Financial System Weakness Presents a Formidable Challenge

The Federal Financial Management Improvement Act of 1996 (FFMIA) requires the 24 Chief Financial Officers (CFO) Act agencies to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) federal accounting standards,

FFMIA also requires GAO to report annually on the implementation of the act. This report, primarily based on GAO and inspectors general reports, discusses (1) the problems that continued to affect agencies systems' FFMIA compliance in fiscal year 2006 and (2) the initiatives under way to help move federal financial management toward FFMIA compliance.

Federal agencies have continued to make progress in meeting the requirements of FFMIA since the passage of the law in 1996. Most agencies though, have not yet progressed to the stage that their systems are substantially compliant, and some agencies have made little progress. Accordingly, agencies continue to fall short in their attempts to establish the financial systems needed to create the full range of information needed for effective day-to-day management.

In fiscal year 2006, auditors for 17 of the 24 CFO Act agencies reported that agencies' financial management systems did not substantially comply with at least one of the three FFMIA requirements. Based on audit reports, GAO identified six types of problems primarily related to agencies' systems. These problems with agency financial systems remain a significant obstacle to supporting effective management of the federal government.

With regard to improvement initiatives, GAO noted continued progress in two key areas: (1) agencies' required remediation plans and (2) the Office of Management and Budget's (OMB) efforts to address system implementation problems. All 12 of the remediation plans GAO reviewed included corrective actions, but several were missing key elements. Moreover, agencies continue to struggle with efforts to modernize their financial management systems.

This problem is particularly acute at the Department of Defense. Agency modernization efforts have been consistently hampered by failure to follow best practices in systems development and implementation, commonly referred to as disciplined processes.

As a result, these efforts far too often do not meet cost, schedule, and performance goals. To help address these problems, OMB has demonstrated continued progress in the implementation of the financial management line of business initiative. However, additional steps forward are needed to provide a foundation for this initiative.

Categories: Financial Management, Reporting requirements, Regulatory agencies, Noncompliance, Internal controls, Financial statements, Financial statement audits, Financial records, Financial management systems, Financial management, Accounting standards, Accountability