The President's FY04 Budget

ANALYSIS
Full Accountability to the Taxpayer? Maybe Next Year

By Vincent J. Badolato
Research Director, The Performance Institute

(April 17) - While many agencies have made substantial progress in improving financial reporting, the federal government has failed its financial audit for the sixth consecutive year.

The Bush Administration made "Improved Financial Management" one of the five goals of the President's Management Agenda (PMA) to reverse the trend of failed audits and make the federal government accountable to the American taxpayer. The PMA identifies that a clean financial audit is a basic requirement for a well-managed organization to succeed. The initiative made the case for improved financial management and the federal departments and agencies have made significant progress on achieving the goal of accurate and timely financial information to produce clean audits.

Fiscal year 2002 presented a very positive sign: 21 of 24 major departments and agencies earned auditors' approval for fiscal year 2002 and two agencies succeeded in submitting timely financial information two years before the requirements of the new government-wide standard. The federal government appeared to be on the fast track to a clean audit after five consecutive failures. But the March 31 General Accounting Office (GAO) report on the US government's consolidated financial statement brought us back to reality. The report stated that GAO was "unable to express an opinion on the consolidated financial statements because of certain material weaknesses in internal control and in accounting and reporting." With all of the improvements in financial management that occurred over the past year, the federal government still failed its financial audit for the sixth consecutive year.

So what went wrong? It's easy to pass blame off to the Department of Defense (DOD) for this result, having had serious financial management problems that have kept them on the GAO high-risk list since 1995. With an annual budget equal to the GDP of Austria, resolving the financial management challenges at DOD is imperative to achieving an opinion on the consolidated financial statements. But a clean audit opinion goes deeper than DOD. In order for the government to earn consistent clean audit opinions to ensure the highest measure of accountability to the American taxpayer, federal departments and agencies have to be more diligent in implementing the principles of financial performance: accurate, timely, useful and transparent financial information.

Accurate

The federal government has made impressive strides in improving the accuracy of financial reporting in FY 2002. At the beginning of the current failed audit trend in 1996, only six of the 24 major departments and agencies under the Chief Financial Officer (CFO) Act were able to achieve an unqualified, or clean, audit opinion. An astounding 21 of those 24 agencies received a clean audit for FY 2002, an increase of 15 agencies since 1996 and three more than FY 2001. Amongst those receiving a clean audit was the Department of Agriculture (USDA), claiming its first clean audit in its 141-year history. Several other agencies, notably Department of Education, FEMA, and NASA, received clean audits after recently disclaiming their audit opinions.

While these record improvements in financial management must be applauded, the underlying "material weaknesses" that exist government-wide cannot be overlooked. GAO states these weaknesses to be "problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal control". GAO notes, for example, that the Department of the Treasury's Internal Revenue Service (IRS) has made substantial improvements in addressing its weaknesses by focusing on budgetary activity controls and property and equipment accountability. While these are clear steps in the right direction, substantial and long-term commitments of resources and senior managers are required to diminish the most serious financial weaknesses at IRS.

As was plainly evident with the Enron and WorldCom financial debacles, no world class organization can continue to be successful and accountable to their stakeholders without diligent and well documented financial records. Neglecting to do this will prevent the federal government from making day to day operating decisions and determining where waste and fraud are hampering individual programs to the department level management of the department. Fixing the financial management systems weaknesses that continue to exist in the federal government are absolutely essential to ensure the accuracy and accountability of financial reporting.

Timely

The federal government has also made notable advances in improving the timeliness of financial reporting. The PMA requires that all agencies produce timely reports and the Administration has placed the goal of producing clean audits within 45 days of the end of the fiscal year by 2004. Two agencies, Department of Treasury and Social Security Administration, have exceeded this challenge by submitting clean audits within this 45 day timeframe, two years ahead of the government-wide goal. While both agencies' efforts are extremely positive, Treasury's submittal was three months earlier than their FY 2001 issuance, a considerable improvement.

With the accelerated reporting goal in place for FY 2004, it is imperative that all federal agencies maintain consistent financial reporting and properly prepare consolidated financial statements. It is still a trend amongst many federal agencies that additional resources are expended to implement impromptu procedures to make billions of dollars of adjustments well after the end of the fiscal year. Federal agencies need to have clearly defined financial practices and procedures in place to diligently account for transactions as they occur, rather than accounting for these transactions after financial statements are due. This will allow federal agencies to timely submit clean audited financial statements for the preparation of consolidated financial statements.

Useful

Useful information is the most important aspect of financial reporting. Even with accurate and timely financial information, unless that information is useful to front line managers, who are ultimately responsible for the financial management of an agency, the integrity of the data can be compromised. Many financial management systems neglect to identify the needs of the front line managers or are too complicated to be useful to these managers. If the frontline managers do not find their financial management system to be useful, then it is near impossible for them to provide accurate and timely data, two other major requirements of a sound reporting system. Useful financial data provides the frontline manager with cost information on a cost-per-unit basis. This type of data will allow managers to manage the costs of their programs. If the financial information is not useful on this level, then it is not a good system for managing financial data.

Transparent

While 21 of 24 CFO Act agencies were able to earn auditors approval for FY 2002, the federal government had many discrepancies in the consolidated financial statements. Most significantly, the federal government was unable to account for billions of dollars in transactions between various entities of the federal government. This prevented the proper preparation of the consolidated financial statements. GAO finds that the core problem with intra-governmental transactions is that there are no clearly stated government-wide business rules for these transactions to be handled consistently. Both the Office of Management and Budget (OMB) and Treasury have taken steps to alleviate this problem by establishing standard business rules beginning in FY 2003 (OMB) and developing a new system and procedures for preparing consolidated financial statements (Treasury). These new methods will greatly assist the federal government in being accountable for transactions between their trading partners and foster the development of consolidated statements, but it requires full integration from the agencies.

The PMA places improved financial management as one of the five governmentwide management goals to ensure that the federal government is results-oriented, citizen-centered, and market-based. Timely, accurate and transparent financial information is a crucial aspect of this. Accountability to the taxpayer can not be claimed when billions of dollars go unaccounted for. In conjunction with other initiatives, such as the Program Assessment Rating Tool, the federal government can determine the importance and relevance of federal programs to see if they fit into the objectives of the government in the 21st century. Unnecessary programs can be phased out, outdated ones can be modernized, and proven or emerging programs can receive additional funding. While making these decisions poses a significant challenge to the Congress and Administration, unqualified audit opinions is a basic step toward achieving the goal of making the federal government a results-oriented world class organization that is fully accountable to its stakeholders, the American taxpayers.