CHIEF FINANCIAL OFFICERS ACT OF 1990 AND FEDERAL FINANCIAL MANAGEMENT ACT OF 1994

The Chief Financial Officer Act of 1990 (CFO Act) provided tight financial control over agency operations and the central coordination of financial management functions to support an efficient administration of the executive branch. It centralized organization of federal financial management, required long-term strategic planning to sustain modernization, and began the development of projects to produce audited financial statements for the federal government. As Title IV of the Government Management Reform Act of 1994, the Federal Financial Management Act of 1994 extended the scope of the CFO Act by requiring agency-wide financial statements and a consolidated government-wide financial statement.

RATIONALE FOR CFO ACT

By the late 1980s, it was apparent that the financial systems of the federal government were in a deplorable state. The savings and loan crisis had developed undetected, financial scandals had occurred in the Department of Housing and Urban Development, numerous high-risk programs had been identified, and seriously deficient systems of internal control were common.

Financial management systems were obsolete and inefficient. Management, program funding, and revenue-generating activities were impaired. Hundreds of separate accounting systems made monitoring, comparison, and auditing difficult. Enormous investments to upgrade financial systems were failing to achieve the benefits of integration because planning and coordination were lacking.

No one federal official or agency had statutory responsibility for coordination of federal financial management practices. Congress was concerned that management functions and innovations were being neglected as a result of the preoccupation of the Office of Management and Budget (OMB) with the budget.

In 1990 the CFO Act was adopted to improve the general and financial management practices of the federal government by establishing a structure for the central coordination of financial management. The act provided for the implementation of accounting systems and internal controls to produce reliable financial information and to deter waste, fraud, and abuse. Additionally, the act required extensive changes in reporting to improve the information available to administrators and to the Congress.

REQUIREMENTS OF THE CFO ACT AND ITS 1994 EXPANSION

The CFO Act changed federal financial management in three ways: It created a new organizational structure for financial management, it encouraged the development of new and compatible accounting systems, and it required new forms of reporting.

Three basic changes to organizational structure were introduced in the CFO Act to provide for central coordination of financial management. In addition, a coordinating council was created. First, to heighten management priorities and centralize primary accountability, the act provided for the statutory appointment by the president of a deputy director for management to report directly to the director of OMB. This individual, one of two deputy directors at OMB, is the chief financial officer of the United States with responsibility for general management and financial management policies. His or her responsibilities include guiding improvements in government-wide financial systems, monitoring the quality of financial management personnel, and working to ensure that the executive branch has a financial structure capable of producing quality financial information.

The second component of organizational reform was the creation within OMB of the Office of Federal Financial Management under the control of the deputy director for management. A controller, who functions primarily in the area of financial management, heads this office and serves as principal adviser to the deputy director for management.

The final component of organizational reform was the designation of CFOs and deputy CFOs for fourteen cabinet departments and eight major agencies of the executive branch. Accounting, budgeting, and financial activities were consolidated under agency CFOs who report directly to agency heads. These positions were created to foster organizational uniformity in management operations and to facilitate coordination of federal financial management. Additionally, the chief financial officers council was created to coordinate improvements in federal financial management among agencies.

Under the CFO Act, the deputy director of management has overall responsibility for the development of management systems, including systems to measure performance. Each agency CFO has specific responsibility to develop and maintain integrated financial management systems. These responsibilities include directing the design of agency financial management systems and enhancement projects as well as overseeing assets management systems that encompass cash management, debt collection, and inventory management and control.

In creating new financial management systems, the primary objective was to develop comprehensive financial management systems that would integrate agency accounting, financial information, and financial management systems. Priorities include the elimination of duplicate systems and establishment of strong internal controls. With respect to accounting systems, conformity with applicable accounting principles and standards were required. Integrated systems were needed to support the production of financial statements and to generate quality financial information for a variety of decision-making purposes.

To encourage the availability of sufficient resources to adequately support financial systems, the deputy director of management was required to review and monitor agency budgets for financial systems and to assess the adequacy of agency personnel. The Office of Federal Financial Management was funded under a separate and distinct line item, and agency CFOs were empowered with budget responsibility for financial management functions.

The Federal Financial Management Act provided specific improvements in financial management. To reduce the cost of disbursements, it required the use of electronic transfers in making wage, salary, and retirement payments. To encourage debt collections, it provided that agencies could retain a percentage of delinquent debts collected. To promote internal markets and competition, it established four franchise funds on a pilot basis. To reduce duplication, it empowered the OMB director to consolidate and streamline management reporting processes.

The CFO Act altered reporting by instituting five-year strategic planning reports, the production of financial statements, and issuance of annual management reports. The director of OMB was required to develop and annually to revise government-wide plans with a five-year horizon for improving the government's financial management systems. The director's report is supported by agency reports that identify changes needed to achieve modern, integrated financial systems. Deliberate long-range planning is intended to curb the proliferation of unique systems and to provide for the common elements necessary for central reporting. The five-year plans to improve financial management include details about the type and form of information that is to be produced, including kinds of projects proposed to integrate systems, equipment, and personnel needs, and the costs of implementation.

Under the CFO Act, all covered departments and agencies are required to prepare annual financial statements for trust funds, revolving funds, and commercial activities. A pilot project provided for the preparation of agency-wide statements in six agencies. A gradual pilot approach was adopted with respect to the production of agency-wide financial statements because federal accounting standards were inadequate. The Federal Accounting Standards Advisory Board (FASAB) was established one month before the CFO Act was passed.

The production of agency-wide financial statements and a consolidated government-wide financial statement for the executive branch was intended to strengthen accountability and to provide the information needed for effective management, including performance evaluation. For example, financial statements include information about the ways budgeted funds were spent, the proportion of taxes and other receivables collected, the condition of physical assets, and the extent of financial obligations associated with various commitments.

Under the CFO Act, the director of the OMB is required to submit an annual financial management report to Congress. This report analyzes the status of financial management in the executive branch; summarizes agency financial statements, audits, and audits reports; and reviews reports on internal accounting and administrative controls. Also, government corporations are required to file an annual management report in addition to financial statements, which have to include a statement about internal accounting and administrative controls. Management reports must include plans for correcting internal control weaknesses.

RESPONSIBILITIES OF AUDITORS

The Federal Financial Management Act required the production and audit of agency-wide financial statements covering all accounts and activities of the twenty-three CFO-covered agencies and a consolidated government-wide financial statement for the executive branch as a whole. Additionally, the Act provided that the director of OMB may require audited financial statements of components of agencies such as the Departments of the Army, Air Force, and Navy. All financial statements produced under the CFO and Federal Financial Management Acts must be audited in accordance with generally accepted government auditing standards.

The inspector general of an agency determines who performs the audit. In the absence of an inspector general, the agency head makes this determination. The inspector general, certified public accountant (CPA) firms, or other qualified parties may perform audits. Additionally, the comptroller general may conduct the audit at his or her discretion or at the request of Congress. The Federal Financial Management Act specifies that the comptroller general has responsibility for auditing the consolidated government-wide financial statements of the executive branch.

Special provisions apply to the auditing of government corporations. The CFO Act replaced a requirement that these corporations be audited at least once every three years by the comptroller general with a requirement of annual audits. The corporation was assigned responsibility for arranging the audit, and the comptroller general retained authority to review financial statement audits performed by others.

see also Government Accounting

bibliography

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Chief Financial Officers Act of 1990 (1990). U.S. Congressional and Administrative News, 101st Congress 2nd Session, Vol. 6, Legislative History (Public Law 101–576). St. Paul, MN: West.

Ewer, Sid R. (1997). "Federal Government Accountability." CPA Journal, 67(3): 22–27.

Government Management Reform Act of 1994 (1994). U.S. Congressional and Administrative News, 103rd Congress 2nd Session, Vol. 3, Laws (Public Law 103–356). St. Paul, MN: West.

Government Management Reform Act of 1994 (1994). U.S. Congressional and Administrative News, 103rd Congress 2nd Session, Vol. 3, Legislative History (Public Law 103–356). St. Paul, MN: West.

Hodsoll, Frank (1992). "Facing the Facts of the CFO Act." Public Budgeting & Finance, 12(4): 72–74.

Jones, L. R. (1993). "Counterpoint Essay: Nine Reasons Why the CFO Act May Not Achieve Its Objective." Public Budgeting & Finance, 13(1):,87–94.

Jones, L. R., and McCaffery, Jerry L. (1997). "Implementing the Chief Financial Officers Act and the Government Performance and Results Act in the Federal Government." Public Budgeting & Finance, 17(1): 35–55.

Jones, L. R., and McCaffery, Jerry L. (1992). "Federal Financial Management Reform and the Chief Financial Officers Act." Public Budgeting & Finance, 12(4): 75–86.

Jones, L. R., and McCaffery, Jerry L. (1993). "Implementation of the Federal Chief Financial Officers Act." Public Budgeting & Finance, 13(1): 68–76.

Steinberg, Harold I., and Von Brachel, John (1996). "The CFO Act: A Look at Federal Accountability." Journal of Accountancy, 181(3): 55–57.

Jean E. Harris