The AGA Weblog

American Recovery and Reinvestment Act: Successes and Challenges

By: Robert Maitner Jr., CGFM, PMP

Robert Maitner Jr., CGFM, PMP, is a senior managing consultant with IBM Public Sector Financial Management.

The American Recovery and Reinvestment Act (Recovery Act) of 2009 set into motion the largest government intervention into the economy since the Great Depression. The Recovery Act (public law 111-5) was passed in February of 2009, the result of the new administration’s initiative to stimulate the economy with $787 billion worth of additional government spending. The package includes spending on health care, education, expansion of unemployment benefits, investments in infrastructure and energy programs. By the end of August 2009, about 20 percent of Recovery Act funds had been expended on to tax reductions to both citizens and businesses.

Initial assessments of the effects of the Recovery Act were mixed, with some economists predicting in March 2009 that more would be needed (upwards of $500 billion) to see positive results and economic growth, while others questioned the need for the stimulus at all. The bipartisan Congressional Budget Office (CBO) concluded that while the Recovery Act would increase economic output and employment in the short term (with an increase in the Gross Domestic Product, or GDP, between 1.4 and 3.8 percent by the end of 2009), the GDP would actually realize a net decrease by 2019 between 0.1 and 0.3 percent. 

As we near the end of 2009 and approach almost one full year of both the new administration and the passage of the Recovery Act, it is natural to stop and assess the true impact of the stimulus package as well as challenges associated with its implementation nationwide. And we can be assured that government officials and politicians on both sides of the aisle will mark the occasion to make arguments both in favor and against this unprecedented level of government involvement in the economy?

On Friday, Oct. 30, the Obama administration reported through its Recovery.gov public site that the stimulus generated or saved 640,000 jobs nationwide.

It makes sense to take a moment and look at what the Recovery Act has meant to those directly involved in implementing its programs. 

For example, what has the Recovery Act meant to both federal as well as state and local agencies overseeing programs being funded by the Recovery Act? How are the funds administered, and what are some of the challenges associated with accepting and using Recovery Act money? And what about oversight and accountability? 

American taxpayers not only want to see a return on their investment, but also want to be assured that the funds are being spent appropriately and are subject to a full accounting for each dollar.

Tennessee's ARRA Audit Efforts

By: Kathy Anderson, CGFM

Kathy Anderson is assistant director for communication and coordination for the Division of State Audit, Comptroller of the Treasury, State of Tennessee.

As I’m sure is the same in other audit organizations, we in the state of Tennessee have recognized the need to jump in and help ensure accountability regarding ARRA money. Now, not later. And on an ongoing basis. The expectation, not only from the federal government, but also from the citizens and from our own general assembly, is that the auditors will take extra care to ensure that internal controls are in place, ARRA funds are not misspent and that problems identified are reported immediately.

After Gov. Phil Bredesen set up the Office of Tennessee Recovery Act Management and established a czar, Comptroller Justin Wilson appointed a liaison from our office. This liaison has been largely responsible for keeping up with the centralized ARRA efforts and for updating the auditors on decisions made by the office. 

Education and Assistance

To help with accountability, the Office of the Comptroller of the Treasury is taking two approaches. We recognize the increased risks of noncompliance in the smaller governments. So we have increased our efforts to educate and assist those governments with ARRA grants to ensure the rules and expectations regarding these monies are reinforced. This educational effort has included coordination with local government assistance organizations, letters to local governments explaining expectations and available guidance, presentations, meetings and website links to appropriate guidance. 

We have continuing concerns about the money sent on to the municipal level. Our office does not directly perform the audits for municipalities. We would like to see some additional audit work and assistance at that level, but to require additional, real-time audit work from the CPA firms would inevitably result in increased audit fees—audit fees these municipalities can not afford. So we continue to strategize and to at least provide some educational assistance to the extent we have resources available.

Detection and Deterrence

Of course, nothing assists more with accountability than efforts to detect and deter. We quickly dispatched some small audit teams to look at expenditures on multiple levels. Auditors have done some quick reviews at the state level, the county level and the subrecipient level. These small audit teams are being “noisy” in their work. We want all Tennessee recipients to be on notice that we are out there looking to make sure these funds are spent appropriately and that they could be next up for a review.

These extra reviews, focused on ARRA funds, are in addition to our efforts to review internal controls and start examining compliance, largely in conjunction with the Single Audit work.  We have a very ARRA-centric approach to that work as well.

Questions

My point here is that we are pushing forward in our auditing efforts. The citizens are relying on us to do this right. The state of Tennessee is committed to compliance, and we think it is important to do what we can to assist in that effort.  And I know there is much more to be done. So my questions are:

To the government auditors—What steps are you taking to audit ARRA funds? 

To those charged to look over local governments—What steps are you taking to ensure proper accountability at the local level?

To all accountability professionals—Where are the biggest risks, in your opinion, or areas where you have already seen problems with ARRA funds? What are you doing to mitigate those risks?   

Think Big! Act Courageously! Make a Difference!—The Era of ARRA

By: William A. (Billy) Morehead, Ph.D., CGFM, CPA

AGA National President William A. (Billy) Morehead, Ph.D., CGFM, CPA, is chair Division of Accountancy, CIS, and Finance, Delta State University.

In fewer than two weeks, Oct. 10, 2009 to be exact, the first report to www.recovery.gov is due from all the recipients of American Recovery and Reinvestment Act (ARRA) monies. During these past seven months since the passage of ARRA, I have witnessed unprecedented cooperation and interaction between the federal and state governments—I could not be more proud of the way our governments have interacted.

In March, I attended the National Association of State Controllers meeting in Maryland. Numerous concerns were raised about implementation and reporting requirements. ARRA was barely a month old and many people at both the federal and state governments were feeling their way through the numerous pages of requirements. Representatives on both sides started charting this unprecedented course of cooperation, and AGA was there!

Throughout the spring, AGA was diligently working with representatives at all levels of government to continuously improve the ARRA accountability and reporting process. AGA held informative ARRA sessions in Baltimore, Portland, Kansas City and Boston. (See AGA’s Intergovernmental ARRA Report.) Others are being considered. The National Association of State Auditors, Comptrollers and Treasurers (NASACT) held its annual meeting in August. Again, a public hearing on ARRA was included. At each of these AGA and NASACT meetings, key representatives from each level of government were in attendance to discuss the status of ARRA and the latest developments. Following each event and the candid discussions of the issues and concerns, the reporting responsibilities related to ARRA were continuously improved—all because each side of the discussion came together at the same table and freely and frankly discussed the progress and concerns. Often, both parties left the table with new clarity and appreciation for the other; and, most important, progress was made.

The culmination of these unprecedented efforts will become evident during October when these first reports are due. Between the 10^th and 31^st of October, recipients and grantors of the ARRA funds will be reviewing and making necessary adjustments to reported data before the public release Nov.1. I’m sure all eyes will be on www.recovery.gov to see the data. 

This first round of reporting is likely not to be perfect, but it will be unprecedented. And, it will likely forever change how the public receives data from our governments. Our data will likely become reported promptly after the close of an accounting period; it will require us, as government financial management professionals, to be as transparent and accountable in ways and using technologies we have never have before—and that’s good!

All along the way, AGA has been there, “Thinking Big! Acting Courageously! and Making a Difference!”

AGA's Fourth Annual Internal Control & Fraud Conference Under Way in Washington, D.C.

AGA’s Fourth Annual Internal Control & Fraud Conference got under way this morning in Washington, D.C. The more than 500 attendees heard first from Earl E. Devaney, Chair, Recovery Accountability and Transparency Board, Executive Office of the President, on “The Role of the Recovery, Accountability and Transparency Board in Safeguarding Federal Investments from Fraud."

The board was created by Congress as party of the Recovery Act. Ten specific federal inspectors general were appointed to the board, plus two additional IGs who were appointed by the president. With Devaney serving as chair, the total membership is 13.

As part of the mission of the board, a new federal agency had to be established, so there’s been a lot of administrative tasks to attend to. The board has also overhauled the recovery.gov website, which will debut on Sept. 28 with all-new functionality.

“We knew this website had some failings and needed to be improved considerably to meet the expectations in the act, which is a historic level of transparency,” he said. Contractors were hired to build a new site. “I think this website is going to be one of the better websites in government.” Devaney described it as visually pleasing, useful and highly interactive. “We’re going to be displaying every contract, every dollar that we can on a map.”

Users can punch in their ZIP code to see where the projects are in their area and then they can click on the project. The contract will pop up and citizens can read it.

Federal contracts can be hard to read and understand, he said. “But it’s all going to be there. That’s the key. It’s all going to be there for millions of Americans to see.” The old website is getting 32,000 hits per minute and Devany expects phenomenal interest in the new website. “We’re hoping that people come into this website and stay,” he said, adding, “It’s going to be a very interesting experiment in transparency.”

Another website the board has built is federalreporting.gov. Recipients of the Recovery Act money have to register by Oct. 10 and have to start reporting their spending. By Oct. 31 they are required to have this information presented correctly on the website. Will all the data be right? Probably not, Devaney conceded. “There will be instances when the data doesn’t match what the federal agencies are reporting. In some cases, it may change the way the federal government does business.”

The other side of the board’s mission is accounting for the $787 billion. A Wall Street Journal reporter asked Devaney to comment on the certified fraud examiners claim that up to 7 percent of the money could be lost to fraud. “If there’s that much fraud, you’re going to have to enter the jungles of Costa Rica to find me because I won’t be around,” Devaney said.

Early on in the Recovery Act process, the federal IGs met and agreed this had to call for a different approach than detecting fraud, waste and abuse by looking at things after the fact and realizing something had happened. “We had to get our heads around prevention. What can we do on the front end of this pipeline?” With 29 IGs in 28 agencies involved, a focus has been on training along with state and local partners. Thousands of people have been trained, he said, and we’re monitoring every contract that comes out. “It’s the right thing to do in this type of situation. We’re leveraging all kinds of partnerships.”

In all his years in government, Devaney said he’s never seen state, local and federal authorities getting together the way they have on this. “The risks are so profound and we all share that risk.” Governors, mayors and IGs all feel the concern about embarrassments. “There’s a lot of eyeballs on this money, and we’re leveraging our collective resources as best as possible.”

He said he’s heard many complaints from states about not receiving money to implement the Recovery Act. Devaney can’t fathom why Congress didn’t include funds for that. OMB has made some minor adjustments and there are bills pending to get more money out there. “Frankly, it’s getting a little late in the game for that,” he said. “I hope that happens—even if it’s late. States were hurting before this. To lay this on states is very traumatic and problematic.” Despite these issues, Devaney wants states to see his board as a resource they can come to for help.

A third element of the board’s work is the construction of a huge database. “This is going to be the richest effort that the fraud community has made on spending—ever,” Devaney said, adding that there will be strong analytic tools associated with this effort.

What do I think of the odds of this money being subjected to fraud or waste? Devaney asked. “I think we have half a shot because every dollar is ‘tagged’ as a recovery dollar with a Treasury code. The website will track and make transparent to the American people what is being done with the money.”

He said the new website is going to be the best tool the press has every gotten. Devaney had a number of prominent press people say to him, “We can’t wait.” The media will be looking for the $900 hammer story, and they will find it, believe me, he said.

“This website will unleash a million citizen IGs,” he said, which will cause issues if they all try to call the board at once, so the infrastructure to handle that is being established. Through the calls will come opportunities we otherwise wouldn’t have known about, and we will pursue them, he said.

“If you were going to go steal money, would you steal this money?” Devaney asked. “It’s pretty darned visible. This isn’t the money I would pick if I was setting out to steal money.”

This new focus on transparency is here to stay, Devaney said. “I’ve come to believe strongly that whatever we do here will serve as the prototype for the future,” he said. “You won’t find politicians saying in the coming years, ‘Let’s do it the old non-transparent way.’ ”

Citizens have a right to expect that this board will be able to answer the question, “Where did my money go,” Devaney said. On Oct. 30 they will have the opportunity to participate in a grand experiment. “In these tough times, they should expect nothing less.”

A Look to the Future

The Internal Control and Fraud Conference continued with David Williams, inspector general, U.S. Postal Service, who spoke on "Attacking Fraud in the Digital World." Attacks are more sophisticated and more frequent. “The same environment allows us to unleash cyber bloodhounds,” he said. We can employ search engines, crawlers and relational databases that are “deadly effective.”

We are now in the age of information, globalism, terrorism and black market globalism. How do we increase our readiness? Answers are childishly simple. Generations X and Y in our work forces can probably do it if we give them the creative freedom to do so, Williams said. However, huge corporations are battling 16-year-old hackers working from their bedrooms. If we’re not careful, we create a police state with these tools.

Critical element of most crimes is to hide your identity. “The Internet allows you do that in an unprecedented way,” Williams said. “Unlike mail, it doesn’t have a return address.” With the significant growth of contractors in government not enough is being done to combat the inherent fraud, he said. While the system is not working, a tsunami of contractors is coming at us. We want them and we need them, but we have to better control it. There are now more contractors than soldiers in Iraq.

Williams talked about black swans—large-scale and unexpected events. One is the Great Depression. These events are occurring with greater frequency and colliding with each other. They’re coming at us at a time when we’re really vulnerable, at a time when we’ve cut out redundancy and controls, he said. “The absence of redundancy is very unforgiving.”

Williams stressed the importance of using risk maps to deploy resources accordingly. Something likely to cause serious consequences takes precedence over something that is merely a nuisance. Crimes are linked with economic events that lead to the bursting of financial bubbles. “At the same time the corporate world was melting down, the government wasn’t doing much better,” Williams said.

We need to increase efforts to combat conflicts of interest as well as identify and watch shadow organizations while forming partnerships to combat these criminals.

Where are we headed? We have to find the wall. We can’t make a computer that can think. There are many things they can do, but they can’t scheme or imagine. They can’t be suspicious or crafty. There’re the smartest kids in the room, but they’re innocent. We have to be the dark-side thinkers for the computers so they can help us to stop these crimes, Williams said.

Auditors are wonderful partners in putting tools together. “With continuous auditing where you’re watching things unfold in front of you and data mining—those two professions are coming together,” he concluded.

The New Reports for the Recovery.gov and State Recovery Sites

By: Anthony H. Rainey

Anthony H. Rainey is treasurer and CFO of Hyattsville, MD.

As a municipal finance officer, I think that Recovery.gov and state Recovery sites provides some interesting reports. However, many municipalities desire more intricate and customized information that portrays their respective environments. In our Government 2.0 world, we have some new expectations from municipal finance officers. We collect our revenues, manage our budgets, issue debt and manage the external audit of our financial statements. We need the information that the federal and state governments collect from our citizens.

Municipalities and the organizations and people within our boundaries provide the federal government with intricate information on income, demographics and receipts. We would like an ARRA investment in the development of delivery mechanism (the existing sites) for the following information.

ARRA Site Enhanced Information 

• Can the federal Gov 2.0 sites provide us with access to the information used by the Bureau of Labor Statistics, Department of Commerce, Internal Revenue Service, Housing and Urban Development, Housing and Human Services and Department of Transportation?
• Can the federal Gov 2.0 sites "geo-code" (for importation into our Geographical Information Systems) this information so that we can view it on maps?
• Can municipalities obtain specific information on businesses and contract dollars and payrolls with federal government contracts reported on Recovery.gov, Business Partner Network and FedBizOpps?
• Can municipalities get the detail with breakdowns by:
• North America Industry Classification System (NAICS) code that are in our municipal boundaries?
• Employee Identification Numbers (EIN) that are in our municipal boundaries?
• Local Area Unemployment Statistics (LAUS) that are in our municipal boundaries?
• Statistics by Occupation that are in our municipal boundaries?
• Consumer Price Indexes (CPI) that can closely reflect what is going on within our municipal boundaries?
• Producer Price Indexes (PPI) that can closely reflect what is going on within our municipal boundaries?
• Current Population Survey (CPS) that can closely reflect what is within our municipal boundaries?
• Can we have it on Recovery.gov so that we can download it in pdf or xls or comma separated value file formats?

Recovery.gov Requested Information

We would like to have access to the above every 45 days to enable us to utilize the information that our communities provide to you and that you refine to make it useful. You can add a lot of value by compiling in by municipal boundaries. Municipal finance officers also need Recovery.gov to provide "municipal" information on the following:

1. Changes in Population. Changes in population affect a local government's revenue because of the impact upon employment, income and property value. Population bases affect the demand for new capital outlays for infrastructure and higher levels of service, like education, public safety and recreation. Local governments that are confronted with a declining population cannot reduce their expenditures in the same proportion as they lose population. "Fixed Expenditures" like debt service, federal/state/county government mandates, and salaries and benefits are fixed and can only be reduced by eliminating programs and the employees who manage them. Population levels are intertwined with economic and demographic factors, such that a decline in population has a cumulative negative effect on revenues—the further the decline, the more adverse the effect on employment, income, housing and business activity. Can the U.S. Census Bureau provide this to us by municipal boundary on Recovery.gov to enable us to monitor our population changes?

2. Per Capita Income. Per capita income is an indicator of a community's wealth. Credit rating agencies (Moody's, Standard and Poor's, Fitch) use per capita income as an important measure of a government's ability to repay debt.

A decline in per capita income causes a drop in consumer purchasing power and is an indicator that businesses, especially in the retail sector, will suffer a decline that can ripple through the rest of the economy. Changes in per capita income are especially important for communities that have little commercial or industrial tax base, because personal income is the primary source from which taxes can be paid. Can the U.S. Bureau of Economic Analysis provide this to us by municipal boundary on Recovery.gov to enable us to monitor our population changes?

3. Public Assistance Transfer Payments. A transfer payment is associated with a decline in personal income. The number of public assistance recipients against the number of residential households in a community provides a good barometer of the safety net. Increases in the number of public assistance recipients and transfers payments portray potential increases in the level and unit cost of services because of the relatively higher needs of low-income residents combined with their relative lack of personal wealth. Can the U.S. Census Bureau provide employee benefits, government transfer payments, social assistance information to us by municipal boundary on Recovery.gov to enable us to monitor our population changes?

4. Employment Base. Employment base considers both the unemployment rate and the number of jobs because they are closely related and it is directly related to the levels of business activity and personal income. Changes in the number of jobs provided by the community are a measure of and an influence on business activity. A change in the rate of employment of the community's residents is related to fluctuations in personal income and, thus, is a measure of and an influence on the community's ability to support its local business sector.

If the employment base is growing, if its diversity provides a cushion against short-run economic fluctuations or a downturn in one sector, and if the employment base provides sufficient income to support the local business community, then it will have a positive influence on the local government's financial condition. A decline in employment base as measured by jobs or lack of employment can be an early warning sign of declining economic activity and thus, governmental revenues. Can the U.S. Department of Labor provide employment information to us by municipal boundary on Recovery.gov to enable us to monitor our population changes?

We would like to have access to the above every 45 days to enable us to utilize the information that our communities provide to you and that you refine to make it useful. You can add a lot of value by compiling in by municipal boundaries.

State Recovery Sites Requested Information

Municipal finance officers also need state Recovery sites to provide "municipal" information on the following:

1. Real Property Values. Changes in real property values are important because most local governments depend on property taxes for a substantial portion of their revenues. If a locality has a stable tax base, then the higher the aggregate property value, the higher the revenues generated. Local governments that experience rapid population and economic growth also experience short-run growth in property values because in the short run, the supply of housing is fixed and the increase in demand due to growth forces prices up. On the other hand, declining real property values affect a local government's revenue base as it typically relies heavily on property tax revenue. Controls on certain property tax increases create an imbalanced tax rate among properties. Declines in property values will not be a cause, but rather a symptom of other underlying problems. Can each state work with the tax assessors and tax collectors to provide information to us by municipal boundary on their Recovery site to enable us to monitor our property value changes? Can they geo code it to enable us to port it into our GIS?

2. Residential Development. The net cost of servicing residential development is generally higher than the net cost of servicing commercial or industrial development because residential development usually creates more expenditure demands (generally in the area of education) than revenue receipts. The ideal condition would be to have sufficient commercial or industrial development to offset the costs of the residential development. The location of new residential development is also important. Houses built on the outer fringe of a community can impose a far greater initial cost to local government than houses built within developed areas. This is because the locality must provide capital items such as streets, sewer lines, water mains, education facilities and fire stations to service the new development. The extent to which new residential development affects the financial condition of a particular community will depend on the community's economy, tax structure and expenditure profile. Can each state work with the building permit offices to provide information to us by municipal boundary on their Recovery site to enable us to monitor our residential development changes? Can they geo code it to enable us to port it into our GIS?

3. Sales Tax and Business and Professional License Receipts. The level of business activity affects a local government's financial condition in two ways. First, it directly affects revenue yields as sales taxes and gross receipts taxes are products of business activity. Second, the effect of these indicators may be indirect to the extent that a change in business activity affects other demographic and economic areas such as employment base, personal income or property values. Changes in business activity also tend to be cumulative. For example, a decline in business activity will tend to have a negative impact on employment base, personal income and/or commercial property values. This in turn can cause a decline in local revenues generated by businesses. Can each state work with the tax and license collectors to provide information to us by municipal boundary on their Recovery site to enable us to monitor our property value changes? Can they geo code it to enable us to port it into our GIS?

4. Uncollected Current Property Taxes as a Percentage of the Total Levy. Every year a certain percentage of current real and personal property taxes go uncollected because property owners are unable to pay them. As this percentage increases, there is a decline in a local government's economic health. Bond rating agencies consider that a local government will normally be unable to collect between 2.0 to 3.0 percent of its property tax levy each year. If uncollected property taxes rise to more than 5.0 percent, then rating agencies consider this a negative indicator that signals potential problems in the stability of the property tax base or is indicative of systemic problems with local tax collection efforts. Can each state work with the tax assessors and tax collectors to provide information to us by municipal boundary on their Recovery site to enable us to monitor our property value changes? Can they geo code it to enable us to port it into our GIS?

For those of you who live in a municipality, with all of the money in the information technology infrastructure that is part of the ARRA, can we have all of the above by November of 2009?

What do you think?

Make it so.

Broadening Communication on the Recovery Act

By: Helena Sims

Helena Sims is AGA’s director of Intergovernmental Relations.

The U.S. Office of Management and Budget (OMB) recently conducted a series of webinars on reporting requirements for funds received under the American Recovery and Reinvestment Act of 2009 (Recovery Act). The webinars were encouraging to those of us who care about intergovernmental relations and government transparency. Through the webinars, OMB reached out to the partners who will be critical to the successful implementation of the Recovery Act’s reporting requirements. The webinars were a good start in a communications process that must not only continue, but also be broadened.

The successful launch of Recovery.gov, which is the main vehicle for finding out how Recovery Act dollars are being spent, can only be achieved through a successful partnership between federal agencies, and the recipients and subrecipients of federal funds. The stakes are high because the public expects transparency when it comes to Recovery Act spending. Success will demand that government choreography be taken to new heights. All those who submit reports to FederalReporting.gov, which is the database underlying Recovery.gov, must know how they are going to submit them, when they must be submitted, and when data can be corrected.

Through its webinars, OMB has done a great deal to clarify these issues, but the webinars made it clear that continued communication is critical. It appears that federal agencies will provide guidance in a variety of areas, including how far down the subrecipient/vendor chain a recipient must go to gather data on job creation and retention. Recipients will also look to federal agencies for guidance on data quality tests, documentation requirements to support recipient and subrecipient reports, and internal controls used to review reports.

AGA is sponsoring “Intergovernmental Dialogues” on the Recovery Act. These forums are ideally suited to broadening communication among OMB, federal agencies, states and local governments. AGA has already conducted two of these dialogues—one in Baltimore and one in Portland, OR—and we will be conducing two more within the next month. One dialogue will be in Kansas City, MO, on Aug. 17. The other is scheduled for Sept. 1 in Boston.

Prior to the next dialogues, AGA would appreciate your thoughts on issues that are still outstanding and in need of resolution prior to the Oct. 10 deadline for filing reports on FederalSpending.gov. By understanding the issues in advance, we can make the dialogues more useful. We can make a concrete contribution to the discussion that was launched by the webinars.

Strengthening Accountability and Transparency in a Time of Fiscal Challenge

By: Jeff Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff, CGFM, CPA, CFE, is an AGA Past National President and the executive director of the KPMG Government Institute.

Presentation after presentation at the recent AGA Professional Development Conference (PDC) in New Orleans demonstrated that the government financial management and audit communities are working earnestly to implement the accountability and transparency provisions of the American Recovery and Reinvestment Act (Recovery Act). Two thumbs up to the federal Office of Management and Budget (OMB) for its leadership, which was evident throughout the conference (Danny Werfel, Acting Controller of OMB’s Office of Federal Financial Management, may have set an all-time AGA record for most speaking engagements at a single PDC). That leadership has been on display since OMB issued initial implementing guidance only one day after the Recovery Act became law. 

Two thumbs up also goes to the government audit community for its willingness to work proactively as evidenced by the efforts of the federal inspectors general and the Recovery Accountability and Transparency Board, chaired by Earl Devaney, the work of the Government Accountability Office under the leadership of Gene Dodaro, CGFM, and efforts by state and local auditors, such as Russ Hinton, CGFM, CPA, and Sam McCall, Ph.D., CGFM, CPA, CIA, CGAP, who spoke at the PDC. Most important, two thumbs up to the people on the ground, the CFOs at all levels of government, who have put in a Herculean effort under difficult circumstances to implement a new set of requirements.

Many challenges remain; some of which can be addressed through continuing hard work and the normal evolution of a new initiative, such as guidance, training, communications and lessons learned. Other challenges may take some time to complete, such as changes to systems and business processes. However, it was evident from speaker after speaker that resources are a problem and the frenetic pace may be difficult to maintain. 

From the state and local side, there are reductions in force and hiring freezes to contend with at a time the expectations for accountability and transparency have been raised considerably. It strikes me that this may not get any better in the near term given the tremendous stress on state and local budgets. A July 7, 2009 Washington Post article speaks directly to this issue. For example, California faces a reported $26 billion budget gap. Ohio has seen its rainy day fund dwindle from close to $1 billion to 89 cents. (Yes, the article said 89 cents; meaning the state could not even afford an item from McDonald’s Dollar Menu.) At the AGA PDC, federal CFOs spoke of greatly increased workloads without a requisite increases in resources to do the job. Even the federal auditors, who received more than $200 million to oversee Recovery Act spending, spoke of the stresses to their staff with 60-day reporting requirements and the huge scope of Recovery Act spending that requires audit oversight.

There is also the matter of the unparalleled federal budget deficits in this time of increased spending to stabilize the economic health of the country. That’s on top of huge existing long-term commitments across a range of federal programs, which Treasury characterized as “an unsustainable fiscal path” in its Citizen’s Guide to the 2008 Financial Report of the United States Government: The Federal Government’s Financial Health. Recognition is broad and growing, inside and outside of government, that the nation’s current fiscal path cannot be sustained. In fact, entitlement reform is now being discussed. As discussed in the Citizen’s Guide, entitlements, primarily health care and Social Security, represent the government’s largest long-term fiscal challenge. Regardless of the ultimate form or timetable for entitlement reform, current services funding levels will continue to stress the budget. For example, in June 2009, the OMB Director Peter Orszag called on federal agencies to cut spending for fiscal year 2011 by 5 percent compared to the fiscal year 2010 budget.

So what does all of this mean for the new accountability and transparency requirements in the Recovery Act? For one thing, good financial management is ever more important and should continue to be a high priority. Second, the financial and audit communities will have to find ways to be more efficient because additional resources will be difficult to justify at a time when programs are being cut and/or citizens’ needs are being left unmet. The silver lining is that our precarious fiscal situation forces people to think about what they are doing and how they are doing it. Finally, leading practices and lessons learned are becoming more important as governments do not have the luxury of reinventing the wheel.

My questions to the readers of this essay are:

• What can be done to address the need for the government financial managers to do more with less, while enhancing accountability and transparency?
• What would you suggest be done to foster greater efficiency in government finance operations?
• Given the challenges, what needs to happen for successful implementation of the Recovery Act’s accountability and transparency provisions to result?
• All things considered, what do you believe presents the greatest risk to the success of the Recovery Act’s accountability and transparency provisions?

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

October 2009: Will You Be Ready?

By: Mitch Laine, CGFM

Mitch Laine, CGFM, is an AGA Past National President and an independent educator/consultant who teaches courses for AGA and Management Concepts.

At the PDC, many sessions focused on the Recovery Act and its impact on federal, state and local governments. Much attention was given to the reporting requirements necessary to assure that the money is properly spent and achieves program objectives, and that information is made available to the public to assure transparency and accountability.

The data collection includes gathering information from federal agencies, recipients and subrecipients. Vendors receiving the money have to be identified, along with information as to jobs created. The information will be due 10 days after the end of each quarter beginning in early October.

The work necessary to develop the systems to handle the data, and to actually collect it, will be an incredible challenge. Accountability professionals at all levels of government will be involved. And obviously, planning and executing the activities necessary to meet the reporting requirements will require tremendous efforts.

On the plane returning from the AGA PDC, I was sitting next to the wife of a finance director of a large federal grant-making agency. We started talking about the Recovery Act and the impact on her husband’s job. Suddenly, an additional thought struck me. The data is due in early October. That’s the same time that federal agencies also go through year-end closing. And we all know that the effort necessary to meet the requirements to have the financial statements prepared, audited and issued by Nov. 15 is a challenging task.

So here is my thought: How are agencies going to handle year-end financial statement requirements, while at the same time meeting the new reporting requirements of the Recovery Act? What are going to be the challenges of dealing with both at once? I’m not sure of the answer, but it’s certainly something that the federal accountability community needs to be thinking about and planning for.

I have no current operational responsibilities, so I will only be an observer in this process. But based on my prior experience, I am assuming that the federal CFO offices will have a significant responsibility to assure that the data properly comes in as required, and that is why I am raising the year-end issue.

Shortly after drafting this blog, I mentioned it to two colleagues. One is a partner in a firm that does a lot of federal financial statement audits and the other is active in the federal grants community. They agreed with the concern that I raised, and had a few additional interesting reactions including:

• This effort will require lots of collaboration between the grants management and financial communities. We can’t forget that the grants community might be a bit tired by the end of September for two reasons. For many agencies, there has traditionally been a significant amount of fourth quarter grant award activity. And this year they will have the additional challenge of getting out much of the Recovery Act money as well.

• To meet the Nov. 15 financial statement reporting date, agencies need to use accounting estimates for certain balances, including the grants payable accrual. Since lots of new (never before available) data regarding grant awards will be in by Oct. 10, will there be a need to increase audit testing to assure consistency between the estimates and the actual?

• Should consideration be given to moving back the PAR/AFR reporting date? While this idea might be worthy of consideration, my thought on this is that it probably isn’t possible given the accounting/reporting and auditing contracts that are already in place.

In summary, the beginning of the next fiscal year will be busy. Will the federal accountability community be ready? What do you think?

P.S. Kudos to the AGA National Office, the PDC Host Committee, and the PDC Technical Committee for a great conference!

The Recovery Act: Staying a Step Ahead Through Effective Intergovernmental Relations

By: Jeff Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff, CGFM, CPA, CFE, is an AGA Past National President and the executive director of the KPMG Government Institute.

One key to success is staying a step ahead. This is something AGA did when it established its focus on intergovernmental relations in 2007 through the AGA Partnership for Intergovernmental Management and Accountability, which is headed by Helena Sims. Who would have thought that two years later, we would see intergovernmental relations at the forefront of government accountability and transparency with the implementation of the Recovery Act? The Recovery Act’s unprecedented accountability and transparency provisions reach all levels of government, including all 50 states and most, if not all, municipalities. In fact, almost 90,000 government entities are affected.

Now how do you get all of these various entities on the same page, or even in the same book? It will not be easy. The different levels of government will have to work together. A Jan. 21, 2009, memo issued by the Obama administration one day after the president’s inauguration said that the federal government should be transparent, participatory and collaborative. To effectively implement the Recovery Act across the different levels of government, federal agencies should coordinate among themselves to avoid duplication and burdensome and/or inconsistent requirements. Every unit of government receiving Recovery Act funds should understand what is expected and how to comply with new and/or expanded requirements and expectations. Their participation in the process and the consideration of the views of the different levels of government as implementation of the Recovery Act continues to evolve can also be critical.

Communications and intergovernmental relations will be at a premium for implementation to work effectively. The AGA Partnership for Intergovernmental Management and Accountability recently hosted two regional intergovernmental dialogues on the Recovery Act to help frame the issues and provide a forum for intergovernmental communication; first in Baltimore, MD, and then in Portland, OR. In addition, an executive session on implementation of the Recovery Act is scheduled for the upcoming AGA Professional Development Conference.

Other organizations are addressing the challenges facing governments. For example, the CFO Academy at the National Defense University recently hosted an all-day executive seminar on “The Recovery Act: Leadership Perspectives and Insights on the New Transparency Environment and Management Oversight.” The National Academy of Public Administration, through its Standing Panel on Executive Organization and Management, led by Paul Posner, Ph.D., director of the Public Administration Program at George Mason University and National President of the American Society of Public Administration, hosted a session on “The Stimulus and Intergovernmental Management: Accountability on the Line.”
Intergovernmental relations will be key to helping keep everyone on the same page. Here are some of the common Recovery Act management and compliance areas that we have identified in our work with state and local governments.

·      Section 1512 reporting, such as the capability of government systems to meet the OMB reporting guidance and whether to adopt a centralized or a decentralized data collection strategy for Recovery Act funds that flow to the subrecipient level as pass-through funding.

·      Program and performance reporting, ranging from the number of jobs created or saved, the uses of funds, the timeliness of disbursements, and the achievement of programs goals, such as educational achievement.

·      Fraud, waste and abuse considerations and the need to address risks at the outset before Recovery Act funds are expended.

·      Federal Medical Assistance Percentage (FMAP) compliance covered in the requirements of section 5001, such as maintenance of eligibility (section 5001(f)(1)), compliance with prompt payment (section 5001(f)(2)), and eligible expenditures (section 5001(k)).

·      Davis-Bacon Act wage rate requirements in section 1606.

·      Section 1605 requirements to “Buy American” for all iron, steel and manufactured goods used in a Recovery Act funded project for the construction, alteration, maintenance or repair of a public building or public work.

·      Maintenance of effort requirements, whereby Recovery Act funds cannot be used to supplant local funding and must be used for additive projects and not applied to cutbacks.

·      Certification by governors, mayors or other state and local officials that infrastructure investments have been reviewed and full responsibility is accepted as to the appropriate use of Recovery Act funds.

·      Applying for and securing funds under competitive grants.

·      Inventorying and understanding all new program-level compliance requirements where federal agencies have raised the bar for accountability and transparency through additional program requirements related to the Recovery Act.

Addressing these common issues will require partnerships at every level of government, the nonprofit community, such as colleges and universities, and the government contract community. Recipients of Recovery Act funds will be looking for common approaches to pressing issues that can be effectively and efficiently implemented and meet the accountability and transparency expectations of the Recovery Act.

In closing, my questions to the readers of this essay are:

·      How can the needed level of intergovernmental relations for the Recovery Act be best ensured?

·      What ideas do you have for addressing the common Recovery Act compliance areas of interest to state and local governments that are highlighted in this essay? Are you aware of any leading practices that could be shared across governments?

·      What impediments do you see and how can they be adequately mitigated?

·      Are there other issues of common interest to state and local governments that this essay did not capture?

·      Which areas of common interest to state and local governments covered in this essay are also applicable to the non-profit community?

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

Are You Prepared to Protect the Integrity of Recovery Act Spending?

By: Jeff Steinhoff, CGFM, CPA, CFE

Jeff Steinhoff, CGFM, CPA, CFE, is an AGA Past National President and a director with KPMG LLP.

One of the five accountability objectives of the Recovery Act is that funds are to be used for authorized purposes and instances of fraud, waste and abuse are mitigated. The Recovery Act established major oversight roles for the inspectors general and Government Accountability Office, established the Recovery Act Accountability and Transparency Board, and designated more than $300 million to these organizations for oversight.

Given the magnitude of Recovery Act spending, even a small rate of improper payments places billions of dollars at risk for fraud, waste and abuse. The federal government also expects state and local governments to embed anti-fraud, waste and abuse efforts into their administration of Recovery Act monies. The expectations are very high, as the public has zero tolerance for fraud, waste and abuse. Are the government systems and internal controls capable of addressing fraud, waste and abuse where billions of dollars are being expended quickly to jump-start the economy? If the past is prologue, the answer is probably no, as we have seen time and time again that emergency programs can spawn fraud, waste and abuse (Katrina being the most recent example). But we can learn from the past and work to mitigate problems.

While we all know that eliminating all fraud, waste and abuse is not a realistic expectation—especially where a lot of money is flowing quickly from many sources—some lessons learned can be applied to the Recovery Act. As documented in various studies and reports, here are some key steps to help mitigate fraud, waste and abuse.

·      Identify risks of fraud, waste and abuse embedded in program objectives and operations.

·      Perform integrity due diligence for contractors and others with substantial discretionary authority.

·      Provide fraud awareness training and other related training to program and project managers, acquisition officials and grant managers.

·      Evaluate the effectiveness of internal controls by testing them against various scenarios.

·      Use forensic auditing techniques to support prevention on the front end and provide ongoing monitoring and detection.

·      Monitor compliance with government terms and conditions by end-user recipients and contractors.

·      Closely coordinate and liaise with auditors and law enforcement authorities.

·      Investigate and conduct fact-finding in response to allegations of wrongdoing.

Ultimately, all the above steps should work in tandem as part of a comprehensive fraud risk management program. Let’s focus on one element—forensics. Forensics can play an important role in an agency’s program to combat fraud, waste and abuse. As discussed in my article in the AGA Journal of Government Financial Management, Summer 2008, titled "Forensic Auditing—A Window to Identifying Fraud, Waste and Abuse," forensic audit techniques used by auditors are equally applicable to management, which should be the first line of defense against fraud, waste and abuse. The article outlines nine steps to consider in implementing a forensic auditing program as part of management’s arsenal of tools to combat fraud, waste and abuse.

Other approaches may be equally effective, and there is a lot of literature on the subject and experts who can help you get started. What is important is that management avail itself of tried-and-true management techniques that have proven to be effective. If you have not already done so, take the initiative as part of your Recovery Act stewardship to establish a comprehensive fraud risk management program that has as a centerpiece the use of forensic auditing techniques. Use these tools to cost effectively help limit fraud, waste and abuse at the outset before a disbursement is made and as a means of detecting problems on the back end and plugging weaknesses in internal control. The interest of the public can be better served and their tax dollars better spent.

In thinking about the perspectives offered in this essay:

·      Is your agency prepared to effectively and efficiently mitigate fraud, waste and abuse for Recovery Act spending?

·      Do you have in place a comprehensive fraud risk management program?

·      Is forensic auditing an important part of management’s arsenal as a first line of defense to combat fraud, waste and abuse or are the use of these tools largely the purview of the audit community?

·      Do you have any other thoughts on what is needed at this juncture to help ensure the public’s expectations for Recovery Act spending is largely realized through preventive controls that effectively and efficiently attack fraud, waste and abuse at the outset? 

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