The AGA Weblog

The Executive Order on Improper Payments: A Call for Action!

By: Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff, a Past AGA National President, is the Executive Director of the KPMG Government Institute

November 23, 2009, will go down as a red letter day in the fight against improper payments with the release of the Presidential Executive Order – Reducing Improper Payments and Eliminating Waste in Federal Programs.

In the words of Office of Management and Budget (OMB) Director, Peter Orszag, in announcing the pending issuance of the Executive Order on November 18:

“Each year, taxpayers lose billions of dollars in wasteful improper payments by the federal government to individuals, organizations, and contractors. ….. In 2008, improper payments totaled $72 billion; in 2009, they totaled $98 billion — an increase driven by improved detection and the significant increase in federal outlays associated with the economic downturn. These errors and mistakes are unacceptable. Taxpayers deserve to know that their dollars are being spent wisely and effectively.” 

To quote from the November 23rd Executive Order:

“When the Federal Government makes payments …., it must make every effort to confirm that the right recipient is receiving the right payment for the right reason at the right time. The purpose of this order is to reduce improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major programs administered by the Federal Government, while continuing to ensure that Federal programs serve and provide access to their intended beneficiaries. No single step will fully achieve these goals. Therefore, this order adopts a comprehensive set of policies, including transparency and public scrutiny of significant payment errors throughout the Federal Government; a focus on identifying and eliminating the highest improper payments; accountability for reducing improper payments among executive branch agencies and officials; and coordinated Federal, State, and local government action in identifying and eliminating improper payments.”

Among the new requirements in the Executive Order are to: 

• Create an online dashboard of key indicators and statistics on improper payments.  This is in line with the accountability and transparency concepts in the American Recovery and Reinvestment Act (Recovery Act). 
• Create and publicize a single mechanism for the public to report suspected incidences of waste, fraud, or abuse.  Much like the Recovery Act, increased citizen involvement in combating fraud, waste, and abuse is being encouraged and facilitated.
• Require agencies to establish more frequent error reduction targets, and more frequent error measurement for certain high-priority programs. This increases the focus on programs of the highest risk of improper payments.
• Issue recommendations on new internal techniques agencies can use to better detect and mitigate improper payments.  As discussed in several of my previous AGA essays[i] and an AGA Journal of Government Financial Management article, entitled Forensic Auditing – A Window to Identifying and Combating Fraud, Waste and Abuse[ii], the use of continuous monitoring/continuous auditing techniques and technology tools are important for this purpose.  They can be applied and leveraged by agency management to help address fraud, waste, and abuse.
• Require each agency to designate a current, Senate-confirmed appointee to be accountable to the President for meeting improper payment reduction targets. This makes a clear statement about the expectation for results and helps set the proper “tone at the top” and Presidential commitment. 

• For programs where targets for reducing payment error rates are not met for two years in a row, require the agency head, Chief Financial Officer, and the agency Inspector General to provide the OMB Director a report describing the likely causes of the agency’s failure and actions it will take to meet reduction targets.  This would raise the stakes appreciably and foster greater accountability for results.
• Increase data-sharing among federal agencies and programs and, where applicable, state and local governments and other stakeholders to improve eligibility verification and pre-payment scrutiny.  Data-sharing has been a long-standing problem for some programs and is in need of a solution. 
• Require quarterly agency reports [correct??] on any high-dollar errors identified by the agency and actions the agency will take to recover the improper payment and to prevent future improper payments.  Again, this provides added accountability and focus on those areas of greatest risk.

• Pursue administrative actions to provide state, local, and other organizations with incentives for reducing improper payments.  A greater partnership with state and local governments and non-profit organizations should help given their role in disbursing hundreds of billions of dollars of federal funds annually, including programs at high risk for improper payments, such as Medicaid which is state administered.
• Seek to enhance contractor accountability by pursuing methods such as subjecting contractors to debarment, suspension, and financial penalties for failing to timely disclose credible evidence of significant overpayments received on government contracts.  It is being made clear to contractors their responsibility to be stewards of public funds where there are improper payments. In the past, some contractors may have simply kept any federal overpayments unless the government identified the problem and sought the return of its money.  This now places some of the onus on the contractor.

The Executive Order provides a framework to build on efforts that have taken place since enactment of the Improper Payments Information Act (IPIA) of 2002.  By focusing attention on requiring estimates of improper payments, IPIA helped frame the issue, the magnitude of the problem, and the need for broader action, which led to the Executive Order.  This is an example where requiring agencies to estimate and report annually can drive broader management reform. 

Now is the time to develop solutions to previously thorny payment problems by changing business processes and leveraging technology.  It is time to look outside of the box, or in some cases just better leverage what is already available, by implementing new techniques and using technology to first and foremost help prevent improper payments and then to enhance the ability to detect and recover any such payments.

My questions to you:

• What are your views on the Executive Order?
• What actions do you believe would best help achieve the President’s goals in the Executive Order to reduce improper payments?
• What about the use of technology, such as forensic tools to help analyze and correlate information in order to prevent and detect improper payments?
• Do you have any leading practices you would like to share?
• What do you view as the impediments or challenges to meeting the goals and requirements of the Executive Order in your agency?

As this is the last essay to be posted on AGA blog, my thanks go to AGA for giving me the honor of being the first and last essayist.  Thanks go to each of you who have read the essays and those who have shared their views and comments. Special thanks go to Marie Force and Chris Camara for their initiative and sterling leadership of this program.

The views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.

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[i] Forensic Auditing—A Window to Identifying and Combating Fraud, Waste and Abuse, June 3, 2008; Are You Prepared to Protect the Integrity of Recovery Act Spending, May 27, 2009; Is Your Finance Organization A Leader in Supporting Acquisition and Contract Management, August 31, 2009; Check It—What Gets Checked Gets Done, September 25, 2009; and Odds Are Fraud Is an Issue in Your Organization, November 23, 2009

[ii] Forensic Auditing—A Window to Identifying and Combating Fraud, Waste and Abuse, Journal of Government Financial Management, Summer 2008, Vol. 57, No. 2

Non-Cancellable Operating Leases—What Challenges Do You Face in Accumulating the Necessary Information for Financial Statement Reporting?

By: Andrew Lewis, CGFM, CPA

Andrew Lewis is a senior manager with KPMG LLP’s government audit practice and a Fellow of the KPMG Government Institute. In addition, Andrew is president-elect of the Montgomery/Prince George’s Counties AGA Chapter, and is an adjunct professor in the Masters of Accountancy program at The George Washington University.

Federal agencies are required to disclose the amounts of future non-cancellable operating lease payments in the footnotes to their annual financial statements. Through this reporting, the reader of the financial statements has a window into the government’s financial exposure for non-cancellable operating leases. Depending on the agency, operating leases could run into the hundreds of millions of dollars.

Operating leases are defined in OMB Circular No. A-11,Preparation, Submission, and Execution of the Budget (dated August 2009), Appendix B (3) as follows:

Operating lease means a lease that meets all the criteria listed below. If the criteria are not met, the     lease will be considered to be a capital lease or a lease-purchase, as appropriate.

·      Ownership of the asset remains with the lessor during the term of the lease and is not transferred to the government at or shortly after the end of the lease term.

·      The lease does not contain a bargain-price purchase option.

·      The lease term does not exceed 75 percent of the estimated economic life of the asset.

·      The present value of the minimum lease payments over the life of the lease does not exceed 90 percent of the fair market value of the asset at the beginning of the lease term.

·      The asset is a general purpose asset rather than being for a special purpose of the government and is not built to the unique specification of the government as lessee.

·      There is a private sector market for the asset.

OMB Circular No. A-136, Financial Reporting Requirements(dated June 10, 2009), Section II.4.9.18, Note 18 Leases, requires that agencies include the following table (or comparable format) in the notes to their annual financial statements:

Operating Leases:

Future Payments Due:

Asset Category

Fiscal Year (1)  (2) (3) Totals

Year 1 xxx xxx xxx xxx

Year 2 xxx xxx xxx xxx

Year 3 xxx xxx xxx xxx

Year 4  xxx xxx xxx xxx

Year 5 xxx xxx xxx xxx

After 5 Years xxx xxx xxx xxx

Total Future xxx xxx xxx xxx
Lease Paymts

Meeting the reporting requirements of OMB Circular No. A-136 typically means that accounting personnel at Federal agencies must accumulate information from the agencies’ real estate or procurement offices. Determining whether the agency’s leases contain cancellation clauses, and aggregating the future lease payments for all of the leases can be resource intensive for some agencies—especially those with limited information on their operating leases or those with a significant number of operating leases. Although most agencies lease space through the U.S. General Services Administration (GSA), those agencies that have authority to lease space directly from parties outside of the federal government could face even greater resource challenges.

The information that agencies gather should not just satisfy financial reporting requirements, but should also be useful for the agency’s day-to-day management of lease costs and the agency’s use of resources.

Questions for Discussion: 

What challenges has your agency faced in gathering the future lease payment amounts for non-cancellable operating leases? 

What processes do you find effective for accumulating this information? Is the information routinely available to management, or is it the product of an annual effort to prepare audited financial statements?

Do you find that having this basic information has been useful in managing operating leases apart from meeting financial reporting requirements? If not, what can be done to encourage the use of this information by agency management?

What other benefits does having this information in the annual financial statements provide to your agency?

The TARP Refund: What To Do With It?

By: Robert Maitner Jr., CGFM, PMP

Robert Maitner Jr. is senior managing consultant with IBM Public Sector Financial Management.

Imagine this situation. You have encountered an unexpected expense that you had not planned or budgeted for, say perhaps a medical bill. So you take a loan in the amount of $500 to cover the expense. When the bill comes, you are pleasantly surprised that is for only $300. What do you do with the remaining $200? Should this be considered a windfall? Or should it be applied to the $500 loan amount? If the $200 would go toward basic necessities, such as food or shelter, the temptation is there to hold on to the cash. If it would mean a few more dinners out, then perhaps applying the money to the loan balance makes more sense.

This is the same scenario we see with the Troubled Asset Relief Program (TARP).

President Obama recently announced that the bank bailout cost about $200 billion less than expected, telling reporters, “It means that some of that money can be devoted to deficit reduction.”

Democratic leaders want to see those leftover TARP funds used for a new jobs bill. That may not be possible, however. The TARP legislation states that any unused money must go toward reducing the national debt, which sits now at a whopping $12 trillion. The Wall Street Journal explains that the Treasury secretary has some latitude in deciding how to use the funds, but that he first must consider taxpayers’ interests by maximizing overall returns and minimizing impacts on the national debt.

The debate here is a matter of priorities—what is more critical at this time, jobs creation or reducing the national debt? If you’re one of millions of Americans still out of work, you’d most likely opt for the jobs bill. If you’re not out of work, and hawkish about our growing national debt, you may say that the money should be applied back to the loan amount (the debt). It’s all a matter of perspective.  

Perhaps some sort of split would make sense here as well. What about using half of the funds for a jobs creation bill, and apply the second half to reduce the national debt? What do you think?

Odds Are Fraud Is an Issue in Your Organization

By: Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff is a Past AGA National President and the Executive Director of the KPMG Government Institute.

Ask the average person who they feel is responsible for ferreting out fraud in government programs, the most common answer might be state and local auditors, federal inspectors general, and the Government Accountability Office. But it is really management that should be the first line of defense against fraud. Rather than finding fraud after the fact as auditors sometimes do, a better approach is to mitigate fraud up front through implementation of comprehensive fraud risk programs. Several of my earlier AGA essays[1] and a 2008 AGA Journal article[2] have talked about the importance of management’s responsibility for internal control and having the lead in protecting against fraud. Also, research conducted by the KPMG Government Institute[3] has shown that high-performing federal finance organizations are catalysts for establishing comprehensive fraud programs and in supporting program managers in carrying out their responsibility to address the risk of program fraud.

Now why do I raise this again? KPMG’s recently released Fraud Survey 2009[4] provides a sobering perspective of how senior executives in the private and public sectors currently view the risk of fraud. The survey was conducted against a backdrop of the current economic downturn, where we have seen vast sums of market capitalization wiped out and several trillion dollars of taxpayer money committed to stabilizing financial institutions, injecting liquidity into the capital markets, and jump-starting the economy through infrastructure spending programs and other stimulus actions.

As the Fraud Survey 2009 report concluded, “Aside from questioning where yesterday’s money went, many remain concerned about where tomorrow’s money is going. To be sure, record levels of government spending may usher in record levels of fraud, waste and abuse.” This gets right to the accountability and transparency provisions in the American Recovery and Reinvestment Act and the president’s statement in his inaugural address: “Those of us who manage the public’s dollars will be held to account—to spend wisely, reform bad habits and do our business the right way—because only then can we restore the vital trust between a people and their government.”

What were the perceptions of senior executives as they considered the nature of fraud and misconduct risks in their organizations, and the challenges they confront in their efforts to prevent, detect and respond to such risks? About 15 percent of the respondents were from government/public sector, with the remainder from publicly traded and privately held companies.

Among the key findings of the Fraud Survey 2009:

• Roughly one-third of respondents (32 percent) said at least one of three categories of fraud (misappropriation of assets, fraudulent financial reporting, and other illegal or unethical acts) was going to increase during the next 12 months in their organization.
• Government/public sector respondents ranked other illegal or unethical acts as their most significant risk at 39 percent, while asset misappropriation ranked second at 23 percent. Fraudulent financial reporting came in at 19 percent, while the remaining 19 percent of government respondents said that all three categories of risk were an equal threat.
• The majority of executives cited fraud and misconduct as posing significant risks today. Nearly two-thirds of executives (65 percent) reported that fraud and misconduct is a significant risk. If such wrongdoing were to be experienced, the greatest concern for over two-thirds of executives (71 percent) is the potential for a loss of public trust when public and market confidence is at a premium.
• Executives expect the threat of fraud to remain steady or rise in the coming year. About three out of four executives believed that fraud and misconduct risks, such as misappropriation of assets and fraudulent financial reporting, will either stay the same or increase over the next 12 months (85 percent and 74 percent, respectively).
• Inadequate internal controls or compliance programs heighten the risks of fraud and misconduct. Two-thirds of executives (66 percent) reported that inadequate internal controls or compliance programs at their organizations enable fraud and misconduct to go unchecked.
• Gaps exist in plans to address allegations of wrongdoing. Roughly a quarter of respondents (27 percent) said they lack effective protocols on how investigations should be conducted and at what point the board of directors (translated for government into the city council/state legislature/U.S. Congress, top elected officials and the public) should be alerted to potential concerns. Likewise, roughly a third (33 percent) lacked protocols on how to remedy control breakdowns.
• Executives acknowledged room for improvement across most elements of their antifraud efforts. The areas cited as most in need of improvement include employee communication and training, technology-driven continuous auditing and monitoring techniques (such as the use of forensic tools), and fraud and misconduct risk assessment, with 67 percent, 65 percent and 60 percent of respondents, respectively, identifying at least moderate improvements needed.

Succeeding in these turbulent times requires government leadership to ensure internal controls are up to the challenge of confronting the fraud and misconduct risks in today’s environment. Those in government that take up the challenge and see themselves as the first line of defense against fraud will be equipped to shine their own light brightly on a way forward and “restore the vital trust between a people and their government” the president spoke about in his inaugural address.

My questions to you:

• What is the fraud prevention and detection culture in your agency?
• Does management view fraud prevention as everyone’s responsibility?
• Does management ultimately hold itself accountable for ensuring adequate internal control is in place to reasonably avoid fraud?
• Has a comprehensive fraud risk program been established to help mitigate risk and prevent fraud and to effectively detect and deal with fraud when it arises?
• Are forensic tools (continuous auditing and monitoring techniques) routinely used by management to help mitigate and manage fraud risk and to help management be the first line of defense against fraud?

The views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.

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[1] Forensic Auditing—A Window to Identifying and Combating Fraud, Waste and Abuse, June 3, 2008; Are You Prepared to Protect the Integrity of Recovery Act Spending, May 27, 2009; Is Your Finance Organization A Leader in Supporting Acquisition and Contract Management, August 31, 2009; and Check It—What Gets Checked Gets Done, September 25, 2009

[2] Forensic Auditing—A Window to Identifying and Combating Fraud, Waste and Abuse, Journal of Government Financial Management, Summer 2008, Vol. 57, No. 2

[3] The KPMG Executive Guide to High Performance in Federal Financial Management, June 2009

[4] Fraud Survey 2009, KPMG Forensic Advisory, September 2009

Now That The Audit Is Over, The Hard Work Begins!

By: Andrew Lewis, CGFM, CPA

Andrew Lewis is a senior manager with KPMG LLP’s government audit practice and a Fellow of the KPMG Government Institute. In addition, Andrew is president-elect of the Montgomery/Prince George’s Counties Chapter, and is an adjunct professor in the Masters of Accountancy program at The George Washington University.

For those involved in federal financial reporting, you’ve just recently or will soon complete your agency’s FY 2009 financial statement audit. And for those who perform  state and local government financial reporting, your agency’s Comprehensive Annual Financial Report (CAFR) audit and Single Audit are already in full swing or nearing completion. While many might think that the hard part is getting through the audit, they may find that the hardest part is after it is completed, when corrective actions need to be adopted.

Office of Management and Budget (OMB) Circular No. A-50, Audit Followup, provides guidance to federal employees as they’re resolving findings and implementing corrective action for most audits. Key steps for implementing corrective action required by this Circular include:

Establishing a System for Audit Follow-up:  Agencies “shall establish systems to assure the prompt and proper resolution and implementation of audit recommendations.  These systems shall provide for a complete record of action taken on both monetary and non-monetary findings and recommendations.” (Section 5)

Involving Senior Leadership of the Agency:  Agencies should designate “a top management official to oversee audit follow-up, including resolution and corrective action” and assure “that management officials throughout the agency understand the value of the audit process and are responsive to audit recommendations.” (Section 7.a)

Implementing Prompt Resolution:  Agencies shall “require prompt resolution and corrective actions on audit recommendations. Resolution shall be made within a maximum of six months . . .” (Section 8.a.2)

Looking for Trends in Audit Findings:  Agencies shall “provide for periodic analysis of audit recommendations, resolution and corrective action, to determine trends and system-wide problems, and to recommend solutions.” (Section 8.a.9)

Holding People Accountable:  Agencies shall “assure that performance appraisals of appropriate officials reflect effectiveness in resolving and implementing audit recommendations.” (Section 8.a.10)

Beyond the guidance in OMB Circular No. A-50, I would make several other recommendations: 

Hold the Process Owners Accountable:  Agencies should evaluate whether they’re holding the process owners responsible for implementing the corrective action.  For example, I’ve seen several instances in which the accountants designate themselves as the officials responsible for resolving the audit findings even though they don’t have the knowledge, authority or experience to resolve the issue. They are really serving as the liaison with the process owners, who are the only ones that can resolve the problem. Agencies should be sure to hold the process owners directly accountable for implementing corrective action.

Meet Frequently:  Frequent meetings with all of the people involved in implementing corrective actions keeps momentum going and helps ensure the right resources are focused on meeting deadlines in the agency’s corrective action plan.

Factor In Time For Training:  Sometimes agencies adopt a policy change to address a corrective action without factoring in the time it takes to train all the personnel involved in carrying out the new policy. Unfortunately, this can mean that the actual implementation of a corrective action occurs long after the policy change has been adopted. It’s better to factor in training time at the start.

Brief the Auditors Periodically:  Agencies should consider holding a forum with the auditors to explain how the agency is implementing changes to respond to the auditor’s recommendations. This would give the auditors an opportunity to explain their recommendations more fully—especially if the agency has interpreted a recommendation that differs from the auditors’ intent. 

Monitor the Effectiveness of Corrective Action Through the Agency’s OMB Circular No. A-123 Process:  OMB Circular No. A-123, Management’s Responsibility for Internal Controls, requires testing and monitoring of the operating effectiveness of the agency’s key controls. This testing and monitoring effort provides an excellent opportunity for the agency to determine whether the corrective action has been properly implemented and has effectively addressed the weakness. 

Questions for Discussion:  What other techniques do you use in your agency or have you witnessed that are effective in resolving audit findings? What are additional elements of a corrective action plan that you find effective? 

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International’s member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.

This views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP. 

The Dance of Dominos

By: Sunil Datt, MS, MBA, MA, CGFM, PMP

Sunil Datt, MS, MBA, MA, CGFM, PMP, is Senior Managing Consultant, IBM Global Business Services.

When Mervyn King, Governor of the Bank of England, recently said: “Break up the banks,” I was inclined to hand him the hatchet; and set up a small business distributing hatchets to Ben Bernanke (chairman of the Federal Reserve) and other central bank chiefs around the globe. Since my writing about inattention to systemic risk in this weblog exactly 10 months ago, much noise and little action has taken place for addressing the issue (you see, secretly I was hoping that all central bank governors read this weblog). And more noise there was, as Alistair Darling, the Chancellor, opined with a stiff upper lip that “the situation was more complex” than what the Governor suggested, and his solution was “not right for the 21^st century.” That last comment, of course, referring to the separation of banking from trading activities via the Glass-Steagall Act after the Great Depression. I was inclined to cheer for Darling’s modernist outlook, but then I realized that it is the practice to chose one side and cheer for it irrespective, as a ball is being kicked around, in the great British sport of soccer! But I digress; back to King’s argument.

Says King: “There are only two ways in which the problem can—in logic—be solved. One is to accept that some institutions are ‘too important to fail’ and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories.”

His arguments against the first approach are convincing, and I will come to those. So logically, says he, we should let certain institutions fail, and his approach is to divide the large banks into the ‘utility’ bank and the ‘casino’ bank. The utility bank effectively provides for payments, deposits and loans; the casino bank undertakes some of the riskier financial activities such as proprietary trading. As we have a common interest in ensuring continuity of utility services, those banks can be considered too important to fail. The casino banks, on the other hand, can bear the consequences of their own actions. “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

One method under the first approach, says King, is of course higher capital requirements. But these reduce, not eliminate, the need for taxpayers to provide catastrophe insurance. Also, the “riskiness” of a bank’s activities and the liquidity of its funding can change suddenly and radically as market expectations shift. This means that what appeared to be an adequate capital or liquidity cushion one day appears wholly inadequate the next. “Indeed, the Achilles heel of the Basel regime is the assumption that there is a constant capital ratio which delivers the desired degree of stability of the banking system.”

The second method under the first approach would be to require banks to take out insurance in the form of ‘contingent capital’, that is capital in a form that automatically converts to common equity upon the trigger of a threshold that kicks in before a bank becomes insolvent. This is different from subordinated debt, which banks have been permitted to count as capital under the Basel regime, but which do not provide a reliable capital buffer until too late—after the bank has failed. 

I think the insufficiency of Basel-type requirements by themselves containing contagion is by now widely accepted. The problem is that King’s proposal for the ‘utility bank’ and the ‘casino bank’ is fairly arbitrary too. Take for example, mortgages. If the utility bank originates the mortgage, and the casino bank buys the mortgage to develop and trade structured products (mortgage backed securities), what prevents the utility bank from generating ‘weak’ mortgages exactly as it happened recently, and the same problem starts all over again. 

The real issue is the interconnectedness and the tight integration of global financial markets in today’s world. The dominos don’t stand individually and get knocked down one by one. They hold hands and dance together. And they infect each other virally. From that perspective, ‘smart’ regulation lies in a combination of better reporting requirements from all major financial players, highly automated processing of submitted data,, and sharp quick analysis to detect seeds of systemic risk. Stress testing all new financial instruments would be part of such a regime. Of course, the devil is in the detail, and a weblog is no place for that. So suffice to say, bury the hatchet King, there still is work to be done!

 

 

Just Say No to Day-to-Day Transaction Processing

By: Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff is a Past AGA National President and the Executive Director of the KPMG Government Institute.

AGA’s 2008 CFO survey[1] showed that federal finance organizations feel they face steeper compliance requirements with smaller rewards; whereby mission priorities get a back seat to compliance. They feel they are pushed into a chief accountant role as opposed to an executive leadership role. They expressed a desire to spend more time on strategic decision-making activities and less time on day-to-day transaction processing activities.  

High-performing finance organizations effectively manage and reduce the time they spend on routine transaction processing. But what does this mean in real-life terms? The Government Accountability Office (GAO) found that leading finance organizations try to spend no more than 20 percent of their time on routine transaction processing.[2]

Research by the KPMG Government Institute[3] found that the finance work force that supports the transaction processing needs of today may not be well-positioned to support the analytical needs of tomorrow. It is expected that finance organizations of the future will have fewer people, with a much greater percentage of financial analysts than accounting technicians involved with routine transaction processing. To reduce the cost of finance operations and better support agency program objectives, a leading finance organization manages the cost of performing routine transaction processing and accounting activities. It does this through a variety of means such as:

• Moving to shared services centers
• Outsourcing to transaction processors
• Consolidating, streamlining, and/or reengineering existing transaction processing
• Standardizing transactions and adopting common transaction processes
• Using technology 

Leading finance organizations understand the need to establish the right balance and smartly carry out routine finance operations, especially transaction processing. They have a baseline of where they are and what they want to achieve. This is not conceptually difficult; but implementation and sustainability can be challenging. The 2008 AGA survey clearly showed that federal CFOs were not satisfied with the status quo.

There are some things you can do that KPMG’s research shows are a staple of high performing finance organizations.

Think about it in terms of the following questions:

Does your finance organization have a formal goal and an action plan to reduce the time spent on routine transaction processing so that it can instead focus its resources on strategic support activities, such as financial analysis and managerial cost accounting?

Does your finance organization know what percentage of its resources is spent on each of its major activities, such as routine transaction processing, financial analysis, and strategic and operational planning as a baseline that is periodically updated?

Is the finance organization generally in line with the GAO finding that high-performing finance organizations typically spend no more than 20 percent (and hopefully less given significant technological advances since the GAO study) of their time on routine transaction processing and other routine finance activities?

Has the finance organization compared itself against other organizations to identify leading practices and opportunities to reduce routine transaction processing?

Does the finance organization continually explore opportunities to outsource and take advantage of emerging leading practices and advancements in technology?

Is transaction processing standardized, which entails having common accounting codes and common accounting processes?

Is it recognized that financial and other information needed for transaction processing can come from program systems and other information systems outside of the purview of the finance organization, which also need to be in sync with the common accounting codes and common accounting processes?

Has reengineering taken place to eliminate inefficient processes, consolidate transaction processing activities not outsourced and streamline operations?

Is technology fully leveraged in transaction processing, such as the through the use of electronic commerce, data warehousing, document imaging and other transaction processing techniques?

My questions to you:

• Has your agency’s finance organization implemented the leading practices highlighted in this essay to reduce the cost of routine transaction processing activities?
• If so, what has been the result? Has the finance organization been successful in reducing the cost of routine transaction processing? What practices have had the greatest positive impact on reducing costs? What practices have had the least impact on reducing costs?
• What are the areas that continue to present the greatest challenge to the finance organization in reducing the cost of routine transaction processing?
• What other ideas do you have for reducing routine transaction processing activities so that CFOs can focus more attention on strategic decision-making activities as called for in the AGA’s 2008 CFO survey?

The views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.

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[1] Association of Government Accountants’ Annual CFO Survey, Financial Management—Providing a Foundation for Transition, July 2008

[2] GAO Executive Guide: Creating Value Through World-Class Financial Management (AIMD-00-134),

April 1, 2000

[3] The KPMG Executive Guide to High Performance in Federal Financial Management, 2009

Five Big Trends That Are Affecting the Way Government Works

By: Jon Desenberg

Jon Desenberg is the policy director of The Performance Institute.

It’s a pleasure to be back and blogging for AGA. Rather than talking about one particular theme or issue this time around, I decided to go with everyone's increasingly short attention spans and time constraints and just briefly mention five trends that I'm seeing here in Washington this fall.

Government 2.0—A few years back it would have been hard to imagine Google opening a big office on New York Avenue in the heart of D.C., completely decked out with foosball tables, cappuccino machines and all the trappings of Silicon Valley. It would have been harder still to imagine the room full of government types who were not just keeping up with the Google people, but actually wow-ing them with new ideas on social networking and cloud computing. Yet, late this summer, there it was, FDA was talking about a virtual widget they created and then gave to thousands of websites, local governments were talking about their pioneering use of social networking for crime reporting. The true “father of the Internet” Vint Cerf was on hand to discuss his take on government and interactive networking. I found the work of Rita King in international affairs to be particularly innovative and fascinating; she is using virtual reality to discover the realities of the Muslim world, amazing work that has been awarded a 2.0 prize. Her main concepts have begun to be discussed in the State Department in just the last few weeks.

Program Evaluation Reborn—For many years those of us working in strategic planning and performance management were uneasy about the absence of an emphasis on truly rigorous program evaluation. The Government Performance and Results Act actually called for regular evaluation, as did the Bush Administration’s Program Assessment Rating Tool. Yet for years it languished, even as planning and measurement were greatly improved and ramped up throughout government. What was the sense of planning and measuring if the impact of the program was never understood? It was a mystery and something that we at the Performance Institute regularly worked on with federal, state and local government. Finally in the last couple weeks, we’ve seen a major policy announcement by Federal Budget Director Peter Orzag. By the way, Mr. Orzag was recently rated the fifth most powerful person in Washington, so this is a major shift. I had a chance to comment more fully on the new policy announcement last week on Federal News Radio.

R.I.P National Security Personnel System (NSPS)—Even if you don’t work for the Department of Defense (DoD), the congressional decision this month to end the controversial DoD pay for performance system will impact everyone who works for a government organization. Tying pay to performance is difficult and angers many people, particularly those who don’t feel they are getting fair treatment. Yet what is the alternative? Pay increases for every year of work? Increases for everyone, regardless of what was actually accomplished and by whom? What are we saying about our government and to the bright and innovative people we need to recruit if we stick with such outdated systems? More specifically, what was the return on all of our taxpayer money for the millions and millions of dollars spent training and converting tens of thousands of employees to NSPS, only to see it scrapped. Was this the change our country voted for last November?

The Quadrennial Review Boom—For years, the Department of Defense engaged in something called the QDR, or Quadrennial Defense Review, to assess the threats and challenges the nation faces and re-balance DoD's strategies, capabilities and forces to address those changes in four-year increments. This effort seemed particularly well-suited to the long-range planning needs of the massive DoD effort and complemented more traditional strategic planning exercises, and was tightly tied to budget. The whole effort must have sounded intriguing to other organizations, because today we are in the midst of a quadrennial review boom, with players ranging from the State Department to the Department of Homeland Security getting in on the act. It seems very logical; but do we need another layer on top of the mountain of plans and measures already in place? Aren’t the legally required strategic plans supposed to be three- to five-year plans? Why another plan? The result is more planning sessions and documents left to gather dust on the top of an already big pile. The QDR worked well at DoD for specific reasons, the jury is still out on its rapid spread elsewhere.

The Performance Improvement Council—We have many inter-agency councils, from CFO to CHCO to CIO and more, yet the newest council has been ramping up in the last few months and it’s a welcome addition. President Obama could have eliminated the Performance Improvement Council (PIC), after all it was founded under an executive order of President Bush. Yet, he put politics aside and both Budget Director Orzag and Chief Performance Officer Zients are emphasizing the importance of bringing agencies together to develop cross-programmatic measures, understand best practices and uncover which program strategies work and which don’t. This is some of the most unheralded work in Washington and importantly shows that performance management is a bi-partisan, long-term effort. The Performance Institute applauds the work of OMB and the PIC and look forward to more results in the months ahead.

 

Internal Controls: Whose Responsibility is it Anyway?

By: Adrienne L. Ferguson, MPA

Adrienne Ferguson is an associate professor for the Chief Financial Officers Academy teaching government financial management leadership courses at the National Defense University, Information Resources Management College (iCollege) at Fort McNair in Washington, D.C. She has over 25 years of federal government experience focusing on internal controls, accounting and data quality.

Today is the last day of another fiscal year (FY) in the federal government. The end of the year may not bring about a period of jubilation and reflection like the end of the calendar year, but it certainly brings an exhaustive list of closing events and activities and reporting requirements. One of those requirements includes the preparation of the Annual Statement of Assurance for internal controls, which has long been required by the Federal Managers’ Financial Integrity Act (FMFIA) of 1982. This statement puts on record the agency head’s judgment of the overall adequacy and effectiveness of internal controls within the agency. By providing this statement, the agency head is providing reasonable assurance for the following:

• Effectiveness and efficiency of controls in operation
• Reliability of financial reporting
• Compliance with applicable laws and regulations

Meeting the requirements of FMFIA and the Office of Management and Budget’s implementing guidance, OMB Circular A-123, Management’s Responsibility for Internal Controls, is no small feat and the rigor behind the requirements include conducting self assessments and risk assessments, evaluating general controls and application controls, testing the control design and operating effectiveness, and reporting the results.  

Although evaluating and reporting on internal controls is not new to the federal government, there is still tons of confusion, mounds of paperwork and masses of requirements that may only be fully understood by a handful of individuals inside the auditing and accounting communities. Since those in the financial neighborhood are usually the “action officers” that prepares the Statement of Assurance for the agency head, they are not always the “responsible officers” and sometimes the responsible party is unknown. With rising net operating cost within the government; the growing deficit; and the budding potential for fraud, waste, abuse and mismanagement in federal programs and operations, if there was ever a time to be clear about the responsibilities for internal controls, it is now. 

As noted in the titles of the FMFIA and OMB Circular A-123, specific attention is drawn toward “federal manager” and “management,” but does this imply that it is only management’s responsibility? Generally speaking, federal managers, who are collectively responsible for over $3 trillion in outlays, are accountable for the effectiveness and efficiency of an organization, but they cannot do it alone. The commitment to establish and maintain internal controls has been evolutionary in the federal government, but the responsibility to uphold this commitment has always pointed toward management. Program and mission offices, administrative and institutional components, as well as financial support organizations must all be aware of and support the goals of implementing, planning, managing, assessing, improving, monitoring and reporting on effective internal controls within our federal agencies. 

As public servants, we serve to ensure that we are “managing” federal funds and resources by maintaining effective controls within our programs and operations. When reviewing the Government Accountability Office “High Risk” list, it identifies a broad list of 30 areas requiring significant attention in government programs and operations, with some areas being on the list since 1990. Although much progress has been made, this list has doubled since it was originally published in 1990. When areas drop off the list, more are added.

Even though FY 2009 is near the end, while we saunter into FY 2010, let’s rethink how internal controls are viewed in our organizations. We are in a position to save billions of dollars and improve the effectiveness and efficiency in gargantuan ways. Questions that can be asked for the beginning of the next fiscal year are:

• Is the tone throughout the organization one that echoes quality, efficiency, integrity and accountability for both management and staff?
• Does the organization’s governance framework include a strategy that starts from the top, but ensures that touch points are engaged throughout the entire agency?
• Are partnerships developed with financial professionals and program/administrative units?
• Should internal control training be mandatory each year like annual security training?
• Should annual performance evaluation objectives relate specifically to internal controls?

The Sept. 30 assurance statement should be proof of everyone’s labor and efforts. It’s not just management’s controls, it’s everyone’s controls. Let’s start the new fiscal year by ensuring that we all play a role in internal controls. What will you do?

Check it—What Gets Checked Gets Done

By Jeffrey C. Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff is a Past AGA National President and the Executive Director of the KPMG Government Institute.

“Check it—what gets checked gets done. Every asset is precious. Every financial transaction is important. Be aware, be precise, be accurate. Your performance counts.”

No, these are not the words of the author, but the name and mantra of a program established several years ago by the Department of Defense that can be a simple but a powerful way to look at the role of financial stewardship and internal control. AGA’s 2008 CFO Act survey showed that federal finance organizations feel they face steeper compliance requirements with smaller rewards; whereby mission priorities take a back seat to compliance. When finance organizations speak about having too many compliance requirements, they may cite the requirements in the Office of Management and Budget (OMB) Circular A-123, Management’s Responsibility for Internal Control, which was issued pursuant to the Federal Managers’ Financial Integrity Act of 1982 (Financial Integrity Act).

The Financial Integrity Act requires annual statements of assurance from the agency head supported by an assessment process that provides a basis for the assurance statement. GAO found that over time, the assessment process became largely a paperwork exercise focused on compliance and not substance. There was too much just “checking the boxes” and the assessment process was dying under the weight of the volumes of documentation developed to support the annual assurance statement. In 2004, OMB made significant revisions to Circular A-123 to better focus the assessment process and help revitalize the program.

Let’s look at the underlying purpose of the Financial Integrity Act and the assessment and annual reporting process. This process does not have to be viewed as a compliance exercise but can instead be seen as a management tool that can focus on clear themes, such as the Check It program in the Department of Defense, and help manage risks.

Research conducted by the KPMG Government Institute[1] found that managing risk, which underlies the Financial Integrity Act, is not much different than managing projects or operations. Goals and objectives should first be established and communicated to the staff. Clear and effective policies and procedures should be in place and operating effectively and efficiently to help achieve the goals and objectives. Remediation of risks to acceptable levels should be timely and effective, and accountability for results established and enforced. The risk management process should be continuous as risks are ever-changing.

At its core, the concept of risk management means, in some cases, accepting certain risks and not setting up costly systems to avoid all risks. Research shows that leading federal finance organizations understand the cost-benefit equation and ensure that reliable, timely and relevant financial information is available to make trade-off decisions involving risk, benefit and cost.

A leading federal finance organization (and I would submit the same applies to finance organizations at the state and local levels of government as well) typically steps back and asks itself questions such as:

• What do we not want to read about in the newspaper or see on the evening news?
• What do we want to make sure happens and happens well?
• What problems have developed or emerged in other organizations that could be a problem in our organization as well?
• What controls do we have in place, and what do we know about how well they are working?    
• What changes have taken place in the finance organization and the agency, and what new risks have been introduced? 

Once you have answered these questions, then as the Department of Defense suggests, CHECK IT.

My questions to you:

• Do you CHECK IT, with the objective of “what gets checked, gets done,” or do you simply “check the box” and find yourself in compliance regimen with limited value to the organization?
• What programs have your organizations developed that can help avoid a compliance regimen and provide a window into what can help provide meaning and value to management while fostering “smart” compliance with laws, such as the Financial Integrity Act, and implementing regulations, such as OMB Circular A-123?
• Does your organization manage risk so that you check the things that are most important in adding value and in helping to carry out your mission in an effective and efficient manner?

The views in this essay are those of the author only, and do not necessarily represent the views or professional advice of KPMG LLP.

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[1] The KPMG Executive Guide to High Performance in Federal Financial Management, 2009