Improving Government Financial Management Systems -- Lessons from a U.S. GAO Report

Posted by Bill Dorotinsky

Countries around the world are working to improve their public financial management (PFM) systems, and the U.S. is no exception. While for many countries the U.S. example may seem remote --- too unique in the authority of the Congress or too economically developed --- the similarities and lessons are more relevant than might appear at first glance. A recent GAO report, Highlights of a Forum: Improving The Federal Government's Financial Management Systems (GAO-08-447SP, April 2008), provides some fascinating insights into the state of PFM in the U.S.

As the title suggests, the publication is the summary of findings from a December 2007 forum convened by the Comptroller General of the U.S., that brought together U.S. Federal Government PFM experts from the internal audit, chief financial officer, and chief information officer community. The Forum was broadly a stock-taking exercise. Numerous PFM laws were enacted in the U.S. from 1990 on-wards, and the Forum took stock of the degree of implementation of these laws and of the performance of the PFM system in some aspects. The report provides more on the specific laws enacted during the 1990's, but generally they involved creating a chief financial officer structure in major agencies, and focused on improving internal controls, accounting, and financial reporting systems across the government.

Context

As background, it is important to realize that the U.S PFM system has been evolving for more than 200 years (with some foundations laid during the colonial period). Much of its early PFM history revolved around accounts settlement and treasury operations, as well as financial reporting and accounting. From 1921, auditing and budgeting took-on greater import with the establishment of the General Accounting Office (now Government Accountability Office) and Bureau of the Budget (now the Office of Management and Budget). But even these reforms were aimed mainly at central agencies undertaking treasury management, budgeting, and auditing. Somewhat less attention was paid to directly building PFM systems within line departments or agencies. These systems were developed of necessity, but in a truly deconcentrated manner, absent government-wide standards. Some reforms were driven from Congress and Congressional agents (GAO), others by the President and executive agencies (Treasury, OMB).

Highlights

The GAO Forum Highlights noted some interesting themes that will be familiar to international PFM practitioners.

• Defining the role of the financial officer. The U.S. Federal Chief Financial Officer community is struggling to define its role. The fragmentation or stove-piping of various PFM reforms over the years has resulted in separate budget, internal audit, external audit, and financial officer (accounting) communities. For the CFO community, the laws of the 1990's emphasized financial statement production, but the community is wrestling with whether that is their true value-added. Should CFO's be more involved in supporting program operations and management? Producing information for strategic decision-making? More directly involved in making decisions? (Obviously, these need to be integrated with the existing budget offices, treasury payment operations, and other sub-systems that are doing some of this already.)
• Automation is only a support tool. A systems perspective is necessary, from data input and transaction recording, data analysis, reporting, and use of information in decision-making. Large investments in technology will not by themselves solve the problems of reporting and financial management.
• Clean audit opinions are not an end in themselves. While important, these are only one objective. The Highlights indicate that for 2007, 19 of 24 CFO Act of 1990 agencies received clean audit opinions. However, it also noted that "many agencies do not have financial management systems that produce timely, reliable, and useful financial information with which to make informed decisions and ensure accountability on an ongoing basis."
• Focusing only on narrow financial management objectives (e.g. financial reporting and clean audit opinions) can lead to stove-piped financial operations, disconnected from program and agency management. Financial systems need to meet the requirements of numerous stakeholders and objectives, including Congress, the President and OMB, Treasury, agency management, program management, and the general public. At present, the CFO community sees financial management as narrowly focused on production of financial statements that seem to be of little use to anyone.
• Absence of government-wide standards and standard processes has allowed the growth of many different IT and financial management systems. Not all of the differences are perceived as having a firm foundation in different business needs of the agencies.
• Project management skills are in short-supply across the government for IT systems, and contracting out for these services has limits. To lower risks from these large investments and ensure accountability for system contracts, some in-house skills for overseeing these investments are needed. The growing use of contractors for system development, implementation and management could facilitate or impede development of the government's financial management knowledge base.
• Agencies have tended to to focus on IT or financial management system ownership, rather than on the value-added activities of financial analysis, personnel and process management, financial oversight.
• To customize or not to customize software. The Highlights report some difference of views, with some advocating for adopting off-the-shelf software and forcing changes to business processes to meet the software as purchased, or some indicating the need to customize. Customization obviously adds to costs, and some apparently believe customization is done to perpetuate existing inefficient business processes unrelated to agency business needs. A need for more standard, government-wide processes was identified. (The report notes that OMB has been moving in this direction with its 'lines of business' efforts.)
• For IT systems, some lessons for reducing risks identified in the report include: (1) hire experienced project managers and system integrators; (2) adhere to a disciplined project management process: (3) develop government-wide standards for core business processes; (4) use independent verification and validation of system implementation (the report notes using in-house, administratively influential senior officials that are not directly involved in the project); (5) periodic re-evaluation of system implementation, including whether to halt implementation or move forward on a different path); and, (6) use of executive oversight bodies for the project what have sufficient and appropriate authority to remove impediments to project implementation and also support continuation or project cancellation.
• Nature of CFO appointments. Interestingly, there was also some debate whether agency CFO's should be professionals, political appointees with authority, or perhaps some combination.

PFM Blog comments

Some of the lessons of PFM reform come hard (and at great expense), even for developed countries with an abundance of skilled human resources. Many of the lessons the U.S. is learning are identical to those from countries around the world and from international institutions such the World Bank and IMF. For the U.S., the fragmented development of the PFM system has left many legacy systems that have impeded progress towards a coherent PFM system over-all. This GAO-convened forum is a good step forward in building some consensus among practitioners. But even this report comes across as somewhat narrow. A country's PFM system covers the entire process from budget and fiscal policy formulation, through execution (including procurement, physical and financial asset management, payment, recording and accounting), reporting and audit. It covers policy and process, personnel, and outcomes. The report and Forum discussion seem to come mainly from the financial reporting and accounting side. For the U.S., size and level of development, in addition to its unique political system and history, pose challenges for a coherent PFM system.