Scope and Methodology

We reviewed the fiscal year 2002 financial statement audit reports for the  24 CFO Act agencies to identify the (1) auditors’ assessments of agency  financial systems’ compliance, (2) problems that affect FFMIA compliance,  and (3) agency management’s FFMIA assessments. While agencies are  making progress in producing auditable financial statements and  addressing their financial management systems weaknesses, most agency  systems are still not substantially compliant with FFMIA’s requirements. For fiscal year  2002, IGs and their contract auditors reported that the systems of 19 of the  24 CFO Act agencies did not substantially comply with at least one of  FFMIA’s three requirements—federal financial management systems  requirements, applicable federal accounting standards, or the SGL. While more CFO Act agencies have obtained clean or unqualified audit  opinions on their financial statements, there is little evidence of marked  improvements in agencies’ capacities to create the full range of information  needed to manage day-to-day operations. The CFO Act calls for agencies to develop and maintain an integrated  accounting and financial management system that complies with federal  systems requirements and provides for (1) complete, reliable, consistent,  and timely information that is responsive to the financial information needs  of the agency and facilitates the systematic measurement of performance,  (2) the development and reporting of cost management information, and  (3) the integration of accounting, budgeting, and program information. In addition to recommending that OMB require agency auditors to provide  a statement of positive assurance when reporting substantial compliance,  we also previously recommended that OMB (1) explore further  clarifications of the definition of “substantial compliance” to help ensure  consistent application of the term, (2) reiterate that the indicators of  compliance in its January 4, 2001, guidance are not meant to be all  inclusive, (3) develop additional guidance, in accordance with the  GAO/PCIE FAM, to specify procedures that auditors should perform  when assessing FFMIA compliance, and (4) emphasize the importance of  cost accounting to managers by requesting that auditors pay special  attention to agencies’ ability to meet the requirements of SFFAS No. As we recently reported, as of September 30, 2002,  17 agencies advised us that they were planning to or were in the process of  implementing a new core financial system. Nevertheless, it is imperative that agencies adopt leading  practices to help ensure successful systems implementation. Successful implementation of  financial management systems has been a continuous challenge for both  federal agencies and private sector entities. Federal agencies, such as NASA and DOD, have experienced many of these  challenges in attempting to implement new financial management systems. Our recent reports  highlight this and other investment management and project weaknesses at  DOD. The widespread systems problems facing the federal government need  sustained management commitment at the highest levels of government. When providing negative assurance with FFMIA,  auditors state that nothing came to their attention indicating that these  agencies’ financial management systems did not substantially meet FFMIA  requirements.
Why GAO Did This Study

The ability to produce the data needed to efficiently and effectively manage the day-to-day operations of the federal government and provide accountability to taxpayers has been a long-standing challenge to most federal agencies. To help address this challenge, the Federal Financial Management Improvement Act of 1996 (FFMIA) requires the 24 Chief Financial Officers Act agencies to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) federal accounting standards, and (3) the U.S. Government Standard General Ledger (SGL). FFMIA also requires GAO to report annually on the implementation of the act.

What GAO Found

Federal agencies are making progress to address financial management systems weaknesses. At the same time, for fiscal year 2002, 19 of the 24 CFO Act agency inspectors general or their contract auditors reported that these agencies' financial management systems did not comply with FFMIA. The nature and seriousness of the reported problems indicate that, generally, agency management does not yet have the full range of reliable information needed for accountability, performance reporting, and decision making. Audit reports highlight six recurring problems that have been consistently reported for those agencies whose auditors reported noncompliant systems. Following OMB's reporting guidance, auditors for 5 agencies provided negative assurance on agency systems' FFMIA compliance for fiscal year 2002. This means that nothing came to their attention indicating that these agencies' financial management systems did not meet FFMIA requirements. GAO does not believe that this type of reporting is sufficient for reporting under the act. FFMIA requires the auditor to state "whether" the agency systems are in substantial compliance, which in our view, requires the auditor to perform sufficient audit tests to be able to provide positive assurance. Agencies have recognized the seriousness of their financial systems weaknesses, and as of September 30, 2002, 17 of the 24 CFO Act agencies were planning to or were implementing a new core financial system. It is imperative that agencies adopt leading practices, such as top management commitment and business process reengineering, to ensure successful systems implementation. The JFMIP Principals, congressional oversight, and the President's Management Agenda are driving governmentwide initiatives to transform federal financial management. Modernization of agency financial systems and continued attention is needed to sustain momentum on these initiatives.