial infrastructure on which to build financial processes and systems. The issuance of generally accepted accounting standards is a critical feature of the financial infrastructure. However, FASAB cannot simply adopt accounting standards established for private sector entities or state and local governments because the federal government is different from other entities and it needs standards that reflect its own environment and objectives. While these unique characteristics must be reflected in virtually every accounting standard, efforts must be made to accelerate the development and issuance of accounting standards. This step is crucial to reinventing government, since many other National Performance Review (NPR) recommendations rest on the assumption that the costs of services can be determined.
Under the existing process, the board can only recommend standards to the principals, and the standards are not final until the principals unanimously agree on and sign them. Subsequently, these standards must be published by both GAO and OMB.
The current structure and process of establishing accounting standards should be changed to:
--issue a comprehensive set of standards within 18 months, and
--provide more dedicated resources to standards development.
Finally, if standards cannot be issued within 18 months, consideration should be given to provide more independence to the board to issue standards.
It is anticipated that FASAB principals will have adopted three sets of standards (covering 16 accounting standards) and one concept statement by January 1994. Plans now in place would also project that FASAB would issue three more sets of standards and another concept statement by September 1994. Those issued standards would constitute over 70 percent of the board's planned standards. Given that progress, it is possible that the board could--within another six months--complete the last 30 percent. Issuing these standards is key to consolidated and consistent financial information reporting and statements. These standards will provide the basis for the development of integrated budget and financial systems that can then provide managers with good financial information for decisions on their programs.
OMB's recently published policies and procedures for interpreting statements of federal financial accounting standards (Circular A-134) raises the question of whether interpretation would be more appropriately handled by an independent board. The current process, as outlined in the circular, requires that agencies and individuals request interpretative guidance from OMB. Further, if OMB determines that an interpretation of the accounting standards is needed, OMB initiates a process that includes formal consultation with GAO and the Department of the Treasury, and results in a final interpretation signed by the OMB Director. This process allows for separate responses published by the Comptroller General and the Secretary of the Treasury.
OMB's interpretation process is largely outside the FASAB standardsetting process. It uses scarce OMB staff for accounting standard interpretation and creates the potential for decisions to be made that could be in direct conflict with board actions. Further, it limits the vital flow of information back to the board on interpretation of its published standards--feedback that would lead to refinement of those standards. Due to the short deadlines recommended for issuing all standards, we are not recommending a change in the interpretation focus at this time, but if an independent board is ultimately required, the board should be responsible for standards interpretation.
Beyond the nine members of the board, resources dedicated to the development of standards include a FASAB staff that prepares draft and final documents, reviews public hearings and comments, and staffs monthly board meeting deliberations on the draft standards. FASAB, through authority given in the MOU, can dedicate more resources to projects through task forces and supplemental staff. Considering the urgency of establishing the standards, it would seem appropriate to use this authority to accelerate development. Cost accounting is a prime example where the issuance of accounting standards is essential for the delivery of improved financial management. With the recent passage of the Government Performance and Results Act of 1993--which requires governmentwide performance measurement, budgeting, and results monitoring--the demand for consistent cost information across government will rise dramatically. Many of NPR's recommendations will rely heavily on the ability to deliver cost information about programs. This places even more importance and urgency on the board to develop and issue cost accounting standards. With the current level of staff, action on that standard is not expected to be completed until 1995.
Additionally, significant staff effort is required to prepare for the board's monthly meetings. Consideration could be given to reducing the frequency of those meetings to bimonthly or quarterly. More staff resources could be then dedicated to development of standards and less to preparation for board meetings.
Finally, should accounting standards not be issued within the time period recommended in this report, the administration should consider introducing legislation to give the board more independence to issue standards. A precedent exists in the financial community to have independent standards-setting boards establish accounting principles and standards. Subject to oversight and review by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) issues standards for corporations that wish to trade stock publicly. The SEC requires that to trade stock, these companies must abide by these standards and be audited annually against them. Additionally, the Governmental Accounting Standards Board (GASB) issues standards for state and local governments.
An independent board to set federal accounting standards could immediately issue and publish standards upon approval by the board and principals, eliminating the duplicative processes now in place. This would not preclude OMB from setting policy guidance for agencies to comply with the published standards.
FASAB should be required to develop and issue a comprehensive set of accounting principles and standards by March 1995. This comprehensive set should include the 11 sets of standards noted in this report. The board should maximize the use of task forces and a "fellows program" to augment staff to ensure successful delivery of all standards.
2. Create an independent federal financial accounting standards board with the power to develop, publish, and interpret accounting principles and standards for the federal government, if a comprehensive set of accounting standards is not issued within 18 months. (3)
The FASAB chair should report to the Vice President by December 1994 on the status of the issuance of a comprehensive set of accounting standards. Should that report conclude that issuance of those standards will not be within the 18 months required, OMB, in consultation with Treasury and GAO, should prepare legislation by March 1995 to establish an independent board to set accounting standards. This board would be structured so as to not to conflict with the constitutional division of powers between the executive and legislative branches.
This legislation should support the traditional division of powers between the executive and legislative branches by allowing an independent board to issue standards; OMB, the Department of the Treasury, and agencies to implement them; and GAO and inspectors general to audit against those standards.
Where relevant, the legislation should consider adoption of the current board structure for membership, process, and operation. Also, it should consider any relevant existing structures, such as GASB and FASB, which independently issue accounting standards for state and local governments and public corporations.
3. Dedicate staff to the Federal Accounting Standards Advisory Board (FASAB) to develop a high-level set of cost accounting standards. (2)
FASAB should temporarily supplement its current staff by recruiting a dedicated core staff of several senior financial individuals with cost accounting experience. These people should be recruited from not only the federal sector, but also state and local governments, private industry, and academia. The initial set of standards this staff develops would be high-level in nature to ensure issuance within one year and to allow experience to dictate further refinement of the standards in future years. These standards should be issued by December 1994.
Clarify and Strengthen the Financial Management Roles of OMB and Treasury
The fundamental goal of the Chief Financial Officers (CFO) Act of 1990 is to reform and improve financial management in the federal government.[Endnote 1] A key element of the act is the establishment of a new financial management leadership structure. Specifically, the act designated a new Deputy Director for Management in the Office of Management and Budget (OMB) as the chief officer responsible for federal financial management, established an Office of Federal Financial Management (OFFM) with a controller as its director to carry out the functions given the new OMB Deputy Director, and established CFOs in 23 agencies across government. The Deputy Director for Management is charged with establishing financial management policies and requirements, monitoring the establishment and operation of financial systems, outlining the agency structures for CFOs, and developing and reporting on a 5-year plan to improve financial management.
Although the act was very specific about the duties and responsibilities of this new leadership, it also clearly stated that nothing in the act would interfere with the current duties and responsibilities of the Department of the Treasury.[Endnote 2] Those duties specific to governmentwide financial management are designated to the commissioner of the Financial Management Service (FMS). The commissioner is responsible for a wide range of accounting, reporting, disbursing, collecting, and cash management functions for the federal government. FMS operates governmentwide financial information systems and--although these are prototypes--produces the only consolidated financial statements for the federal government. The commissioner reports to the Fiscal Assistant Secretary, who is responsible for administering the government's financing operations and fiscal affairs and reports to the Treasury Under Secretary for Domestic Finance.
In the past, OMB and the Department of the Treasury have tried to outline their working relationships in a memorandum of understanding (MOU). A revision of that MOU was initiated, but has not been finalized.
NEED FOR CHANGE
In the three years since the CFO Act was passed, a tremendous effort has been initiated across government to implement the provisions of the act. While many will agree that progress has been made, it has become more evident that in the area of governmentwide financial management leadership, the division of roles between OMB and the Department of the Treasury has become blurred between policy and implementation. This has resulted in the lengthy and sometimes contentious development of policies and implementing regulations between the two institutions. More seriously, it leaves agencies, which are dependent on this policy and guidance, unable to move forward with reforms and sometimes caught in the middle of policy disputes between the two central agencies. The two areas where this blurring of roles manifests itself are policy and procedure development and governmentwide financial information.
Policy/Procedure Development. There is growing concern in the federal financial management community that OMB has not outlined a broad strategic plan for financial management that clearly outlines priorities and goals for the agencies. Currently, the only document in which a plan for federal financial management exists is OMB's Federal Financial Management Status Report and 5-Year Plan.[Endnote 3] For the past two years, OMB has presented this in a fairly lengthy report to Congress, outlining the status of federal financial management and the 5-year plan for improving financial management. Although the report does describe a multi-year plan, it is also exhaustive in its delineation of the status of programs and initiatives for financial management. As a result, it is very difficult to determine the priorities or goals of its many programs--in turn making it more difficult for the Department of the Treasury and the agencies to implement these programs. OMB should instead provide a clearly stated federal financial management strategic plan and related performance goals. It should be short in length; crisp and specific in terms of expectations. Until OMB develops and presents a broad strategic plan, it will be very difficult to dedicate resources and measure whether progress is being made in improving financial management.
While there is room to improve in outlining a strategic financial management plan, there is no lack for policy and implementing procedure guidance. The enactment of the CFO Act and the establishment of OFFM resulted in the demand for more financial management policy. OMB's response to those demands raises the question of where policy development stops and defining implementing procedures begins, especially in areas where the Department of the Treasury was responsible for financial activities prior to the CFO Act.
OMB issues various governmentwide policies for financial management in a series of circulars. Treasury provides operating guidance to the agencies on the detailed procedures to implement these broad policies in the Treasury Financial Manual. The agencies are responsible for implementing all of the above. Increasingly, OMB's circulars are becoming more lengthy in their description of policies and more prescriptive regarding implementation. This tendency is especially evident in cash management, credit management, and financial systems activities. Clarifying the shared responsibilities of OMB and the Department of the Treasury in these areas and others would save resources.
Governmentwide Budget and Financial Information. The CFO Act requires agencies to develop systems that integrate budget and financial information. Central agency financial systems in both OMB and the Department of the Treasury are not excluded from this challenge. This information should also be integrated and based on consistent accounting and systems standards at the federal government level. Currently, separate systems in OMB and the Department of the Treasury collect this information from the agencies. OMB maintains systems for budget formulation and budget execution, while the Department of the Treasury maintains systems for governmentwide collections, payments, and cash flow management. Data are inconsistently defined, reported, and collected. This leads to a duplicative, labor-intensive process requiring OMB, the Department of the Treasury, and the agencies to dedicate extensive resources in reconciling information to produce useful analyses and reports on the fiscal condition of the federal government. OMB should clearly define, for all agencies, budget and financial data and what constitutes an integrated budget and financial system. Then it should work with the Department of the Treasury and the agencies to achieve integrated governmentwide financial information.
Although interim systems have been developed to consolidate data, there remains a lack of clear authority and responsibility for the integrity of governmentwide financial information. While most managers already recognize the need to take advantage of the availability of more sophisticated information technology to provide accurate and more timely information, they also must recognize the need to change their approach to the management of this data and information resource. Data stewardship is a current information technology management approach that treats data as a corporate resource and requires management and accountability for that resource. Data stewardship assigns responsibility for collecting and reporting this information, and requires accountability for the integrity of that data.
The ever-increasing demand for timely, accurate, and integrated budget and financial information is equally shared by OMB and the agencies. At the governmentwide level, federal financial managers should be no less rigorous in their drive toward reviewing information needs and then restructuring processes and systems to maximize the use of technology now and in the future. They need to agree on a long-term strategy for the integration of budget and financial information, dedicate the resources toward this effort, and then implement and manage the integrity of that data information resource. Ensuring the responsible management of this function requires senior-level leadership to bring together OMB, the Department of the Treasury, and the agencies.
OMB and the Department of the Treasury have initiated efforts to establish an information architecture to link broad financial information needs with agency-specific requirements. This project, called MIDAS, is at the very early stages. Similarly, initial discussions have occurred between the two central agencies on the need for governmentwide data stewardship. Data steward-ship at the governmentwide level is a shared responsibility. OMB is responsible for defining data needs; the Department of the Treasury and the agencies are responsible for collecting that data; and all are responsible for the data integrity. In order to recognize the shared responsibility for integrated governmentwide financial information, a small, high-level steering group could collectively oversee the planning and implementation of this function. Membership could include OMB, the Department of the Treasury, and the agencies to allow the various data users and collectors to participate in that management function. Since OMB has the responsibility for governmentwide budget and financial policy, it should chair this steering group.
In summary, as the implementation of the CFO Act has evolved, issues on the level of leadership, the dividing point between policy and implementing procedures, and the management of financial information have surfaced that question the clear delineation of leadership roles between OMB and the Department of the Treasury. Resolving these issues now will allow both agencies to dedicate their limited resources toward the development and implementation of a broad strategic plan and guidance to agencies for improving financial management, rather than toward disputes over authority and duplication of federal financial management roles.
The Director of OMB and the Secretary of the Treasury, in consultation with the CFO Council, should develop an MOU to clarify their respective financial management roles and responsibilities. The CFO Council should review this MOU before it is forwarded for signature by the principals. This MOU should be developed within 90 days of the filling of the position of OMB Deputy Director for Management. The MOU should be updated--at a minimum--with the change of each administration; consideration should be given to updating it with each change of senior financial management leadership. Upon executing this MOU, OMB and the Department of the Treasury should identify two senior-level (i.e., senior executive service) individuals who would have primary responsibility for clarifying roles and responsibilities related to financial policy and procedures and implementing integrated budget and financial information.
2. Develop and publish a strategic plan for improving financial management. (2)
The Director of OMB, in coordination with the Secretary of the Treasury and the agency CFOs, should develop and publish a strategic plan for financial management by July 1994. This strategic plan should clearly identify priorities and performance goals for the Department of the Treasury and for the agencies. It should be short in length--a crisp and specific statement of expectations. It should be developed in conjunction with the CFO status report and 5-year plan, required to be submitted annually to Congress. This plan should be updated annually by OMB and would form the basis for the tactical 5-year plans due each September from the Department of the Treasury and the agencies.
3. Create a governmentwide budget and financial information steering group. (2)
The Director of OMB, in collaboration with the Secretary of the Treasury and the CFO Council, should charter a governmentwide budget and financial information steering group. This group should oversee the planning and management of the data stewardship responsibilities for the federal government. The group should be chartered and convened by May 1994.
4. Develop and publish a definition of an integrated budget and financial system. (2)
The Director of OMB, in cooperation with the Joint Financial Management Improvement Program, which has the responsibility for developing and publishing financial systems requirements, should define and communicate to the agencies what constitutes an integrated budget and financial system by May 1994. The Department of the Treasury and the agencies should be involved in developing this definition.
5. Develop an integrated budget and financial information strategic plan. (2)
The Director of OMB, in collaboration with the Secretary of the Treasury and the CFO Council, should develop by May 1994 a long-range strategy for linking broad budget and financial information needs with agency-specific requirements. This strategy should address the need for integrated financial and program information at all levels to serve the agency program managers in carrying out their programs and central agencies in supporting policy analysis. It should also clearly specify priorities and performance goals. Once this strategy has been developed and approved, support for the project's full implementation should be given by both OMB and the Department of the Treasury.
Fully Integrate Budget, Financial, and Program Information
Financial and program managers must be accountable for program results and fiscally responsible for their resources. They must be able to provide information that is essential to monitor budgets and operating performance, support good financial stewardship, and prevent waste or fraud. To meet these needs, financial systems must process, track, and provide accurate, timely, internally consistent, and readily accessible information on financial activity in the most cost-effective and efficient manner.
Government financial systems should provide basic accounting functions for accurately recording and reporting financial transactions. They should also be the basic vehicle for the integrated budget, financial, and program information that managers will use to make decisions on their programs. Financial management systems must reflect how the federal government seeks to manage its activities, and must support these activities through the integration of program functions and the use of current technology.
For years, serious financial management system problems have been reported by audits and by agencies themselves. Legislation has been enacted and Office of Management and Budget (OMB) circulars have been issued supporting improvements in financial systems. For example, the Federal Managers' Financial Integrity Act of 1982 called for review of financial management systems for good internal controls.[Endnote 1] Subsequently, OMB Circular A-127, Financial Management Systems, was reissued in July 1993.[Endnote 2] It prescribed policies and standards for executive agencies to follow in developing operating, evaluating, and reporting on financial management systems.
As agencies began to explore the upgrade of their systems and the use of off-the-shelf financial system software increased, the need became evident for basic financial systems requirements. The Joint Financial Management Improvement Program (JFMIP) sponsored the development in 1988 of the Core Financial System Requirements. That effort evolved into the development of a comprehensive set of functional requirements for federal systems. A draft update to those core requirements is targeted for issuance in the autumn of 1993. The JFMIP also developed and issued subsidiary systems requirements, including Functional Standards for Personnel/Payroll in May 1990 and Functional Standards for Travel in January 1991. A more recent project includes Seized/Forfeited Asset Systems Requirements issued in March 1993. Also, JFMIP developed drafts of Inventory System Requirements and Direct and Guaranteed Loan Systems Requirements that are under review by the agencies.
The enactment of the Chief Financial Officers (CFO) Act of 1990 specifies several requirements to improve the financial information available to agency managers, Congress, and others.[Endnote 3] These include requirements that agency CFOs integrate accounting and budgeting information, that they develop and maintain accounting and financial management systems that report cost information, and that agency financial management systems must provide for the systematic measurement of performance. OMB requires agencies to include plans to modernize and integrate their financial systems in their annual 5- year plan submission.
NEED FOR CHANGE
Current assessments suggest that the government has a long way to go to reach its goal of an integrated financial system. Fourteen of the 23 agencies covered by the CFO Act have financial systems problems that rank on OMB's high-risk list.[Endnote 4] OMB's 1992 agency inventory of 878 agency financial systems reveals some stunning facts about the condition of federal financial systems.[Endnote 5]
--Over 30 percent of these systems are over 10 years old.
--Less than 6 percent are between 1 and 2 years old.
--In over 18 percent, age could not be established with certainty.
--33 percent of agency systems do not meet functional requirements for reporting to OMB and the Department of the Treasury.
--40 percent do not meet internal reporting requirements.
--52 percent do not meet agency financial processing requirements.
--47 percent of agency systems do not meet their own internal automated data processing (ADP) requirements.
These facts raise serious concern about the fundamental effectiveness and efficiency of those agency financial management operations. Equally serious, agency financial systems are not keeping pace with technological changes in their own agencies, which may place these systems at risk in the near future.
Over the years, many resources have been devoted to improving financial systems. In OMB's 1992 inventory, 24 percent of agencies report that they are replacing or planning to replace their systems; another 25 percent have upgrades planned or under way. Still, only marginal progress has been made toward the goal of technologically current, integrated financial systems. Many of these improvements have been largely uncoordinated and piecemeal, without an adequate governmentwide framework and focused top management attention to make them work.
The CFO Act gave OMB the responsibility to review financial systems plans and the resources required to implement those plans. Agencies are required to include those plans in their 5-year plans. While this gives OMB a great deal of opportunity to influence decisions on where systems are built and when they are supported with resources, there is limited evidence to demonstrate it has been used. Where it has been used, there has been great success. For example, its influence was used to support the development of the Credit Alert Interactive Voice Response System (CAIVRS) by the Department of Housing and Urban Development. This system--used to screen federal loan applicants for federal credit delinquencies--was developed with the participation of four other federal credit agencies. Decisions on the development and funding of financial systems initiatives occur in various processes and at many levels both at OMB and in the agencies. OMB must be able to tap into the key points of these processes and coordinate and facilitate priority financial systems projects through these various processes. OMB could have a large impact on the modernization of financial systems in government, if they used this responsibility to its full potential. More concentrated efforts by OMB during this review process could direct the investment of resources toward the most critical financial systems improvements.
Concurrently, agencies need more information about where financial systems improvements are being made across government. While OMB is beginning to collect more information about financial systems through the development of an inventory, and the Department of the Treasury's Financial Management Service has information about cross-servicing, there is little effective distribution of this information to agencies. The JFMIP currently develops federal financial systems requirements and has established a role as a clearinghouse for sharing and disseminating good financial management techniques and technologies. This responsibility could be broadened to include a special emphasis on financial systems.
Through its CFO leadership role, OMB can facilitate the development of joint development projects between agencies that share interest in a particular financial function. These joint projects provide benefits for all in that they are more cost-effective than independent efforts. Further, if they are built to be flexible and transportable across agencies, then even more savings can result. OMB can also facilitate the funding of these projects through encouraging the use of multi-year or no-year funding mechanisms that recognize the long-term nature of financial systems development. Additionally, there are many instances where funding and support is available in different agencies for joint projects, but limitations on the transfers of funding between appropriations restrict the collaborative use of these funds. OMB could pursue interagency funding mechanisms that allow for these cross-agency projects. Finally, many agencies today receive financial services from other agencies on a reimbursable basis. This approach--generally referred to as cross-servicing or franchising--could be encouraged by OMB for more agencies.
As more emphasis is placed on performance measures and results with the enactment of the Government Performance and Results Act of 1993, more demand will be made for cost information, requiring additional investment in cost accounting systems.[Endnote 6] Currently, cost accounting systems are used in only a few agencies in the federal government. Today, many agencies collect cost information in their financial systems, but cannot associate the information with projects or activities, much less their current budget structure. Because of the way this information is captured, it is too often just "accounting" transaction information, relevant only to financial personnel and not useful to managers. Consequently, program managers have developed their own "cuff" systems to provide the needed financial information to manage their programs. These systems provide duplicative and often very unreliable financial data, but they do associate program information with financial information. Currently, there are neither federal cost accounting standards nor systems requirements. Both are very necessary for the development of consistent cost and related performance measurement information within agencies and across government.
Some agencies have made progress integrating cost and program performance information. The Internal Revenue Service (IRS) has initiated the development of a Cost Management Information System, an integrated system that collects operational, financial, and performance data to provide its managers with decision support information. It builds on IRS' newly implemented modern integrated budget and financial system and applies principles of continuous business improvement and activity-based management in its design. Activity-based costing is a relatively new approach to cost accounting that businesses across the nation are beginning to adopt. A recent Fortune magazine article on the new approach cites Chrysler, Union Carbide, GE Medical Systems, and Hewlett-Packard--to mention only a few--as having shifted to this new approach toward cost accounting. The article supports the premise that this approach not only seemed to give operating managers better information to manage, but elevated the value that financial people can add to the process. Islands of best practices, such as the IRS and its state-of-the-art financial management approaches, exist in the federal government. However, they need to be publicized and replicated in other agencies.
Heads of agencies should certify to the Director of OMB by December 1993 that their financial systems are in compliance or that they have updated plans in place for compliance by September 1996. Agencies not in compliance should demonstrate they considered cross-servicing or franchising for financial services, or joint agency development projects, before deciding to invest in new systems.
2. Establish an innovation fund for financial systems development. (3)
The Director of OMB should propose legislation to create a multi-year financial systems innovation fund for the fiscal year 1996 budget that awards funds to agencies that propose joint development projects for financial systems software applications. This fund should be managed by the CFO Council and made available to agencies that propose joint development projects.
3. Provide interagency funding mechanisms for joint development financial systems projects. (3)
The Director of OMB should propose interagency funding mechanisms for the fiscal year 1995 budget that should allow funding for joint financial systems development projects to be collected from various appropriations. OMB should facilitate the development of these joint projects. Such systems projects could support activities such as international payroll, revenue collection, loan processing, or others where off-the-shelf software solutions are not yet available. Additionally, OMB should ensure that these joint projects, once approved, are supported throughout the budget process and protected from cuts.
4. Establish a clearinghouse of financial systems applications, cross-servicing, and best practices. (2)
JFMIP should build on its already clearly established role as a clearinghouse to share and disseminate good financial management techniques and technologies to include a special emphasis on financial systems. This clearinghouse should be available to agencies by September 1994 as a source of information to support their shifts toward modern financial systems.
5. Dedicate a core of financial systems personnel to develop cost accounting systems requirements. (2)
JFMIP should form a core temporary staff of several agency senior financial systems personnel with cost accounting systems experience that would be dedicated to developing these systems requirements. The JFMIP should concurrently develop these systems requirements as the cost accounting standard is developed by the Federal Accounting Standards Advisory Board. They should issue these systems requirements within six months after the cost accounting standards are issued, or by March 1995.
Cross-references to Other NPR Accompanying Reports
Mission-Driven, Results-Oriented Budgeting, BGT05: Provide Line Managers with Greater Flexibility to Achieve Results.
Increase the Use of Technology to Streamline Financial Services
The use of information technology to streamline financial services is a key element of the infrastructure that the federal government must have to deliver fiscally sound financial management. Historically, financial processes were among the first administrative processes to be automated, and these systems continue today to be fundamental in the delivery of good financial management. Over the years, the greatest challenge before financial managers has been to continue to improve upon these systems and take advantage of the technological enhancements that have evolved in information management. Financial systems generally provide two major products--the delivery of financial information and the automation of financial processes. Both can benefit from the improvements that exist in information technology today.
Federal financial management systems and applications have not fully used the ever-changing enhancements technology has made available. The systems lag in standards and compatibility and are, for the most part, out of date. Manual processes that require paper documentation and multiple data entry to various subsystems even within an agency financial system are highly prevalent throughout the federal government. These situations result in inefficiencies and introduce problems of reconciling erroneous and omitted data. Additionally, they require a tremendous resource commitment of people and time to process financial transactions.
The federal government promotes the use of electronic funds transfer (EFT), which includes transfers through the Automated Clearing House and transfers made by wire. Using EFT rather than paper checks for payments (popularly called direct deposit) reduces costs and allows greater control over the timing of payments. Currently, the cost to send checks is nearly six times the amount to send the payments electronically to banks. Additionally, vendors, individuals, or states gain greater security, reliability, and convenience if paid electronically by the government.
Electronic benefits transfer (EBT) is a more recent advance. EBT uses plastic cards to deliver federal benefits to individuals who do not have bank accounts or regular relationships with banks. EBT replaces food stamp coupons and checks delivered through the mail. It uses proven technology and the existing commercial infrastructure, including automated teller machines, point-of-sale terminals, and online data transmission networks. The goals of the EBT program are to provide an electronic disbursement alternative to all beneficiaries without bank accounts and to coordinate these efforts with federal, state, and local programs.
Electronic data interchange (EDI) has been piloted in several agencies and is currently used very successfully in the Department of Defense and the General Services Administration to exchange common business documents and financial transaction data between and among agencies and the public sector for invoicing, purchase orders, receiving reports, etc. The federal payments process within EDI is called Vendor Express and transfers both dollar value and related information electronically into bank accounts.
Within the federal government payments for services between agencies can be handled electronically through the On-line Payment and Collection (OPAC) system. However, not all agencies use OPAC in their business transactions within the government, and, where it is used, the processing of transactions is not always timely. The application of EDI standards throughout the agencies using OPAC would promote even more efficient transfer of financial data among the agencies.
Tremendous resource savings and greater reliability can be achieved when electronic technology is applied to business practices between or within government agencies, or between businesses and government agencies.
NEED FOR CHANGE
The federal government has led the financial industry in certain technologically progressive applications, but they are not used to their maximum effectiveness. In 1992, the federal government's cash flow was $2.5 trillion. Less than 10 percent of collections were received electronically and only 42 percent of payments were made electronically.[Endnote 1] Even though EFT has been available to pay federal employees for 15 years, the government still provides checks to employees, if they desire. Currently, about 84 percent of federal employees receive their salary payment electronically.[Endnote 2] Some agencies have pursued requiring EFT as a condition of employment and have run into union objections. Others, such as the military, have been successful in fully implementing EFT to pay their military and civilian employees. This tool has only recently begun to be used by a small number of agencies to reimburse employees for travel expenses. The GSA began reimbursing its federal travelers in February 1993 through EFT and provides an 800 number for employees to call to check on payment status. The Department of Energy also reimburses its federal travelers through EFT.
Federal salaries are only a small proportion of the 800 million payments made annually by the federal government. The largest number of federal payments are for social security (over 550 million). In 1992, only 49 percent of those payments were made through EFT. That percentage has increased recently and is expected to be around 55 percent in 1993. The increase is due, in large part, to the efforts of the Department of the Treasury and the Social Security Administration offering direct deposit of funds at the initial point of contact with a new beneficiary. Federal pension and veterans benefit payments and tax refunds constitute the other significant volumes of federal payments. Of those, 66 percent of federal pensions, 43 percent of veterans benefits, and 10 percent of tax refunds were paid electronically in 1992.
Converting all unbanked recipients to EBT would save millions of dollars annually over paper-based processing costs, claims costs, and availability of funds. Eight states currently are operating and testing EBT while another 26 are in various stages of planning. Major issues remaining to be resolved include the unknown cost/benefit impact; who bears the costs of the program; and the treatment of liability for lost, stolen, and sold cards under proposed Federal Reserve Board regulations.
The National Performance Review (NPR) is proposing a nationwide EBT that would use a standard commercial debit card. As envisioned, this nationwide EBT would be a standard configuration, based on existing industry standards, that would be offered competitively by vendors as a base or enhanced service, locally and regionally, just as in the commercial environment. This project will require a dedicated group of individuals with senior government support and leadership. Just as critical to any eventual system is the settlement, reconciliation, and reporting service to support large-scale EBT use that needs to be in place. The Department of the Treasury, the Federal Reserve, and the Food and Nutrition Service are currently working on this service.
Numerous administrative processes in government, whether they are for travel, procurement, budget execution, timekeeping, property management, personnel/payroll accounting, or other processes requiring financial transactions, continue to be labor and paperintensive, requiring multiple levels of approval and remaining vulnerable to poor internal controls. Most could be streamlined and automated to save time, increase data accuracy, and improve internal controls. Modern software applications designed for both personal computer (PC) and PC-based local area networks are available for most of these processes. However, agencies continue to use existing manual-based processes, or more often continue to design and build customized systems to support these processes without eliminating manual-based processes.
Current approaches to systems development, such as information engineering, recommend that managers develop an information architecture as a first step in the redesign of systems and processes. This approach systematically guides managers through an examination of their current systems and processes and identifies key information flows and products. The benefit of this approach is that it generally results in recommendations to simplify processes, automate others, and more often than not, eliminate many. If this approach is followed, agencies generally avoid simply automating poor manual processes. This is particularly important in the replacement of older financial systems. This approach has been used by the Environmental Protection Agency in the design of its Contracts Management Information System. It is also the approach now being used in the redesign of financial systems in the Departments of State and Housing and Urban Development.
Electronic signature allows for electronic approval of funding documents. Not only does this tool reduce the paperwork burden associated with the administration of these documents, it also automates internal controls that often add to the paperwork process and just as often are ignored. Although many applications are on the market that provide for electronic signature, the standards for secure transfer of data vary between them, creating internal control concerns and raising data management issues. Although much progress has been made in developing standards for electronic signature, final standards and protocols from the National Institute of Standards and Technology (NIST) are still not available. NIST has issued a bulletin that provides initial information to federal agencies on security issues in the use of EDI. However, the lack of published electronic signature standards and protocols deters many financial managers from implementing these systems and prevents efficient and secure transfer of data between systems.
The Secretary of the Treasury should issue requirements to implement this recommendation in full by September 1994.
2. Handle all interagency payments through the On-line Payment and Collection (OPAC) system. (1)
The Secretary of the Treasury should issue requirements to implement this recommendation in full by September 1994.
3. Handle all payments to state or local governments through EFT. (1)
The Secretary of the Treasury should issue requirements to implement this recommendation in full by September 1994.
4. Include the EFT payment clause from the Federal Acquisition Regulations in all contracts. (1)
The Director of the Office of Management and Budget (OMB) should set the policy and the Secretary of the Treasury should issue requirements for all agencies to implement this by October 1994. All businesses with federal contracts would be paid through EFT after that point. All contracts should include the electronic funds transfer payment methods clause in the Federal Acquisition Regulations beginning October 1994.[Endnote 3]
5. Issue all payments to individuals through EFT or EBT. (1)
The Secretary of the Treasury should issue requirements to implement the EFT portion of this recommendation by September 1994. For programs involving direct benefits to individuals, EFT should be the presumed method for paying new beneficiaries. Agencies should continue to aggressively promote conversion to EFT for check recipients. Special emphasis to convert promptly should be directed at federal pension and veterans benefits. The Internal Revenue Service should expedite implementation of electronic payments for tax refunds. As EBT becomes more widely available, checks issued to unbanked individuals should be phased out.
6. Simplify, redirect, and reengineer agency financial processes to make them fully electronic and reduce the paperwork burden. (1)
Agency heads should review their financial processes toward this end. Their review, reinforced in revised OMB Circular A-127, should be included in the agency 5-year plans submitted to OMB by September 1994.
Cross-references to Other NPR Accompanying Reports
Reengineering Through Information Technology, IT02: Implement Nationwide, Integrated Electronic Benefit Transfer.
Department of Agriculture, USDA07: Deliver Food Stamp Benefits Via Electronic Benefits Transfer to Improve Service to Customers While Remaining Cost Effective.