CFOs: Surviving in a New Era - AGA
CFOs: Surviving in a New Era - AGA
CFOs: Surviving in a New Era - AGA
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Association of Government Accountants’ Annual CFO Survey july 2011<br />
cfos:<br />
<strong>Surviv<strong>in</strong>g</strong><br />
<strong>in</strong> the <strong>New</strong> ERA
About the Association of Government Accountants<br />
The Association of Government Accountants (<strong>AGA</strong>), founded <strong>in</strong> 1950, is the<br />
educational organization dedicated to the enhancement of public f<strong>in</strong>ancial management.<br />
The <strong>AGA</strong> serves the professional <strong>in</strong>terests of state, local and federal<br />
f<strong>in</strong>ancial managers who are responsible for effectively us<strong>in</strong>g billions of dollars<br />
and other monetary resources every day. The association has more than 15,000<br />
members, <strong>in</strong>clud<strong>in</strong>g professionals <strong>in</strong> account<strong>in</strong>g, adm<strong>in</strong>istration, audit<strong>in</strong>g, budget<strong>in</strong>g,<br />
consult<strong>in</strong>g, grants, fraud <strong>in</strong>vestigation and <strong>in</strong>formation technology. The<br />
<strong>AGA</strong> has been <strong>in</strong>strumental <strong>in</strong> develop<strong>in</strong>g account<strong>in</strong>g and audit<strong>in</strong>g standards and<br />
<strong>in</strong> generat<strong>in</strong>g new concepts for the effective organization and adm<strong>in</strong>istration of<br />
f<strong>in</strong>ancial management functions. The association conducts <strong>in</strong>dependent research<br />
and analysis of all aspects of government f<strong>in</strong>ancial management. These studies,<br />
<strong>in</strong>clud<strong>in</strong>g the 2011 <strong>AGA</strong> Chief F<strong>in</strong>ancial Officer (CFO) survey and more than 20<br />
<strong>in</strong>dependent studies supported by the Corporate Partner Advisory Group, make<br />
<strong>AGA</strong> a lead<strong>in</strong>g advocate for improv<strong>in</strong>g the quality and effectiveness of government<br />
fiscal adm<strong>in</strong>istration and program performance and accountability. For more<br />
<strong>in</strong>formation, please visit our Web site at www.agacgfm.org.<br />
About the National Association of State Auditors,<br />
Comptrollers and Treasurers<br />
The National Association of State Auditors, Comptrollers and Treasurers (NASACT)<br />
is an organization for state officials who deal with the f<strong>in</strong>ancial management of state<br />
government. NASACT’s membership comprises officials who have been elected<br />
or appo<strong>in</strong>ted to the office of state auditor, state comptroller or state treasurer <strong>in</strong> the<br />
50 states, the District of Columbia and U.S. territories. Visit www.NASACT.org.<br />
About Grant Thornton LLP Global Public Sector<br />
Grant Thornton’s Global Public Sector, based <strong>in</strong> Alexandria, Va., is a global management<br />
consult<strong>in</strong>g bus<strong>in</strong>ess with the mission of provid<strong>in</strong>g responsive and <strong>in</strong>novative<br />
f<strong>in</strong>ancial, performance management, and systems solutions to governments and<br />
<strong>in</strong>ternational organizations. The people <strong>in</strong> the <strong>in</strong>dependent firms of Grant Thornton<br />
International Ltd provide personalized attention and the highest-quality service to<br />
public and private clients <strong>in</strong> more than 100 countries. Grant Thornton LLP is the<br />
U.S. member firm of Grant Thornton International Ltd, one of the six global audit,<br />
tax and advisory organizations. Visit www.grantthornton.com/publicsector.
1<br />
executive summary<br />
The Association of Government Accountants (<strong>AGA</strong>)<br />
and Grant Thornton LLP have surveyed government<br />
chief f<strong>in</strong>ancial officers (CFO) s<strong>in</strong>ce 1996. The National<br />
Association of State Auditors, Comptrollers and<br />
Treasurers (NASACT) and the Government of Canada<br />
jo<strong>in</strong>ed us <strong>in</strong> 2008. The 2011 survey reports on 1,385<br />
onl<strong>in</strong>e and <strong>in</strong>-person <strong>in</strong>terviews with federal and<br />
state f<strong>in</strong>ancial professionals, <strong>in</strong>clud<strong>in</strong>g 38 Canadian<br />
officials. <strong>AGA</strong>, NASACT and Grant Thornton will<br />
publish a second report on state government <strong>in</strong><br />
August 2011.<br />
Risk management needs attention<br />
In times of tight budgets and shr<strong>in</strong>k<strong>in</strong>g staffs,<br />
effective management becomes critical. Small<br />
mistakes can multiply and have global implications.<br />
Governments need new solutions to<br />
survive and thrive – and <strong>CFOs</strong> have at their<br />
f<strong>in</strong>gertips the right concepts and processes for<br />
the challenge. One way is through effective risk<br />
management. When focused on core missions,<br />
risk management helps governments<br />
set priorities, avoid unneeded costs<br />
and deliver better services to citizens.<br />
Unfortunately, U.S. federal<br />
and state f<strong>in</strong>ancial executives<br />
and managers give a C to<br />
a B- grade on how well<br />
their entities <strong>in</strong>tegrate<br />
<strong>in</strong>ternal controls with risk<br />
management. F<strong>in</strong>ancial<br />
executives say that many<br />
non-f<strong>in</strong>ancial leaders and<br />
managers do not understand<br />
risk, either ignor<strong>in</strong>g it or<br />
becom<strong>in</strong>g so risk-averse as<br />
to paralyze operations.<br />
Governments need the f<strong>in</strong>ancial perspective on<br />
risk management that <strong>CFOs</strong> provide. F<strong>in</strong>ancial<br />
management leaders know how to handle f<strong>in</strong>ancial<br />
risks, but are usually absent from the operations<br />
or mission risk arenas. This is unfortunate<br />
because operations risks tend to cause f<strong>in</strong>ancial<br />
problems and vice versa. F<strong>in</strong>ancial executives say<br />
that recent budget shortfalls and cuts are caus<strong>in</strong>g<br />
new risks to government missions, to f<strong>in</strong>ancial<br />
management and to risk management itself. As<br />
f<strong>in</strong>ancial staffs get smaller, oversight decl<strong>in</strong>es and<br />
more th<strong>in</strong>gs slip through the cracks. Less money<br />
makes it difficult to start new activities, so <strong>CFOs</strong><br />
must become sales agents for better risk management<br />
efforts.<br />
Predictive and statistical<br />
analytics can deliver more value<br />
Predictive or statistical analytics or model<strong>in</strong>g<br />
uses data m<strong>in</strong><strong>in</strong>g, statistical analysis, game<br />
theory and geospatial analysis<br />
to extract <strong>in</strong>formation from<br />
data, and then applies it<br />
to predict<strong>in</strong>g trends<br />
and patterns and<br />
to identify<strong>in</strong>g
2<br />
emerg<strong>in</strong>g phenomena. Governments use such<br />
analytics for a wide range of activities, from<br />
identify<strong>in</strong>g and mitigat<strong>in</strong>g risk, fraud, waste and<br />
abuse to sett<strong>in</strong>g priorities for resource allocations.<br />
Among U.S. federal executives surveyed,<br />
only 28% are satisfied with the use of analytics<br />
<strong>in</strong> f<strong>in</strong>ancial areas and 32% with its use <strong>in</strong> nonf<strong>in</strong>ancial<br />
areas. These executives say their f<strong>in</strong>ancial<br />
staffs are good at compil<strong>in</strong>g data but give them<br />
an average grade of C- <strong>in</strong> analyz<strong>in</strong>g it. Shr<strong>in</strong>k<strong>in</strong>g<br />
budgets offer opportunities to <strong>CFOs</strong> to step up<br />
with analytic skills that will help manage risk,<br />
save money and allocate resources for maximum<br />
return on <strong>in</strong>vestment (ROI) <strong>in</strong> operations and<br />
mission-critical areas. <strong>CFOs</strong> should put predictive<br />
and statistical analytics high on their staff<br />
tra<strong>in</strong><strong>in</strong>g schedules and recruit<strong>in</strong>g needs and, as<br />
with risk management, work hard to sell these<br />
skills to top leaders.<br />
Budget cuts need<br />
better management<br />
F<strong>in</strong>ancial executives say the current environment<br />
of government budget reductions will cut<br />
<strong>in</strong>to public sector <strong>in</strong>novation and could have a<br />
multiplier effect on fund loss. There will be little<br />
or no extra money available for new <strong>in</strong>formation<br />
technology (IT) or upgrades, just at a time<br />
when IT should be tak<strong>in</strong>g up the slack caused by<br />
shr<strong>in</strong>k<strong>in</strong>g staffs. Less money could lower compliance<br />
and report<strong>in</strong>g that states must do to receive<br />
federal funds.<br />
Ways that survey respondents recommend to<br />
deal with f<strong>in</strong>ancial management budget cuts<br />
<strong>in</strong>clude sett<strong>in</strong>g priorities and work<strong>in</strong>g only<br />
on the top-ranked tasks, especially those that<br />
promise to save more money. Because the<br />
primary cost of f<strong>in</strong>ancial management is labor,<br />
<strong>CFOs</strong> need to f<strong>in</strong>d ways to reduce the amount of<br />
work needed for high-priority tasks and strive to<br />
automate them wherever possible. Keep<strong>in</strong>g assets<br />
visible and communicat<strong>in</strong>g with all functions<br />
and operations also will save money and <strong>in</strong>crease<br />
efficiency. Consolidat<strong>in</strong>g f<strong>in</strong>ancial operations can<br />
be a money saver as long as a sound bus<strong>in</strong>ess case<br />
confirms the ROI. F<strong>in</strong>ally, <strong>CFOs</strong> must strive to<br />
provide more f<strong>in</strong>ancial and performance <strong>in</strong>formation<br />
to top leaders and program managers.<br />
Federal f<strong>in</strong>ancial report<strong>in</strong>g model<br />
needs major update<br />
In our 2009 survey, 34% of federal f<strong>in</strong>ancial<br />
executives said they would like changes <strong>in</strong> the<br />
current federal f<strong>in</strong>ancial report model that would<br />
save money and <strong>in</strong>crease its value. In 2011, this<br />
<strong>in</strong>creased to 89%. Some suggested changes: focus<br />
on spend<strong>in</strong>g and costs, break <strong>in</strong>formation down<br />
by projects and programs, add more risk management<br />
<strong>in</strong>formation and <strong>in</strong>tegrate performance<br />
results with f<strong>in</strong>ancial data <strong>in</strong> a s<strong>in</strong>gle statement.<br />
Also, <strong>in</strong> 2011 most federal executives would like<br />
to change the annual f<strong>in</strong>ancial statement audit<br />
cycle from 1 year to every 2 or more years if<br />
an entity has a history of unqualified op<strong>in</strong>ions<br />
and no major changes to its f<strong>in</strong>ancial systems or<br />
processes or its structure. This would save time<br />
and money, free<strong>in</strong>g f<strong>in</strong>ancial professionals for<br />
tasks with higher value to their entities’ missions.<br />
Government entities should do an objective risk/<br />
cost benefit analysis before mak<strong>in</strong>g any changes<br />
to annual f<strong>in</strong>ancial report<strong>in</strong>g.<br />
There has never been a time <strong>in</strong> recent history<br />
when government <strong>CFOs</strong> have had such an<br />
opportunity to br<strong>in</strong>g the full force of their f<strong>in</strong>ancial<br />
acumen to bear on public sector problems<br />
of performance, priorities and stewardship. How<br />
<strong>CFOs</strong> <strong>in</strong>tegrate their resources and themselves<br />
<strong>in</strong>to government adm<strong>in</strong>istration over the next<br />
few years will determ<strong>in</strong>e their status for decades<br />
to come — and will be the solution to a solvent<br />
and more effective public sector.
3<br />
Table of contents<br />
Executive summary 1<br />
About the survey 4<br />
Risk management 5<br />
Budget reductions and risk 7<br />
Budget cut benefits to risk management 9<br />
Executives’ satisfaction with risk management activities 9<br />
Structure of risk management 10<br />
Risk management <strong>in</strong> the f<strong>in</strong>ancial function 12<br />
How <strong>CFOs</strong> can play a greater role <strong>in</strong> enterprise<br />
risk management 13<br />
Predictive and statistical analytics 16<br />
Analytic tools <strong>in</strong> f<strong>in</strong>ancial management 16<br />
How <strong>CFOs</strong> can help nonf<strong>in</strong>ancial operations<br />
with analytics 18<br />
Budget cuts 20<br />
Innovation 20<br />
Loss of funds 20<br />
Audits and auditors 21<br />
The silver l<strong>in</strong><strong>in</strong>g 21<br />
How to deal with reduced f<strong>in</strong>ancial<br />
management budgets 21<br />
Help<strong>in</strong>g to rationalize government budgets 23<br />
Federal f<strong>in</strong>ancial report<strong>in</strong>g model 24<br />
Chang<strong>in</strong>g the f<strong>in</strong>ancial report<strong>in</strong>g model 26<br />
How to move forward on federal f<strong>in</strong>ancial<br />
statement reports 26<br />
Chang<strong>in</strong>g the annual audit cycle 27<br />
Conclusions 28
4<br />
About the survey<br />
The Association of Government Accountants (<strong>AGA</strong>), <strong>in</strong><br />
partnership with Grant Thornton LLP, has sponsored<br />
an annual government chief f<strong>in</strong>ancial officer (CFO)<br />
survey s<strong>in</strong>ce 1996. In 2011, for the 3rd year, the <strong>AGA</strong> has<br />
jo<strong>in</strong>ed with the National Association of State Auditors,<br />
Comptrollers and Treasurers (NASACT) to expand the<br />
reach of the survey. We also appreciate the contributions<br />
of the Government of Canada.<br />
We plan a second report <strong>in</strong> August 2011 to<br />
look at state issues <strong>in</strong> more depth, <strong>in</strong>clud<strong>in</strong>g debt<br />
issuance and management, retirement systems<br />
and health <strong>in</strong>surance.<br />
Our purpose for do<strong>in</strong>g the surveys is to identify<br />
emerg<strong>in</strong>g issues <strong>in</strong> f<strong>in</strong>ancial management and provide<br />
a vehicle practitioners can use to share their<br />
views and experiences with colleagues and policy<br />
makers. This is one way that <strong>AGA</strong> and NASACT<br />
ma<strong>in</strong>ta<strong>in</strong> their leadership <strong>in</strong> governmental f<strong>in</strong>ancial<br />
management issues. For this 2011 survey report,<br />
our focus is on predictive or statistical analytics,<br />
risk management, deal<strong>in</strong>g with budget reductions,<br />
assist<strong>in</strong>g nonf<strong>in</strong>ancial operations and the report<strong>in</strong>g<br />
model for annual f<strong>in</strong>ancial statements.<br />
152 U.S. federal f<strong>in</strong>ancial leaders (<strong>CFOs</strong>, deputy<br />
<strong>CFOs</strong>, Inspectors General and other executives)<br />
and senior leaders of oversight groups such as the<br />
Office of Management and Budget (OMB). We<br />
did nonrandom onl<strong>in</strong>e <strong>in</strong>terviews with 1,157<br />
<strong>AGA</strong> members, of whom 38 were also NASACT<br />
members; all but 5 of worked for a government or<br />
government-funded <strong>in</strong>stitution such as a school<br />
district or public <strong>in</strong>stitution of higher learn<strong>in</strong>g, as<br />
shown <strong>in</strong> Figure 1. We also did a separate survey<br />
of 38 U.S. state government <strong>CFOs</strong>, comptrollers,<br />
treasurers and other state f<strong>in</strong>ancial executives,<br />
many of whom were NASACT members; we will<br />
prepare a separate survey report on the f<strong>in</strong>d<strong>in</strong>gs <strong>in</strong><br />
August 2011. We took some <strong>in</strong>formation on risk<br />
management from a Grant Thornton-supported<br />
survey of 38 Government of Canada m<strong>in</strong>istry<br />
<strong>CFOs</strong> and deputy <strong>CFOs</strong> or their equivalents.<br />
Figure 1:<br />
Government affiliation, <strong>AGA</strong> members<br />
respond<strong>in</strong>g to 2011 survey<br />
47%<br />
Federal<br />
3%<br />
Other<br />
1%<br />
Regional<br />
Anonymity<br />
To preserve anonymity and encourage respondents<br />
to speak freely, the annual surveys of the<br />
f<strong>in</strong>ancial community do not attribute thoughts<br />
and quotations to <strong>in</strong>dividual f<strong>in</strong>ancial executives<br />
who were <strong>in</strong>terviewed, and they do not identify<br />
onl<strong>in</strong>e respondents.<br />
34%<br />
State<br />
15%<br />
Local<br />
Survey methodology<br />
With <strong>AGA</strong>, NASACT and Canadian guidance,<br />
Grant Thornton developed onl<strong>in</strong>e and <strong>in</strong>-person<br />
survey <strong>in</strong>struments that <strong>in</strong>cluded closed- and<br />
open-ended questions used to survey people.<br />
We did nonrandom <strong>in</strong>-person <strong>in</strong>terviews with<br />
We augmented the U.S. federal <strong>in</strong>-person surveys<br />
with 3 breakfast meet<strong>in</strong>gs of <strong>CFOs</strong> and deputy<br />
<strong>CFOs</strong> who discussed survey topics as a group. Copies<br />
of the <strong>in</strong>-person and onl<strong>in</strong>e questionnaires may be<br />
found at www.grantthornton.com/publicsector.
5<br />
Risk management<br />
Governments, <strong>in</strong>dustries, economies, societies and<br />
whole ecosystems exist <strong>in</strong> a dynamic environment.<br />
That dynamism means that the future is, to some<br />
extent, uncerta<strong>in</strong>. It is grow<strong>in</strong>g even more uncerta<strong>in</strong><br />
for f<strong>in</strong>ancial management, accord<strong>in</strong>g to a 2009 survey<br />
of more than 700 private sector f<strong>in</strong>ancial executives. 1<br />
About 62% of them believe that the volume and<br />
complexity of risks have changed extensively or a<br />
great deal over the last 5 years and a third say they<br />
were caught off guard by an operational “surprise”<br />
dur<strong>in</strong>g the same period.<br />
Def<strong>in</strong><strong>in</strong>g risk and risk management<br />
Risk: The effect of uncerta<strong>in</strong>ty on objectives<br />
Risk management: Coord<strong>in</strong>ated activities to direct and<br />
control an organization with regard to risk<br />
—International Organization for Standardization (ISO)<br />
Standard 31000: 2009, Risk management — pr<strong>in</strong>ciples<br />
and guidel<strong>in</strong>es (November 2009)<br />
Fortunately, much of government exists to detect,<br />
assess and mitigate risk <strong>in</strong> areas such as defense,<br />
public safety, food supplies, health, disasters, the<br />
environment and, <strong>in</strong> the broad sense of the word,<br />
the welfare of the people. Despite this, many<br />
government entities have not yet <strong>in</strong>corporated<br />
effective risk management <strong>in</strong> their organizations.<br />
This first section of our survey report discusses<br />
the reasons that public sector f<strong>in</strong>ancial executives<br />
give for this paradox and what governments can<br />
do about it. We also show that, <strong>in</strong> a world full<br />
of uncerta<strong>in</strong>ty and grow<strong>in</strong>g <strong>in</strong>terdependence,<br />
f<strong>in</strong>ancial executives and managers must be leaders<br />
<strong>in</strong> us<strong>in</strong>g risk management tools.<br />
Governments and risk management<br />
Whether a government entity makes benefit payments,<br />
issues bonds, manages reserves or fights<br />
wars, it faces and must manage risk. F<strong>in</strong>ancial<br />
management leaders are <strong>in</strong>timately <strong>in</strong>volved <strong>in</strong><br />
manag<strong>in</strong>g many f<strong>in</strong>ancial risks, but are usually<br />
absent from the operations or mission risk<br />
arenas. This is unfortunate because operations<br />
risks tend to cause f<strong>in</strong>ancial problems and vice<br />
versa. In addition, some f<strong>in</strong>ancial professionals<br />
have risk assessment and management skills that<br />
operations professionals need. For this reason,<br />
we are go<strong>in</strong>g to start this section with a broad<br />
discussion of f<strong>in</strong>ancial and nonf<strong>in</strong>ancial risk<br />
us<strong>in</strong>g the concepts <strong>in</strong> the box “Def<strong>in</strong><strong>in</strong>g risk and<br />
risk management.” The def<strong>in</strong>itions are from the<br />
International Organization for Standardization<br />
(ISO), the world’s largest developer and publisher<br />
of <strong>in</strong>ternational standards for almost every<br />
sector of bus<strong>in</strong>ess, <strong>in</strong>dustry and technology.<br />
Everyone understands that risks <strong>in</strong>clude how<br />
natural disasters affect citizens and communities.<br />
Governments can reduce the effects of<br />
unpreventable disasters by issu<strong>in</strong>g build<strong>in</strong>g codes<br />
<strong>in</strong> earthquake-prone regions. In the f<strong>in</strong>ancial<br />
community, reserves can balance their portfolios;<br />
work<strong>in</strong>g capital funds or <strong>in</strong>ternal service funds<br />
can set fees at a level that will likely ma<strong>in</strong>ta<strong>in</strong><br />
cash flow and be affordable to customers; and<br />
f<strong>in</strong>ancial officers can <strong>in</strong>stall <strong>in</strong>ternal controls just<br />
about anywhere <strong>in</strong> a government entity to mitigate<br />
waste, fraud and abuse of taxpayer money.<br />
Yet, there are threats that tend to fly under<br />
the risk management radar, either missed or<br />
ignored by top leaders. One of them is project<br />
1<br />
Beasley, Mark et al., Report on the current state of enterprise risk<br />
oversight: management account<strong>in</strong>g research conducted on behalf of<br />
the American Institute of CPAs,” North Carol<strong>in</strong>a State University<br />
College of Management. ERM Initiative, March 2009.
6<br />
or program management itself, says a U.S.<br />
federal CFO <strong>in</strong> one of our 152 <strong>in</strong>-person<br />
<strong>in</strong>terviews: “There are not enough skilled<br />
project managers <strong>in</strong> my department, so it is an<br />
everyday struggle to effectively and efficiently<br />
manage projects. This is true <strong>in</strong> my department<br />
and likely to be a government-wide issue as<br />
well.” Poor project management <strong>in</strong>creases the<br />
chances of project failure, which is an operational<br />
risk. Poor management also <strong>in</strong>creases cost<br />
overruns and <strong>in</strong>efficient use of public funds,<br />
which is one reason that operational risk is also<br />
a CFO’s concern.<br />
For example, says a federal CFO, “Many of the<br />
so-called improper payments we make to beneficiaries<br />
would not have happened if agency operations<br />
<strong>in</strong> the field had done a better job upfront <strong>in</strong><br />
discover<strong>in</strong>g that some recipients were <strong>in</strong>eligible.”<br />
In turn, risk management can cause operational<br />
problems such as <strong>in</strong>adequate resources or<br />
reputation loss. For the perceptive CFO, there are<br />
no solid borders between f<strong>in</strong>ancial, operational,<br />
mission and reputation risk, nor should there be!<br />
As shown <strong>in</strong> Figure 2, there is only risk. Further,<br />
the effects of risk <strong>in</strong> one objective can spread to<br />
the goals of an enterprise such as a whole govern-<br />
ment, a department or m<strong>in</strong>istry and its agencies,<br />
or an agency and its offices and programs, along<br />
with outside suppliers and customers. Indeed,<br />
today’s borderless <strong>in</strong>ternational economy means<br />
that the whole world may feel the effects of risk<br />
<strong>in</strong> one country or even a s<strong>in</strong>gle <strong>in</strong>dustry. This<br />
calls for enterprise risk management (ERM). 2<br />
2<br />
“Enterprise risk management is a process, effected by an entity’s<br />
board of directors, management and other personnel, applied<br />
<strong>in</strong> strategy sett<strong>in</strong>g and across the enterprise, designed to identify<br />
potential events that may affect the entity, and manage risk to be<br />
with<strong>in</strong> its risk appetite, to provide reasonable assurance regard<strong>in</strong>g<br />
the achievement of entity objectives.” Committee of Sponsor<strong>in</strong>g<br />
Organizations of the Treadway Commission (COSO), Enterprise<br />
Risk Management — Integrated Framework, Executive Summary,<br />
September 2004, page 2.<br />
Figure 2: Risk has no hard and fast borders<br />
F<strong>in</strong>ancial<br />
Mission<br />
Risk<br />
Operational<br />
Reputation<br />
Primary Risk<br />
Secondary Risk<br />
Tertiary Risk
7<br />
In addition, as shown <strong>in</strong> Figure 2, a s<strong>in</strong>gle<br />
event <strong>in</strong> one part of an entity can affect many<br />
or all of the other parts. One federal executive<br />
gives the example of a nuclear power plant<br />
catastrophe’s cascad<strong>in</strong>g effect on all parts on a<br />
department or government and even across the<br />
globe. When this happens, resources flow out<br />
of other components’ budgets to programs <strong>in</strong><br />
the lead component. Other departments and<br />
their components experience workload <strong>in</strong>creases<br />
because of the primary, secondary and tertiary<br />
effects of the catastrophe’s demand for their<br />
services, such as for health, security, hous<strong>in</strong>g and<br />
emergency assistance to citizens <strong>in</strong> the catastrophe’s<br />
region. Supplies of products and services<br />
made <strong>in</strong> that region may become scarce, disrupt<strong>in</strong>g<br />
private and public sector supply cha<strong>in</strong>s<br />
<strong>in</strong> a nation or the global economy. In short, risk<br />
has no borders.<br />
Budget reductions and risk<br />
It does not take a s<strong>in</strong>gle catastrophic event to<br />
cause problems across governments, as is evident<br />
by the economic meltdowns of f<strong>in</strong>ancial and<br />
manufactur<strong>in</strong>g <strong>in</strong>stitutions start<strong>in</strong>g <strong>in</strong> 2007.<br />
In the United States and most of the rest of the<br />
world, the recession and slow recovery have<br />
<strong>in</strong>creased the risk that government entities at all<br />
levels will not be able to achieve their missions<br />
<strong>in</strong> full, because of <strong>in</strong>creased demand for some<br />
services coupled with decreased revenues to pay<br />
for all services.<br />
We asked U.S. and federal f<strong>in</strong>ancial executives<br />
about the risks that budget reductions might<br />
cause to their operations and to government<br />
<strong>in</strong> general. We found that most of the risks fell<br />
<strong>in</strong>to 3 categories: risks to achiev<strong>in</strong>g mission,<br />
to f<strong>in</strong>ancial management and to effective<br />
risk management.<br />
Risks to mission<br />
“Resource constra<strong>in</strong>ts end up mean<strong>in</strong>g you do<br />
less with less, not more with less,” says a federal<br />
f<strong>in</strong>ancial executive. “You have to scale back,<br />
but sometimes without an understand<strong>in</strong>g of<br />
how a particular cut will <strong>in</strong>crease risk <strong>in</strong> other<br />
areas.” Says another, “Projects will not be able<br />
to meet their schedules and will be less safe, and<br />
fewer vendors will want to do bus<strong>in</strong>ess with the<br />
government, which may <strong>in</strong>crease costs.” Leaders<br />
may make short-term decisions about budgets<br />
without understand<strong>in</strong>g long-term risks that may<br />
result, say others. “Certa<strong>in</strong>ly, it will be harder to<br />
get ahead of the curve and mitigate risk <strong>in</strong>stead<br />
of just react<strong>in</strong>g to it,” says a f<strong>in</strong>ancial executive <strong>in</strong><br />
charge of risk management.<br />
“Resource constra<strong>in</strong>ts end up mean<strong>in</strong>g you do less with<br />
less, not more with less. You have to scale back, but<br />
sometimes without an understand<strong>in</strong>g of how a particular<br />
cut will <strong>in</strong>crease risk <strong>in</strong> other areas.”<br />
—a federal f<strong>in</strong>ancial executive<br />
Targets for budget cuts always seem to start<br />
with tra<strong>in</strong><strong>in</strong>g, conferences and travel, which are<br />
needed to a certa<strong>in</strong> extent to ga<strong>in</strong> and susta<strong>in</strong><br />
skills and foster collaboration — and which <strong>in</strong><br />
some cases are basic to mission activities. On<br />
the other hand, say some f<strong>in</strong>ancial executives,<br />
such cuts may <strong>in</strong>crease the use of computerbased<br />
tra<strong>in</strong><strong>in</strong>g and Web-based conferenc<strong>in</strong>g (if<br />
governments can f<strong>in</strong>d the funds for the needed<br />
new technology and formats). Likewise, say<br />
executives, <strong>in</strong>formation system development,
8<br />
<strong>in</strong>tegration and upgrades will slow down just<br />
when new IT <strong>in</strong>vestment could <strong>in</strong>crease the<br />
amount and quality of services while reduc<strong>in</strong>g<br />
costs. Pay freezes and attrition will get <strong>in</strong> the<br />
way of hir<strong>in</strong>g and reta<strong>in</strong><strong>in</strong>g the best and most<br />
experienced people with the technical skills and<br />
knowledge to operate and manage missioncritical<br />
activities.<br />
Risks to f<strong>in</strong>ancial management<br />
Canadian <strong>CFOs</strong> <strong>in</strong>terviewed say there are risks<br />
associated with implement<strong>in</strong>g results of their<br />
government’s ongo<strong>in</strong>g adm<strong>in</strong>istrative reviews<br />
aimed at balanc<strong>in</strong>g the national budget by at least<br />
2015–16. The ensu<strong>in</strong>g restra<strong>in</strong>ts on spend<strong>in</strong>g will<br />
most likely affect their ability to meet <strong>in</strong>creas<strong>in</strong>g<br />
demands for accountability and transparency. In<br />
the U.S., cuts <strong>in</strong> IT <strong>in</strong>vestments and personnel<br />
may hit the f<strong>in</strong>ancial function harder than other<br />
types of cuts. F<strong>in</strong>ancial management for the huge<br />
volumes of transactions <strong>in</strong> some government<br />
activities mandates either large staffs or advanced<br />
systems, but many agencies still lack such IT and<br />
may not receive fund<strong>in</strong>g for new systems anytime<br />
soon. Regard<strong>in</strong>g personnel, f<strong>in</strong>ancial professionals<br />
who shifted from the private sector to government<br />
dur<strong>in</strong>g the recession may want to return to<br />
<strong>in</strong>dustry as the economy picks back up. Comb<strong>in</strong>e<br />
that with an ag<strong>in</strong>g but well-<strong>in</strong>formed workforce<br />
that is about to retire and one realizes that there<br />
will be fewer people with less experience <strong>in</strong> the<br />
f<strong>in</strong>ancial function. <strong>CFOs</strong> who fail to mitigate<br />
such risks, for example through tra<strong>in</strong><strong>in</strong>g and<br />
succession plann<strong>in</strong>g, may see oversight and controls<br />
deteriorate.<br />
Risks to risk management<br />
In later sections of this report, it will become<br />
clear that most government executives want and<br />
need to improve their entities’ ability to manage<br />
both f<strong>in</strong>ancial and operations risks. Entities<br />
cannot do this for free, so they will need to<br />
<strong>in</strong>vest <strong>in</strong> new risk management skills and tools.<br />
Further, top leaders will need to be persuaded<br />
of the importance of risk management activities<br />
and to use the <strong>in</strong>formation they provide to make<br />
decisions about priorities and maximize return<br />
on <strong>in</strong>vestment (ROI).<br />
“First comes an urgency to complete daily tasks,<br />
<strong>in</strong>stead of manag<strong>in</strong>g risk,” says an executive.<br />
Very soon, risk management takes a back seat<br />
to other activities. Less visible risk management<br />
activities will receive less attention, such<br />
as <strong>in</strong>ternal controls that become an issue only<br />
once someth<strong>in</strong>g goes wrong, say several federal<br />
executives. Adds another, “As f<strong>in</strong>ancial staffs get<br />
smaller, oversight will decl<strong>in</strong>e and more th<strong>in</strong>gs<br />
will slip through the cracks.” Forget about<br />
improvements <strong>in</strong> risk management. Entities may<br />
put low-priority material weaknesses on the back<br />
burner and give annual f<strong>in</strong>ancial audit preparation<br />
fewer resources (although it has always been<br />
a high priority of government <strong>CFOs</strong>).
9<br />
The CFO of a U.S. federal department says,<br />
“Now is the worst time for me to want to start a<br />
new risk management capability <strong>in</strong> my organization,<br />
because there is no budget for it.” In our<br />
op<strong>in</strong>ion, build<strong>in</strong>g a risk management program<br />
around exist<strong>in</strong>g risk elements is a partial solution<br />
and a foundation for a more comprehensive<br />
approach later. Also, risk management is more an<br />
organizational attitude than a set of tools. In any<br />
case, <strong>CFOs</strong> must become sales agents with solutions<br />
that appeal to top leaders and legislators,<br />
if they expect to get the tools and <strong>in</strong>spire the attitude<br />
that ultimately will save public treasure.<br />
Budget cut benefits to<br />
risk management<br />
Several executives th<strong>in</strong>k that budget reductions<br />
are go<strong>in</strong>g to force governments to more riskbased<br />
operations decision mak<strong>in</strong>g. Good risk<br />
management requires good data and the right<br />
analytics to apply the data to sett<strong>in</strong>g priorities,<br />
model<strong>in</strong>g operations options, mak<strong>in</strong>g and<br />
monitor<strong>in</strong>g decisions and <strong>in</strong> general <strong>in</strong>creas<strong>in</strong>g<br />
fact-based government. F<strong>in</strong>ancial executives and<br />
managers will ga<strong>in</strong> status and <strong>in</strong>fluence if they<br />
have the right tools and the ability to sell risk<br />
management to elected and appo<strong>in</strong>ted officials<br />
and to the public. All these pluses are predicated<br />
on <strong>CFOs</strong>’ abilities to persuade top leaders<br />
to, as one federal CFO says, “mitigate the risks<br />
of runn<strong>in</strong>g out of money and spend<strong>in</strong>g too<br />
much on areas that promise little return and<br />
too little <strong>in</strong> those that we should be address<strong>in</strong>g<br />
more aggressively.”<br />
Executives’ satisfaction with risk<br />
management activities<br />
With this larger def<strong>in</strong>ition of risk <strong>in</strong> m<strong>in</strong>d, we<br />
asked <strong>CFOs</strong>, deputy <strong>CFOs</strong>, other f<strong>in</strong>ancial<br />
executives, auditors and central agency executives<br />
<strong>in</strong> the U.S. federal and state governments and<br />
Canadian m<strong>in</strong>istries whether they th<strong>in</strong>k that<br />
their entity has adequate risk management for its<br />
top 3 or 4 goals. Table 1 shows the results. About<br />
half of U.S. federal and about three-quarters<br />
of U.S. state and Canadian executives say yes,<br />
although there were substantial percentages of<br />
“no” answers <strong>in</strong> all 3 categories of respondents.<br />
Table 1:<br />
Executives’ op<strong>in</strong>ions on adequacy of enterprise risk<br />
management <strong>in</strong> their entities<br />
Response U.S. federal U.S. state<br />
Government is not do<strong>in</strong>g all that badly with<br />
ERM compared to <strong>in</strong>dustry. In the private sector<br />
survey on risk management mentioned at the<br />
start of this section, 62% of f<strong>in</strong>ancial executives<br />
said that their entities do not have any enterprise-wide<br />
risk management processes.<br />
Representative comments from the f<strong>in</strong>ancial<br />
executives polled for Table 1 <strong>in</strong>clude:<br />
• Yes: “Our deputy departmental CFO takes<br />
risk management seriously and works hard to<br />
make it happen.” — CFO of a treasury comptroller<br />
office<br />
• Yes: “We have risk management committees<br />
of senior executives and subject matter experts<br />
aligned with each portion of our f<strong>in</strong>ancial statement<br />
balance sheet. They recommend actions<br />
to a national risk committee to evaluate the<br />
risks.” — a federal guaranty agency CFO<br />
Canadian<br />
m<strong>in</strong>istries<br />
Yes 50% 71% 78%<br />
Mixed 16% 4% 3%<br />
No 28% 25% 20%<br />
Don’t know 6% 0% 0%
10<br />
• Mixed: “The CFO provides limited risk<br />
analysis, but it not a structured, concrete<br />
approach. We need to change that.” — CFO<br />
of a department<br />
• Mixed: “We have a lot of risk metrics, which is<br />
nice, but they aren’t effective unless leadership<br />
enacts changes because of them.” — chief of<br />
staff of a major headquarters office<br />
• No: “We are more reactive, fix<strong>in</strong>g problems<br />
only after they arise. We are not proactive and<br />
do not do much risk analysis.” — CFO of<br />
a bureau<br />
• No: “The department does not take risk<br />
management seriously. There is little <strong>in</strong>terest<br />
<strong>in</strong> <strong>in</strong>ternal controls.” — f<strong>in</strong>ancial executive<br />
<strong>in</strong> a bureau<br />
“We have career development programs for executives and<br />
managers, but these do not <strong>in</strong>clude risk management, nor is it<br />
considered a core competency for leadership positions.”<br />
— a state f<strong>in</strong>ancial executive<br />
These and other comments <strong>in</strong> the survey show<br />
that the most important ERM <strong>in</strong>gredient is support<br />
from top leaders, followed by a structured<br />
approach to risk management. Also, executives<br />
tended to be more positive about the adequacy<br />
of risk management <strong>in</strong> components of departments<br />
or m<strong>in</strong>istries than they are about ERM. In<br />
the U.S. federal government, this may reflect the<br />
diversity of missions <strong>in</strong> some large departments.<br />
Among those who were positive about ERM,<br />
some cited an active, liv<strong>in</strong>g strategic plan with<br />
goals and objectives that they monitored for risk.<br />
One problem with leaders is that they may<br />
not understand the nature of risk and risk<br />
management. For example, says a state f<strong>in</strong>ancial<br />
executive, “We have career development<br />
programs for executives and managers, but<br />
these do not <strong>in</strong>clude risk management, nor is<br />
it considered a core competency for leadership<br />
positions.” This can cause leaders to act at one or<br />
the other extremes of risk management: ignore<br />
risks entirely or become so risk-averse that risk<br />
management either consumes too much time<br />
and resources or even paralyzes some operations.<br />
F<strong>in</strong>ally, a comprehensive approach to risk<br />
management helps address many risk areas<br />
throughout a service or product lifecycle.<br />
Says a f<strong>in</strong>ancial executive of a large federal<br />
entity that makes grants, “We take a bottomup<br />
approach, look at <strong>in</strong>itial applications and<br />
assess grantees’ ability to execute funds. Risk<br />
monitor<strong>in</strong>g and assessment are part of the<br />
systems we use to track progress. We weave risk<br />
<strong>in</strong>to tra<strong>in</strong><strong>in</strong>g and development of our federal<br />
project managers and grantees. We talk about<br />
how to manage risk, what needs to happen<br />
and help them become aware of the fact that<br />
there may be big headl<strong>in</strong>es if grantees are not<br />
us<strong>in</strong>g funds the right way. We do an assessment<br />
of risk elements before awards are given<br />
to grantees. We then work with the grantees<br />
on how to start up programs and ensure they<br />
understand process and procedures and have<br />
the correct <strong>in</strong>frastructure.”<br />
Structure of risk management<br />
There are several different risk management<br />
structures with<strong>in</strong> government. Operat<strong>in</strong>g much<br />
like their private sector counterparts <strong>in</strong> bank<strong>in</strong>g<br />
and <strong>in</strong>surance, most chief risk officers (CRO) <strong>in</strong><br />
government are responsible for risk management<br />
<strong>in</strong> loan, grant and <strong>in</strong>vestment programs, but not<br />
necessarily for ERM policy and activities across<br />
an entity.
11<br />
There are also risk management offices (RMOs)<br />
that provide comprehensive coord<strong>in</strong>ation to<br />
ERM while at the same time assist<strong>in</strong>g <strong>in</strong>dividual<br />
components and programs with specific<br />
risk issues. The U.S. Department of Homeland<br />
Security (DHS) Office of Risk Management<br />
described <strong>in</strong> the box on this page is a good<br />
example. However, as shown <strong>in</strong> Figure 3, when<br />
we asked if their entity has an RMO, about twothirds<br />
of federal f<strong>in</strong>ancial executives said no.<br />
Figure 3:<br />
Is there a designated risk management<br />
office or operation <strong>in</strong> your federal entity?<br />
67%<br />
No<br />
29%<br />
Yes<br />
4%<br />
Don’t know<br />
Regard<strong>in</strong>g ERM, a CFO of a large federal<br />
department with diverse missions says that<br />
risk management must happen at all levels of<br />
management, horizontally and vertically across<br />
a whole government. Sometimes <strong>in</strong>dividual<br />
entities or their components or programs will<br />
identify specific risks and try to mitigate them,<br />
but there may be no central group to align<br />
mitigation activities, mandates and regulations.<br />
Differences <strong>in</strong> the approaches and rules may<br />
cause confusion, redundancy and cross-purpose.<br />
Example of a risk management office at the<br />
U.S. Department of Homeland Security<br />
The DHS Office of Risk Management and Analysis<br />
(RMA) provides risk analysis, enhanc<strong>in</strong>g risk management<br />
capabilities of partners and <strong>in</strong>tegrat<strong>in</strong>g<br />
homeland security risk management approaches.<br />
The office offers DHS components and partners:<br />
• Technical assistance: Tailored analysis, methodological<br />
review, guidance and other technical<br />
assistance to support the ability of homeland<br />
security partners to analyze and manage risk <strong>in</strong> a<br />
consistent and defensible manner<br />
• Risk management tra<strong>in</strong><strong>in</strong>g: A comprehensive<br />
learn<strong>in</strong>g and development plan designed to<br />
advance and <strong>in</strong>tegrate risk management tra<strong>in</strong><strong>in</strong>g<br />
at the department<br />
• Establishment and foster<strong>in</strong>g of partnerships:<br />
Professional relationships with organizations<br />
and agencies across the homeland security<br />
enterprise, <strong>in</strong>clud<strong>in</strong>g <strong>in</strong>ternational bodies, to<br />
promote collaboration and <strong>in</strong>tegration<br />
• Risk Knowledge Management System: A<br />
centralized <strong>in</strong>formation-shar<strong>in</strong>g service to support<br />
risk analysis and risk management activities<br />
across the homeland security enterprise by<br />
archiv<strong>in</strong>g, curat<strong>in</strong>g and shar<strong>in</strong>g risk-related <strong>in</strong>formation,<br />
data and models<br />
—Adapted from DHS RMA home page at:<br />
www.dhs.gov/xabout/structure/gc_1287674114373.shtm
12<br />
None of those surveyed argue strongly aga<strong>in</strong>st<br />
the idea of a central RMO, and several saw the<br />
value of funnel<strong>in</strong>g risk assessments, f<strong>in</strong>d<strong>in</strong>gs and<br />
recommendations to a higher level. Respondents<br />
mentioned potential or current barriers to a successful<br />
RMO <strong>in</strong> their organizations.<br />
• That risk management may become the<br />
RMO’s “job,” when it should be everyone’s job.<br />
• Divid<strong>in</strong>g f<strong>in</strong>ancial and operations risk management<br />
<strong>in</strong>to a CFO’s office and another nonf<strong>in</strong>ancial<br />
office, when the two are <strong>in</strong>tertw<strong>in</strong>ed.<br />
• That an RMO serves either the top strategic<br />
<strong>in</strong>terests of an entity or first-l<strong>in</strong>e frontl<strong>in</strong>e programs;<br />
<strong>in</strong>stead, says a central agency executive,<br />
it is important for an RMO or some other<br />
central risk management function to operate at<br />
all levels of an entity.<br />
• Opposition to the idea of a central RMO,<br />
which one executive po<strong>in</strong>ted out as the biggest<br />
risk of all to this approach.<br />
Simply hav<strong>in</strong>g an RMO or CRO is likely not<br />
enough, though. One executive po<strong>in</strong>ted out that<br />
many of the U.S. federal agencies and offices that<br />
have CROs got <strong>in</strong>to trouble with their loans,<br />
grants and guaranties anyway dur<strong>in</strong>g the economic<br />
problems that started <strong>in</strong> 2007. However, hav<strong>in</strong>g<br />
a full-service risk management office for technical<br />
support, along with top management attention to<br />
ERM (or risk management <strong>in</strong> general), might have<br />
prevented some problems, says another CFO of a<br />
large, diverse federal department.<br />
How f<strong>in</strong>ancial management contributes<br />
to risk management<br />
An entity’s <strong>in</strong>ternal control activities should be<br />
<strong>in</strong>tegrated <strong>in</strong> its ERM activities, but this is not<br />
always the case. Risk mitigation strategies on the<br />
program or operations side of an entity are rarely<br />
<strong>in</strong>formed by the <strong>in</strong>ternal control work done on<br />
the f<strong>in</strong>ancial side. This may reflect the siloed<br />
nature of many public sector organizations or<br />
simply a lack of understand<strong>in</strong>g that f<strong>in</strong>ancial and<br />
nonf<strong>in</strong>ancial risks go together.<br />
For example, of executives who commented on<br />
the topic, most said their primary contribution<br />
to ERM is through <strong>in</strong>ternal controls over f<strong>in</strong>ancial<br />
transactions. We asked U.S. federal and state<br />
executives and managers how well satisfied they<br />
were with how their entity <strong>in</strong>tegrates risk management<br />
<strong>in</strong> general with its <strong>in</strong>ternal controls and<br />
show the results <strong>in</strong> Table 2. On a scale of 1 to 5,<br />
with 1 be<strong>in</strong>g very dissatisfied and 5 very satisfied,<br />
federal and state executives scored an average of<br />
3.1 and 3.5, respectively, while managers at the<br />
federal, state and local/regional level scored 3.5,<br />
3.6 and 3.5. Pass<strong>in</strong>g grades, but noth<strong>in</strong>g stellar.<br />
Table 2:<br />
Executives’ satisfaction with<br />
<strong>in</strong>tegration of risk management with<br />
<strong>in</strong>ternal controls<br />
U.S. Government<br />
Mean satisfaction<br />
score on<br />
1 to 5 scale*<br />
Federal executives 3.1<br />
State executives 3.5<br />
Federal managers 3.5<br />
State managers 3.6<br />
Local/regional<br />
managers<br />
3.5<br />
*1 = very dissatisfied, 5 = very satisfied<br />
Risk management <strong>in</strong> the<br />
f<strong>in</strong>ancial function<br />
We also asked U.S. federal executives what were<br />
the most important 3 or 4 f<strong>in</strong>ancial activities they<br />
were monitor<strong>in</strong>g for risk management purposes
13<br />
Table 3:<br />
Federal executives’ top 5 f<strong>in</strong>ancial function activities monitored for risk<br />
1. Prepar<strong>in</strong>g annual audited f<strong>in</strong>ancial statement reports and undergo<strong>in</strong>g audits of them<br />
2. Budgetary issues (formulat<strong>in</strong>g and track<strong>in</strong>g)<br />
3. F<strong>in</strong>ancial process improvements (<strong>in</strong>clud<strong>in</strong>g their efficiency and performance)<br />
4. Provid<strong>in</strong>g <strong>in</strong>formation for decision mak<strong>in</strong>g, <strong>in</strong>clud<strong>in</strong>g f<strong>in</strong>ancial reports other than annual f<strong>in</strong>ancial<br />
statements<br />
5. Risks and <strong>in</strong>ternal controls<br />
Table 4:<br />
Risk management tools and methods used by U.S. federal executives for their<br />
f<strong>in</strong>ancial functions<br />
1. Internal controls, such as those required by White House Office of Management and Budget<br />
Circular A-123, Managements’ Responsibility for Internal Controls<br />
2. None (i.e., respondents say their f<strong>in</strong>ancial organizations use no such tools)<br />
3. Statistical analysis (sampl<strong>in</strong>g; flux, trend and root cause analysis)<br />
4. Audits (<strong>in</strong>clud<strong>in</strong>g <strong>in</strong>ternal and external audits)<br />
5. F<strong>in</strong>ancial report<strong>in</strong>g (not necessarily for annual f<strong>in</strong>ancial statements)<br />
and show the top 5 responses <strong>in</strong> Table 3 above.<br />
We excluded mission-specific activities such as<br />
monitor<strong>in</strong>g grants and loans and concentrated<br />
<strong>in</strong>stead on the basic tasks of f<strong>in</strong>ancial management.<br />
Table 4 shows the risk management tools and<br />
methods that U.S. federal executives apply<br />
to f<strong>in</strong>ancial functions, listed <strong>in</strong> the order of<br />
frequency with which they were mentioned<br />
by respondents.<br />
How <strong>CFOs</strong> can play a greater role<br />
<strong>in</strong> enterprise risk management<br />
Many <strong>CFOs</strong> say that their office would be a<br />
good home for a centralized RMO, and a few<br />
say they already have that function both for<br />
operations and for f<strong>in</strong>ancial managers. Says one,<br />
“Government is pushed to take care of today and<br />
neglect tomorrow. That risk is hard to measure.<br />
The role of the CFO is keep<strong>in</strong>g such risks at the<br />
forefront of discussions on annual adm<strong>in</strong>istrative,<br />
<strong>in</strong>formation technology, capital <strong>in</strong>vestment,<br />
human capital and other related issue. To me,<br />
<strong>CFOs</strong> do not have to be CROs, too. They just<br />
have to be the speaker of truth about the value<br />
you are gett<strong>in</strong>g for the money.”<br />
For a CFO, perhaps the best place to start or get<br />
on board a balanced ERM <strong>in</strong>itiative is with the<br />
office of the CFO (OCFO). Says a central agency<br />
executive, “The first circle has to be close to
14<br />
home — it should be the basic CFO responsibilities,<br />
fundamentals like <strong>in</strong>ternal control over basic<br />
account<strong>in</strong>g. Deal with th<strong>in</strong>gs <strong>in</strong>side your shop<br />
first, and then go outside. Next, look for where<br />
your entity is hemorrhag<strong>in</strong>g money or hav<strong>in</strong>g<br />
other problems that could be mitigated by f<strong>in</strong>ancial<br />
management approaches, skills and tools.”<br />
“We need good estimation models of how much th<strong>in</strong>gs will cost,<br />
the outlays and what are the outcomes. We must make sure to<br />
keep track of funds weekly so that we do not spend more than<br />
we th<strong>in</strong>k we will have. ”<br />
— a state f<strong>in</strong>ancial executive<br />
An <strong>in</strong>itial step might be to assess the risk management<br />
skills of f<strong>in</strong>ancial staff aga<strong>in</strong>st the<br />
f<strong>in</strong>ancial and nonf<strong>in</strong>ancial goals of an entity. On<br />
average, federal executives give their f<strong>in</strong>ancial<br />
staffs a low score on hav<strong>in</strong>g the skills needed to<br />
apply risk management methods, while state<br />
f<strong>in</strong>ancial executives give their staffs a relatively<br />
high score (Table 5). 3<br />
Table 5:<br />
Executives’ satisfaction with their<br />
f<strong>in</strong>ancial staff’s risk management skills<br />
U.S. Government<br />
Mean satisfaction<br />
score on<br />
1 to 5 scale*<br />
Federal executives 2.7<br />
State executives 4.0<br />
*1 = very dissatisfied, 5 = very satisfied<br />
3<br />
State f<strong>in</strong>ancial executives’ scores may be somewhat higher than<br />
those of federal executives because of a higher percentage of auditors<br />
among the state survey respondents.<br />
We also asked participants <strong>in</strong> the onl<strong>in</strong>e survey<br />
whether they were satisfied with their skills and<br />
tra<strong>in</strong><strong>in</strong>g <strong>in</strong> risk management. About 6 of 10<br />
managers at each level of government — federal,<br />
state and local/regional — were satisfied with<br />
their skills and tra<strong>in</strong><strong>in</strong>g; 2 <strong>in</strong> 10 were not, and<br />
the balance did not know.<br />
An immediate application of f<strong>in</strong>ancial risk management<br />
skills might be monitor<strong>in</strong>g and predict<strong>in</strong>g<br />
revenues versus expenses <strong>in</strong> entities that<br />
are supported by fees or specific tax revenues.<br />
Says a state CFO <strong>in</strong> such an organization, “Most<br />
of our money comes out of a trust fund built<br />
from specific tax receipts. Over the past 10 years,<br />
when the trust fund started to run out of money,<br />
the legislature gave us general appropriations.<br />
We are runn<strong>in</strong>g out of money now and we may<br />
not get enough appropriated funds to make up<br />
the difference. So, we now keep track of outlays<br />
and we have plans <strong>in</strong> place to ration funds if we<br />
do run out. We need good estimation models of<br />
how much th<strong>in</strong>gs will cost, the outlays and what<br />
are the outcomes. We must make sure to keep<br />
track of funds weekly so that we do not spend<br />
more than we th<strong>in</strong>k we will have.”<br />
Another entry po<strong>in</strong>t <strong>in</strong> operations risk management<br />
is through <strong>in</strong>ternal controls, say some<br />
f<strong>in</strong>ancial executives. Says a state CFO, “My office<br />
establishes agency risk management and <strong>in</strong>ternal<br />
control standards that each state agency is required<br />
to implement. We require agencies to certify that<br />
they comply with the standards and review their<br />
implementation to confirm this.” Some state auditors<br />
<strong>in</strong> our survey say that they become <strong>in</strong>volved<br />
<strong>in</strong> operational risks through the annual f<strong>in</strong>ancial<br />
statement audit, if such risks have an effect on<br />
audit f<strong>in</strong>d<strong>in</strong>gs. Then, they recommend ways to<br />
improve risk assessment. Other state auditors say<br />
they have no role <strong>in</strong> risk management.
15<br />
Several federal <strong>CFOs</strong> say they are on executivelevel<br />
risk management committees and do not<br />
conf<strong>in</strong>e themselves to f<strong>in</strong>ancial risk. Others<br />
provide f<strong>in</strong>ancial risk comments on strategic<br />
risk management plans or on component or<br />
program plans.<br />
Unfortunately, many federal and state f<strong>in</strong>ancial<br />
executives <strong>in</strong> the survey report have little or no<br />
<strong>in</strong>teraction with risk management activities<br />
outside of fiscal areas. Some say they<br />
simply do not have the time or resources<br />
to play a role wider than the areas of<br />
account<strong>in</strong>g and <strong>in</strong>ternal controls. Several<br />
state <strong>CFOs</strong> say that risk assessment and management<br />
outside of the f<strong>in</strong>ancial arena lies with<br />
the budget office or specific programs. Entities<br />
that structure risk management leave themselves<br />
vulnerable to operations problems because they<br />
lack a f<strong>in</strong>ancial management perspective on risk<br />
— and as we said earlier, there are no borders<br />
when it comes to risk.<br />
A word of caution: po<strong>in</strong>t<strong>in</strong>g out risks is a risk <strong>in</strong><br />
itself, accord<strong>in</strong>g to some executives. Says a state<br />
CFO: “Nonf<strong>in</strong>ancial managers rout<strong>in</strong>ely elect<br />
to ignore risks until they are unavoidable. In<br />
addition, they perceive the controller function as<br />
‘caus<strong>in</strong>g’ the result<strong>in</strong>g problem because we speak<br />
out about and attempt to address risks.” Besides<br />
tra<strong>in</strong><strong>in</strong>g and skill build<strong>in</strong>g, nonf<strong>in</strong>ancial managers<br />
need to be rewarded for mitigat<strong>in</strong>g risk,<br />
<strong>in</strong>stead of be<strong>in</strong>g punished for identify<strong>in</strong>g them.<br />
A federal executive says that some of his entity’s<br />
nonf<strong>in</strong>ancial managers are reluctant to “get on<br />
the risk list” because no one seems to get off it,<br />
so that extra works can cont<strong>in</strong>ue for years.<br />
One th<strong>in</strong>g is for sure: governments are go<strong>in</strong>g to<br />
be pay<strong>in</strong>g much more attention to risk management<br />
<strong>in</strong> the future. This is an opportunity<br />
for the CFO who takes an active role <strong>in</strong> ERM,<br />
especially <strong>in</strong> help<strong>in</strong>g <strong>in</strong>tegrate <strong>in</strong>ternal controls<br />
and other risk management activities. Such a<br />
f<strong>in</strong>ancial professional will be able to rise <strong>in</strong> the<br />
ranks of leadership because the world is not gett<strong>in</strong>g<br />
any less risky.
16<br />
Predictive and statistical analytics<br />
Quantitative analytics are hardwired <strong>in</strong>to the<br />
operations cultures of many government entities;<br />
<strong>in</strong>deed, some offices and even whole agencies like the<br />
U.S. Census Bureau exist simply to apply predictive<br />
and statistical analytics <strong>in</strong> ways that produce useful<br />
<strong>in</strong>formation for planners, marketers, citizens and<br />
decision makers. Yet, predictive and statistical<br />
analytics have yet to permeate the adm<strong>in</strong>istrative<br />
decision mak<strong>in</strong>g of many government entities,<br />
<strong>in</strong>clud<strong>in</strong>g their f<strong>in</strong>ancial functions. This is chang<strong>in</strong>g,<br />
but very gradually.<br />
Predictive or statistical analytics or model<strong>in</strong>g uses<br />
data m<strong>in</strong><strong>in</strong>g, statistical analysis, game theory and<br />
geospatial analysis to extract <strong>in</strong>formation from<br />
data, and then applies it to predict<strong>in</strong>g trends and<br />
patterns and to identify<strong>in</strong>g emerg<strong>in</strong>g phenomena.<br />
This is useful for risk management, help<strong>in</strong>g to<br />
prevent bad th<strong>in</strong>gs from happen<strong>in</strong>g and to ensure<br />
that good th<strong>in</strong>gs happen as <strong>in</strong>tended. The core<br />
of predictive analytics relies on captur<strong>in</strong>g relationships<br />
among explanatory variables and the<br />
predicted variables from past occurrences, then<br />
exploit<strong>in</strong>g knowledge of the relationships to predict<br />
future outcomes. Government entities <strong>in</strong> our<br />
survey use these tools and methods for:<br />
• Collect<strong>in</strong>g revenues or fees<br />
• Credit scor<strong>in</strong>g for loans<br />
• Detect<strong>in</strong>g erroneous and improper payments<br />
• Detect<strong>in</strong>g fraud<br />
• Forecast<strong>in</strong>g environmental trends<br />
and behaviors<br />
• Identify<strong>in</strong>g risk profiles<br />
• Optimiz<strong>in</strong>g resource allocations<br />
• Predict<strong>in</strong>g program portfolio or<br />
economy levels<br />
• Sett<strong>in</strong>g priorities for resource allocations<br />
• Underwrit<strong>in</strong>g<br />
• Validat<strong>in</strong>g budget processes and assumptions.<br />
Analytic tools <strong>in</strong><br />
f<strong>in</strong>ancial management<br />
We asked federal executives what types of predictive<br />
and statistical analytic tools they use as part<br />
of f<strong>in</strong>ancial management for their entities. The<br />
most frequent responses were:<br />
Data<br />
m<strong>in</strong><strong>in</strong>g<br />
Pattern<br />
Trend<br />
Pattern<br />
Data Data Data<br />
Statistical<br />
analysis<br />
Game<br />
theory<br />
Geospatial<br />
an<br />
• Sampl<strong>in</strong>g techniques used for test<strong>in</strong>g <strong>in</strong>ternal<br />
controls, audits and other related purposes<br />
• Dashboards and balanced scorecards, often<br />
manual but sometimes l<strong>in</strong>ked to sophisticated<br />
data-m<strong>in</strong><strong>in</strong>g systems<br />
• Predictive model<strong>in</strong>g, based primarily on<br />
historical <strong>in</strong>ternal data but sometimes <strong>in</strong>corporat<strong>in</strong>g<br />
outside factors and data for “what-if”-<br />
type analysis<br />
• Trend analysis us<strong>in</strong>g historical data<br />
• “Homegrown” applications, typically based on<br />
spreadsheets or PC database software, often<br />
search<strong>in</strong>g for anomalies
17<br />
• Bus<strong>in</strong>ess Intelligence (BI) software, <strong>in</strong>clud<strong>in</strong>g<br />
for data m<strong>in</strong><strong>in</strong>g and data warehouses (typically,<br />
this is commercial off-the-shelf software<br />
(COTS) for enterprise resource plann<strong>in</strong>g<br />
(ERP) with a BI module)<br />
• Cost track<strong>in</strong>g and analysis<br />
• Geospatial analysis to track claims<br />
and predict potential overpayments<br />
or fraudulent payments<br />
• More sophisticated analyses: Uncerta<strong>in</strong>ty<br />
(Monte Carlo), regression<br />
• Monitor<strong>in</strong>g problem report logs<br />
Although a few federal entities are well advanced<br />
<strong>in</strong> the use of predictive and statistical analysis<br />
<strong>in</strong> the f<strong>in</strong>ancial and nonf<strong>in</strong>ancial arenas, for the<br />
most part departments and their components<br />
are <strong>in</strong> the very early stages of us<strong>in</strong>g these tools.<br />
Quite a few do not use them at all, accord<strong>in</strong>g<br />
to our respondents.<br />
Table 6:<br />
Federal executives’ level of satisfaction<br />
with use of predictive and statistical analytics<br />
<strong>in</strong> f<strong>in</strong>ancial and nonf<strong>in</strong>ancial areas<br />
Level of<br />
satisfaction<br />
F<strong>in</strong>ancial<br />
areas<br />
Nonf<strong>in</strong>ancial<br />
areas<br />
Satisfied 28% 32%<br />
Mixed<br />
feel<strong>in</strong>gs<br />
36% 19%<br />
Not satisfied 35% 49%<br />
As noted <strong>in</strong> Table 6, about the same percentage<br />
of federal respondents have mixed or negative<br />
feel<strong>in</strong>gs about the use of predictive or statistical<br />
analysis <strong>in</strong> both f<strong>in</strong>ancial and nonf<strong>in</strong>ancial areas.<br />
Example of Bus<strong>in</strong>ess Intelligence application<br />
for waste, fraud and abuse<br />
The Recovery Operations Center at the federal<br />
Recovery Accountability and Transparency Board<br />
(RATB) oversees funds from the American Recovery<br />
and Re<strong>in</strong>vestment Act of 2009 (ARRA). The Center<br />
uses advanced BI software and methods to detect<br />
fraud, waste and abuse related to stimulus funds,<br />
and then applies predictive and statistical analytics<br />
to reveal trends and hotspots for follow-up actions<br />
by the <strong>CFOs</strong> and <strong>in</strong>spectors general of federal entities<br />
issu<strong>in</strong>g recovery funds, who take the needed corrective<br />
actions. Processes like those of the Recovery<br />
Operations Center have helped manage the overall<br />
risk issues <strong>in</strong>volved <strong>in</strong> ARRA stimulus fund<strong>in</strong>g.<br />
A very few say their f<strong>in</strong>ancial functions do not<br />
need such analytic prowess, but most would like<br />
to see more.<br />
Some respondents who use little or no predictive<br />
or statistical analytics say they are wait<strong>in</strong>g to automate<br />
their analysis with COTS tools (if they can<br />
f<strong>in</strong>d the money for this) or say they do not have<br />
the needed data. However, as <strong>in</strong>dicated <strong>in</strong> the list<br />
earlier <strong>in</strong> this section, other respondents are us<strong>in</strong>g<br />
homegrown, PC-based solutions. Regard<strong>in</strong>g data<br />
available <strong>in</strong> mach<strong>in</strong>e-usable form, an executive<br />
says, “I visited an office that had separate clear<strong>in</strong>ghouses<br />
with hard-to-analyze paper files. Still,<br />
the office used the paper files for data to create a<br />
heat map 4 that showed counties and cities with<br />
4<br />
A geographic map of data where the values of a two-dimensional<br />
table are represented shades of color (e.g., green for no problems<br />
<strong>in</strong> an area, yellow for some problems and red for many).
18<br />
“The government as a whole is not staffed to use predictive<br />
and statistical analytics. It employs people who are good at<br />
compliance and compil<strong>in</strong>g data, but not <strong>in</strong> analyz<strong>in</strong>g data.”<br />
— a federal executive<br />
high frequencies of a problem. They did that map<br />
without digitiz<strong>in</strong>g the data. So maybe we do not<br />
need to digitize everyth<strong>in</strong>g. There are tradeoffs, of<br />
course, but we have to be practical about it.”<br />
Federal executive survey respondents believe that<br />
the f<strong>in</strong>ancial personnel <strong>in</strong>side CFO organizations<br />
will need to improve their skills <strong>in</strong> apply<strong>in</strong>g or<br />
us<strong>in</strong>g predictive analysis for the benefit of their<br />
entire entities. Asked to rate these skills on a 1 to<br />
5 scale with 1 = not at all skilled and 5 = highly<br />
skilled, respondents gave their personnel a 2.7<br />
mean score (see Figure 4). Some executives th<strong>in</strong>k<br />
they may need to recruit new professionals with<br />
f<strong>in</strong>ancial and statistical tra<strong>in</strong><strong>in</strong>g <strong>in</strong> order to deliver<br />
data models that predict and analyze fiscal and<br />
other <strong>in</strong>formation. Says a federal executive, “The<br />
government as a whole is not staffed to use predictive<br />
and statistical analytics. It employs people<br />
who are good at compliance and compil<strong>in</strong>g data,<br />
but not <strong>in</strong> analyz<strong>in</strong>g data.” Barriers to re-staff<strong>in</strong>g<br />
for skills that are more analytic <strong>in</strong>clude personnel<br />
cutbacks and hir<strong>in</strong>g freezes.<br />
Figure 4:<br />
Federal executives’ rat<strong>in</strong>g of their f<strong>in</strong>ancial staff’s skills <strong>in</strong><br />
predictive and statistical analytics<br />
Not at all skilled<br />
1 2 3 4 5<br />
Personnel<br />
Highly skilled<br />
How <strong>CFOs</strong> can help nonf<strong>in</strong>ancial<br />
operations with analytics<br />
More serious is the problem of lack of demand<br />
for predictive and statistical <strong>in</strong>formation by nonf<strong>in</strong>ancial<br />
executives and managers. Says a federal<br />
executive, “<strong>CFOs</strong> need to gear up to tell their<br />
bosses, ‘I’m not just throw<strong>in</strong>g reports to you anymore.<br />
My job is to get you to change around the<br />
th<strong>in</strong>gs that I am report<strong>in</strong>g.’ Analytics just makes<br />
that happen quicker.”<br />
We asked federal executives what they would<br />
recommend to top leaders concern<strong>in</strong>g the use<br />
of predictive and statistical analytics, and how<br />
<strong>CFOs</strong> could help nonf<strong>in</strong>ancial operations with<br />
such analysis. Many of the answers to both<br />
questions started with po<strong>in</strong>t<strong>in</strong>g out shr<strong>in</strong>k<strong>in</strong>g<br />
budgets. Outside of entities whose mission is<br />
mostly monetary (e.g., mak<strong>in</strong>g grants, loans<br />
or guaranties), f<strong>in</strong>ancial risk alone may not<br />
be enough to galvanize elected and appo<strong>in</strong>ted<br />
leaders. Says a f<strong>in</strong>ancial executive <strong>in</strong>volved <strong>in</strong><br />
risk management <strong>in</strong> a research and development<br />
entity, “We need to help nonf<strong>in</strong>ancial operations<br />
use predictive and statistical analytics to set<br />
priorities for programs and entity needs. That<br />
means help<strong>in</strong>g them understand priorities, the<br />
f<strong>in</strong>ancial cycle of a project and how to reduce<br />
program entitlements — <strong>in</strong> other words, how<br />
to make hard choices.”<br />
Recommendations for how f<strong>in</strong>ancial functions<br />
can help nonf<strong>in</strong>ancial operations <strong>in</strong>clude:<br />
• Strive to <strong>in</strong>tegrate f<strong>in</strong>ancial and nonf<strong>in</strong>ancial<br />
analytics, such as associat<strong>in</strong>g costs with bus<strong>in</strong>ess<br />
process options or comb<strong>in</strong><strong>in</strong>g budget and<br />
performance data. Says a f<strong>in</strong>ancial executive,<br />
“You can use f<strong>in</strong>ancial <strong>in</strong>dicators to detect<br />
nonf<strong>in</strong>ancial issues, such as improv<strong>in</strong>g the<br />
accounts receivable or payable entry processes
19<br />
to <strong>in</strong>crease transparency <strong>in</strong> order to reveal<br />
potential areas of fraud.”<br />
• Start gett<strong>in</strong>g <strong>in</strong>volved <strong>in</strong> nonf<strong>in</strong>ancial<br />
analytics, for example by offer<strong>in</strong>g f<strong>in</strong>ancial<br />
skills and test<strong>in</strong>g data for accuracy.<br />
• Jo<strong>in</strong> improvement teams such as for<br />
Lean, Six Sigma and bus<strong>in</strong>ess process<br />
reeng<strong>in</strong>eer<strong>in</strong>g (such teams make heavy use<br />
of analytic approaches and tools).<br />
• Build f<strong>in</strong>ancial staff analytic skills to complement<br />
operations analytic needs as well.<br />
• Make analytics easy to use and understand,<br />
and above all else, practical for nonf<strong>in</strong>ancial<br />
managers.<br />
• Help nonf<strong>in</strong>ancial leaders obta<strong>in</strong> answers<br />
demanded by legislators, such as unit costs<br />
and budget trends.<br />
• Establish discipl<strong>in</strong>ed processes to capture and<br />
<strong>in</strong>tegrate more timely and realistic project cost<br />
estimat<strong>in</strong>g and monitor<strong>in</strong>g.<br />
• Assist nonf<strong>in</strong>ancial managers <strong>in</strong> expla<strong>in</strong><strong>in</strong>g<br />
their requirements <strong>in</strong> both fiscal and operations<br />
terms.<br />
The list above shows improvements <strong>in</strong> analytic<br />
services by the f<strong>in</strong>ancial function. Yet, simply<br />
be<strong>in</strong>g able to improve operations is not enough to<br />
w<strong>in</strong> support for predictive and statistical analytics<br />
<strong>in</strong> a government entity. Says a CFO <strong>in</strong> a large federal<br />
department, “Such analytics require a culture<br />
change. Yet, there is no push among people <strong>in</strong><br />
my department for an <strong>in</strong>novative revamp of the<br />
process, much less a culture change.”<br />
What will be required is to sell the change to<br />
leaders and staff alike, <strong>in</strong> all parts of an organization.<br />
Accord<strong>in</strong>g to some executives, the sales<br />
po<strong>in</strong>ts may center on some potentially headl<strong>in</strong>emak<strong>in</strong>g<br />
political issues that are with<strong>in</strong> the CFO’s<br />
“sweet spot,” such as improper payments and<br />
detect<strong>in</strong>g waste, fraud and abuse. Such issues<br />
require good analysis, data accuracy and executive<br />
action, so help<strong>in</strong>g to identify, quantify, isolate<br />
and solve such problems is a plus for sell<strong>in</strong>g<br />
analytics. Apply<strong>in</strong>g analytics to other risks also<br />
shows the value of analytical tools and methods<br />
— and the value of the CFO to nonf<strong>in</strong>ancial<br />
leaders. When this happens, a government<br />
CFO bogged down <strong>in</strong> compliance and f<strong>in</strong>ancial<br />
reports starts the metamorphosis to a full bus<strong>in</strong>ess<br />
partner with the entity CEO, much like a<br />
private sector CFO.<br />
In terms of skill-build<strong>in</strong>g targets, <strong>CFOs</strong> should<br />
put predictive and statistical analytics high on<br />
their staff tra<strong>in</strong><strong>in</strong>g schedules and recruit<strong>in</strong>g<br />
needs. The good th<strong>in</strong>g about such analytics is<br />
that, done right, they can deliver quantifiable<br />
results <strong>in</strong> a world that is <strong>in</strong>creas<strong>in</strong>gly <strong>in</strong>terested<br />
<strong>in</strong> the ROI of taxpayer money. This will require<br />
a culture change among f<strong>in</strong>ancial and nonf<strong>in</strong>ancial<br />
leaders and functions, so <strong>CFOs</strong> need to be<br />
the lead sales representatives for a new way of<br />
do<strong>in</strong>g government bus<strong>in</strong>ess.
20<br />
Budget cuts<br />
In an earlier section on risk management, we discussed<br />
the potential effects of budget constra<strong>in</strong>ts on various<br />
risk-related activities. Here, we look at other areas<br />
where survey respondents say that recent and future<br />
budget cuts will degrade performance <strong>in</strong> f<strong>in</strong>ancial<br />
management. At the same time, tight budgets can<br />
<strong>in</strong>crease the <strong>in</strong>fluence of the savvy CFO who can help<br />
hammer the most value out of every dollar of revenue.<br />
Innovation<br />
Low-cost <strong>in</strong>novations have mostly been tapped<br />
out, say some executives. These <strong>in</strong>clude bus<strong>in</strong>ess<br />
process improvements that do not depend<br />
on IT, such as streaml<strong>in</strong><strong>in</strong>g and reeng<strong>in</strong>eer<strong>in</strong>g.<br />
That leaves <strong>in</strong>novations that require heavy capital<br />
<strong>in</strong>vestment. They will likely be put on hold unless<br />
there are compell<strong>in</strong>g reasons that <strong>in</strong>volve either<br />
sav<strong>in</strong>g large amounts of money or (more likely)<br />
los<strong>in</strong>g large amounts for lack of compliance with<br />
fund<strong>in</strong>g sources. Staff cuts not accompanied by<br />
workload cuts often leave IT as the only realistic<br />
solution, and IT <strong>in</strong>novation is expensive.<br />
impacts are loss of budgetary control, failed<br />
f<strong>in</strong>ancial report<strong>in</strong>g that results <strong>in</strong> credit rat<strong>in</strong>g<br />
reduction, <strong>in</strong>accurate payments to vendors and<br />
employees and loss of federal grants and U.S.<br />
Internal Revenue Service (IRS) debt service<br />
subsidies because of poor grant report<strong>in</strong>g and<br />
compliance with Securities and Exchange<br />
Commission and IRS report<strong>in</strong>g.” Says another<br />
state executive, “If we provide fewer f<strong>in</strong>ancial<br />
services and other support services to operational<br />
divisions, then nonf<strong>in</strong>ancial personnel<br />
will either need to do work for which they lack<br />
the tra<strong>in</strong><strong>in</strong>g and skills or they will simply not<br />
do it at all. This <strong>in</strong>creases f<strong>in</strong>ancial management<br />
risk and ultimately services to citizens.”<br />
Loss of funds<br />
State f<strong>in</strong>ancial executives say that they could<br />
end up los<strong>in</strong>g federal funds if they cannot<br />
comply with federal report<strong>in</strong>g and others<br />
requirements that accompany the money.<br />
Accord<strong>in</strong>g to a state f<strong>in</strong>ancial executive, “The<br />
most significant areas where f<strong>in</strong>ancial management<br />
budget reductions would have adverse
21<br />
Audits and auditors<br />
Auditors may be hard hit, too, says a state executive:<br />
“In tight times there are more audits and<br />
more attention to audit<strong>in</strong>g and account<strong>in</strong>g standards.<br />
That means that reductions <strong>in</strong> audit staff<br />
would present great challenges for us to meet<br />
required audit procedures and deadl<strong>in</strong>es, which<br />
means less accuracy. Also, federal rules and<br />
regulations with which we have to comply create<br />
exponential challenges for us to meet deadl<strong>in</strong>es<br />
with fewer resources.”<br />
As for when budget reductions will beg<strong>in</strong> to affect<br />
f<strong>in</strong>ancial management, a state f<strong>in</strong>ancial manager<br />
says, “There will be little impact <strong>in</strong> the short term,<br />
and maybe midterm degradation <strong>in</strong> accuracy,<br />
timel<strong>in</strong>ess and service will be acceptable. But we<br />
cannot keep the dam from burst<strong>in</strong>g forever.”<br />
The silver l<strong>in</strong><strong>in</strong>g<br />
“I see budget reduction as a benefit,” says a<br />
federal executive, “We have become complacent,<br />
and this forces the government to exam<strong>in</strong>e our<br />
operations. It shakes th<strong>in</strong>gs up.” Says another,<br />
“There will be efficiencies if we do the budget<br />
cutt<strong>in</strong>g properly. If leaders are will<strong>in</strong>g to elim<strong>in</strong>ate<br />
th<strong>in</strong>gs that do not add value to the mission,<br />
to reduce the number of pet projects and break<br />
up fiefdoms, then some reductions will make<br />
th<strong>in</strong>gs better.” F<strong>in</strong>ally, a federal executive <strong>in</strong>volved<br />
<strong>in</strong> <strong>in</strong>novation says, “Any time there is a cut <strong>in</strong> the<br />
f<strong>in</strong>ancial management budget, agencies respond<br />
well by f<strong>in</strong>d<strong>in</strong>g new solutions.” The th<strong>in</strong>g is to<br />
f<strong>in</strong>d those solutions, says another executive, “We<br />
have 275 f<strong>in</strong>ancial staff and if we cut 25 of them<br />
and do their work more effectively, then we save<br />
money. But without better effectiveness, we will<br />
just <strong>in</strong>troduce <strong>in</strong>efficiencies and <strong>in</strong>crease risk.”<br />
Certa<strong>in</strong>ly, governments will have to manage their<br />
money better. Says a federal executive, “We have<br />
wasted a lot of money on systems, and I th<strong>in</strong>k<br />
– I hope – that budget reductions will cause federal<br />
leaders, especially chief <strong>in</strong>formation officers<br />
and implementers to do a better job of manag<strong>in</strong>g<br />
projects and to make better decisions on where<br />
to spend f<strong>in</strong>ancial management dollars. Over the<br />
years, there have not been many penalties for<br />
runn<strong>in</strong>g a poor project.”<br />
“There will be efficiencies if we do the budget cutt<strong>in</strong>g<br />
properly. If leaders are will<strong>in</strong>g to elim<strong>in</strong>ate th<strong>in</strong>gs that do<br />
not add value to the mission, to reduce the number of pet<br />
projects and break up fiefdoms, then some reductions<br />
will make th<strong>in</strong>gs better.”<br />
—a federal executive<br />
How to deal with reduced<br />
f<strong>in</strong>ancial management budgets<br />
We asked executives we <strong>in</strong>terviewed how they<br />
have dealt with or plan to deal with reductions<br />
to f<strong>in</strong>ancial budgets.<br />
Set priorities<br />
Perhaps the best suggestion from all survey<br />
respondents is to reduce the amount of work<br />
you do accord<strong>in</strong>g to a set of priorities based on<br />
management decision mak<strong>in</strong>g, risk or the public’s<br />
need to know about government fiscal issues.<br />
“You need not do fiscal reviews by travel<strong>in</strong>g to all<br />
grantee sites,” says a federal executive, “You can<br />
just visit the medium- or high-risk ones.” Says<br />
another, “Focus on the big sav<strong>in</strong>gs opportunities.”<br />
For example, like the sea capta<strong>in</strong> who said, “The<br />
flogg<strong>in</strong>gs will cont<strong>in</strong>ue until morale improves,”<br />
elected and appo<strong>in</strong>ted officials tend to ask for<br />
more reports when times get tough. Some <strong>CFOs</strong><br />
have been successful <strong>in</strong> persuad<strong>in</strong>g elected and<br />
appo<strong>in</strong>ted officials and central offices to rank
22<br />
the importance of the <strong>in</strong>formation they want,<br />
which helps them and f<strong>in</strong>ancial executives<br />
reduce the number and frequency of compliance<br />
requirements and reports. Other <strong>CFOs</strong> have<br />
managed to avoid a good deal of report<strong>in</strong>g and<br />
audits other than those required by statute. A<br />
federal f<strong>in</strong>ancial executive says <strong>CFOs</strong> must do<br />
this because “Report<strong>in</strong>g requirements are always<br />
grow<strong>in</strong>g, which offsets any small sav<strong>in</strong>gs we’ve<br />
been able to f<strong>in</strong>d elsewhere.”<br />
“Real sav<strong>in</strong>gs will come when central agencies take the lead<br />
<strong>in</strong> consolidat<strong>in</strong>g duplicate and similar activities across<br />
government. This goes for f<strong>in</strong>ancial and nonf<strong>in</strong>ancial activities.”<br />
— a f<strong>in</strong>ancial executive<br />
“My entity’s senior leaders are do<strong>in</strong>g a better<br />
job this year at be<strong>in</strong>g selective of special projects<br />
they assign to my f<strong>in</strong>ancial branch,” says<br />
a f<strong>in</strong>ancial executive, “But the real sav<strong>in</strong>gs will<br />
come when central agencies take the lead <strong>in</strong><br />
consolidat<strong>in</strong>g duplicate and similar activities<br />
across government. This goes for f<strong>in</strong>ancial and<br />
nonf<strong>in</strong>ancial activities.”<br />
Many executives say that f<strong>in</strong>ancial functions<br />
need to determ<strong>in</strong>e the relevance of all their activities<br />
through <strong>in</strong>dependent performance audits,<br />
management studies, Lean, Six Sigma, reeng<strong>in</strong>eer<strong>in</strong>g<br />
projects and bus<strong>in</strong>ess analytics. Some say<br />
they need outside technical assistance and advice<br />
for these activities, followed by tra<strong>in</strong><strong>in</strong>g <strong>in</strong>-house<br />
staff <strong>in</strong> how to use them.<br />
Transactions and report<strong>in</strong>g<br />
Transaction activities are go<strong>in</strong>g to have to<br />
cont<strong>in</strong>ue at whatever volume is required.<br />
Reeng<strong>in</strong>eer<strong>in</strong>g or automat<strong>in</strong>g transaction processes<br />
could be a major money saver (but see<br />
Innovation above – some f<strong>in</strong>ancial offices are<br />
bare bones already). Us<strong>in</strong>g IT to push transaction<br />
work steps to customers such as nonf<strong>in</strong>ancial<br />
managers could save money for the f<strong>in</strong>ancial<br />
function but is not advisable unless there is a<br />
net sav<strong>in</strong>gs to the government or net ga<strong>in</strong> <strong>in</strong><br />
value to customers.<br />
• Expand use of government charge cards<br />
for travel, fleet fuel and other small or<br />
medium purchases — it saves money on<br />
transaction process<strong>in</strong>g, reduces late payments<br />
and garners rebates.<br />
• Introduce fast pay procedures to avoid <strong>in</strong>terest.<br />
• Produce electronic reports only<br />
— no more pr<strong>in</strong>t<strong>in</strong>g. 5<br />
• Get rid of redundant reports, such as fourthquarter<br />
analyses on spend<strong>in</strong>g or improper<br />
payments, along with studies for programs that<br />
are unlikely to be funded.<br />
• Elim<strong>in</strong>ate <strong>in</strong>ternal reviews of required reports<br />
that are never used <strong>in</strong>-house.<br />
• Simply communicat<strong>in</strong>g with other functions<br />
and with l<strong>in</strong>e operations can save money.<br />
• Keep assets visible to everyone <strong>in</strong> an<br />
entity; this leverages sav<strong>in</strong>gs <strong>in</strong> the entire<br />
<strong>in</strong>ventory, whether the assets are repair<br />
parts or <strong>in</strong>formation.<br />
Good communications is important when it<br />
comes to sav<strong>in</strong>g money on reports. “People do<br />
not always ask the right questions. We do not<br />
always understand what they are ask<strong>in</strong>g. We need<br />
to pick up the phone and clarify what they’re<br />
look<strong>in</strong>g for versus runn<strong>in</strong>g around.”<br />
5<br />
In 2011, a U.S. Bureau of Prisons employee won an award for a<br />
simple idea that saves an estimated $16 million a year: send the<br />
Federal Register to federal workers onl<strong>in</strong>e <strong>in</strong>stead of by mail.
23<br />
Consolidat<strong>in</strong>g and sourc<strong>in</strong>g<br />
Several <strong>CFOs</strong> report sav<strong>in</strong>gs through consolidat<strong>in</strong>g<br />
f<strong>in</strong>ancial, budget and other offices, <strong>in</strong>formation<br />
systems and data centers. They say to<br />
look for opportunities to do this where it will<br />
not require a large upfront capital <strong>in</strong>vestment.<br />
Some also say that <strong>in</strong>sourc<strong>in</strong>g work now done<br />
by contractors will save money, while others say<br />
this is problematic for many f<strong>in</strong>ancial functions<br />
right now because of hir<strong>in</strong>g freezes and staff<br />
reductions. Either way, <strong>in</strong>dicate a few executives,<br />
it is more important to have a bus<strong>in</strong>ess<br />
case that shows the sav<strong>in</strong>gs of a proposed consolidation<br />
or change <strong>in</strong> sourc<strong>in</strong>g, than to have<br />
a general policy for or aga<strong>in</strong>st such choices.<br />
Standardiz<strong>in</strong>g<br />
Many executives say that standardiz<strong>in</strong>g f<strong>in</strong>ancial<br />
processes and data across their governments would<br />
go a long way toward achiev<strong>in</strong>g overall sav<strong>in</strong>gs.<br />
They th<strong>in</strong>k that standardiz<strong>in</strong>g leads to consolidation,<br />
effective shared services centers, economies of<br />
scale and true government off-the-shelf (GOTS)<br />
f<strong>in</strong>ancial software. An executive th<strong>in</strong>ks that it may<br />
be easier to learn how to use nonstandard data —<br />
meta-data solutions can help with this.<br />
Help<strong>in</strong>g to rationalize<br />
government budgets<br />
This is a tough topic for many f<strong>in</strong>ancial executives<br />
we <strong>in</strong>terviewed. Many say that governments<br />
need to kill irrelevant programs and reduce<br />
entitlements. However, <strong>CFOs</strong> know that money<br />
is not the ma<strong>in</strong> matter when appropriators discuss<br />
a program’s budget or its future. <strong>CFOs</strong> have<br />
the hard, cold facts about fund<strong>in</strong>g. Top leaders<br />
ask for it rout<strong>in</strong>ely, but they are often unhappy<br />
with what they hear, say several <strong>CFOs</strong>.<br />
Yet, as government resources rema<strong>in</strong> constra<strong>in</strong>ed,<br />
improv<strong>in</strong>g transparency and availability of useful<br />
f<strong>in</strong>ancial data becomes more important. “Factbased<br />
decision mak<strong>in</strong>g is critical to improv<strong>in</strong>g<br />
government spend<strong>in</strong>g and reduc<strong>in</strong>g government<br />
deficits,” says the CFO of a large federal agency,<br />
“Merg<strong>in</strong>g f<strong>in</strong>ancial and performance data is<br />
important to this.” Equally important is “…<br />
sell<strong>in</strong>g appropriators the story the facts reveal,”<br />
says a f<strong>in</strong>ancial executive, and to do this “… you<br />
need good relations with them and they need to<br />
trust you.”<br />
Evolv<strong>in</strong>g toward evaluation<br />
What we are talk<strong>in</strong>g about here is evaluation,<br />
and <strong>in</strong> times of fiscal constra<strong>in</strong>t a look at the<br />
f<strong>in</strong>ancial value of an activity or program – ROI<br />
and “bang for the buck” are critical. “<strong>CFOs</strong><br />
need to spend more of their time focus<strong>in</strong>g on<br />
programmatic activities,” says another f<strong>in</strong>ancial<br />
executive, “They must be able to provide <strong>in</strong>formation<br />
on program activities so that program<br />
managers are able and encouraged to perform<br />
more efficiently.”<br />
Of course, to do this f<strong>in</strong>ancial executives must<br />
understand their entities’ missions and programs.<br />
Says an executive, “It is a dangerous idea for<br />
<strong>CFOs</strong> who do not understand the ramifications<br />
of f<strong>in</strong>ancial decisions on mission to get <strong>in</strong>volved<br />
<strong>in</strong> those decisions.”<br />
Basic block<strong>in</strong>g and tackl<strong>in</strong>g<br />
Even as they expand their roles <strong>in</strong> management,<br />
government <strong>CFOs</strong> cannot forget that some of<br />
the basic account<strong>in</strong>g work of f<strong>in</strong>ancial functions<br />
can give an important boost to how entities<br />
spend their money. These basics <strong>in</strong>clude track<strong>in</strong>g<br />
and reprogramm<strong>in</strong>g unobligated funds, help<strong>in</strong>g<br />
avoid improper payments, good account<strong>in</strong>g and<br />
sound f<strong>in</strong>ancial stewardship. “Do everyth<strong>in</strong>g possible<br />
to build confidence <strong>in</strong> your numbers,” says<br />
a f<strong>in</strong>ancial executive.
24<br />
Federal f<strong>in</strong>ancial report<strong>in</strong>g model<br />
Ever s<strong>in</strong>ce the federal Chief F<strong>in</strong>ancial Officers Act of 1990 (CFO Act), most federal Executive<br />
Branch entities have been required to submit or at least contribute <strong>in</strong>formation to audited<br />
f<strong>in</strong>ancial reports with f<strong>in</strong>ancial statements 6 that are now part of an annual Performance and<br />
Accountability Report (PAR). Like the annual statements of state and local government,<br />
the federal statements are based on the f<strong>in</strong>ancial report<strong>in</strong>g model 7 used by publicly held<br />
corporations. Unlike state and local governments, the federal government does not depend<br />
on unqualified op<strong>in</strong>ions on its statements by auditors <strong>in</strong> order to issue bonds.<br />
For the past several years, this annual CFO<br />
survey has reported discontent among the ranks<br />
of federal f<strong>in</strong>ancial executives concern<strong>in</strong>g the<br />
current model of annual f<strong>in</strong>ancial report<strong>in</strong>g.<br />
Typically, a compla<strong>in</strong>t by a survey respondent<br />
starts by say<strong>in</strong>g the model produces <strong>in</strong>formation<br />
that few consider relevant or useful, so that<br />
the current form and content of the statements<br />
have little value. Next, the respondent says that<br />
prepar<strong>in</strong>g the reports consumes an <strong>in</strong>ord<strong>in</strong>ate<br />
6<br />
These <strong>in</strong>clude Balance Sheet, Statement of Net Costs, Statement of Changes <strong>in</strong> Net Position, Statement of Custodial Activity, Statement<br />
of Social Insurance and Statement of Changes <strong>in</strong> Social Insurance Amounts.<br />
7<br />
A f<strong>in</strong>ancial report<strong>in</strong>g model consists of GAAP-compliant f<strong>in</strong>ancial statements and accompany<strong>in</strong>g notes, along with the process of prepar<strong>in</strong>g<br />
the f<strong>in</strong>ancial statements, audit<strong>in</strong>g them and us<strong>in</strong>g the <strong>in</strong>formation for the next budget cycle.
25<br />
Table 7:<br />
Federal executives’ op<strong>in</strong>ions on chang<strong>in</strong>g the current f<strong>in</strong>ancial report<strong>in</strong>g model<br />
and associated f<strong>in</strong>ancial statement audit<br />
Change Yes No Maybe<br />
Change the current f<strong>in</strong>ancial report model to save<br />
money and <strong>in</strong>crease its value<br />
Do a full f<strong>in</strong>ancial statement audit every 2 or more<br />
years if entity has history of unqualified op<strong>in</strong>ions<br />
and no major changes to its f<strong>in</strong>ancial systems or<br />
processes or its structure<br />
89% 10% 1%<br />
55% 43% 2%<br />
amount of a CFO’s time and attention. Indeed,<br />
<strong>CFOs</strong>’ ma<strong>in</strong> concern has been to achieve an<br />
unqualified or clean audit op<strong>in</strong>ion on their<br />
annual f<strong>in</strong>ancial statements ever s<strong>in</strong>ce our<br />
survey started ask<strong>in</strong>g about priorities. This is<br />
not because of the reward for a clean op<strong>in</strong>ion,<br />
but <strong>in</strong>stead because not gett<strong>in</strong>g one can be a<br />
career breaker.<br />
Most audit and f<strong>in</strong>ancial executives understand<br />
that the value of f<strong>in</strong>ancial statements is that they<br />
show that an organization’s f<strong>in</strong>ancial <strong>in</strong>formation<br />
is accurate. Most would agree that the process<br />
of prepar<strong>in</strong>g the statements and hav<strong>in</strong>g them<br />
audited has improved federal f<strong>in</strong>ancial management.<br />
Indeed, no one objects to be<strong>in</strong>g audited.<br />
But is the cost do<strong>in</strong>g these th<strong>in</strong>gs the way that<br />
they have always been done still worth it? A<br />
f<strong>in</strong>ancial executive <strong>in</strong> the 2011 survey sums up<br />
the dilemma this way: “You know that the government<br />
wants the money to be accounted for<br />
and the annual f<strong>in</strong>ancial statement report to get<br />
a clean op<strong>in</strong>ion, but no one is look<strong>in</strong>g at maximiz<strong>in</strong>g<br />
returns on <strong>in</strong>vestment.”<br />
We asked federal executives whether they<br />
would change the current model and show<br />
their op<strong>in</strong>ions <strong>in</strong> Table 7. Nearly 9 out of 10<br />
executives would change the report<strong>in</strong>g <strong>in</strong> ways<br />
that run from major to m<strong>in</strong>or. Of <strong>in</strong>terest is<br />
that we asked this same question <strong>in</strong> the 2009<br />
CFO survey and only 34% of respondents<br />
called for such changes. Just over half of<br />
respondents say that <strong>in</strong>stead of conduct<strong>in</strong>g a<br />
full audit on f<strong>in</strong>ancial statements every year,<br />
they would have it done every 2 or more years<br />
if an entity has a history of unqualified audit<br />
op<strong>in</strong>ions. There were some exceptions to this<br />
longer period, such as when an entity implements<br />
a new f<strong>in</strong>ancial system or processes or<br />
restructures its organization.<br />
“You know that the government wants the money to be<br />
accounted for and the annual f<strong>in</strong>ancial statement report to<br />
get a clean op<strong>in</strong>ion, but no one is look<strong>in</strong>g at maximiz<strong>in</strong>g<br />
returns on <strong>in</strong>vestment.”<br />
—a f<strong>in</strong>ancial executive
26<br />
Chang<strong>in</strong>g the f<strong>in</strong>ancial report<strong>in</strong>g model<br />
Suggestions concern<strong>in</strong>g the current model range from tweaks to teardowns, but most respondents<br />
simply want better <strong>in</strong>formation for mak<strong>in</strong>g decisions and report<strong>in</strong>g to legislators and the public.<br />
One executive says that whatever the model is, its focus determ<strong>in</strong>es where a CFO is go<strong>in</strong>g to <strong>in</strong>vest<br />
considerable time and resources, so right now that focus should be on add<strong>in</strong>g value to and lower<strong>in</strong>g<br />
the cost of f<strong>in</strong>ancial management.<br />
Suggestions for chang<strong>in</strong>g the model<br />
✓• Create a new statement associated<br />
with spend<strong>in</strong>g money.<br />
• Change the Statement of Net Costs<br />
to be about costs, not just expenses<br />
as it is now.<br />
• Break <strong>in</strong>formation down by projects<br />
and programs, which would produce<br />
<strong>in</strong>formation of more value to program managers<br />
and citizens.<br />
• Integrate performance results with f<strong>in</strong>ancial<br />
<strong>in</strong>formation <strong>in</strong> a s<strong>in</strong>gle report.<br />
• Elim<strong>in</strong>ate statements no one uses, then<br />
take away all other unnecessary requirements<br />
and hold requirements stable.<br />
• Report the <strong>in</strong>formation that stakeholders<br />
say they want.<br />
• Make the model risk-based.<br />
• Add predictive <strong>in</strong>formation to<br />
the statements.<br />
• Focus on both f<strong>in</strong>ancial and nonf<strong>in</strong>ancial<br />
performance metrics.<br />
• Use pla<strong>in</strong> English <strong>in</strong> the reports.<br />
• Simplify the reports; there are now too<br />
many overlaps and layers.<br />
• Move toward the Government of Canada<br />
model, so that the auditors’ op<strong>in</strong>ion is on<br />
the consolidated f<strong>in</strong>ancial statements of the<br />
United States government <strong>in</strong>stead of on<br />
its components, and only on components<br />
and other factors that are material to the<br />
consolidated report.<br />
• Focus on speed<strong>in</strong>g up the shar<strong>in</strong>g of<br />
<strong>in</strong>formation, which means simplify<strong>in</strong>g and<br />
sett<strong>in</strong>g priorities on what is to be reported.<br />
✘Aga<strong>in</strong>st chang<strong>in</strong>g the model<br />
• In some cases, banks and the <strong>in</strong>vestment<br />
<strong>in</strong>dustry look specifically at the<br />
audit op<strong>in</strong>ion, revenue and expenses<br />
<strong>in</strong> the current model.<br />
• Unqualified f<strong>in</strong>ancial statements<br />
provide legitimacy and trust.<br />
How to move forward on federal<br />
f<strong>in</strong>ancial statement reports<br />
Several executives advocate a reasoned and<br />
cautious approach to chang<strong>in</strong>g the f<strong>in</strong>ancial<br />
report<strong>in</strong>g model and audit cycle. Says a CFO,<br />
“I would favor a risk/cost benefit analysis of<br />
the annual report and audit process. We learn<br />
th<strong>in</strong>gs every year from the audit, such as where<br />
there are weaknesses, but it is unclear at what<br />
cost.” Says another, “If the idea of do<strong>in</strong>g otherthan-annual<br />
audits moves forward, it should be<br />
piloted very carefully first. As an alternative, we<br />
could consider do<strong>in</strong>g a smaller-scale audit <strong>in</strong> off<br />
years for agencies receiv<strong>in</strong>g clean op<strong>in</strong>ions. That<br />
approach would keep management on their toes,<br />
but potentially use fewer resources.”
27<br />
Chang<strong>in</strong>g the annual audit cycle<br />
Note that although many respondents would like to have full audits every other year or every 3 years,<br />
the majority th<strong>in</strong>k it important to do at least some review annually, such as of <strong>in</strong>ternal controls. Also,<br />
says an executive who is for extend<strong>in</strong>g audits period to every other year, “A lot of th<strong>in</strong>gs fall through<br />
the cracks, so the <strong>in</strong>terim period would have to be managed well and you’d need to make sure<br />
everyone is on top of their work.”<br />
For chang<strong>in</strong>g the annual audit cycle<br />
✓<br />
• The costs for f<strong>in</strong>ancial preparation, report<strong>in</strong>g and audit<strong>in</strong>g process<br />
are lowered.<br />
• Some of the time now spent on prepar<strong>in</strong>g annual audits could<br />
be devoted to other th<strong>in</strong>gs, such as address<strong>in</strong>g material weaknesses<br />
or provid<strong>in</strong>g higher-value service.<br />
• Annual reports<br />
encourage quick fixes of<br />
Aga<strong>in</strong>st chang<strong>in</strong>g the annual audit cycle<br />
material weaknesses, <strong>in</strong>stead<br />
✘<br />
• Yearly audits provide discipl<strong>in</strong>e (“In any large bureaucracy,<br />
th<strong>in</strong>gs can get sloppy fast,” says an executive). • Skipp<strong>in</strong>g a year would be a<br />
of long-term fixes.<br />
• Catastrophes can build and yet be overlooked <strong>in</strong> a<br />
good reward for hav<strong>in</strong>g one’s<br />
multi-year period.<br />
f<strong>in</strong>ancial management <strong>in</strong> order.<br />
• The dollar amounts <strong>in</strong>volved <strong>in</strong> many department and<br />
agency budgets are so large that severe problems can<br />
develop <strong>in</strong> a short period.<br />
• The federal government should follow the same report<strong>in</strong>g<br />
period requirements it puts on publicly held companies.<br />
What applies to audited annual f<strong>in</strong>ancial statements<br />
should also be applied to other reports,<br />
say some executives. “I would reduce every f<strong>in</strong>ancial<br />
report, not just the f<strong>in</strong>ancial statements that<br />
we submit for public review, to its bare bones<br />
and if Joe Citizen couldn’t understand it, I’d ask<br />
if it really had any value. There is a movement<br />
to do just that and I hope it cont<strong>in</strong>ues. Put every<br />
report on the table and ask what data element or<br />
elements could we do without? Which ones do<br />
not really tell the story? Which ones do people<br />
not really look at? Also, the closer to real-time<br />
you can make a report, the greater its value.<br />
People do not read massive, complicated and<br />
obsolete reports — they do not tell you anyth<strong>in</strong>g.<br />
Take a different approach.”
28<br />
Conclusions<br />
Politicians guide appropriations to areas they believe<br />
are <strong>in</strong> the best <strong>in</strong>terest of their constituents, and often<br />
do not consider how best to adm<strong>in</strong>ister the money<br />
after that. Especially dur<strong>in</strong>g times of constra<strong>in</strong>ed<br />
spend<strong>in</strong>g, that is where the CFO can play a leadership<br />
role. <strong>CFOs</strong> can <strong>in</strong>troduce new ways to focus on<br />
fund<strong>in</strong>g and expenses that go beyond old-style<br />
compliance and give new mean<strong>in</strong>g to stewardship.<br />
Risk management<br />
Today, risk is global, not just local, so governments<br />
worldwide need to pay more attention<br />
to risk management. This new focus starts with<br />
top leadership committ<strong>in</strong>g to an approach that<br />
sets priorities, balances and mitigates risks to<br />
mission and merges f<strong>in</strong>ancial and non-f<strong>in</strong>ancial<br />
risk management. It is a cross-organizational<br />
activity, not just the job of a s<strong>in</strong>gle chief risk<br />
officer or risk management office (although they<br />
can supply technical leadership and support).<br />
All executives have to be <strong>in</strong>volved, and each<br />
should help cascade risk management downward<br />
through an entity and among other governments<br />
at all levels. Risk management must be<br />
<strong>in</strong>tegral to an entity’s strategic plans, tracked for<br />
effectiveness and evaluated for what works and<br />
what does not.<br />
Predictive and statistical analytics<br />
Governments are awash with data, yet often<br />
have much less real <strong>in</strong>formation than leaders<br />
and program managers need to plan, execute<br />
and evaluate strategies and programs and<br />
manage risk. It is about time that f<strong>in</strong>ancial professionals<br />
start us<strong>in</strong>g analytics to sp<strong>in</strong> more data<br />
<strong>in</strong>to decision-mak<strong>in</strong>g gold. <strong>CFOs</strong> must take the<br />
lead <strong>in</strong> sell<strong>in</strong>g analytics to elected and appo<strong>in</strong>ted<br />
officials <strong>in</strong> order to help advance government<br />
management and stewardship. The first step:<br />
start us<strong>in</strong>g more predictive and statistical analytics<br />
<strong>in</strong> f<strong>in</strong>ancial functions.<br />
Budget cuts<br />
Do<strong>in</strong>g more with less is out; do<strong>in</strong>g less with<br />
less is <strong>in</strong>. Governments must whittle down the<br />
reports and activities they demand of f<strong>in</strong>ancial<br />
functions to those that produce the highest ROI.<br />
Otherwise, f<strong>in</strong>ancial professionals will waste their<br />
talents on documents that few read or use. In the<br />
same ve<strong>in</strong>, budget cuts give governments permission<br />
to focus on top priorities, us<strong>in</strong>g risk management<br />
and analytic methods to identify “must<br />
do” activities versus “nice to do” work <strong>in</strong> all levels<br />
of departments and programs.<br />
Federal f<strong>in</strong>ancial report<strong>in</strong>g model<br />
In the Federal Government, annual f<strong>in</strong>ancial<br />
reports consume a good deal of a CFO’s time<br />
and resources, but 9 out of 10 federal executives<br />
th<strong>in</strong>k the report<strong>in</strong>g model must to be changed<br />
<strong>in</strong> order make it more worthy of the effort.<br />
The Federal Government can no longer ignore<br />
such an overwhelm<strong>in</strong>g call for change, nor is<br />
the solution just a few tweaks. Needed is a new<br />
model better suited for federal missions and<br />
public adm<strong>in</strong>istration.<br />
This is a serious time for governments everywhere,<br />
yet it is an opportunity for <strong>CFOs</strong><br />
and f<strong>in</strong>ancial professionals to show their true<br />
potential for public sector management. The<br />
government f<strong>in</strong>ancial community can and will<br />
help lead us to a new era when all other sectors<br />
of the economy admire and want to emulate<br />
public adm<strong>in</strong>istration.
Design by www.sparkdesign.net<br />
Additional Information<br />
If you would like more copies of this<br />
survey or an opportunity to hear more<br />
about its content and the challenges<br />
fac<strong>in</strong>g the federal CFO community, please<br />
contact the Association of Government<br />
Accountants at the address below:<br />
Association of Government Accountants<br />
2208 Mount Vernon Avenue<br />
Alexandria, VA 22301<br />
Telephone: (703) 684-6931; (800) <strong>AGA</strong>-7211<br />
Web Site: www.agacgfm.org<br />
E-Mail: agamembers@agacgfm.org<br />
Survey Contributors<br />
Association of Government Accountants<br />
Relmond Van Daniker, CPA, Executive Director<br />
National Association of State Auditors,<br />
Comptrollers and Treasurers<br />
R. K<strong>in</strong>ney Poynter, CPA, Executive Director<br />
Government of Canada<br />
Marcel Boulianne, Office of the Comptroller<br />
General, Treasury Board of Canada Secretariat<br />
Grant Thornton LLP<br />
Clifton A. Williams, CPA, CGFM, survey director<br />
C. Morgan K<strong>in</strong>ghorn Jr.<br />
Carlos Otal, CPA<br />
Robert Childree<br />
Wendy Morton-Huddleston, CGFM, PMP<br />
Steven Clyburn<br />
Amber V<strong>in</strong>ton
Association of Government Accountants<br />
2208 Mount Vernon Avenue<br />
Alexandria, VA 22301<br />
Grant Thornton LLP<br />
333 John Carlyle Street<br />
Alexandria, VA 22314<br />
© 2011 Association of Government Accountants. All rights reserved.