Financial Management: Providing a Foundation for Transition - AGA

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6government decision making. From their perspective,financial statements add little value toa government entity, yet preparing and auditingthem take resources away from value-added workthe office of the CFO (OCFO) could do to helpachieve an entity’s mission.“We are getting A’s on our tests but not learning anything.”—An executiveAppropriate means that the content and formof an organization’s financial reports reflect itspurpose, structure and operations. Governmentshave unique characteristics that are much differentfrom those of private companies, sayexecutives in our survey. Corporate financialstatements show investors the value and viabilityof a company, and the purpose of a companyis to make profits. The purpose of governmentis not to make profits, nor is the FederalGovernment going to be sold or go out of business.Instead of value, the information taxpayers,Congress and top leaders want is about governmentspending, cost-effectiveness and performance.Government financial statements do notprovide this information in their current privatesector-based form.Referring to the past 17 years of the CFOAct, one executive says, “Declare victory forthe first phase of the CFO Act and move onto the next phase.” The next chapter of theCFO Act story will be built on that victory, yetshould not be about marginal improvements infinancial reporting. Instead, it must be abouthow CFOs identified the right audiences forfinancial reports and gave them relevant, usefuland transparent information. In the face ofmounting deficits, such information will besorely needed.Internal controls need broaderfocus and integrationIn the wake of major private sector scandals, in2002 the Sarbanes-Oxley Act (SOX) called formore stringent attention to controls over financialreporting by corporations. OMB Circular A-123,Management’s Responsibility for Internal Control,revised December 2004 (A-123), is the FederalGovernment’s version of SOX. Nearly four yearsafter the revision of A-123, the government is atanother fork in the road. As with financial reports,one branch leads to better control over financialreporting and reducing fraud, waste and abuse.Most of the activity involved in this option takesplace within the OCFO and IG ’s office. The otherbranch expands the scope of A-123 internal controlsfrom a narrow focus on financial reporting to abroader application to programs and processes thatproduce the outputs needed to meet an entity’s mission.Most of the expanded scope’s work happensoutside the OCFO and the IG’s office and is doneby program managers. This is where A-123 candeliver the most value for programs and operations.Figure 1:Executives’ opinion of the effects ofOMB Circular A-12376%Positive19%Neutral or N/A5%Negative
7Financial reporting with a government-wide focus: the U.S. vs. the Canadian modelThe Government of Canada’s top-down approach to an annualgovernment-wide financial report has features that couldsolve problems in the bottom-up approach used by the U.S.Federal Government.The Federal Government’s consolidated financial reportfollows a closing package process that starts with funds,agencies and departments (entities) preparing individualfinancial statements and having them audited. Entityreports fall due 45 days after fiscal year close. The TreasuryDepartment’s Financial Management Service rolls up theindividual report results into the consolidated financial report,which is due 30 days later. GAO audits the consolidated financialreports and has given them disclaimer opinions for thepast 11 years. Some months after delivering its opinion, GAOissues findings and recommendations about material weaknessesand other issues of the consolidated report. For FY2007, this was about 8 months after close.There are problems with this bottom-up process. First,materiality is determined on an entity basis versus on a government-widebasis. Second, repeated disclaimer opinions donot inspire trust in federal financial management. Third, thereis a half-year or more lag in detailed reporting of governmentwidematerial weaknesses, which delays addressing them.Fourth, the current process for preparing, correcting andauditing financial reports is expensive, costing the governmenthundreds of millions of dollars a year.Canada’s top-down approach gives the national annual financialreport primacy over those of individual agencies andCrown Corporations. These entitiessubmit trial balance data during and atthe end of the fiscal year for the nationalfinancial statement process. The government’scentral auditor identifies andaudits material components, takingthe audit work to the entity that submittedthe data. An independent publicaccounting firm audits the nationalreport. After that, entities prepare theirown financial statements. Audit materialityis determined on a government-widebasis, not by individual entities.Canada regularly receives an unqualifiedaudit opinion on their consolidatedfinancial report. This increases trustin government figures. As important,Canada’s top-down national report andaudit enables a risk-based approach tosubsequent financial audits and reviewsof individual entities. Entity level auditorsuse materiality levels establishedon a government-wide basis.Rather than force the Canadian modelacross the U.S. Government, an approachfor 2009 could include some federaldepartments applying such a top-downapproach on their own to help maintainor obtain an unqualified opinion.Departments can have their componententities submit trial balances, so thatCFOs can see what is material to thewhole department, not just to some of itsparts. CFO Act components will still needto have their own audited financial reports.However, focusing component-levelreporting and auditing on departmentwideissues is a risk-based, cost effectiveway to obtain a clean opinion on thedepartmental financial report.
Page 1: Association of Government Accountan
Page 4 and 5: 2Table of contentsAbout the Associa
Page 6 and 7: 4Road to transformationReviewing th
Page 10 and 11: 8Positive opinions on A-123When the
Page 12 and 13: 10more likely to add value to opera
Page 14 and 15: 12• Better guidance and clearer r
Page 16 and 17: 14Cost/benefit analysis and targete
Page 18 and 19: 16• Many executives say their peo
Page 20 and 21: 18Some CFOs report success in reduc
Page 22 and 23: 20SystemsSurvey respondents listed
Page 24 and 25: 22the top of those that they want c
Page 26 and 27: 24Financial statements and audits:
Page 28 and 29: 26IG office, as it is when the audi
Page 30 and 31: 28ConclusionDesign by www.sparkdesi
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Financial Management: Providing a Foundation for Transition - AGA

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