The AGA Weblog

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?

Four Levels of Transparency

By: William Aaron

William Aaron is the chief of consulting services and innovation for Weidner, Inc.

It’s hard to recall a time when there has been more focus on the need for transparency in government. From the president on down to local elected officials, the attention to ensuring government is transparent is extraordinary—and continuing to grow.

But while transparency in government is one of those ideas that you just can’t argue against—right up there with baseball, Mom and apple pie—it’s important to note that all transparency is not created equal.

So let’s get transparent about transparency.

From our work over the past 11 years with government organizations and jurisdictions at the federal, state and local levels, we have come to understand that government transparency can be defined on four separate levels. The next time you hear someone talking about transparency in government, check and see how transparent they really are.

The four levels of government transparency, moving from least transparent to most transparent, are:

Level One:  How We Plan to Spend Money. This is the level where government has traditionally defined transparency:  What does the budget say about how we intend to spend money? It’s the first step—it speaks to what we plan to spend money on, after all. We might, for example, declare that we’re adding $500,000 to the city budget to fight truancy. Many governments are working hard but are still struggling with this first level of transparency.

Level Two:  How We Actually Spend Money. At this level, we may be able to be clear about how dollars were spent. Did we actually spend that $500,000 we budgeted to fight truancy, and did we spend it on the anti-truancy effort? At this level of transparency we are beginning to have a story of fiscal responsibility, but are not yet able to tell a story about performance, about what spending that money accomplished.

Level Three:  What we Delivered With the Money. At this level of transparency we are able to be clear that our customers got something for the money we spent. With the additional $500,000 to fight truancy, we provided X number of counseling sessions or Y number of tutoring sessions—so we know services were delivered, what sort and how many. We are building a more complete story of transparency of whether we spent the money appropriately and delivered what we intended to deliver. To be fully transparent, though, we need to report on the results customers experienced as a consequence of receiving our services.

Level Four:  What Results Were Accomplished with the Money. This is the highest level of transparency, where government gets very clear about what every taxpayer knows: that spending money is only a means to an end. That end is defined as the experience or result the customer has as a consequence of receiving the services. What difference was made? With the additional $500,000 we spent to fight truancy, did we actually change the truancy rate? Did we improve academic achievement, or increase the graduation rate? What result did we accomplish?

At this highest level of transparency, you are telling your customers the extent to which you are able to influence the results you clearly laid out in Level One—the budget. As the good folks in Oklahoma City say, “We Deliver What We Promise”—and they mean it in terms of results.

Government organizations, which are widely recognized as among the best managed in the nation, can answer these questions with objective performance information—and they use that same information to guide their management decisions, including how they allocate their budgets.

So how transparent is your organization? And—more important—how transparent do your customers expect you to be?

You can download a free self-assessment tool to help you determine how transparent and accountable your organization.

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.

Point, Click and Wow! Bringing the Power of Transparency to Federal Financial Statements

By: Andrew C. Lewis, CGFM, CPA 

Andrew C. Lewis, CGFM, CPA, is a senior manager with KPMG LLP’s government audit practice and a fellow of the KPMG Government Institute. In addition, he is an adjunct professor in the Masters of Accountancy program at The George Washington University.

I don’t know if you agree with me, but all of these new transparency websites are absolutely fascinating and are likely here to stay.

In support of the Obama administration’s open government initiative (specifically the Presidential Memorandum on Transparency and Open Government) and legislative mandates (especially the Federal Funding Accountability and Transparency Act of 2006 and the American Recovery and Reinvestment Act of 2009), federal agencies have been challenged to find ways to make government transparent, participatory and collaborative. And in a very short period of time, websites like Recovery.gov, USASpending.gov, and Data.gov have opened up volumes of government information for all to see.

Federal financial statements, though, have so far been relatively free from the requirements of these new transparency initiatives. Before being required to make our federal financial statements more transparent, what are some ways that we, as the federal accounting and auditing community, can help support this effort?

Here are some thoughts to consider:

·      How can the federal financial statements or the summary reports be made more interactive? The point-and-click interface of the transparency websites named above allow for a user to “drill down” and see detailed information based on a variety of parameters (for example, total contracts by each agency, and then the value of individual contracts by vendor). Could this same interface be applied to the federal financial statements or the summary reports? For example, imagine looking at an agency’s financial statements and being able to click on the account title for “Accounts Receivable, net” to see a listing of the largest customers making up that balance? Or, imagine clicking on the footnote table for “General Property, Plant, and Equipment, net” and seeing a listing of significant assets making up each type of property (for example, clicking on “Buildings” will bring up a listing of the most highly valued buildings owned by the agency).

·      What additional information should federal agencies include in the financial summary information section of management’s discussion and analysis (MD&A)?  The Federal Accounting Standards Advisory Board and the Office of Management and Budget currently require agencies to include the entity’s analysis of its financial statements, including such items as major changes in balances and key financial trends. The most common approach that agencies have adopted is to include pie charts or tables that summarize the financial statement line items—each of the key line items that make up total assets or total liabilities, etc.—and describe changes in total balances from year to year. Although useful, these “macro-level” descriptors may be perceived as falling short of the transparency initiatives’ expectation that even the most granular data be available for citizens to review. So, what else could be added to MD&A? What about comparison information like:

§       The agency’s largest contractors?

§       The agency’s largest grantees?

§       The agency’s customers representing the largest accounts receivable balances?

§       The agency’s largest accounts payables?

§       The largest IT system development projects?

§       The largest fixed assets or equipment acquisitions?

§       Expenses incurred by state or country?

§       Personnel employed by state or country?

·      Should federal agencies provide appropriation-level consolidating or combining statements online? Although too voluminous to include in the agencies’ Performance and Accountability Reports, should appropriation-level financial information be made available to the general public? Imagine being able to view not just an agency’s consolidated balances, but also being able to drill down to see expenses, revenues, assets, liabilities and budgetary information by each appropriation? 

·      Should federal agencies provide program and office-level reporting online? This is an area that’s also too voluminous to include in the agencies’ Performance and Accountability Reports. But, shouldn’t the general public be able to query the costs, revenues, assets, liabilities and budget authority by each accountable unit, organization or office within each agency? Again, picture an interactive database that allows a user to see costs by each reporting unit within the agency.

What do you think are other ways that federal agencies can make their financial statements more transparent? Do you think this “drill down” information is readily available from the standard books and records of your agency? Would this information have to be individually generated, or could it be located easily and made available? 

How else can the proven technology interfaces of the transparency websites be used to improve the reporting of federal financial statements?

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 essay represents the views of the author only, and does not represent the views or professional advice of KPMG LLP. 

Give GASB A Piece of Your Mind: Pension Accounting and Financial Reporting

By: Sheila Weinberg

Sheila Weinberg is the CEO for the Institute for Truth Accounting.

The Governmental Accounting Standards Board (Board) has issued an Invitation to Comment (ITC) on Pension Accounting and Financial Reporting. The ITC is intended to obtain feedback from constituents at an early stage of the Board’s reexamination of its pension accounting and financial reporting standards. This reexamination process is designed to provide the Board with an opportunity to consider whether modifications to current pension standards are required to better meet the financial reporting objectives of accountability and decision usefulness, including enabling users of financial reports to assess the extent to which interperiod equity has been achieved.

This AGA blog and those on July 24 and 29 will be used to gather your comments on questions asked by GASB in the ITC. I urge you to enter your answers to the questions proposed by click on “comments” at the end of this blog posting. If you have started to read the ITC and got overwhelmed, these comments to these blogs will be a way for you to weigh in on the issues without having to draft an official response. Please e-mail me at sweinberg@truthinaccounting.org if you want to provide very detailed answers. Of course, you can respond directly to GASB.

The topics considered in the ITC include the process on which pension accounting and financial reporting should focus; recognition of liabilities and expenses; measurement of unfunded pension obligations; the use of actuarial methods; and reporting by government employers in cost-sharing multiple-employer pension plans and reporting by pension plans themselves. Today’s blog will address the focus of accounting and financial reporting for pensions.

In answering the question related to this focus, the Board would like you to consider the following objectives:

• Accountability—Reporting that helps citizens and others to assess their government’s accountability for the efficient and effective use of public resources and assists governments to demonstrate their stewardship over those resources. 
  
• Decision usefulness—Reporting that produces information that is useful for making decisions, such as whether to buy a government’s bonds, where to purchase a home or send a child to school, how to vote on a school budget or municipal bond referendum, or how to allocate scarce resources in a budget.  
  
• Interperiod equity—Reporting that addresses interperiod equity helps one to assess whether a government is covering the costs of providing services with resources raised during the period in which the services were provided, or if the government is shifting costs to future periods. This could be particularly important for pension benefits, which may be received by retirees and their beneficiaries decades after they were actually earned.
  

The Board would also like you to reflect on two processes related to defined pension benefits. 

• The process by which an employer incurs an obligation to employees for defined pension benefits earned by them. In other words, an employee works for a government and in exchange the government owes the employee compensation, a portion of which comes in the form of pension benefits to be paid when the employee retires.
  
• The process by which an employer finances its projected future cash outflows for defined pension benefits. In other words, a government, that owes pension benefits to its employees, sets about determining how to accumulate resources to pay those benefits when they come due in the future.

GASB’s Question:

To best achieve the financial reporting objectives of accountability and decision usefulness, including the assessment of interperiod equity, which of the processes related to pensions  do you believe governmental accounting and financial reporting should provide information about, and why?

a.       The process by which an employer incurs an obligation to employees for defined pension benefits earned by them,

b.       The process by which an employer finances its projected future cash outflows for defined pension benefits, or

c.        Both processes.

 

GASB needs to hear from you about these important issues. Please provide your answer to this important question by clicking on “comments” below.  Feel free to also provide your thoughts about pension accounting and financial reporting.

A more detailed discussion of these issues can be found in the complete ITC or its related supplement. 

Read the complete Invitation to Comment.

In an effort to obtain comments from a wide audience the Board has prepared a Plain-Language Supplement.

Insight into the Social Security Administration’s Performance and Accountability Report

By: Mary Glenn-Croft

Mary Glenn-Croft is the Social Security’s Administration’s (SSA) Chief Financial Officer and Performance Improvement Officer and serves as the Deputy Commissioner for Budget, Finance and Management. The Certificate of Excellence in Accountability Reporting (CEAR) for SSA’s FY 2008 Performance and Accountability Report (PAR) marks the 11^th consecutive year the agency has won the award.

Winning the CEAR is a prestigious honor that represents a significant accomplishment for a federal agency and it is the highest form of recognition in federal financial reporting. SSA is honored to be recognized again this year. We prepare our PAR with the goal of enabling the president, Congress and the public to assess the effectiveness of our performance and stewardship of resources entrusted to us to effectively carry out our programs.

As an agency that has a significant role in improving the economic well-being of the nation as well as being the steward of the trust funds, the focus on accountability and performance information is of utmost importance. Creating a report that is both easy to access and readable by all audiences enables us to be fully transparent to the public. Our PAR has a wide audience that uses the report for multiple purposes. The president and Congress use the report to assess how well we are performing our mission with the resources provided. Agency management uses the information to effectively manage resources and make day-to-day decisions on workloads. In addition, the public uses the report to assess how well we are managing taxpayer dollars that have been entrusted to us to deliver the programs and services they deserve.

As many agencies can attest, winning the CEAR is no easy task. It takes a true team effort to produce a report that is not only compliant with the applicable laws and guidance, but that is easily understood and addresses the major issues we face. With the leadership and strong support of our commissioner, there are many components within SSA involved in the production of the PAR. We all work closely together throughout the year to ensure the process goes as smoothly as possible. SSA’s Office of the Inspector General contributes a great deal to the success of our report.

Each year we begin production of the PAR by examining our strengths and weaknesses from the past year, allowing us to refine our process and develop new approaches to make each report more useful and informative than the last. We use the performance results in the report to enhance the quality of program management and support policy and resources decisions, which ultimately improves our service to the American public. We also use the feedback from outside sources, including the AGA and Mercatus, to enhance our report. Each year we attempt to accommodate all the comments from AGA’s CEAR Review Panel.

In developing the PAR, we keep specific objectives in mind—linking performance to our strategic goals, integrating performance and financial information, and demonstrating SSA’s commitment to sound stewardship principles. Each year we establish performance goals in support of our Agency Strategic Plan to gauge our success in achieving our strategic objectives. The published results of our performance serve as a report card and trigger a process of continuous improvement.

Integrating performance and financial information so that users of the report can plainly see how we are using financial resources to achieve results is vital. Including a discussion of our financial statements and the independent auditor’s report on the financial statements provides that link between program performance and financial performance.

The PAR is our vehicle to communicate to the public SSA’s continued commitment to responsible stewardship by displaying how well we managed our finances, performed in administering our programs throughout the year, and how well we accomplished our mission. We have received 15 consecutive unqualified financial statement audit opinions, and we have received an unqualified opinion concerning our assertion about the effectiveness of the agency’s systems of accounting and internal control since FY 2005.

Achieving each of these objectives enables us to produce a report that is beneficial to many different audiences on many different levels. Being fully transparent and accountable to the public has never been more important than it is today. Accountability reporting is an evolving process and the standards for excellence will be continuously raised. Are you ready?

Has the Federal Government Created an Embarrassment Waiting to Happen?

By: Harold I. Steinberg, CGFM, CPA

Harold I. Steinberg, CGFM, CPA, is the technical consultant for AGA’s Certificate of Excellence in Accountability Reporting Program.

I recently attended a meeting at the National Academy of Public Administration (NAPA) on the American Recovery and Reinvestment Act. The first speaker was an OMB staffer who explained the guidance OMB is providing the agencies for the distribution of the monies and the subsequent reporting of how the monies are spent. OMB appears to be requesting a ton of information, more for transparency than for control. What struck me was that, as to be suspected, the OMB staff person was bright, articulate and knowledgeable. But he was very young and relatively new to government. He also said he is the sole OMB staff working on the Act.

The next speakers were the heads of the Governors, State Budget Officers, County, City, and City and County Management associations. They discussed their principals’ needs, expectations, concerns, etc.  Some horror stories were told. For instance, although the goal is to have the monies spent as soon as practicable, a recent memo extolling “prudence” has the Federal Highway Administration (FHA) conducting reviews of state government proposals for the placement of highways, whereas heretofore the FHA basically accepted the states’ decisions.

The last speaker was the GAO staffer who is heading GAO’s effort, mandated in the Act, to review and report bi-monthly on the use of the funds by selected states and localities. In describing, in great detail, how the monitoring will be done, he mentioned discussions had already been held with the Recovery Accountability and Transparency Board (established by the Act to coordinate and conduct oversight of recovery funds to prevent fraud, waste and abuse), the inspector generals, the state auditors and the local government auditors. It struck me that there is already a network in place, that is, the inspector general community and the Intergovernmental Audit Forums, ready to conduct a robust oversight of the Act's implementation.

The bottom line is that in the desire to assure accountability (the companion to transparency), the government will have more persons auditing and investigating the functioning of the Act, than managing its implementation. The Act designated more than $250 million for the Government Accountability Office, Recovery Accountability and Transparency Board, and Offices of Inspector General to audit and investigate, yet hardly anything to manage the expenditure of the $787 billion.

The Act’s purposes are noble. But if the $787 billion is to be spent absent fraud, waste and abuse, and the public is to know that the Act’s the purposes have been met, certain things are needed. 

The first is accounting systems that process and record the disbursements efficiently, accurately and in a timely manner. The problem here is the capacity of the existing infrastructure to handle the huge increase in transactions, particularly since the personnel and systems are already bending under the weight of ever-increasing processing and reporting requirements. Think about the Department of Energy systems and personnel that currently process a budget of approximately $26 billion a year. The Recovery Act requires them to disburse an additional $40 billion without any increase in personnel. 

The second is controls, to assure the monies are used wisely and only for the purposes intended in the legislation. The major risk here is that in the desire to assure the money is used only to promote economic recovery and for investments that promote long-term economic benefits and increase economic efficiency, too many controls are injected.

The third is reporting, supposedly to assure transparency. Transparency, however, is not an end in itself. Transparency does not require a file dump. Transparency is a tool to assure accountability. The information required for transparency entails striking a balance between the value of the information and the risk of seeking too much.

The last, and maybe the most important thing, is determination of results. How effective were the programs on which the monies were spent?  Were they the best choice?  Answering these questions requires that people make decisions about the metrics and then specify, announce and use the metrics.

Two hundred and fifty million dollars is a lot of money for finding problems. Ironically, absent adequate attention to the four elements of accounting, controls, reporting and determining performance, $250 million won’t be needed. The scandals and misuses of funds will be as visible as the cherry blossoms around the Tidal Basin.

This administration’s mantras are “Don’t waste a crisis” and “Invest in the future.” Wouldn’t it have made more sense to take the $250 million and use the economic meltdown as the reason to build the management capacities to properly spend the Recovery Act monies, and then use those capacities to continue to serve the government’s management needs?

The PAR Pilot

By: Hal Steinberg, CGFM, CPA

Harold I. Steinberg, CGFM, CPA, is the technical advisor to AGA's Certificate of Excellence in Accountability Reporting (CEAR) Program.

The recent Federal Financial Management Conference included an excellent session titled Improving the Relevance of Financial Reports-PAR Pilot Three representatives of agencies that opted to issue their Performance and Accountability Reports using an alternative format extolled the Pilot Program and expressed hope that OMB would continue permitting the alternative.

AGA supports the Pilot Program approach, as evidenced by its report You’ve Come A Long Way Baby: An Evaluation Of The Federal Agencies’ Annual Financial Reporting (See http://www.agacgfm.org/publications/EvaluationPilotProgram.pdf). The reason is not that preparation of the traditional Performance and Accountability Reports (PAR) is too time consuming or the reports are supposedly not “read.” Rather, now that the agencies have achieved a high level of transparency with the original reporting approach, it makes sense to adjust the formats to be more responsive to the limitations associated with shrinking agency resources, take greater advantage of the Internet, and provide the public with the information it wants/needs in a form and depth appropriate for those wants and needs. In doing so, however, certain premises should be acknowledged.

First, it is fallacious to assume the primary reader of the PAs was to be the public—who we know prefers their information in one minute sound bites. Nor does it make sense to dismiss the use of the PARs by OMB or Congress as no more than “reference” books. Does anyone believe PARs were meant to be read like novels?

Second, regardless of who, if anyone, reads the PARs, one of their primary values is that they are the last link in a process. PARs assured that certain beneficial activities, which might otherwise not have been done, were done. For example, does anyone think that absent the requirement to publish audited financial statement, the agencies would have cleaned up their accounting systems; or absent the requirement to report measurable performance results, they would have established meaningful, quantifiable performance goals and indicators and accumulated the data that indicated progress?

Thus it is important to recognize the appropriate purposes for each of the pieces of the Pilot and to construct the reports accordingly.

• The Agency Financial Report should be the vehicle with which an agency fulfills its requirement to be accountable for the financial and other resources with which it was entrusted and the care with which those resources were used. This would include accountability for performance. I am not suggesting detail performance measures as in the Performance Section s of a PAR, but at least an overview of what has been obtained and achieved. And it should be in relation to targets. Reporting accomplishments without targets is puffery.

• The Annual Performance Report fulfills many purposes: inform the OMB and Congressional Budget process; assure the availability of performance information for management; provide performance accountability to the public—but only if the information is readily accessible; and provide a vehicle for assuring agencies are using performance management as intended by the Government Performance and Results Act. I might add that although the Congressional budget process might be informed, increasing the use of the performance information will require the agencies to educate Congresspersons and their staffs about the value of performance information.

• The purpose of the Citizens’ Report is to educate “someone” about the agency by integrating information from both the Agency Financial Report and the Annual Performance Report. . One group is probably the appropriate Congressional staff, The big question is: Who else is that “someone”? I suspect it is each agencies’ stakeholders, which means each agency has to identify its audience.

• The speakers mentioned a fourth document, the two-page Budget, Performance, and Financial Snapshot. This might be the only report that the public, who as I said wants their information in sound bites, can be expected to read.

One other point. One of the speakers wants to avoid duplication between the Citizens’ Report and the Agency Financial Report or Annual Performance Report. It should be pointed out that duplication and integration are two different things. Repeating information verbatim from the latter two reports in the first report is duplication and should be avoided. On the other hand, the Citizens’ Report is to be the one document in which financial and performance information is integrated. This means the other two reports are the source of information—highly abbreviated—for the Citizens’ Report.

What are your thoughts? Do you think these are the purposes for the various Pilot Program reports? Do you think the information, in total, enables an agency to meet the objectives of demonstrating accountability for financial and program performance; informing the budget process; and supporting improved management?

The Cost of Transparency

By: Thad Juszczak

Thad Juszczak, a member of AGA’s Washington, D.C. Chapter, is a director with Grant Thornton LLP, a retired federal budget officer and the AGA National Treasurer.

Accountability and transparency are two concepts on everyone’s minds (and blogs) these days, thanks to the American Recovery and Reinvestment Act (Recovery Act). Accountability has been around for a while; it means that someone specific is responsible for achieving performance results. (Most of us know that AGA’s mission is Advancing Government Accountability.)

Transparency is a newer concept. It means that the things you are doing to achieve performance results are open and (more important) understandable. Simple openness is not enough, and posting every financial transaction to a website is not transparency. That’s obfuscation. USAspending.gov started to make federal expenditures transparent, but I think the jury is still out on how effective it has been.

While most people support the goals of the Recovery Act, not everyone is confident that it is the appropriate or sufficient approach. The administration addressed this concern by promising unparalleled transparency for Recovery Act funds. We won’t need someone else’s assessment about whether the Recovery Act is successful; it will be so transparent that we can see for ourselves.

Accountability is absolutely essential for all government programs. We must know that someone is achieving performance results. Agencies already report on results under the Government Performance and Results Act (GPRA). Transparency seems like a good idea, but as I read the Office of Management and Budget’s 62 pages of “Initial Implementing Guidance,” it occurs to me that it is also expensive. There is going to be a lot of new tracking and reporting of Recovery Act spending by agencies. A new website, Recovery.gov, provides a portal to Recovery Act transparency. Of course, all this tracking and reporting will come on top of everything else that agencies are already doing.

Fortunately, the Recovery Act includes provisions for agencies to use a small percentage of those funds for “management and oversight purposes.” I looked at one agency, the Environmental Protection Agency (EPA), and saw that it received $7.2 billion in Recovery Act funds, primarily for state and tribal assistance grants. The “management and oversight purposes” funds were up to $90 million, with another $20 million for the inspector general. I don’t know if EPA will need this $110 million (or more), and admittedly it’s not a lot of money compared to the overall Recovery Act funds in the agency, but we should recognize that transparency for the Recovery Act could cost $110 million just at EPA. That money could have gone to climate control or clean water, or maybe not have been borrowed at all, saving future interest costs. As funding for transparency, this money doesn’t actually improve any program.

If transparency is good for the Recovery Act, would it be good for the entire budget, or do the circumstances of the Recovery Act require something special? Does USAspending.gov provide sufficient transparency for the budget? Would the cost of transparency drop if all major government expenditures were required to be transparent? Is transparency where we want to spend our money? Is transparency a necessary condition for accountability or can you have accountability without transparency? Does transparency mean that we don’t trust government employees to do the right thing?

And finally, how much transparency do we really want? I can hear Jack Bauer now as he rescues America one more time: “Just tell me what you want, give me the money, and get out of my way.” 

Takin’ Care of Business Or If You’ve Got the PAR, We’ve Got the Time—Participate in the CEAR Program

By: Evie Barry

Evie Barry is AGA’s director of performance reporting.

The Certificate of Excellence in Accountability Reporting (CEAR) Program is starting its 11^th year. When AGA’s CEAR Program started reviewing federal Performance and Accountability Reports (PARs) in early 1998, only six FY97 reports were submitted for review and no certificates were awarded. Last year, the CEAR Program received 24 FY07 reports and 17 agencies received the Certificate of Excellence in Accountability Reporting. Our program has proven to be a major factor in the steady improvement of the reports, thus resulting in a record number of award recipients.

Last year, the U.S. Office of Management and Budget (OMB), desiring that performance and accountability be even more meaningful and transparent to the public, initiated a Pilot Program. The Pilot Program allowed agencies to explore different formats that would allow them to tailor their financial and performance reporting to their constituencies, enhance the presentation and yet comply with all statutory requirements. The CEAR Program reviewed five “pilots” and two received the Certificate.

For the FY08 PARs, 20 of the 24 CFO Act agencies received a “clean” audit opinion and the number of material weaknesses decreased from 39 to 32. Also the U.S. Army Corps of Engineers, a Department of Defense component, received a clean audit opinion for the first time, while the Department of Transportation received not only a clean audit opinion, but had no material weaknesses. Now that’s progress!

New for FY08 reports, in addition to requiring agencies participating in the pilot to prepare a Citizens’ Report (the new name for the Highlights Report), OMB is encouraging the other CFO Act agencies to do likewise. The Citizens’ Report is limited to 25 pages and should identify the relationship with the PAR. In addition, the Citizens’ Report should also include a two-page “snapshot” that would provide key takeaway points on the agency’s mission and organization; budget overview; cost of operations; performance on high-priority outcomes; future challenges; and financial results. Sound familiar? Yes, those components are very similar to what AGA recommends be included in a Citizen-Centric Report.

As I was reading Ken Bresnahan’s blog on Monday, it occurred to me that the federal government is recognizing that being transparent is fundamental to trust in government. If reporting is integral to building trust, then providing practical, understandable and useful information to accurately assess the government’s financial position must go beyond financial statements. Government’s activities must be identified in terms of measures with efficiency and effectiveness information included. 

So why submit to the CEAR Program? Because the teams of reviewers take an objective and candid look at the PAR or Pilot Program Reports and offer recommendations to improve their quality using the AGA Guidelines, which are revised each year to reflect the statutory and regulatory requirements. These reports are the most important vehicle for explaining what agency dollars are buying and how its programs are being managed. Now, with the Citizens’ Report and snapshot, the agencies are offering easy-to-read documentation of the agency’s affairs.

As Steve Fisher, CFO of the Federal Trade Commission (an FY07 award recipient) stated, “Although we did not receive a CEAR award for our FY 2006 PAR, we used the CEAR review team comments to maximize the benefit of the evaluation. The PAR team used the comments received from the reviewers to improve the presentation of information and make the report more useful to the reader. AGA’s CEAR review is extremely valuable. The independent observations of the experienced and independent members of the review team have proven to be very beneficial.”

What are your thoughts on the program?