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Improving Financial Management

Build a Strong Financial Management Infrastructure

FM05: Use the Chief Financial Officers (CFO) Act to Improve Financial Services

BACKGROUND

The Chief Financial Officers (CFO) Act of 1990 promises a new era in federal financial management and supports efforts to gain financial control of government operations. It has been hailed as "the most comprehensive and far-reaching financial management improvement legislation since the Budget and Accounting Procedures Act of 1950 was passed over 40 years ago."[Endnote 1]

The CFO Act calls for the federal government to establish a foundation of basic financial management practices that are common and considered vital in the private sector. It directs the Office of Management and Budget (OMB) to "provide overall direction and leadership to the executive branch on financial management matters by establishing financial management policies and requirements."[Endnote2] The act requires long-range financial planning, audited financial statements, integration of budget and accounting data, and development of cost information, among many other good financial management practices. It also establishes a financial management leadership structure within the Office of the President-- specifically, OMB--and within federal departments and agencies.

The act established a Deputy Director for Management, the position of controller, and the Office of Federal Financial Management, all located in OMB. In doing so, OMB became the focal point for financial management policy in the federal government. Under the act, OMB has authority to set financial management policy, which should serve to eliminate inconsistent practices among the departments and agencies. OMB is also responsible for establishing policies and providing other guidance regarding the systematic measurement of agencies' performance.

The CFOs are required by the CFO Act to be chosen from "individuals who possess demonstrated ability in general management of, and knowledge of and extensive practical experience in financial management practices in large governmental or business entities."[Endnote 3]

Deputy CFO qualification standards include "demonstrated ability and experience in accounting, budget execution, financial and management analysis, and systems development, and not less than 6 years practical experience in financial management."[Endnote 4]

The CFO Act sets a high standard for financial personnel, acknowledging the need for professionalism and competence, and provides a key element in the financial management infrastructure-- quality people. It encourages financial managers to have broad financial management backgrounds. It did not specifically address the qualifications of financial management staff, but implied that high standards should be pervasive throughout the federal financial management community.

The CFO Act also established an important organization, the CFO Council. The council is composed of OMB's Deputy Director for Management and controller, the Fiscal Assistant Secretary at the Department of the Treasury, and the agency CFOs. The council's function is to "advise and coordinate the activities of the agencies of its members on such matters as consolidation and modernization of financial systems, improved quality of financial information, financial data and information standards, internal controls, legislation affecting financial operations and organizations, and any other financial management matter."[Endnote 5] Thus, the CFO Council is an important vehicle for coordinating improvements in all aspects of financial management. With its broad agenda, the CFO Council can take the lead in developing and implementing many plans and projects that can improve agency financial management effectiveness across government.

NEED FOR CHANGE

The CFO Act requires that CFO and Deputy CFO positions be filled by individuals with proven skills in financial management. However, many of the initial CFO appointees were individuals already in place in their agencies when the Act was implemented; there was not sufficient opportunity for the President to appoint new CFOs that fully met the qualifications stated in the CFO Act. Many federal agencies are larger than some Fortune 500 companies, and the past experience of CFO candidates can help determine their ability to effectively run a large financial operation. In order for the public to become confident that the government effectively manages its finances, it is important that the senior financial managers be regarded as professionally competent, both inside and outside of their organizations. They must provide the kind of committed leadership that will bring the government's finances to a higher level of professional management.

Many of the recommendations in this report will require a great deal of technical expertise, such as the information systems integration of budget, accounting, and program data. Unless such projects are managed and operated by technically qualified personnel, the efforts to improve financial management will meet with failure. The issue of qualified, committed personnel goes deeper than just a layer or two in the organizational hierarchy. It reaches down to every level of the financial management staff. Many financial managers complain about a lack of training for their staff and a personnel system that inhibits the hiring of more qualified employees.[Endnote 6]

Recruiting and hiring technically qualified personnel is not easy under present civil service policies. For example, a former CFO for the Department of Housing and Urban Development (HUD) tried in 1992 to raise the standards for candidates of HUD's 10 regional controller positions. The Office of Personnel Management (OPM) would not allow him to specify more stringent qualifications requirements than already existed for the job category. Because OPM's criteria were too weak to screen out unqualified candidates and OPM's pre-set qualifying factors accounted for 70 out of 100 possible points, the CFO was forced to spend weeks developing a complex ranking system using the remaining 30 points. He ended up hiring qualified candidates, "in spite of, not because of, existing personnel rules."

It is apparent that while federal employees are in need of training in the field of financial management, when training is provided, it can be very effective. The Treasury Department's Financial Management Service has led the formation of the Federal Credit Management Training Institute, which has sponsored Accounting I and Financial Statement Analysis classes taught by the American Institute of Bankers at locations around the country for federal credit managers. Recent Accounting I pretests given to 390 federal employees in the field of financial management resulted, on average, in failing scores of 41 percent. Of the 457 employees who took the Financial Statement Analysis course, the average pretest score was a failing 51 percent. However, the good news is that the training was very effective. Final course test scores for the Accounting I course averaged 74 percent, and for the Financial Analysis course averaged 81 percent.[Endnote 7]

Many training programs currently exist in the field of federal financial management. They range from courses sponsored by the U.S. Department of Agriculture Graduate School and the Treasury Department, to internship and job rotation programs sponsored by agencies and OPM. There are also many conferences and seminars sponsored by such groups as the Association of Government Accountants, the Joint Financial Management Improvement Program, and the American Institute of Certified Public Accountants. However, financial management personnel do not take full advantage of the current opportunities for training in financial management. This seems to be largely due to a lack of information about the existence of such opportunities and also due to the cost of the programs. Many agencies do not have sufficient budgetary resources to pay for employees to attend courses. Agencies often are forced to pass up opportunities to train their personnel, even though the cost of the cumulative actions of untrained personnel can ultimately be higher than the cost of any training course.

Financial management training is not a need limited to personnel in the financial management field. Program managers must also be trained in the interpretation and use of the financial information that is and will be made available to them. Budget information has historically been the principal source of financial information for program managers at all levels (from Presidents and Secretaries to line managers). As improved financial information becomes available to aid managers in evaluating program performance, efforts to educate program managers have not kept pace. Currently, there is no coordinated effort to ensure that non-financial managers are informed about the use that they can make of financial information, and the role they can play in improving the management of the government's financial assets. There is also no formal method of ensuring that the financial information provided to the non-financial managers is understandable and useful.

A strengthened financial leadership structure will enhance financial managers' ability to serve line managers. The leadership structure called for in the CFO Act includes the organizational structure changes to support the newly-established CFOs and Deputy CFOs at 23 departments and agencies.[Endnote 8] The CFO is to be the principal financial officer for a department or agency, reporting directly to the head of the agency, responsible for all financial management activities. To meet these responsibilities, the CFO Office is to have authority over the various functional components of financial management: finance, accounting, budget, and financial information systems. OMB has issued a memorandum outlining the suggested financial functions that should ideally report to the CFO, but budgeting was not among the recommended functions.[Endnote 9] The memorandum serves as guidance only, and sets no requirements for CFO office structure.

ACTIONS

1. Ensure that all financial management personnel are fully qualified. (1)

CFO candidates should have relevant experience and stature within the financial community. Heads of agencies should ensure that the deputy CFOs are equally qualified, because with the CFOs they can form a strong team promoting good financial management practices within their agency. OMB should enlist private sector associations of financial executives to provide names of qualified candidates, or to develop a rating system of candidates for high-level positions much like the American Bar Association provides for U.S. Supreme Court nominees.

Agencies should improve the quality of personnel hired into financial management positions. They should seek out financial management candidates in the public and private sectors with strong backgrounds in accounting, finance, and information systems when vacancies occur at all levels. Agencies should ensure that vacancy announcements are open to all qualified candidates. Agencies should be able to specify that candidates are required to have certifications if appropriate, such as certified public accountants, certified management accountants, certified internal auditors, and certified fraud auditors, and other qualifications in the fields of information systems, budgeting, and finance. Other National Performance Review (NPR) recommendations dealing with personnel issues suggest the decentralization of the recruitment process, which would allow financial managers to raise the qualifications screening factors in order to ensure that the most qualified candidates will score at the top of a list of ranked applicants.[Endnote 10]

2. Coordinate efforts to provide low-cost, effective training for financial management personnel. (1)

The CFO Council should foster the design and coordination of an extensive array of training options for financial management personnel by May 1994. The Council should seek out low-cost and no- cost training alternatives and reallocate existing training resources in a more cost-effective manner. Agencies should track the training of their personnel, both individually and in aggregate. This tracking should be reported by agencies to the CFO Council beginning in May 1994 to encourage a competition among the agencies and departments for a "best trained staff" award or recognition. In order to improve the qualifications of existing staff and to promote a "lifelong learning" culture, NPR recommends the following possible training alternatives that the CFO Council could adapt to fit agency and personnel needs:

--Job rotation or visitation (within various financial management functions of a department, between program and financial functions, with the private sector, or with state and local governments).

--Private sector or agency training programs that meet standards for professional accreditation programs.

--Other forms of professional development, including continuing education, participation in professional associations, sabbaticals, etc.

The CFO Council should establish a continuing professional education (CPE) program for financial managers by October 1994. The program could be developed in collaboration with organizations such as the American Bankers Association, American Institute of Certified Public Accountants, the Association of Government Accountants, and federal agencies offering training programs. Such a program is being considered by the Joint Financial Management Improvement Program. It could be similar to the requirement that persons performing government audits obtain CPE credits. OMB should issue a policy statement on continuing professional education for employees in the field of financial management, and the policy should be included in the OMB and agency Five-Year Financial Management Plans. Supervisors should consider CPE and other training when making promotion decisions.

3. Ensure that the information being collected, disseminated, and reported on is useful, objective, timely, and accurate for the benefit of program managers. (1)

CFOs should begin meeting regularly with agency heads and program managers to develop tools such as financial measures, indicators, and reporting formats, to ensure that line management information needs are being met by the CFO Office. This would provide CFO offices and line managers with a better understanding of the roles that each one plays in the efficient operation of their organization. Additionally, it should increase the collaboration between the two groups and reduce any existing tensions. The CFO office should explain how to make the best use of the financial information it is providing to line managers. Feedback mechanisms should be established to ensure an ongoing usefulness of the information being provided to the program managers.

CFOs, using the CFO Council as a point of coordination, should jointly develop tools by May 1994 to evaluate overall agency financial management performance for reporting to department or agency heads. CFOs should begin making their reports to department heads by June 1994. Copies of those reports should be provided to the CFO Council.

CFOs should provide financial management briefings to agency heads on a regular basis to report on financial management indicators. All too often agency heads are not aware of, nor do they understand, the financial aspects of program management. Such briefings would provide for more informed decisions and debates on program management. It would also demonstrate the value of financial information to agency heads so that they may better manage their agencies.

4. The OMB deputy director for management should meet periodically with departmental deputy secretaries to discuss financial management issues.

This could include a review of management reports, financial performance indicators, cross-servicing issues, and other activities related to emphasizing sound financial management practices. It should also include a review of the financial management tools developed by the CFO Council. Good financial management practices and tools could be acknowledged and shared. The meeting could also serve to brief deputy secretaries on their role in financial management and to ensure that efforts to improve financial management cross all departments.

5. Identify the set of financial management functions that should report to agency CFOs. (2)

OMB should issue guidelines by December 1993 encouraging agency CFOs to be responsible for all financial management functions. These functions would include finance, accounting, financial information systems, budgeting, accounts payable, collections, and internal control. For larger agencies, OMB should discourage making the CFOs responsible for extraneous functions, such as personnel or facilities management, that reduce their focus on financial management responsibilities. Exceptions to the guidelines should be reviewed by OMB's Director.

CROSS-REFERENCES TO OTHER NPR ACCOMPANYING REPORTS

Reinventing Human Resource Management, HRM01: Create a Flexible and Responsive Hiring System.

ENDNOTES

1. U.S. General Accounting Office, The Chief Financial Officers Act: A Mandate for Federal Financial Management Reform (Washington, D.C.: U.S. General Accounting Office, September 1991).

2. The Chief Financial Officers Act of 1990, Public Law 101-576 (November 15, 1990).

3. McMurtry, Virginia, The Chief Financial Officers Act of 1990: An Overview (Washington, D.C.: Congressional Research Service, February 19, 1991), pp. 91-184.

4. Ibid.

5. See The Chief Financial Officers Act of 1990.

6. See National Performance Review Accompanying Report Reinventing Human Resource Management.

7. Federal Credit Management Training Institute, Final Report: Accounting I and Financial Statement Analysis Courses (April 1992).

8. The CFO Act agencies include: Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Department of Housing and Urban Development, Interior, Justice, Labor, State, Transportation, Treasury, Veterans Affairs, Environmental Protection Agency, National Aeronautics and Space Administration, Agency for International Development, Federal Emergency Management Agency, General Services Administration, National Science Foundation, Nuclear Regulatory Commission, Office of Personnel Management, and Small Business Administration.

9. OMB Memorandum signed by Director Leon Panetta dated February 9, 1993.

10. See National Performance Review Accompanying Report Reinventing Human Resource Management.

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