OMB should test agency financial management compliance

The Office of Management and Budget and the Government Accountability Office continue to disagree over how much assurance is necessary to determine compliance with federal financial management regulations.

GAO reaffirmed prior recommendations that OMB require agencies to provide positive assurance through comprehensive testing that they comply with the Federal Financial Management Improvement Act. OMB also should clarify the meaning of substantial compliance.

As in the past, OMB disagreed with GAO’s view on auditors providing positive assurance but said it would consider defining substantial compliance in future policy and guidance updates.

Although 19 of 24 major agencies received unqualified opinions on their fiscal 2005 financial statements, the number of agencies that did not substantially comply with federal financial management requirements has remained fairly constant, GAO said.

Agencies have made improvements, but many agencies’ financial management systems are still not able to routinely produce reliable, useful and timely financial information.

“We continue to be concerned that the full nature and scope of the problems have not yet been identified, because most auditors have only provided negative assurance in their FFMIA report,” said comptroller general David Walker in the report released today.

GAO views the continuing lack of compliance with FFMIA and the associated problems with agency financial systems to be significant challenges to improving the management of the federal government

For 2005, auditors for five agencies provided negative assurance that agency systems substantially complied with FFMIA under current guidance. This means that agency auditors only have to provide assurances that nothing glaringly wrong came to their attention about the agencies’ financial management systems. It does not, however, mean that the systems comply with FFMIA, GAO said.

The five agencies were the Commerce Department, Environmental Protection Agency, National Science Foundation, the Office of Personnel Management and the Social Security Administration.

By contrast, Labor Department auditors, for a second year, provided a positive assurance opinion that the agency substantially complied with the financial requirements. Positive assurance requires additional and more detailed testing of agency systems.

“That reporting practice adds more value,” GAO said in its report.

Auditors, however, are reluctant to provide positive assurance until OMB better defines substantial compliance. OMB would also need to establish guidance beyond permitting negative assurance.

To comply with FFMIA and address nonintegrated systems, inadequate reconciliations and lack of compliance with standard government accounting, a number of agencies are implementing new financial management systems, upgrading existing systems or moving to a shared-services provider under the financial management lines of business consolidation initiative. Several agencies, however, reported problems in the development and implementation of new financial management systems last year because they did not follow best practices, GAO said.

Positive assurance would prove only marginally useful, because other existing federal financial management initiatives already require similar testing and help agencies identify and correct FFMIA deficiencies, OMB controller Linda Combs said in response earlier this month.

Financial performance standards incorporated into the President’s Management Agenda, policy guidance on internal controls over financial reporting under Circular A-123 and financial standards included in the financial management Line of Business provide an accurate assessment of agency adherence to FFMIA, she said.

“We are both striving for the creation and use–for both government managers and taxpayers–of accurate, reliable and timely management information,” Combs said.

Although OMB is advancing financial management initiatives across government, leadership and support from Congress will be crucial in reforming federal financial management, GAO said.

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