Use The CFO Act to Improve Financial Services

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.