The AGA Weblog

Are the Financial Management Winds Changing?

By: Danny Werfel

Danny Werfel, a member of AGA’s Washington, D.C. Chapter, is deputy controller, Office of Federal Financial Management, U.S. Office of Management and Budget

I was a panelist at a public forum on financial management recently and was asked the following question by an audience member: “Where is federal financial management heading in the next few years?” Almost immediately after I began my answer, the questioner interrupted me to clarify her question. She was not interested in where I personally thought financial management should head in the next few years. She wanted to know where it is headed. In other words, she wanted me to take an objective look at the various “data points” in the federal financial community today and discuss what I thought those data points are saying. After giving those assembled that day what could have only amounted to an unsatisfying response, I’d now like a second chance at answering this question.

I believe the “data points” are telling us a surprisingly clear and compelling story about where financial management is inevitably headed. Federal financial management is transitioning from an emphasis on “what we own and owe” to an emphasis on “where the money is going.” I come to this conclusion by observing the increasing demand among key stakeholders (in particular, Congress) for information and accountability on where federal dollars are being spent.

The Chief Financial Officers (CFO) Act of 1990 started the federal financial management journey by establishing as a primary activity the production of traditional, accrual basis financial statements, such as the balance sheet. These statements are largely anchored around asset and liability reporting, answering the question of “what we own and owe.” Federal CFOs have spent the better part of 18 years initiating the necessary controls and systems to publish reliable financial statements. Results from FY 2007 demonstrate that these efforts are paying off, with 80 percent of CFO Act agencies achieving clean audit opinions.

While the disciplines necessary to produce traditional financial statements have led to meaningful internal management improvements, the public consumption and demand for the information contained in traditional financial statements never materialized. Instead, demand has centered around how federal funds are distributed and the extent to which federal payments are made correctly and for authorized purposes. And now this demand appears to have reached a fevered pitch, with immediate and long-term impacts on federal financial management.

The recent enactment of the Federal Funding Accountability and Transparency Act (“Transparency Act”) best exemplifies this. The Transparency Act requires the Executive Branch to provide, in a web-enabled and searchable environment, detailed and timely data on all federal grant, contract and loan payments that exceed $25,000. With the launch of USASPENDING.GOV in January of this year, the public has a powerful tool to search where federal dollars are going—to which parties, in what amount, in what geographic location, and for what purpose. By 2009, the Transparency Act requires federal agencies to report “sub-award” information (which means following federal funds beyond the initial recipient).

Significant work remains before all Transparency Act requirements are met. The challenge to produce this data and ensure it is timely and reliable rivals the challenge agencies faced in the 1990s when they began producing traditional financial statements. Yet, an important difference between CFO Act and Transparency Act reporting is the potential the latter has to change the way citizens use government information to drive accountability and inform the public dialogue on the federal budget.

Beyond the Transparency Act, other indicators point to growing congressional interest in “where the money is going.” Hearings and letters of inquiry in the financial management domain are increasingly focused on areas such as improper payments, charge card abuses and instances of excessive spending. Currently, there are a slew of introduced bills that would establish additional requirements for financial reporting and accountability on federal payments. The declining emphasis by congressional overseers on traditional financial statements is, in part, a testament to agency successes in this area. But it is also reflects that the connection between the citizen and government financial information goes well beyond traditional financial statements.

Is Transparency Act information the critical link between the citizen and government accountability? Today, information on “where the money is going” appears to be creating a more meaningful connection between the citizen and government than information on “what we owe and own.” But, if I can return to my old habit of talking about where I think things should be headed, I don’t believe our journey will be complete until the most critical question of all takes center stage: “What results are being achieved with our money?”

TOMORROW: Judith A. Kamnikar, Ph.D., CGFM, CPA, on "Partners in Education and Training: AGA, Academe and Government"

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Making Fiscal Responsibility Popular

By: Diane Lim Rogers (“EconomistMom”), Ph.D.

Diane Lim Rogers recently joined the Concord Coalition as their first Chief Economist. She was Chief Economist for the U.S. House Budget Committee from January 2007 through April 2008. Using her dual credentials as a Ph.D. economist and mom of four, Diane now “blogs” on EconomistMom.com.

It’s been just over a month since Mother’s Day when I launched EconomistMom.com, a place “where analytical rigor meets a mother’s intuition.” I hope readers of this AGA blog will come visit my blog today, if you haven’t already, and especially to please pass the link around to your friends who are not government accountants or economists. As I explain on my “about” page, EconomistMom.com is a place where honest math and sound economics is communicated in a way that makes common sense and is relevant to our daily lives. The issues we discuss span a wide and unusual range as suggested by the blog’s title–from “do deficits matter?” (yes) to “can I get my family life in perfect order?” (no). Among the broader policy issues, there is a particular focus on the economics of fiscal responsibility, as my hope is that the blog will be part of a newly effective, “grassroots” movement involving ordinary American parents and grandparents, encouraging our policymakers to “do the right (fiscal) thing” for the sake of our children and grandchildren.

My blog’s emphasis on fiscal responsibility is no accident. Yes, it does help justify my “blogging” as part of my “work” for the Concord Coalition, whose mission after all is “dedicated to educating the public about the causes and consequences of federal budget deficits, the long-term challenges facing America's unsustainable entitlement programs, and how to build a sound economy for future generations” (taken right from the “about” page of the Concord website). But it’s much more than that. Fiscal responsibility has really been my “passion” as a fiscal policy economist since my position as the senior economist for tax and budget policy at the Council of Economic Advisers, during the last year of the Clinton Administration, when I wrote about the “legacy” of the Administration’s fiscally-disciplined policies in President Clinton’s last economic report. And the issue of fiscal responsibility wouldn’t have become nearly such a “passion” were it not for the merging of my perspective as an economist and my concerns as a mother. I firmly believe that the theory and evidence show that fiscal responsibility is essential in order to promote a strong economy. I also firmly believe that our current fiscal irresponsibility is a shirking of duty to our children and grandchildren—that it’s just plain unfair to those future generations with no “political voice,” whose future is in the hands of their parents and grandparents.

I wouldn’t have started the blog, however, had I believed that that “shirking of duty” was a well-informed, intentional choice made by those (evil) current parents and grandparents. I have little desire to “shame” people into doing the right (fiscal) thing. I have much more desire to follow my hunch that most parents and grandparents are good, caring people who just don’t fully understand the adverse economic consequences of the government’s fiscal irresponsibility, and that if they better grasped how much this directly affects their own kids’ and grandkids’ future well-being , that they’d start to reward (I mean with votes rather than money) politicians who do the right (fiscal) thing, and that only then would the politicians have the (even selfish) incentive to do the right (fiscal) thing.

This is in line with Concord’s “grassroots” approach—EconomistMom.com is a sort of “virtual Fiscal Wake-Up Tour” after all—which in my common-sense opinion has promise to be almost infinitely more effective than strategies that gather old (no offense), wise (fiscally-hawkish) men in grand ballrooms inside the Beltway to say that politicians ought to listen to them because they’re smart. (And no offense to those policy groups who pursue such strategies, because I still see merit to an “attack on all fronts.” I just think the grassroots approach will prove to be the much more cost-effective strategy—maximizing political bang per buck.)
So my blog tries to explain why deficits matter, and why they should matter to any ordinary American family, using a combination of economic wisdom and common sense. I like to stress that families don’t budget the way the government is currently budgeting, often as if there are no constraints, and with failure to weigh costs against benefits. Families understand that their budgeting decisions matter, especially for the well-being of their children.

Wouldn’t it be great if we could get the government to budget as if it mattered, by turning fiscal responsibility into a popular thing?

MONDAY: Evie Barry, AGA Director of Performance Reporting, on ""Best Practices and Lessons Learned from CEAR FY 07 Reviews"

Too Many Chiefs? Do We Need to Change the Way We Govern Our Federal Government Support Operations?

By Patricia E. Healy, CGFM

Patricia E. Healy, CGFM, is an executive consultant at CGI Federal. She recently retired after serving almost nine years as deputy CFO of the U.S. Department of Agriculture. She is a fellow of the National Academy of Public Administration.

I recently retired from the federal government having most recently served as the deputy chief financial officer of the U.S. Department of Agriculture. Before I left, many of us were already discussing the upcoming transition to a new administration. Since I left, I have been part of or attended forums sponsored by the Council for Excellence in Government, the National Academy of Public Administration and others intended to examine where we have been, where we need to go and how best to represent this to the new administration.

In these forums, or accompanying hallway conversations, participants begin to reflect on the role of the Chief Financial Officers Act of 1990 in reforming financial management in the federal government. Invariably this leads to a discussion of the role of the chief financial officer (CFO) in our agencies and whether the CFO is now only focused on compliance issues (such as financial statements, internal controls) and not enough on supporting overall agency program objectives. These conversations are important, as it is always good to engage in self-examination and to respond to the ever-changing, evolving environment of the federal government. However, rather than focus solely on the role of the CFO, I wonder if we might not need to take a larger view of how we govern our support infrastructure in the federal government.

Since 1990, we have seen the emergence of chief financial officers, chief information officers, chief technology officers, chief human capital officers, chief acquisition officers and chief performance officers. They all represent infrastructure operations intended to efficiently and effectively support program mission. Yet in most cases, these operations are by law, regulation or past practice, stovepipe functions tasked with compliance objectives of their own. They are funded by ever-decreasing discretionary dollars, and compete for these dollars among themselves and with agency mission programs funded from discretionary accounts. This can create an atmosphere where the efficiency and effectiveness of the overall agency operations, infrastructure and programs, are not being addressed. Further, opportunities to leverage funds and staff resources across functional areas to solve common problems are often lost. There is no single executive in charge of the entire enterprise infrastructure, one who can view operations holistically and facilitate solutions and set the priorities across the enterprise.

So given this reality of the federal government management condition, how can we manage effectively and efficiently for strategic outcomes across multiple functions and “chiefs”? Peter Weill of the Massachusetts Institute of Technology, in his book (with Jeanne W. Ross) entitled IT Governance: How Top Performers Manage IT Decision Rights for Superior Results, reported on a study of more than 250 large global organizations and found that top-performing organizations succeed where others fail by implementing effective IT governance. My experience, and that of my colleagues here at CGI, has shown that governance functions such as effective and recurring planning, structured steering and operating committees across multiple chiefs, clear division of roles and responsibilities, and rigorous processes and monitoring lead to increased performance, accountability and control of business and IT functions.

What has your experience been in regard to successfully navigating cross-domain collaboration for strategic results? What practices have you seen work?

MONDAY: Sheila Weinberg, Truth in Accounting, on "Running Deficits When Your Balance is Balanced"

Questions on posting comments or wish to subscribe to the feed that sends blogs right to your e-mail? Find instructions here. Want to be our guest on the Blog? Contact Marie Force, AGA communications director, at mforce@cox.net.

Taking a Fresh Look at Circular A-123 Appendix A—Three Years Later

By: Robert Maitner Jr., MGA, CGFM

Robert Maitner Jr., MGA, CGFM, an at-large AGA member, is a senior managing consulting with IBM’s public sector financial management practice.

In December 2004, early into fiscal year 2005, the U.S. Office of Management and Budget (OMB) issued an update to one of its better known and widely regarded circulars, A-123, Management’s Responsibility for Internal Control. This was the first revision to the circular since June of 1995, and included for the first time the now infamous Appendix A, Internal Control over Financial Reporting, effective with fiscal year 2006. The original A-123, which was a natural outgrowth of the Federal Managers’ Financial Integrity Act (FMFIA), came into being in 1982 and was known as OMB “Internal Controls Guidelines.” The early version of the document included guidelines for organizational and management internal controls, and was tied to the requirements of FMFIA, such as the annual FMFIA statement of assurance over internal controls.

More than 25 years later, federal agencies are still preparing the annual statement of assurance (SOA), but since 2006, with a twist. The new Appendix A required for the first time a separate statement regarding internal control over financial reporting as a subset of the overall FMFIA statement. Essentially, a second statement was added as part of the original.

The establishment of Appendix A was a direct response to the passing of the Sarbanes-Oxley Act of 2002. Following a series of high profile corporate scandals and accounting improprieties during the late 1990s and early 2000s, the federal government decided to crack down on publicly held companies. President Bush signed the Sarbanes-Oxley Act in July of 2002, putting into place a series of new stringent requirements surrounding internal control over financial reporting and including annual attestations by external auditors.

In particular, Appendix A requires:

• Strengthened process for conducting and documenting management’s assessment methodology • Documentation of the assessment method and key processes such that the reader can acquire an understanding of the process flow and controls • Direct testing of key controls to determine operating effectiveness • New assurance statement for internal control over financial reporting (as a subset of the overall FMFIA assurance statement)

All in all, this translated into more work to be done on the part of the agency chief financial officer (CFO) staff, as well as subordinate organizational levels.

Now three years into the new requirements, federal agencies continue to wrestle through process flows diagrams, narratives, risk analyses and controls documentation. Entire organizations have come into existence for the sole purpose of providing services related to compliance with both Sarbanes-Oxley and Appendix A, and naturally all of the big firms have gotten into the game. Some of the larger and better-funded agencies have been able to keep up with the requirements, either through additional staffing or outsourcing, while the smaller ones may struggle with the added burden.

This all leads to the question, “how effective has A-123 been in achieving its original goals?” And “has the impact to the agencies been worth the additional effort?” It would also be in line to take a look at the progress that some agencies are making in its efforts to achieve an unqualified audit opinion on its annual CFO Act financial statements, and how they are integrating those efforts with the Appendix A activities. And is there a relationship between the level of assurance provided by an agency and the status of its audit opinion? What do you think?

TOMORROW: Joseph Kull, CGFM, Director, Washington Federal Practice, PricewaterhouseCoopers LLC, on "Can We Contract Out the Human Capital Issue?"

Questions on posting comments or wish to subscribe to the feed that sends blogs right to your e-mail? Find instructions here. Want to be our guest on the Blog? Contact Marie Force, AGA communications director, at mforce@cox.net.

Is It Time to Reevaluate the Role of the Federal Balance Sheet?

Jeffrey C. Steinhoff, CGFM, a member of AGA’s Northern Virginia and Washington, D.C. Chapters, retired earlier this year after 40 years of government service. His most recent position was managing director, Financial Management and Assurance, U.S. Government Accountability Office (GAO). He is an AGA Past National President and is known in the Association as the “father” of the Certified Government Financial Manager (CGFM) Program. We are delighted to welcome Jeff as our first blogger!

Is It Time to Reevaluate the Role of the Federal Balance Sheet?
AGA has been at the forefront in advocating simplicity in governmental reporting at all levels. A number of state and local governments have been experimenting with Citizen-Centric Reporting, and earlier this year the U.S. Department of the Treasury issued The Federal Government’s Financial Health: A Citizen’s Guide to the 2007 Financial Report of the United States Government, a nine-page summary presented in a user-friendly format. Further experimentation will continue as Citizen-Centric Reporting evolves and gains greater acceptance. I applaud these efforts and strongly support AGA’s continued leadership as a catalyst to move this initiative forward.

On a track parallel with the evolution of Citizen-Centric Reporting, there is also a need to reevaluate the broader content of federal financial statements and, in particular, the role of the balance sheet. The Federal Accounting Standards Advisory Board (FASAB) is now addressing the treatment of social insurance on the balance sheet, and I am confident that its ongoing deliberations will result in the right decision. FASAB’s earlier creation of the Statement of Social Insurance shines light on what are arguably the most important numbers on the federal government’s financial statements and represents a major achievement in developing useful financial statements unique to government. Building on this work, it is time to ask fundamental questions about the role of the balance sheet since it can never really capture the full range of the federal government’s assets and liabilities. Once we have decided on the role of the balance sheet, we could consider alternatives to the current financial reporting model that would ensure that all federal financial reporting objectives are met in a more useful way.

Take for example investments in property, plant and equipment at the U.S. Department of Defense (DoD). DoD has struggled for decades with the valuation of existing assets, and addressing this problem will take years of additional effort and a large investment. But does knowing what has been invested in an aircraft carrier that was deployed several decades ago add to the ability to manage DoD and provide accountability? I’m not inferring that this information does not have value and should be disregarded. However, other financial information may have much greater value in the context in which DoD operates and for the Congress, which is responsible for oversight and today relies on the budget process as opposed to financial statements. Some have postulated that reporting on the amount, condition and use of property, plant and equipment and on the development costs of new weapons systems in lieu of balance sheet amounts based on historical values may prove to be more useful to decision-makers while providing needed financial accountability.

The issue of the role of the balance sheet is not solely related to DoD. The current balance sheet does not and cannot really value the ability to tax and print money or put a price tag on the vast resources owned by our national government, including its investments in human capital, which are unique to government. So what is it trying to convey, and is it the right mechanism at the federal level?

At the same time, one could certainly argue that the balance sheet is so fundamental to financial reporting that it must be retained in the current form. Former FASAB Chair David Mosso, for whom I have the utmost of respect, often referred to the balance sheet as the backbone of the financial statements as it brings integrity to cost and revenue data.

My hope is that this essay engenders some debate about the future of the balance sheet given growing questions about its role and usefulness and suggestions that perhaps now is the time to think creatively on how to make financial statements more useful in the federal environment.

What do you view as the role of the balance sheet?

What steps could be taken to improve the usefulness of the balance sheet?

Questions about the blog? Want to appear as our guest? Contact Marie Force, director of communications, at mforce@cox.net.