The Government’s Messy Books

Many U.S. government agencies still struggle to improve their financial reporting and achieve a clean audit opinion.

When the current president’s father, George H.W. Bush, signed the Chief Financial Officers Act of 1990 into law, it required that 24 government agencies appoint CFOs and produce annual, auditable financial statements comparable to those of publicly held corporations. Seventeen years later, the progress of those agencies is still measured with single digit numbers.

The U.S. Office of Management and Budget reported Tuesday that 19 of the 24 CFO Act agencies received a clean audit opinion on their fiscal year 2007 audits. And although that’s a slight improvement over last year’s number — when 18 passed — it merely marks a return to results achieved by 19 agencies in 2005.

Nor are those variations due to one agency — several agencies have gained and lost their blessings from the Government Accountability Office in the past two years. While the Departments of Energy and Transportation both achieved clean audits after failing to do so last year, the Department of Agriculture, clean in 2006, received a qualified opinion this year. The Departments of Defense, Homeland Security, State, and NASA received disclaimed opinions, in which the GAO says it cannot render an opinion because there are indications the agencies’ financial statements are unreliable.

Still, CFO Act agencies have made improvements in their mandate to be more like their corporate brethren. For the third year, all of them have made their financial filings within 45 days, a time frame that was shrunk from five months in 2001. They have also been using tightened internal-control regulations, which the OMB compares to the requirements of the Sarbanes-Oxley Act’s Section 404.

The OMB’s announcement also praised the agencies for making improvements. The total number of material weaknesses declined from 41 to 39, reflecting a 35 decrease in weaknesses since 2001. According to the OMB, this feat is “notable” for the fact that materiality guidelines have recently been expanded, raising the possibility that more material weaknesses would have been reported this past year.

In addition, the agencies have improved their error rate for improper payments. They reduced such payments by $7.9 billion, or 3.1 percent, compared to the 3.9 error rate reported in fiscal year 2004. The OMB attributes this improvement to a fairly new initiative requiring the agencies to report how many improper payments they make each year.

Long term, the government hopes to produce a governmentwide consolidated audit, but that goal remains a long way off. From fiscal years 2002 through 2006, at least half of the agencies have had nonintegrated systems, inadequate reconciliation procedures, a lack of accurate records, and weak IT security, according to the GAO. As a result, the agencies face “a significant obstacle in supporting effective management of the federal government,” the GAO reported earlier this year.

The issues are particularly problematic at the Department of Defense, the largest federal agency that is hampered by legacy systems and will likely be the one to hold the government back from achieving a consolidated audit, according to recently retired OMB controller Linda Combs.

The latest report card comes as current and former federal CFOs are working to improve their stature in what critics say is a short-tenured and compliance-heavy job. Among recent initiatives is the creation of a mentoring and idea-exchange program called CFO SAGE, or Strategic Advisors to Government Executives. Put together by the Council for Excellence in Government, the program is similar to one put together a couple of years ago for federal chief information officers.

These advisers include the former finance chiefs of the Department of Justice and Customs and Border Control. For Samuel Mok, who recently stepped down as the Labor CFO, the program could also offer a forum for these CFOs to question the effectiveness of the CFO Act. “Many of the problems remain the same,” Mok told CFO.com. “We should take a look back and say, ‘Hey, guys look what you have done.’”

According to Mok, no one has revisited the law to see how it was implemented and where improvements can be made. At the same time, as political appointees, federal CFOs are privy to the political whims of each administration, so they may feel limited in effecting major change at their jobs, he says.

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