Management's Discussion & Analysis

Financial Management Progress and Priorities

The Office of Federal Financial Management (OFFM) within the Office of Management and Budget (OMB) is responsible for the Federal Government´s financial management policy and manages governmentwide financial management priorities. As required in the Chief Financial Officers (CFO) Act (31 U.S.C. 3512), OMB is required to provide an annual report on the status of federal financial management and the goals for improvement¹⁷. This section summarizes recent progress and outlines several key initiatives intended to achieve improved results moving forward.

Progress To Date

Since the passage of the CFO Act of 1990, the Federal financial community has made important strides in instilling strong accounting and financial reporting practices. Over the past 20 years, an increasing number of Federal agencies have initiated and sustained disciplined and consistent financial reporting operations, implemented effective internal controls around financial reporting, and have successfully integrated transaction processing and accounting records. These efforts have resulted in improved results on financial statement audits, with 20 out of the 24 major "CFO Act" agencies achieving a clean opinion in FY 2010. In addition, the number of auditor-identified material weaknesses stands at 31, a more than 50 percent decline from the 61 material weaknesses that were identified at the start of this past decade.

The foundations for the accomplishments achieved over the past 20 years are numerous. In particular, and as envisioned by OMB Circular A-123, Management´s Responsibility for Internal Control, the Federal financial management community approached these reporting challenges holistically, integrating both programmatic and financial management disciplines in building successful financial reporting programs. Given the size and complexity of the programs and transactions involved, these results would not have been possible without the advances in Federal financial management.

Ongoing Challenges

Despite the progress identified above, critical gaps in financial management performance remain. Weaknesses in basic financial management practices continue to prevent four major agencies, and the Government as a whole, from achieving a clean audit opinion. The cost of maintaining effective financial operations is increasing, driven largely by the growing and high costs agencies are incurring to modernize agency financial systems. While Federal agencies have mobilized resources to meet the new and growing demand for real-time transparency into where recovery-related and other Federal dollars are going, more work is necessary to sustain these solutions in a cost-effective manner over the long term. Federal agencies reported approximately $125 billion in improper payments in FY 2010 and continue to maintain thousands of unneeded real property assets on their books. These instances of Government waste compromise the integrity of Federal programs, lead to damaging inefficiencies, and erode citizens´ trust in Government.

Improvement Initiatives

It has never been more vital that the Government´s financial managers are performing at high levels to meet these challenges and are maximizing the return on every dollar invested in financial management activities. To do so, three areas emerge as the optimal priority areas for the Federal financial management community:

• Eliminating Waste – Efforts to cut Government waste should be prioritized through renewed focus and emphasis on eliminating improper payments, removing unneeded real property from the Government´s books, and strengthening the audit framework for Federally-funded State and local activities.
• Closing the Efficiency and Technology Gap in Financial Operations – Expensive and long-term investments in technology solutions to support financial reporting and accounting must be reconsidered in favor of shorter-term, lower cost, and easier to manage solutions that meet critical business needs, drive operational efficiency, and leverage shared service solutions where cost-effective.
• Promoting Accountability and Innovation through Open Government – Efforts should be directed towards improving the content and quality of currently reported information to provide better value to taxpayers and Government decision-makers. Further, solutions must be developed and deployed in partnerships that extend beyond the borders of the Federal financial management community, to involve Federal and State stakeholders, and most critically, members of the public.

Eliminating Waste

• Addressing Improper Payments. The Improper Payments Information Act of 2002 (IPIA) created a framework for assessing every Federal program and dollar for risk of improper payments, annually measuring the accuracy of payments, and initiating improvements to ensure that errors are reduced and eliminated. Addressing improper payments is a central component of Administration efforts to eliminate waste. Over the past year, the President has issued Executive Order 13520 on Reducing Improper Payments, a Presidential memorandum on intensifying and expanding agency efforts to recapture improper payments, and a Presidential memorandum directing that a Do Not Pay List be established to help prevent improper payments from being made to ineligible recipients. In addition, the President also signed into law the Improper Payments Elimination and Recovery Act, which amends IPIA. While agencies are currently implementing these initiatives, we are starting to see early results. Based on information submitted by agencies in their FY 2010 Performance and Accountability Reports, the Government-wide error rate is 5.49 percent, a decrease from the FY 2009 rate of 5.65 percent or $3.8 billion less in estimated improper payments. In addition, agencies recaptured $687 million in improper payments to contractors and vendors in FY 2010, an approximately 300 percent increase from FY 2009. More information on agency improper payments and the Administration´s improper payment initiatives can be found at PaymentAccuracy.gov.
• Accelerating Efforts to Better Manage Federal Real Property. The Administration is focused on improving the management of real property assets. It supports creating incentives to dispose of unneeded Federal real property, including the incentive for all Federal agencies to retain net proceeds from the sale of excess property. On June 10, 2010, the President signed a memorandum on Disposing of Unneeded Federal Real Estate–Increasing Sales Proceeds, Cutting Operating Costs, and Improving Energy Efficiency, which directed Federal agencies to accelerate efforts to remove excess and surplus property. This effort is expected to produce billions of dollars in cost savings through reducing annual operating costs, reducing square footage through space realignment efforts such as consolidating existing space within owned buildings and reflecting the impact of telework on properties, as well as through the proceeds retained through the sale of a building. To date, Federal agencies have identified $1.7 billion of the $3 billion in non-defense savings opportunities that the President has required agencies to achieve by the end of FY 2012.
• Improving Grants Management. Each year, the Federal Government provides over $500 billion in grants to State, local and tribal governments, colleges and universities, and other non-profit organizations –roughly one-sixth of the Federal budget. In 2009, the American Recovery and Reinvestment Act (ARRA) authorized an additional $275 billion in grants to recipients through new ARRA programs and existing programs. In 2009, OFFM initiated and completed a pilot project for early review of and reporting on internal controls for major ARRA programs using the Single Audit process, as required under OMB Circular A-133. In 2010, OFFM continues the Phase 2 of the project for fiscal year 2010 single audits. OMB also requires the agencies to review the audit findings and highlight the high risk areas along agency corrective action plans. This process, along with other efforts to strengthen A-133, is intended to mitigate instances of fraud, waste, abuse, and improper payments in Federal grant programs. OFFM also committed to working with the grants community to make the grant process efficient and citizen-friendly through streamlining grant applications and reports and modernizing the grants system, Grants.gov.

Closing the Efficiency and Technology Gap in Financial Operations

• Decreasing the Cost of Financial System Modernizations. Complexity and inefficiency in our financial management operations has led to an increasingly expensive environment for modernizing financial systems. Also, once deployed, our modern systems do not consistently meet our business needs or produce the right information to support decision-making. In June, OMB froze activity on agency financial system plans pending their immediate review and approval. To date, a total of 20 agencies have reviewed and aligned their financial system plans through splitting projects into smaller, simpler segments with clear deliverables; focusing on the most critical business needs first; and ensuring ongoing, transparent project oversight. As a result, agencies are more focused on their core business priorities while still being held accountable for demonstrating results. Not only have these reviews helped to change how government does business, they have also helped to reduce budget costs. In addition, several high-risk projects were identified during the reviews, which will be under close scrutiny and subject to intense oversight to include continued review by OMB, in consultation with the Financial Systems Advisory Board. Additional next steps include the establishment of Customer Control Boards that will help to organize agencies that are leveraging similar solutions. This will allow the agencies to pool resources, share strategies, and organize solutions across the Government in an effort to support the combined interests of agencies to modernize at a pace and scope that fits their individual business needs.
• Implementing Common Solutions for Financial Management Functions: Existing and new capabilities are being evaluated to automate and centrally implement financial management activities. For example, through a common electronic vendor invoicing solution, it is possible to input vendor invoice data rather than manually keying the information into a financial system. The Treasury Department will identify and pilot potential solutions to capture vendor invoices. In addition, Treasury is also working aggressively to identify electronic solutions to assist with intragovernmental transactions.

Promoting Accountability and Innovation through Open Government

• Improving Data Quality for Federal Spending Information. Ensuring the quality of Federal spending information has been central to OMB´s efforts in implementing the Federal Funding Accountability and Transparency Act. In December 2009, the Administration established the Open Government Directive (M-10-06), which required each agency take specific steps to ensure that data is reported quickly, efficiently, and accurately. The Directive further required agencies to designate a senior official to be accountable for the quality, objectivity of, and internal controls over, Federal spending information publicly disseminated through USAspending.gov. The Open Government Directive was quickly followed by the Data Quality Framework in February, which provides specific guidance on data quality plans as they relate to Federal spending data. Pursuant to this guidance, Federal agencies developed these specific data quality plans that outline a governance structure, risk assessment process, governing principles and controls, communications, and monitoring of Federal spending information. This framework heavily relies on agencies´ existing internal control programs as required under OMB Circular A-123. Agencies are required to modify and enhance internal controls over Federal spending data to meet the changing environment of disseminating more information to the public at a quicker pace. In April and August 2010, OMB issued guidance to Federal agencies on improving information quality and required the reporting of grants and contracts sub-award information. Both prime Federal contractors and prime Federal grant recipients are required to report sub-award information, for display into USAspending.gov. Access to both prime and now sub-award data offers the public with unprecedented amounts of information on Federal spending. This increased transparency will ensure that the Federal Government is held fully accountable for the administration of Federal programs. Notwithstanding these accomplishments, efforts must continue to address existing and burgeoning data quality concerns. Informed by stakeholder input and recommendations, OMB and Federal agencies will work to ensure that high quality Federal spending information is available to promote accountability and ultimately be used to improve the performance of our Federal programs.
• Partnering For Solutions. The Partnership Fund for Program Integrity Innovation (Partnership Fund) was established by the Consolidated Appropriations Act of 2010 (P.L. 111-117) to fund pilot projects to improve delivery of Federal assistance programs administered through state and local governments or where Federal-state cooperation could be beneficial. Funding supports pilots and evaluations of promising innovations that confront these challenges in Federal, state and/or local administration. Partnership Fund pilots advance four goals:
  • improve payment accuracy;
  • improve administrative efficiency;
  • improve service delivery;
  • reduce access barriers for eligible beneficiaries.
  OMB is actively working with a Collaborative Forum of federal agencies, state and local administrators, industry and other stakeholders to identify pilot opportunities that could inform the expansion of innovations to other state or local agencies as well as further potential administrative or legislative action to facilitate these goals. In aggregate, pilots must save at least as much as they cost.

• Strengthening the Reporting Model. The Federal Government´s "reporting model" defines the information that is included in federal entity financial statements and other required supplemental information (e.g., Management´s Discussion and Analysis) and the scope of internal controls related to financial reporting. Inclusion in the financial statements or required supplemental information also affects the nature and extent of the auditor´s responsibilities. The overall goal of this initiative is to maintain public faith and confidence in Federal financial management by proposing improvements to the usefulness of financial reports to decision makers and the public and strengthening audit requirements on areas where financial risks are the most significant. Particular emphasis is being placed on obtaining improved information on the cost of Government activities and the results achieved. OMB, working with the CFO Council, developed a new statement of spending that focused on how and where Federal money was spent. This new statement will be piloted in FY 2011and will establish reliable reporting of how taxpayer dollars are being spent.

The sweeping challenges we face in the Government today require our financial managers to move beyond the status quo and to generate a higher return on investment for our financial management activities. The Financial Management Community has made critical progress- decreasing the Government-wide Improper Payment rate resulting in $3.8 billion less in estimated improper payments, increasing the amount of recaptured improper payments by approximately 300 percent, and identifying $1.7 billion in non-defense saving opportunities with real property. The steps outlined above leverage the tools and capacities in place today, but refocus energies on critical and emerging priorities – cutting wasteful spending, improving the efficiency of our operations and information technology, and laying a foundation for data quality and collaboration as we enter a new era of transparency and open Government.

Footnotes

¹⁷ The CFO Act requires OMB to submit to Congress an annual “financial management status report,” the relevant components of which are included in this Financial Report. Specifically, the “Financial Management Progress and Priorities” section of the MD&A updates and outlines the financial management priorities and planned actions associated with these priorities. Also, specific data on the results of Federal agency financial management efforts (e.g., audit results, material weakness totals, etc.) are included in the Other Accompanying Information Section of this Financial Report.(Back to Content)