Recommendations and Actions
"Internal controls" are an integral part of any organization's basic management processes. Internal controls ensure that organizational missions are being met through effective and efficient means. They are intended to protect an organization's resources and assets from fraud, waste, abuse, and mismanagement. The formal internal controls program of the federal government consists of two parts: (1) the design and implementation of internal controls, and (2) the review of the adequacy of those internal controls.
The traditional view of internal controls is rooted in financial management and accounting. This view is being integrated into the broader context of "management controls." This broader view has been growing in acceptance in government circles since the late 1980s. Internal management control techniques include policies, procedures, and organizational plans, and physical arrangements.(1) These include time clocks or sign-in sheets, computer password protections, and required signatures to approve travel documents. Controls also include the separation of duties--a form of checks and balances. Effective internal management controls keep dishonest employees from paying secretarial staff the amount due an executive; and they keep Head Start grant money from being awarded to drug dealers.
Financial Integrity Act.
Concern over inadequate management controls led Congress to enact the Federal Managers' Financial Integrity Act (FMFIA) in 1982. The act establishes a review process of internal accounting, administrative controls, and accounting systems. Each agency must report annually to the President and Congress on the condition of its management controls and accounting systems, self-report "material control weaknesses," and describe the Actions that will be taken to correct the material weaknesses.(2) FMFIA requires the Office of Management and Budget (OMB) to issue guidelines and the General Accounting Office (GAO) to issue internal control standards.(3)
OMB Circular A-123, "Internal Control Systems," implements FMFIA. It requires agencies to segment their organizations and functions into assessable units or components. Reviews of these components' management controls are carried out through Risk Assessments, Management Control Reviews, and Alternative Management Control Reviews as prescribed by OMB. OMB's guidelines are intended to place the responsibility with the line manager to assess the adequacy of the management controls of his or her organizational component.
Typically, however, small staffs in each agency have been dedicated to monitoring the requirements of FMFIA and OMB Circular A-123. In addition, GAO and Inspector General (IG) staffs selectively review agencies' management controls. Therefore, the annual reports are a combination of material control weaknesses that have been uncovered by managers, management control staffs, GAO, and/or the IG.
Action on Weaknesses.
According to OMB, since 1982, agencies have reported approximately 4,500 material weaknesses and corrected 3,855 of them. Currently, 645 material control weaknesses are pending.(4) Overall, the reports indicated that the majority of the weaknesses had been disclosed by IG or GAO staffs. Some agencies, such as the Department of Veteran's Affairs, rely on IG staffs to disclose problems with management controls. Others, such as the Department of Health and Human Services (HHS), rely more heavily on management staff to disclose the weaknesses. In 1992, the majority of HHS' material weaknesses had been disclosed by line managers.(5)
Some agencies have high-level management councils that assist the agency head in determining which identified weaknesses should be included in the annual report and in tracking the progress of corrective Actions. In addition, the interagency Management Control Coordinating Council exists to share information across agencies regarding the implementation of FMFIA.
Need for Change
The Management Control Coordinating Council believes FMFIA has the potential for being an early warning tool.(6) "Are there other HUDs today?" the Assistant Comptroller General for Accounting and Financial Management asked rhetorically in his 1990 testimony to Congress. "Unfortunately, I believe there are," he continued.(7) For this reason, the government needs a tool such as FMFIA to provide an early warning of problems. However, FMFIA and OMB Circular A-123 have not ensured that effective management controls were in place. As a result, scandals occurred, wasting the taxpayers' dollars and eroding their confidence. If proper management controls had been in place, or if their ineffectiveness had been brought to the attention of high- level executives sooner, these debacles might not have occurred.(8)
Agency heads must ensure internal management controls are in place and must be sure that they are appropriate and effective. Too few or inadequate management controls may exist in some instances. Conversely, there can be too many management controls that are counterproductive and not cost-effective because they are process- oriented, not results-oriented.(9) For example, to ensure that employees are working the appropriate number of hours, management sometimes asks employees to punch a time clock each day or sign in and out on a time sheet. Would it not be more significant to show that they have completed the required work at the required level of quality?
Current Approach is Hollow.
While management controls must be cost-effective, so should the review of these controls. FMFIA and A-123 have been criticized because they are seen as hollow, inflexible procedures. One agency refers to FMFIA as "flim-flam." While many people interviewed consider management controls as important tools to safeguard the government's assets and resources, FMFIA generally is perceived as a labor-intensive, paperwork-focused reporting requirement with little positive results. It treats management controls as a separate, staff- run program, not an integral part of line management.
Many agencies have developed their own techniques for fulfilling the FMFIA requirement. Therefore, it is critical that OMB, through its circular and guidelines, give agencies sufficient flexibility to tailor their programs to their missions. However, the Internal Control Guidelines, issued by OMB in 1982, have not been revised to reflect the fact that many agencies' needs for management control differ. They prefer to have the flexibility to develop their own FMFIA programs, guided only by general policy, not detailed prescriptive guidelines.
Current Approach Does Not Make Line Managers Responsible. A key to establishing a practice of reporting problems early is to have those that sight the problems first--usually front-line employees or line managers--reporting them. However, in general, there is a lack of incentives for managers to report problems. Some managers are concerned that sanctions will result from reporting weaknesses.(10) In addition, some managers find that high-level management is sometimes uninterested in correcting management control problems(11) and that adequate resources are not available for corrective Actions. And yet, management controls are an integral function of effective management. Accountability for and the review of management controls should be in the hands of the line managers.(12) They need to explicitly be held responsible for reporting these problems and resolving them promptly.
1. Rewrite OMB Circular A-123, "Internal Control Systems," to be a succinct document that defines the policy for establishing and reviewing management controls. (2)
OMB should rewrite--not revise--its Circular A-123 and should incorporate the following concepts:
--- Emphasize that management controls are more than financially based.
--- Emphasize reliance on line managers to incorporate management controls into their regular operating practices and strategic plans.
--- Emphasize managers' accountability for results. Are the management controls appropriate and adequate? Do they help attain the desired results of programs? Are customer needs being met? Are resources and assets being used most efficiently?
--- Encourage the use of a cross-functional (program and staff) management council at all executive branch agencies. Include in its responsibilities the review of management controls in terms of operating practices as a whole and in the context of strategic and quality management. These management councils should have a membership that represents both line and staff management and should include access to an information technology specialist(s).(13)
--- Promote a role for auditors (IGs, GAO, FMFIA staffs) that is secondary to but supportive of the line managers. Auditors should review the agencies' processes for reviewing and implementing management controls.
--- Promote FMFIA as primarily a management tool to be used within agencies--for identifying management control concerns and initiating corrective Actions--and not solely as an external reporting process.
--- Encourage agencies to include management information systems experts in the development of management control systems.
--- Promote the use of the FMFIA review process as an early warning tool(14) to identify problems or "management control improvement areas" long before they create wasteful practices.
This new A-123 will set the direction for management controls and their review and allow agencies to develop the flexibility to develop their own system for management controls. Given the existence of GAO's "Standards for Internal Controls in the Federal Government," the OMB circular should be policy oriented.
FMFIA--recast as a tool for line managers to ensure that adequate and reasonable management controls are in place--should deemphasize the role of outside auditors. OMB should convey to agencies that the FMFIA annual report is not an end in itself--it is a tool to identify management concerns and bring them to the attention of high-level management.
2. Replace OMB's existing Internal Control Guidelines with a handbook on management controls. (2)
OMB, the President's Council on Management Improvement, and the interagency Management Control Coordinating Council should jointly develop a handbook on management controls to replace the Internal Control Guidelines last issued by OMB in 1982.
The new handbook would focus on the implementation of effective management controls and not on cumbersome reporting requirements. It should include:
--- definitions of key items (e.g. material weaknesses, high risk, management controls) as defined by those agencies identified as having "best practices;"
--- identification of effective agency management control councils, based on "best practices";
--- examples of how to redirect resources to correct potential weaknesses before they become real problems;
--- examples of effective early warning systems;
--- examples of combined review and reporting requirements; and
--- names of individuals who are willing to provide training and technical assistance.
The handbook should be updated periodically through supplements or complete revisions.
3. Revise government-sponsored management training to teach management control as an integral function of management, not as a reporting requirement. (1,2)
Much of the training on management controls--by OPM and the agencies- -has been geared toward the reporting and review requirements of FMFIA, not the significance of management controls as a management tool. The role of management controls, and the techniques by which managers ensure that resources are being properly used, must be a normal part of all federal managers' training.
Cross References to Other NPR Accompanying Reports
Executive Office of the President, EOP05: Reinvent OMB's Management Mission.
Improving Financial Management, FM08: Reduce Financial Regulations and Requirements.
Reengineering Through Information Technology, IT01: Provide Clear, Strong Leadership to Integrate Information Technology into the Business of Government.
Creating Quality Leadership and Management, QUAL02: Improve Government Performance Through Strategic and Quality Management.
1. U.S. General Accounting Office, Standards For Internal Controls In The Federal Government (Washington, D.C., U.S. General Accounting Office, 1983), p. 7.
2. According to A-123 and OMB guidance, a "material control weakness " is one that: significantly impairs the mission of an agency or component; deprives the public of needed services; violates statutory or regulatory requirements; significantly weakens safeguards against waste, loss, unauthorized use, or misappropriation of funds, property, or other assets; or results in a conflict of interest. A material control weakness should also: merit the attention of the agency head/senior management, the Executive Office of the President, and Congress; and/or exist in a majority of agency components or in a major agency program or activity; and/or risk or result in the actual loss of either $10 million or 5 percent of the resources of a budget line item; and/or reflect adversely on the credibility of the agency when reported to the public.
3. The implementation of FMFIA is guided by OMB Circular A-123 "Internal Control Systems" (revised in 1986), OMB's "Internal Control Guidelines" (issued in 1982), OMB's annual guidance, and GAO's "Standards For Internal Controls In The Federal Government" (issued in 1983). Many agencies have also developed handbooks.
4. Data provided by the Management Integrity Branch, Office of Management and Budget.
5. Interview with Edwin Sullivan, Director, Division of Integrity and Organizational Review, Department of Health and Human Services, August 1993.
6. President's Council on Management Improvement, Internal Control Interagency Coordination Council, "Improving the Management Control Process," July 1989, p. 7. The Internal Control Interagency Coordination Council is now called the Management Control Coordinating Council.
7. U.S. General Accounting Office, Federal Internal Control and Financial Management Systems: Major Reform Efforts Are Needed, GAO/T- AFMD-90-14, (Washington, D.C.: GAO, April 18, 1990), p.15.
8. Grosshans, Werner, "Internal Control Assessments--Are They Needed on Performance Audits?" Government Accountants Journal (Winter 1992), p. 44.
9. Camillus, John C., Strategic Planning and Management Control (Canada: D.C. Heath, 1986), p. 13.
10. Ibid., p. 19.
11. President's Council on Management Improvement, Internal Control Interagency Coordination Council, p. 9.
12. Kendig, William L., and Wayne D. Howard, "The Maturing of the Management Control Process," Government Accountants Journal (Spring 1992), p. 48.
13. This is the same council described in Creating Quality Leadership and Management, QUAL02: Improve Government Performance Through Strategic and Quality Management, Action item 3. OMB's May 1990 memo on FMFIA encouraged agencies to form a similar council. This council, as proposed, would have broader responsibilities.
14. President's Council on Management Improvement, Internal Control Interagency Coordination Council, p. 7.
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