Build a Strong Financial Management Infrastructure
BACKGROUND Financial and program managers must be accountable for program results and fiscally responsible for their resources. They must be able to provide information that is essential to monitor budgets and operating performance, support good financial stewardship, and prevent waste or fraud. To meet these needs, financial systems must process, track, and provide accurate, timely, internally consistent, and readily accessible information on financial activity in the most cost-effective and efficient manner.
Government financial systems should provide basic accounting functions for accurately recording and reporting financial transactions. They should also be the basic vehicle for the integrated budget, financial, and program information that managers will use to make decisions on their programs. Financial management systems must reflect how the federal government seeks to manage its activities, and must support these activities through the integration of program functions and the use of current technology.
For years, serious financial management system problems have been reported by audits and by agencies themselves. Legislation has been enacted and Office of Management and Budget (OMB) circulars have been issued supporting improvements in financial systems. For example, the Federal Managers' Financial Integrity Act of 1982 called for review of financial management systems for good internal controls.[Endnote 1] Subsequently, OMB Circular A-127, Financial Management Systems, was reissued in July 1993.[Endnote 2] It prescribed policies and standards for executive agencies to follow in developing operating, evaluating, and reporting on financial management systems.
As agencies began to explore the upgrade of their systems and the use of off-the-shelf financial system software increased, the need became evident for basic financial systems requirements. The Joint Financial Management Improvement Program (JFMIP) sponsored the development in 1988 of the Core Financial System Requirements. That effort evolved into the development of a comprehensive set of functional requirements for federal systems. A draft update to those core requirements is targeted for issuance in the autumn of 1993. The JFMIP also developed and issued subsidiary systems requirements, including Functional Standards for Personnel/Payroll in May 1990 and Functional Standards for Travel in January 1991. A more recent project includes Seized/Forfeited Asset Systems Requirements issued in March 1993. Also, JFMIP developed drafts of Inventory System Requirements and Direct and Guaranteed Loan Systems Requirements that are under review by the agencies.
The enactment of the Chief Financial Officers (CFO) Act of 1990 specifies several requirements to improve the financial information available to agency managers, Congress, and others.[Endnote 3] These include requirements that agency CFOs integrate accounting and budgeting information, that they develop and maintain accounting and financial management systems that report cost information, and that agency financial management systems must provide for the systematic measurement of performance. OMB requires agencies to include plans to modernize and integrate their financial systems in their annual 5- year plan submission.
NEED FOR CHANGE
Current assessments suggest that the government has a long way to go to reach its goal of an integrated financial system. Fourteen of the 23 agencies covered by the CFO Act have financial systems problems that rank on OMB's high-risk list.[Endnote 4] OMB's 1992 agency inventory of 878 agency financial systems reveals some stunning facts about the condition of federal financial systems.[Endnote 5]
--Over 30 percent of these systems are over 10 years old.
--Less than 6 percent are between 1 and 2 years old.
--In over 18 percent, age could not be established with certainty.
--33 percent of agency systems do not meet functional requirements for reporting to OMB and the Department of the Treasury.
--40 percent do not meet internal reporting requirements.
--52 percent do not meet agency financial processing requirements.
--47 percent of agency systems do not meet their own internal automated data processing (ADP) requirements.
These facts raise serious concern about the fundamental effectiveness and efficiency of those agency financial management operations. Equally serious, agency financial systems are not keeping pace with technological changes in their own agencies, which may place these systems at risk in the near future.
Over the years, many resources have been devoted to improving financial systems. In OMB's 1992 inventory, 24 percent of agencies report that they are replacing or planning to replace their systems; another 25 percent have upgrades planned or under way. Still, only marginal progress has been made toward the goal of technologically current, integrated financial systems. Many of these improvements have been largely uncoordinated and piecemeal, without an adequate governmentwide framework and focused top management attention to make them work.
The CFO Act gave OMB the responsibility to review financial systems plans and the resources required to implement those plans. Agencies are required to include those plans in their 5-year plans. While this gives OMB a great deal of opportunity to influence decisions on where systems are built and when they are supported with resources, there is limited evidence to demonstrate it has been used. Where it has been used, there has been great success. For example, its influence was used to support the development of the Credit Alert Interactive Voice Response System (CAIVRS) by the Department of Housing and Urban Development. This system--used to screen federal loan applicants for federal credit delinquencies--was developed with the participation of four other federal credit agencies. Decisions on the development and funding of financial systems initiatives occur in various processes and at many levels both at OMB and in the agencies. OMB must be able to tap into the key points of these processes and coordinate and facilitate priority financial systems projects through these various processes. OMB could have a large impact on the modernization of financial systems in government, if they used this responsibility to its full potential. More concentrated efforts by OMB during this review process could direct the investment of resources toward the most critical financial systems improvements.
Concurrently, agencies need more information about where financial systems improvements are being made across government. While OMB is beginning to collect more information about financial systems through the development of an inventory, and the Department of the Treasury's Financial Management Service has information about cross-servicing, there is little effective distribution of this information to agencies. The JFMIP currently develops federal financial systems requirements and has established a role as a clearinghouse for sharing and disseminating good financial management techniques and technologies. This responsibility could be broadened to include a special emphasis on financial systems.
Through its CFO leadership role, OMB can facilitate the development of joint development projects between agencies that share interest in a particular financial function. These joint projects provide benefits for all in that they are more cost-effective than independent efforts. Further, if they are built to be flexible and transportable across agencies, then even more savings can result. OMB can also facilitate the funding of these projects through encouraging the use of multi-year or no-year funding mechanisms that recognize the long-term nature of financial systems development. Additionally, there are many instances where funding and support is available in different agencies for joint projects, but limitations on the transfers of funding between appropriations restrict the collaborative use of these funds. OMB could pursue interagency funding mechanisms that allow for these cross-agency projects. Finally, many agencies today receive financial services from other agencies on a reimbursable basis. This approach--generally referred to as cross-servicing or franchising--could be encouraged by OMB for more agencies.
As more emphasis is placed on performance measures and results with the enactment of the Government Performance and Results Act of 1993, more demand will be made for cost information, requiring additional investment in cost accounting systems.[Endnote 6] Currently, cost accounting systems are used in only a few agencies in the federal government. Today, many agencies collect cost information in their financial systems, but cannot associate the information with projects or activities, much less their current budget structure. Because of the way this information is captured, it is too often just "accounting" transaction information, relevant only to financial personnel and not useful to managers. Consequently, program managers have developed their own "cuff" systems to provide the needed financial information to manage their programs. These systems provide duplicative and often very unreliable financial data, but they do associate program information with financial information. Currently, there are neither federal cost accounting standards nor systems requirements. Both are very necessary for the development of consistent cost and related performance measurement information within agencies and across government.
Some agencies have made progress integrating cost and program performance information. The Internal Revenue Service (IRS) has initiated the development of a Cost Management Information System, an integrated system that collects operational, financial, and performance data to provide its managers with decision support information. It builds on IRS' newly implemented modern integrated budget and financial system and applies principles of continuous business improvement and activity-based management in its design. Activity-based costing is a relatively new approach to cost accounting that businesses across the nation are beginning to adopt. A recent Fortune magazine article on the new approach cites Chrysler, Union Carbide, GE Medical Systems, and Hewlett-Packard--to mention only a few--as having shifted to this new approach toward cost accounting. The article supports the premise that this approach not only seemed to give operating managers better information to manage, but elevated the value that financial people can add to the process. Islands of best practices, such as the IRS and its state-of-the-art financial management approaches, exist in the federal government. However, they need to be publicized and replicated in other agencies.
1. Ensure that agency financial systems are in compliance with the revised OMB Circular A-127. (1)
Heads of agencies should certify to the Director of OMB by December 1993 that their financial systems are in compliance or that they have updated plans in place for compliance by September 1996. Agencies not in compliance should demonstrate they considered cross-servicing or franchising for financial services, or joint agency development projects, before deciding to invest in new systems.
2. Establish an innovation fund for financial systems development. (3)
The Director of OMB should propose legislation to create a multi-year financial systems innovation fund for the fiscal year 1996 budget that awards funds to agencies that propose joint development projects for financial systems software applications. This fund should be managed by the CFO Council and made available to agencies that propose joint development projects.
3. Provide interagency funding mechanisms for joint development financial systems projects. (3)
The Director of OMB should propose interagency funding mechanisms for the fiscal year 1995 budget that should allow funding for joint financial systems development projects to be collected from various appropriations. OMB should facilitate the development of these joint projects. Such systems projects could support activities such as international payroll, revenue collection, loan processing, or others where off-the-shelf software solutions are not yet available. Additionally, OMB should ensure that these joint projects, once approved, are supported throughout the budget process and protected from cuts.
4. Establish a clearinghouse of financial systems applications, cross-servicing, and best practices. (2)
JFMIP should build on its already clearly established role as a clearinghouse to share and disseminate good financial management techniques and technologies to include a special emphasis on financial systems. This clearinghouse should be available to agencies by September 1994 as a source of information to support their shifts toward modern financial systems.
5. Dedicate a core of financial systems personnel to develop cost accounting systems requirements. (2)
JFMIP should form a core temporary staff of several agency senior financial systems personnel with cost accounting systems experience that would be dedicated to developing these systems requirements. The JFMIP should concurrently develop these systems requirements as the cost accounting standard is developed by the Federal Accounting Standards Advisory Board. They should issue these systems requirements within six months after the cost accounting standards are issued, or by March 1995.
Cross-references to Other NPR Accompanying Reports
Mission-Driven, Results-Oriented Budgeting, BGT05: Provide Line Managers with Greater Flexibility to Achieve Results.
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