Use the Chief Financial Officers (CFO) Act to Improve Financial Services BACKGROUND The Chief Financial Officers (CFO) Act of 1990 promises a new era in federal financial management and supports efforts to gain financial control of government operations. It has been hailed as "the most comprehensive and far-reaching financial management improvement legislation since the Budget and Accounting Procedures Act of 1950 was passed over 40 years ago."[Endnote 1] The CFO Act calls for the federal government to establish a foundation of basic financial management practices that are common and considered vital in the private sector. It directs the Office of Management and Budget (OMB) to "provide overall direction and leadership to the executive branch on financial management matters by establishing financial management policies and requirements."[Endnote2] The act requires long-range financial planning, audited financial statements, integration of budget and accounting data, and development of cost information, among many other good financial management practices. It also establishes a financial management leadership structure within the Office of the President-- specifically, OMB--and within federal departments and agencies. The act established a Deputy Director for Management, the position of controller, and the Office of Federal Financial Management, all located in OMB. In doing so, OMB became the focal point for financial management policy in the federal government. Under the act, OMB has authority to set financial management policy, which should serve to eliminate inconsistent practices among the departments and agencies. OMB is also responsible for establishing policies and providing other guidance regarding the systematic measurement of agencies' performance. The CFOs are required by the CFO Act to be chosen from "individuals who possess demonstrated ability in general management of, and knowledge of and extensive practical experience in financial management practices in large governmental or business entities."[Endnote 3] Deputy CFO qualification standards include "demonstrated ability and experience in accounting, budget execution, financial and management analysis, and systems development, and not less than 6 years practical experience in financial management."[Endnote 4] The CFO Act sets a high standard for financial personnel, acknowledging the need for professionalism and competence, and provides a key element in the financial management infrastructure-- quality people. It encourages financial managers to have broad financial management backgrounds. It did not specifically address the qualifications of financial management staff, but implied that high standards should be pervasive throughout the federal financial management community. The CFO Act also established an important organization, the CFO Council. The council is composed of OMB's Deputy Director for Management and controller, the Fiscal Assistant Secretary at the Department of the Treasury, and the agency CFOs. The council's function is to "advise and coordinate the activities of the agencies of its members on such matters as consolidation and modernization of financial systems, improved quality of financial information, financial data and information standards, internal controls, legislation affecting financial operations and organizations, and any other financial management matter."[Endnote 5] Thus, the CFO Council is an important vehicle for coordinating improvements in all aspects of financial management. With its broad agenda, the CFO Council can take the lead in developing and implementing many plans and projects that can improve agency financial management effectiveness across government. NEED FOR CHANGE The CFO Act requires that CFO and Deputy CFO positions be filled by individuals with proven skills in financial management. However, many of the initial CFO appointees were individuals already in place in their agencies when the Act was implemented; there was not sufficient opportunity for the President to appoint new CFOs that fully met the qualifications stated in the CFO Act. Many federal agencies are larger than some Fortune 500 companies, and the past experience of CFO candidates can help determine their ability to effectively run a large financial operation. In order for the public to become confident that the government effectively manages its finances, it is important that the senior financial managers be regarded as professionally competent, both inside and outside of their organizations. They must provide the kind of committed leadership that will bring the government's finances to a higher level of professional management. Many of the recommendations in this report will require a great deal of technical expertise, such as the information systems integration of budget, accounting, and program data. Unless such projects are managed and operated by technically qualified personnel, the efforts to improve financial management will meet with failure. The issue of qualified, committed personnel goes deeper than just a layer or two in the organizational hierarchy. It reaches down to every level of the financial management staff. Many financial managers complain about a lack of training for their staff and a personnel system that inhibits the hiring of more qualified employees.[Endnote 6] Recruiting and hiring technically qualified personnel is not easy under present civil service policies. For example, a former CFO for the Department of Housing and Urban Development (HUD) tried in 1992 to raise the standards for candidates of HUD's 10 regional controller positions. The Office of Personnel Management (OPM) would not allow him to specify more stringent qualifications requirements than already existed for the job category. Because OPM's criteria were too weak to screen out unqualified candidates and OPM's pre-set qualifying factors accounted for 70 out of 100 possible points, the CFO was forced to spend weeks developing a complex ranking system using the remaining 30 points. He ended up hiring qualified candidates, "in spite of, not because of, existing personnel rules." It is apparent that while federal employees are in need of training in the field of financial management, when training is provided, it can be very effective. The Treasury Department's Financial Management Service has led the formation of the Federal Credit Management Training Institute, which has sponsored Accounting I and Financial Statement Analysis classes taught by the American Institute of Bankers at locations around the country for federal credit managers. Recent Accounting I pretests given to 390 federal employees in the field of financial management resulted, on average, in failing scores of 41 percent. Of the 457 employees who took the Financial Statement Analysis course, the average pretest score was a failing 51 percent. However, the good news is that the training was very effective. Final course test scores for the Accounting I course averaged 74 percent, and for the Financial Analysis course averaged 81 percent.[Endnote 7] Many training programs currently exist in the field of federal financial management. They range from courses sponsored by the U.S. Department of Agriculture Graduate School and the Treasury Department, to internship and job rotation programs sponsored by agencies and OPM. There are also many conferences and seminars sponsored by such groups as the Association of Government Accountants, the Joint Financial Management Improvement Program, and the American Institute of Certified Public Accountants. However, financial management personnel do not take full advantage of the current opportunities for training in financial management. This seems to be largely due to a lack of information about the existence of such opportunities and also due to the cost of the programs. Many agencies do not have sufficient budgetary resources to pay for employees to attend courses. Agencies often are forced to pass up opportunities to train their personnel, even though the cost of the cumulative actions of untrained personnel can ultimately be higher than the cost of any training course. Financial management training is not a need limited to personnel in the financial management field. Program managers must also be trained in the interpretation and use of the financial information that is and will be made available to them. Budget information has historically been the principal source of financial information for program managers at all levels (from Presidents and Secretaries to line managers). As improved financial information becomes available to aid managers in evaluating program performance, efforts to educate program managers have not kept pace. Currently, there is no coordinated effort to ensure that non-financial managers are informed about the use that they can make of financial information, and the role they can play in improving the management of the government's financial assets. There is also no formal method of ensuring that the financial information provided to the non-financial managers is understandable and useful. A strengthened financial leadership structure will enhance financial managers' ability to serve line managers. The leadership structure called for in the CFO Act includes the organizational structure changes to support the newly-established CFOs and Deputy CFOs at 23 departments and agencies.[Endnote 8] The CFO is to be the principal financial officer for a department or agency, reporting directly to the head of the agency, responsible for all financial management activities. To meet these responsibilities, the CFO Office is to have authority over the various functional components of financial management: finance, accounting, budget, and financial information systems. OMB has issued a memorandum outlining the suggested financial functions that should ideally report to the CFO, but budgeting was not among the recommended functions.[Endnote 9] The memorandum serves as guidance only, and sets no requirements for CFO office structure. CROSS-REFERENCES TO OTHER NPR ACCOMPANYING REPORTS Reinventing Human Resource Management, HRM01: Create a Flexible and Responsive Hiring System. ENDNOTES 1. U.S. General Accounting Office, The Chief Financial Officers Act: A Mandate for Federal Financial Management Reform (Washington, D.C.: U.S. General Accounting Office, September 1991). 2. The Chief Financial Officers Act of 1990, Public Law 101-576 (November 15, 1990). 3. McMurtry, Virginia, The Chief Financial Officers Act of 1990: An Overview (Washington, D.C.: Congressional Research Service, February 19, 1991), pp. 91-184. 4. Ibid. 5. See The Chief Financial Officers Act of 1990. 6. See National Performance Review Accompanying Report Reinventing Human Resource Management. 7. Federal Credit Management Training Institute, Final Report: Accounting I and Financial Statement Analysis Courses (April 1992). 8. The CFO Act agencies include: Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Department of Housing and Urban Development, Interior, Justice, Labor, State, Transportation, Treasury, Veterans Affairs, Environmental Protection Agency, National Aeronautics and Space Administration, Agency for International Development, Federal Emergency Management Agency, General Services Administration, National Science Foundation, Nuclear Regulatory Commission, Office of Personnel Management, and Small Business Administration. 9. OMB Memorandum signed by Director Leon Panetta dated February 9, 1993. 10. See National Performance Review Accompanying Report Reinventing Human Resource Management. ADOPT GOOD BUSINESS PRACTICES INTRODUCTION A well-run organization might be described as cost-conscious, professionally managed, efficiently operated, financially sound, streamlined, and accountable. Those words are not typically used when the entity being described is the federal government. They would, however, be used in describing successful businesses. A private sector business, subject to the rigors of the market, pays immediate consequences for poor management. An unprofitable business loses its ability to borrow or raise capital; ultimately, it may have to file for bankruptcy. In the federal government, bad management is exposed to no market discipline. It is hidden by committee, undiscovered, or even rewarded. Historically, the government has been able to avoid accountability for its management of taxpayer assets. Those days are gone. In this environment of scarce financial resources, taxpayers are justly demanding that the government use its resources prudently. Every dollar that is wasted is a dollar taken out of a taxpayer's wallet, or lost from a program that would help build a better future. The government need not reinvent any wheels when it comes to improving its operations. Private sector professionals have designed accounting systems, management reports, financial analysis and planning techniques, service delivery systems, and other tools to make their operations run smoothly and efficiently. The federal government simply needs to adopt the same commitment to improved practices and operations that drives businesses every day. It needs to be run in a more businesslike manner. The recommendations in this section are intended to improve the manner in which the government conducts its business.
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