GAO: Fed Agency Finance Processes Are a Mess

More than half of the federal agencies subject to the CFO Act are not living up to a financial-reporting mandate set out for them more than a decade ago.

They have had trouble modernizing their systems and implementing financial management processes that are up to par with the requirements of the Federal Financial Management Improvement Act (FFMIA) of 1996, according to the Government Accountability Office's most recent report on the law's progress.

The report offers no surprises, considering that the government has been unable to provide a consolidated audit opinion on its financial results because there are always some agencies — which are required under the CFO Act to provide annual, auditable financial statements — that end up having significant accounting issues and audit reports with disclaimers.

Thirteen of the 24 agencies subject to the CFO Act are not complying with at least one of the requirements in FFMIA, according to the GAO. For fiscal-year 2007, that means many of the agencies had insecure IT controls, technology systems that weren't integrated, and late filings. For example, IRS employees waste some of their time compensating for the agency's "deficient" systems when preparing financial statements, according to the GAO. As a result, "these challenges affect IRS's ability to fulfill its responsibilities as the nation's collector because its managers lack accurate, useful, and timely financial information and sound controls," the GAO says.

The federal agencies' efforts to modernize their systems often miss their deadline and cost targets, and are often "hampered by not following disciplined processes," says the GAO. Some of the agencies that are struggling with implementing financial-management systems to match the law's expectations include the departments of Defense, Health and Human Services, and Homeland Security.

In effect, these agencies' methods for financial reporting hinders their ability to turn over information that would keep their programs running effectively, according to the GAO. "Many agencies still do not have effective financial management systems, including processes, procedures, and controls in place that can routinely produce reliable, useful, and timely financial information that federal managers can use for day-to-day decision-making purposes," the GAO says.

While the GAO does not make any recommendations in the report, it prods the agencies to modernize. "If agencies continue year after year to rely on costly and time-intensive manual efforts to achieve or maintain unqualified opinions, the Congress and others may be misled as to the true status of agencies' financial management systems capabilities," the GAO adds.

To be sure, this year's assessment shows an improvement over previous years. For the first 10 years of FFMIA, an average of 18 agencies not compliance. However, the GAO suspects the actual number of noncompliant agencies this year was higher than the official 13, speculating that the language used in the agencies' guidance for following the law could have been misinterpreted and that the guidance appears to have been inconsistently applied by auditors. The GAO notes that the departments of Energy, Interior, Justice, and Labor, along with the Small Business Administration, have shown improvements and are "no longer in substantial noncompliance" with FFMIA.

According to the GAO, the U.S. Office of Management and Budget, which is responsible for making sure federal agencies comply with FFMIA, should change its auditing standards to make it clear that just because an agency has no material weakness doesn't mean it's automatically compliant with FFMIA.

For its part, OMB is working on rewriting its rules for agencies' financial management systems in addition to its FFMIA guidelines.