Financial Reporting

Federal Financial Reports Improved But Far From Perfect

U.S. financial watchdogs testified before a House of Representatives subcommittee at the end of March on the improved, but still dismal, state of federal agencies’ financial reporting. While the speakers’ testimony shed light on recurring problems, it also illustrated that the agencies’ financial reporting has improved and probably will make further progress, provided it continues to be a top priority, subject to ongoing congressional scrutiny.

This year, as in the past, the combined federal agencies’ financial report was delivered on time, fraught with serious deficiencies.

Congressman Stephen Horn (R-Calif.) noted that federal agencies had made huge overpayments—a problem difficult for them to address if not accurately reported in timely financial statements. For example, the Health Care Financing Administration, a division of the Department of Health and Human Services, reportedly made $13.5 billion in inappropriate Medicare payments in the 1999 fiscal year. But according to the GAO, most agencies have not estimated the magnitude of improper payments made by their programs.

Horn and his colleagues have scheduled the hearing each March, for the last five years, to learn more about why agencies so often produce their reports late, incorrectly and only with great effort. Before the hearing, Horn had issued a “report card” that assigned to 24 major federal agencies an average grade of D+ in financial reporting.

Speaking before the committee were David M. Walker, GAO comptroller general; Joshua Gotbaum, OMB executive associate director and controller; and Donald V. Hammond, Treasury fiscal assistant secretary. The three agencies share responsibility for oversight of the consolidated federal financial statements.

Walker said that, since the agencies’ transition to audited financial statements in 1996, they “have gained valuable experience in preparing financial statements, which is beginning to pay off.” Hammond agreed.

Gotbaum, in a subsequent interview with the JofA, said federal agencies face two major new challenges: to use accounts that didn’t exist before the creation of the Federal Accounting Standards Advisory Board (FASAB) in 1990 and to install systems that track the new accounts and turn out accurate financial reports. “In some cases, we’ve even had to change our management practices and responsibilities,” he said. “It’s a big job.”

Still, Gotbaum saw two reasons for optimism. One was the end of the Y2K crisis. “To avoid problems, agencies put financial system upgrades on hold. But now that the Y2K goal has been met, they’re going ahead with the enhancements.”

In support of those efforts, OMB, the Treasury and the GAO are promoting a systems-testing process they established as part of the Joint Financial Management and Improvement Program. Under it, JFMIP analysts evaluate commercial software packages and, if they meet federal agencies’ requirements, certify them accordingly. “This enables agencies to buy systems with confidence that they actually can do the job,” Gotbaum said.

The other bright spot Gotbaum saw was the added credibility federal accounting standards have gotten from the AICPA’s recognition of FASAB’s accounting standards as GAAP. “It assures taxpayers we are accountable for resources they entrust to us,” he said.

Further, federal agencies appear to be adopting GAAP-based reporting faster than the states did. “The states began producing GAAP statements in the 1970s,” Gotbaum said. “In 1980, Standard and Poor’s told them if they didn’t get a clean opinion, it would hurt their credit ratings. Ten years later, only half the states had a clean opinion. In only four years—1996 through 1999—the U.S. government got that far.”

Nevertheless, Gotbaum is mindful of what remains to be done. “Getting clean opinions is a milestone,” he said. “But the ultimate goal is to combine financial information with performance data, reported automatically and routinely, for use in managing agencies and making budget decisions. And on that score, we still have a way to go.”


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