We the people of the United States have a hard time keeping our finances in order. Our corporations may practice the world's most rigorous financial reporting (some recent debacles notwithstanding), but our government does not. Agencies with such lofty responsibilities as establishing justice, ensuring domestic tranquility, and providing for the common defense have a hard time even producing a financial statement. Those that do produce one often fail their audits.
All that was supposed to change starting in 1990, when President George H. W. Bush signed the Chief Financial Officers Act. The act mandated that 14 cabinet-level departments and 10 major agencies appoint CFOs and try to emulate publicly held corporations when it came to financial management. The act, and other financial reform legislation that followed, required those 24 agencies to produce annual, auditable financial statements.
Today, a new President George Bush has inherited a mixed bag of pecuniary progress. Clearly, federal CFOs have made enormous strides, establishing a new level of accountability in government financial management. All 24 agencies covered by the CFO Act produce annual statements. While only 6 received unqualified opinions on their 1996 audits, that number had tripled to 18 by 2000 — the first year in which all 24 agencies submitted financial statements on time.
But those numbers don't tell the whole story. Discount those agencies that were found by auditors to have major internal control weaknesses and those whose systems don't comply with FFMIA (the Federal Financial Management Improvement Act of 1996, which set financial information systems standards), and the number of agencies passing muster drops from 18 back to 6, points out David M. Walker, comptroller general of the United States and head of the General Accounting Office (GAO). What's more, "If you look at the 18 departments and agencies that did receive clean opinions on their [FY2000] financial statements," says Walker, "a majority of those received that clean opinion only because they engaged in 'heroic efforts' — whereby they spent millions of dollars and thousands of person-hours...adjusting journal entries and reconstructing the books."
That some agencies spend millions simply to cobble together passable statements is a major frustration for Walker, because it means they ignore underlying accounting problems that cost billions and undermine the public trust. For example, the President's 2002 Management Agenda revealed that 13 programs alone were responsible for $20.7 billion in erroneous benefit and assistance payments. Walker points out that, as in private industry, the goal of financial reform isn't the actual report; it's "to make sure that responsible federal officials have access to timely, accurate, and useful financial information."
Walker is also frustrated because, to date, the GAO has been unable to express an opinion on a consolidated annual report for the entire federal government since the first one was submitted four years ago. Nevertheless, he is confident that the government is on the right track. He cites the support of President Bush the younger, the first U.S. President with an MBA. Says Walker, "[He] has made it very clear that he wants to improve how government does business." The four principals of the Joint Financial Management Improvement Program — Walker, Treasury Secretary Paul O'Neill, Office of Management and Budget (OMB) director Mitch Daniels, and Office of Personnel Management director Kay Coles James — have met three times since last August. Previously, the principals had not met for about 10 years.
Of course, it will take much more than meetings to overcome the obstacles to a clean, consolidated financial report. Inefficient or nonexistent processes and information systems, a dearth of qualified personnel — such problems, familiar to private-sector CFOs, are writ large in the federal government. Fixing them will be no small task. Even so, one can find hopeful signs of progress, as we did when we examined three agencies that run the gamut from fiscal morass (the Department of Defense) to star-crossed achiever (the National Aeronautics and Space Administration) to financial champion (the Social Security Administration).
Draining the Swamp: Department of Defense
By far the biggest swamp in federal financial management is the Department of Defense, which, says Walker, rates "an 'A' on effectiveness — by that I mean fighting and winning armed conflicts. But it gets a 'D' in economy, efficiency, and accountability." Last year, Walker told Congress that "[t]he largest impediment to an [unqualified] opinion on the U.S. government's consolidated financial statements is the DoD's serious financial management problems."
The DoD is the world's mightiest and messiest conglomerate, with six major divisions — the Army, the Navy, the Air Force, the Marine Corps, the Office of the Secretary of Defense, and the Joint Chiefs of Staff — and 14 other defense agencies. Comparing it with a private-sector company is futile: its 2002 budget of $334 billion exceeds the annual revenues of the world's largest company, Exxon-Mobil, by more than $100 billion. The department cuts checks each month to 3.4 million civilian and military employees, and it relies on thousands of outside contractors to build and maintain its weapons systems and facilities.
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