September 1991 The Chief Financial Officers Act The Chief Financial Officers (CFO) Act of 1990 (Public Law 101-576) marks the beginning of what promises to be a new era not only in

United States General Accounting Office

GAO Accounting and FinancialManagement Division

September 1991

The Chief FinancialOfficers Act

A Mandate for FederalFinancial ManagementReform

GAO/AFMD-12.19.4

Preface

The Chief Financial Officers (CFO) Act of 1990(Public Law 101-576) marks the beginning of whatpromises to be a new era not only in federalmanagement and accountability, but also in efforts togain financial control of government operations.

The government has a responsibility to use timely,reliable, and comprehensive financial informationwhen making decisions which have an impact oncitizens’ lives and livelihood. Despite good intentionsand past efforts to improve financial managementsystems, this is still not done.

The Congress mandated financial management reformby enacting the CFO Act, which was signed into lawby President Bush on November 15, 1990. This is themost comprehensive and far-reaching financialmanagement improvement legislation since theBudget and Accounting Procedures Act of 1950 waspassed over 40 years ago. The CFO Act will lay afoundation for comprehensive reform of federalfinancial management. The act establishes aleadership structure, provides for long-rangeplanning, requires audited financial statements, andstrengthens accountability reporting.

Federal financial managers, auditors, and programmanagers at all levels of government will be affectedas agencies take actions required under the CFO Actto improve financial management systems andinformation. Therefore, it is essential that the CFOAct’s provisions are fully understood.

GAO/AFMD-12.19.4 CFO ActPage 1

Preface

This booklet will help agency managers and otherinterested parties (1) become familiar with the CFOAct’s principal features, (2)better understand theactions needed to successfully implement the act, and(3) identify the sources for additional information toassist in carrying out the act’s provisions.

Charles A. BowsherComptroller Generalof the United States



Contents

Preface 1

OMB’s LeadershipRole

6

Agency CFOs 8

ConsolidatedFinancialManagementOperations

10

EnhancedFinancialManagementSystems

11

FinancialManagementPlans

12Improved Financial Information 14

FinancialStatements andAudits

16

Annual FinancialManagementStatus Reports

19


Contents

FinancialManagementStaffing

21

The CFO Council 23

GovernmentCorporations

24

SettingAccounting andAuditingStandards

25

Table Table 1: Agencies Included in FinancialStatement Pilot Project

17

Abbreviations

CFO Chief Financial OfficerOMB Office of Management and BudgetGAO General Accounting Office


OMB’s Leadership Role

Strong centralized leadership is key to solving thegovernment’s long-standing financial managementproblems. The Congress, the administration, GAO,and others have supported this kind of leadership forfederal financial management.

The CFO Act provides for such leadership by givingthe Office of Management and Budget (OMB) broad,new authority and responsibility for directing federalfinancial management, modernizing the government’sfinancial management systems, and strengtheningfinancial reporting. The act also creates a newposition in OMB—the Deputy Director forManagement, who is to be the government’s chiefofficial responsible for financial management.

While the CFO Act emphasizes improved financialmanagement, it also charges OMB’s Deputy Directorfor Management with overseeing many of the federalgovernment’s general management functions. Thesefunctions include information policy, procurementpolicy, property management, and productivityimprovement.

The act specifies that the Deputy Director forManagement’s financial management functions shallinclude

• establishing governmentwide financial managementpolicies and requirements and monitoring theestablishment and operation of financial managementsystems;

• monitoring resources required to effectively operate,maintain, and enhance financial management systemsthrough activities such as reviewing agency budgetrequests for financial management systems andoperations;

• reviewing and, where appropriate, recommending tothe Director of OMB changes to the budget and


OMB’s Leadership Role

agency legislative proposals to ensure that they are inaccordance with OMB’s financial management plans;

• overseeing and making recommendations to agencyheads on the administrative structure of agencyfinancial management activities;

• monitoring the financial execution of the budget; and• ensuring that the government has a highly qualified

cadre of financial management professionals.

The CFO Act also establishes a new Office of FederalFinancial Management in OMB to carry out thesegovernmentwide financial managementresponsibilities. To head this office, the actestablishes the position of Controller, an individualwho is to possess “demonstrated ability and practicalexperience in accounting, financial management, andfinancial systems.” This individual will handleday-to-day operations to ensure that financialoperations are being properly carried outgovernmentwide.

Both the Deputy Director for Management and theController are to be appointed by the President withthe advice and consent of the Senate.


Agency CFOs

Influential financial management leadership is asimportant at the agency level as it is at OMB. For thisreason, an agency CFO must be a key figure in anagency’s top management team.

To provide a sound leadership structure linked toOMB’s financial management responsibilities, theCFO Act creates chief financial officer positions in 23major agencies. For most of the agencies, the CFO isto be a presidential appointee and is to be assisted bya deputy chief financial officer. Both are to haveextensive financial management experience.

The CFO Act specifies that OMB’s Deputy Directorfor Management is to develop and maintainqualification standards for agency CFOs and theirdeputies. On June 6, 1991, OMB issued interimstandards, which provide guidance to agencies on thetypes of experience, knowledge, skills, and abilitiesneeded by agency CFOs.

An agency CFO is to report directly to the agencyhead on financial management matters. The CFO’sresponsibilities are to include the following:

• developing and maintaining integrated accountingand financial management systems;

• directing, managing, and providing policy guidanceand oversight of all agency financial managementpersonnel, activities, and operations;

• approving and managing financial managementsystems design and enhancement projects;

• developing budgets for financial managementoperations and improvements;

• overseeing the recruitment, selection, and training ofpersonnel to carry out agency financial managementfunctions;

• implementing agency asset management systems,including systems for cash management, credit


Agency CFOs

management, debt collection, and property andinventory management and control; and

• monitoring the financial execution of the agencybudget in relation to actual expenditures.

On February 27, 1991, OMB issued guidance(M-91-07) for preparing organization plans required bythe CFO Act. That guidance details the authorities,functions, and responsibilities that a CFO is to havefor compliance with the act.


Consolidated Financial ManagementOperations

The responsibility for developing and operatingfinancial management systems is often fragmentedbetween accounting organizations and programcomponents. This leads to costly systemsdevelopment failures and poorly controlled systemsthat are unresponsive to the needs of agencymanagers.

To consolidate responsibility for an agency’s financialmanagement, the CFO Act requires that

“an agency Chief Financial Officer shall oversee all financialmanagement activities relating to the programs and operations ofthe agency.”

Under the act, an agency CFO’s responsibility willextend to every aspect of financial managementrelated to operating agency programs.Governmentwide organizational change is needed tovest the CFOs with authority related to accounting,budget execution, and other financial managementoperations. This will ensure that one person who ispart of top management has overall responsibility forestablishing and implementing effective financialmanagement policies, internal controls, and financialmanagement systems.


Enhanced Financial ManagementSystems

For years, serious financial management systemproblems have been reported by audits and byagencies themselves under the Federal Managers’Financial Integrity Act (31 U.S.C. 3512 (b), (c)). Thesereports paint a bleak picture of a government withantiquated financial systems that do not satisfytoday’s financial information needs.

To correct this situation, the CFO Act mandates thatagency CFOs are to develop and maintain agencyfinancial management systems that comply with

• applicable accounting principles, standards, andrequirements;

• internal control standards; and• requirements of OMB, the Department of the

Treasury, and others.

Agency financial management systems are to providecomplete, reliable, consistent, and timely information.Financial data are to be prepared on a uniform basisand be responsive to the financial information needsof agency management. To upgrade agency financialmanagement systems, the act calls for agency CFOsto approve and manage agency financial managementsystems design or enhancement projects.

OMB’s February 27, 1991, guidance to agencies forpreparing organization plans under the act specifiesthat a CFO should have authority to

“manage directly, and/or monitor, evaluate, and approve, thedesign, budget, development, implementation, operation, andenhancement of agencywide and agency component accounting,financial and asset management systems.”

Further, the OMB guidance states that CFOs shouldbe full participants in agency information resourcesmanagement decisions.


Financial Management Plans

A structured approach to planning and developingfinancial systems projects is critical to their success.1

For example, this approach to financial managementsystems development could specify (1) goals forresolving financial systems problems, (2) policies andstrategies for accomplishing these goals, and(3) milestones for plan implementation. By using thisapproach, systems can be designed, maintained, andrevised from an agencywide perspective.

The CFO Act requires OMB to prepare and submit tothe Congress a governmentwide 5-year financialmanagement plan. The plan, which is to be updatedannually, is to describe planned OMB and agencyactivities for the next 5 fiscal years to improve thefinancial management of the federal government. Itshould be a vision of how financial managementreform will be carried out—a blueprint for changewith a set of clear expectations. Further, the actrequires agency CFOs to prepare and annually reviseagency plans to implement OMB’s 5-year financialmanagement plan.

Each 5-year plan submitted by OMB is to includeinformation such as the following:

• a description of the existing financial managementstructure and any changes needed to establish anintegrated financial management system;

• a strategy for developing and integrating individualagency accounting, financial information, and otherfinancial management systems;

• proposals to eliminate duplicate and otherunnecessary systems and projects to bring existingsystems into compliance with applicable standardsand requirements;

• milestones for equipment acquisitions and otheractions necessary to implement the 5-year plan;

1GAO’s Critical Factors in Developing Automated Accounting andFinancial Management Systems (January 1987).



• financial management personnel needs and actions toensure those needs are met;

• a plan for ensuring the annual audit of financialstatements of executive agencies pursuant to the act;

• cost estimates for implementing the governmentwide5-year plan; and

• a report on executive branch implementation of theplan during the preceding fiscal year.

The comprehensive governmentwide and agencyplans called for in the act should enable top managersto monitor major financial management systemsdevelopment efforts and operations. Thus, these planswill help ensure that financial management systemsand internal control improvement efforts arecompleted on schedule, correct problems, andcomply with applicable requirements.

Improved planning should help ensure that financialreporting provides for complete, reliable, consistent,and timely information that responds to managers’financial information needs. Over time, these planswill help to bring about continuity in systemsdevelopment projects and facilitate a unifiedapproach to setting priorities and allocatingresources.

The Department of the Treasury has issued guidelinesfor examining financial management systemsimprovement plans.2 These guidelines, which weredeveloped in cooperation with OMB and otheragencies, would be useful in devising agency systemsimprovement plans under the CFO Act, as well as inassessing their adequacy.

2Financial Management Systems Plan Review Methodology,Department of the Treasury, Financial Management Services,December 1990.



ImprovedFinancialInformation

The lack of useful financial information impedes thefederal government’s efforts to build an effectivefinancial management structure.3 Better managementinformation (such as reports of performanceindicators) can be an early warning measure whichidentifies developing problems before they reachcritical proportions. Also, decisionmakers needreliable financial information to assess theimplications of alternatives and improve the economyand efficiency of government operations.

Several of the CFO Act’s requirements aim to improvethe financial information available to agencymanagers, the Congress, and others. One of themrequires that agency CFOs develop and maintainaccounting and financial management systems whichreport cost information.

Another calls for the integration of accounting andbudgeting information. Thus, principles used inaccounting for program costs are to be consistentwith those used in developing program budgets. Thisclear linking of budgeting and accounting informationcan benefit both management control and planning.

The act also specifies that agency financialmanagement systems must provide for the systematicmeasurement of performance. Therefore, agencyCFOs will have an important responsibility to see thatfinancial management systems are designed to reportcost trends and other performance indicators.

Most importantly, the act requires that financialstatements be prepared and audited. This requirementis further discussed in the following section.Together, these features of the CFO Act will improvethe reliability and usefulness of agency financialinformation.

3Managing the Cost of Government: Building An Effective FinancialManagement Structure (GAO/AFMD-85-35 and 35-A, February 1985).



Analyses of financial statements can also providemanagers with valuable information on trends and thefinancial viability of programs. To assist agencies inanalyzing financial statements, GAO issued a guideentitled, Financial Reporting: Framework forAnalyzing Federal Agency Financial Statements(GAO/AFMD-91-19, March 1991). As an example, theguide includes an analysis of the financial statementsissued by the Department of Veterans Affairs forfiscal years 1986 through 1989; applies the attributes,measures, and techniques set forth in the framework;and discusses the results of the analysis.


Financial Statements and Audits

Since 1984, GAO has audited the financial statementsfor various federal agencies, including the GeneralServices Administration and the Departments ofAgriculture, the Air Force, Housing and UrbanDevelopment, and Veterans Affairs. These auditsimproved the quality of agency financial informationand identified significant problems in agency financialoperations and reporting.

The CFO Act requires that financial statements beprepared for trust and revolving fund operations andfor agency programs that are substantiallycommercial functions. For example, this wouldinclude programs for providing (1) insurance,(2) loans and loan guarantees, and (3) a service orthing of value for which a fee, royalty, or rent ischarged. The act also establishes a pilot projectwhereby certain agencies, listed in table 1, are toprepare agencywide financial statements for specificyears.



Table 1: AgenciesIncluded in FinancialStatement Pilot Project

Fiscal year

Agency 1990 1991 1992

Agriculture X X X

Labor X X X

Veterans Affairs X X X

General ServicesAdministration X X X

Social SecurityAdministration X X X

Housing andUrbanDevelopment X X

Army X X

Air Force X

Internal RevenueService X

Customs Service X

The CFO Act requires that the financial statements beaudited. These audits are the responsibility of theinspectors general but may be conducted by, and atthe discretion of, the Comptroller General, in lieu ofan inspector general.

Inspectors general may contract with independentpublic accountants to conduct financial statementaudits. GAO’s Guide to Federal Agencies’Procurement of Audit Services From IndependentPublic Accountants (GAO/AFMD-12.19.3,April 1991) provides advice in this regard.

Reports of audits conducted under the CFO Act mustbe completed by June 30 of the year following theclose of the fiscal year for which the financialstatements were prepared. Further, OMB is requiredto report to the Congress by June 30, 1993, on the



benefits, difficulties, and costs associated withpreparing these financial statements and having themaudited.


Annual Financial Management StatusReports

To heighten accountability and make the financialresults of programs clearly visible, agency CFOs areresponsible under the act for preparing annualreports and transmitting them to agency heads andOMB. These reports are due within 60 days of thesubmission of the auditor’s report on its audit of theannual financial statements (approximately August 31of each year) and are to include the followinginformation:

• a description and analysis of the status of agencyfinancial management;

• the annual financial statements and audit reportsprepared under the CFO Act, where applicable;

• a summary of the reports on internal accounting andadministrative control systems submitted to thePresident and the Congress under the FederalManagers’ Financial Integrity Act; and

• other information the agency head considersappropriate concerning agency financialmanagement.

GAO’s November 1990 report on the Department ofVeterans Affairs4 is an example of a report thatcontains this information. This type of report showsaccountability for government programs andresources and can be used for oversight anddecision-making when assessing departmentprograms and determining public policy.

In addition to these agency reports, the CFO Act callsfor OMB to annually submit to the Congress agovernmentwide financial management status reportat the time of the President’s budget submission. Thisreport is to include a description and analysis of thestatus of financial management in the executivebranch from a governmentwide perspective and a

4Financial Audit: Department of Veterans Affairs FinancialStatements for Fiscal Years 1989 and 1988 (GAO/AFMD-91-6,November 14, 1990).


Annual Financial Management Status

Reports

summary of the information contained in agency CFOannual financial status reports.


Financial Management Staffing

The lack of a cadre of highly qualified financialmanagement professionals has long hamperedeffective federal financial management operations.The CFO Act addresses the need for suchprofessionals to fill CFO and Deputy CFO positionsand to adequately staff financial managementoperations.

For example, the act requires OMB’s Deputy Directorfor Management to develop and maintain qualificationstandards for agency CFOs and their deputies and toadvise agency heads on selecting people to fill thesepositions. Also, the Deputy Director for Managementis responsible for (1) providing advice to agencies onthe qualifications, recruitment, performance, andretention of financial management personnel,(2) assessing the overall adequacy of the professionalqualifications and capabilities of financialmanagement staffs throughout the government, and(3) making recommendations on ways to improve thequality of those staffs.

The act specifically places with the agency CFOsresponsibility for recruiting, selecting, and trainingpersonnel to carry out agency financial managementfunctions. OMB’s February 27, 1991, guidance forimplementing the act (M-91-07) states that agencyCFOs should have authority to provide agencywidepolicy advice on financial management staffingmatters.

Many agencies have major components that performfinancial management operations. OMB’s guidancestates that agency CFOs are responsible for(1)approving job descriptions and skill requirementsfor those who head these components’ financialmanagement activities and operations and(2)participating in their annual performanceevaluation.


Financial Management Staffing

Overall, the government faces a major challenge inattracting and retaining an adequate number of peoplewith the skills needed to staff financial managementoperations. The 5-year financial management planscalled for by the act will provide a basis foridentifying and addressing potential staffing resourceproblems.

A continuing education policy for financial managersis also important in maintaining a well-trained andhigh-caliber financial management work force. Such apolicy is recommended by the Joint FinancialManagement Improvement Program5 in itsDecember 1990 report, Continuing ProfessionalEducation: Federal GS-510 Accountants.

5The Joint Financial Management Improvement Program is acooperative undertaking of OMB, the Department of the Treasury,GAO, and the Office of Personnel Management to improve financialmanagement practices throughout government.


The CFO Council

In November 1987, the CFOs that had beenadministratively named by agencies formed anadvisory body on governmentwide accounting andfinancial management policy. This body provided aforum to exchange ideas and consider issues ofcommon interest, such as modernizing financialsystems and improving the quality of financialinformation.

To continue these efforts, the CFO Act established aChief Financial Officers Council. The act specifiesthat the Council will be chaired by OMB’s DeputyDirector for Management. Other members will beOMB’s Controller, Treasury’s Fiscal AssistantSecretary, and the agency CFOs appointed under theact.

As specified in the act, the CFO Council’s functionsare to advise agencies and coordinate their activitieson financial management matters, such as(1) consolidating and modernizing financial systems,(2) improving the quality of financial data andinformation standards, (3) strengthening internalcontrols, and (4) developing legislation affectingfinancial operations and organizations.


Government Corporations

The CFO Act institutes changes in the financialmanagement of government corporations, such as theResolution Trust Corporation and the Federal DepositInsurance Corporation.

First, government corporations are required toannually prepare a report on their internal accountingand administrative controls, consistent with theFederal Managers’ Financial Integrity Act requirementfor reports by executive agencies. These reportsshould be based on annual reviews of thecorporation’s controls. Whenever the reviews detectsignificant problems, the corporations should developspecific corrective action plans.

Prior to enactment of the CFO Act, the GovernmentCorporation Control Act (31 U.S.C. 9105) requiredGAO to perform a financial statement audit ofcovered corporations at least once every 3 years. TheCFO Act changes the timing and responsibility forthese audits. Each corporation is now required tohave its financial statements audited annually by theinspector general or by an independent publicaccountant. The Comptroller General retains thediscretionary authority to conduct the audit.

The CFO Act also requires the head of the corporationto submit an annual management report to thePresident and the Congress no later than 180 daysafter the end of the corporation’s fiscal year. Toinform the Congress about the corporation’soperations and financial condition, these reports areto include information such as the corporation’saudited financial statements and report on internalcontrols.


Setting Accounting and AuditingStandards

Relevant accounting and auditing standards arecritical to the CFO Act’s financial statement and auditinitiatives. The act calls for agency financial systemsto comply with applicable accounting principles,standards, and requirements. Also, audits of financialstatements prepared under the act are to be done inaccordance with generally accepted governmentauditing standards.

The Budget and Accounting Procedures Act of 1950(31 U.S.C. 3511 (a)) directs the Comptroller General,in consultation with OMB and Treasury, to prescribeaccounting principles, standards, and relatedrequirements for executive agencies to follow. TheCFO Act provides that OMB’s Deputy Director forManagement is to establish governmentwide financialmanagement policies and requirements for executiveagencies.

To ensure the relevancy of federal accountingstandards, the Comptroller General, the Director ofOMB, and the Secretary of the Treasury have agreedto a cooperative approach to the standard-settingprocess by establishing the Federal AccountingStandards Advisory Board. This nine-memberadvisory board of knowledgeable individuals fromgovernment and the private sector will makerecommendations to the heads of GAO, OMB, andTreasury on proposed accounting standards designedto meet the needs of federal agencies and other usersof federal financial information.

The Board is studying a wide range of accountingstandards. In March 1991, the Board recommendedthat agencies continue to use, on an interim basis, theapplicable accounting standards contained in agencyaccounting policies, procedures manuals, and/orrelated guidance to prepare their financial statementsunder the CFO Act. Where these applicable standards


Setting Accounting and Auditing

Standards

differ from those of GAO’s Policy and ProceduresManual for Guidance of Federal Agencies (Title 2),agencies are to fully disclose the differences and thealternative accounting basis used in preparing theirstatements. On June 11, 1991, OMB adopted thisrecommendation (M-91-11).

Generally accepted government auditing standardsare issued by the Comptroller General in GAO’sGovernment Auditing Standards (1988 Revision), the“Yellow Book.” Updates to the standards will considerrecommendations from the newly establishedGovernment Auditing Standards Advisory Council.The Council will advise the Comptroller General onauditing standards issues throughout thestandard-setting process. It will be involved in theidentification, development, and issuance of revisionsto Government Auditing Standards as well asinterpretations of and guidance on the standards.


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