Statement of
Joshua Gotbaum
Executive Associate Director and Controller
Office of Management and Budget
Before
U.S. House of Representatives
Committee on Government Reform
Subcommittee on Government Management, Information & Technology

March 31, 2000

Mr. Chairman and members of the Subcommittee, I am here today to discuss the progress made during the last year in Federal financial management and to describe the challenges that still face us.

Federal Financial Management: Real Progress, But Still Far To Go

In enacting the Chief Financial Officers (CFO) Act in 1990, the Congress recognized that the Federal Government lagged far behind private businesses and State and local governments in financial management. The Government Management Reform Act extended this mandate by requiring annual audited agency financial statements; that requirement took effect four years ago. Over this period, we have come a long way. Consider where we were then and where we are now:

There is plenty yet to achieve, but the Federal financial community has made great strides in just 10 years. This progress is due to hard work by thousands of people throughout the Government who:

1999 Financial Statements

Achieving an unqualified opinion on the financial statements of individual Federal agencies and ultimately the consolidated Government-wide financial statement is a major milestone toward putting our financial house in order. Striving to get clean opinions leads to the development of better financial information which, when provided to management on a timely basis, provides the basis for producing better decisions. For the FY 1999 statements, we made significant progress toward our goals of clean opinions for individual agencies and the Government as a whole.

The timeliness of financial reports improved. Last year, 15 of the 24 CFO Act agencies met the statutory March 1 deadline for producing financial statements. This year, 19 did so, and we received an additional three statements during March. Two statements are still outstanding.

The quality of these financial statements also improved. Last year by this time, only 8 of the 24 CFO Act agencies had received clean opinions on their financial statements; ultimately 12 did so. This year, 13 agencies have already received clean opinions, and we have hopes that the two who have not yet reported will do so as well, for a total of 15. Seven agencies improved measurably over last year, moving from a disclaimer or a qualified opinion to a qualified or a clean opinion. The Departments of Commerce and Transportation jumped from disclaimers to clean opinions -- significant accomplishments for these departments whose financial records were in such poor shape the year before that the auditors could not provide an opinion. The Departments of Health and Human Services, Energy, and Veterans Affairs advanced from qualified to clean opinions. The Departments of Education and Justice moved from disclaimers to qualified opinions.

Work continued on efforts to resolve the two leading obstacles to a Government-wide clean opinion -- accounting for property, plant, equipment and inventories at the Department of Defense, and accounting for intra-governmental transactions. The Department of Defense is investing significant contractor support resources to resolve the difficulties in accounting for property, plant, equipment, and inventories. An interagency task force with representatives from the Office of Management and Budget (OMB), the Department of the Treasury, and the General Accounting Office (GAO) continued to work with the CFO Council to develop short- and long-term solutions to the complex challenge of identifying and reporting transactions between Federal Government entities or intra-governmental transactions.

We had hoped to do even better. Throughout this process, OMB staff remained in close contact with agency CFOs and Inspectors General on the progress of the audited financial statements. As late as the end of January, all 24 agencies anticipated meeting the March 1 due date and 18 agencies were projecting clean opinions. In late January and February, however, as the agencies worked with the financial information and their auditors, some found that their accounts still did not meet standards. In some cases these could not be resolved by the March1 deadline; as a result, the opinions of two agencies slipped from the prior year.

OMB will continue to work with GAO and the other auditors, the Department of the Treasury, and the agencies that missed the statutory deadline or did not receive clean opinions to identify and eliminate the obstacles to timely and clean opinions for agencies and the Federal Government as a whole.

Despite undeniable progress, there is still much to do. Developing financial reports in accordance with GAAP, then achieving clean audits of those statements, is a major milestone, but it is nonetheless not the final goal. Ultimately, we want financial systems that provide this information in a reliable timely way, to improve Government decision-making and provide accountability.

As we learned from our experience with the Year 2000 (Y2K) challenge, improvement in automated systems is an enormous task. There are hundreds of separate systems used in the two dozen major agencies. Many of these were developed before financial reporting was required. In 1996, two years after requiring the preparation of financial statements, Congress enacted the Federal Financial Management Improvement Act (FFMIA) of 1996. Essentially, FFMIA requires Federal agencies to use financial management systems that support full disclosure of Federal financial data, including full costs of Federal programs and activities, to citizens, Congress, and agency management, so that programs and activities can be considered on their full costs and merits. To achieve this goal, we must plan, authorize, and fund the necessary investments to upgrade or replace many deficient financial management systems, as well as the human capital needed to manage those systems.

Other Efforts to Strengthen Government Financial Management

In order to improve Government management, each year the Director of OMB, after consulting with the President, the Vice President, and others in the Administration, designates a series of Priority Management Objectives (PMOs). Issues designated as PMOs receive coordinated, sustained, and intensive management attention. Last year, PMO #1 was the Y2K challenge.

It should come as no surprise to anyone that the first PMO in the FY 2001 Budget is to use performance information to improve program management and make better budget decisions. The Government Performance and Results Act (GPRA) seeks to integrate budget and financial information with performance and results. Agencies and the Government as a whole must continue to work to implement systems that report financial and program information quickly and reliably, and then to use that information in our stewardship of the Nation's resources.

Improving financial management information is PMO #2. This effort includes not only improved and timely financial reporting, backed by independent audits, but also the achievement of the financial systems goals of FFMIA.

There are, in addition, other PMOs that are of importance to our efforts to modernize and systematize financial management:

Benchmarking Progress

As this Committee knows, these improvements are difficult and progress requires great effort. We are making that effort. We have shown steady progress in each of the four years that audited agency financial statements have been required. Yet we have far to go. We expect much more in the coming years, for this is a process of years, not months. Modernizing financial management and reporting is a long-term process.

Nonetheless, what has been accomplished by the Federal Government in the past four years is extraordinary. Consider, for comparison, the experience of state governments, which began well before the Federal Government to prepare timely financial reports backed by independent audits. With few exceptions, individual states began issuing GAAP-based financial statements in the 1970s. In 1980, Standard & Poors, a rating agency, issued a policy statement directing that all state bond issuers' financial reports should be prepared in conformity with GAAP, audited by independent auditors and issued within six months of year end, lest their ratings be affected. By 1990 -- ten years later -- 43 states issued GAAP-based statements; of those, 25 -- 50% of all state governments -- received an unqualified opinion. In 1995 -- fifteen years later -- 49 out of 50 states issued GAAP statements; however, only about three-quarters received clean opinions (information obtained from surveys conducted by the National Association of State Comptrollers, State Comptrollers: Technical Activities and Functions in 1992 and 1996) By comparison, more than half (54%) of the CFO Act agencies were able to achieve clean opinions in just four years.

We will continue our efforts. We remain convinced that accurate, timely and complete financial statement information, supported by solid financial management systems, can help identify issues, establish priorities and provide the basis for sound policy decisions. This information will enable us to implement GPRA and integrate performance information into resource decisions and program management. And it will help provide the American people with the accountability they expect from their Government.