Fully Integrate Budget, Financial and Program Info

Fully Integrate Budget, Financial, and Program Information

BACKGROUND

Financial and program managers must be accountable for program results
and fiscally responsible for their resources. They must be able to
provide information that is essential to monitor budgets and operating
performance, support good financial stewardship, and prevent waste or
fraud. To meet these needs, financial systems must process, track, and
provide accurate, timely, internally consistent, and readily accessible
information on financial activity in the most cost-effective and
efficient manner.

Government financial systems should provide basic accounting functions
for accurately recording and reporting financial transactions. They
should also be the basic vehicle for the integrated budget, financial,
and program information that managers will use to make decisions on
their programs. Financial management systems must reflect how the
federal government seeks to manage its activities, and must support
these activities through the integration of program functions and the
use of current technology.

For years, serious financial management system problems have been
reported by audits and by agencies themselves. Legislation has been
enacted and Office of Management and Budget (OMB) circulars have been
issued supporting improvements in financial systems. For example, the
Federal Managers' Financial Integrity Act of 1982 called for review of
financial management systems for good internal controls.[Endnote 1]
Subsequently, OMB Circular A-127, Financial Management Systems, was
reissued in July 1993.[Endnote 2] It prescribed policies and standards
for executive agencies to follow in developing operating, evaluating,
and reporting on financial management systems.

As agencies began to explore the upgrade of their systems and the use of
off-the-shelf financial system software increased, the need became
evident for basic financial systems requirements. The Joint Financial
Management Improvement Program (JFMIP) sponsored the development in 1988
of the Core Financial System Requirements. That effort evolved into the
development of a comprehensive set of functional requirements for
federal systems. A draft update to those core requirements is targeted
for issuance in the autumn of 1993. The JFMIP also developed and issued
subsidiary systems requirements, including Functional Standards for
Personnel/Payroll in May 1990 and Functional Standards for Travel in
January 1991. A more recent project includes Seized/Forfeited Asset
Systems Requirements issued in March 1993. Also, JFMIP developed drafts
of Inventory System Requirements and Direct and Guaranteed Loan Systems
Requirements that are under review by the agencies.

The enactment of the Chief Financial Officers (CFO) Act of 1990
specifies several requirements to improve the financial information
available to agency managers, Congress, and others.[Endnote 3] These
include requirements that agency CFOs integrate accounting and budgeting
information, that they develop and maintain accounting and financial
management systems that report cost information, and that agency
financial management systems must provide for the systematic measurement
of performance. OMB requires agencies to include plans to modernize and
integrate their financial systems in their annual 5- year plan
submission.

NEED FOR CHANGE

Current assessments suggest that the government has a long way to go to
reach its goal of an integrated financial system. Fourteen of the 23
agencies covered by the CFO Act have financial systems problems that
rank on OMB's high-risk list.[Endnote 4] OMB's 1992 agency inventory of
878 agency financial systems reveals some stunning facts about the
condition of federal financial systems.[Endnote 5]

--Over 30 percent of these systems are over 10 years old.

--Less than 6 percent are between 1 and 2 years old.

--In over 18 percent, age could not be established with certainty.

--33 percent of agency systems do not meet functional requirements for
reporting to OMB and the Department of the Treasury.

--40 percent do not meet internal reporting requirements.

--52 percent do not meet agency financial processing requirements.

--47 percent of agency systems do not meet their own internal automated
data processing (ADP) requirements.

These facts raise serious concern about the fundamental effectiveness
and efficiency of those agency financial management operations.  Equally
serious, agency financial systems are not keeping pace with
technological changes in their own agencies, which may place these
systems at risk in the near future.

Over the years, many resources have been devoted to improving financial
systems. In OMB's 1992 inventory, 24 percent of agencies report that
they are replacing or planning to replace their systems; another 25
percent have upgrades planned or under way. Still, only marginal
progress has been made toward the goal of technologically current,
integrated financial systems. Many of these improvements have been
largely uncoordinated and piecemeal, without an adequate governmentwide
framework and focused top management attention to make them work.

The CFO Act gave OMB the responsibility to review financial systems
plans and the resources required to implement those plans. Agencies are
required to include those plans in their 5-year plans. While this gives
OMB a great deal of opportunity to influence decisions on where systems
are built and when they are supported with resources, there is limited
evidence to demonstrate it has been used. Where it has been used, there
has been great success. For example, its influence was used to support
the development of the Credit Alert Interactive Voice Response System
(CAIVRS) by the Department of Housing and Urban Development. This
system--used to screen federal loan applicants for federal credit
delinquencies--was developed with the participation of four other
federal credit agencies. Decisions on the development and funding of
financial systems initiatives occur in various processes and at many
levels both at OMB and in the agencies. OMB must be able to tap into the
key points of these processes and coordinate and facilitate priority
financial systems projects through these various processes. OMB could
have a large impact on the modernization of financial systems in
government, if they used this responsibility to its full potential. More
concentrated efforts by OMB during this review process could direct the
investment of resources toward the most critical financial systems
improvements.

Concurrently, agencies need more information about where financial
systems improvements are being made across government. While OMB is
beginning to collect more information about financial systems through
the development of an inventory, and the Department of the Treasury's
Financial Management Service has information about cross-servicing,
there is little effective distribution of this information to agencies.
The JFMIP currently develops federal financial systems requirements and
has established a role as a clearinghouse for sharing and disseminating
good financial management techniques and technologies. This
responsibility could be broadened to include a special emphasis on
financial systems.

Through its CFO leadership role, OMB can facilitate the development of
joint development projects between agencies that share interest in a
particular financial function. These joint projects provide benefits for
all in that they are more cost-effective than independent efforts.
Further, if they are built to be flexible and transportable across
agencies, then even more savings can result. OMB can also facilitate the
funding of these projects through encouraging the use of multi-year or
no-year funding mechanisms that recognize the long-term nature of
financial systems development. Additionally, there are many instances
where funding and support is available in different agencies for joint
projects, but limitations on the transfers of funding between
appropriations restrict the collaborative use of these funds. OMB could
pursue interagency funding mechanisms that allow for these cross-agency
projects.  Finally, many agencies today receive financial services from
other agencies on a reimbursable basis. This approach--generally
referred to as cross-servicing or franchising--could be encouraged by
OMB for more agencies.

As more emphasis is placed on performance measures and results with the
enactment of the Government Performance and Results Act of 1993, more
demand will be made for cost information, requiring additional
investment in cost accounting systems.[Endnote 6] Currently, cost
accounting systems are used in only a few agencies in the federal
government. Today, many agencies collect cost information in their
financial systems, but cannot associate the information with projects or
activities, much less their current budget structure. Because of the way
this information is captured, it is too often just "accounting"
transaction information, relevant only to financial personnel and not
useful to managers. Consequently, program managers have developed their
own "cuff" systems to provide the needed financial information to manage
their programs. These systems provide duplicative and often very
unreliable financial data, but they do associate program information
with financial information. Currently, there are neither federal cost
accounting standards nor systems requirements. Both are very necessary
for the development of consistent cost and related performance
measurement information within agencies and across government.

Some agencies have made progress integrating cost and program
performance information. The Internal Revenue Service (IRS) has
initiated the development of a Cost Management Information System, an
integrated system that collects operational, financial, and performance
data to provide its managers with decision support information. It
builds on IRS' newly implemented modern integrated budget and financial
system and applies principles of continuous business improvement and
activity-based management in its design.  Activity-based costing is a
relatively new approach to cost accounting that businesses across the
nation are beginning to adopt.  A recent Fortune magazine article on the
new approach cites Chrysler, Union Carbide, GE Medical Systems, and
Hewlett-Packard--to mention only a few--as having shifted to this new
approach toward cost accounting. The article supports the premise that
this approach not only seemed to give operating managers better
information to manage, but elevated the value that financial people can
add to the process.  Islands of best practices, such as the IRS and its
state-of-the-art financial management approaches, exist in the federal
government.  However, they need to be publicized and replicated in other
agencies.

Cross-references to Other NPR Accompanying Reports

Mission-Driven, Results-Oriented Budgeting, BGT05: Provide Line Managers
with Greater Flexibility to Achieve Results.

ENDNOTES

1. The Federal Managers' Financial Integrity Act of 1982, Public Law
97-255 (September 8, 1982).

2. A revised OMB A-127 was issued in July 1993 that removed the
inconsistencies and overlapping policies with other OMB circulars.

3. The Chief Financial Officers Act of 1990, Public Law 101-576
(November 15, 1990).

4. U.S. Office of Management and Budget, Federal Financial Management
Status Report and 5-Year Plan (Washington, D.C., August 1993), p. 29.

5. Ibid. pp. 27-30.

6. The Government Performance and Results Act of 1993, Public Law 103-62
(August 3, 1993).