Financial Management: Providing a Foundation for Transition - AGA

Association of Government Accountants’ Annual CFO Survey july 2008FinancialManagementProviding a Foundation for Transition

1Executive summaryIn 2008, 239 federal financial management executivesand managers took part in the 12th annual chief financialofficer (CFO) survey sponsored by the Association ofGovernment Accountants (AGA) and conducted by GrantThornton LLP. Survey respondents are proud of thefinancial management and internal control successes ofthe past 7 years. However, they say that the governmentmust head in a new direction to achieve even greatergains. Future improvements need to focus on how theCFO can add value to missions and programs, not justcomply with regulations.Financial reportingMost survey respondents agree that the way the Federal Governmentprepares, presents and audits annual financial statements is broken. Only5 percent of citizens are satisfied with the federal financial information theyreceive, according to another 2008 AGA survey. Designed for industry, thecurrent financial reporting model costs too much and delivers little usefulinformation to government decision makers. Needed are new modelsthat are more transparent to citizens, relevant to decision makers andappropriate for government. The Executive Branch can make some of thechanges required for such models. Also, federal entities can reduce the costand improve the quality of the current model or other models by using arisk management approach.Accounting and auditing standardsMost executive respondents think the approach used by federal auditors forfinancial reports adds value to government management. Nonetheless, halfcalled for changing federal accounting standards and 60 percent for newaudit standards. They want the standards to be more relevant to the business,goals and purpose of government. In essence, the standards shouldguide reporting on performance in areas that matter to program managersand citizens, not just to auditors.Internal controlThree out of four executives in the survey are positive about the WhiteHouse Office of Management and Budget’s (OMB) December 2004revision of Circular A-123, Management’s Responsibility for InternalControl. They think that the circular has helped improve controls overfinancial reporting. However, the respondents say that more mustbe done to improve and monitor controls on program efficiency andeffectiveness—mission success is more importantthan getting the financial numbers right.Consolidation and integrationConsolidating and integrating the many financeandcontrols-related mandates placed on federalentities by Congress and OMB could reducethe work of complying with them. On theirown, entities can combine compliance activitiesto save time and money. This will also help tointegrate controls on processes that cut acrossorganizational boundaries. One way to achievesuch integration is for CFOs to become theirentities’ chief accountability officers, responsiblefor risk management, tracking return on investmentand providing support to programs.Future CFOsIn the future, the quintessential federal CFOwill have a relationship of mutual trust withdepartmental and agency leaders and be skilledin developing and retaining an effective financialteam. Such CFOs will understand the federalbudget process, have accounting acumen, knowthe business information needs of programmanagers and be skilled in selling a budget toOMB and Congress, internal control to programmanagers and the benefits of integrated financialand performance information to everyone.All signs point toward a bleak fiscal future forthe Federal Government. Massive deficits and thecosts of overseas conflicts mean fewer resources forprograms and some tough budget decisions. If CFOsstay on the present path of financial management,they will be of little use in making those decisions.With the course corrections suggested by currentCFOs in this report, future CFOs can providethe integrated financial and performance analysisdecision makers need. They will also be better ableto help program managers to develop more costeffectiveoperations. In short, future CFOs will addmore value than ever before, if they follow the rightpath to success.

2Table of contentsAbout the Association ofGovernment AccountantsThe Association of Government Accountants(AGA), founded in 1950, is the educationalorganization dedicated to the enhancement ofpublic financial management. The AGA servesthe professional interests of state, local andfederal financial managers who are responsiblefor effectively using billions of dollars and othermonetary resources every day. The associationhas more than 14,000 members, including professionalsin accounting, administration, auditing,budgeting, consulting, grants, fraud investigationand information technology. The AGA hasbeen instrumental in developing accountingand auditing standards and in generating newconcepts for the effective organization and administrationof financial management functions. Theassociation conducts independent research andanalysis of all aspects of government financialmanagement. These studies, including the 2008AGA CFO Survey, make AGA a leading advocatefor improving the quality and effectiveness ofgovernment fiscal administration and programperformance and accountability. For more information,please visit our Web site at www.agacgfm.org.Executive summary 1About the survey 3Road to transformation 4Financial reporting: more than a seal of approval 4Internal controls need broader focus and integration 6Continuing resolutions: a challenge to CFOs 10Compliance overload 12Top risks 15Human capital 15Leadership 18Systems 20Looking forward 21What to continue 21What to avoid 23Financial statements and audits: a closer look 24Working with auditors 25Changing accounting and auditing standards 26Conclusion 28About Grant ThorntonGrant Thornton LLP, founded in Chicago in1924, is the U.S. member firm of Grant ThorntonInternational (http://www.gti.org), one of the sixglobal accounting, tax and business advisoryorganizations. In over 500 offices in over 100countries, including 50 offices in the UnitedStates, the partners of Grant Thornton memberfirms provide personalized attention and thehighest-quality service to public and privateclients around the globe. Grant Thornton’s GlobalPublic Sector, based in Alexandria, Va., is aglobal management consulting business with themission of providing responsive and innovativefinancial, performance management and systemssolutions to governments and international organizations.Visit Grant Thornton’s Global PublicSector at http://www.grantthornton.com/publicsector.

3About the surveyThe Association of Government Accountants (AGA),in partnership with Grant Thornton, has sponsoredan annual federal chief financial officer (CFO) surveysince 1996. Earlier AGA surveys focused on issuessuch as governance structure, human capital, financialsystems, performance measurement, internal controland compliance. For the 2008 survey, we focus onpolicy issues important to the continued success offinancial transformation in government. These issuesinclude financial reporting, internal control, continuingresolutions, compliance requirements, human capital,systems, and accounting and audit standards.Most survey respondents are from federal civilianagencies and departments. The purpose of thesurveys is to identify emerging issues in financialmanagement and provide a vehicle for practitionersto share their views and experiences withcolleagues and policy makers. This is one of theways in which AGA maintains its leadership ingovernmental financial management issues.AnonymityIn order to preserve anonymity and encouragerespondents to speak freely, AGA’s annual surveysof the CFO community do not attributethoughts and quotations to individual financialexecutives who were interviewed.Survey methodologyWith AGA guidance, Grant Thornton developedonline and in-person interview survey instrumentsthat included closed- and open-endedquestions. Grant Thornton used these questionnairesto interview 239 federal executives andmanagers involved in federal financial managementin 70 departments, departmental agenciesand independent entities and commissions. Therewere 121 in-person interviewees and 118 onlinerespondents. 1 They included CFOs, deputyCFOs and other entity financial executives,along with some senior managers. In addition,leaders from the U.S. Office of Management andBudget (OMB), the Government AccountabilityOffice (GAO), congressional committees and theInspectors General (IG) community participatedin the survey.1An additional 85 state and local government and 17 nongovernmentprofessionals responded to the online survey, butwere not included in this report.

4Road to transformationReviewing the results of the 2008 CFO Survey, onesenses a higher readiness for change than in previousyears. On the positive side, the financial executivesand managers in the 2008 survey feel they haveaccomplished much in the last 7 years. Certainly,the Federal Government keeps better books, andits financial information is more accurate than everbefore. Now, the federal financial community is readyto go to the next level of accomplishment. CFOs andother executives in our survey want evolutionaryrather than revolutionary change—but they wantchanges to start now.On the negative side, many of our surveyrespondents question the value of much of thework that they must do, especially in meetingcompliance mandates. This sentiment is particularlyacute among those who believe that thegovernment faces a bleak fiscal future because ofits huge deficits. There are hard decisions aboutbudgets ahead, say these respondents, and theywant the financial communityto help make the right choicesabout programs, defenseand services to citizens.For this to happen, the Federal Governmentmust choose the right route to transformingfinancial management into a valuable tool fordecision making and program improvement. Inthis section, we use the metaphor of a fork in theroad to financial management’s future to discusschoices for financial reporting, internal control,continuing resolutions and compliance.Financial reporting: more than aseal of approvalFinancial reporting is the first fork in the roadtoward transformation, because many surveyrespondents think that it consumes time andresources disproportionate to its value for decisionmaking. One branch of the road leadsto more precise, accurate and timely financialstatements modeled on those used by the privatesector, with an unqualified auditor opinion as aseal of approval. The other branch heads towardmaximizing the usefulness of financial reports,which is where the majority of the financialexecutives we interviewed in 2008want to go.BackgroundThe Chief Financial Officers Act of 1990,as amended by the GovernmentManagement Reform Act of1994, mandated better

5financial accounting and reporting for federalentities like departments, agencies and certainfunds. OMB Circular No. A-136, FinancialReporting Requirements, sets forth the form andcontent of the financial statements in the reports.The annual report also includes an independentauditor’s opinion of the reliability of the processesused to develop the information the statementspresent. Federal entities that are requiredby the CFO Act to have audited annual financialstatements combine them with reports on programand mission performance; the combinedreport is called the Performance and EvaluationReport (PAR). For a more detailed discussionof technical issues on financial reports, see“Financial statements and audits: a closer look”on page 24.For 17 years, the CFO Act helped buildfederal financial management’s ability andcapacity. Audits have become tougheryear after year, but today auditors givemost CFO Act entities unqualifiedor clean opinions on their annualfinancial reports (19 of 24 CFOAct entities received clean opinionsfor their FY 2007 reports).Seventy-two percent of citizens say it is important to receivefederal financial information, but only 5 percent are satisfiedwith what they get.—Association of Government Accountants/ Harris Interactive ®poll, January 2008.Usefulness of financial statementsUnfortunately, few people actually read federalfinancial statements, much less use them formaking decisions. Referring to the good recordof clean audit opinions on these statements, anexecutive says, “We are getting A’s on our testsbut not learning anything.” Most of the CFOsand financial executives in our survey agree.They think that the story of the CFO Act doesnot have to end with financial reporting. Instead,say many, it is time to evolve federal financialinformation into a form that will be more transparentto citizens, relevant to decision makersand appropriate for government.Transparent means that information is clear andthat it matters. Ninety percent of American adultssay that, as taxpayers, they are entitled to transparentfinancial management information fromall levels of government, according to a January2008 Harris Interactive ® poll commissioned bythe Association of Government Accountants.Seventy-two percent of the citizen surveyed saythat it is important to receive federal governmentfinancial information, but only 5 percent reportsatisfaction with what they receive.Relevant means delivering information that isimportant to taxpayers, legislators, an administration’stop leaders, policy makers, executivesand managers. Almost all 120 executives inour survey say that very little of the informationin federal financial reports is relevant to

6government decision making. From their perspective,financial statements add little value toa government entity, yet preparing and auditingthem take resources away from value-added workthe office of the CFO (OCFO) could do to helpachieve an entity’s mission.“We are getting A’s on our tests but not learning anything.”—An executiveAppropriate means that the content and formof an organization’s financial reports reflect itspurpose, structure and operations. Governmentshave unique characteristics that are much differentfrom those of private companies, sayexecutives in our survey. Corporate financialstatements show investors the value and viabilityof a company, and the purpose of a companyis to make profits. The purpose of governmentis not to make profits, nor is the FederalGovernment going to be sold or go out of business.Instead of value, the information taxpayers,Congress and top leaders want is about governmentspending, cost-effectiveness and performance.Government financial statements do notprovide this information in their current privatesector-based form.Referring to the past 17 years of the CFOAct, one executive says, “Declare victory forthe first phase of the CFO Act and move onto the next phase.” The next chapter of theCFO Act story will be built on that victory, yetshould not be about marginal improvements infinancial reporting. Instead, it must be abouthow CFOs identified the right audiences forfinancial reports and gave them relevant, usefuland transparent information. In the face ofmounting deficits, such information will besorely needed.Internal controls need broaderfocus and integrationIn the wake of major private sector scandals, in2002 the Sarbanes-Oxley Act (SOX) called formore stringent attention to controls over financialreporting by corporations. OMB Circular A-123,Management’s Responsibility for Internal Control,revised December 2004 (A-123), is the FederalGovernment’s version of SOX. Nearly four yearsafter the revision of A-123, the government is atanother fork in the road. As with financial reports,one branch leads to better control over financialreporting and reducing fraud, waste and abuse.Most of the activity involved in this option takesplace within the OCFO and IG ’s office. The otherbranch expands the scope of A-123 internal controlsfrom a narrow focus on financial reporting to abroader application to programs and processes thatproduce the outputs needed to meet an entity’s mission.Most of the expanded scope’s work happensoutside the OCFO and the IG’s office and is doneby program managers. This is where A-123 candeliver the most value for programs and operations.Figure 1:Executives’ opinion of the effects ofOMB Circular A-12376%Positive19%Neutral or N/A5%Negative

7Financial reporting with a government-wide focus: the U.S. vs. the Canadian modelThe Government of Canada’s top-down approach to an annualgovernment-wide financial report has features that couldsolve problems in the bottom-up approach used by the U.S.Federal Government.The Federal Government’s consolidated financial reportfollows a closing package process that starts with funds,agencies and departments (entities) preparing individualfinancial statements and having them audited. Entityreports fall due 45 days after fiscal year close. The TreasuryDepartment’s Financial Management Service rolls up theindividual report results into the consolidated financial report,which is due 30 days later. GAO audits the consolidated financialreports and has given them disclaimer opinions for thepast 11 years. Some months after delivering its opinion, GAOissues findings and recommendations about material weaknessesand other issues of the consolidated report. For FY2007, this was about 8 months after close.There are problems with this bottom-up process. First,materiality is determined on an entity basis versus on a government-widebasis. Second, repeated disclaimer opinions donot inspire trust in federal financial management. Third, thereis a half-year or more lag in detailed reporting of governmentwidematerial weaknesses, which delays addressing them.Fourth, the current process for preparing, correcting andauditing financial reports is expensive, costing the governmenthundreds of millions of dollars a year.Canada’s top-down approach gives the national annual financialreport primacy over those of individual agencies andCrown Corporations. These entitiessubmit trial balance data during and atthe end of the fiscal year for the nationalfinancial statement process. The government’scentral auditor identifies andaudits material components, takingthe audit work to the entity that submittedthe data. An independent publicaccounting firm audits the nationalreport. After that, entities prepare theirown financial statements. Audit materialityis determined on a government-widebasis, not by individual entities.Canada regularly receives an unqualifiedaudit opinion on their consolidatedfinancial report. This increases trustin government figures. As important,Canada’s top-down national report andaudit enables a risk-based approach tosubsequent financial audits and reviewsof individual entities. Entity level auditorsuse materiality levels establishedon a government-wide basis.Rather than force the Canadian modelacross the U.S. Government, an approachfor 2009 could include some federaldepartments applying such a top-downapproach on their own to help maintainor obtain an unqualified opinion.Departments can have their componententities submit trial balances, so thatCFOs can see what is material to thewhole department, not just to some of itsparts. CFO Act components will still needto have their own audited financial reports.However, focusing component-levelreporting and auditing on departmentwideissues is a risk-based, cost effectiveway to obtain a clean opinion on thedepartmental financial report.

8Positive opinions on A-123When the December 2004 revision of A-123first went into affect, some federal executiveswere doubtful of it, fearing another private sectorsolution that would not fit into governmentoperations. As shown in Figure 1, today threeout of four executives surveyed believe that theirefforts to comply with A-123 have had a positiveaffect on their financial statement audit, financialoperations, IT security or non-financial operations.They say that going through the circular’sprocess has strengthened controls and madeprogram managers more aware of their responsibilitiesin this area. Complying with the circularhas provided many with the resources and topexecutive support to do better process documentation,to correct control weaknesses and toeliminate poor practices.Ninety percent of executives who commented onA-123 said that their work on it has reduced therisk of financial waste, fraud and abuse. Reportsone executive, “Workingon A-123 helped usfind problems withimproper payments. As a result, we recoupedhundreds of millions of dollars.” Althoughthey did not always have such big results, threeout of four executives said that the resourcesthey invested in complying with the internalcontrol circular were worth the return. Somehave reduced compliance costs by coordinatingthe assessments done for A-123’s Appendix A(Internal Control Over Financial Reporting)and Appendix C (Requirements for EffectiveMeasurement and Remediation of ImproperPayments), such as taking one large sample ofaccounts payable for work on the requirementsof both Appendix A and Appendix C, instead ofdoing this separately.These are excellent results so it might seemlogical to keep going down the current path ofinternal control. However, the results mask aserious concern. Unless the government broadensthe scope and fosters integration of internal controlactivities, they may become a rote “check thebox” compliance items. That is what happenedto A-123 before its December 2004 revision andsubsequent high profile. It could happen again.Broader scopeMost CFOs focus on A-123’s Appendix A.However, financial reporting is only one ofthree control objectives under Section 2 of theFederal Managers Financial Integrity Act of 1982(FMFIA). The other two are effectiveness andefficiency of operations and compliance withapplicable laws and regulations. Complying withFMFIA aside, sound controls on operationsreduce the risk of poor performance of an entity’smission. That is more important than getting thefinancial numbers right, and should receive asmuch or more attention as controls over financialreporting. It is also where CFOs can broaden theirroles and increase the value they add to an entity.

9Table 1:Executives’ rating of internal control effort integration within their entities(1 = strongly disagree, 4 = strongly agree)Statement1. Internal control efforts are well integrated across functions such asfinancial management, IT, security, human capital and operations.2. The CFO and other CxOs (or their equivalent) work together tointegrate their internal control efforts.3. The entity supports the integration of internal controls with an entitywiderisk management approach.Averageagreement rating1.92.02.4This is why some of our executives want to seeAppendix A requirements reduced or at leastkept the same. They think that channelingresources to controls over program and entityperformance and related reporting will deliver abetter return on investment.Integration neededIdeally, an entity will integrate the work ofmanaging and reporting on financial, operationaland compliance controls. Unfortunately, surveyresponses to Statements 1 and 2 in Table 1 showthat financial executives have lukewarm opinionsabout internal control integration in theirentities. In the table, a score of 1 means strongdisagreement and 4 means strong agreement.“CxOs” refers to chief information officers, chiefhuman capital officers, chief acquisition officersand other chiefs of specific functions.According to some executives, a barrier toimproving the agreement scores in Table 1 is thatCxOs in an entity say they “own” their part ofthe control structure. This stovepipe mentalitygets in the way of controls for processes thatcut across organizational boundaries. Everyonehas a role in internal control, and all must worktogether on it.“Don’t stovepipe internal controls. Integrate acrossfunctions—A-123, FISMA, acquisition requirements, HRcontrols. Use A-123 as the framework and add other controlreview requirements into a single framework with onetimeline, one milestone list and one plan.”—An executiveRisk managementStatement 3 in Table 1 is important to the futureof controls, because an entity-wide risk managementapproach leads to setting cross-cuttingpriorities for risk mitigation. Many entities, andsometimes the whole national government, lacka sense of priority when it comes to controls.Better risk assessment and a focus on managingrisk would make control activities less costly and

10more likely to add value to operations. Says anexecutive, “Understand what risk is acceptable.Some risk needs to be accepted in order to getthings done. Controls need to focus on managementanalysis and review that help understandwhere weaknesses lie and how they can beimproved.” Also, many say that auditing controlsfor the sake of a clean opinion is of little value.Survey respondents would like A-123 and otherinternal control guidelines to be more clear andprecise. However, one-size-fits-all compliancerequirements ignore that entities need to tailorcontrols to their processes and missions. In addition,no new government-wide rules are needed forcontrol compliance, but oversight entities shouldmaintain the pressure to develop effective controls.In summary, the future path of internal controlleads to integrated controls of both financial andperformance processes, particularly those that arecentral to an entity’s mission. Controls focus onimportant risks to mission and are continuallymonitored for their effectiveness. Such controlstend not to become paper exercises, but insteadare valued elements of sound operations.Continuing resolutions:a challenge to CFOsCFOs and their entities are hit frequently bycontinuing resolutions (CRs), which at bestdistract from government operations and atworst lower effectiveness. All public servantswould consider it a joy not to have CRs, butthese bumps in the road are a part of their lives:in the past 3 decades Congress and the ExecutiveBranch have managed to pass all appropriationsbills on time only in 4 years.Our survey asked financial executives theiropinions about the affects of CRs; Table 2below shows the results. Almost all intervieweesTable 2:Executives’ opinions on continuing resolutionsIn any of the past 3 fiscal years, has your entity had to operate under a continuing resolution?No 5%Yes 95%Problems caused by continuing resolutions% YesDelay or cutbacks in CFO initiatives 66Cutbacks in other significant entity programs 60Delays or cutbacks in contracting/acquisition plans 79Other problems 40

11have worked under CRs in the past three years.About one in five has experienced CR-relatedproblems that have affected some aspect of theirentity’s program and mission. The reportedproblems include issues of program integrity,poor resource management, inability to plan,distraction from the core business of financialmanagement and wasteful incremental fundingof projects and contracts.Program integrity. Says an executive, “CRs hurtus the most in the area of program integrity,which is funded last in priority. Program integrityincludes risk management, facility maintenance,etc. In CRs, people abandon lookingat return on investment and do the immediatething, rather than what will be important in thelong term. If we are in the process of measuringsomething, we have to stop measuring for awhileand then return to it, with a lot of observationsand data lost in between.”Planning. “CRs lead to poor management ofresources, as managers are forced to be reactive,rather than proactive,” says an executive. “Theycan’t plan ahead and start new projects. Whenfunding is received it is often too late in the yearto fully execute.”Distraction. “The CFO gets distracted and loses3 or more months in most CRs. This causesdelays and cutbacks and hinders the ability of theorganization to move forward,” says an executive.Waste of time. “The problem with CRs isthat, after the process is started, you have todevelop a spend plan that needs to be approvedby the department, then by Congress, whichcan take up to 60 days,” says an executive, “Allthis time delay for a CR that can be as shortas 10 days. Better not to have CRs, but if wedo, then have CRs for an extended period of30 days or so.” In addition, CRs can causeincremental funding of contracts, which meansmore work for entity staff.Loss of quality. According to an executive,“Once a budget is approved, everything shiftsto the hurry-up and obligate mode—we losethe window of opportunity to provide qualityreviews of financial decisions because the rush toobligate doesn’t always allow it.”Everyone agrees CRs are inevitable, so planningfor and dealing with these bills is critical.Most executives want OMB, the White Houseand Congress to accept responsibility for theiractions related to CRs and then agree to helpimprove the process of managing under acontinuing resolution. Here are some of theirstrategic and tactical suggestions for dealingwith continuing resolutions.Strategic actions. At a macro level, strategicimprovements all require coordination betweenthe White House, OMB and Congress. Thesestrategic improvements include:• Thirty-day (minimum) continuing resolutions.There is a pretense that somehow a2-day or 2-week CR will allow enough timeto work out the details to resolve an approvedbudget. In fact, the shorter-term CRs causetoo much anxiety on all fronts. A 30-day CRis a reasonable timeframe. Should a budget beapproved before 30 days, the budget becomesimmediately effective and supersedes the continuingresolution.• Biennial budget. This means giving everyfederal entity a 2-year appropriation. The topichas been discussed at various levels for morethan 20 years. This can be done in ways thatensure that legislators have a hand in shapingthe federal budget.

12• Better guidance and clearer rules fromOMB, which should provide better definitionsand information on such things as whatconstitutes a new start for a project, ratesettingformulas, flexibility, best practices andspend guidance.• Working capital funds/revolving fundsshould be created for entities that do not receivesignificant amounts from appropriations.Outside mandates for financial informationSome laws and regulations concerning financial managementcompliance activities:Before 2000• Chief Financial Officers Act (CFO Act)• Government Performance and Results Act (GPRA)• Federal Financial Management Improvement Act(FFMIA)• Federal Managers Financial Integrity Act (FMFIA)• Clinger-Cohen ActAfter 2000• Federal Information Security Management Act (FISMA)• Improper Payments Information Act (IPIA)• Accountability of Tax Dollars Act (ATDA)• Recovery Auditing Act (RAA)• DHS Financial Accountability Act (DHS FAA)• Federal Funding Accountability and Transparency Act(FFATA)• OMB Circular A-123, Management’s Responsibility forInternal Control, December 2004 revision (A-123)There are also Federal Accounting Standards AdvisoryBoard (FASAB) and other OMB circular requirements.Tactical actions. Here are ideas for managingCRs in an entity:• Planning. CFOs need to anticipate and planfor CRs, make them part of the 12-monthplanning process, assume 9 months of authorizedspending, set priorities for spending andmanage employee expectations.• Curbing discretionary spending. Deferpurchases such as training, long-term contractsand long-term obligations until later in thefiscal year and scale back on CFO initiatives.• Adjusting contracts. Change the length ofcontracts and restructure them so that they donot start during a continuing resolution.• Exceptions. Carve out or set aside funds forlarge systems acquisitions.Some survey respondents predict that FY2009 CRs will run through May 2009—a full8 months. Continuing resolutions may be agreat tool for the the Executive and LegislativeBranches, but are costly to taxpayers andharmful to government’s missions. Finding abetter way for the two branches to disagreewould benefit everyone.Compliance overloadAn overload of compliance work saps CFOresources from value-added activities needed toenhance entity missions, say executives. Thisposes a risk both to entities and to the relevanceof CFOs themselves. Here, government leadersface another fork in the road. The first branchis similar to the choice of direction for financialreporting: put entities under more and strictercompliance requirements, with the aim of gettingrid of all risks. It is impossible to achievezero risk and often costly to try, yet governmentsare prone to extreme risk aversion in mattersboth great and small.

13The other branch is to reduce work by consolidatingrequirements and the activities theygenerate and by using a more focused approachto compliance reporting and auditing.In the 2007 CFO Survey, 2 we called attentionto the major drain on CFO resources causedby complying with requirements of oversightgroups and Congress. These requirementsspring from the laws and rules shown in thebox “Outside mandates for financial information.”Many mandates springing from thoselaws and rules are unfunded, so the cost ofcompliance falls on already strained accountingand finance budgets. In the 2007 CFO Survey,executives estimated that they spent one-fourthof their resources in compliance activitiesneeded to meet outside mandates. About halftheir remaining resources went to stewardshipand transaction processing. This left less thanone-fourth of a CFO’s time and resources forhigh-value activities like supporting strategicand program decision making.In 2008, respondents gave us little reason tothink that the situation had changed. Somereported becoming more proficient in writingthe many reports needed to comply with outsiderequirements, ranging from the Performanceand Accountability Report, which includesannual financial statements and performancemeasures, to improper payments reports requiredby Congress. This saved some resources, but thesavings were consumed as oversight entities andauditors “raised the bar” on requirements.Says an executive, “There is a sense in the federalcommunity that CFOs are not relevant because2Scoring Financial Management & Oversight Efforts: the 2007Association of Government Accountants Annual CFO Survey,June 2007.“If compliance requirements are about things that are notimportant to running an entity and they consume a lot of time,then the system is broken.”—An executivethey are consumed with issues that have nothingto do with managing the mission of an entity.If compliance requirements are about thingsthat are not important to running an entity andthey consume a lot of time, then the system isbroken.” Another reports the effect of too muchcompliance work on morale: “As the amount ofcompliance work increases, the government losesone of its most attractive benefits to talentedprofessionals: knowing that you are helping thecountry survive and thrive. Many finance andaccounting professionals think that working oncompliance issues to satisfy outside regulatorsand oversight entities is not as meaningful ashelping to achieve entity missions and the goalsof government, so they leave their entity andsometimes the Federal Government.”Congress is rarely interested in the substantiveissues of accounting or in financial reports, sayseveral respondents, because those topics do notwin many votes from constituents. On the otherhand, according to one executive, governmentfinancial management is a handy political issue,and politics something is either good or bad,nothing in between. As a result, many federalfinancial management bills are not well thoughtout in terms of process, effect or cost/benefit.Executives in our survey had three basic categoriesof suggestions for reducing the risk thatoverwhelming compliance activities pose toentities and their CFO components: cost/benefitanalysis, consolidation and risk management.

14Cost/benefit analysis and targeted compliance.Some executives say that Congress and OMBshould do more cost/benefit analyses on therequirements they make of entities. As mentionedearlier under “Financial Report,” not all entitieshave the problem that a government-widecompliance requirement seeks to solve. Executivesfrequently mentioned two examples of this: theImproper Payments Information Act (IPIA) andthe Recovery Auditing Act (RAA). The Acts maybe great ideas in cases where entities have significantreal or potential problems with improperpayments. Some do not, yet still have to squeezeout scarce resources to comply with IPIA andRAA mandates. For entities that historically havenot had a material weakness in this area, someexecutives suggest biennial or triennial instead ofannual audits.Consolidating compliance activities canhappen outside and inside an entity, say executives.Outside, Congress and OMB can consolidateand rationalize all or most finance-relatedcompliance requirements, including the content,format and due dates of their reports. Thiswould reduce overlaps and redundancy and helpleaders take a holistic view of finance, accountingand performance measurement. The consolidatedresult would be broad reform instead ofpiecemeal solutions.Some of our respondents say they have reducedthe resources needed for compliance by consolidatingand coordinating the work of the variousteams involved. For example, portions of the complianceor reporting work for FISMA, FFMIA,the President’s Management Agenda, the CFOAct, A-123 and the PAR can be consolidated inorder to save resources. This requires planning,scheduling and collaboration among differentparts of an entity, but the result can be more comprehensivesolutions to problems. Consolidationalso reduces data calls to program managers andpromotes partnership among CxOs andother executives.

15Top risksRespondents to the in-person interview of executivesand the online survey of managers indicated that thetop three risks to accomplishing their mission areproblems with, in order, human capital, leadershipand systems. Compliance is a strong fourth issue forthe executives (see Figure 2). Other issues includeCongressional and Executive Branch politics, the needfor more accountability, lack of standard operatingprocedures and poor or unintegrated financial andperformance measures.Figure 2:Relative importance of major risks categories by percentageof times mentioned in executive survey responses% of all mentions4035302520151050Human Capital Systems Leadership ComplianceRisk categoryHuman capitalTo government leaders, human capital meanspeople with the right skills and experience. Ourannual surveys indicate that, for the past severalyears, human capital has been the number oneconcern of CFOs and other financial executivesin both defense and civilian entities, far moreso than any other issue. For example, in the2008 survey, more than twice as many executiverespondents listed human capital as a riskthan systems or leadership. This finding willnot surprise anyone in a government supportfunction such as financial management. Forthe past 10 years, the number of federal financeand accounting employees either has declinedor held steady. At the same time, the amount ofwork required for many support functions hasrisen, in part because of increased mandates forcompliance with outside rules (see box, Outsidemandates for financial information, on page 12).As a result, say respondents, they face the humancapital problems described below.• Federal hiring procedures are complex andlengthy, say many respondents. People todayare not willing to jump through as manyhoops or wait as long as they once were.• For several years now, top leaders have knownthat Babyboomer retirements are causingbrain drains throughout the government. Saysone financial executive, “I expect to lose 65percent of the staff in my division in the next5 years, which includes Acquisition Officers,Contracting Officers and Senior Accountants.A lot of institutional knowledge will be lost,especially in the areas of systems.”• A shortage of mid- and senior-level financeand accounting professionals in the governmenthas caused some entities to lure themaway from others with promises of promotions,training and meaningful work. “Wedon’t have people in the pipeline who arecapable of taking some of our middle- andupper-level management positions,” says anexecutive, “So it is easier to hire people fromother bureaus.”• Private companies and enforcement agenciesoffer higher salaries to talented financial professionalsthan can most governments.

16• Many executives say their people are overworkedand eventually burn out, moving toanother entity or to the private sector. An executivesays, “You can have a busy season wheneveryone works more than 50 hours a week,but it can’t last all year.”Some of the suggestions our respondents offeredfor mitigating human capital risks come straightout of human resources and managementtextbooks. They are all sound practices for anyorganization, and include the following:“The easiest way to get people to work for you is to show themthat the work they do is relevant.”—An executiveSet up succession plans and invest in them.Succession planning is not just for executivesand managers, though. One executive says hisentity over hires for some positions where theyknow they will lose staff because of attrition,so they can train new people before incumbentemployees leave.Cross-train staff so that they can work in differentareas during surges. One CFO has heraccounting staff do contract closeouts whennecessary. “This short-term task will be part ofthe staff’s performance rating and will build theirskill sets,” she says, “The key is thinking outsideof narrowly defined divisions of labor like: that’saccounting, that’s acquisition.”Use intern programs to attract youngeremployees. Offering to pay off college loansmight attract more graduates.Offer rotational assignments to new professionalworkers (the Defense Finance andAccounting Agency’s Leaders in Motion programis an example).Train employees in new skills. Respondents saidthe AGA’s Certified Government Financial Manager(CGFM) program was a good investment.The next set of suggestions for mitigating humancapital risk is more particular to government.Flexibility. One major category of ideas has todo with becoming more flexible. This includes tostreamline government hiring processes, be moreflexible about salaries and bonuses (includingusing pay banding) and make it easier to movepeople around into different positions. In addition,some executives would like more hiring andfiring authority, as is the case with their privatesector counterparts.Retirement policies. A wave of Babyboomerretirements should make the government rethinkits retirement policies for public servants, sayseveral respondents. They think that the governmentcan do a better job of retaining federalemployees beyond their eligible retirement age(55 years with 30 years’ federal service), such asthrough part-time, flexible and flexiplace workschedules. Another option is to re-hire federalretirees, but in most cases current law reducestheir salaries by the amount of their pensions.This is no incentive for a talented retiree toreturn to an entity to work on temporary projects,fill critical skill gaps or train new employees.Some entities already have the flexibility to dothis, and the Office of Personnel Management isworking on ways to increase the practice.Quality of worklife. Many executives encouragetelecommuting, flextime and related programsto make it easier for employees to balance workand family life. Programs like telework require

17rethinking how people work and investing innew technology, but some executives say theirentities are unwilling to do either. However,such programs are working in many entities,according to respondents.Says an oversight entity executive, “The easiestway to get people to work for you is to show themthat the work they do is relevant.” If people seethat their work is important, they are willing to gothat extra mile to ensure it is done right.Reducing non-value-added work. Anotherexecutive says, “The quality of life in ourworkforce is a product of our old inefficiencies.We spend a lot of time doing manualprocesses that could be automated, and oncompliance activities seemingly for the sake ofcompliance. Fixing these inefficiencies, betterinformation technology and less non-valueaddedwork would give us the opportunity tofree up more staff time.”CFO ➔ CAOOne of the titles given to the Comptroller General of the United States is “chief accountabilityofficer,” which befits the head of the Government Accountability Office. Within a department oragency, a CAO leads a disciplined, integrated, internally consistent and enterprise-wide approachto risk, return on investment and program support. In the private sector, this is the job of the CFO,but in most federal entities no single person is responsible for all 3 major tasks. Some executivesin our survey say that a federal CFO is the ideal candidate for departmental or agency CAO.Financial management includes (or should include) risk management; financial professionals havethe skills to calculate and track return on investment; and resources always translate into budgetsand money, which are in the realm of the chief financial officer.CFO/CAORiskManagementReturn onInvestmentProgramSupport

18Some CFOs report success in reducing workloadby changing the structure of support services. Forexample, centralizing accounting activities oncedone in field offices to a single site has reducedone entity’s accounting workload by 10 percent,says its CFO.Finally, CFOs do not have to go it alone. Saysone executive, “I don’t know how many timesI’ve been approached by CFOs who say theyhave personnel problems, yet they haven’tdiscussed it with their chief human capitalofficers!” Teamwork among all CxOs should beregular, not sporadic.Lines of authority are less important than a relationship of trustbetween an organization’s CFO and chief executive.LeadershipA search for the word “leader” in the notes ofour interviews with executives often finds it nearterms like vision, strategy, planning, communicate,influence and change. When they commentedon leadership, our executive respondentsmost often were looking upward toward agencychiefs and departmental secretaries. Some complainof lack of support from the very top, whileothers simply say “They just don’t understand.”Looking up to the executives in the in-personsurvey, non-executive respondents to our onlinesurvey cited these leaders for lack of directionand decision making, and for poor planning.Executives interviewed think that the tenureof some CFOs is too short for them to makemuch difference to their organizations. Otherssay that some new CFOs did not understandgovernment accounting and financial managementwhen they started, and a few CFOs evenadmitted to this.Finally, many CFOs say that they do not yethave a seat at the table of top executive leaders.Because of this, they lack influence in creatingand planning entity strategy and have less abilityto persuade others to recognize the importanceand utility of sound financial information.CFO leadership attributesRespondents said that attributes of a federalCFO depend on what the specific entity positionrequires and the environment. For example,if an entity wants to improve its accounting andfinancial systems, then a new CFO may needstrong systems skills. If an entity is highly politicalor undergoing major change, then its CFO’s relationshipto Congress is also very important.There is one exception: across the board, CFOsmust have excellent relationships with their chiefexecutives (e.g., agency chief, administrator ordepartmental secretary). By law, CFOs coveredunder the CFO Act report directly to their chiefexecutives. However, such a line of authority isless important than a relationship of trust betweenan entity’s CFO and chief executive. This relationshipenables the CFO to influence decisions at thetop regardless of legal reporting authority.Executives in the survey say that other attributesa CFO should have include the following.Mastery of human resources. Human capitalproblems in the financial management communityare severe, so a CFO has to be a masterat finding, retaining and training the rightpersonnel. Most of all, the CFO must be ateam builder.Understanding and experience with the federalbudget process. In government, budget is king,so it is important for new CFOs to understand thegovernment’s budget process, say respondents. Says

19one, “CFOs entering from the private sector willbe shocked at how many government resourcesare consumed fighting for basic funding, and thatfinancial information plays such a limited role indecision making.” Still, CFOs must understandthe connection between budgeting and financialmanagement and become skilled in sellingthe budget to Congress and other stakeholders.Fighting for their own CFO budget will be difficult,because Congress tends to appropriate fundsfor programs but not for overhead functions.Accounting acumen. While government CFOsdo not have to be certified public accountants, sayseveral executives, they need to understand theimportance and use of accounting skills and information.Some respondents say that CFOs wholack this understanding tend to neglect that side oftheir business, which suffers from their inattention.Business intelligence. Program managers canuse good financial and performance information,say survey participants. Therefore, a toppriority for CFOs is the ability to understand thebusiness information needs of program managersand the best way to provide this intelligence. Inaddition, CFOs should have an entity-wide perspectivebecause they may be working in a worldof stovepipes.Skills in selling. Other CFO attributes thatexecutives mentioned include being a goodnetworker and communicator up, down andacross the hierarchy, to peer entity chiefs, CxOs,Congress and stakeholders. A large part of thegovernment CFO job is to sell: the budget toCongress, internal control to program managers,the need for change to financial managementstaff and the benefits of integrated financialand performance information to everyone.Being a communicator also means theCFO should be able to “. . . have difficult conversations,because the CFO brings both goodand bad news,” says an executive.If CFOs make it a priority to add value to entities’ mainmissions, then they are more likely to be heard by top leaders.Other leadersThe deputy. We should not neglect the secondmost important position in the financial community:the deputy chief financial officer (DCFO).Says a longtime CFO with experience in defenseand civilian entities, “The DCFO is the CFO’skey player because she or he handles the operationalissues. It is important to have a careerdeputy in this position, someone who thoroughlyunderstands the organization and its issues.”Entity chiefs. If accounting, finance and metricsare irrelevant to Congress, then so is the CFO.This does not go unnoticed by the heads of agenciesand departments, who may be equally guiltyof inattention to important issues of financialmanagement. The way to deal with the problem,according to executive respondents, is for CFOsto buy into and support the executive agendaand get along with the top leader. If CFOsmake it a priority to add value to entities’main missions, then they are more likelyto be heard by top leaders.

20SystemsSurvey respondents listed information technology(IT) and systems as the third greatestrisk to accomplishing their mission. Importantissues included integrating financial and performanceinformation and standardizing data andsystems, if not across the whole government,then at least in different categories of service orwithin a large department.Several respondents pointed to the lack ofintegrated information for financial and programmanagement as a major risk. This includeslinking data for planning, programming, budgetingand execution. Without such linkage, governmentwill continue to find it hard to show therelationship between dollars allocated and resultsachieved. In what some believe will be a nearterm period of belt tightening caused by hugedeficits, this could be fatal to some programs.Most financial systems depend on feeds fromprogram systems that initially capture financialand performance information. When thosesystems do a poor job, it is reflected in financialand performance information and reporting.Many agencies and departments hope to solvethis problem by implementing large enterpriseresource planning (ERP) systems, but such projectsappear to run into snags regularly, mostly inthe area of program data integration.Our executive respondents agree that there is noreal government-wide strategy for business ITand systems, no priorities and no master plans.In the case of business and financial systems,such a strategy and its related plans should, theysay, be based on the following principles:• Link and integrate financial, budget, programperformance, human resources and otherrelated business information.• Have fewer systems than there are now.• Standardize information and data across governmentfor most business activities.More use of shared services providers (SSP)would help in reducing the number of systemsand standardizing information. Several respondentsapplauded the concept of OMB’s FinancialManagement Line of Business (FMLOB)initiative, which aims at consolidating financialmanagement systems through shared serviceproviders. They see SSPs as a good choice whendeciding what to do about obsolete legacysystems. These respondents were less laudatoryabout how the FMLOB and other initiativesplayed out across the government. Some thoughtthat OMB’s separate Lines of Business initiativeshad the side effect of further stovepipinginformation flow and processes in entities. Aswell, executives in entities that are implementingERPs were not favorably disposed towardFMLOB and similar initiatives.One of the least costly ways for CFOs to ensurethe utility of entity business systems is to be partof the implementation team and participate inprototyping the systems. In this way, the needsof current and future financial systems will beconsidered entity-wide.

21Looking forwardHow can the government enhance financialmanagement? Financial policy makers and executivesin the survey listed the improvement initiatives theythink Congress and Executive Branch leaders shouldcontinue or start—and also what not to do.What to continueSince 2000, legislators and administration policymakers introduced many initiatives aimed atimproving how the government manages itsfinances and uses financial and performanceinformation (see box, Outside mandates forfinancial information on page 12). Which arethe most important to continue for the next 2to 5 years? Table 3 shows what our executiverespondents think, including financial, OMBand oversight leaders.Table 3:Survey executives’ ranking of current financial managementinitiatives that should be emphasized over the next 2 to 5 yearsInitiative1. Cost, budget and performance reporting2. Program efficiency and effectiveness (A-123, Section 2)3. Financial management systems (A-123, Section 4)4. Financial statement audits, continue current depth and scope5. Financial reporting (A-123, Appendix A)6. Performance and Accountability Report7. Increasing the use of shared service providers (FMLOB)8. Effective measurement and remediation of improper payments(A-123, Appendix C)Cost, budget and performance;program efficiency and effectivenessProviding actionable information on cost, budgetand performance so that it can be used to improveprogram efficiency and effectiveness is the cornerstoneof what the CFO organization is supposedto do, according to many survey respondents.Actionable information may be sorely needed inthe near future, say several executives, becausethere may not be enough money to continue thestatus quo, much less expand programs. Says one,“We have huge deficits and they may continue,so there will be a contraction in defense spendingonce the wars in Iraq and Afghanistan are over.Economy and efficiency will be important. Whenit comes time to cut back, some people will wantto simply cut out programs because that is the easiestthing to do. The reality is that we won’t be ableto or can’t just cut all those programs. We have tolook at everything and say, do we need this? Whatdo we give up if we do this? Can we make thisprogram better and more efficient? If the answer isno, then the program may need to be cut.”One of the constant themes throughout the 2008survey is to eschew accounting for accounting’ssake. Instead, say many respondents, CFOs shouldfocus on adding value to entity programs and mission.Indeed, said one, “There should not be anyeffort expended to create financial information thatis not of value to manage programs,” says an executive.Making this a reality could result in a strongerrole for CFOs in an integrated environment ofaccounting, budget and performance management.Financial management systemsIn the previous section on risks, executives andmanagers listed systems as the third greatest riskto accomplishing their entities’ missions, so itis no surprise that systems initiatives are near

22the top of those that they want continued overthe next 2 to 5 years. Many want to see morestandardization and centralization of systems,especially in business areas in which there is(or should be) a degree of commonality acrossgovernment. Yet, many are not sure they wantto use SSPs, one option for central, standardservices. Those that favor IT outsourcing oftensay they want to see SSPs that specialize incategories of government processes, such asgrants management.New initiatives neededExecutives in the survey made many suggestions for additional or supplementary financialmanagement initiatives. These included:• Simplifying financial reports and making them useful for decision making, including developingcitizen centric reports.• Shifting financial training from transactions and financial reporting to analytics and assessingcosts and risks.• Establishing a CFO Academy, with OMB or the National Defense University as potential sponsors.• Integrating and standardizing reports of budget, program and financial information.• Pressuring vendors to develop government-oriented commercial off-the-shelf ERP software thatmeets OMB’s Financial Systems Integration Office requirements at a detailed transaction level(Some ERP vendors believe they already do this).• Using more cost accounting, such as activity-based costing.• Requiring more integration or linkage between financial and acquisition systems.• Increasing the use of executive dashboards and executive scorecards with financial, performanceand risk information. Also, reporting more productivity and utilization measures.• Increasing the flexibility of the management of funds, to promote better response to changes andincrease transparency (because otherwise such funding shifts are sometimes hidden).• Extending financial management information and duties to non-financial managers and holdingthem accountable.• Clarifying the role and responsibilities of CFOs, controllers and Inspectors General.• Improving the Intra-Governmental Payment and Collection processes.• Conducting fewer audits and instead doing reviews, which are less costly and may be moreeffective in identifying critical problems.

23What to avoid“Enough already!” say several executives whothink the government should avoid introducingany new finance and accounting initiatives untilentities finish addressing the current ones. Otherthings to avoid include those listed below.Stop raising the bar. Several CFOs want theGAO, OMB and IGs to stop raising the baron requirements. Examples of this includeaccelerating the timing of financial reports andlowering materiality thresholds. They wouldlike Congress and the Executive Branch to setclear priorities when promulgating rules foror overseeing entity financial management. Asdiscussed in the earlier section on compliance,they would also like to see more cost/benefitanalysis done before introducing new lawsand rules.No more unfunded mandates. Too many newcompliance requirements arrive with noadditional resources to fulfill them. Someexecutives say that such requirementsshould be funded in the entity budget,instead of taken out of its hide.Avoiding overreaction. Some executivessay that the government-wide initiatives,systems and regulations introduced in thepast few years are starting to identifymore fraud, waste and abuse, whichis good. “However,” says one, “Wemust target this misuse and holdpeople accountable for correctingit, instead of creating additionalinitiatives, systems andregulations.” Another says,“Lawmakers and oversightgroups should stay away fromall niche issues like premium class travel. Theentity that has a niche problem should dealwith it; there don’t have to be new rules orregulations for everyone else.”Requiring data no one uses. CFO Act annualfinancial statements are only one example ofreports that few people read and use, accordingto respondents. There are many others.Cannot go back to not caring. “We need tounderstand the importance of cost,” says a CFOwhose department accounts for a major slice ofthe federal budget. “We can’t say a problem istoo big to solve. If we strive to add value, we cando it. We cannot go back to not caring.”

24Financial statements and audits: a closer lookExecutives in our survey stressed that unqualified orclean auditor opinions on financial statement shouldbe a by-product of good accounting that supportsprogram management. However, even after yearsof clean opinions, an entity can receive qualified ordisclaimer opinions, which can be a career-enderfor a CFO. One reason this may happen, say someexecutives, is because GAO and IGs keep changingthe rules and auditors are inconsistent in applyingthem. We asked executives where they thought theyshould focus attention in order to gain clean auditopinions in FY 2009 through 2011. Their responsesapply mainly to their own entities, but taken togetherthe results shown in Table 4 offer some guidance tonew CFOs and financial executives.Table 4:Executives’ opinions on where a CFO should focus attention toobtain or sustain a clean opinion on annual financial reports,ranked in order of importanceInitiative1. Financial statement audit readiness2. Account reconciliations3. Internal controls over financial reporting (Appendix A)4. Internal controls over program efficiency and effectiveness(Section 2)5. Property, Plant and Equipment6. Internal controls over information technology (Section 4)7. Compliance with government mandates8. Intragovernmental transfers9. Liabilities10. Decision support informationAudit readiness refers to preparing an entityand its financial statements, systems and proceduresfor the annual audit of the CFO Act financialreport. Executives report that their work onA-123 has improved their audit readiness, bothfor the annual financial report and other reports.Now, many are looking to combine the workof preparing their various finance and controlsrelatedreports.Account reconciliations include basic reconciliationsto the fund balance with Treasury,insufficient set of tools to perform accountreconciliation activities, lack of systemsintegration and lack of standard expenditurecategory definitions.Internal control issues will continue todominate the financial management and auditlandscapes in the near future, says an executive.Others say that controls over systems havebecome much more important as they automateprocesses. In addition, considering theBabyboomer retirement wave, now is the righttime to document processes and work oninternal controls.Property, Plant and Equipment (PP&E)remains problematic for some entities. PP&Egenerally includes buildings and structures, furnitureand fixtures, equipment, vehicles and land.Valuing and accounting for what the governmentowns can be time consuming, and some questionthe value of doing so. Says an executive,“Is it any value to know the depreciation valueversus the replacement value of a governmentownedbuilding? Depreciation is a tax benefitfor for-profit concerns. The replacement value isimportant for government management purposes,so why not audit it? That would enhance thereliability of budget estimates.” Other examples,

25say executives, include trying to put a value ona historic monument that will never be sold orrequiring periodic valuation of warships.Reconciling intragovernmental transfers is mademore difficult by a lack of clear guidelines fromthe Treasury, say some respondents. Together,PP&E and intragovernmental transfers may bethe biggest current barriers to gaining a cleanopinion for the U.S. consolidated financial report.Liabilities are of major concern to the FederalGovernment, including environmental cleanupcosts. Grant makers are concerned, because grantaccrual methods can be opinion busters andtypically involve a great deal of conversation withauditors and grantees, says an executive.Decision support is not exactly at the bottomof the priority focus list (some items not listedranked a bit lower), and the question posed inTable 4 is about annual financial reports, notmanagement accounting. Still, it seems a pitythat the current model for federal financialstatements does not motivate CFOs to make thehighest and best use of financial information atop concern. We will discuss this shortly.Working with auditorsThree out of four executives think that theapproach that financial auditors take today influencescontrols and accountability mechanisms inways that add value to the management of government(see Figure 3). It is all about communicationand transparency, say many executives. Their topsuggestion for a successful audit is to have early,frequent and focused meetings with auditors and tofully disclose issues and potential risks with them.Early, because if auditors come at mid-year, asthey often do, then issues they identify will bedifficult to fix by the end of the year. Frequent, inorder that all parties stay on track throughout theaudit cycle. Focused, to prevent “fishing expeditions”should auditors go outside the scope oftheir charge. Full disclosure, to inspire trust andavoid surprises to either party.Figure 3:Opinions of executives on whether theapproach used by federal auditors addsvalue to government management75%Yes25%NoEducate auditors about the mission and operationsof an entity, say several executives, andmake sure that they are on board with theorganization’s vision and goals. If auditors askfor something, give it to them (but talk to theaudit manager if a request does not make sense).Always talk to the IG about risks (hopefullythroughout the year) and get IG and auditorinput on plans to mitigate risk and beforemaking accounting changes.Several respondents advised preparing a memorandumof understanding with an agreed-uponscope for the audit, then tracking the auditclosely to keep it in scope. This is not as mucha problem when the auditor is an independentpublic accounting (IPA) firm on contract to an

26IG office, as it is when the audit team is madeup of IG staff. Executives say do not be afraid topush back on some auditor views, especially if aCFO disagrees with an auditor’s solution.CFOs should recognize when auditors identify areal issue and not go into denial, says an executive.It is not such a bad thing for an auditor to discovera material weakness, because then the CFO can fixit. Indeed, says another, use auditors as a tool anda resource to provide independent interim reportsand counseling throughout the year.During the fixing, though, it is not enoughsimply to take care of problems auditors identify.“We need to find ways to show auditorsand oversight groups we are fixing adverse auditfindings they bring up,” says an executive. Todo that, and to get along, CFOs have to talk toauditors in their own language and understandtheir job, says another.“We need to find ways to show auditors and oversight groupswe are fixing adverse audit findings they bring up.”— An executiveNo one says that there should be not auditorsor auditing. Most would agree with an executivewho is also an auditor who says, “Havingan auditor look over their shoulder motivatesprogram managers.”A message to auditorsAuditors need to consider the feedback thissurvey gives them from financial executives, suchas the following.• “Auditors have become so risk averse that theyhave abandoned their training and professionaljudgment and instead are always looking in thebook for a solution. 3 ”• “They will second-guess you, but never offerany suggestions at the start of an audit, claimingthat they can’t jeopardize their independence.”• “Auditors often come in with a developedmethodology of how to fix issues found duringfinancial statement audits, but sometimes itneither fits the entity nor gets to root of theproblems. ‘One size fits all’ may not work.”• “Why do auditors wait until near the end ofthe audit to convey good or bad news?”In addition, executives question some auditordefinitions of materiality. Even though someproblems may be real, they may not affect theintegrity of financial statements at a material level.Clearly, both auditors and auditees can benefitfrom hearing and acting on each other’s feedback.So will the American public.Changing accounting andauditing standardsWe asked survey executives if the FederalGovernment needs to revisit the accounting andauditing standards for which it holds entitiesaccountable. As shown in Figure 4, less than athird said no, keep the status quo. Half said tochange accounting standards, and 60 percentwanted to see new audit standards.Changing accounting and audit standards is adifficult thing to do: there are too many organizationsinvolved and regulatory entities inparticular tend to be jealous of their authority.However, the Executive Branch can change thefinancial statements without altering standards,which could improve how the government preparesand reports its finances.3This criticism has more generally been leveled at current practices of accountants, contracting officers and other professionals, both in andout of government.

27Figure 4:Opinions of executives on changes needed for accounting and audit standardsNo changeChangeaccountingstandardsChange auditstandards0% 10% 20% 30% 40% 50% 60% 70%Percentage of executive respondentsIn general, executives want standards to berelevant to the business, goals and purpose ofgovernment. Says a CFO, “Accounting standardsneed to focus more on program accounting todetermine the performance of every dollar spentby the government. It is unclear that the five statementscurrently used give meaningful numbers, asthey do for the private sector. Government financialreporting standards are needed to indicateperformance levels that matter, and then we needto audit to these standards.”making management decisions. Congress doesnot consider the reports for budgeting, and few ingovernment can use them for business decisions.Says an oversight executive, “The central thing weshould be asking is what informationis important for entities to have sothey can run properly?”Another executive says, “Financial reports needto be headlights for managers, not tail lights.Our fixation with historical costs should go. Weneed to know, what is it, what does it cost, doesit lead to the outcome I want. It is given thatthere will be a government, so focus standards onhow you measure and report on it.”Standards should also contribute to managementdecision making. Many respondents say that thecurrent federal approach to financial reportingdoes not produce any information useful for

28ConclusionDesign by www.sparkdesign.netIt is time to declare victory and move on, says anexecutive in our survey. Victory includes 7 years ofprogress in improving the accounting, systems andfinancial reporting of the Federal Government. Today,most CFO Act entities get unqualified opinions ontheir annual financial statement audits. Financialand non-financial leaders alike are more consciousof internal controls over financial reporting (A-123,Appendix A). Overall, the government is a bettersteward of public funds than before. It has built a finefoundation for transition to new levels of financialmanagement excellence.Simply following the same path that brought successin the past could be a terrible mistake. Whata hollow victory it would be if, in the future, moreentities succeed in meeting more and tougherfinancial compliance requirements, yet added littlevalue to government missions and operations.It is time to go in a new direction, one in whichprogram offices and non-financial executives arethe main customers for financial information, notjust auditors. This is the path that a CFO musttake to become a trusted advisor to departmentalsecretaries and agency chiefs.For this to happen, CFOs need to have more timeand resources. The best place to find these assetsis to minimize unnecessary compliance activities.Congress, oversight entities and the ExecutiveBranch must cast off “one-size-fits-all” compliancefor the sake of compliance. Instead, they mustwork together to identify, agree on and addressgovernment-wide high-risk areas. This targetedfocus will yield a higher return on investment andwill likely identify major cost savings and programimprovements. In addition, OMB and CFOsshould work together to consolidate and coordinateschedules and work done for compliancereporting, which will reduce duplication of effort.An ability to inspire trust with other top executivesis a prerequisite for federal CFOs. Becausehuman capital is such a critical problem infederal financial management, another criticalattribute for CFOs is how well they can bring inand retain talent, train the workforce and buildan effective team. In addition, CFOs should becapable of becoming their entities’ chief accountabilityofficers. This is because CFOs have accessto the requisite financial and performance dataand a leadership position in controls.Finally, CFOs themselves have to becomecatalysts for change. In the future, the ExecutiveBranch should challenge the federal CFOCouncil to develop solutions that will headfinancial management down to the right pathto relevance and high value to the government.Declare victory, because much has been accomplished.Then strive for even greater success.

Additional InformationIf you would like more copies of this surveyor an opportunity to hear more about itscontent and the challenges facing thefederal CFO community, please contact theAssociation of Government Accountants atthe address below:Association of Government Accountants2208 Mount Vernon AvenueAlexandria, VA 22301Telephone: (703) 684-6931; (800) AGA-7211Web Site: www.agacgfm.orgE-Mail: agamembers@agacgfm.orgSurvey ContributorsAssociation of Government AccountantsRelmond Van Daniker, CPA,Executive DirectorAnna Miller, CPA, Director of ResearchGrant Thornton LLPClifton A. Williams, CPA, CGFMCharles Morgan Kinghorn Jr.Larry J. Goode, CPA, CGFM, CCP, CITPKenneth BresnahanWendy M. Morton, CGFM, PMPSteven Clyburn

Association of Government Accountants2208 Mount Vernon AvenueAlexandria, VA 22301Grant Thornton LLP333 John Carlyle StreetAlexandria, VA 22314© 2008 Association of Government Accountants. All rights reserved.