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 government-wide financial management priorities.  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.  This year, for the first time since the passage of the CFO Act over 20 years ago, 23 of the 24 CFO Act agencies obtained an opinion from the independent auditors on their financial statements.²⁴  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. Out of the 24 major “CFO Act” agencies, there were 21 clean opinions, 2 qualified opinions, and only one remaining disclaimer in FY 2011.  In addition, the number of auditor-identified material weaknesses stands at 31, an approximate 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 No. 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 and other limitations continue to prevent one major agency, and the Government as a whole, from achieving an 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 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 $115 billion in improper payments in FY 2011 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. However, initiatives as outlined below are resulting in progress with these issues and are putting the Government in a better position.

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 – The President launched the Campaign to Cut Waste last summer to reduce costs, identify and implement efficiencies, and root out wasteful expenditures across government.  Building on this effort, the Federal Government will continue to focus on removing unneeded real property from the Government’s books and eliminating improper payments. 
• Closing the Efficiency and Technology Gap in Financial Operations – The Federal Government are working to simplify the governance structure in an effort to unify the grants community and strengthen the audit framework for Federally-funded State and local activities.  In February, the President issued a memorandum directing OMB to work with stakeholders to improve Federal grants management.  In addition, 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

• Campaign to Cut Waste.  In an effort to reduce costs, identify and implement efficiencies, eliminate practices that are antiquated and unnecessary, and root out waste across government, the President launched the Campaign to Cut Waste in June of 2011.  Executive Order 13576 “Delivering an Efficient, Effective, and Accountable Government,” which established the Campaign to Cut Waste, called upon all agencies to reinforce the performance and management reform gains already achieved; systematically identify additional reforms necessary to eliminate wasteful, duplicative or otherwise inefficient programs; and publicize these reforms so that they may serve as a model across the Federal Government.  Building on this effort, the President issued an Executive Order on “Promoting Efficient Spending” that requires agencies to cut certain administrative costs in FY 2013 by not less than 20 percent below FY 2010 levels.  The Chief Financial Officers at each of the agencies are largely responsible for achieving these savings.  The CFO Council is responsible for reporting the result of these efforts to the President’s Management Council.  These efforts under the Campaign to Cut Waste are expected to result in billions of dollars in savings by FY 2013.
• Accelerating Efforts to Better Manage Federal Real Property.  The Administration is focused on improving the management of real property assets.  The Federal Government is the largest property owner in the country, but it is not using some of those assets productively.  The Administration supports efforts to remove unneeded real property from the Government’s books and reduce operating costs related to real 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 and to realize $3 billion in savings from the Government’s properties by September 30, 2012.  To date, Federal agencies have identified $1.5 billion of the President’s $3 billion goal through actions including reducing annual operating costs, reducing square footage through consolidating space within owned and leased buildings, increasing the impact of telework, selling owned properties, and improving energy efficiencies. To build on this effort and work in achieving more long-term savings, the President introduced the Civilian Property Realignment Act in the FY 2012 budget.  The proposal would create an independent Board to reduce and realign the Federal civilian property inventory.  The Board would cut bureaucratic red tape, resolve longstanding competing stakeholder interests, and help address the financial challenges that hinder efforts to dispose and consolidate Federal real property.  Expanding on the work toward the passage of the President’s proposal, the Administration has continued to make progress on achieving savings in real property by working with the Federal Real Property Council and the Real Property Advisory Committee to encourage greater collaboration across agencies.
• Addressing Improper Payments.  The Improper Payments Information Act of 2002 (IPIA) as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA), 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 and overpayment recoveries are pursued.  Addressing improper payments is a central component of Administration efforts to eliminate waste.  Over the past two years, 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 of 2010 (IPERA), which amends IPIA.  While agencies are continuing to implement these initiatives, we are already seeing real results. Based on information submitted by agencies in FY 2011, the reported government-wide error rate is 4.69 percent, a decrease from the FY 2010 rate of 5.29 percent.  The estimated improper payments reported for FY 2011 are $18 billion lower than if the error rate had remained at the higher rate of 5.42 percent reported for FY 2009, the first year of improper payment reporting under the Administration.  In addition, agencies reported recapturing more than $1.2 billion in improper payments to contractors and vendors in FY 2011, almost twice as much as was recaptured in FY 2010.  More information on agency improper payments and the Administration’s improper payment initiatives can be found at PaymentAccuracy.gov.

Closing the Efficiency and Technology Gap in Financial Operations

• 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.  OFFM is 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.  On February 28, 2011, the President issued a Memorandum instructing OMB to work with Federal and non-Federal stakeholders to review OMB Circulars and look for ways to reduce administrative burden for recipients while improving program outcomes for Federal grants.  OFFM convened two working groups, one focusing on Cost Principles and Audit Requirements for States, Localities, and Tribes, and another to look at the same policies for universities.  The recommendations of these two groups were submitted to OMB at the end of August.  On October 27, 2011, OMB issued M-12-01, creating the Council on Financial Assistance Reform (COFAR) to provide policy level leadership for the grants community to implement much needed reforms to improve effectiveness and efficiency in Federal grants.  The COFAR is working to develop these reforms based on the recommendations received from the grants community.
• Decreasing the Cost of Financial System Modernizations.  Complexity and inefficiency in the Federal Government’s financial management operations has led to an increasingly expensive environment for modernizing financial systems.  Also, once deployed, the Federal Government’s modern systems do not consistently meet our business needs or produce the right information to support decision-making.  In June 2010, OMB froze activity on CFO Act agency financial system plans pending their immediate review and approval.  To date, a total of 21 agencies have been reviewed and, where appropriate, the agencies have realigned 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.  These realignments have resulted in cost reductions for some of the projects reviewed.  Review of the agency financial system projects continues according to the risk associated with the projects.  In addition, Customer Control Boards were established 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. 

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.  Under the Administration’s Campaign to Cut Waste, the President’s June 13, 2011 Executive Order (EO), “Delivering an Efficient, Effective, and Accountable Government” established the Government Accountability and Transparency Board (GATB).  Under the EO, the Board is charged with providing recommendations to the President on enhancing the transparency of Federal spending and advance fraud detection efforts, data quality and fraud detection.  These recommendations will leverage the experience and lessons learned from the implementation of the Recovery Act and the Recovery Accountability and Transparency Board (RATB).  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 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.  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.  Access to both prime and now sub-award data offers the public 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.
• 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 in 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 is currently being piloted and will establish reliable reporting of how taxpayer dollars are being spent.
• 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: (1) improve payment accuracy; (2) improve administrative efficiency; (3) improve service delivery; and (4) 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.   So far, six pilots have been funded and are being implemented by lead Federal agencies in cooperation with state partners.  These pilots address multiple programs, including the Supplemental Nutrition Assistance Program (SNAP), Unemployment Insurance, Medicaid, the Earned Income Tax Credit (EITC), and the Treasury Offset Program. 

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 reported government-wide improper payment rate, from 5.29 percent in FY 2010 to 4.69 percent in FY 2011 and increasing the amount of recaptured improper payments by approximately 80 percent.  In addition, the agencies are on target to exceed the goal of $3 billion in savings from real property by September 30, 2012.  The steps outlined above leverage the tools and capacities in place today, and 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

²⁴ The Department of Homeland Security had the  Balance Sheet and the Statement of Custodial Activity audited and received a qualified opinion on these statements. The Department of State received a clean opinion on the Statements of Net Costs and the Statement of Budgetary Resources, and a qualified opinion on  the Balance Sheet and Statement of Changes in Net Position.   HHS received a clean opinion on all statements except the Statement of Social Insurance and the Statement of Changes in Social Insurance, both of which received a disclaimer of opinion.  The Department of Defense received a disclaimed opinion on all statements subject to audit.(Back to Content)