The Federal Government and its constituent departments and agencies earn no income and have no profitability concerns. The Federal Government can, however, print money, write checks, borrow money, and spend. By law, Federal Agency executives are responsible for the accurate and timely accounting, controlling, and reporting of the receipts, disbursement, and application of public monies. For over 200 years, Congress, by legislation, has attempted to control these financial activities through a process that includes authorizing, appropriating, and budgeting authority approvals relating to raising and spending Federal funds. Other laws offer criteria directing Federal departments and agencies to better plan, manage, and monitor their operations and to do so in a more economical, efficient, and effective manner. These responsibilities lead to peculiarities and variations for Federal entities that are not the same for private sector organizations.
The financial management laws of direct concern to Federal financial executives and auditors of Federal operations and activities are listed next and described in more detail in this chapter. The provisions of these laws establish the financial and operational criteria that must be subjected to scrutiny during the annual independent audit of an agency’s financial statements. Selected provisions of several of these laws and regulations are of direct concern to those conducting Federal audits. A close review of each law, in its entirety, must precede the development of an effective plan to audit a Federal department’s financial statements, operations, activities, functions, and awarded contracts and grants in aid.1
Major Legislation to Establish Federal Financial Management Policy
All fiscal, financial, and operational responsibility is vested in the United States Congress under the Constitution. Over the years and through various laws, Congress has delegated aspects of that responsibility to selected central agencies (e.g., the Office of Management and Budget [OMB],2 the Government Accountability Office [GAO], the Department of the Treasury, the General Services Administration [GSA], and the Office of Personnel Management [OPM]). These central agencies, in turn, publish more detailed government-wide regulations to implement the laws. Additionally, Congress grants broad discretion to the heads of each Federal Agency to determine appropriate managerial, accounting, systems, and controls over financial reporting and to establish the procedures and practices needed to effectively, efficiently, and economically manage the individual agency’s operations, programs, and activities.
The first and most basic financial management legislation referring to Federal revenues, disbursements, and the use of public monies appears in the Constitution itself. Portions of Article 1, Sections 8 and 9, outline what powers the drafters vested with Congress; for example:
This constitutional provision provides Congress with the “power of the purse.” No agency, program, activity, or function can be initiated, nor can Federal monies be expended by the President, without an earlier legal action by the Congress (i.e., the enactment of an authorization, appropriation, or budgetary authority, described in the following sections).
Each year, much is made of a President’s State of the Union address, and his budget is a key aspect of this annual speech. More accurately, though, the annual message is the President’s proposed budget for the Federal Government. Unless both houses of Congress agree with the President—and seldom are all of the President’s proposals accepted without change—there will be no budget; thus, the cliché: “The President proposes, Congress disposes.” When serious disagreements arise between the President’s and Congress’s views on the Federal budget for any fiscal year, the ramifications are serious. If Congress refuses to conclude on a budget for the Federal Government, the Federal Government shuts down, as in the government closures in 1996. More recently, policy disagreements between the President and Congress have resulted in heightened budget tensions and ongoing incremental funding in the form of continuing resolutions. This has resulted in a prolonged period of resource uncertainty, making both short- and longer-term planning more difficult.
The Federal budget is the legal mandate of Congress to the President and heads of Federal departments and agencies to tax, collect, borrow, obligate, and expend money in the manner, only for the purposes, at the rate, and within the time period prescribed by Congress. The Federal budget, approved by both Houses of Congress, is, at one and the same time:
Congress does not approve the President’s requested budget as a single amount. Instead, the amount requested by the President is broken down and analyzed by several congressional committees and subcommittees that may approve, change, or disapprove of the President’s proposal or even approve budget authority that was never sought by the President. During the legislative review phase, Congress will initiate committee hearings and, at times, turn budget issues into matters of considerable public prominence, widely reported in the news and electronic media.
By law, Congress must complete its appropriation process and approve a budget for the overall Federal Government by October 1 of each year. In recent years, many appropriations have not been made final by Congress until well after the new fiscal year has begun. The failure to pass a Federal budget results in Congress having to give temporary operational and spending authority to the executive branch; this legislation is referred as a continuing resolution. The approved financial budget or authority takes the form of several pieces of legislation, that is, several individual appropriations, which, when summed, become the Federal Government’s legal budget or financial plan for the fiscal year. Once passed by Congress, the individual appropriation laws, if not vetoed by the President, become the budget and spending authority, which is closely managed, monitored, accounted for, reported upon, and audited by Federal departments and agencies. Deviations from the provisions of authorization and appropriation legislation are statutory violations for which there must be a reporting to the President and to Congress.
The next chart summarizes the major budget and financial management laws in place today. Subsequent sections in the chapter discuss each one of these laws in greater detail.
Major Budget and Financial Management Legislation
| 1870 | Anti-Deficiency Act | Prevented executive departments and agencies from making expenditures in excess of amounts appropriated by Congress |
| 1921 | Budget and Accounting Act | The more significant provisions of this act affect Federal financial management policy, systems, controls, and practices to this day |
| 1945 | Government Corporation Control Act | Passed to provide for closer Congress scrutiny of government corporations and to require that these organizations undergo independent audits by the Comptroller General |
| 1950 | Budget and Accounting Procedures Act | Provided Congress with overriding accounting and reporting and more control over Federal receipts, expenditures, funds, and property |
| 1951 | Supplemental Appropriations Act | Permitted the President to submit annual budget on program accomplishments |
| 1956 | Amendments to the Budget and Accounting Procedures Act | Changed the Federal budgeting and financial process to assert more congressional control over the executive branch |
| 1974 | Impoundment Control Act | Established statutory criteria that defined what constitutes a valid obligation against a Federal appropriation |
| 1978 | Inspector General Act | Established Inspectors General (IGs) in Federal Agencies and gave them authority to oversee all audits conducted |
| 1982 | Federal Manager’s Financial Integrity Act | Reflected increased concern by Congress over the adequacy of internal accounting and administrative controls in Federal executive agencies |
| 1984 | Single Audit Act, as amended in 1996 | Required recipients of Federal financial assistance to undergo a single financial audit that could be leveraged; shifting the focus away from individual program-oriented audits of Federal financial assistance |
| 1990 | Federal Credit Reform Act | Required that the President’s budget reflect the full cost of direct loan and loan guarantee programs, including new direct loan obligations or loan guarantee commitments |
| 1990 | Chief Financial Officers Act | Changed significantly the accounting and reporting of the Federal Government to include audited financial statements |
| 1993 | Government Performance and Results Act, amended in 2010 | Requires Federal departments and agencies to develop strategic and performance plans and reports of major functions and operations, outcome-related goals and objectives, and a description of skills, technology, and resources required |
| 1994 | Government Management Reform Act | Required each Federal department and agency to submit, by March 1 of each year, an audited financial statement for the preceding fiscal year showing the financial position and the results of operations |
| 1996 | Federal Financial Management Improvement Act | Promoted more useful and reliable financial information through compliance with accounting standards, systems requirements and the standard general ledger |
| 2002 | Accountability for Tax Dollars Act | Extended audited financial statements to government corporations and other executive branch agencies |
| 2002 | Improper Payment Information Act, amended in 2010 and 2012 | Requires Federal Agencies to identify, estimate, and reduce improper payments; requires agency IGs to annually audit management’s compliance (now called the Improper Payment Elimination and Recovery Act of 2010) |
| 2004 | Department of Homeland Security Financial Accountability Act | Extended requirements for a chief financial officer (CFO) and audited financial statements to the newly created department; also required the department to obtain a separate audit opinion over internal control over financial reporting |
| 2006 | Federal Funding Accountability and Transparency Act | Required Federal Agencies to report grant and contract spending information on a government Web site |
Since the country’s founding, Congress has battled the executive branch over fiscal excesses, perceived waste and mismanagement, and failures to adhere to spending laws. An objective of the Anti-Deficiency Act of 1870 was to prevent Federal executive departments from spending more than was appropriated by Congress. Later amendments to this law mandated specific procedural practices, such as requiring that Federal Agencies obtain formal approval from OMB of all funds appropriated by Congress. This OMB approval is referred to as an apportionment. An apportionment constitutes the authorization by OMB to a Federal Agency citing the amounts, purposes, and rates at which an agency may spend the funds appearing in its appropriation law. And, of course, no apportionment of funds by OMB can exceed the ceiling set by Congress in the appropriation itself.
Within the Federal financial management community, probably the most quoted and most closely monitored legislation includes provisions of the Anti-Deficiency Act, referred to by accountants and auditors as Section 3679 Audits (of the Revised Statutes). Some of the key provisions having audit implications include:
Other provisions of the Revised Statutes of concern to Federal auditors provide that no Federal officer or employee shall:
Violation of any of these prohibitions requires that a Federal employee be subject to appropriate administrative discipline that could include suspension without pay or removal from office. The willful or knowing violation, upon conviction, may result in a fine of not more than $5,000, imprisonment for up to two years, or both.
The Budget and Accounting Act of 1921 led to some important improvements and changes in Federal financial management:
Although revised, in part, by subsequent legislation, the Budget and Accounting Act of 1921 required the Comptroller General to prescribe forms, systems, and fund accounting for all Federal departments and establishments and to examine fiscal officer accounts and claims against the United States.
GAO was given the responsibility of examining fiscal officers’ accounts and claims against the government and for investigating “at the seat of Government and elsewhere” all matters relating to the receipt, disbursement, and application of Federal funds. To fulfill these responsibilities, Congress provided GAO with the right to access and examine any books, documents, papers, records of Federal departments, or establishments. This right was later expanded to include the right to access and examine records and documents of Federal contractors and grantees insofar as those records related to the expenditure of Federal monies.
With the implementation of the Budget and Accounting Procedures Act of 1950, Congress attempted to amend provisions of the Budget and Accounting Act of 1921 and impose improvements requiring that:
Regarding GAO’s new auditing responsibilities, the Budget and Accounting Procedures Act of 1950 stated that GAO’s audits should include, but are not be limited to, the accounts of accountable officers. Accountable officers are specially designated Federal executives who reside in all Federal Agencies. Further, the act stated that the GAO audit was to be conducted in accordance with the principles and standards prescribed by the Comptroller General. The audit and examination procedures were to give due regard to generally accepted “principles” of auditing, including consideration of the effectiveness of accounting organizations and systems, internal audit and control, and related administrative practices of Federal Agencies. To this day, GAO continues to prescribe audit standards, to wit: the Government Auditing Standards (Yellow Book), the 2011 edition of which is the latest revision.
The Supplemental Appropriations Act of 1951 statutorily established the criteria for valid obligations and claims for payment under Federal appropriations. If a claim fails to conform to the criteria in this act, the claim is not a valid obligation of the United States and cannot be paid.
According to Section 1311 of this act, no amount shall be recorded as an obligation of the government unless it is supported by one of the eight prescribed forms of documentary evidence. Congress intended that these eight forms of documentary evidence (defined in more detail in Chapter 4) encompass the full range of the types of obligations that could be legally incurred by an agency in the course of its operations.
The Supplemental Appropriations Act requires that every agency report at year-end, for each appropriation and budget authority, the unliquidated obligations and remaining unobligated appropriation balances. This report must be certified by those agency officials formally designated as having the responsibility for recording and monitoring obligations. This reporting also initiates a special Federal year-end audit known government-wide as a 1311 or year-end or unliquidated obligations audit.
The need for the Impoundment Control Act arose as a result of a financial dispute between the Office of the President and Congress over the expenditure of congressionally appropriated monies. While earlier congressional concerns were primarily focused on the potential overexpenditure of appropriated funds, this particular instance focused on the President’s decision not to spend appropriated funds in an attempt to reduce Federal expenditures that Congress at the time was not likely to do so. Thus, the Office of the President “impounded,” restricted, reserved, froze, or otherwise reduced spending by Federal Agencies to amounts below those appropriated by Congress. The Impoundment Control Act, with few exceptions, prohibited future impoundments of appropriated monies. If an impoundment of appropriated funds was requested, advanced notification had to be provided to Congress and fully disclosed to the public. Except as otherwise authorized in the act, Congress stated that no reserves of an appropriation shall be established.
For years preceding the passage of the Impoundment Control Act of 1974, Congress had been in violation of its own laws, as well as the Constitution, with respect to budgeting and financial accountability. This act established a new budget process, attempted to impose more control over the financial activities of the executive branch, and brought greater discipline to Congress itself.
In subsequent years, however, Congress, more so than the executive branch, was in violation of the Impoundment Control Act. For example, by the 1974 act, Congress:
This act, the budget process, budget cycle, and some of the budget strategies applied or used in the Federal Government are discussed in more detail in a later chapter of the book.
The Inspector General Act of 1978 created independent and objective units within departments and agencies to conduct and supervise audits and investigations. It is the intent of Congress that Federal IGs provide leadership and coordination in preventing fraud and promoting economy, efficiency, and effectiveness. In addition, IGs are expected to keep Congress, the President, and top agency executives abreast of important developments within their individual agencies.
The Federal Managers’ Financial Integrity Act of 1982 (FMFIA) displayed Congress’s continuing concern over the financial management practices of the Federal Government. FMFIA required that systems of accounting and administrative controls be established and that each agency annually conduct an evaluation and report to the President and the Congress on the adequacy of these systems.
Selected provisions of the act that could impact the nature of tests made when conducting a Federal audit might be those provisions that require each executive agency to provide reasonable assurances that:
Agencies continue to conduct reviews of their systems of accounting and administrative controls and make reporting pursuant to the FMFIA of 1982 and later legislation.
In the 1950s, problems arose with the manner in which the Federal Government performed audits of state and local governmental entities and other organizations receiving Federal financial assistance. These problems were cataloged by the GAO and government-wide studies and were the subject of numerous congressional committee hearings into the 1980s. Examples of the Federal Government’s problems and the ripple-type problems created at the state and local government levels were numerous but fell into a few general categories:
Initially passed in 1984 and amended in 1996, the Single Audit Act ordered Federal organizations to implement an audit concept whereby recipients receiving $500,000 or more of Federal assistance need undergo only one audit each year. The results of this single audit would then be shared with all organizations having a financial interest in that recipient. Further, the act declared that audits made in accordance with the Single Audit Act “shall be in lieu of any financial audit of Federal awards which a non-Federal entity is required to undergo under any other Federal law or regulation.” This act changed the historical focus of Federal oversight, eliminating financial and human resource costs related to thousands of duplicative and uncoordinated Federal audits and reviews.
Studies submitted to Congress and witnesses appearing before committees of Congress relative to the 1996 amendments were uniformly supportive of the Single Audit Act. While improvements could be (and were) made, the consensus was that this law had instituted an efficient and effective audit concept contributing to an enormous reduction in overlap and duplication in comparison to earlier Federal audit approaches.
The legally defined comprehensive single audit required two things:
These single audits were required to be made pursuant to GAO’s Yellow Book plus the audit procedures and reporting requirements in OMB Circular A-133, Audits of State and Local Governments and Non-Profit Organizations, as amended.4
The Single Audit Act addressed the need for access to working papers by requiring that working papers be made available to a Federal Agency or the Comptroller General of the United States, upon request, to carry out audit and oversight responsibilities. Such access, by law, included the right of the Federal Government to obtain copies. OMB Circular A-133 in turn required auditors to retain the working papers for a minimum of three years after date of issuance of the auditor’s report, unless the auditor is notified in writing by a Federal cognizant agency or oversight agency or a pass-through entity to extend the retention period beyond the three-year minimum. When the auditor becomes aware that an audit finding is being contested, he or she must contact the contesting parties for guidance prior to destruction of the working papers and reports.
Congress in the Single Audit Act and OMB in its Circular A-133 provided the following definitions of awards, financial assistance, and major program that Congress wanted audited and opined upon:
The Single Audit Act, Yellow Book, and OMB Circular A-133 in combination comprise the audit reporting “standards,” or criteria that must be met if the single audit is to comply with the law. This combination of the Act, GAO’s audit standards, and OMB regulations requires that an audit report for a single audit be a package of up to 12, and possibly more, reports, some with audit opinions, some with audit assurances, and some transmitting information required by the Federal overseers.
Unless specifically required by OMB, the scope of a single audit does not automatically encompass performance audits.
The Federal Credit Reform Act of 1990 is not well known because few Federal Agencies are authorized to make loans or enter into loan guarantee transactions. In addition, upon its original passage into law, this act was part of Federal Government’s general Omnibus Reconciliation Act of 1990. But the Federal Credit Reform Act significantly changed financing, accounting, and reporting for Federal loans and loan guarantees. These financial assistance programs included some of the more popular of the government loans, including farmers’ home loans, small business loans, veterans’ mortgage loans, and student loans.
The Federal Credit Reform Act required, for the first time in history, the President’s budget request to reflect the full cost of direct loans and loan guarantee programs, including the planned level of new loan obligations and loan guarantee commitments associated with each appropriation request. Congress, in the act, stated that the purposes of the act were to:
This law concluded a 200-year history of accounting for less than the full cost of Federal loans and loan guarantees. Federal departments and agencies now had to recognize, at the time of legislative action, the true cost that these programs were likely to incur, such as projected default costs, interest subsidy costs, and recognition, at the time of loaning, the current market rate of interest. To accomplish its objectives, the act’s provisions required that:
Recording interest subsidy costs recognizes that Federal loans provide for payment of interest rates that were well below the going market rates. This lower interest rate, in essence, gave borrowers and recipients of loan guarantees a break or subsidy. To finance this subsidy, the Treasury Department was borrowing money at higher market interest rates.
Historically, agency accounts recorded only a cash disbursement and made no formal accounting for the future repayment (i.e., as a loan receivable) or possible default of the loan. This type of accounting avoided the embarrassing need of the Federal Government to recognize loan defaults and to later account for uncollected loans. This underrecognition of costs had been further compounded by having no accounting until the loan defaulted or the Federal Government had to make payment under a defaulted loan guarantee program. For the most part, these events happened years later, were not anticipated, and in the case of failures of hundreds of savings and loan associations and banks in the 1980s, resulted in billions of dollars of losses being passed along to later generations to finance.
In the 1990s, congressional and executive branch interest in financial systems, controls, performance reporting, and other management improvement exceeded that of any decade in the preceding 200 years. The Chief Financial Officers Act (CFO Act) was typical of legislation enacted in the 1990s. In the CFO Act, Congress reaffirmed its intent to oversee and control the financial management process of the Federal Government and to centralize authority and responsibilities for better accounting, controls, and financial management. For the first time, department comptrollers were required to adhere to applicable accounting and reporting standards, annual financial statements by Federal entities, and independent audits of those financial statements.
The CFO Act was a significant, but partial, response to financial management issues known to Congress and the executive branch for decades. This was noted by the prefatory thoughts of Congress in the CFO Act that described a deteriorated financial reporting and internal controls environment within the Federal Government. Highlights included:
Among several objectives noted in the CFO Act was the improvement in each agency’s systems of accounting, financial management, and internal controls to assure issuance of reliable financial information to deter fraud, waste, and abuse of government resources.
By the CFO Act, Congress established separate deputy directors at OMB—one for budget and one for management. The Deputy Director of OMB for Management, a senior executive position, was established by the CFO Act, and the role of management in OMB for Federal financial management was significantly expanded. OMB was required to perform rather specific financial management oversight and operational responsibilities, including:
Additionally, OMB was required to directly communicate with financial officers of states and local governments, and foster exchanges of information concerning financial management standards, techniques, and processes.
Congress, to correct perceived and existing Federal financial management deficiencies, made OMB responsible for specific responsibilities, such as these:
This guidance would be promulgated to Federal Agencies through OMB’s Circular and Bulletin series.
The CFO Act of 1990 is unique among Federal law because it requires that the persons appointed to senior Federal financial management positions be competent and possess relevant experience. The act gave OMB other important responsibilities in this area. These included development and maintenance of qualification standards for agency CFOs and agency deputy CFOs appointed under the act and advising departments and agencies regarding selection of their CFOs and deputy CFOs.
The CFO Act (as amended) requires the appointment of a CFO in operating departments and agencies and some independent offices. Each Federal CFO is, for cabinet and larger agencies, appointed by the President and serves with the advice and consent of the Senate, or is designated by the President in consultation with agency heads. (CFOs of smaller agencies and offices are appointed by the head of the agency.) Congress mandated that these executives be experienced and possess a certain level of competence, therefore requiring that the CFOs for both large and small Federal entities were to be appointed or designated:
from among individuals who possess demonstrated ability in general management of, knowledge of, and extensive practical experience in financial management practices in large governmental or business entities.
The duties for department and agency CFOs included financial as well as nonfinancial roles, such as financial and nonfinancial systems, monitoring and accounting for budget execution, all aspects of all entity personnel having financial responsibilities, and certain department-wide reporting and budget-type responsibilities.
Prior to the enactment of the CFO Act, the financial management function was not, organizationally, at a uniform level across the Federal Government and responsibilities for financial management were dispersed among several senior executives. The average tenure of these executives was about 18 months—a term of service that produced constant turnover and was too short to permit these executives to effectively preside over projects that span fiscal years. The CFO Act requires that department and agency CFOs report to the head of the agency and the CFO is charged with overseeing all financial management activities relating to the programs and operations. Before the act the program and operational managers often had their own financial personnel reporting to them.
The responsibilities of agency CFOs and deputy CFOs were extended to include developing and maintaining integrated agency accounting, financial management systems, and personnel issues, including responsibilities to:
Until the CFO Act, the financial management function in Federal entities typically was split between the budgetary responsibilities and the fiscal accounting and reporting responsibilities, with the accounting officials having almost no role with respect to budget preparation or for budget execution. The act now requires that CFOs shall:
The CFO Act dictated that annual financial statements be prepared for each agency. These financial statements to be submitted to OMB must reflect the overall financial position, result of operations, and cash flows or changes in financial position of each revolving fund, trust fund, and the accounts of each office, bureau, and activity of a Federal entity performing substantial commercial functions during a preceding year. OMB was directed to prescribe the form and content of these agency financial statements. This guidance is promulgated through OMB circulars and bulletins.
Annual independent audits of an agency’s financial statements are another new financial management requirement of the CFO Act. (The other three areas are the (1) appointment of CFOs, (2) requirement to comply with applicable accounting standards and principles, and (3) publishing of financial statements by Federal departments and agencies.)
Section 304 of the CFO Act requires each financial statement to be prepared pursuant criteria cited in the act and to be independently audited in accordance with Government Auditing Standards. Where an agency has an IG, this audit is performed by the IG or an independent auditor, as determined by the IG. Where there is no IG, the head of the Federal entity determines the independent auditor to perform the audit.
The Comptroller General is authorized to review these audits or may perform the audit of the financial statements at the discretion of the Comptroller General or a committee of Congress. The director of OMB periodically publishes guidance on the scope and other details of these audits in OMB circulars and bulletins.
Various sections of the act refer to “applicable” accounting principles and standards. For example:
In the CFO Act, Congress did not detail what these “applicable” financial criteria would be or designate which agency or Federal executive is responsible for determining the “applicable” financial criteria. But at the time the act was enacted, in 1990, the Comptroller General of the United States, Secretary of the Treasury, and director of OMB, by agreement, established the Federal Accounting Standards Advisory Board (FASAB, which is discussed in the following paragraphs.)
With the enactment of the CFO Act, the responsibility for setting accounting and financial reporting standards shifted from the GAO, in the legislative branch, to OMB, in the executive branch. Then in a 1990 agreement between GAO, OMB, and the Treasury Department, the FASAB was established to recommend the applicable accounting principles required by the CFO Act.
Over the decade of the 1990s, FASAB recommended several applicable accounting principles now regarded as the generally accepted accounting principles (GAAP) for each Federal Agency and the Federal Government as a whole. In 1999, FASAB was formally recognized by the American Institute of Certified Public Accountants as the sole and official standard setter of GAAP for Federal entities. In 1996, the Federal Financial Management Improvement Act (FFMIA) also compelled Federal entities to implement and maintain financial management systems that comply substantially with the “applicable” accounting standards.
The CFO Act required, among other mandates, that there be integrated agency accounting and financial management systems throughout the Federal Government. These integrated systems were to be designed to ensure compliance with internal control standards and the implementation of policies to provide consistency over data entry, transaction processing and reporting and to also eliminate unnecessary duplication of transaction entries. Integrated agency accounting and financial management systems, including internal controls, were to be developed and maintained to ensure:
System requirements of the Federal Government now defined an integrated agency accounting and financial management system as a system that coordinates a number of previously unconnected functions in order to improve the overall efficiency and control. This system has four essential characteristics:
Congress, in enacting the Government Performance and Results Act (GPRA), noted that Federal managers were seriously handicapped in their efforts to improve program efficiency and effectiveness because of an insufficient articulation of program goals and inadequate information on program performance. Also, congressional policy making, spending decisions, and program oversight were seriously handicapped by insufficient attention to agency program performance results.
The purposes detailed in the GPRA included:
To promote consistency and comparability in communicating program information and corresponding with Congress and the public, the GPRA provided the following definitions that were to be used throughout the Federal Government:
Among its findings when it enacted the FFMIA, Congress stated that:
The FFMIA emphasized that control standards and systems of control had not been uniformly implemented by agencies relative to their Federal financial management systems6 but that these Federal financial management systems continued to be seriously deficient. FFMIA acknowledged that much effort had been devoted to Federal internal controls in past years and that uniform control standards still had not been implemented as part of an agency’s integrated financial management system. More specifically, Congress declared that:
The intent of the FFMIA of 1996 was that Federal Agencies would:
The internal controls problem was compounded by systems growth over the years, with complexities resulting from increased automation and streamlining, continued decentralization and dispersion of program operations, and remote on-location, real-time accounting data inputted hundreds or thousands of miles from headquarters. Changes to agency systems environments, particularly the move to increasingly computerized databases, heightened the need to revamp existing Federal Agency controls where possible, but more than likely would require the design and implementation of entirely new controls.
In recent years, Federal Agency system failures and increased costs have resulted in increased scrutiny from OMB. Large enterprise-wide solutions have gone out of favor and are giving way to more focused and less costly incremental steps. Along with revisiting the way systems are implemented, OMB and the Treasury are taking a renewed look at FFMIA, its intent, and how compliance is measured. As part of this process, the hundreds of financial management systems requirements developed over the years by the Joint Financial Management Improvement program and later GSA’s Financial Systems Integration Office (FISO) are being reviewed and revisited. In the past, these requirements and an accompanying certification process served as a seal of approval for Federal financial systems and were proxies for assessing FFMIA compliance. This front-end certification process has been eliminated and is in the process of being replaced with a back-end, more outcome-oriented FFMIA compliance assessment by both management and independent auditors. Over the years, FFMIA compliance has been much debated and subject to varying interpretations and will likely continue to be in the future.
Congress, in the FFMIA, required each annual financial statement audit called for by the CFO Act of 1990 to comply with Section 803 of the FFMIA (31 USC 3512). This section mandated each Federal Agency to implement and maintain financial management systems that:
Congress also required each of the required annual financial statement audits to specifically report on whether the agency financial management systems comply with the three requirements of the FFMIA. When an auditor finds that the agency’s financial management systems do not comply with these three FFMIA requirements, Congress states the auditor shall identify in the audit report:
In 2001, OMB issued guidelines for assessing compliance with FFMIA to be used by both management and independent auditors. In an effort to standardize and improve financial management systems, the Joint Financial Management Improvement Program, consisting of representatives from OMB, GAO, Treasury, and the GSA, developed financial management system standards and a certification process for financial systems to pass before being acceptable for Federal Agency use. The number and detail of financial system standards proliferated over the years, and in 2010, OMB disbanded FISO. These standards are part of the body of Federal financial management systems requirements in place today. However, efforts are currently under way to review these requirements and revisit the measures for determining compliance with the FFMIA.
The Accountability for Tax Dollars Act of 2002 extended the requirement for annual audited financial statements to executive agencies beyond those required to prepare and audit financial statements by the CFO Act. In doing this, the act extended financial accountability to many of the smaller entities within the executive branch not falling under a major Federal department or agency.
The issue of improper payments by the Federal Government was elevated to prominence by GAO in a series of targeted audits they performed. Congress responded with a series of legislative changes including the initial passage of the Improper Payment Information Act of 2002 and subsequent amendments in 2010 and 2012. These collective pieces of legislation require Federal Agencies to identify high-risk programs susceptible to improper payments, develop statistically based improper payment estimates, establish corrective action plans to address underlying causes, and track and report progress. In 2012, improper payments are estimated to be more than $100 billion, centered mostly in the Medicare, Medicaid, Earned Income Tax Credit, and Unemployment Insurance programs.7 Agency IGs are required to annually assess agency effort to comply with improper payments legislation.
The Department of Homeland Security Financial Accountability Act of 2004 extended many of the requirements of the CFO Act to this newly created Federal Agency. Most noteworthy from an audit standpoint is the requirement for audited financial statements as well as a separate audit opinion on internal control over financial reporting. While a number of Federal Agencies voluntarily pursue this separate audit opinion, only the Department of Homeland Security is required to have it by law.
The Federal Funding Accountability and Transparency Act of 2006 introduced a new level of financial reporting facilitated by advances in technology and the Internet. This legislation calls for Federal Agencies to report detailed spending information for grants and contracts on a government-sponsored Web site. This type of financial reporting has raised a number of issues, including the value of voluminous noninterpretive financial data, the quality and consistency of these detailed data as compared with audited information, and the need for independent assurance. These issues will continue to be debated as this type of detailed financial reporting proliferates on other government Web sites.
1 An excellent reference source for many of these laws is the report Laws Related to Federal Financial Management, by the House of Representatives’ Committee on Government Reform and Oversight, Washington, D.C., August 1996.
2 Throughout this book, reference is made to the OMB with the recognition that laws and regulations prior to 1974 make reference to the Bureau of the Budget and other descriptors earlier in the country’s history.
3 These Federal executives, one or more of whom reside in every Federal Agency, are referred to as accountable officers.
4 When first enacted, the Single Audit Act of 1984 was implemented through two separate OMB circulars: OMB Circular A-128 for Audits of State and Local Governments and OMB Circular A-133 for Institutions of Higher Education and Nonprofit Entities. In 1997, OMB Circulars A-128 and A-133 were replaced and superseded by a single circular, titled OMB Circular A-133, Audits of State and Local Governments and Non-Profit Organizations, last amended in June 2003.
5 See GAO report GAO-02-791T, “Effective Implementation of FFMIA is key to Providing Reliable, Useful, and Timely Data,” June 2002.
6 Federal financial management systems are defined to include internal financial controls, data, computer hardware, computer software, and competent and trained personnel.
7 According to paymentaccuracy.gov, a White House Web site.