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Report to Congressional Committees: 

September 2005: 

Financial Management: 

Achieving FFMIA Compliance Continues to Challenge Agencies: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-881]: 

GAO Highlights: 

Highlights of GAO-05-881, a report to the Committee on Homeland 
Security and Governmental Affairs, U.S. Senate, and the Committee on 
Government Reform, House of Representatives: 

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 continues to be a challenge for most 
federal agencies. To help address this challenge, the Federal Financial 
Management Improvement Act of 1996 (FFMIA) requires the Chief Financial 
Officers (CFO) 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: 

While most CFO Act agencies have obtained clean or unqualified audit 
opinions on their financial statements, the underlying financial 
systems remain a serious problem. Agencies still lack the capacity to 
create the full range of information needed for effective day-to-day 
management. In fiscal year 2004, auditors for 16 of the 23 CFO Act 
agencies reported that agencies’ financial management systems failed to 
comply with FFMIA. As shown in the figure below, primarily six types of 
problems related to agencies systems were identified in the audit 
reports. These same types of problems have been consistently reported 
for agencies with noncompliant systems for a number of years. GAO views 
these problems with agency financial systems to be a significant 
challenge to improving the management of the federal government. 

Auditors for six agencies provided negative assurance on systems’ FFMIA 
compliance for fiscal year 2004. This means that nothing came to their 
attention to indicate that financial management systems did not meet 
FFMIA requirements. OMB’s current reporting guidance calls for negative 
assurance; however, GAO continues to believe that this type of 
reporting is not sufficient for reporting under the act. In addition, 
negative assurance may provide the false impression that the auditors 
are reporting that the agencies’ systems are compliant. In contrast, 
auditors for the Department of Labor (DOL) provided positive assurance 
by reporting that DOL’s financial management systems substantially 
complied with FFMIA requirements. In fiscal year 2005, DOL auditors 
plan to enhance their audit procedures to focus on the reliability and 
use of managerial cost information. GAO looks forward to other auditors 
adopting a similar reporting practice that adds more value. In 
addition, auditors have expressed concern about providing positive 
assurance because of the need to clarify the meaning of substantial 
compliance. 

OMB continues to move ahead on other initiatives to enhance financial 
management in the federal government. Moreover, the continuing 
leadership and support of Congress will be crucial in reforming 
financial management in the federal government. 

What GAO Recommends: 

GAO reaffirms its prior recommendations that OMB revise its guidance to 
require positive assurance regarding substantial compliance with the 
requirements of FFMIA, and clarify “substantial compliance” to promote 
consistent reporting. As in the past, OMB did not agree with GAO’s view 
on the need for auditors to provide positive assurance on FFMIA, but 
agreed to consider clarifying the definition of “substantial 
compliance” in future policy and guidance updates. We believe that 
positive assurance is a statutory requirement and will continue to work 
with OMB on this issue. 

www.gao.gov/cgi-bin/getrpt?GAO-05-881. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Sally Thompson at (202) 
512-2600 or thompsons@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Guidance for FFMIA Issued by OMB: 

Financial Audit Manual Section on FFMIA Developed by GAO and PCIE: 

Scope and Methodology: 

Systems Weaknesses Continue to Impede Financial Management 
Accountability: 

FFMIA Compliance Findings Mostly Based on Negative Assurance: 

Reasons for Noncompliance: 

Key Initiatives That Impact Federal Financial Management Systems: 

DOD Continues to Struggle to Enhance Financial Management: 

Continuing Congressional Interest Helps Provide Accountability: 

Conclusions: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Requirements and Standards Supporting Federal Financial 
Management: 

Appendix II: Publications in the Federal Financial Management Systems 
Requirements Series: 

Appendix III: Statements of Federal Financial Accounting Concepts, 
Standards, Interpretations, and Technical Bulletins: 

Appendix IV: AAPC Technical Releases: 

Appendix V: Checklists for Reviewing Systems under the Federal 
Financial Management Improvement Act: 

Appendix VI: Comments from the Office of Management and Budget: 

Appendix VII: Auditors' FFMIA Determinations for Fiscal Year 2004: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Problems Reported by Auditors for Fiscal Years 2000 through 
2004: 

Figure 2: Auditors' FFMIA Assessments for Fiscal Years 2000 through 
2004: 

Figure 3: Problems Reported by Auditors for Fiscal Years 2000 through 
2004: 

Figure 4: Agency Systems Architecture: 

Abbreviations: 

AAPC: Accounting and Auditing Policy Committee: 

AICPA: American Institute of Certified Public Accountants: 

AID: Agency for International Development: 

BPD: Bureau of the Public Debt: 

CFO: chief financial officer: 

COE: centers of excellence: 

COTS: commercial off-the-shelf: 

DFAS: Defense Finance and Accounting Service: 

DHS: Department of Homeland Security: 

DOD: Department of Defense: 

DOJ: Department of Justice: 

DOL: Department of Labor: 

DOT: Department of Transportation: 

EPA: Environmental Protection Agency: 

FAM: GAO/PCIE Financial Audit Manual: 

FASAB: Federal Accounting Standards Advisory Board: 

FBWT: Fund Balance with Treasury: 

FEA: Federal Enterprise Architecture: 

FEMA: Federal Emergency Management Agency: 

FFMIA: Federal Financial Management Improvement Act: 

FFMSR: Federal Financial Management System Requirements: 

FISMA: Federal Information Security Management Act: 

FMFIA: Federal Managers' Financial Integrity Act: 

FSIC: Financial Systems Integration Committee: 

GSA: General Services Administration: 

HHS: Department of Health and Human Services: 

IRS: Internal Revenue Service: 

JFMIP: Joint Financial Management Improvement Program: 

LOB: line of business: 

MACS: Mission Accounting and Control System: 

NASA: National Aeronautics and Space Administration: 

NBC: National Business Center: 

NRC: Nuclear Regulatory Commission: 

NSF: National Science Foundation: 

OFFM: Office of Federal Financial Management: 

OIG: office of inspector general: 

OMB: Office of Management and Budget: 

OPM: Office of Personnel Management: 

PCIE: President's Council on Integrity and Efficiency: 

PMO: Program Management Office: 

SFFAC: Statement of Federal Financial Accounting Concepts: 

SFFAS: Statement of Federal Financial Accounting Standards: 

SGL: U.S. Government Standard General Ledger: 

SSA: Social Security Administration: 

USDA: U.S. Department of Agriculture: 

VA: Department of Veterans Affairs: 

Letter September 20, 2005: 

The Honorable Susan M. Collins: 
Chairman: 
The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Tom Davis: 
Chairman: 
The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives: 

Most federal agencies continue to lack the financial data needed to 
efficiently and effectively manage day-to-day operations and to provide 
an acceptable level of accountability to taxpayers. In 1990, to address 
this long-standing weakness, Congress mandated financial management 
reform within the federal government by enacting the Chief Financial 
Officers (CFO) Act,[Footnote 1] which requires the modernization of 
financial management systems by agencies in order to attain the 
systematic measurement of performance; the development of cost 
information; and the integration of program, budget, and financial 
information for management reporting. The goal of the CFO Act is to 
improve accounting and financial management practices by providing 
management with the full range of information needed for day-to-day 
management. 

The Federal Financial Management Improvement Act of 1996[Footnote 2] 
(FFMIA) builds on the foundation laid by the CFO Act by emphasizing the 
need for agencies to have financial management systems that can 
generate reliable, useful, and timely information with which to make 
fully informed decisions and to ensure accountability on an ongoing 
basis. FFMIA requires the major departments and agencies covered by the 
CFO Act[Footnote 3] to implement and maintain financial management 
systems that comply substantially with (1) federal financial management 
systems requirements, (2) applicable federal accounting standards, and 
(3) the U.S. Government Standard General Ledger (SGL) at the 
transaction level. The act also requires auditors to state in their 
audit reports whether the agencies' financial management systems 
substantially comply with the act's requirements. In addition, we are 
required to report annually on the implementation status of the act. 
This report, our ninth, discusses (1) the auditors' assessments of 
agency systems' compliance with FFMIA for fiscal year 2004 and the 
financial management systems problems that continue to affect systems' 
FFMIA compliance and (2) the initiatives underway to help move federal 
financial management toward FFMIA compliance. 

We conducted our work in the Washington, D.C. area from February 2005 
through May 2005, in accordance with U.S. generally accepted government 
auditing standards. 

Results in Brief: 

While more CFO Act agencies have obtained clean or unqualified audit 
opinions on their financial statements, the underlying agency financial 
systems remain a serious problem. Agencies still generally lack the 
capacity to create the full range of information needed to effectively 
manage day-to-day operations. For fiscal year 2004, auditors for 16 of 
the 23 CFO Act agencies reported that their agencies' financial 
management systems did not comply substantially with one or more of the 
three FFMIA requirements. As a result of these deficiencies, the 
financial management systems of most agencies are still unable to 
routinely produce reliable, useful, and timely financial information. 
This weakness limits the federal government's capacity to manage with 
timely and objective data, and thereby hampers its ability to 
effectively manage and oversee its major programs. 

Auditors for the other seven CFO Act agencies did not report such 
problems but for the most part did not offer assurances that this was 
in fact the case. Auditors for six[Footnote 4] of the seven agencies 
reported that the results of their tests disclosed no instances in 
which the agencies' systems did not substantially comply with FFMIA. 
These auditors provided what is termed negative assurance of FFMIA 
compliance when they reported that nothing came to their attention 
during the course of their planned procedures to indicate that these 
agencies' financial management systems did not meet FFMIA requirements. 
While negative assurance is the level of assurance allowed by the 
Office of Management and Budget's (OMB) audit guidance, the auditors 
for one agency, the Department of Labor (DOL), instead provided 
positive assurance when they reported that in their opinion, DOL's 
financial management systems substantially complied with the 
requirements of FFMIA. Providing positive assurance, as required by the 
act, involves more testing than that performed by auditors to render an 
opinion on the financial statements. DOL's auditors told us that the 
extent of their audit procedures enabled them to conclude that DOL's 
systems were substantially compliant with the provisions of FFMIA. For 
fiscal year 2005, the DOL auditors plan to enhance their procedures to 
increase their focus on the reliability and use of managerial cost 
information, among other things. This is a very positive action by the 
DOL auditors, and we look forward to other agencies adopting a similar 
reporting practice. 

The Department of Homeland Security Financial Accountability 
Act[Footnote 5] added the Department of Homeland Security (DHS) to the 
list of CFO Act agencies effective for fiscal year 2005. With that 
designation, DHS will be subject to FFMIA for fiscal year 2005. Because 
DHS was not subject to FFMIA in fiscal year 2004, we have not included 
DHS in our summaries of compliance with FFMIA and problems reported by 
the auditors for fiscal year 2004. However, we have noted that the DHS 
auditors identified and reported deficiencies that relate to all three 
FFMIA requirements. We plan to include DHS in our analysis of the 
fiscal year 2005 FFMIA results. 

As shown in figure 1, agencies have not yet achieved the goals of 
FFMIA--as well as the CFO Act--to establish financial management 
systems that support controlling the cost of the federal government and 
improving the performance, productivity, and efficiency of federal 
financial management. Based on our review of the fiscal year 2004 audit 
reports for the 16 agencies reported to have noncompliant systems, the 
same six primary problems continue to affect FFMIA compliance. While 
more severe at some agencies than others, the nature and seriousness of 
the problems reported indicate that generally most agencies' financial 
management systems are not yet able to routinely produce reliable, 
useful, and timely financial information. We view the problems with 
agencies' financial management systems to be a significant challenge to 
improving the management of government. 

Figure 1: Problems Reported by Auditors for Fiscal Years 2000 through 
2004: 

[See PDF for image] 

[End of figure] 

OMB continues to move forward on new initiatives to enhance financial 
management and provide results-oriented information in the federal 
government. Two notable developments in this area in fiscal year 2004 
were the realignment of responsibilities formerly performed by the 
Joint Financial Management Improvement Program (JFMIP) and the 
development of financial management lines of business. 

While we are not making any new recommendations in this report, we 
reaffirm our prior recommendations[Footnote 6] aimed at enhancing OMB's 
audit guidance related to FFMIA assessments. Specifically, we 
recommended that OMB (1) require agency auditors to provide a statement 
of positive assurance when reporting an agency's systems to be in 
substantial compliance with the requirements of FFMIA and (2) further 
clarify the definition of "substantial compliance" to encourage 
consistent reporting. As we noted in our prior reports, auditors we 
interviewed had concerns about providing positive assurance in 
reporting on agency systems' FFMIA compliance because of a need for 
clarification regarding the meaning of substantial compliance. 

In commenting on a draft of this report, OMB agreed with our assessment 
that many federal agencies still need to make improvements to generate 
more accurate and timely financial information to optimize day-to-day 
operations. Moreover, OMB agreed with us that financial management 
success encompasses more than agencies receiving unqualified opinions 
on their financial statements. As in previous years, we and OMB have 
differing views on the level of audit assurance necessary for assessing 
compliance with FFMIA. While OMB commended DOL's auditors for 
performing the additional level of audit work needed to provide 
positive assurance of compliance with FFMIA and encouraged similar 
efforts at other agencies, it stated that requiring a statement of 
positive assurance for all agencies was not necessary. We continue to 
believe that a statement of positive assurance is a statutory 
requirement under the act and will continue to work with OMB on this 
issue. OMB did agree to consider clarifying the definition of 
"substantial compliance" in its future policy and guidance updates. Our 
detailed evaluation of OMB's comments can be found at the end of this 
letter. 

Background: 

FFMIA is part of a series of management reform legislation passed by 
Congress over the past two decades. This series of legislation started 
with the Federal Managers' Financial Integrity Act of 1982 
(FMFIA),[Footnote 7] which Congress passed to strengthen internal 
controls and accounting systems throughout the federal government, 
among other purposes. Issued pursuant to FMFIA, the Comptroller 
General's Standards for Internal Control in the Federal 
Government[Footnote 8] provides the standards that are directed at 
helping agency managers implement effective internal control, an 
integral part of improving financial management systems. Internal 
control is a major part of managing an organization and comprises the 
plans, methods, and procedures used to meet missions, goals, and 
objectives. In summary, internal control, which under OMB's guidance 
for FMFIA is synonymous with management control, helps government 
program managers achieve desired results through effective stewardship 
of public resources. 

Effective internal control also helps in managing change to cope with 
shifting environments and evolving demands and priorities. As programs 
change and agencies strive to improve operational processes and 
implement new technological developments, management must continually 
assess and evaluate its internal control to ensure that the control 
activities being used are effective and updated when necessary. While 
agencies had achieved some success in identifying and correcting 
material internal control and accounting system weaknesses, their 
efforts to implement FMFIA had not produced the results intended by 
Congress. 

Therefore, in the 1990s, Congress passed additional management reform 
legislation to improve the general and financial management of the 
federal government. The combination of reforms ushered in by the (1) 
CFO Act of 1990, (2) Government Performance and Results Act of 
1993,[Footnote 9] (3) Government Management Reform Act of 
1994,[Footnote 10] (4) FFMIA, (5) Clinger-Cohen Act of 1996,[Footnote 
11] (6) Accountability of Tax Dollars Act of 2002,[Footnote 12] and (7) 
Department of Homeland Security Financial Accountability Act of 
2004,[Footnote 13] if successfully implemented, provides a solid 
foundation for improving the accountability of government programs and 
operations as well as for routinely producing valuable cost and 
operating performance information. These financial management reform 
acts emphasize the importance of improving financial management across 
the federal government. 

In particular, building on the foundation laid by the CFO Act, FFMIA 
emphasizes the need for agencies to have systems that are able to 
generate reliable, useful, and timely information for decision-making 
purposes and to ensure accountability on an ongoing basis. FFMIA 
requires the departments and agencies covered by the CFO Act to 
implement and maintain financial management systems that comply 
substantially with (1) federal financial management systems 
requirements, (2) applicable federal accounting standards,[Footnote 14] 
and (3) the SGL[Footnote 15] at the transaction level. FFMIA also 
requires auditors to state in their CFO Act financial statement audit 
reports whether the agencies' financial management systems 
substantially comply with FFMIA's systems requirements. Appendixes I 
through IV include details on the various requirements and standards 
that support federal financial management. 

Guidance for FFMIA Issued by OMB: 

OMB establishes governmentwide financial management policies and 
requirements and has issued two sources of guidance related to FFMIA 
reporting. First, OMB Bulletin No. 01-02, Audit Requirements for 
Federal Financial Statements, dated October 16, 2000, prescribes 
specific language auditors should use when reporting on an agency 
system's substantial compliance with FFMIA. Specifically, this guidance 
calls for auditors to provide negative assurance when reporting on an 
agency system's FFMIA compliance. Second, in OMB Memorandum, Revised 
Implementation Guidance for the Federal Financial Management 
Improvement Act (Jan. 4, 2001), OMB provides guidance for agencies and 
auditors to use in assessing substantial compliance. The guidance 
describes the factors that should be considered in determining whether 
an agency's systems substantially comply with FFMIA's requirements. 
Further, the guidance provides examples of the types of indicators that 
should be used as a basis for assessing whether an agency's systems are 
in substantial compliance with each of the three FFMIA requirements. 
Finally, the guidance discusses the corrective action plans, to be 
developed by agency heads, for bringing their systems into compliance 
with FFMIA. 

Financial Audit Manual Section on FFMIA Developed by GAO and PCIE: 

We have worked in partnership with representatives from the President's 
Council on Integrity and Efficiency (PCIE) to develop and maintain the 
joint GAO/PCIE Financial Audit Manual (FAM). The FAM provides specific 
procedures auditors should perform when assessing FFMIA 
compliance.[Footnote 16] As detailed in appendix V, we have also issued 
a series of checklists to help assess whether agencies systems meet 
systems requirements. The FAM guidance on FFMIA assessments recognizes 
that while financial statement audits offer some assurance regarding 
FFMIA compliance, auditors should design and implement additional 
testing to satisfy FFMIA criteria. For example, in performing financial 
statement audits, auditors generally focus on the ability of the 
financial management systems to process and summarize financial 
information that flows into annual agency financial statements. In 
contrast, FFMIA requires auditors to assess whether an agency's 
financial management systems comply with system requirements, 
accounting standards, and the SGL. To do this, auditors need to 
consider whether agency systems provide reliable, useful, and timely 
information for managing day-to-day operations so that agency managers 
would have the necessary information to measure performance on an 
ongoing basis rather than just at year-end. Further, OMB's current 
audit guidance[Footnote 17] calls for financial statement auditors to 
review performance information for consistency with the financial 
statements, but does not require auditors to determine whether such 
information is available to managers for day-to-day decision making as 
called for by the FAM guidance for testing compliance with FFMIA. 

Scope and Methodology: 

We reviewed the fiscal year 2004 financial statement audit reports for 
the 23 CFO Act agencies to identify the auditors' assessments of agency 
financial systems' compliance and the problems that affect FFMIA 
compliance. We also reviewed the fiscal year 2004 financial statement 
audit report for DHS to identify any FFMIA-related issues. Prior 
experience with the auditors and our review of their reports provided 
the basis for determining the sufficiency and relevancy of evidence 
provided in these documents. Based on the audit reports, we identified 
problems reported by the auditors that affect agency systems' 
compliance with FFMIA. The problems identified in these reports are 
consistent with long-standing financial management weaknesses we have 
reported based on our work at a number of agencies. However, we caution 
that the occurrence of problems in a particular category may be even 
greater than auditors' reports of FFMIA noncompliance would suggest, 
because auditors may not have included all problems in their reports. 
Finally, we held discussions with OMB officials to obtain information 
about their current efforts to improve federal financial management and 
address our prior recommendations related to FFMIA. 

We conducted our work in the Washington, D.C. area from February 2005 
through May 2005 in accordance with U.S. generally accepted government 
auditing standards. We requested comments on a draft of this report 
from the Director of OMB or his designee. We received written comments 
from the OMB Controller. OMB's comments are discussed in the Agency 
Comments and Our Evaluation section and reprinted in appendix VI. 

Systems Weaknesses Continue to Impede Financial Management 
Accountability: 

While agencies have made demonstrable progress in producing auditable 
financial statements and some progress in addressing their financial 
management systems weaknesses, the majority of agencies' systems are 
still not substantially compliant with FFMIA's requirements. Figure 2 
summarizes auditors' assessments of FFMIA compliance for fiscal years 
2000 through 2004 and suggests that the instances of noncompliance with 
FFMIA's three requirements have remained fairly constant. For fiscal 
year 2004, offices of inspectors general (OIG) and their contract 
auditors reported that the systems of 16 of the 23 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 at the transaction 
level.[Footnote 18]

Figure 2: Auditors' FFMIA Assessments for Fiscal Years 2000 through 
2004: 

[See PDF for image] 

Note: See appendix VII for details on agencies' compliance with FFMIA 
requirements. 

[End of figure] 

In fiscal year 2004, auditors for six agencies--the Department of 
Commerce (Commerce), the Department of Energy (Energy), the 
Environmental Protection Agency (EPA), the General Services 
Administration (GSA), the National Science Foundation (NSF), and the 
Social Security Administration (SSA)--provided negative assurance that 
the agencies' financial systems were in compliance with FFMIA. In 
addition, for the first time, auditors for one agency, DOL, provided 
positive assurance that its systems were in compliance with FFMIA. In 
contrast, in fiscal year 2003, the auditors for Commerce, Energy, EPA, 
the Nuclear Regulatory Commission (NRC), NSF, and SSA reported that the 
results of their tests disclosed no instance in which their financial 
management systems did not meet FFMIA requirements. 

At the NRC, the auditors determined that the financial management 
systems did not comply with the requirements of FFMIA in fiscal year 
2004, although they had previously determined that the systems were in 
compliance in fiscal year 2003. The change was due to audit tests 
performed on NRC's fee billing system in fiscal year 2004. As a result 
of their tests, the auditors concluded that the billing system lacked 
sound internal controls and does not comply with existing requirements 
for revenue systems. At GSA, the auditors provided negative assurance 
that the financial management systems were FFMIA-compliant in fiscal 
year 2004, although they had previously determined that the systems 
were not in compliance for fiscal year 2003 due to significant 
reconciliation problems. For fiscal year 2004, the GSA auditors closed 
the material weakness regarding the significant reconciliation problems 
that had affected GSA the prior year. 

DHS will be subject to FFMIA for the first time in fiscal year 2005. 
The Department of Homeland Security Financial Accountability 
Act[Footnote 19] added DHS to the list of CFO Act agencies effective 
for fiscal year 2005. Because DHS was not subject to FFMIA in fiscal 
year 2004, we have not included DHS in our summaries of compliance with 
FFMIA and problems reported by the auditors for fiscal year 2004. 
However, we have noted that the DHS auditors identified and reported 
deficiencies that relate to all three FFMIA requirements. We plan to 
include DHS in our analysis of the fiscal year 2005 FFMIA results. 

While substantially more CFO Act agencies have obtained clean or 
unqualified audit opinions on their financial statements, as shown in 
figure 2, the underlying agency financial systems remain a serious 
problem. The number of unqualified opinions has increased over the past 
8 years (from 11 in fiscal year 1997 to 18 for fiscal year 2004), and 
most agencies were able to issue their audited financial statements 
within the accelerated reporting time frame--22 of the 23 CFO Act 
agencies[Footnote 20] issued their audited financial statements by the 
November 15, 2004, deadline set by OMB, just 46 days after the close of 
the fiscal year. While the increase in unqualified and timely opinions 
is noteworthy, we are concerned over the growing number of CFO Act 
agencies that have restated certain of their financial statements for 
fiscal year 2003 to correct errors and have included a matter of 
emphasis paragraph in our report on the audit of the fiscal year 2004 
consolidated financial statements given the seriousness of this 
problem. As we have previously testified,[Footnote 21] at least 
11[Footnote 22] of the 23 CFO Act agencies restated their fiscal year 
2003 financial statements, whereas 5[Footnote 23] CFO Act agencies 
restated their fiscal year 2002 financial statements. The restatements 
to CFO Act agencies' fiscal year 2003 financial statements ranged from 
correcting two line items on one agency's balance sheet to numerous 
line items on several of another agency's financial statements. The 
amounts of the agencies' restatements ranged from several million 
dollars to over $91 billion. Nine[Footnote 24] of those 11 agencies 
received unqualified opinions on their financial statements originally 
issued in fiscal year 2003. Seven of the 9 auditors issued unqualified 
opinions on the restated financial statements, which in substance 
replace the auditors' opinions on their respective agencies' original 
fiscal year 2003 financial statements. For 2[Footnote 25] of these 9 
agencies, the auditors not only withdrew their unqualified opinions on 
the fiscal year 2003 financial statements but also issued other than 
unqualified opinions on their respective agencies' restated fiscal year 
2003 financial statements because they could not determine whether 
there were any additional misstatements and the effect that these could 
have on the restated fiscal year 2003 financial statements. 

For two of the agencies with restated financial statements, auditors 
provided negative assurance that the agencies' systems were in 
compliance with FFMIA for fiscal year 2003. The restatements at these 
agencies reflected inaccurate recording of transactions, and in one 
case, the cause for the restatement could be traced back to the 
implementation of new software, among other factors. The necessity for 
these agencies to restate certain financial accounts in the subsequent 
fiscal year raises questions about whether the agencies systems 
substantially met FFMIA requirements and whether financial managers had 
access to reliable, useful, and timely information with which to make 
fully informed operational decisions in fiscal year 2003. 

The need for restatements and end-of-the-year adjustments to correct 
for errors undermines public trust and confidence in both the entity 
and all responsible parties and indicates a continuing lack of 
improvement in the underlying agency financial systems. Undue emphasis 
on receiving unqualified or clean audit opinions has led to an 
expectation gap since, as more agencies receive clean opinions, public 
expectations are raised that the government has sound financial 
management and can produce reliable, useful, and timely information on 
demand throughout the year, whereas the annual FFMIA assessments offer 
a different perspective. 

FFMIA Compliance Findings Mostly Based on Negative Assurance: 

In fiscal year 2004 auditors for seven agencies reported their systems 
to be in substantial compliance with the requirements of FFMIA. 
Auditors for six of these agencies (Commerce, Energy, EPA, NRC, NSF, 
and SSA) provided negative assurance that the agencies' systems were in 
compliance with FFMIA. Auditors provide negative assurance when they 
state that nothing came to their attention during the course of their 
planned procedures to indicate that these agencies' financial 
management systems did not meet FFMIA requirements. If readers are not 
familiar with the concept of negative assurance, which we believe is 
generally the case, they may incorrectly assume that these systems have 
been fully tested by the auditors and that the agencies have achieved 
compliance. OMB's current audit guidance[Footnote 26] only calls for 
auditors to provide negative assurance when reporting whether an 
agency's systems are in substantial compliance with FFMIA. 

To provide positive assurance of FFMIA compliance, auditors need to 
perform more comprehensive audit procedures than those necessary to 
render an opinion for a financial statement audit. In performing 
financial statement audits, auditors generally focus on the capability 
of the financial management systems to process and summarize financial 
information that flows into financial statements. In contrast, FFMIA is 
much broader and requires auditors to assess whether an agency's 
financial management systems substantially comply with systems 
requirements. To do this, auditors need to consider whether agency 
systems provide complete, accurate, and timely information for day-to- 
day decision making and management. 

In fiscal year 2004, auditors for DOL provided an opinion, or positive 
assurance, of DOL's financial management systems' compliance with 
FFMIA. At DOL, the Inspector General (IG) contracted with an 
independent public accounting firm to perform the FFMIA examination in 
accordance with American Institute of Certified Public Accountants 
attestation standards, which by reference are incorporated in 
Government Auditing Standards. To do so, the auditors used a 
combination of financial statement and FFMIA-specific audit procedures. 
Specifically, they performed extensive transaction testing and 
reconciliations combined with FFMIA-related audit procedures based on 
the GAO/PCIE FAM requirements. For example, they developed a good 
understanding of the financial systems capabilities, documented their 
assessments of DOL's financial systems' compliance with systems 
requirements, and considered the nature and extent of managerial cost 
information available for effective day-to-day management. 

According to the auditors, two developments at DOL in fiscal year 2004 
were key to the ability of the auditors to conclude that DOL systems 
substantially complied with the three requirements of FFMIA for fiscal 
year 2004. First, during fiscal year 2004, DOL management assigned 
staff the responsibility of reconciling the Fund Balance with Treasury 
(FBWT)[Footnote 27] accounts on a daily basis. Due to this increased 
focus on FBWT, at the end of fiscal year 2004, the auditors found no 
material differences between DOL and Treasury's records. Second, DOL 
implemented a cost management system during fiscal year 2004 in order 
to provide current year cost data to managers that has not been 
available in prior years. The auditors also determined that none of the 
internal control deficiencies reported as part of the financial 
statement audit indicated substantial noncompliance with FFMIA 
requirements. For the fiscal year 2005 financial statement audit, the 
auditors plan to increase their focus on the types of reports being 
produced currently by the cost system and how managers are using that 
information for day-to-day operations. In addition, the fiscal year 
2005 DOL audit plan requires the auditors to perform the FFMIA-related 
FAM audit procedures and complete the associated checklists. 

The efforts by the DOL auditors to perform the level of review 
necessary to provide positive assurance of FFMIA compliance in fiscal 
year 2004 is most noteworthy. We have discussed the importance of 
providing positive assurance on FFMIA as required by the act for a 
number of years. We look forward to other agencies adopting similar 
auditing and reporting practice. 

Providing positive assurance of an agency's financial management system 
can identify weaknesses and lead to improvements that enhance the 
performance, productivity, and efficiency of federal financial 
management systems. It also provides a clear "bottom line," whereas 
negative assurance does not do so. Therefore, as we have discussed in 
prior reports,[Footnote 28] we reaffirm our prior recommendation that 
OMB require agency auditors to provide a statement of positive 
assurance when reporting an agency's systems to be in substantial 
compliance with FFMIA. OMB continues to support the requirement for 
negative assurance of FFMIA compliance. While OMB agrees that testing 
should occur, and its guidance on FFMIA calls for it, OMB officials 
stated that different, more coordinated approaches toward assessing an 
agency's internal controls and FFMIA compliance might provide 
sufficient assurance on an agency's systems. For example, in preparing 
the President's Management Agenda (PMA) scorecard assessments, OMB 
officials meet with agencies to discuss a number of financial 
management issues and have systems demonstrations. Agencies are asked 
to identify key business questions and related cost drivers. Then, the 
agencies must develop systems that can produce the information needed 
on those cost drivers to help management at all levels focus on 
results. OMB officials stated that they believed the PMA scorecard 
framework offers an alternate route toward substantial compliance that 
is similar to that offered by positive assurance. In its written 
comments on a draft of this report (see app. VI), OMB stated that the 
processes used in evaluating agencies against the PMA standards can 
provide a corroborative mechanism in evaluating compliance with FFMIA. 
Our concern is that the information provided by this approach does not 
come under audit scrutiny, which is what the law requires, and may not 
be reliable. 

In December 2004, OMB revised Circular No. A-123, Management's 
Responsibility for Internal Control, to strengthen the requirements for 
conducting management's assessment of internal control over financial 
reporting. The revision incorporates the internal control requirements 
for publicly traded companies that are contained in the Sarbanes-Oxley 
Act of 2002.[Footnote 29] The circular emphasized management's 
responsibility for establishing, maintaining, and reporting on internal 
control to achieve the objectives of effective and efficient 
operations, reliable financial reporting, and compliance with laws and 
regulations. In commenting on a draft of this report, OMB emphasized 
that through its revision to Circular No. A-123, agencies are required 
to implement more rigorous processes for conducting management's 
assessment of the effectiveness of internal controls over financial 
reporting. Given that PMA and Circular No. A-123 reviews help to ensure 
agencies' access to and use of timely and accurate financial data, OMB 
believes that requiring a statement of positive assurance would prove 
only marginally useful. 

From our perspective, auditor reporting on internal control is a 
critical component of monitoring the effectiveness of an organization's 
accountability, especially for large, complex, or challenged entities. 
Auditors can better serve their clients and other financial statement 
users and better protect the public interest by having a greater role 
in providing assurances of the effectiveness of internal control in 
deterring fraudulent financial reporting and protecting assets. 
Financial management systems are a critical element of an entity's 
internal control over financial reporting. Although enhanced internal 
control reporting would not necessarily address the full capability of 
the financial management systems in place, such reporting would include 
reportable internal control weaknesses caused by financial systems 
problems. However, the full value of independent auditors' assessments 
of FFMIA compliance will not be fully realized until auditors perform a 
sufficient level of audit work to be able to provide positive assurance 
that agencies are in compliance with FFMIA as called for in the act. 
When reporting an agency's financial management systems to be in 
substantial compliance, positive assurance from independent auditors 
will provide users with confidence that the agency systems provide the 
reliable, useful, and timely information envisioned by the act. 

In addition, we also reaffirm our previous recommendation that OMB 
explore clarifying the definition of "substantial compliance" to help 
ensure consistent application of the term. As we noted in our prior 
reports, auditors we interviewed had concerns about providing positive 
assurance in reporting on agency systems' FFMIA compliance because of a 
need for clarification regarding the meaning of substantial compliance. 
In its comments, OMB stated that its growing experience helping 
agencies implement the PMA enables it to refine the existing FFMIA 
indicators associated with substantial compliance. Accordingly, OMB 
said it would consider our recommendation in any future policy and 
guidance updates. 

Reasons for Noncompliance: 

Based on our review of the fiscal year 2004 audit reports for the 16 
agencies reported to have systems not in substantial compliance with 
one or more of FFMIA's three requirements, we identified six primary 
reasons cited by the auditors for agency systems not being compliant. 
The weaknesses reported by the auditors ranged from serious, pervasive 
systems problems to less serious problems that may affect only one 
aspect of an agency's accounting operation: 

* nonintegrated financial management systems,

* inadequate reconciliation procedures,

* lack of accurate and timely recording of financial information,

* noncompliance with the SGL,

* lack of adherence to federal accounting standards, and: 

* weak security controls over information systems. 

Figure 3 shows the relative frequency of these problems at the 16 
agencies reported to have noncompliant systems. The same six types of 
problems have been cited by auditors in their fiscal years 2000 through 
2003 audit reports, although the auditors may not have reported these 
problems as specific reasons for their systems' lack of substantial 
compliance with FFMIA. In addition, we caution that the occurrence of 
problems in any particular category may be even greater than auditors' 
reports of FFMIA noncompliance would suggest because auditors may not 
have identified all problems in their reviews. 

Figure 3: Problems Reported by Auditors for Fiscal Years 2000 through 
2004: 

[See PDF for image] 

[End of figure] 

Nonintegrated Financial Management Systems: 

The CFO Act calls for agencies to develop and maintain integrated 
accounting and financial management systems[Footnote 30] that comply 
with federal systems requirements and provide 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. OMB Circular No. A-127, 
Financial Management Systems, requires agencies to establish and 
maintain a single integrated financial management system that conforms 
to functional requirements published by JFMIP's Program Management 
Office (PMO). More details on the financial management systems 
requirements can be found in appendixes I and II. 

The lack of integrated financial management systems typically results 
in agencies expending major effort and resources, including in some 
cases hiring external consultants, to develop information that their 
systems should be able to provide on a daily or recurring basis. 
Agencies with nonintegrated financial systems are also more likely to 
devote more time and resources to collecting information than those 
with integrated systems. In addition, opportunities for errors are 
increased when agencies' systems are not integrated. 

Auditors frequently mentioned the lack of integrated financial 
management systems in their fiscal year 2004 audit reports. As shown in 
figure 3, auditors for 12 of the 16 agencies with noncompliant systems 
reported this to be a problem, compared with 11 of the 17 agencies 
reported with noncompliant systems in fiscal year 2003. For example, 
auditors for the Department of Justice reported that the financial 
management systems of the department's component agencies are not 
integrated or configured to support financial management and reporting. 
For instance, the U.S. Marshals Service's core financial system lacks 
integrated subsidiary ledgers for certain key account balances. 
Consequently, staff at this organization must perform time-consuming 
manual procedures to document adjustments and crosswalks between the 
general ledger and the financial statements. However, the limited 
amount of time available at the end of each financial reporting period 
increases the risk that errors existing in the financial statements 
were not detected and corrected prior to final issuance. The auditors 
also noted that the nonintegrated systems do not support management's 
need for timely and accurate information for day-to-day decision 
making. 

At the National Aeronautics and Space Administration (NASA), auditors 
reported numerous weaknesses in the core financial system, the 
integrated financial management system first implemented by NASA in 
fiscal year 2003. We have previously reported on problems NASA faced 
when implementing this system.[Footnote 31] Specifically, the auditors 
found that the core financial system lacked integration with certain 
key subsidiary systems, such as the property system, and does not 
facilitate the preparation of financial statements. Although the 
auditors recognized that management identified and resolved significant 
system problems in fiscal year 2004, the auditors identified serious 
continuing weaknesses in their review of property, plant, and equipment 
(PP&E)--specifically contractor-held PP&E. For example, due to a lack 
of integration with the property system, entries for contractor-held 
property, totaling $8.5 billion, had to be manually entered into the 
core financial system. The auditors concluded that the problems will 
not be fully addressed until NASA implements a single integrated system 
for reporting property and develops a methodology to identify costs 
that should be capitalized at the time that transactions are processed. 
The auditors further noted that certain transactions continue to be 
posted incorrectly due to improper configurations within the system. 
Consequently, they concluded that NASA lacks an integrated financial 
management system that provides effective and efficient 
interrelationships between software, hardware, personnel, procedures, 
controls, and data. 

Inadequate Reconciliation Procedures: 

A reconciliation process, whether manual or automated, is a necessary 
and valuable part of a sound financial management system. The less 
integrated the financial management system, the greater the need for 
adequate reconciliations because data are being accumulated from a 
number of different sources. Reconciliations are needed to ensure that 
data have been recorded properly between the various systems and manual 
records. The Comptroller General's Standards for Internal Control in 
the Federal Government highlights reconciliation as a key control 
activity. 

As shown in figure 3, auditors for 11 of the 16 agencies with 
noncompliant systems reported that the agencies had reconciliation 
problems, including difficulty in reconciling their FBWT accounts with 
Treasury's records, compared with 11 of the 17 agencies reported with 
noncompliant systems in fiscal year 2003. Treasury policy requires 
agencies to reconcile their accounting records with Treasury records on 
a monthly basis (comparable to individuals reconciling their personal 
checkbooks to their monthly bank statements). 

For example, in fiscal year 2003, auditors for the Department of 
Transportation (DOT) reported that the department had not implemented 
effective processes to reconcile transactions with other federal 
agencies. During fiscal year 2004, DOT did improve its reconciliation 
procedures using a new reporting tool within its financial management 
system. However, on September 30, 2004, DOT still had not identified 
agencies associated with $27 billion, or about half, of the $55 billion 
of transactions with other federal agencies that were processed and 
reported to Treasury in fiscal year 2004. The large amount associated 
with unknown trading partners demonstrates that DOT still lacks an 
effective process for reconciling transactions. Furthermore, DOT lacked 
an effective process for reconciling transactions among its own 
subsidiary agencies. In fiscal year 2004, DOT's subsidiary agencies 
reported a total of $17 million in accounts receivable, or amounts due 
from other departmental agencies. These same organizations, however, 
reported $582 million in accounts payable, or amounts owed to other 
departmental agencies. Because these amounts should reflect only 
transactions within DOT, at the consolidated agency level the amount 
due should match the amount owed. Due to this discrepancy, DOT 
management had to perform extensive research and make numerous manual 
adjustments to balance its records and prepare reliable financial 
statements. 

Until DOT is able to automatically track transactions with other 
federal agencies and between its own subsidiary agencies, it will not 
be able to make significant progress in reconciling its transaction 
balances internally and with those of other agencies. As a result of 
these problems at DOT and other federal agencies, the federal 
government's ability to determine the impact of these differences on 
the amounts reported in the consolidated financial statements is 
impaired, which we cite in our audit report on the U.S. government's 
consolidated financial statements as one of three major impediments to 
providing an opinion on those financial statements. Resolving the 
intragovernmental transactions problem remains a difficult challenge 
and will require a commitment by federal agencies and strong leadership 
and oversight by OMB. 

Lack of Accurate and Timely Recording of Financial Information: 

As shown in figure 3, auditors for all 16 of the agencies with 
noncompliant systems reported the lack of accurate and timely recording 
of financial information as a problem for fiscal year 2004, compared 
with 15 of the 17 agencies reported with noncompliant systems in fiscal 
year 2003. Accurate and timely recording of financial information is 
essential for successful financial management. Timely recording of 
transactions facilitates accurate reporting in agencies' financial 
reports and other management reports used to guide managerial decision 
making. In addition, having systems that record information in an 
accurate and timely manner is critical for key governmentwide 
initiatives, such as integrating budget and performance information. 

In contrast, untimely recording of transactions during the fiscal year 
can result in agencies making substantial efforts at fiscal year-end to 
perform extensive manual financial statement preparation efforts that 
are susceptible to error and increase the risk of misstatements. For 
example, auditors for the U.S. Department of Agriculture (USDA) 
reported that the department had to make about 1,800 closing 
adjustments, totaling billions of dollars, to the financial statements 
at year-end. The auditors noted that most of the adjustments they 
reviewed were necessary; however, having to make numerous adjustments 
at year-end diminished the utility of the financial data in assisting 
managers in administering USDA programs and operations throughout the 
year. 

In another case, the Department of Defense's (DOD) auditors reported 
that the Defense Finance and Accounting Service in Indianapolis made 
$204.8 billion (excluding adjustments for intragovernmental 
transactions) in unsupported accounting entries to prepare the fiscal 
year 2004 Army General Fund financial statements. Since these 
adjustments were unsupported, it was difficult for auditors to assess 
the accuracy of the transactions and account balances, and was one of a 
number of financial statement material weaknesses that led DOD auditors 
to disclaim an opinion on DOD's fiscal year 2004 financial statements. 

Noncompliance with the SGL: 

As shown in figure 3, auditors for 11 of the 16 agencies with 
noncompliant systems reported that the agencies' systems did not comply 
with SGL requirements for fiscal year 2004, compared with 10 of the 17 
agencies reported with noncompliant systems in fiscal year 2003. FFMIA 
specifically requires federal agencies to implement the SGL at the 
transaction level. Using the SGL promotes consistency in financial 
transaction processing and reporting by providing a uniform chart of 
accounts and pro forma transactions and provides a basis for comparison 
at the agency and governmentwide levels. The defined accounts and pro 
forma transactions standardize the accumulation of agency financial 
information as well as enhance financial control and support financial 
statement preparation and other external reporting. 

By not implementing the SGL, agencies may experience difficulties in 
providing consistent financial information across their components and 
functions. For example, auditors for the Department of Health and Human 
Services (HHS) found that approximately 1,550 nonstandard accounting 
entries with an absolute value of almost $30 billion were recorded in 
HHS' Program Support Center's[Footnote 32] CORE accounting system to 
compensate for noncompliance with the SGL. These nonstandard accounting 
entries were recorded to correct for misstatements, to record 
reclassifications, and to correct reported balances. The auditors noted 
that these amounts were significantly less than those in fiscal year 
2003, when approximately 2,300 nonstandard accounting entries were 
recorded with an absolute value of about $41 billion. 

In another instance, auditors for the U.S. Agency for International 
Development (USAID) found that the agency's overseas missions continue 
to use the Mission Accounting and Control System (MACS) as their 
primary financial system. MACS is a computer-based system that does not 
substantially comply with FFMIA's SGL requirement since it lacks the 
SGL chart of accounts. Instead, the system uses transaction codes to 
record entries; therefore, USAID cannot ensure that transactions are 
posted properly and consistently from mission to mission. 

Lack of Adherence to Federal Accounting Standards: 

One of FFMIA's requirements is that agencies' financial management 
systems account for transactions in accordance with federal accounting 
standards; however, agencies continue to face significant challenges in 
implementing these standards. As shown in figure 3, auditors for 11 of 
the 16 agencies with noncompliant systems reported that these agencies 
had problems complying with one or more federal accounting standards 
for fiscal year 2004, compared with 11 of the 17 agencies reported with 
noncompliant systems in fiscal year 2003. Appendixes III and IV list 
the federal financial accounting standards and other guidance issued by 
the Federal Accounting Standards Advisory Board and its Accounting and 
Auditing Policy Committee, respectively. 

Auditors expressly reported compliance problems with 11 specific 
accounting standards in fiscal year 2004. Of those standards, the 4 
that were most troublesome for agencies are Statement of Federal 
Financial Accounting Standards (SFFAS) No. 1, Accounting for Selected 
Assets and Liabilities; SFFAS No. 4, Managerial Cost Accounting 
Concepts and Standards; SFFAS No. 6, Accounting for Property, Plant, 
and Equipment; and SFFAS No. 7, Accounting for Revenue and Other 
Financing Sources. In particular, SFFAS No. 4, which became effective 
in 1998, continues to be difficult for federal managers to fully 
implement. For example, as auditor for the Department of the Treasury's 
Internal Revenue Service (IRS),[Footnote 33] we reported that during 
fiscal year 2004 IRS continued to lack a cost accounting system capable 
of accurately and timely tracking and reporting the costs of its 
programs and projects. This condition also renders IRS unable to 
produce reliable cost-based performance information. IRS officials 
stated that they have the information necessary to determine the cost 
of various activities, such as conducting investigations; however, this 
information is widely distributed among a variety of information 
systems that are not integrated and therefore cannot share data. This 
makes the accumulation of cost information time consuming and labor 
intensive, and thus such information is not readily available for 
decision-making purposes. Accurate and timely cost management 
information is critical for federal managers to transform how 
government agencies manage the business of government and vital in 
developing meaningful links between budget, accounting, and 
performance. The requirement for managerial cost information has been 
in place since 1990 under the CFO Act and since October 1997 as a 
federal accounting standard. 

Similar system and process deficiencies also impede agency efforts to 
accurately and timely track and report the cost of their PP&E in 
accordance with SFFAS No. 6. For example, in its annual report on 
reliability, as required by section 1008 of the National Defense 
Authorization Act for Fiscal Year 2002,[Footnote 34] DOD acknowledged 
material deficiencies that impede its ability to reliably report the 
cost and depreciation of its general PP&E. Specifically, DOD disclosed 
a lack of (1) supporting documentation for general PP&E purchased many 
years ago, (2) integrated acquisition and financial systems, and (3) 
systems designed to capture the acquisition and modification costs and 
calculate depreciation. The consequences of not complying with this 
accounting standard are also similar: management lacks accurate and 
timely information to adequately safeguard, account for, and control 
these assets. 

Weak Security Controls over Information Systems: 

Information security weaknesses are a major concern for federal 
agencies and the general public and one of the frequently cited reasons 
for noncompliance with FFMIA. These control weaknesses place vast 
amounts of government assets at risk of inadvertent or deliberate 
misuse, financial information at risk of unauthorized modification or 
destruction, sensitive information at risk of inappropriate disclosure, 
and critical operations at risk of disruption. Accordingly, we have 
considered information security to be a governmentwide high-risk area 
since 1997.[Footnote 35] As shown in figure 3, auditors for 15 of the 
16 agencies with noncompliant systems reported security weaknesses in 
information systems to be a problem, compared with all 17 of the 
agencies reported with noncompliant systems in fiscal year 2003. 
Consistent with section 1008 of the National Defense Authorization Act 
for Fiscal Year 2002, which requires DOD to minimize the use of 
resources to develop, compile, report, and audit unreliable financial 
statements, DOD auditors relied upon management's assertion regarding 
DOD's lack of compliance with federal financial management systems 
requirements. Accordingly, the DOD auditors limited their audit work 
and did not report information security weaknesses in their disclaimer 
report on DOD's fiscal year 2004 financial statements. However, DOD 
management reported that in addition to being unable to provide 
information that is reliable, timely, and accurate, the department's 
information systems are potentially vulnerable to an information 
warfare attack and reported this issue as a "significant deficiency" 
under the reporting requirements of the Federal Information Security 
Management: 

Act of 2002.[Footnote 36] The DOD auditors advised us that they agree 
with DOD management's acknowledgement of information security 
weaknesses. Therefore, we have included DOD in the summary of agencies 
with information security weaknesses. In addition, most of the agencies 
whose auditors provided negative assurance of substantial compliance 
with FFMIA still have computer security issues that need to be 
addressed by agency management. 

Unresolved information security weaknesses could adversely affect the 
ability of agencies to produce accurate data for decision making and 
financial reporting because such weaknesses could compromise the 
reliability and availability of data that are recorded in or 
transmitted by an agency's financial management system. As a case in 
point, in fiscal year 2004, auditors for the Department of Veterans 
Affairs reported that program and financial data continue to be at risk 
due to (1) the implementation and enforcement of controls and oversight 
over access to information systems, (2) the segregation of key duties 
and responsibilities of employees, and (3) contingency planning. They 
concluded that these weaknesses placed sensitive information, including 
financial data and sensitive veteran medical and benefit information, 
at risk of inadvertent or deliberate misuse, fraudulent use, improper 
disclosure, or destruction, possibly without detection. 

Key Initiatives That Impact Federal Financial Management Systems: 

As agencies move forward with initiatives to address FFMIA-related 
problems, it is important that consideration be given to the numerous 
governmentwide initiatives under way to address long-standing financial 
management weaknesses. OMB continues to move forward on new initiatives 
to enhance financial management and provide results-oriented 
information in the federal government. Two notable developments in this 
area in fiscal year 2004 were the realignment of responsibilities 
formerly performed by JFMIP and its PMO and the development of 
financial management lines of business. Furthermore, the continuing 
leadership and support of Congress will be crucial to sustaining 
momentum in the reformation of financial management in the federal 
government. 

Changes to Federal Financial Management due to JFMIP Realignment: 

In a December 2004 memorandum, OMB announced a realignment of JFMIP's 
responsibilities for financial management policy and oversight in the 
federal government. JFMIP was originally formed under the authority of 
the Budget and Accounting Procedures Act of 1950 and was a joint and 
cooperative undertaking of the General Accounting Office,[Footnote 37] 
the Department of the Treasury, OMB, and the Office of Personnel 
Management (OPM), working in cooperation with each other to improve 
financial management practices in the federal government. Leadership 
and program guidance was provided by the four principals of JFMIP--the 
Comptroller General of the United States, the Secretary of the 
Treasury, and the Directors of OMB and OPM. The PMO, managed by the 
Executive Director of JFMIP using funds provided by the CFO Council 
(CFOC), was established in 1999. The PMO was responsible for the 
testing and certification of commercial off-the-shelf (COTS) core 
financial systems for use by federal agencies and coordinating the 
development and publication of functional requirements for financial 
management systems.[Footnote 38]

On December 1, 2004, in an effort to eliminate duplicative roles and 
streamline financial management improvement efforts, the four 
principals agreed to realign JFMIP's responsibilities for financial 
management policy and oversight. Specifically, under the announced 
realignment, the PMO will now report to the chair of a new CFOC 
committee--the Financial Systems Integration Committee (FSIC). Other 
JFMIP functions, such as issuing systems requirements, were assumed by 
OMB's Office of Federal Financial Management (OFFM) and the CFOC. While 
JFMIP ceased to exist as a separate organization, the Principals will 
continue to meet at their discretion consistent with the 1950 act. 

The newly established FSIC will be responsible for advising OFFM on 
systems requirements and overseeing the PMO, which will continue 
certifying core financial systems. The realignment recognizes that OMB 
and the agencies have responsibility for all facets of financial 
management systems and the work of the FSIC will be critical to the 
success of the realignment. 

Federal Financial Management Line of Business Initiative Continues to 
Evolve: 

In spring 2004, OMB launched task forces to conduct a governmentwide 
analysis of five lines of business supporting the President's 
Management Agenda (PMA) goal to expand electronic government. The goal 
of the Line of Business (LOB) initiative is to develop business-driven, 
common solutions for five specific lines of business that extend across 
the entire federal government. The five lines of business are financial 
management, human resources management, grants, federal health 
architecture, and case management.[Footnote 39] These lines of business 
share similar business requirements and processes. In the spring of 
2005, OMB added the Information Technology Security LOB task force. OMB 
and designated agency LOB task forces plan to use enterprise 
architecture-based principles and best practices to identify common 
solutions for business processes, technology-based shared services, or 
both to be made available to government agencies. Driven from a 
business perspective rather than a technology focus, the solutions are 
expected to address distinct business improvements to enhance 
government's performance and services for citizens. 

The financial management LOB goals are to achieve or enhance process 
improvements and cost savings in the acquisition, development, 
implementation, and operation of financial management systems through 
shared services, joint procurements, consolidation, and other means; 
promote seamless data exchange between and among federal agencies; 
provide for the standardization of business processes and data 
elements; and strengthen internal controls through real-time 
integration of core financial and subsidiary systems. To achieve these 
goals, OMB and the associated agency task forces have focused on 
developing Centers of Excellence (COE). 

OMB officials stated that the purpose of developing COEs is to reduce 
the number of systems that each individual agency must support, promote 
standardization, and reduce the duplication of efforts. COEs can also 
create economies of scale by consolidating selected financial functions 
into a single agency or center. The economies of scale come from being 
able to use fewer staff to achieve the same results. For example, major 
software vendors often issue a software patch daily that must be tested 
and installed. A single COE would be able to test and update multiple 
agencies' systems rather than having multiple agencies each performing 
the same update. 

Officials at OMB stated that the financial management LOB continues to 
evolve with four agencies[Footnote 40] being selected to become COEs 
through the fiscal year 2006 budgetary process. In addition, OMB led 
the development of a due diligence checklist to assess an agency's 
capacity to be a COE. This checklist documents whether an agency can 
perform specific functions, has proper certification and accreditation, 
and uses a PMO-certified system. OMB has plans to develop additional 
tools and guidance to facilitate the COE concept. For example, OMB is 
considering a service level agreement template to provide agencies with 
standard contract clauses and will require agencies to document and 
justify the competition and selection process. 

OMB officials stated that the policies and procedures established 
through the financial management LOB will help keep federal financial 
management systems current; improve business processes; and with fewer 
systems in operation, facilitate vendor contracts. We have long 
supported and called for initiatives to standardize and streamline 
common financial systems, which may not only reduce costs but, if done 
correctly, can dramatically improve accountability. We have ongoing 
work to analyze the financial management LOB. 

DOD Continues to Struggle to Enhance Financial Management: 

As we have stated in our prior reports,[Footnote 41] DOD's financial 
management and related business operations continue to cause 
substantial waste and inefficiency, have an adverse impact on mission 
performance, and result in the lack of adequate transparency and 
appropriate accountability across all major business areas. Of the 25 
areas on GAO's governmentwide high-risk list, 8 are DOD-specific 
program areas related to key business functions, and the department 
shares responsibility for 6 other high-risk areas that are 
governmentwide in scope.[Footnote 42] These problems preclude the 
department from producing reliable and timely data on its results of 
operations and accurately reporting on its trillions of dollars of 
assets and liabilities. Additionally, DOD's stovepiped, duplicative, 
and nonintegrated systems environment contributes to these operational 
problems and costs the American taxpayers billions of dollars each 
year. For fiscal year 2005, the department requested approximately $13 
billion to operate, maintain, and modernize its reported 4,150 business 
systems.[Footnote 43]

Overhauling the financial management and business operations of one of 
the largest and most complex organizations in the world represents a 
daunting challenge. In an effort to better manage DOD's resources, the 
Secretary of Defense has appropriately placed a high priority on 
transforming key business processes to improve their efficiency and 
effectiveness in supporting the department's military mission. The 
Business Management Modernization Program is the department's business 
transformation initiative; it encompasses defense policies, processes, 
people, and systems that guide, perform, or support all aspects of 
business management--including development and implementation of the 
business enterprise architecture or modernization blueprint. The 
Secretary of Defense has estimated that improving business operations 
of the department could save 5 percent of DOD's annual budget, which 
equates to a savings of over $20 billion a year. 

Transformation of DOD's business systems and operations is critical to 
the department having the ability to provide Congress and DOD 
management with accurate and timely information for use in the decision-
making process. Although the Secretary of Defense and several key 
agency officials have shown commitment to transformation, little 
tangible evidence of significant broad-based and sustainable 
improvements has been seen in DOD's business operations. For DOD to 
successfully transform its business operations, it will need a 
comprehensive and integrated business transformation plan; people with 
the skills, responsibility, and authority to implement the plan; an 
effective process and related tools, such as a business enterprise 
architecture;[Footnote 44] and results-oriented performance measures 
that link institutional, unit, and individual personnel goals and 
expectations to promote accountability for results. 

Continuing Congressional Interest Helps Provide Accountability: 

The leadership and support demonstrated by Congress has been essential 
in the reformation of financial management in the federal government. 
As previously discussed, the legislative framework provided by the CFO 
Act and FFMIA, among others, established a solid foundation for 
stimulating change needed to achieve sound financial systems 
management. For example, in November 2002, Congress enacted the 
Accountability of Tax Dollars Act to extend the financial statements 
audit requirements of the CFO Act to additional federal agencies. Then, 
in October 2004, Congress added DHS to the list of CFO Act agencies and 
required DHS to obtain an audit opinion on its internal controls. In 
addition, DHS will be subject to FFMIA for fiscal year 2005 and its 
auditors will be required to report any FFMIA-related systems 
deficiencies or weaknesses identified. Sustained congressional interest 
in these issues has been demonstrated by the number of hearings on 
federal financial management and reform held over the past several 
years. It is critical that the various appropriations, budget, 
authorizing, and oversight committees hold agency top management 
accountable for resolving these problems and that the committees 
continue to support improvement efforts. 

The continued attention by Congress to these issues is crucial in 
sustaining momentum for financial management reform in the federal 
government. Toward this end, the Subcommittee on Government Management, 
Finance and Accountability, House Committee on Government Reform is 
currently examining the consolidation of existing federal financial 
management laws into legislation that would simplify, streamline, and 
enhance the laws governing agency financial management. These laws were 
primarily designed to increase financial accountability, enhance agency 
strategic focus, promote sound management through effective internal 
control, provide for effective information technology deployment, 
facilitate debt collection activities, and encourage better asset 
management. These are all interrelated management concepts, which the 
subcommittee intends to bring together under a single unified statute 
so that rules and regulations are clearly delineated for federal 
managers, which will enhance accountability for the federal government. 

Conclusions: 

Continuing problems with agencies' financial systems make it difficult 
for agencies to produce reliable, useful, and timely financial 
information on an ongoing basis for day-to-day management. While the 
number of agencies receiving unqualified or "clean" opinions on their 
financial statements has increased since fiscal year 1997, the 
continued widespread noncompliance with FFMIA shows that agencies have 
a long way to go before having systems, processes, and controls able to 
routinely generate reliable, useful, and timely information. 

As shown by the FFMIA-related problems reported in agency audit 
reports, federal financial management systems are not currently able to 
provide federal managers with the financial data needed for effective 
day-to-day management of their programs or for efficient external 
reporting. We continue to be concerned that the full nature and scope 
of the problems have not yet been identified because most auditors have 
only provided negative assurance in their FFMIA reports. We believe the 
law requires auditors to provide positive assurance on FFMIA 
compliance. Therefore, we reaffirm our recommendation made in prior 
reports that OMB revise its current FFMIA guidance to require agency 
auditors to provide a statement of positive assurance when reporting an 
agency's systems to be in substantial compliance. Such a determination 
will require auditors to perform a more thorough examination of their 
agencies' systems. We also reaffirm our other prior recommendation for 
OMB to explore further clarification of the definition of "substantial 
compliance" in its FFMIA guidance to encourage consistent reporting 
among agency auditors. As we have stated in prior reports,[Footnote 45] 
the auditors we have interviewed expressed concerns about providing 
positive assurance when reporting on agency systems' FFMIA compliance 
because of their belief that the meaning of substantial compliance 
needs to be clarified. 

The size and complexity of the federal government presents a formidable 
management challenge to modernize and improve its financial management 
systems that will require continued attention from the highest levels 
of government. We recognize that it will take time, investment, and 
sustained emphasis on correcting deficiencies to improve federal 
financial management systems to the level required by FFMIA. However, 
with concerted and coordinated effort, including attention from top 
agency management and the Congress, the federal government can make 
progress toward improving its financial management systems and thus 
achieve the goals of the CFO Act and provide accountability to the 
nation's taxpayers. 

Agency Comments and Our Evaluation: 

In written comments (reprinted in app. VI) on a draft of this report, 
OMB generally agreed with our assessment that while federal agencies 
continue to make progress in addressing financial management systems 
weaknesses, many agencies still need to make improvements to produce 
the information needed to efficiently and effectively manage day-to-day 
operations. As in previous years, OMB did not see the necessity of our 
recommendation for agency auditors to provide a statement of positive 
assurance when reporting agency systems to be in substantial compliance 
with the requirements of FFMIA. While OMB commends DOL's auditors for 
performing the additional level of audit work needed to provide 
positive assurance of compliance with FFMIA and encourages similar 
efforts at other agencies, OMB stated that requiring a statement of 
positive assurance for all agencies would prove only marginally useful. 
OMB stated that the framework of performance standards established 
under the PMA, as well as the ongoing efforts to update policy 
guidance, such as the internal control requirements in OMB Circular No. 
A-123, provide alternative mechanisms for evaluating FFMIA compliance. 
The PMA and Circular No. A-123 initiatives are two examples of current 
OMB efforts intended to complement FFMIA's goal of creating the full 
range of information needed for day-to-day management. From OMB's 
perspective, these efforts together with existing audit processes can 
provide an accurate assessment of substantial compliance, identify 
deficiencies, and suggest corrective actions. 

While we agree that the PMA and OMB Circular No. A-123 initiatives are 
helping to drive improvements, auditors need to consider other aspects 
of financial management systems when assessing FFMIA compliance that 
are not fully addressed through the current reporting structure. For 
example, in preparing the PMA scorecard assessments, OMB officials meet 
with agencies to discuss a number of financial management issues and 
have systems demonstrations. Our concern is that some of the 
information provided by this approach does not come under audit 
scrutiny and may not be reliable. Similarly, internal control 
assessments performed under Circular No. A-123 are based on 
management's judgment and are subject to review by independent auditors 
only in limited circumstances. From our perspective, an opinion by an 
independent auditor on FFMIA compliance would confirm that an agency's 
systems substantially met the requirements of FFMIA and provide 
additional confidence in the information provided as a result of the 
PMA and Circular No. A-123 initiatives. Finally, we continue to believe 
that a statement of positive assurance is a statutory requirement under 
the act. 

With regard to our prior recommendation, which we reaffirmed in this 
report, for revised guidance that clarifies the definition of 
substantial compliance, OMB said that the experience obtained from 
helping agencies implement the standards incorporated in the PMA will 
allow a further refinement of the FFMIA indicators associated with 
substantial compliance. Therefore, OMB agreed to consider clarifying 
the definition of "substantial compliance" in future policy and 
guidance updates. As we noted in our prior reports,[Footnote 46] 
auditors we interviewed expressed a need for clarification regarding 
the meaning of substantial compliance. 

OMB also provided additional oral comments, which we incorporated as 
appropriate. 

We are sending copies of this report to the Chairman and Ranking 
Minority Member, Subcommittee on Federal Financial Management, 
Government Information, and International Security, Senate Committee on 
Homeland Security and Governmental Affairs, and to the Chairman and 
Ranking Minority Member, Subcommittee on Government Management, 
Finance, and Accountability, House Committee on Government Reform. We 
are also sending copies to the Director of the Office of Management and 
Budget, the Secretary of Homeland Security, the heads of the 23 CFO Act 
agencies in our review, and agency CFOs and IGs. Copies will be made 
available to others upon request. In addition, this report will be 
available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

This report was prepared under the direction of Sally E. Thompson, 
Director, Financial Management and Assurance, who may be reached at 
(202) 512-2600 or by e-mail at [Hyperlink, thompsons@gao.gov] 
hompsons@gao.gov if you have any questions. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix VIII. 

Signed by:  

David M. Walker: 
Comptroller General of the United States: 

[End of section]

Appendixes: 

Appendix I: Requirements and Standards Supporting Federal Financial 
Management: 

Financial Management Systems Requirements: 

The policies and standards prescribed for executive agencies to follow 
in developing, operating, evaluating, and reporting on financial 
management systems are defined in Office of Management and Budget (OMB) 
Circular No. A-127, Financial Management Systems. The components of an 
integrated financial management system include the core financial 
system,[Footnote 47] managerial cost accounting system, administrative 
systems, and certain programmatic systems. Administrative systems are 
those that are common to all federal agency operations[Footnote 48] and 
programmatic systems are those needed to fulfill an agency's mission. 

Circular No. A-127 refers to the series of publications entitled 
Federal Financial Management Systems Requirements, initially issued by 
the Joint Financial Management Improvement Program's (JFMIP) Program 
Management Office (PMO)[Footnote 49] as the primary source of 
governmentwide requirements for financial management systems. Appendix 
II lists the federal financial management systems requirements 
published to date. Figure 4 is the current model that illustrates how 
these systems interrelate in an agency's overall systems architecture. 

Figure 4: Agency Systems Architecture: 

[See PDF for image] 

[End of figure] 

OMB Circular No. A-127 also requires agencies to purchase commercial 
off-the-shelf (COTS) software that has been tested and certified 
through the PMO software certification process when acquiring core 
financial systems. The PMO's certification process, however, does not 
eliminate or significantly reduce the need for agencies to develop and 
conduct comprehensive testing efforts to ensure that the COTS software 
meets their requirements. Moreover, according to the PMO, core 
financial systems certification does not mean that agencies that 
install these packages will have financial management systems that are 
compliant with FFMIA. Many other factors can affect the capability of 
the systems to comply with FFMIA, including modifications made to the 
PMO-certified core financial management systems software and the 
validity and completeness of data from feeder systems. 

Federal Accounting Standards: 

The Federal Accounting Standards Advisory Board (FASAB)[Footnote 50] 
promulgates federal accounting standards that agency Chief Financial 
Officers use in developing financial management systems and preparing 
financial statements. FASAB develops the appropriate accounting 
standards after considering the financial and budgetary information 
needs of Congress, executive agencies, and other users of federal 
financial information and comments from the public. FASAB forwards the 
standards to the three sponsors--the Comptroller General, the Secretary 
of the Treasury, and the Director of OMB--for a 90-day review. If there 
are no objections during the review period, the standards are 
considered final, and FASAB publishes them on its Web site and in 
print. 

The American Institute of Certified Public Accountants has recognized 
the federal accounting standards promulgated by FASAB as being 
generally accepted accounting principles for the federal government. 
This recognition enhances the acceptability of the standards, which 
form the foundation for preparing consistent and meaningful financial 
statements both for individual agencies and the government as a whole. 
Currently, there are 29 Statements of Federal Financial Accounting 
Standards (SFFAS) and 4 Statements of Federal Financial Accounting 
Concepts (SFFAC).[Footnote 51] The concepts and standards are the basis 
for OMB's guidance to agencies on the form and content of their 
financial statements and for the government's consolidated financial 
statements. Appendix III lists the concepts, standards, 
interpretations,[Footnote 52] and technical bulletins, along with their 
respective effective dates. 

FASAB's Accounting and Auditing Policy Committee (AAPC)[Footnote 53] 
assists in resolving issues related to the implementation of accounting 
standards. AAPC's efforts result in guidance for preparers and auditors 
of federal financial statements in connection with implementation of 
accounting standards and the reporting and auditing requirements 
contained in OMB's Bulletin No. 01-09, Form and Content of Agency's 
Financial Statements (Sept. 25, 2001), and Bulletin No. 01-02, Audit 
Requirements for Federal Financial Statements (Oct. 16, 2000). To date, 
AAPC has issued six technical releases, which are listed in appendix IV 
along with their release dates. 

U.S. Government Standard General Ledger: 

The SGL was established by an interagency task force under the 
direction of OMB and mandated for use by agencies in OMB and Treasury 
regulations in 1986. The SGL promotes consistency in financial 
transaction processing and reporting by providing a uniform chart of 
accounts and pro forma transactions used to standardize federal 
agencies' financial information accumulation and processing throughout 
the year; enhance financial control; and support budget and external 
reporting, including financial statement preparation. The SGL is 
intended to improve data stewardship throughout the federal government, 
enabling consistent reporting at all levels within the agencies and 
providing comparable data and financial analysis 
governmentwide.[Footnote 54]

Internal Control Standards: 

Congress enacted legislation, 31 U.S.C. 3512(c),(d) (commonly referred 
to as the Federal Managers' Financial Integrity Act of 1982 (FIA)), to 
strengthen internal controls and accounting systems throughout the 
federal government, among other purposes. Issued pursuant to FIA, the 
Comptroller General's Standards for Internal Control in the Federal 
Government[Footnote 55] provides standards that are directed at helping 
agency managers implement effective internal control, an integral part 
of improving financial management systems. Internal control is a major 
part of managing an organization and comprises the plans, methods, and 
procedures used to meet missions, goals, and objectives. In summary, 
internal control, which under OMB's guidance for FIA is synonymous with 
management control, helps government program managers achieve desired 
results through effective stewardship of public resources. 

In December 2004, OMB revised Circular No. A-123, Management's 
Responsibility for Internal Control, to strengthen the requirements for 
conducting management's assessment of internal control over financial 
reporting. The circular emphasized management's responsibility for 
establishing and maintaining internal control to achieve the objectives 
of effective and efficient operations, reliable financial reporting, 
and compliance with laws and regulations. 

Effective internal control also assists in managing the changes due to 
shifting environments and evolving demands and priorities. As programs 
change and agencies strive to improve operational processes and 
implement new technological developments, management must continually 
assess and evaluate its internal control to ensure that the control 
objectives are being achieved. 

[End of section]

Appendix II: Publications in the Federal Financial Management Systems 
Requirements Series: 

FFMSR document: FFMSR-8 System Requirements for Managerial Cost 
Accounting; 
Issue date: February 1998. 

FFMSR document: JFMIP-SR-99-5 Human Resources & Payroll Systems 
Requirements; 
Issue date: April 1999. 

FFMSR document: JFMIP-SR-99-8 Direct Loan System Requirements; 
Issue date: June 1999. 

FFMSR document: JFMIP-SR-99-9 Travel System Requirements; 
Issue date: July 1999. 

FFMSR document: JFMIP-SR-99-14Seized Property and Forfeited Assets 
Systems Requirements; 
Issue date: December 1999. 

FFMSR document: JFMIP-SR-00-01Guaranteed Loan System Requirements; 
Issue date: March 2000. 

FFMSR document: JFMIP-SR-00-3 Grant Financial System Requirements; 
Issue date: June 2000. 

FFMSR document: JFMIP-SR-00-4 Property Management Systems Requirements; 
Issue date: October 2000. 

FFMSR document: JFMIP-SR-01-01 Benefit System Requirements; 
Issue date: September 2001. 

FFMSR document: JFMIP-SR-02-01 Core Financial System Requirements; 
Issue date: November 2001. 

FFMSR document: JFMIP-SR-02-02 Acquisition/Financial Systems Interface 
Requirements; 
Issue date: June 2002. 

FFMSR document: JFMIP-SR-03-01 Revenue System Requirements; 
Issue date: January 2003. 

FFMSR document: JFMIP-SR-03-02 Inventory, Supplies and Materials System 
Requirements; 
Issue date: August 2003. 

FFMSR document: JFMIP-SR-02-01 Addendum to Core Financial System 
Requirements; 
Issue date: March 2004. 

FFMSR document: JFMIP-SR-01-04 Framework for Federal Financial 
Management Systems; 
Issue date: April 2004. 

FFMSR document: OFFM-NO-0105 Core Financial System Requirements 
(Exposure Draft); 
Issue date: February 2005. 

FFMSR document: OFFM-NO-0206 Insurance System Requirements (Exposure 
Draft); 
Issue date: May 2005. 

Source: OMB's OFFM. 

Note: Effective December 1, 2004, all financial management system 
requirements documents and other guidance initially issued by JFMIP 
were transferred to OFFM and remain in effect until modified. 

[End of table]

[End of section]

Appendix III: Statements of Federal Financial Accounting Concepts, 
Standards, Interpretations, and Technical Bulletins: 

Concepts. 

SFFAC No. 1 Objectives of Federal Financial Reporting. 

SFFAC No. 2 Entity and Display. 

SFFAC No. 3 Management's Discussion and Analysis. 

SFFAC No. 4 Intended Audience and Qualitative Characteristics for the 
Consolidated Financial Report of the United States Government. 

Standards: SFFAS No. 1 Accounting for Selected Assets and Liabilities; 
Effective for fiscal year[A]: 1994. 

Standards: SFFAS No. 2 Accounting for Direct Loans and Loan Guarantees; 
Effective for fiscal year[A]: 1994. 

Standards: SFFAS No. 3 Accounting for Inventory and Related Property; 
Effective for fiscal year[A]: 1994. 

Standards: SFFAS No. 4 Managerial Cost Accounting Concepts and 
Standards; 
Effective for fiscal year[A]: 1998. 

Standards: SFFAS No. 5 Accounting for Liabilities of the Federal 
Government; 
Effective for fiscal year[A]: 1997. 

Standards: SFFAS No. 6 Accounting for Property, Plant, and Equipment; 
Effective for fiscal year[A]: 1998. 

Standards: SFFAS No. 7 Accounting for Revenue and Other Financing 
Sources; 
Effective for fiscal year[A]: 1998. 

Standards: SFFAS No. 8 Supplementary Stewardship Reporting; 
Effective for fiscal year[A]: 1998. 

Standards: SFFAS No. 9 Deferral of the Effective Date of Managerial 
Cost Accounting Standards for the Federal Government in SFFAS No. 4; 
Effective for fiscal year[A]: 1998. 

Standards: SFFAS No. 10 Accounting for Internal Use Software; 
Effective for fiscal year[A]: 2001. 

Standards: SFFAS No. 11 Amendments to Accounting for Property, Plant, 
and Equipment--Definitional Changes; 
Effective for fiscal year[A]: 1999. 

Standards: SFFAS No. 12 Recognition of Contingent Liabilities Arising 
from Litigation: An Amendment of SFFAS No. 5, Accounting for 
Liabilities of the Federal Government; 
Effective for fiscal year[A]: 1998. 

Standards: SFFAS No. 13 Deferral of Paragraph 65-2--Material Revenue-
Related Transactions Disclosures; 
Effective for fiscal year[A]: 1999. 

Standards: SFFAS No. 14 Amendments to Deferred Maintenance Reporting; 
Effective for fiscal year[A]: 1999. 

Standards: SFFAS No. 15 Management's Discussion and Analysis; 
Effective for fiscal year[A]: 2000. 

Standards: SFFAS No. 16 Amendments to Accounting for Property, Plant, 
and Equipment; 
Effective for fiscal year[A]: 2000. 

Standards: SFFAS No. 17 Accounting for Social Insurance; 
Effective for fiscal year[A]: 2000. 

Standards: SFFAS No. 18 Amendments to Accounting Standards for Direct 
Loans and Loan Guarantees in SFFAS No. 2; 
Effective for fiscal year[A]: 2001. 

Standards: SFFAS No. 19 Technical Amendments to Accounting Standards 
for Direct Loans and Loan Guarantees in SFFAS No. 2; 
Effective for fiscal year[A]: 2003. 

Standards: SFFAS No. 20 Elimination of Certain Disclosures Related to 
Tax Revenue Transactions by the Internal Revenue Service, Customs, and 
Others; 
Effective for fiscal year[A]: 2001. 

Standards: SFFAS No. 21 Reporting Corrections of Errors and Changes in 
Accounting Principles; 
Effective for fiscal year[A]: 2002. 

Standards: SFFAS No. 22 Change in Certain Requirements for Reconciling 
Obligations and Net Cost of Operations; 
Effective for fiscal year[A]: 2001. 

Standards: SFFAS No. 23 Eliminating the Category National Defense 
Property, Plant, and Equipment; 
Effective for fiscal year[A]: 2003. 

Standards: SFFAS No. 24 Selected Standards for the Consolidated 
Financial Report of the United States Government; 
Effective for fiscal year[A]: 2002. 

Standards: SFFAS No. 25 Reclassification of Stewardship 
Responsibilities and Eliminating the Current Services Assessment 
(amended); 
Effective for fiscal year[A]: 2006. 

Standards: SFFAS No. 26 Presentation of Significant Assumptions for the 
Statement of Social Insurance: Amending SFFAS 25 (amended); 
Effective for fiscal year[A]: 2006. 

Standards: SFFAS No. 27 Identifying and Reporting Earmarked Funds; 
Effective for fiscal year[A]: 2006. 

Standards: SFFAS No. 28 Deferral of the Effective Date of 
Reclassification of the Statement of Social Insurance: Amending SFFAS 
25 and 26; 
Effective for fiscal year[A]: 2006. 

Standards: SFFAS No. 29 Heritage Assets and Stewardship Land; 
Effective for fiscal year[A]: 2006. 

Interpretations:  

No. 1 Reporting on Indian Trust Funds. 

No. 2 Accounting for Treasury Judgment Fund Transactions. 

No. 3 Measurement Date for Pension and Retirement Health Care 
Liabilities. 

No. 4 Accounting for Pension Payments in Excess of Pension Expense. 

No. 5 Recognition by Recipient Entities of Receivable Nonexchange 
Revenue. 

No. 6 Accounting for Imputed Intra-departmental Costs. 

Technical Bulletins:  

TB 2000-1 Purpose and Scope of FASAB Technical Bulletins and Procedures 
for Issuance. 

TB 2002-1 Assigning to Component Entities Costs and Liabilities That 
Result From Legal Claims Against the Federal Government. 

TB 2002-2 Disclosures Required by Paragraph 79(g) of SFFAS 7. 

TB 2003-1 Certain Questions and Answers Related to the Homeland 
Security Act of 2002. 

Source: FASAB. 

[A] Effective dates do not apply to Statements of Federal Financial 
Accounting Concepts, Interpretations, and Technical Bulletins. 

[End of table]

[End of section]

Appendix IV: AAPC Technical Releases: 

Technical release: TR-1 Audit Legal Representation Letter Guidance; 
AAPC release date: March 1, 1998. 

Technical release: TR-2 Determining Probable and Reasonably Estimable 
for Environmental Liabilities in the Federal Government; AAPC release 
date: March 15, 1998. 

Technical release: TR-3 Preparing and Auditing Direct Loan and Loan 
Guarantee Subsidies Under the Federal Credit Reform Act; 
AAPC release date: July 31, 1999. 

Technical release: TR-4 Reporting on Non-Valued Seized and Forfeited 
Property; 
AAPC release date: July 31, 1999. 

Technical release: TR-5 Implementation Guidance on SFFAS No. 10: 
Accounting for Internal Use Software; 
AAPC release date: May 14, 2001. 

Technical release: TR-6 Preparing Estimates for Direct Loan and Loan 
Guarantee Subsidies Under the Federal Credit Reform Act (Amendments to 
TR-3); 
AAPC release date: January 2004. 

Source: FASAB. 

[End of table]

[End of section]

Appendix V: Checklists for Reviewing Systems under the Federal 
Financial Management Improvement Act: 

Checklist: GAO/AIMD-00-21.2.3 Human Resources and Payroll Systems 
Requirements; 
Issue date: March 2000. 

Checklist: GAO-01-99G Seized Property and Forfeited Assets Systems 
Requirements; 
Issue date: October 2000. 

Checklist: GAO/AIMD-21-2.6 Direct Loan System Requirements; 
Issue date: April 2000. 

Checklist: GAO/AIMD-21.2.8 Travel System Requirements; 
Issue date: May 2000. 

Checklist: GAO/AIMD-99-21.2.9 System Requirements for Managerial Cost 
Accounting; 
Issue date: January 1999. 

Checklist: GAO-01-371G Guaranteed Loan System Requirements; 
Issue date: March 2001. 

Checklist: GAO-01-911G Grant Financial System Requirements; 
Issue date: September 2001. 

Checklist: GAO-02-171G Property Management Systems Requirements; 
Issue date: December 2001. 

Checklist: GAO-04-22G Benefit System Requirements; 
Issue date: October 2003. 

Checklist: GAO-04-650G Acquisition/Financial Systems Interface 
Requirements; 
Issue date: June 2004. 

Checklist: GAO-05-225G Core Financial System Requirements; 
Issue date: February 2005. 

Source: GAO. 

[End of table]

[End of section]

Appendix VI: Comments from the Office of Management and Budget: 

EXECUTIVE OFFICE OF THE PRESIDENT: 
OFFICE OF MANAGEMENT AND BUDGET: 
WASHINGTON, D.C. 20503: 

THE CONTROLLER: 

AUG 22 2005: 

Ms. Sally E. Thompson:
Director, Financial Management and Assurance: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Thompson: 

Thank you for allowing us to comment on the GAO draft report entitled 
"Financial Management: Achieving FFMIA Compliance Continues to 
Challenge Agencies."

In general, OMB agrees with your assessment that many agencies still 
need to make improvements to generate more accurate and timely 
financial management information to optimize day-to-day operations. For 
instance, ongoing agency reviews under the President's Management 
Agenda (PMA) show that agencies must make fundamental changes to their 
financial management practices in order to collect and report accurate 
and timely financial information. As noted below, we are working 
aggressively to assist agencies in building a strong foundation of 
financial management practices through the PMA as well as through 
updating policy guidance such as the revised internal control 
requirements defined in Appendix A of OMB Circular A-123. 

The recent successes of agencies in obtaining unqualified opinions on 
their financial statements and in resolving long-standing material 
weakness point to significantly improved financial performance. 
However, our common goal goes far beyond attaining unqualified opinions 
on agency financial statements. We are both striving for the creation 
and use - for both government managers and the taxpayer - of reliable, 
useful and timely management information. 

The PMA and A-123 initiatives are examples of current efforts intended 
to complement the goal of the Federal Financial Management Improvement 
Act (FFMIA) to create the full range of information needed for day-to- 
day management. Underlying both of these efforts are formal evaluative 
and review practices to identify deficiencies and take corrective 
action. 

Under the PMA's Improving Financial Performance initiative, the 
"standards of success" provide a vigorous corroborative mechanism for 
assessing FFMIA compliance. The standards for achieving "yellow" status 
ensure that agencies establish a foundation of sound accounting 
processes and effective internal controls so that available financial 
data is both timely and accurate. Indicators include receiving an 
unqualified financial statement opinion and eliminating all material 
weaknesses and non-compliances. To achieve "green" status, agencies 
must demonstrate how they are using timely and accurate financial data 
to drive letter results and have a plan to expand the use of financial 
information in day-to-day management. 

Through OMB's revision to Circular A-123, agencies are required to 
implement more rigorous processes for conducting management's 
assessment of the effectiveness of internal controls over financial 
reporting. Appendix A of the revised A-123 directs Federal managers to 
take a proactive approach to assessing internals controls by: 1) 
documenting the reporting process end-to-end, 2) directly testing key 
controls to validate effectiveness, and 3) reporting on the results of 
the tests in a new management assurance statement. These new internal 
control requirements for Federal agencies, spurred by similar 
requirements for public companies directed by the Sarbanes-Oxley Act of 
2002, greatly complement and buttress the standards set by the PMA. 
Many of the ongoing assessments required under the revised A-123 mirror 
the types of assessments that would occur in establishing a statement 
of positive assurance under FFMIA. 

With the review vehicles discussed above helping to ascertain systems' 
compliance with FFMIA and ensuring agency access and use to timely and 
accurate financial data, OMB believes that requiring a statement of 
positive assurance would prove only marginally useful. We commend the 
auditors at the Department of Labor (DOL), as you have, for taking the 
extra steps to provide positive assurance of compliance on DOL's 
financial management systems. Nevertheless, while encouraging similar 
efforts at other agencies, we believe that mandating positive assurance 
of systems' compliance with FFMIA for all agencies is not necessary. 

The draft report also recommends that OMB clarify the definition of 
"substantial compliance." We believe that our growing experience 
helping agencies implement the high standards incorporated in the PMA 
will enable us to further refine the existing FFMIA indicators 
associated with substantial compliance. As such, we will consider this 
recommendation, as appropriate, in any future policy and guidance 
updates. 

We appreciate the opportunity to comment on the draft report and look 
forward to continue working with GAO in improving Federal financial 
management systems. If you have any questions please feel free to 
contact David Alekson at 202.395.5642. 

Sincerely,

Signed by: 

Linda M. Combs: 
Controller: 

[End of section]

Appendix VII: Auditors' FFMIA Determinations for Fiscal Year 2004: 

Agency: Department of Agriculture; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Department of Commerce; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: Department of Defense; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Department of Education; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements. 

Agency: Department of Energy; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: Department of Health and Human Services; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; SGL. 

Agency: Department of Housing and Urban Development; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards. 

Agency: Department of the Interior; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Department of Justice; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Department of Labor; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: Department of State; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards. 

Agency: Department of Transportation; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Department of the Treasury; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Department of Veterans Affairs; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements. 

Agency: Agency for International Development; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; SGL. 

Agency: Environmental Protection Agency; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: General Services Administration; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: National Aeronautics and Space Administration; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: National Science Foundation; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: Nuclear Regulatory Commission; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements. 

Agency: Office of Personnel Management; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Small Business Administration; 
Auditor's assessment of compliance: No; 
Areas of reported systems lack of substantial compliance: Systems 
requirements; Accounting standards; SGL. 

Agency: Social Security Administration; 
Auditor's assessment of compliance: Yes; 
Areas of reported systems lack of substantial compliance: [Empty]. 

Agency: Total; 
Auditor's assessment of compliance: Yes: 7; 
Auditor's assessment of compliance: No: 16; 
Areas of reported systems lack of substantial compliance: Systems 
requirements: 16; 
Areas of reported systems lack of substantial compliance: Accounting 
standards: 11; 
Areas of reported systems lack of substantial compliance: SGL: 11. 

Source: GAO prepared from analysis of fiscal year 2004 audit reports. 

[End of table]

[End of section]

Appendix VIII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Sally E. Thompson, (202) 512-2600: 

Acknowledgments: 

In addition to the contact named above, Kay L. Daly, Assistant 
Director; W. Stephen Lowrey; and Chanetta R. Reed made key 
contributions to this report. 

(193056): 

FOOTNOTES

[1] Pub. L. No. 101-576, 104 Stat. 2838 (1990). 

[2] Federal Financial Management Improvement Act of 1996, Pub. L. No. 
104-208, div. A., § 101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 
30, 1996). 

[3] There were initially 24 CFO Act agencies. See Pub. L. No. 101-576, 
§205, 104 Stat. 2838, 2842-2843 (1990). The Federal Emergency 
Management Agency (FEMA), one of the 24 CFO Act agencies, was 
subsequently transferred to the Department of Homeland Security (DHS) 
effective March 1, 2003. With this transfer, FEMA is no longer required 
to prepare and have audited financial statements under the CFO Act, 
leaving 23 CFO Act agencies for fiscal year 2004. For fiscal years 2003 
and 2004, DHS was required to prepare audited financial statements 
under the Accountability of Tax Dollars Act of 2002 (Pub. L. No. 107- 
289, 116 Stat. 2049 (Nov. 7, 2002)). Because DHS was not a CFO Act 
agency, it was not subject to FFMIA for fiscal year 2004. The DHS 
Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 
16, 2004), added DHS to the list of CFO Act agencies and deleted FEMA, 
increasing the number of CFO Act agencies again to 24 for fiscal year 
2005. 

[4] The Department of Commerce, the Department of Energy, the 
Environmental Protection Agency, the General Services Administration, 
the National Science Foundation, and the Social Security 
Administration. 

[5] Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004). 

[6] GAO, Financial Management: FFMIA Implementation Critical for 
Federal Accountability, GAO-02-29 (Washington, D.C.: Oct. 1, 2001); 
Financial Management: FFMIA Implementation Necessary to Achieve 
Accountability, GAO-03-31 (Washington, D.C.: Oct. 1, 2002); Financial 
Management: Sustained Efforts Needed to Achieve FFMIA Accountability, 
GAO-03-1062 (Washington, D.C.: Sept. 30, 2003); and Financial 
Management: Improved Financial Systems Are Key to FFMIA Compliance, GAO-
05-20 (Washington, D.C.: Oct. 1, 2004). 

[7] Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982), now codified at 
31 U.S.C. 3512 (c),(d). 

[8] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

[9] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). 

[10] Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994). 

[11] Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996). 

[12] The Accountability of Tax Dollars Act of 2002 extends the 
requirement to prepare and submit audited financial statements to most 
executive agencies not subject to the CFO Act unless they are exempted 
by OMB. However, these agencies are not required to have systems that 
are compliant with FFMIA. 

[13] Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004). 

[14] The American Institute of Certified Public Accountants recognizes 
the federal accounting standards promulgated by the Federal Accounting 
Standards Advisory Board as generally accepted accounting principles. 
For a further description of federal accounting standards, see app. I. 

[15] The SGL provides a standard chart of accounts and standardized 
transactions that agencies are to use in all their financial systems. 

[16] GAO-01-765G, sections 701, 701A, 701B, and 260.58-.60. 

[17] OMB Bulletin No. 01-02, Audit Requirements for Federal Financial 
Statements (Oct. 16, 2000). 

[18] Of these 16 agencies, auditors for 9 agencies reported that their 
agencies' systems were not in substantial compliance with all three 
FFMIA requirements. 

[19] Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004). 

[20] The Department of Health and Human Services' Fiscal Year 2004 
Performance and Accountability Report was issued in December 2004. 

[21] GAO, Fiscal Year 2004 U.S. Government Financial Statements: 
Sustained Improvement in Federal Financial Management Is Crucial to 
Addressing Our Nation's Future Fiscal Challenges, GAO-05-284T 
(Washington, D.C.: Feb. 9, 2005). 

[22] Departments of Agriculture, Defense, Health and Human Services, 
Justice, State, and Transportation and GSA, NSF, NRC, the Office of 
Personnel Management, and the Small Business Administration. 

[23] Departments of Agriculture, Health and Human Services, the 
Interior, Transportation, and the Treasury. 

[24] GSA, NSF, NRC, Office of Personnel Management (OPM), and the 
Departments of Agriculture, Health and Human Services, Justice, State, 
and Transportation. 

[25] NRC and the Department of Justice. 

[26] OMB Bulletin No. 01-02, Audit Requirements for Federal Financial 
Statements (Oct. 16, 2000). 

[27] Agencies record their budget spending authorizations in their FBWT 
accounts. Agencies increase or decrease these accounts as they collect 
or disburse funds. 

[28] GAO-02-29, GAO-03-31, GAO-03-1062, and GAO-05-20. 

[29] A final rule issued by the Securities and Exchange Commission that 
took effect in August 2003 provides guidance for implementations of 
Sections 302, 404, and 906 of the Sarbanes-Oxley Act of 2002 (Pub. L. 
No. 107-204, §§302, 404, 906 116 Stat. 745, 777, 789, 806 (July 30, 
2002)), which requires publicly traded companies to establish and 
maintain an adequate internal control structure and procedures for 
financial reporting and include in the annual report a statement of 
management's responsibility for and assessment of the effectiveness of 
those controls and procedures in accordance with standards adopted by 
the Securities and Exchange Commission. 

[30] Federal financial system requirements define an integrated 
financial system as one that coordinates a number of previously 
unconnected functions to improve overall efficiency and control. 
Characteristics of such a system include (1) standard data 
classifications for recording financial events; (2) common processes 
for processing similar transactions; (3) consistent control over data 
entry, transaction processing, and reporting; and (4) a system design 
that eliminates unnecessary duplication of transaction entry. 

[31] GAO, Business Modernization: Improvements Needed in Management of 
NASA's Integrated Financial Management Program, GAO-03-507 (Washington, 
D.C.: Apr. 30, 2003); Information Technology: Architecture Needed to 
Guide NASA's Financial Management Modernization, GAO-04-43 (Washington, 
D.C.: Nov. 21, 2003); Business Modernization: Disciplined Processes 
Needed to Better Manage NASA's Integrated Financial Management Program, 
GAO-04-118 (Washington, D.C.: Nov. 21, 2003); Business Modernization: 
NASA's Integrated Financial Management Program Does Not Fully Address 
Agency's External Reporting Issues, GAO-04-151 (Washington, D.C.: Nov. 
21, 2003); Business Modernization: NASA's Challenges in Managing Its 
Integrated Financial Management Program, GAO-04-255 (Washington, D.C.: 
Nov. 21, 2003); and National Aeronautics and Space Administration: 
Significant Actions Needed to Address Long- standing Financial 
Management Problems, GAO-04-754T (Washington, D.C.: May 19, 2004). 

[32] The Program Support Center (PSC) is an administrative office, 
which provides program support services to 8 of HHS' 12 operating 
divisions. The CORE accounting system has been described as the 
"nucleus" of PSC's accounting operations. 

[33] GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial 
Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004). 

[34] Pub. L. No. 107-107, 115 Stat. 1012, 1204 (Dec. 28, 2001). 

[35] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005). 

[36] Pub. L. No. 107-347, title III, 116 Stat. 2899, 2946 (Dec. 17, 
2002). 

[37] Effective July 7, 2004, the General Accounting Office's legal name 
became the Government Accountability Office to better reflect its role 
as a modern professional services organization. 

[38] See app. II for the systems requirements documents issued to date. 

[39] Case management involves managing claims or investigations 
including creating, routing, tracing, assignment and closing of a case, 
as well as collaboration among case handlers. 

[40] GSA, the Department of the Interior's National Business Center, 
the Department of the Treasury's Bureau of the Public Debt, and DOT. 

[41] GAO, DOD Business Transformation: Sustained Leadership Needed to 
Address Long-standing Financial and Business Management Problems, GAO- 
05-723T (Washington, D.C.: Jun. 8, 2005); GAO, DOD Business Systems 
Modernization: Billions Being Invested without Adequate Oversight, GAO- 
05-381 (Washington, D.C.: Apr. 29, 2005); and Department of Defense: 
Further Actions Are Needed to Effectively Address Business Management 
Problems and Overcome Key Business Transformation Challenges, GAO-05- 
140T (Washington, D.C.: Nov. 17, 2004). 

[42] See GAO-05-207. The eight specific DOD high-risk areas are (1) 
approach to business transformation, (2) business systems 
modernization, (3) contract management, (4) financial management, (5) 
personnel security clearance program, (6) supply chain management, (7) 
support infrastructure management, and (8) weapon systems acquisition. 
The six governmentwide high-risk areas that include DOD are (1) 
disability programs, (2) interagency contracting, (3) information 
systems and critical infrastructure, (4) information sharing for 
homeland security, (5) human capital, and (6) real property. 

[43] Business systems include financial and nonfinancial systems such 
as civilian personnel, finance, health, logistics, military personnel, 
procurement, and transportation, with the common element being the 
generation or use of financial data to support DOD's business 
operations. 

[44] A business enterprise architecture is a well-defined blueprint for 
operational and technological change. 

[45] GAO-02-29, GAO-03-31, and GAO-05-20. 

[46] GAO-02-29, GAO-03-31, and GAO-05-20. 

[47] Core financial systems, as defined by the JFMIP PMO, include 
managing general ledger, funding, payments, receivables, and certain 
basic cost functions. 

[48] Examples of administrative systems include budget, acquisition, 
travel, property, and human resources and payroll. 

[49] In December 2004, OMB announced a realignment of JFMIP's 
responsibilities. Specifically, under the announced realignment, the 
PMO will continue its software certification process, but now report to 
the chair of a new Chief Financial Officers Council (CFOC) committee-- 
the Financial Systems Integration Committee (FSIC). Also, systems 
requirements will be issued by OFFM. Therefore, JFMIP has ceased to 
exist as a separate organization, although the Principals will continue 
to meet at their discretion. 

[50] In October 1990, the Secretary of the Treasury, the Director of 
OMB, and the Comptroller General established FASAB to develop a set of 
generally accepted accounting standards for the federal government. 
Effective October 1, 2003, FASAB is comprised of six nonfederal or 
public members, one member from the Congressional Budget Office, and 
the three sponsors. 

[51] Accounting standards are authoritative statements of how 
particular types of transactions and other events should be reflected 
in financial statements. SFFACs explain the objectives and ideas upon 
which FASAB develops the standards. 

[52] An interpretation is a document of narrow scope that provides 
clarifications of original meaning, additional definitions, or other 
guidance pertaining to an existing federal accounting standard. 

[53] In 1997, FASAB, in conjunction with OMB, Treasury, GAO, the CFOC, 
and the President's Council on Integrity and Efficiency, established 
AAPC to assist the federal government in improving financial reporting. 

[54] SGL guidance is published in the Treasury Financial Manual. 
Treasury's Financial Management Service is responsible for maintaining 
the SGL and answering agency inquiries. 

[55] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3 (Washington, D.C.: November 1999). 

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