Government-wide Financial Reporting - AGA

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Government-wide Financial Reporting - AGA

Corporate Partner

Research

Advisory Group

Series

Report No. 31 July 2012

Government-wide

Financial Reporting


Acknowledgements

About the Authors

Bert T. Edwards, CGFM, CPA, CGMA, was the lead researcher for this project. An

independent consultant since his 2010 retirement as Executive Director of the Office of

Historical Trust Accounting at the U.S. Department of the Interior, Edwards previously

served as CFO of the U.S. Department of State. After a successful 33-year career at

Arthur Andersen LLP as its worldwide industry head for government, higher education

and nonprofit industries, Edwards served as a consultant for the World Bank and

USAID in Vietnam, Moldova, Palestine and Germany and also lectured extensively for

the AICPA and accounting firms on government accounting and auditing issues.

Principal contributors to this report were: Daniel J. Murrin, CGFM, CPA, from

Ernst & Young; John R. Cherbini, CGFM, CPA, CGMA, and Carlos A. Otal, CPA, from

Grant Thornton LLP; Ronald Longo, CGFM, CPA, and David M. Zavada, CPA, from

Kearney & Company; Andrew C. Lewis, CGFM, CPA, CIPP/G, and Jeffrey C. Steinhoff,

CGFM, CPA, CFE, CGMA, from KPMG LLP; Joseph L. Kull, CGFM, CPA, CGMA, from

PwC; and Ann Davis, CGFM, CPA, as Treasury Liaison.

Other contributors were: Werner Lippuner, CISA, CISM, and Danila Weatherly

from Ernst & Young; and Demek M. Adams, CGFM, from Grant Thornton LLP.

The authors would also like to acknowledge the efforts of Lynn Hoffman and

Maryann Malesardi on this project.

Corporate Partner Advisory Group

Chairman:

Hank Steininger, CGFM, CPA

Managing Partner, Global Public Sector,

Grant Thornton, LLP

AGA Professional Staff:

Relmond Van Daniker, DBA, CPA

Executive Director

Susan Fritzlen

Deputy Executive Director/COO

Lynn Hoffman

Programs Coordinator

Maryann Malesardi

Director of Communications

AGA is proud to recognize our sponsors for supporting this effort.

AGA’s Corporate Partner Advisory Group Research Program

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AGA has been instrumental in

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and auditing standards and in

generating new concepts for the effective

organization and administration

of government financial management

functions. The Association conducts

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all aspects of government financial

management. These studies make AGA

a leading advocate for improving the

quality and effectiveness of government

fiscal administration and program

performance and accountability.

Our Thought Leadership Library

includes more than thirty completed

studies. These in-depth studies are

made possible with the support of our

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reports at www.agacgfm.org/

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AGA Corporate Partner Advisory Group Research


Table of Contents

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1. Introduction ................................................................................................... 6

Historical Perspective ......................................................................................... 6

The Research ................................................................................................. 8

Research Project Scope and Methodology ....................................................................... 8

2. Breakdowns in the Compilation Process: Bridging Budgetary and Other Critical Information ............................. 9

Issue ........................................................................................................ 9

Analysis .................................................................................................... 10

Data Flows Supporting the Compilation Process ................................................................. 11

Bridging Unaudited Budgetary Information to Audited Balances ................................................... 13

Identifying and Reporting the Differences Between the Unified Budget Deficit, Net Operating Cost

and the Changes in Cash Needed to Populate the CFS Reconciliation Statements ..................................... 13

A Related Initiative ........................................................................................... 14

Short-Term Recommendations ................................................................................ 14

Long-Term Recommendation .................................................................................. 16

3. Usefulness of the Two CFS Reconciliation Statements ............................................................. 17

Issue ....................................................................................................... 17

Reconciliation of Net Cost Is a Critical Financial Statement Within the CFS ........................................... 17

Improving the Statement of Changes in Cash .................................................................... 18

Short-Term Recommendation ................................................................................. 18

4. Structure ..................................................................................................... 19

Overview of the As-Is Environment ............................................................................. 19

Interviews .................................................................................................. 20

Observations ................................................................................................ 20

Short-Term Recommendations ................................................................................ 21

Long-Term Recommendation .................................................................................. 22

Appendix A: Summary of Important Actions Leading to the Current

Consolidated Financial Statements of the U.S. Government .......................................................... 24

Appendix B: Clarification on Data Format in Statement of Cash ....................................................... 27

Appendix C: Interviews with State, Private-Sector and U.S. Government Financial Officials ............................... 28

Appendix D: Abbreviations and Acronyms .......................................................................... 33

Appendix E: AGA Treasury Review Scope and Methodology Research Project — Summary of Project Meetings ............. 35

Government-wide Financial Reporting 3


Executive Summary

For its audit of the 2011 federal

government consolidated financial

statements (CFS), the Government

Accountability Office (GAO) reported

that the U.S. Department of the

Treasury’s (Treasury) process for compiling

the CFS generally demonstrated that

amounts reported were consistent with

the underlying federal agencies’ audited

financial statements. However, GAO

reported that Treasury’s process did

not ensure that the (1) Reconciliations

of New Operating Cost and the Unified

Budget Deficit and (2) Statements of

Changes in Cash Balances from the

Unified Budget and Other Activities

were fully consistent with underlying

information in audited agency financial

statements and other financial data. 1

This aspect of the compilation process

significantly contributes to a recurrent

material weakness in Treasury’s

compilation for all 15 years GAO has

attempted to audit the CFS. This material

weakness is one of three major impediments

to GAO rendering an opinion on

the CFS. Therefore, the Association of

Government Accountants (AGA) took on

this research project with an objective

of developing actionable recommendations

that address the root cause of this

long-standing problem.

In its ultimate simplicity, imagine

information flowing between each

federal agency and Treasury’s Financial

Management Service (FMS), which

compiles the CFS. One set of information

is flowing on an accrual basis and

the other on a budgetary basis that

is largely cash-based. Both types of

information are reported in the CFS.

For the most part, the accrual information

flow between the agencies and

Treasury, for preparation of the CFS, is

reasonably well documented, and the

underlying information can be reconciled

to that in the audited agencies’

financial statements. The same does

not hold true, however, for budgetary

information included in the two financial

statements cited in the first paragraph.

Arguably, budgetary information is

the most useful financial information

government-wide and within an agency.

Yet the continuing need for a transparent

reconciliation process between agency

and government-wide budgetary balances

has inhibited the audit of probably

the most quoted and used number in the

CFS — the Unified Budget Deficit.

A major improvement would be to

compile and validate budgetary information

in a fashion similar to the accrual

flow. Our research identified specific

technical recommendations that begin

this process and, if properly designed

and implemented, should resolve this

component of Treasury’s compilation

material control weakness and move the

federal government closer to the goal

of achieving an unqualified (“clean”)

auditors’ opinion on the CFS.

Equally if not more important to

success are issues related to structure

and organization. Several themes consistently

came up during our research,

particularly in our discussions with state

and corporate officials: the importance

of clear purpose and priority, financial

authority and responsibility, adequate

resources, and standardization and

centralization. These themes remain a

challenge to the federal government,

and any technical solution would need

to be combined with the type of structural

and organizational changes we are

recommending.

Finally, we were struck by how far

federal government financial management

has come in the 20-plus years

since enacting the Chief Financial

Officers (CFO) Act. 2 The improvement

has been nothing short of remarkable

given the size and complexity of the

federal government and how far it had

to come.

Given this “higher playing field,”

continuing technological advances,

constrained resources and the need for

an open, transparent government, this

is an opportune time to begin to put the

pieces in place to define and achieve

a future vision. The goal should be

relatively simple — to provide reliable,

timely and interactive information to

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AGA Corporate Partner Advisory Group Research


Executive Summary

SUMMARY OF RECOMMENDATIONS

Short-Term Recommendations

manage, demonstrate accountability

and enable an open, transparent government.

One could easily envision an

environment where a real-time system

generates standardized data, providing

reliable, citizen-driven financial reports.

The accounting here is relatively

straightforward, and strong leadership

with a sharp focus and appropriate

authority can make this type of reporting

and underlying process routine. Highperforming

organizations take both the

“clean” auditors’ opinions and the lack

of weaknesses in internal control over

financial reporting and reliable, timely

information for granted — and rightfully

so, since these are critical to their survival

and sustainability. The American

public should demand no less from its

government.

• Enhance the Closing Package process to include reconciliation and

audit of budgetary data.

• Reconcile and audit budgetary information reported in audited

agency financial statements with gross receipt and outlay

information in Treasury’s central accounting system.

• Identify, report and audit the major differences between the Unified

Budget Deficit and Net Operating Cost, and changes in cash to

populate the consolidated level.

• Include all information needed to complete the reconciliation

statements in the Treasury’s Closing Package process.

• Perform a hard close, compile the CFS and begin the CFS audit

process at the end of the third quarter.

• Modify the Statement of Changes in Cash to provide additional

gross receipt and outlay data and change the compilation process

as needed to capture this information.

• Re-energize the Joint Financial Management Improvement

Program by engaging the principals and reconstituting the

steering committee.

• Issue a Presidential Executive Order reaffirming the importance

of a “clean opinion” on the CFS.

• Establish a separate organization reporting to the Fiscal Assistant

Secretary, focused solely on supporting preparation of the CFS, and

augment resources as needed.

• Establish clear responsibility and time frames for corrective actions.

Long-Term Recommendations

• Pursue a more centralized approach to standardizing, collecting,

analyzing and reporting financial information.

• Establish a separate organization in the executive branch responsible

for financial operations, systems, controls and reporting, including

the CFS.

Government-wide Financial Reporting 5


1. Introduction

Over the past 15 years, Treasury,

in cooperation with the Office of

Management and Budget (OMB), has

issued the annual Financial Report of

the U.S. Government (FR), presenting

the financial position and condition of

the nation. For each of those years, the

U.S. Government Accountability Office

(GAO) has issued a disclaimer of audit

opinion on the CFS of the federal government,

which is included in the FR.

The recent economic downturn has

focused the nation on its large budget

deficits, continually rising debt and

the federal government’s long-term

fiscal sustainability. Additionally, a

major credit rating agency has downgraded

the bond rating of the federal

government, which has long enjoyed

the highest credit rating. Against this

backdrop, it is especially important

that the federal government be able to

demonstrate its ability to navigate an

annual audit of the CFS — fundamental

to any organization — and provide the

level of assurance that a “clean” auditors’

opinion represents.

In May 2011, the Association of

Government Accountants (AGA) undertook

an independent research study to

develop recommendations and a plan of

action to address a material GAO-cited

weakness at Treasury that contributes

to GAO’s disclaimer of opinion on the

federal government CFS. Specifically,

this long-standing, unresolved issue

pertains to the identified weaknesses in

the current reconciliation and compilation

processes Treasury employs to

consolidate some 150 federal agencies’

financial data into the CFS.

The research project was built

on interviews with knowledgeable

individuals and organizations affiliated

with the compilation, reconciliation and

associated audit processes. We had a

series of meetings with Treasury, OMB,

GAO and federal government agencies.

We also interviewed representatives

from three state governments (New

York, Massachusetts and Pennsylvania)

and the independent auditors of

Maryland, as well as two large multinational

corporations (IBM and Marriott)

to learn about their practices and experiences

gained from across the governmental

and private sectors. Finally, we

interviewed former Treasury Secretary

Paul O’Neill, who led the charge for

accelerated financial reporting at both

Alcoa and in the federal government.

AGA established a Research Team

that collectively has several hundred

years of senior leadership experience

in government financial management,

reporting and systems. The team

was led by the former CFO of the U.S.

Department of State and included

former senior officials from Treasury,

OMB and GAO.

Historical Perspective

The journey to the CFS began

in 1950, with the enactment of the

Budget and Accounting Procedures

Act (BAPA). 3 In the Treasury Financial

Manual, Part 2, Chapter 1000, 4 the following

citation appears:

“Per the Budget and Accounting

Procedures Act of 1950, Treasury

must render overall Government

financial reports to the President, the

Congress, and the public. Per this

Act, each agency must provide the

Secretary of Treasury (the Secretary)

with reports and information relating

to the agency’s financial condition

and operations as the Secretary may

require for effective performance.

The Secretary’s responsibilities

include the system of central

accounting and financial reporting

for the Government.”

President Harry Truman, who signed

BAPA into law, expressed his thoughts

on the legislation: 5

“The accounting and auditing

provision [of BAPA] lay the foundation

for far-reaching improvements

and simplification. For the first time,

clear-cut legislation is provided

which nails down responsibility for

accounting, auditing, and financial

reporting in the Government. … A

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AGA Corporate Partner Advisory Group Research


Introduction

sound system of accounting in each

agency, appropriately integrated

for the Government as a whole,

is fundamental to responsible

and efficient administration in the

Government.”

While BAPA resulted in important

improvements, its promise was not

fully realized until subsequent financial

management reform legislation more

than 30 years later, which is summarized

later in the document. This reform

legislation revitalized the focus on

financial management and reporting and

included a requirement to prepare the

CFS and have them be audited by GAO.

The federal government has taken

a lengthy journey since the enactment

of the Federal Managers’ Financial

Integrity Act of 1982, 6 and a number of

other acts throughout the intervening

years (see Appendix A). In particular,

since the 1990 passage of the Chief

Financial Officers (CFO) Act, much has

been accomplished to move the federal

government’s financial operations and

reporting to its current state. Widely

heralded as the most comprehensive

financial management improvement in

40 years, the CFO Act ushered in a new

era of federal government accountability.

It significantly changed the landscape

for federal government agency

CFOs, moving the CFO’s role far beyond

basic accounting responsibilities to

that of an agency’s leader in providing

support across a range of critical

programs and operations. 7 But one

achievement that remains elusive is the

ability to prepare consolidated financial

statements for the federal government

as a whole that can obtain a “clean”

auditors’ opinion from GAO.

Among a range of requirements to

reform federal government financial

management practices and capabilities,

the CFO Act required 10 selected

federal government agencies to prepare

audited financial statements beginning

with fiscal year 1992. In commenting

on the requirement for audited agency

financial statements, GAO provided the

following insight:

“Most importantly, the act requires

that financial statements be prepared

and audited. ... Together, these

features of the CFO Act will improve

the reliability and usefulness of

Agency financial information.” 8

The requirement for audited agency

financial statements was later made

permanent and expanded to all 24 CFO

Act agencies with the enactment of

the Government Management Reform

Act of 1994 (GMRA), 9 and the requirement

was then expanded even further

to other federal government agencies

by the Accountability of Tax Dollars

Act of 2002 (ATDA). 10 The GMRA also

included a requirement for Treasury to

prepare auditable CFS for the federal

government beginning with fiscal year

1997. Preparing the CFS was not new

for Treasury, which was at the forefront

of producing prototype statements

beginning in 1973. 11

Over the past two decades, because

of the implementation of the CFO Act

and the GMRA, significant change

has occurred regarding how financial

management is viewed in the federal

government. Financial management is

now an essential component of agency

management to help ensure accountability

and provide valuable information

and enhanced internal controls.

Today, the CFO leadership structure is

focused on the issues and considers the

future much more broadly than it did

even five years ago. The CFO Council,

established by the CFO Act, undertakes

a variety of initiatives and has provided

a forum to address issues on a government-wide

basis.

Even with all the progress made

in federal financial management,

upon completion of its CFS audit in

December 2011 for the fiscal year

ending September 30, 2011, GAO — for

the 15th consecutive year — could not

express an opinion on the consolidated

financial statements. 12

Government-wide Financial Reporting 7


Introduction

The Research

In its role as the premier association

for advancing government accountability,

AGA undertook this governmentwide

financial reporting research

project to provide independent,

objective insight to help Treasury and

the federal government overcome the

long-standing CFS preparation issues

that impede the ability to receive an

unqualified auditors’ opinion.

The primary objective of the

research project was to develop actionable

recommendations that address the

root causes of the long-standing material

weakness in Treasury’s process for

compiling the CFS that contribute to

GAO’s disclaimer of opinion on the CFS.

To meet our objective, we assessed the

preparation and compilation process

for the CFS. We specifically focused on

these areas:

CFS compilation process

Usefulness of the Statement of

Changes in Cash, which is part of

the CFS

Leadership and structural issues

Research Project Scope

and Methodology

In his letter in the 2011 FR related to

the CFS, the Comptroller General of the

United States, the Honorable Gene L.

Dodaro, stated the following:

consolidated financial statements.”

While Defense and Treasury are

continuing to make strides in addressing

the first two impediments, it should

be noted that the scope of this research

project is limited to the material weakness

underlying the third impediment.

Specifically, GAO cited the following:

“… inadequate systems, controls,

and procedures to ensure that the

consolidated financial statements

are consistent with the underlying

audited entity financial statements,

properly balanced, and in conformity

with U.S. generally accepted

accounting principles (GAAP).”

The compilation process for and

the content of the Statement of Social

Insurance and Changes in Social

Insurance within the CFS are not within

the scope of this research project.

The research team conducted 20

interviews with state government

and corporate executives, as well as a

number of Treasury, FMS, OMB, GAO

and federal agency officials. A summary

of the project meetings, including

a list of interviewees, is contained in

Appendix E.

“… three major impediments

continued to prevent us from

rendering an opinion on the federal

government’s accrual-based

consolidated financial statements

over this period: (1) serious financial

management problems at the DOD

that have prevented its financial

statements from being auditable, (2)

the federal government’s inability to

adequately account for and reconcile

intra-governmental activity and

balances between federal agencies,

and (3) the federal government’s

ineffective process for preparing the

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AGA Corporate Partner Advisory Group Research


2. Breakdowns in the Compilation

Process: Bridging Budgetary and

Other Critical Information

Issue

The government-wide CFS contains

both accrual-basis (proprietary) and

cash-basis budgetary financial data.

Treasury’s compilation of the CFS

includes a process to capture accrual

accounts from audited agency financial

statements and successfully link them

to CFS line items. There is no similar

process in place to link audited budgetary

balances to the CFS. Similarly, no

reliable process exists to identify and

report all items needed to reconcile the

Unified Budget Deficit to Net Operating

Cost and the change in cash balance

government-wide. The budgetary

balances and reconciling line items

reported in the CFS are derived primarily

from unaudited sources at Treasury

rather than audited agency financial

statements. Differences between the

Unified Budget Deficit, Net Operating

Cost and the changes in cash government-wide

are developed from analytical

procedures applied by Treasury in

preparation of the CFS.

OMB and generally accepted

accounting principles (GAAP) require

agencies to report net outlays in their

Statements of Budgetary Resources

(SBRs). The CFS also includes two

required statements that include

net outlays as part of the Unified

Budget Deficit. These statements are

the Reconciliation of Net Operating

Costs and Unified Budget Deficit and

the Statement of Changes in Cash

Balance from Unified Budget and Other

Activities (Statement of Changes in

Cash) (see Chapter 3 for a discussion

of the relevance of the two CFS reconciliation

statements). The net outlay

information reported on audited agencies’

SBRs and reported in the CFS are

intended to represent the same amount

and be consistent with information

presented in the budget of the federal

government. They should also be

consistent with information included in

Treasury’s annual Combined Statement

of Receipts, Outlays, and Balances

of the U.S. Government (Combined

Statement).

In 1997, GAO first reported that the

federal government: 13

“… does not have a process to

obtain information to effectively reconcile

the reported change in net position

… and the reported budget deficit.”

GAO noted that significant differences

existed between the total net

outlays reported in audited agencies’

SBRs and the records Treasury used

to prepare the CFS. Over the past 15

years, the net differences between the

total net outlays in selected agencies’

SBRs and the records Treasury uses to

prepare the CFS have ranged from $28

billion in fiscal year 2009 to $140 billion

in fiscal year 2003, with the most recent

net difference of $31 billion in fiscal

year 2011. 14

The inability to reconcile budgetary

and accrual accounting has also been

continuously reported over the past 15

years. GAO has consistently noted that

Treasury does not have a systematic

process in place to capture audited budgetary

information and the significant

components or reconciling line items,

between the Unified Budget Deficit,

Net Operating Cost and the changes

in cash reported in the CFS. While the

overwhelming majority of financial

information used to compile the CFS is

derived from audited agency financial

statements, budgetary receipts and

outlays are not. They are derived from

Net differences between the total net outlays

in agencies’ SBRs have ranged from a low of

$28 billion to a high of $140 billion.

Government-wide Financial Reporting 9


Breakdowns in the Compilation Process

Treasury’s central accounting system,

based on unaudited periodic agency

reports. The lack of an audit trail

between audited budgetary information

reported at the agency level and budgetary

information in the CFS reflects a

breakdown in the compilation process

used by Treasury.

The information needed to reconcile

operating results on the accrual basis

to the budget results (Unified Budget

Deficit) and to reconcile the Unified

Budget Deficit with the change in cash

balance may in some cases be derived

from audited agency financial statements.

However, Treasury does not

have a systematic process in place to

identify the reconciling items and their

source. The information is compiled

by ad hoc procedures applied by

Treasury’s staff, another indication of a

breakdown in the compilation process

used by Treasury.

This chapter presents the results

of our research exploring these issues

along with recommendations to create

an auditable process for the roll-up of

reliable government-wide budgetary

and other information needed to bridge

the current gap.

Analysis

Throughout the course of our

research, our inquiries consistently led

us to disparities between receipts and

outlays reported at the agency and at

government-wide levels. Specifically,

unreconciled differences exist between

(1) receipts and outlays that agencies

reported in their audited financial

statements and (2) the receipt and

outlay components of the Unified

Budget Deficit derived from Treasury’s

central accounting system and reported

in the CFS. The likely source of these

disparities is definitional and due to

reporting differences between the ways

budgetary information is compiled and

reported at the agency and government-wide

levels.

For example, some receipts are

offset against agency outlays and

reported net at the agency level, while

other receipts are recorded only at

the government-wide level. On the

outlay side, the composition of agency

budgetary accounts (Treasury Fund

Symbols) used to compile the audited

agency SBR may be different than the

list of budget accounts used to report

on the government-wide budget.

Figure 1: Net Outlay Differences for Fiscal Year 2011 at Selected

Agencies Between Treasury’s Central Accounting System

(as reported in the CFS) versus Audited Agency Financial Statements (as reported in agency SBRs)

Selected Agencies

Net Outlays

(Combined Statement)

Amounts in Millions

Net Outlays

(SBR)

Difference

Department of Health and Human Services $ 891,244 $ 891,532 $ (288)

Social Security Administration $ 784,194 $ 784,305 $ (111)

Department of Defense $ 742,990 $ 742,794 $ 196

Department of Treasury $ 417,410 $ 430,701 $ (13,291)

Department of Labor $ 131,973 $ 132,969 $ (996)

Department of Education $ 64,271 $ 66,387 $ (2,116)

Department of Homeland Security $ 45,744 $ 46,976 $ (1,232)

Department of Energy $ 31,372 $ 31,350 $ 22

Department of State $ 24,334 $ 26,000 $ (1,666)

Total $ 3,133,532 $ 3,153,014 $ (19,482)

Note: In Figure 1, “Department of Defense” includes the following categories from the Combined Statement: Defense-Military, Army

Corps of Engineers and Other Defense Civil Programs.

Source: Treasury’s annual Combined Statement of Receipts, Outlays and Balances of the U.S. Government (Combined Statement)

and Agency Financial Statements.

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AGA Corporate Partner Advisory Group Research


Breakdowns in the Compilation Process

Net outlay differences are highlighted

in Figure 1. Treasury’s compilation

procedures do not include a

process to identify, reconcile and audit

these net differences, which are even

greater on a gross basis.

Over the past 15 years, much time

and effort have been placed on improving

the quality of financial information

reported in both agency financial

statements and the CFS. It is fair to say

that the majority of the focus to date

has been on the accrual basis accounts

within an agency. Only one of an

agency’s financial statements — the SBR

— is derived solely from an agency’s

budgetary accounts, which are primarily

on a cash basis. Information reported

in the SBR is aggregated at the agency

level, and final audited numbers are not

reported further to or used by Treasury.

Arguably, budgetary information is the

most useful financial information within

an agency, yet the lack of a transparent

reconciliation process between agency

and government-wide balances has had

the effect of inhibiting the audit of probably

the most quoted and used number

published by the federal government —

the Unified Budget Deficit.

Data Flows Supporting

the Compilation Process

Two primary data flows of accrual

and budgetary financial data support

the production of the CFS — the first

flow is audited, the other is unaudited.

The information needed to populate the

CFS reconciliation statements referred

to previously is derived from a combination

of accrual and budgetary data

flows. In Figure 2 (page 12), the audited

flow is on the left, derived from audited

agency financial statements. The

unaudited flow, on the right, is derived

from periodic agency budget execution

reports (SF-133 and SF-224) aggregated

in Treasury’s central accounting system.

Also derived from this flow are

Treasury’s Combined Statement and the

The lack of a transparent reconciliation

process has inhibited the audit of probably

the most quoted and used number

published by the federal government—

the Unified Budget Deficit.

Unified Budget Deficit. The red arrows

bridging the two data flows represent

our recommendation to reconcile and

bridge budgetary information with

audited agency financial statement

balances and to identify and audit any

other budgetary activity reported as

part of the government-wide balances in

Treasury’s central accounting system.

While an audit trail has been built

between (1) audited agency financial

statements (Statement of Net Cost,

Statement of Operations and Changes

in Net Position, Balance Sheet and

Statement of Custodial Activity) and

(2) the CFS for many accounts and

line items, the audit trail has not been

completed for budgetary accounts

that comprise receipts and outlays. In

2002, Treasury in conjunction with OMB

developed the Closing Package concept

for agencies to report to the FMS for its

preparation of the CFS.

The Closing Package is supported

by the Governmentwide Financial

Reporting System (GFRS), which

requires agencies to input audited

information from their financial statements

and crosswalk that information

to line items reported in the CFS. OMB

and Treasury require that the agency

financial statement audits extend to

the agency information reported in the

GFRS to provide assurance regarding

the crosswalking of audited information.

This process effectively leverages

agency audit results for the accrual

accounts and line items contained in

the CFS.

Taking a closer look, Figure 2 illustrates

three primary flows of financial

data relevant to the CFS compilation

process. Two of these flows are audited,

and one is unaudited.

The first flow, to the left, is audited

information agencies reported in

the Closing Package process in the

GFRS. This information is derived

from audited agency financial

statements and the crosswalk of

data into the GFRS is also audited.

Financial information flowing

through this process is adequately

bridged, and an audit trail exists to

support the flow of information.

The second flow of information, in

the middle, is audited, but stops at

the agency level. Agencies currently

produce an SBR that includes

outlay information. As the primary

budgetary statement, the SBR is one

of the principal financial statements

that agencies produce. It is audited

as part of the annual agency financial

audit but is not included in the

Closing Package or the GFRS and is

not used in compiling the CFS.

The third flow of data is unaudited

gross receipts and outlays reported

by agencies in periodic reports to

Treasury and transmitted via the

FACTS II system. 15 These reports

include the Report on Budget

Government-wide Financial Reporting 11


Breakdowns in the Compilation Process

Figure 2: Data Flows Supporting the Government-wide CFS

Agency Level Government-wide

Level

Accrual Balances

Audited

Audited balances,

crosswalked and

transmitted via the

Closing Package/

GFRS process

Government-wide Consolidated Financial Statements (CFS)

Audited Agency

Financial Statements

- Balance Sheet

- Statement of

Net Cost

- Statement of

Changes in Net

Position

Budgetary Balances

Audited

Audited balances

in SBR are not

crosswalked or

transmitted in

preparing the CFS

Audited Net Outlay and

Receipt Balances *

- Agency Statement of

Budgetary Resources

(SBR)

- Statement of

Custodial Activity

Budgetary Balances

Unaudited

Recommended twostep

reconciliation,

reporting, and audit

process

Treasury Central

Accounting System

- Gross receipts

- Gross outlays

Transmitted via

FACTS II system

Receipts and Outlays

Reported to Treasury

Periodically

(from SF-133 and

SF-224 reports)

Combined Statement

of Receipts, Outlays,

Balances

Unified

Budget

Deficit

Agency General Ledger

= Unaudited

= Audited

= Red arrows denote recommended two-step reconciliation, reporting and audit

processes. First, a reconciliation of agency to Treasury receipts and outlays, and

second, the reporting of significant components of differences between the Unified

Budget Deficit and Net Operating Cost and the change in cash. All information

would be transmitted through the Closing Package process, subjecting it to audit.

* Including receipts reported as Earned Revenue on the Statement of Net Cost

Note: The recommendations in red are intended only to address the compilation process weakness. Other weaknesses reported by

GAO related to intragovernmental activity and DoD financial management would need to be separately resolved.

12

AGA Corporate Partner Advisory Group Research


Breakdowns in the Compilation Process

Execution and Budgetary Resources

(SF-133) and the Statement of

Transactions (SF-224). They are

entered into Treasury’s central

accounting system, which is used

to compile the CFS, and eventually

generate the Unified Budget Deficit

reported by Treasury.

Also derived from this flow is the

Combined Statement, 16 a report FMS

issues annually, usually in December.

Financial data flowing through this

process is not reconciled to audited

budgetary information reported by

agencies in either the SBR or to revenue

in the Statement of Custodial Activity,

through which many agencies report

significant receipts such as tax collections

by the Internal Revenue Service

or mineral/oil royalties collected by

the Department of the Interior. While

budgetary information reported in the

SBR and periodic reports to Treasury,

such as the SF-133 and SF-224, are reconciled

at the agency level, a complete

reconciliation to information contained

in Treasury’s central accounting system

is not performed as part of the compilation

process.

Taking the steps necessary to establish

a complete foundation of audited

information from which the balances

in the CFS are derived is a prerequisite

for fully addressing the current gaps in

the compilation process. This entails

addressing two primary gaps in the process:

first, the gap between agency and

government-wide budgetary information,

and second, the gap between the

Unified Budget Deficit, Net Operating

Cost and the changes in cash.

Bridging Unaudited

Budgetary Information to

Audited Balances

Building a reconciliation process

that bridges unaudited and audited

budgetary information is a solution we

heard in a number of our interviews.

This would establish a transparent

audit trail and complete foundation of

audited accrual and budgetary information

from which the CFS is compiled. It

is clear that Treasury understands the

nature of many of the differences that

exist related to budgetary information

between agencies and the governmentwide

balances reported in the CFS.

Treasury has analyzed many of the

receipt and outlay differences and has

significant insight into the areas as

well as into specific agencies where

underlying definitional and reporting

differences exist.

We were briefed on a number of

past initiatives to build this bridge and

design a process to reconcile budgetary

information as well as document

an audit trail between agency and CFS

budgetary data. These past efforts

have provided significant insight into

the problem and have made it easier to

pinpoint potential troublesome areas.

For example, Treasury described reconciliation

approaches for receipts at the

Internal Revenue Service and at Interior.

From both of these efforts, considerable

insight was gained and can be leveraged

to develop a standard reconciliation

template for receipts and outlays.

Further contributing to the gap

between agency and CFS budgetary

information is the form and content

of the agency financial statements as

compared to the CFS and the ease with

which accrual and budgetary information

reported at the agency level aligns

with similar information reported at

the CFS level. For example, agency

Balance Sheets and Statements of Net

Cost align closely with the CFS Balance

Sheet and Statement of Net Cost, so

it is easier to link agency information

to CFS information. Similar alignment

with budgetary accounts and the SBRs

at the agency and CFS levels does not

currently exist. For example, the SBR

does not align with similar statements

at the CFS level.

Identifying and Reporting

the Differences Between

the Unified Budget Deficit,

Net Operating Cost and the

Changes in Cash Needed

to Populate the CFS

Reconciliation Statements

The discussed alignment issue

extends to other statements compiled

only at the government-wide level.

The CFS contains two financial statements,

which are reconcilable in nature

and identify the major differences

between the Unified Budget Deficit, Net

Operating Cost and the changes in cash

at the government-wide level. Unlike

other financial statements in the CFS,

such as the Balance Sheet or Statement

of Net Cost, these statements are not

closely aligned with audited agencylevel

financial statements. These alignment

issues make these statements

particularly challenging to produce.

Since Unified Budget Deficit is

reported in both statements, it is

critical as a first step that the receipts

and outlays comprising these two

important totals first be reconciled to

audited balances. While some level of

Treasury analysis will always be needed

to review and compile the line items on

the two reconciliation statements, the

compilation of the reconciliation statements

is not supported by a reliable

and documented compilation process.

In concept, the gap in the compilation

process related to these statements

is no different from the gap identified

related to receipts and outlays. In both

cases, CFS balances are not linked

back to audited information reported in

audited agency financial statements or

to reconciling information identified as

part of the Closing Package process and

separately audited. Historically, both

reconciliation statements have been

compiled based on analysis performed

at Treasury level or by audit adjustments

identified by GAO.

Government-wide Financial Reporting 13


Breakdowns in the Compilation Process

Our recommendation is intended to provide

a full accounting of gross receipts and outlays

comprising the Unified Budget Deficit.

Treasury is aware of most of the

reconciling items needed to populate the

CFS reconciliation statements as a result

of experience gained in compiling the CFS

over the years. Treasury has a detailed

understanding of these items and the

activities underlying the differences.

But, as we have seen with the Troubled

Asset Relief Program (TARP) and other

newly implemented programs, new items

can be created each year by legislation

or new/revised policies. Developing a

systematic process to identify and report

these reconciling items can be built on the

foundation that already exists and can be

enhanced by improved communication

between Treasury and the agencies. The

result would be needed improvements in

the compilation process.

A Related Initiative

The Governmentwide Treasury

Account Symbol Adjusted Trial Balance

System (GTAS) initiative was brought to

our attention. GTAS is intended to validate

both budgetary and accrual-based

information reported by agencies and

to facilitate the analysis of governmentwide

spending. GTAS, now under development,

could improve the integrity of

budgetary data and facilitate a solution

to reconciling reported differences since

information should be more reliable.

GTAS is similar to the FACTS II

process in design. Scheduled to go

into production in December 2012,

the system is expected to improve

the integrity of all types of financial

information agencies report. As GTAS

becomes more advanced, agencies will

be required to pass more edit checks

before their data can be submitted

to Treasury. These edit checks are

expected to include tests to validate

the relationship between budgetary

and accrual data and the completeness

of adjusting entries. In concept,

higher quality underlying agency data

will enable the production of better

quality financial statements at both the

agency and government-wide levels

because the underlying database will

be the same at agencies and in GTAS.

Pilot efforts are under way to reconcile

agency trial balances reported in the

GTAS to agency financial statements.

GTAS is not intended to be a shortterm

or long-term solution to GAO

findings related to the compilation of

the CFS. GTAS is not a substitute for a

compilation process built from audited

agency financial statements, which

is the concept underlying the Closing

Package approach.

Our recommendations acknowledge

Treasury’s success in linking audited

agency accrual data to the CFS using the

Closing Package approach. We seek to

leverage that success to reconcile budgetary

data through a similar reporting,

reconciliation and audit process.

Short-Term

Recommendations

Recommendation 2.1: Continue to

use and enhance the Closing Package

process in compiling the CFS to include

the reconciliation and audit of budgetary

data and the items needed to

prepare the reconciliation statements.

The Closing Package process and

the approach of deriving reliable

government-wide information from

audited agency financial statements is

a transparent and auditable compilation

process for the overwhelming majority

of the balances in the CFS. In an entity

the size of the federal government with

agencies larger and more complex than

many states and international corporations,

accountability, data reliability and

credibility should always be based on

audited financial statements. Building

on the foundation of audited agency

information is a critical component of a

sound, reliable compilation process.

The existing Closing Package/GFRS

process provides a solution that has

been proven successful in establishing

an audit trail between audited agency

financial statements and the CFS. The

current compilation process used for

accrual balances that leverages audited

agency financial statements through the

Closing Package process has allowed

Treasury to approach a transparent

and auditable compilation process. By

extending this process to include the

reconciliation and audit of budgetary

data as well as the accumulation of

information needed to prepare the reconciliation

statements, Treasury will be

within striking distance of a reliable and

auditable overall compilation process.

Recommendation 2.2: Establish a

process to reconcile and audit budgetary

information reported in audited agency

financial statements with gross receipt

and outlay cash flows in Treasury’s

central accounting system. To facilitate

a complete reconciliation, Treasury

should provide agencies with a populated

reconciliation template as a starting point.

Additional agency procedures are required

to periodically perform the reconciliation,

given that the detailed information to successfully

identify and resolve differences

exists at the agency level.

This recommendation is intended

to provide a full accounting of gross

receipts and outlays reported in the CFS

comprising the Unified Budget Deficit.

Agency budgetary information is compiled,

reported periodically to Treasury

and audited in aggregate annually in the

14

AGA Corporate Partner Advisory Group Research


Breakdowns in the Compilation Process

SBR. However, budgetary information

reported in the CFS is independently

generated from Treasury’s central

accounting system. A process should

be established to reconcile receipts

and outlay information between these

independent sources. Treasury has

attempted to perform this reconciliation

as part of the annual compilation

process and on an agency pilot basis

without broad success. However, in

defense of Treasury’s efforts, the time,

resources and level of detail do not

exist at Treasury to successfully perform

this reconciliation for each agency.

Agencies must “own” their data and, in

turn, “own” the reconciliation process.

The reconciliation process should

be facilitated by Treasury through the

identification of Treasury Fund Symbols

and receipt accounts that are tagged to

agency balances in Treasury’s central

accounting system that can be used by

agencies to make similar comparisons

of the Treasury Fund Symbols included

in their SBRs. Similar comparisons of

the composition of receipt accounts

should also be made. A populated standard

reconciliation template, provided

quarterly by Treasury to each agency,

can serve as a starting point for the

reconciliation. The detailed reconciliation

must be performed at the agency

level where the information exists for

the agency to successfully identify

and resolve definitional and reporting

differences. A budgetary reconciliation

process will add transparency to differences

in budgetary balances reported

in the CFS and establish an audit trail

from audited agency reported budgetary

information to similarly aggregated

information reported at the CFS level.

In addition, performing this quarterly

reconciliation will facilitate the proactive

identification and resolution of differences

and enhance the reliability and

timely compilation to meet stringent CFS

production and audit timelines at year

end. It is important to note that controls

exist at most agencies to reconcile

the annual audited SBR and the actual

column of the President’s Budget. This

process should be leveraged to the

extent possible in performing this reconciliation.

However, this reconciliation

does not always include all receipt and

outlay accounts as a starting point and

may not include final budgetary balances

because of timing differences between

the CFS and the President’s Budget.

Recommendation 2.3: Establish a

process to identify, report and audit the

major differences between the Unified

Budget Deficit, Net Operating Cost and

the changes in cash government-wide

to populate the CFS reconciliation

statements. To facilitate this process,

Treasury should consider providing

agencies with a reconciliation template

populated by using the relevant line

items on the current reconciliation statements

as part of the Closing Package.

This recommendation is intended

to provide Treasury with a systematic

process to accumulate and support

the information it uses to populate

the reconciliation statements. The

information needed to populate the

“Reconciliation of Net Operating Costs

and Unified Budget Deficit” comes from

a combination of agency-supplied data

and Treasury-maintained data. Audited

agency information should be collected

through the Closing Package process

and leveraged to the extent possible

(see Recommendation 2.4).

The information needed to populate

the Statement of Changes in Cash

Balance will likely reside at Treasury, but

to the extent that information is needed

from the agencies, a second template

should be developed to obtain the information.

Many agencies will only populate

a few line items on the template(s), but it

is each agency’s responsibility to identify

the applicable line items. To ensure

consistency in reporting, the template(s)

should be supplemented with guidance

describing precisely what is to be

included on each line. Treasury’s process

should include a mechanism to enable

Treasury to identify and quantify reconciling

items that result from new or revised

policies or legislation. As with the process

recommended for budgetary data in

Recommendation 2.2, this process would

provide a transparent, documented trail

of audited data supporting CFS budgetary

versus GAAP differences.

Recommendation 2.4: Include

budgetary information and information

needed to prepare the reconciliation

statements in the Closing Package

process and the GFRS to provide

transparency and full audit coverage

of budgetary receipts, outlays and

differences between the Unified Budget

Deficit, Net Operating Cost and changes

in cash government-wide. The Closing

Package submission should clearly

identify those budgetary balances

and reconciling items derived from

audited agency financial statements

and any other balances or reconciling

items that need to be addressed at the

government-wide level.

While Recommendation 2.2

describes a process and audit trail

for budgetary information and

Recommendation 2.3 suggests a

process for accumulating reconciling

items, Recommendation 2.4 is intended

to add rigor by subjecting to audit the

crosswalking of reconciled receipts,

outlays and reconciling items as part

of the Closing Package process. As

discussed, the Closing Package process

has facilitated the linkage of audited

agency-level accrual basis information

to the CFS. Thus, an established audit

trail and reporting process exists for

accrual account balances from agency

financial statements to the CFS. We

recommend that the results of the budgetary

reconciliation be incorporated

into the Closing Package process and the

GFRS to essentially crosswalk audited

agency-level budgetary balances to

budgetary balances included in the CFS,

including the Unified Budget Deficit

balance. By including in the Closing

Package the items needed to populate

Government-wide Financial Reporting 15


Breakdowns in the Compilation Process

the reconciliation statements, these

items will be subject to the same audit

procedures as the accrual account balances

currently included in the Closing

Package.

No similar linkage exists for budgetary

information, namely gross receipts

and outlays comprising the Unified

Budget Deficit balance and items

needed to populate the reconciliation

statements. Some of this information

may not be reported in agency

financial statements, and therefore are

not subject to audit. Presenting other

financial information to Treasury as part

of the Closing Package will facilitate

the collection and audit of a complete

accounting of receipts, outlays and

reconciling items.

Recommendation 2.5: Compile the

CFS at the end of the third quarter to

improve internal controls surrounding

the Closing Package process and facilitate

meeting the December 15 reporting

deadline.

Even if all of these process improvement

recommendations are implemented,

the compilation process must start earlier

in the year and include a “trial run” at the

end of the third quarter to reduce financial

reporting and audit risk. This leading

practice has been widely implemented

by the government and private sector.

For example, all publicly held companies

undergo a hard close at least quarterly,

with reports to the SEC.

Federal agencies formerly prepared

financial statements only at year end.

Under this process, agencies produced

audited financial statements six or more

months after year end using costly

and “heroic” efforts, not a process

that could be described as disciplined,

routine or reliable.

Accelerated agency financial reporting

transformed this process to one

where auditors and management now

start earlier in the year to implement,

test and gain confidence in financial

reporting processes and controls. This

enables year-end reporting to be more

routine and reliable. This same transformation

must occur in the process

surrounding the compilation of the CFS.

Performing a hard close at the end of

the third quarter, using agency financial

statements to populate an interim

Closing Package and working with auditors

to perform interim procedures is

essential to routinely producing reliable

and timely audited, government-wide

financial statements by mid-December.

Long-Term

Recommendation

Recommendation 2.6: Continue

to pursue and assess the feasibility,

costs and benefits of a more centralized

approach to standardizing, collecting,

analyzing and reporting financial

information.

Over the longer term, technology

will continue to drive greater capability

and provide additional automated

options. As has been the case with

the evolution of agency-level financial

reporting systems, manual processes

and compensating controls have been

replaced by more automated and

reliable financial systems. This recommendation

addresses these longer-term

considerations.

We also recognize the value of

standardized government-wide data,

processes and controls as a potential

longer-term initiative from which

reliable financial reports could emerge.

This could facilitate the collection

of government-wide data that could

then be analyzed and easily accessed.

Treasury should continue to pursue and

assess the costs and related benefits of

centralized accounting options.

16

AGA Corporate Partner Advisory Group Research


3. Usefulness of the Two CFS

Reconciliation Statements

Issue

As discussed previously, included in

the material weakness cited by GAO is a

breakdown in the compilation processes

related to the two budgetary statements

included only in the CFS — Reconciliation

of Net Operating Cost and Unified Budget

Deficit (Reconciliation Statement) and

Statement of Changes in Cash Balance

for Unified Budget and Other Activities

(Statement of Changes in Cash). When

reconciled to the consolidated net

operating cost on an accrual basis and to

changes in cash, the information regarding

the Unified Budget Deficit provides a

unique perspective available only at the

consolidated federal government level.

During the course of our research, we

assessed the utility of this information

and whether any changes in reporting

should be considered.

As stated in Chapter 2, the form and

content of the CFS does not fully align

with audited agency financial statements.

In some cases, such as with the Balance

Sheet and Statement of Net Cost, alignment

is fairly close, so balances can be

crosswalked through the Closing Package

process fairly easily to balances in statements

appearing in the CFS. However, for

the Reconciliation of Net Operating Cost

and Unified Budget Deficit (Reconciliation

Statement) and Statement of Changes

in Cash Balance for Unified Budget and

Other Activities (Statement of Changes

in Cash), no comparable statement exists

at the agency level. Agencies prepare a

footnote reconciling Net Cost to obligations

that have some similarities and may

crosswalk to some line items in the CFS.

No analog for the Statement of Changes

in Cash exists at the agency level. The

unique nature of these two CFS “reconciliation”

statements presents compilation

challenges and complexities for Treasury.

While these challenges can be overcome,

as discussed in Chapter 2, our intent is to

draw attention to this lack of alignment,

assess the utility of this information, and

address whether any changes in reporting

should be considered.

Reconciliation of Net Cost

Is a Critical Financial

Statement Within the CFS

Reconciling the difference between

consolidated net operating costs calculated

on an accrual basis to the Unified

Budget Deficit provides users with

each perspective — both accrual and

budgetary — a better understanding of

the financial position and sustainability

of the federal government. For example,

key information can be gleaned from

the Statement of Net Cost, such as costs

associated with veterans and employee

benefit programs not captured in budgetary

reporting. Our research indicated

interest in the Unified Budget Deficit not

only on the budgetary basis but also on

the accrual basis and, more important,

the reasons for the differences between

the two perspectives.

Addressing the material weakness

GAO raises (see Chapter 2) will help

ensure that the amounts presented on a

budgetary basis in the separate agency

financial statements align with the

official budget execution information in

the Combined Statement. This reconciliation

between accrual and budgetary

information becomes tantamount to

the “‘Rosetta Stone” for budgetary and

accrual information, ensuring audit

review and validation of accrual-based

information, as well as budgetary information,

may be used throughout the

federal government and by the public

and other key stakeholders.

The ability to perform this reconciliation

also opens the door to focus

reporting on successively lower levels

of aggregation. From a utility perspective,

this is important because anecdotal

evidence in the form of website visits

indicates that disaggregated budgetary

information is much more frequently

viewed (and presumably used) than the

CFS or the individual agencies’ audited

financial statements. Thus, the ability to

reconcile the audited accrual data to budgetary

data brings more credibility to the

more widely used budget information.

Though largely beyond the scope

of this research project, integrating

budget execution and accrual data

Government-wide Financial Reporting 17


Usefulness of the Two CFS Reconciliation Statements

plays a critical role in the development

of information linking program costs

and outcomes. AGA has explored the

concept of a pyramid of financial and

program execution information in a

series of executive sessions held in

conjunction with prior Professional

Development Conferences 17 and in its

work on Citizen-Centric Reporting. 18 AGA

has an e-reporting project under way to

further its efforts in this regard.

Improving the Statement

of Changes in Cash

We believe the Statement of Changes

in Cash and certain Notes to the Financial

Statements contain information that can

inform the discussion related to how

federal government operations impact

outstanding debt and the cash balance.

However, none of our interviewees cited

the current presentation framework or

Statement of Changes in Cash as a data

source for analysis of these issues.

Consistent with the recommendations

of its Financial Reporting Model

Task Force, 19 we understand that the

Federal Accounting Standards Advisory

Board (FASAB) is considering giving the

Statement of Changes in Cash less prominence

and audit coverage by removing it

as a principal CFS statement and making

it required supplemental information.

While analysis of alternatives to reporting

the Statement of Changes in Cash was

outside the scope of this research project,

some initial thoughts are provided for

consideration in formulating options for

refining the Statement.

In its original guidance, the FASAB

was not prescriptive in defining the form

of the Statement of Changes in Cash.

As implemented by Treasury, the current

presentation contains a mixture of gross

cash flows regarding debt issuances

and largely net information regarding

other aspects.

The analog for the Statement of

Changes in Cash in the other sectors,

commonly referred to as the Statement

of Cash Flows, is relevant for commercial

and nonprofit, and state and local

entities, in that the Statement of Cash

Flows converts accrual basis information

into a flow of funds (cash). It provides

useful information related to the viability

and sustainability of the entity. The

Statement is required by the Financial

Accounting Standards Board (FASB) for

the private and nonprofit sectors and by

the Governmental Accounting Standards

Board (GASB) for state and local governments.

Entities are encouraged to report

flows on a gross inflow and outflow

basis. Also, state and local governments

as well as private and nonprofit sectors’

financial reporting focus on future debt,

lease and other future cash outflows.

A gross cash inflow/outflow presentation

helps make it clear that cash flows

result not only from operations but also

other activities, such as loans, investments,

leases and fixed-asset acquisitions.

In addition, current disclosures do

not provide users of the Statement with

anticipated refinancing activity for debt

since there is no table of annual debt

service repayments or repayments due

after five years. In addition, context is

not provided for expected repayments

and future flows related to loan and

investment programs, lease and capital

asset purchase commitments, or their

impact on outstanding debt and cash.

We believe this information would be

valuable to users.

Short-Term

Recommendation

Recommendation 3.1: Modify the

Statement of Changes in Cash to include

information on (1) cash flow from operations,

(2) debt financing activities and

(3) investing activities. The compilation

process should be modified as necessary

to capture this information. FASAB,

Treasury and OMB should determine the

appropriate presentation method.

Information regarding cash flows and

whether Treasury can fund operations

within the operating cycle merits disclosure,

as basic information is needed

to understand the financial position of

the federal government. Information on

gross cash flows related to such matters

as the making and collection of direct

loans, purchase and disposal of investments

(including activity to stabilize the

economy) and flows needed to fund

ongoing deficits is important to allow

users to put results in perspective and

understand future financing needs.

Reconciling the Unified Budget

Deficit to the accrual-based net operating

cost and subjecting the process to

review can improve the quality and reliability

of financial information required

to satisfy growing demands for greater

transparency in reporting. In the case of

the Statement of Changes in Cash, our

research reinforced an emerging view

being considered by the FASAB that

changes may be warranted in where

such information is provided — whether

in a principal statement, footnotes or

another location.

18

AGA Corporate Partner Advisory Group Research


4. Structure

Overview of the As-Is

Environment

The enactment of the CFO Act

ushered in a new era of federal government

accountability. It also put the

“M” (for “Management”) in OMB by

establishing a Presidentially appointed,

Senate-confirmed Deputy Director for

Management (whose role has now been

expanded to include the title of Chief

Performance Officer) and the Office of

Federal Financial Management (OFFM),

headed by a Presidentially appointed,

Senate-confirmed Controller, who

serves at the pleasure of the President.

During development of the CFO

Act, there was significant discussion

as to whether to place the OFFM and

the Controller in OMB, with its central

government-wide management

role and control of the budget, or in

Treasury, with its financial management

expertise and central accounting

capabilities. It was decided that OMB

would have the most leverage to affect

change, given its location within the

Executive Office of the President and

the strong interest of the then-OMB

Director in financial management

reform and improved financial reporting

at the agency and government-wide

levels. Treasury retained its traditional

role as the central accountant and, with

the enactment of the GMRA, became

the preparer of the CFS.

In addition, to leverage the strengths

of both OMB and Treasury, the framers

of the CFO Act proposed to establish a

separate office in Treasury to support the

OFFM’s work, since resources at OMB

were impeded by its size, location (within

the Executive Office of the President) and

mission — primarily a focus on budget

formulation, policy and the control structure

needed to implement and oversee

management of the federal government.

With this separate office, Treasury would

be a partner and valuable technical

resource to OMB and the OFFM.

At the time, it was envisioned that this

Treasury office would employ about 75

people and provide the infrastructure to

support the new CFO Act. This was seen

as the best of both worlds — an OMB

leadership role and a Treasury technical

role and staffing. However, during the

late stages of CFO Act deliberations, the

plan for a separate Treasury office was

dropped due to questions about who had

responsibility for its management. 20

The consolidation of the CFS resides

within the Financial and Budget Reports

Directorate of FMS’s Governmentwide

Accounting Board, which rests six

organizational layers below the Office

of the Fiscal Assistant Secretary (OFAS).

Interestingly, the President’s 2013 budget

proposes to merge FMS with its companion

entity within OFAS, the Bureau of

the Public Debt. Whether the proposed

consolidation will resolve some of the

resource issues remains to be seen.

The resource issue has been raised

beginning with the CFS audit report

for fiscal year 2004. GAO took an

additional step in emphasizing that

the needed systems and resources

infrastructure is a continuing problem

at Treasury. 21 The following language

from GAO’s fiscal year 2004 auditors’

report exemplifies this recurring

message, which was echoed in GAO’s

report on its fiscal year 2011 audit: 22

“Treasury did not have the infrastructure

to address the magnitude of the

fiscal year 2004 financial reporting

challenges it was faced with, such

as an incomplete financial reporting

system, compressed time frames for

compiling the financial information ...

We found that personnel at Treasury’s

Financial Management Service had

excessive workloads that required an

extraordinary amount of effort and

dedication to compile the consolidated

financial statements; however, there

were not enough personnel with specialized

financial reporting experience

to ensure reliable financial reporting

by the accelerated reporting date.”

In carrying out its audit responsibility,

GAO has a small core team assigned

year round to the CFS audit. This team is

augmented at year end with additional

auditors who provide short-term surge

capacity, which Treasury does not have.

Government-wide Financial Reporting 19


Structure

Interviews

The AGA Research Team undertook a

series of interviews with four state, two

private-sector, and OMB, FMS, Treasury

and GAO officials to gain an understanding

of how compilations of CFS and

other complex entities are successfully

accomplished. These interviews are

summarized in Appendix E.

Observations

Three themes — leadership, standardization

and discipline — consistently

arose during our interviews with publicand

private-sector financial managers,

who suggested that success is achieved

by maintaining the following:

Top leadership as the owners of

the initiative — words backed up

with actions to reinforce a sense

of urgency and to make necessary

investments

A well-defined statement of the

objective and its importance

A clear assignment of operational

responsibility together with the

authority to achieve the objective,

i.e., someone in charge with the

ability to enforce decisions across

agencies.

Standardized processes, data and

systems

Discipline in adopting business rules

and providing needed information

Accountability and ability to hold

people accountable

Neither complexity nor size was

seen as a major issue. Arguably the federal

government is the largest and most

complex entity in the world; however,

the job of preparing auditable financial

statements is not complex at its core.

The organizations and individuals we

met with during our research represent

high-ranking Fortune 500 entities able to

overcome their own set of complexities

and achieve reliable and timely financial

reporting that could meet the test of

an audit. Not once did we hear that

one of the components or subsidiaries

was special or different and therefore

unable to meet the necessary reporting

requirements or that they could not

make the reporting entities do what was

needed. The mandate came from the

top, and expectations for results and a

sense of collective urgency were drivers

of reform.

Our interviews also indicated that

entities were expected to perform so the

desired reporting requirements were

met. The level of performance was clear

and well-articulated, primarily defined

by competition, especially with respect

to the capital markets. This is particularly

true for the states, where bond

ratings and access to and cost of capital,

hinge on performance and results. The

same may be said about the private

sector, although direct market competition

also drives the need for reliable,

timely data to make business decisions

that maximize profits. It would be safe

to say that governors and CEOs expect

their organizations to provide timely and

reliable financial information to their

regulators, overseers, lenders, investors

and the public. The inability or failure to

provide such information would most

likely be a death knell for the CFO and

As a result, the need for this capacity remains

today since neither OMB nor Treasury have

invested sufficient resources, systems or people

to carry out the role as the preparer of the CFS.

CEO, if not the entity.

Limited resources were not seen

as an impediment, either. Because of

the high priority placed on reporting,

leadership committed people and funds

to achieve results, and results were

expected for the investment. The people

aspect of this takes on various forms:

Pennsylvania borrows staff during

surge periods.

IBM and Marriott employ “tiger

teams.”

Massachusetts runs continuous

training for its finance staff and

agencies’ staff.

Maryland has a culture of strong

state controllers, one having served

for 35 years.

Infrastructure and process-related

investments enjoyed similar support.

From a people perspective, perhaps

former Treasury Secretary Paul O’Neill

said it best by referring to the fact that

people want to do good work — and

want to be part of something important

and challenging.

In one way or another, Treasury

has adopted some of the approaches

mentioned during our interviews, such

as the use of standard templates, Closing

Packages, team resolution of differences,

and agency and staff training activities.

However, there continues to be the need

for data standardization and business

rules in key areas that impair data

compatibility and quality as cited by IBM

and Secretary O’Neill — as well as a clear

mechanism for enforcing existing data

standards and requirements as described

in our discussions with Marriott, IBM and

state financial officers.

The latter is in part driven by the

need for clear responsibility, authority

and purpose, as well as resources to

make changes that address the root

cause of the remaining reporting challenges

with a sense of urgency. These

missing attributes could be traced to the

early history of the CFO Act, which suggests

the framers recognized the need

20

AGA Corporate Partner Advisory Group Research


Structure

to establish an organization in Treasury

with sufficient resources to support

the OFFM and the OMB Controller and

likewise lead the financial statement

preparation efforts. The establishment

of this organization at an appropriate

level within Treasury — together with

the authority that the OMB Controller

has under the CFO Act — would provide

a greater capability to make and enforce

the type of changes needed to enable

Treasury to resolve the financial statement

preparation findings GAO has

reported for the past 15 years.

There are several issues at the

heart of the solution to the compilation

process — some technical, others

procedural and others organizational.

This is still basic accounting, and one

must believe these obstacles can be

overcome given a clear mandate to do

so, strong leadership and innovative

thinking to drive the desired results and

necessary resources.

And perhaps therein lay the missing

link — purpose and priority. Twenty

years ago there was little incentive to

have an independent audit of the federal

government agencies, or the CFS to

ensure that the books were in reasonable

order, or to have a “clean” auditors’

opinion. But times have changed. Our

federal government is competing for

capital, its creditworthiness and sustainability

have been questioned, and

a digital world raises expectations for

transparency and accountability.

Audited CFS with a “clean” auditors’

opinion are a worldwide symbol,

a standard that marks a certain level

of financial management competency

that is known, accepted and expected

by the public. It is a minimum standard

for anyone doing business, public or

private. While one can debate the merits

of financial statements, there is no

question that the public expects such

statements to have a “clean” auditors’

opinion. It is an imprimatur of good

financial management and one step

toward enabling good government.

As a road map for moving forward

from an organizational/structural

standpoint, we offer the following

recommendations.

Short-Term

Recommendations

Recommendation 4.1: Re-energize

the Joint Financial Management

Improvement Program (JFMIP) by having

the JFMIP principals resume face-toface

meetings several times a year to

systematically work through obstacles

that impede progress on resolving these

and other issues of common interest

to the federal financial management

community. To support this effort, the

JFMIP steering committee, composed

of career officials representing each of

the principals, should be reconstituted

to meet periodically as a resource to the

principals in carrying out the established

initiatives.

The JFMIP was established by the

Budget and Accounting Procedures

Act of 1950 23 as a cooperative program

under the leadership of four principals

— the OMB Director, Secretary of the

Treasury, the Comptroller General and

the Director of the Office of Personnel

Management (OPM). It was intended

that the principals would work together

to address issues across the federal

government. Over the past 60 years, the

principals did not formally interact for

long periods, leaving career officials,

who constituted a steering committee,

to meet and carry out the program.

Changing that paradigm in the early

2000s, the principals became personally

active, meeting face-to-face several

times a year. Many critical decisions

were made during that time, most

notably being the agreement to accelerate

reporting deadlines for agencies and

the CFS, originally proposed by former

Treasury Secretary Paul O’Neill.

This changed somewhat with a

2006 reorganization and relocation of

JFMIP activities. This shift resulted in

the abolishment of the steering committee,

composed of career officials

from OMB, Treasury, GAO and OPM, 24

who supported the principals. Today,

the Comptroller General, who is a

JFMIP principal, meets regularly with

the Controller of OFFM (who also now

wears the hat of Acting Deputy Director

for Management at OMB), which is

a Presidentially appointed, Senateconfirmed

position, and Treasury’s Fiscal

Assistant Secretary, which is a career

position. Their active involvement and

the relationships they have fostered are

important and keep with BAPA’s intent

for the JFMIP. However, under the current

arrangement, only one of the JFMIP

principals is personally involved. Over

time, this can further diminish the impact

and visibility of the JFMIP and its principals.

We believe that resuming periodic

face-to-face meetings of the JFMIP

principals would provide much-needed

additional leadership and direction, place

decision making clearly at the principal

level to resolve government-wide

financial reporting issues and enable a

reconstituted steering committee to help

drive necessary improvement.

Recommendation 4.2: Issue a

Presidential Executive Order reaffirming

that a “clean” auditors’ opinion

for the CFS of the federal government

is important for public accountability,

expectations for the executive branch

agencies, and the authority of Treasury,

as preparer, to establish and enforce

reporting requirements and business

rules related to the CFS.

It is important to make clear that

Treasury has the authority to establish

and enforce reporting requirements

for the CFS, in consultation with the

OFFM Controller in OMB. A Presidential

Executive Order would help eliminate

the gap between Treasury’s responsibility

for preparing the CFS and its

authority to require certain information

be provided to address the recurring

findings from GAO about preparation

of the CFS. The state governments and

Government-wide Financial Reporting 21


Structure

private-sector companies we met with

all had the capability to prescribe what,

how and when information would be

reported and the ability to hold reporting

organizations accountable. They set

the business rules that were followed

across the enterprise. They prescribed

what they needed and how and when it

should be reported. There was discipline

in the process, and they achieved

positive results.

We learned that some federal

agencies may view additional CFS

reporting requirements from Treasury

as burdensome and/or may already be

stretched so thin that they do not believe

they are able to take on additional

reporting. While most federal agencies

today rightfully celebrate their own

“clean” auditors’ opinions, the fact that

the CFS cannot pass the rigors of an

audit — in part because audited agency

financial statements cannot be rolled up

and compiled into the budgetary CFS

statements that balance and tie into the

agency financial statements —should

be viewed as a common concern. There

needs to be a cultural mindset of shared

responsibility and government-wide perspective

that fully supports Treasury’s

resolution to the compilation process

findings, because it is in everyone’s best

interest to establish the federal government

as an effective financial steward

accountable to the public for reports that

pass the auditability test.

This is why we are calling for an

emphatic message from the President

that is strongly reinforced by the JFMIP

principals.

Recommendation 4.3: Establish a

separate organization reporting to the

Fiscal Assistant Secretary of the Treasury

that will focus solely on supporting the

preparation of the CFS and augment this

organization’s resources as necessary.

This separate organization would be

adequately staffed based on a comprehensive

analysis of workload and

sufficient technical knowledge, skills and

abilities to successfully prepare an auditable

CFS. Augmented resources should

include the following:

Continue use of the desk officers

who have direct responsibilities for

managing Treasury relationships

with an agency or agencies with

respect to financial reporting.

Require each agency to designate

an official to manage that same

relationship with Treasury who

can be available during the crucial

November 15 through December 15

audit period, as well as throughout

the year as needed by Treasury.

Provide the new Treasury

organization with surge capacity/

resources, especially during the

December 31 and March 31 quarterly

soft closes and during the June

30 and September 30 hard closes.

Whether these resources come from

Treasury, agencies and/or short-term

contractor support, they must have

the capacity to perform, which GAO

has pointed out as a current problem.

While focusing on the CFS, this

organization could also be a resource

to OMB with respect to the form and

content of agency financial statements

and related technical issues involving

financial reporting. The organization

would also be expected to work closely

and cooperatively with OMB.

Recommendation 4.4: Establish

clear responsibility and time frames for

implementing corrective actions.

Corrective actions should be realistic

but not stretch out too long. Setting

aggressive goals will help establish a

necessary sense of urgency. Although

doing so may require more resources in

the short term, maintaining open audit

findings over multiple years is not in

the best interest of any organization,

including Treasury and the agencies.

The state governments and privatesector

companies we interviewed made

investments, established timelines and

held managers accountable for results.

Long-Term

Recommendation

Recommendation 4.5: Establish

a separate organization within the

executive branch responsible for federal

government financial operations, systems,

controls and reporting, including

preparation of the CFS and undergoing

GAO audit.

In the short-term Recommendation

4.3, we recommend a separate organization

be established now under the

Fiscal Assistant Secretary that would

be responsible for preparing the CFS,

and, ostensibly, implementing the

technical recommendations in this

report. However, in looking holistically

at federal financial management for the

next 15 to 20 years, we see the need

for an organization that can operate in

a dynamic technology and reporting

environment characterized by increasing

data standardization, systems consolidation

and heightened attention on realtime

accountability and transparency.

Thus for the long term, we recommend

a separate entity that would

embody the themes we heard consistently

throughout our research and the

keys to success — clarity of purpose in

and undergoing GAO audit, clear assignment

of operational responsibility and

authority to enforce requirements, and

accountability for results. The new entity

would bring together responsibility and

authority now split between OMB (which

establishes financial policy) and Treasury

(which manages the government’s

accounting back office by maintaining the

general ledger, paying the bills, managing

the federal government’s cash flow

and preparing the CFS).

A separate organization with the requisite

authorities would be better-positioned

to implement changes, including

more standardized data and more

centralized systems, which will allow for

improved federal government financial

management and greater transparency

22

AGA Corporate Partner Advisory Group Research


Structure

and accountability. Standardization and

centralization — both critical success

factors at IBM and Marriott — can

further enable improvements to federal

financial management as well. Given the

pace of technology and the productivity

and cost advantages it offers, for

example, one could envision within

20 years a single accounting system

for the federal government providing

interactive, reliable data in a real-time

environment.

The new organization would be

viewed as an unbiased, nonpartisan,

independent organization (similar to

GAO). Its leader — a Presidential appointee,

confirmed by the Senate — would

hold a fixed term (similar to GAO’s

Comptroller General). Consistent with

the CFO Act, the organization would be

responsible for accounting and reporting

on budget execution at the government-wide

level and would serve as a

resource to OMB, which would remain

responsible for budget formulation and

policy. Both groups would be expected

to work closely and cooperatively. With

appropriate legislation, the head of the

new organization would be designated

as one of the JFMIP principals.

Government-wide Financial Reporting 23


Appendix A: Summary of

Important Actions Leading to the

Current Consolidated Financial

Statements of the U.S. Government

The journey to the CFS began in 1950

with the enactment of the Budget and

Accounting Procedures Act (BAPA). 25 In

the Treasury Financial Manual (TFM),

Part 2, Chapter 1000, 26 the following

citation appears:

“Per the Budget and Accounting

Procedures Act of 1950, Treasury

must render overall Government

financial reports to the President, the

Congress, and the public. Per this

Act, each agency must provide the

Secretary of Treasury (The Secretary)

with reports and information relating

to the agency’s financial condition

and operations as the Secretary may

require for effective performance.

The Secretary’s responsibilities

include the system of central

accounting and financial reporting

for the Government.”

President Harry Truman, who signed

BAPA into law, expressed his thoughts

on the legislation: 27

“The accounting and auditing

provision [of BAPA] lay the foundation

for far-reaching improvements

and simplification. For the first time,

clear-cut legislation is provided

which nails down responsibility for

accounting, auditing, and financial

reporting in the Government. … A

sound system of accounting in each

agency, appropriately integrated

for the Government as a whole,

is fundamental to responsible

and efficient administration in the

Government.”

While BAPA resulted in important

improvements, its promise was not fully

realized until subsequent financial management

reform legislation more than

30 years later. This legislation revitalized

the focus on financial management

and financial reporting and included

a requirement to prepare the CFS and

have it audited by GAO.

The first major event in the reform

of federal government financial management

was the Federal Managers’

Financial Improvement Act of 1982

(FMFIA). 28 Under the FMFIA, for the first

time, federal government agency heads

were required to submit a report on the

status of internal controls that ensure,

for example, that:

“… obligations and costs are in

accordance with applicable law …

funds, property and other assets are

safeguarded against waste, loss,

unauthorized use or misappropriation

… revenues and expenditures

are properly recorded …”

If the agency head believed there

were internal control issues, which could

range from physical security of buildings

to computer systems operations to

accounting accuracy, FMFIA required a

report of these weaknesses and actions

to address the problems. Initial reporting

commenced for fiscal year 1983, with

such annual reports due 90 days

after that fiscal year end and annually

thereafter.

In February 1985, GAO issued a

comprehensive two-volume report,

Managing the Cost of Government

— Building an Effective Financial

Management Structure. 29 This report,

which established a conceptual framework

for improving federal government

financial reporting, controls and

systems, laid the foundation for the

passage of the landmark CFO Act of

1990. It opened with an 1802 quote from

Thomas Jefferson:

“I think it an objective of great

importance … to simplify our system

of finance and to bring it within the

comprehension of every member of

Congress … the whole system has

been involved in impenetrable fog.

There is a point … on which I should

wish to keep my eye … a simplification

of the form of accounts … so

as to bring everything to a single

centre; we might hope to see the

finances of the Union as clear and

intelligible as a merchant’s books, so

that every member of Congress, and

every man of any mind in the Union,

should be able to comprehend them

to investigate abuses, and consequently

to control them.”

Since the 1990 passage of the CFO

24

AGA Corporate Partner Advisory Group Research


Appendix A

Act, much has been accomplished to

move the federal government’s financial

operations and reporting closer to

Jefferson’s vision. Widely heralded

as the most comprehensive financial

management improvement in 40 years,

the CFO Act ushered in a new era of

federal government accountability. It significantly

changed the landscape for the

federal government agency CFO, moving

the role far beyond basic accounting

responsibilities to that of agency leader

in providing support across a range of

critical programs and operations. 30 But

one achievement that remains elusive

is the ability to prepare consolidated

financial statements for the federal

government as a whole that can obtain a

“clean” auditors’ opinion from GAO.

Among a range of requirements to

reform federal government financial

management practices and capabilities,

the CFO Act required 10 selected federal

government agencies to prepare audited

financial statements beginning with

fiscal year 1992. In commenting on the

requirement for audited agency financial

statements, GAO provided the following

insight:

“Most importantly, the act requires

that financial statements be prepared

and audited. … Together, these features

of the CFO Act will improve the

reliability and usefulness of Agency

financial information.” 31

The requirement for audited agency

financial statements was later made

permanent and expanded to all 24 CFO

Act agencies with the enactment of the

Government Management Reform Act

of 1994 (GMRA) 32 and expanded even

further to other federal government

agencies with the Accountability of Tax

Dollars Act of 2002 (ATDA). 33 The GMRA

also included a requirement for Treasury

to prepare auditable CFS for the federal

government beginning in fiscal year

1997. Preparing the CFS was not new

for Treasury, which was at the forefront

of producing prototype statements

beginning in 1973. 34 Treasury continued

to prepare prototype CFS until the 1994

requirements of the GMRA mandated

Treasury’s preparation and GAO’s audit.

The CFO Act laid the foundation for a

series of ensuing management reforms

and legislation built on the concepts

of improved accountability and better

management practices. For example,

we have witnessed the enactment of

the Federal Financial Management

Improvement Act of 1996 (FFMIA) 35

and its focus on improving financial

management systems, which are at

the heart of the CFO Act. Similarly, the

Government Performance and Results

Act of 1993 (GPRA) mandated reporting

on actual results agencies achieved. 36

The Improper Payments Information

Act of 2002 (IPIA) 37 and the Improper

Payments Elimination and Recovery

Act of 2010 (IPERA) 38 have spearheaded

the war against improper payments.

The Federal Funding Accountability

and Transparency Act of 2006 (FFATA) 39

and the American Recovery and

Reinvestment Act of 2009 (ARRA) 40 have

opened the door for unprecedented

accountability and transparency over

federal government spending and have

spawned additional systems, controls,

reporting regimens and oversight

mechanisms. There has been important

related information technology legislation,

such as the Clinger-Cohen Act of

1996, 41 the Government Information

Security Reform Act of 2000 (GISRA) 42

and the Federal Information Security

Management Act of 2002 (FISMA). 43

Over the past two decades, with the

implementation of the CFO Act and the

GMRA, significant change has been

realized in how financial management

is viewed in the federal government.

Now considered an essential component

of agency management, financial

management helps ensure accountability

and provides valuable information

and enhanced internal controls.

Today, the CFO leadership structure is

focused on the issues and considers

the future much more broadly than

it did even five years ago. The CFO

Council, established by the CFO Act,

undertakes a variety of initiatives and

has provided a forum to address issues

on a government-wide basis.

Government-wide Financial Reporting 25


Appendix A

CFOs are coming to the job with the

proven track records in financial management

that the CFO Act envisioned.

CFOs now have a “seat at the table” and

are focused on functions — not encumbered

with a wide range of unrelated

responsibilities. Highly qualified deputy

CFOs also provide continuity and bring

years of experience to the job. While not

yet where the CFO community ultimately

wants to be, the evolution of financial

systems and operations has been dramatic.

44 The number of financial systems

has been reduced, and the integration of

financial systems with program systems

has increased. There has been greater

standardization, a dramatic increase in

shared services and much less duplication

of effort. Technology has enabled

greater efficiency and effectiveness, and

financial statement audits have pinpointed

problems that have resulted in

changes to financial systems. Finally, a

direct byproduct of the CFO Act was the

establishment of the Federal Accounting

Standards Advisory Board (FASAB). The

FASAB has become a widely recognized

standard-setting body and continues its

work to institutionalize and refine federal

government accounting standards and

financial reporting models.

With all the progress made in financial

management, in December 2011,

GAO completed its CFS audit for the fiscal

year ending September 30, 2011. For

the 15th consecutive year, GAO could

not express an opinion on the CFS. 45

GAO cited three major impediments

that contributed to its disclaimer of opinion

on the CFS. The material weaknesses

cited by GAO included problems related

to Treasury’s ability to prepare the

consolidated financial statements using

audited agency information. Treasury, in

coordination with OMB, did implement

corrective actions during fiscal year 2011

to address internal control deficiencies

detailed in GAO’s audit report for the

previous fiscal year. But GAO found that

the federal government continued to

have inadequate systems, controls and

Principal Impediments to an Unqualified

(“Clean”) Auditors’ Report — 2011

• Department of Defense — Unauditable

• Intragovernmental Transactions and Balances

• Compilation Process

procedures to ensure that the CFS are

consistent with the underlying audited

agency financial statements, properly

balanced and in conformity with U.S.

generally accepted accounting principles

(GAAP).

The problems cited in GAO’s report

have been vexing to the federal government

since the outset of the GMRA

requirement for audited CFS and have

adversely impacted Treasury’s ability

to prepare CFS that can withstand the

scrutiny of an independent audit. The

problems transcend Treasury and are a

byproduct of financial reporting systems

and processes across the federal

government, impacting the ability to

consolidate audited agency information

at a government-wide level. This is in

spite of three decades of investments

at the agency level in financial systems

modernizations, enhanced business

process and investments in personnel.

A lot is known about the problem, but

solutions have been elusive despite

hard work by Treasury, OMB and the

150 federal government agencies whose

financial results are incorporated into

the CFS.

26

AGA Corporate Partner Advisory Group Research


Appendix B: Clarification on Data

Format in Statement of Cash

As noted in Chapter 3, our discussions

revealed little interest in the

Statement of Changes in Cash. There are

apparent explanations for this.

Unlike the Statement of Cash Flows

other standard-setters prescribe for

the private/nonprofit and state/local

sectors, the current Statement is a

mixture of gross reporting of cash

inflows and outflows — principally

debt issued and repayments made

on debt held by the public. Many

other significant transaction types

are reported only on a net basis.

The Statement presentation differs

substantially from the three types

of cash flows FASB mandates

for the private/nonprofit sectors

(operating, investing and financing

activities) and four types of cash

flows GASB mandates for the state/

local government sector (operating,

investing, capital asset and financing

activities). FASB and GASB both

encourage gross reporting. The

Statement of Changes in Cash

would be much more informative if

gross cash inflows and outflows for

GSEs, TARP and loan activities, for

example, were disclosed.

We recognize that developing a

similar approach for gross cash inflow

and outflow information in the absence

of an agency requirement to provide

such information in its financial statements

presents additional challenges

in expanding reporting issues for the

Statement of Changes in Cash. However,

some agencies operating lending, leasing,

guaranteeing and similar activities

may already have such gross and net

cash flow data available.

We believe that gross reporting

significantly improves understanding

of the federal government’s complete

cash management activities. For some

transaction types, the cash outflows

may well exceed those of some of the 35

major federal entities.

Government-wide Financial Reporting 27


Appendix C: Interviews with

State, Private-Sector and U.S.

Government Financial Officials

In order to learn from the experiences

of larger state governments, private-sector

firms and former Treasury Secretary

Paul O’Neill, who led the charge for

accelerated financial reporting at both

Alcoa and in the federal government,

the team arranged interviews with top

finance officials of these entities and with

Secretary O’Neill.

State Practices

We conducted interviews with

state controllers and/or their office

staff or independent auditor in four

states — Maryland, Massachusetts, New

York and Pennsylvania. Each state has

achieved unqualified or “clean” auditors’

reports and has been recognized by the

Government Finance Officers Association

(GFOA) 46 for excellence in financial

reporting. Although states are required

to publish financial statements within

nine months of the fiscal year end under

GASB accounting standards and GFOA’s

Comprehensive Annual Financial Report

(CAFR) requirements, these four states

generally publish within six months of

fiscal year end. The states have considerably

more time to close, correct and

undergo an audit in contrast to either

federal government agencies, which

have only 45 days after fiscal year end

to perform these activities, or Treasury

and GAO, which have only 30 days after

audited agency financial statements are

submitted to produce the audited CFS.

These states were able to accomplish

positive results operating in complex

environments that have some of the

same attributes as federal government

agencies — entities with different fiscal

years, multiple auditors and a myriad of

systems and primary and component

units, often numbering in the hundreds.

New York, for example, has more than

300 entities, a major joint venture in the

Port Authority of New York and New

Jersey, 63 public benefit corporations

(some of which are larger than smaller

states), two major pension funds (both

among the largest in the country), as

well as two university systems (State

University of New York and the City

University of New York).

Though there are organizational

differences among the four states, all

seemed to make their processes work.

Two of the four states had an elected

controller; the other two controllers serve

in appointed positions within the governor’s

cabinet. All had responsibility for

overseeing their state’s financial operations,

maintaining financial records and

producing financial reports, in addition

to responsibilities in other areas (e.g., the

Maryland controller also has tax collection

and administration responsibilities).

Budget activities, especially formulation,

were outside the purview of the controllers’

offices. None of the state offices had

direct control or authority over component

units or agency CFOs.

All four states used a common

general ledger system, some having a

central accounting system as well. All

acknowledged, however, that many state

agencies and components had their

own systems to manage their activities.

Human resource systems were cited as

examples. New York was the only state

in the process of implementing a new

central accounting system, and its state

agencies have agreed to move onto the

new system and give up their stand-alone

systems in an effort to reduce costs,

increase standardization and accelerate

reporting.

While processes for handling

intrastate transfers and formal closings

varied, none of the states seemed to

have a problem. Only the Pennsylvania

controller’s office discussed intrastate

transfers to any extent, noting that

unbalanced transactions were resolved

by having state agency staff detailed to

the controller’s office at year end to work

through the issues.

Likewise, each state had a slightly

different twist to its closing processes,

but none reported major difficulties.

All states had a hard close at year end

only. For some states, trial balances

were pulled directly from the state

central accounting system, and for those

balances not on the system, a reporting

template or Agency Reporting Package

(ARP) was used. Only New York required

quarterly and annual ARP submissions.

28

AGA Corporate Partner Advisory Group Research


Appendix C

In two instances, the states’ closed books

became the official financial “books of

record.”

All four states reported that high-level

leadership was key to timely compliance

and reporting. Behind such leadership,

controllers were able to rely on “jawboning”

and “cajoling” to keep the closing

process on schedule. Controllers were

not hesitant to enlist higher levels of

authority when problems arose as failing

to produce timely financials with an

unqualified “clean” auditors’ opinion was

not an option for them, their legislators,

their governors or their outside bond

rating agencies.

At least one state, Pennsylvania,

expanded the core group from seven

to 30 people at crunch times to handle

“Closing Packages,” CAFR reporting and

resolving unbalanced transfers.

Corporate Practices

We interviewed two corporations —

Marriott and IBM — to learn about their

practices. These corporations experienced

and resolved problems similar to

those Treasury faced in complex environments,

with multiple entities operating

different systems, subsidiaries with

different fiscal years, financial statements

in non-U.S. currencies and demanding

regulative (SEC, NYSE) pressures. Both

are among the largest SEC-registered

securities issuers, and as publicly held

companies, both undergo a hard close

each month to meet internal-management,

shareholder and SEC reporting

requirements.

Marriott Corporation

Somewhat analogous to the situation

at Treasury, about 10 years ago

Marriott was having difficulty balancing

its inter-subsidiary accounts. It “froze”

the out-of-balance accounts and started

anew to ensure that all new transactions

were balanced. Marriott assigned a

group of four or five people to focus on

resolving the out-of-balance accounts. It

also required subsidiary CFOs to report

to both subsidiary management and the

corporate CFO.

Specific accounting rules were put in

place and strictly enforced after careful

research to determine root causes of the

imbalances. Generally, the rules require

that the “credit” subsidiary (the entity

transferring funds) is responsible for

determining the entry, and the “debit” or

receiving subsidiary (the entity performing

the work or service) records the flip

side of the transaction.

Because there are different reporting

periods among groups of subsidiaries

(usually based on geography), monthly

(four- or five-week) and quarterly

(13-week) reporting periods are closely

monitored to ensure that any intercompany

accounts “turn around” so that

related transactions show up on each

set of records in the following reporting

period. The problem becomes manageable

by dealing separately with accounts

“frozen” at a point in time, and then

starting anew with strict rules in place

and resolving any differences in the

next monthly reporting period. Marriott

also reduced the number of standard

accounts by more than 80 percent, from

15,000 to 2,500. According to Marriott,

its system for balancing inter-subsidiary

accounts was developed from leading

practices at IBM.

IBM

In 1994, IBM had decentralized

financial management with 12 different

accounting centers, different charts

of accounts and varied accounting

standards, resulting in a variety of “data

flows.” As a result, IBM had difficulty

managing its operations and cash flow

because operating results were not

known until 30 days after the end of the

month. In fact, IBM cited reasons for its

finance re-engineering effort analogous

to the challenges Treasury faced:

A lack of timely, reliable data existed

to operate the business. Obstacles

included tension between centralized

and decentralized leadership, data

inconsistency and effort spent on

“chasing data” versus analysis.

A protracted closing cycle,

involving several handoffs with

a commensurate data summary

Government-wide Financial Reporting 29


Appendix C

at each step, made it difficult to

“drill down” details supporting

summarized data.

Financial systems lacked the desired

flexibility for efficient reporting

and analysis due in large part to

differences in hardware/software and

multiple locations.

In short, the IBM systems were

not positioned to support centralized

management processes, and the systems

were becoming too expensive to support.

IBM began a total overhaul of financial

management in 1994, revising substantially

the existing accounting environment.

This took several years, starting

with the development of a worldwide

chart of accounts that included codes for

country, business unit (type of business)

and object class. Centralized business

rules were also developed to prescribe

how transactions were to be accounted

for and reported.

In 1997, IBM began to centralize by

reducing regional accounting centers

while giving managers access to data

earlier and more frequently. By 2002,

IBM had reduced data centers, made

local data available within seven to nine

days, released earnings in 15 rather than

30-plus days and balanced intercompany

receivables and payables within 30 days.

A key to the consolidation process

was the use of Hyperion software,

considered the world’s largest and most

complex Hyperion application at the

time. It included special report applications,

such as identifying unbalanced

intercompany transactions, budgeting

(comparing budget versus actual results)

and business planning. Special accounting

codes facilitated balancing intercompany

transactions, and any unbalanced

transactions outstanding longer than 30

days were closely monitored.

This approach — and the processes

therein — became known as the “IBM

standard,” and it enjoyed continuous

support from top-level IBM officers.

Looking back at the past 15 to 20 years,

IBM interviewees said this support was

critical to reinforcing the standard and

providing the necessary resources. In

fact, interviewees repeatedly used the

word “discipline” in referring to the “IBM

standard” and the numerous U.S. and

international acquisitions IBM makes

annually. These acquired companies

must implement the “IBM standard”

within six months, and a team at IBM

headquarters stands ready to help them

make the transition. From a reporting

standpoint, subsidiary CFOs report

directly to the IBM Headquarters CFO and

indirectly to the subsidiary CEO.

Current IBM corporate headquarters

staff consists of a consolidation group

and corporate financial team, each with

30 people, and several small groups of

about six people for external financial

reporting (SEC, etc.), operations analysis

and tax accounting. The centralization

of accounting resulted in significant

labor cost savings while substantially

improving controls and shortening the

closing process. Looking to the future,

IBM is contemplating a migration to new

software to configure a single corporate

data warehouse to serve as the “trusted

source” of financial information.

Figure 3: Key Data for Entities Interviewed —

Fortune 500 Rank/Rank Equivalent ($ Billions) 47

Entity

Fortune 500

Revenue/Ranking

Fortune 500

Dollar Value of

Assets/Ranking

Fiscal

Year End

Date of “Clean”

Auditors’ Report–

Timeframe

Maryland 48 $47.8/#51 $39.5/#112 6/30/2011 12/15/2011 – 5.5 mos.

Massachusetts 49 $59.2/#43 $67.7/#71 6/30/2011 1/3/2012 – 6 mos.

New York 50 $298.2/#3 $190.1/#27 3/31/2011 7/25/2011 – 3.8 mos.

Pennsylvania 51 $81.0/#24 $86.9/#61 6/30/2011 12/12/2011 – 5.5 mos.

Alcoa 52 $21.0/#123 $39.3 /#113 12/31/2011 2/16/2012 – 1.5 mos.

IBM 53 $99.9/#18 $113.5/#50 12/31/2011 2/28/2012 – 2 mos.

Marriott 54 $11.7/#210 $9.0/#311 12/30/2011 2/16/2012 – 1.5 mos.

30

AGA Corporate Partner Advisory Group Research


Appendix C

Interviews with Federal

Government Officials

We conducted separate interviews

with OMB, Treasury, FMS and GAO

officials on the front line of federal government

financial management and the

consolidation issue. All focused on issues

related to process timing, resources and

authority.

The timing issue relates to the

relatively short period given to consolidate

and perform the audit. Both

the FMS and GAO cited the 30-day time

frame between agency submissions

and audited CFS as a challenge. The

FMS noted that analysis of any issue is

virtually impossible given the consolidation

of 35 major entities and 115 smaller

ones. GAO noted it has less than 20 days

to complete its audit of the consolidation

process and resolve any issues.

Exacerbating the time crunch is a lack

of resources, mostly related to the FMS.

One is the lack of staff to assist the FMS

in the 30-day consolidation period. FMS

officials specifically cited the strain on

resources in this time frame and even

suggested some sort of “surge” capacity

to augment FMS staff during this period.

GAO’s staff, which includes a small core

team that works on the audit year round,

has usually been augmented over the

years during the later stages of the audit.

We were told that augmenting FMS

staff with agency financial reporting staff

is difficult for the following reasons:

Treasury does not have the authority

to compel agencies to do so. What’s

more, requiring agency staff to be

available to augment FMS staff

during the 30-day window — to

perform reconciliations and other

tasks needed to prepare auditable

CFS — runs counter to the FMS’s

reluctance to add any burden to

agencies’ financial staffs. In fact,

both the FMS and GAO pointed out

that the FMS did not have a “big

stick” to get agencies to comply with

Treasury accounting requirements

or with OMB-mandated reporting

requirements.

Agency staff work long hours

to meet the 45-day time frame

for audited agency financial

statements. It is not uncommon for

key agency staff to take some time

off after November 15 through the

extended Thanksgiving weekend

or to immediately shift its attention

away from the annual closing and

audit to deal with budget issues

such as “pass backs” or continuing

resolutions, which generally take

priority over issues related to

financial statements.

Thus, in addition to not having a

surge capacity, Treasury does not have a

knowledgeable staff available to answer

questions or provide support for information

requests from GAO.

OMB considers the FMS to be the

federal government’s “central financial

data repository.” However, OMB noted

that issues do not always get resolved

or communicated because of the split

responsibilities between OMB/OFFM and

Treasury/FMS, and between the FMS and

the agencies. Some examples follow:

Treasury Fund Symbols changes are

not always publicized to affected

users.

OMB and FMS efforts to improve the

integrity of budgetary data reported

by OMB and Treasury have not yet

resulted in improved agency financial

statements or financial audit process.

The FMS publishes an annual

receipt and outlay report (Combined

Statement) by early December

that neither the FMS nor OMB has

cross-checked for data accuracy and

agreement.

OMB has pushed the FMS for

agency SBRs to identify Treasury

Fund Symbols that would

facilitate reconciliations under the

Intragovernmental Payment and

Account System and, previously,

the Online Payment and Account

System.

Finally, OMB did not see a potential

solution in combining some aspect of

OMB with Treasury. OMB, which falls

within the Office of the President and

informs the President on budget matters,

is largely obligations-based while

Treasury is largely cash-based. From a

budget perspective, there seems to be

little interest in the CFS based on GAAP.

Public-Sector and

Private-Sector

Leadership Perspective

Our discussion with the Honorable

Paul O’Neill reflected his experience as

the CEO of Alcoa as well as and his public

service, including serving in the Bureau

of the Budget (predecessor to the current

OMB) and more recently as Secretary of

the Treasury.

Within 13 months, under Secretary

O’Neill’s leadership, Alcoa was able close

the books in three days from the previous

14 to 21 days. Under his leadership at

Treasury, it became the first cabinet-level

agency to not only close its books but

also to produce audited financial statements

by November 15, 2002 — 45 days

after the fiscal year close and two years

before the accelerated date was to take

effect under the GMRA. He made the

following observations:

The mandate must come from

the top of the organization. If the

leader has a keen interest and

defines expectations, it will get

done. Otherwise, audit findings will

remain unresolved year after year.

A short statement by the President

that a “clean” auditors’ opinion is

symbolic of good government and

that’s why we need to get it would

provide the impetus to move this up

on the priority list. Having a driver

or champion like the President, and

OMB Director and Treasury Secretary

behind a special task force could

make this happen.

There must be a systematic plan of

attack — a clear game plan.

Government-wide Financial Reporting 31


Appendix C

Aggressive timelines must be

adopted and enforced.

Systems need to be interoperable

and user-friendly.

Standardization — a set of business

rules that are understood and

enforced through a leadership

structure — is a critical requirement.

Data quality must be a priority. The

organization should gather only the

information needed for management

and external reporting so there

is no information overload and

management receives what it needs

in a useful form.

Auditors should conduct parallel

testing and not wait for the financial

statements.

On reflecting upon the current

organizational structure of the federal

government financial management, with

the split function between Treasury and

OMB, he noted that in 1966 the Bureau

of the Budget implemented one budget

planning system for everyone, and this

became the “bible” for the analytic

budget community. The same could be

done today for financial management

through a collaborative effort of the

heads of Treasury and OMB, endorsed by

the Comptroller General.

Secretary O’Neill spoke of the current

split functionality of OMB (budget and

management) and Treasury (financial

management). He noted that the former

Bureau of the Budget had great analytical

minds and deep connections to

every federal agency, both remaining

attributes of the budget side of today’s

OMB. Treasury, he felt, appeared more

removed and rather focused, and rightly

so, on debt issuance and other fiscal

policy issues.

He noted that, in his government

experience, career staff members want to

participate in meaningful initiatives that

show the best of government. They want

to be led by positive reinforcement and

do value-added work. They want to be

part of something great, something that

is a winner. They would enjoy moving to

more critical thinking and analytical work

rather than just inputting, repairing and

aggregating data.

32

AGA Corporate Partner Advisory Group Research


Appendix D:

Abbreviations and Acronyms

AGA — Association of Government

Accountants.

Agency — One of the approximately

150 separate entities of the U.S.

Government that submit financial data

to the FMS for the CFS.

ARP — New York State Agency

Reporting Package, submitted for the

March 31 fiscal year close of the State

to the New York Office of the State

Comptroller.

ARRA — American Recovery and

Reinvestment Act of 2009 (Public Law

111-5, February 17, 2009).

ATDA — Accountability of Tax Dollars

Act of 2002 (Public Law 107-289, 116

Stat. 2049, November 7, 2002).

BAPA — Budget and Accounting

Procedures Act of 1950 (Public Law

81-764, 64 Stat. 832, September 12,

1950).

BFM — Bureau of Financial Management

for the Commonwealth of Pennsylvania.

BPD — Treasury OFAS’s Bureau of the

Public Debt.

CAFR — Comprehensive Annual

Financial Report, issued by state and

local governments in the United States.

CAS — Central Accounting System for

the state of New York.

CFO — Chief Financial Officer (some

federal agencies have a different title

for this position).

CFO Act — The Chief Financial Officers

Act of 1990 (Public Law 101-576, 104

Stat. 2838, November 15, 1990).

CFS — Consolidated financial statements

of the federal government prepared

pursuant to accounting standards

promulgated by the FASAB and audited

by GAO.

Clinger-Cohen Act — Clinger-Cohen Act

of 1996 (Public Law 104-106, div. E, 110

Stat. 186 and 679, February 10, 1996).

Closing Package — Periodic, usually

annual, summary of a subordinate

government unit’s financial data to its

central financial management function

to prepare consolidated financial

statements.

Combined Statement — Combined

Statement of Receipts, Outlays, and

Budgets, prepared by the FMS. Updated

throughout the fiscal year from SF-133s

and SF-224s submitted by agencies,

with a final Combined Statement issued

in late fall for the previous fiscal year.

CPAG — AGA’s Corporate Partners

Advisory Group.

CUNY — City University of New York.

Defense — U.S. Department of Defense.

FACTS I and II — Federal Agencies’

Centralized Trial-Balance System.

FASAB — Federal Accounting

Standards Advisory Board, the accounting

standard-setting entity recognized

by the federal government and

American Institute of CPAs to promulgate

accounting standards for the

federal government and its agencies.

FASB — Financial Accounting

Standards Board, the recognized

accounting standard-setting entity for

publicly held, private and for not-forprofit

entities.

Federal government — The U.S.

Government.

FFMIA — Federal Financial

Management Improvement Act of

1996 (Public Law 104-208, div. A, Sec.

101(f), Title V111 Stat. 3009, 3009-389,

September 30, 1996).

FISMA — Federal Information Security

Management Act of 2002 (Public Law 107-

347, 116 Stat. 2899, December 17, 2002).

FMFIA — Federal Managers’ Financial

Integrity Act of 1982 (Public Law 97-225,

96 Stat. 814, September 8, 1982).

FMS — Financial Management Service

of the Treasury OFAS.

FMSNY — Financial Management

System of a New York state agency.

FR — Annual Financial Report of the

U.S. Government — 2011 and earlier

FRs available at www.fms.treas.gov/fr/

index.html and on OMB and GAO websites.

The 2011 FR, on pages 203–204,

lists the websites of the 35 largest

federal government agencies.

Government-wide Financial Reporting 33


Appendix D

GAAP — Generally accepted accounting

principles, which, for the federal

government and its agencies, are

promulgated by the FASAB.

GAO — U.S. Government

Accountability Office (formerly the

General Accounting Office).

GASB — Governmental Accounting

Standards Board, the recognized

accounting standard-setting entity for

the approximately 90,000 U.S. state

and local governmental units and their

instrumentalities and components.

GFOA — Government Financial Officers

Association, a professional organization

of state and local governmental

financial officials.

GFRS — Governmentwide Financial

Reporting System used by the FMS

to aggregate data from 150 reporting

agencies to produce the CFS.

GISRA — Government Information

Security Reform Act of 2000 (Public Law

106-398, October 30, 2000).

GMRA — Government Management

Reform Act of 1994 (Public Law 103-356,

108 Stat. 3410, October 13, 1994).

GPRA — Government Performance and

Results Act of 1993 (Public Law 103-62,

107 Stat. 285, August 3, 1993).

GSE — Government-Sponsored

Enterprise.

GTAS — Governmentwide Treasury

Account Symbol Adjusted Trial Balance

System. Proposed system under development

to replace FACTS I and FACTS

II, scheduled for use in December 2012

(end of first quarter of fiscal year 2013).

Interior — U.S. Department of the

Interior.

IPERA — Improper Payments

Elimination and Recovery Act of 2010

(Public Law 111-204, July 22, 2010).

IPIA — Improper Payment Information

Act of 2002 (Public Law 107-300,

November 26, 2002).

JFMIP — Joint Financial Management

Improvement Program.

NYOSC — New York Office of the State

Comptroller.

NYSE — New York Stock Exchange.

OFAS — U.S. Treasury Department

Office of the Fiscal Assistant Secretary.

OFFM — OMB’s Office of Federal

Financial Management.

OMB — U.S. Office of Management and

Budget within the Executive Office of

the President.

Reconciliation Statement —

Reconciliation of Net Operating Cost

and Unified Budget Deficit.

SEC — U.S. Securities and Exchange

Commission.

Statement of Changes in Cash —

Statement of Changes in Cash Balance

from Unified Budget and Other

Activities.

SUNY — The multi-location entities

constituting the State University of New

York.

TARP — Troubled Asset Relief Program,

U.S. Government Treasury Department

plan to aid banks and other financial

institutions.

TFM — Treasury Financial Manual.

Transparency Act — Federal Funding

and Transparency Act of 2006 (Public

Law 109-282, September 26, 2006).

Treasury — U.S. Department of the

Treasury.

U.S. Government — The combined

federal government’s three branches —

executive, legislative and judicial.

USSGL/SGL — Uniform accounts

used throughout federal government

agencies to achieve consistency in

financial statements among agencies

and between agencies and the federal

government CFS.

34

AGA Corporate Partner Advisory Group Research


Appendix E: AGA Treasury

Review Scope and Methodology

Research Project — Summary of

Project Meetings

Our primary and objective research

yielded conclusions and recommendations

regarding the strategy and actions

for improving the Closing Package

reconciliation processes in the short

term, improving the CFS compilation

processes in the long term and targeting

key stakeholders.

Interviews with key process stakeholders

enabled the research team to

obtain a full understanding of (1) the

process by which the OFAS’s Financial

Management Service collects and generates

agency budgetary and financial

data and consequently prepares the

CFS, (2) the nature of GAO’s audit findings

and (3) recent and ongoing initiatives

to address those findings.

Marriott Corporation

Carl T. Berquist, Executive Vice

President and Chief Financial Officer

Cindy Braak, Vice President, Global

Business Finance

Kevin M. Kimball, Executive Vice

President

Informational interviews were

conducted with four states and two

private-sector corporations to ascertain

best practices and benchmarks regarding

how they compile and prepare

consolidated financial statements.

Similar interviews were conducted

with officials at Treasury, OMB, GAO,

federal agencies and former Treasury

Secretary O’Neill. Our questions focused

on how the interviewees maintain data

integrity through reconciliations and

other internal controls when reporting

at different levels and on different bases

of accounting, such as budgetary and

accrual financial records.

The names of the interviewees and

their organizations follow:

IBM Corporation

Steven B. Watson, Partner-Federal

Financial Management/Global

Business Services

Timothy Mulvey, Financial Statement

Group

Stephanie Nash, Financial Statement

Group

Jeffrey Petzold, Financial Statement

Group

U.S. Department of

the Treasury

Richard L. Gregg, Fiscal Assistant

Secretary

Mark A. Reger, Deputy Assistant

Secretary for Accounting Policy

Ann Davis, CGFM, CPA, Senior Staff

Accountant

Patricia Cappello, CGFM, CPA, Senior

Staff Accountant

R. Scott Bell, CGFM, Senior Staff

Accountant

Wanda Rogers, Deputy

Commissioner, Financial

Management Service

David Rebich, Assistant

Commissioner, Governmentwide

Accounting, Financial Management

Service

Julie Edwards, Deputy Assistant

Commissioner, Governmentwide

Accounting, Financial Management

Service

Colleen Graham, Supervisory

Accountant, Financial Management

Service

Holden Hogue, Financial & Budgetary

Report Directorate, Financial

Management Service

Government-wide Financial Reporting 35


Appendix E

U.S. Government

Accountability Office

Robert F. Dacey, Chief Accountant

Gary T. Engel, Director, Financial

Management and Assurance (FMA)

Larry Malenich, Director, FMA

Paula Rascona, Director, FMA

Arkelga Braxton, Assistant Director,

FMA

Matthew Zaun, Senior Auditor, FMA

Financial Management

Service

Senita Beverly, Director for

Cash Accounting and Reporting

Directorate

Karen Dasuki, Director, Financial

Reports Division

Jeffrey Hoge, Managing Director of

Operations

Karen Stewart, Manager, Cash

Control Branch

Gary Ward, Senior Staff Accountant

OMB

Chris Fairhall, Budget Concepts

Branch

Budget Officers Advisory Council,

includes 24 members from various

federal agencies

Paul O’Neill, Former

Treasury Secretary

Office of Financial

Innovation and

Transformation (OFIT)

Andrew Ganahl, Initiative Leader

Adam Goldberg, Executive Architect

John Hill, Director

House of Representatives

Committee on Oversight

and Government Reform

Jennifer Hemingway, Senior Policy

Staff Member (Majority)

Tegan Millspaw, Research Analyst

(Majority)

Mark Stephenson, Senior Policy

Advisor (Minority)

SB and Company, LLC,

Auditors for the State of

Maryland

Graylin Smith and William Seymour,

Engagement Partners for Maryland

audit team

Commonwealth of

Massachusetts

Martin J. Benison, Comptroller of the

Commonwealth

Howard Merkowitz, Deputy

Comptroller

B.J. Triveti, Director, Financial

Reporting Bureau

Commonwealth of

Pennsylvania Bureau of

Financial Management

(BFM)

Michael Burns, BFM Director

Lauren Dungan, BFM Assistant

Director

New York State Office of

the State Comptroller

Suzette Baker, CPA, CGFM, Assistant

Director, Bureau of Financial

Reporting

David Hasso, CPA, CGFM, Executive

Director, Bureau of Financial

Reporting

Tim Riley, Accountant, Bureau of

Financial Reporting

AGA Research Team meetings were

held at AGA’s office in Alexandria, VA,

every Wednesday from February 8, 2012,

through June 6, 2012.

36

AGA Corporate Partner Advisory Group Research


Endnotes

1. Treasury’s process could also not

ensure that the Statements of Operations

and Changes in Net Position were consistent

with underlying agency financial

statements and other financial data.

2. Chief Financial Officers (CFO) Act

of 1990 (Public Law 101-576, 104 Stat.

2838, November 15, 1990).

3. The Budget and Accounting

Procedures Act of 1950 (Public Law

81-784, 64 Stat. 832, September 12, 1950).

4. www.fms.treas.gov/tfm/vol1/

v1p2c100.html

5. www.presidency.ucsb.edu/ws/

index.phppid+13617#axzz1uYzjyASs

6. The Federal Managers’ Financial

Integrity Act of 1982 (Public Law 97-255,

96 Stat. 814, September 8, 1982).

7. “The CFO Act Turns 20 Years Old:

As We Blow Out the Candles, Where Are

We Today and Where Do We Go From

Here,” by Jeffrey C. Steinhoff, CGFM,

CPA, CFE, and John R. Cherbini, MBA,

CGFM, CPA, AGA, Journal of Government

Financial Management, Winter 2010.

8. GAO, The Chief Financial Officer

Act — A Mandate for Federal Financial

Management Reform, 1991.

9. Government Management Reform

Act of 1994 (Public Law 103-356, 108

Stat. 3410, October 13, 1994).

10. The Accountability of Tax Dollars

Act of 2002 (Public Law 107-289, 116

Stat. 2049, November 7, 2002).

11. Treasury’s Bureau of Government

Financial Operation, now known as the

Financial Management Service (FMS)

began producing a prototype CFS in 1973.

12. 2011 Financial Report of the United

States Government, Statement of the

Comptroller General of the United States

and the U.S. Government Accountability

Office’s Auditor’s Report, December 12,

2011 (available at www.fms.treas.gov/fr/

index.html, and OMB and GAO websites).

13. 1997 Financial Report of the

United States Government.

14. Appendix A1, p. 228, Audit Report

on the Consolidated Financial Statement

of the U.S. Government, FY 2011,

December 12, 2012.

15. FACTS II — the Treasury Federal

Agencies’ Centralized Trial-Balance System

— is the system through which agencies

submit the budgetary information required

for the SF-133, the Year-End Closing

Statement (FMS 2108), and much of the

initial data that will appear in the prior year

column of the Program and Financing

Schedule of the President’s Budget.

16 The Combined Statement is

compiled from SF-133s and SF-224s

submitted by agencies to Treasury

throughout the year.

17. Financial Reporting in a Dynamic,

Digital World: An Overview of AGA’s

2010 Executive Session, July 10, 2010,

Orlando, FL.

18. Building a Foundation for

Confidence in Government: Moving from

Theory to Action in an Era of Scarce

Resources, July 10, 2011, Atlanta, GA.

19. Financial Reporting Model Task

Force Report to the FASAB, December

22, 2010.

20. “The CFO Act Turns 20 Years Old:

As We Blow Out the Candles, Where Are

We Today and Where Do We Go From

Here,” by Jeffrey C. Steinhoff, CGFM,

CPA, CFE, and John R. Cherbini, MBA,

CGFM, CPA, AGA, Journal of Government

Financial Management, Winter 2010.

21. FY 2004 Financial Report of the

United States Government, Government

Accountability Office Comptroller

General’s Statement, December 14, 2004.

22. FY 2011 Financial Report of the

United States Government, Government

Accountability Office Comptroller

General’s Statement, December 12, 2011.

23. The Budget and Accounting

Procedures Act of 1950 (Public Law

81-784, 64 Stat. 832, September 12, 1950).

24. At the time the JFMIP Steering

Committee was abolished in 2006, the

members representing the principals

were the Deputy Controller of OFFM

in OMB, Treasury’s Deputy Fiscal

Assistant Secretary, GAO’s Managing

Director for Financial Management and

Assurance, and OPM’s CFO.

25. The Budget and Accounting

Procedures Act of 1950 (Public Law

81-784, 64 Stat. 832, September 12, 1950).

Government-wide Financial Reporting 37


Endnotes

26. www.fms.treas.gov/tfm/vol1/

v1p2c100.html

27. www.presidency.ucsb.edu/ws/

index.phppid+13617#axzz1uYzjyASs

28. Federal Managers’ Financial

Integrity Act of 1982 (Public Law 97-255,

96, Stat. 814, September 8, 1982).

29. GAO, Managing the Cost of

Government — Building an Effective

Financial Management Structure, GAO/

AFMD-85-35 and 35A, February 1985.

30. “The CFO Act Turns 20 Years Old:

As We Blow Out the Candles, Where Are

We Today and Where Do We Go From

Here,” by Jeffrey C. Steinhoff, CGFM,

CPA, CFE, and John R. Cherbini, MBA,

CGFM, CPA, AGA, Journal of Government

Financial Management, Winter 2010.

31. GAO, The Chief Financial Officer

Act — A Mandate for Federal Financial

Management Reform, 1991.

32. Government Management

Reform Act of 1994 (Public Law 103-356,

108 Stat. 3410, October 13, 1994).

33. The Accountability of Tax Dollars

Act of 2002 (Public Law 107-289, 116

Stat. 2049, November 7, 2002).

34. Treasury’s Bureau of Government

Financial Operation, now known as the

Financial Management Service (FMS)

began producing prototype CFS in 1973.

35. The Federal Financial Management

Improvement Act of 1996 (Public Law 104-

208, div. A., sec. 101(f), title VIII Stat. 3009,

3009-389, September 30, 1996).

36. The Government Performance

and Results Act of 1993 (Public Law 103-

62, 107 Stat. 285, August 3, 1993).

37. The Improper Payments

Information Act of 2002 (Public Law

111-204, November 26, 2002).

38. The Improper Payments

Elimination and Recovery Act of 2010

(Public Law 107-300, July 22, 2010).

39. The Federal Funding and

Transparency Act of 2006 (Public Law

109-282, September 26, 2006).

40. The American Reinvestment and

Recovery Act of 2009 (Public Law 111-5,

February 17, 2009).

41. The Clinger-Cohen Act of 1996

(Public Law 104-106, div. E, 110 Stat. 186,

679, February 10, 1996).

42. The Government Information

Security Reform Act of 2000 (Public Law

106-398, October 30, 2000).

43. The Federal Information Security

Management Act of 2002 (Public Law 107-

347, 116 Stat. 2899, December 17, 2002).

44. “The Government Management

Reform Act of 1994: A Retrospective

of Achievements and Remaining

Challenges,” by Jeffrey C. Steinhoff,

CGFM, CPA, CFE and Robert F. Dacey, JD,

CGFM, CPA, AGA, Journal of Government

Financial Management, Winter 2008.

45. 2011 Financial Report of the United

States Government, Statement of the

Comptroller General of the United States

and the U.S. Government Accountability

Office’s Auditor’s Report, December 12,

2011 (available at www.fms.treas.gov/fr/

index.html, and OMB and GAO websites).

46. From the GFOA mission statement:

“The purpose of the GFOA is

to enhance and promote the professional

management of governments

for the public benefit by identifying

and developing financial policies and

best practices and promoting their use

through education, training, facilitation

of member networking, and leadership.”

47. Fortune, May 23, 2011, Vol. 163,

Number 7. Generally these are fiscal

year 2010 data (next ranking due in

May 2012). For states, data are 2011

fiscal years; their “ranking” is where

they would appear if the Fortune 500

included state governments.

48. www.marylandtaxes.com (2011

CAFR) — data exclude state pension plans.

49. www.mass.gov/osc/publicationsand-reports/financial-reports/cafrreports

(2011 CAFR) — data exclude

state pension plans.

50. www.osc.state.ny.us.finance/

index (2011 CAFR) — data exclude state

pension plans.

51. www.budget.state.pa.us (2011

CAFR) — data exclude state pension plans.

52. www.alcoa.com. Alcoa was not

interviewed per se but Paul O’Neill, its

former CEO, was interviewed.

53. www.ibm.com

54. www.marriott.com

38

AGA Corporate Partner Advisory Group Research


AGA CPAG Research Reports

No. 1, March 2005:

No. 2, July 2005:

No. 3, November 2005:

No. 4, April 2006:

No. 5, June 2006:

No. 6, June 2006:

No. 7, February 2007:

No. 8, March 2007:

No. 9, May 2007:

No. 10, April 2007:

No. 11, May 2007:

No. 12, June 2007:

No. 13, June 2007:

No. 14, January 2008:

No. 15, July 2008:

No. 16, September 2008:

No. 17, November 2008:

No. 18, January 2009:

No. 19, February 2009:

No. 20, March 2009:

No. 21, June 2009:

No. 22, September 2009:

No. 23, November 2009:

No. 24, June 2010:

No. 25, July 2010:

No. 26, September 2010:

No. 27, June 2011:

No. 28, September 2011:

No. 29, December 2011:

No. 30, May 2012:

Audit Federal Financial Controls: Sooner Rather than Later

Financial Management Shared Services: A Guide for Federal Users

Trends in Technology

The Federal Purchase Card: Use, Policy and Practice

Challenges in Performance Auditing: How a State Auditor with

Intriguing New Performance Authority is Meeting Them

PAR—The Report We Hate to Love

The State Purchase Card: Uses, Policies and Best Practices

Federal Real Property Asset Management

Should State and Local Governments Strengthen Financial Controls

by Applying SOX-Like Requirements

Process-Based Financial Reporting

The State Travel Card—Uses, Policies and Best Practices

Trends in Technology—2007 Review

The Federal Travel Card—Uses, Policies and Best Practices

21st Century Financial Managers—A New Mix of Skills and Educational Levels

SAS 70 Reports: Are they Useful and Can They Be Improved

XBRL and Public Sector Financial Reporting: Standardized Business Reporting:

The Oregon CAFR Project

Characteristics of Effective Audit Committees in Federal, State and Local Governments

Grants Management: How XBRL Can Help

Procuring Audit Services in Government: A Practical Guide to Making the Right Decision

Performance-Based Management

Trends in Technology—2009 Review

Managerial Cost Accounting in the Federal Government:

Providing Useful Information for Decision Making

State and Local Governments’ Use of Performance Measures to Improve Service Delivery

Creating an Interactive Single Audit Database

Redefining Accountability: Recovery Act Practices and Opportunities

The Maturity of GRC in the Public Sector: Where Are We Today Where Are We Going

Trends in Technology: 2011 Report, The Information Explosion

Improper Payments: Not Just the Purview of the CFO Anymore

Using Performance Information to Drive Performance Improvement

Leveraging Data Analytics in Federal Organizations

Government-wide Financial Reporting 39


Association

of Government

Accountants

2208 Mount Vernon Avenue

Alexandria, VA 22301

703.684.6931

800.AGA.7211

703.548.9367 (fax)

www.agacgfm.org

agamembers@agacgfm.org

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