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================================================================ COVER

Accounting and Financial Management Division

September 1991




=============================================================== ABBREV

  CFO - Chief Financial Officer
  OMB - Office of Management and Budget
  GAO - General Accounting Office

============================================================ Chapter 0

The Chief Financial Officers (CFO) Act of 1990 (Public Law 101-576)
marks the beginning of what promises to be a new era not only in
federal management and accountability, but also in efforts to gain
financial control of government operations. 

The government has a responsibility to use timely, reliable, and
comprehensive financial information when making decisions which have
an impact on citizens' lives and livelihood.  Despite good intentions
and past efforts to improve financial management systems, this is
still not done. 

The Congress mandated financial management reform by enacting the CFO
Act, which was signed into law by President Bush on November15,
1990.  This is the most comprehensive and far-reaching financial
management improvement legislation since the Budget and Accounting
Procedures Act of 1950 was passed over 40 years ago.  The CFO Act
will lay a foundation for comprehensive reform of federal financial
management.  The act establishes a leadership structure, provides for
long-range planning, requires audited financial statements, and
strengthens accountability reporting. 

Federal financial managers, auditors, and program managers at all
levels of government will be affected as agencies take actions
required under the CFO Act to improve financial management systems
and information.  Therefore, it is essential that the CFO Act's
provisions are fully understood. 

This booklet will help agency managers and other interested parties
(1) become familiar with the CFO Act's principal features, (2)better
understand the actions needed to successfully implement the act, and
(3) identify the sources for additional information to assist in
carrying out the act's provisions. 

Charles A.  Bowsher
Comptroller General
of the United States

============================================================ Chapter 1

Strong centralized leadership is key to solving the government's
long-standing financial management problems.  The Congress, the
administration, GAO, and others have supported this kind of
leadership for federal financial management. 

The CFO Act provides for such leadership by giving the Office of
Management and Budget (OMB) broad, new authority and responsibility
for directing federal financial management, modernizing the
government's financial management systems, and strengthening
financial reporting.  The act also creates a new position in OMB--the
Deputy Director for Management, who is to be the government's chief
official responsible for financial management. 

While the CFO Act emphasizes improved financial management, it also
charges OMB's Deputy Director for Management with overseeing many of
the federal government's general management functions.  These
functions include information policy, procurement policy, property
management, and productivity improvement. 

The act specifies that the Deputy Director for Management's financial
management functions shall include

  establishing governmentwide financial management policies and
     requirements and monitoring the establishment and operation of
     financial management systems;

  monitoring resources required to effectively operate, maintain, and
     enhance financial management systems through activities such as
     reviewing agency budget requests for financial management
     systems and operations;

  reviewing and, where appropriate, recommending to the Director of
     OMB changes to the budget and agency legislative proposals to
     ensure that they are in accordance with OMB's financial
     management plans;

  overseeing and making recommendations to agency heads on the
     administrative structure of agency financial management

  monitoring the financial execution of the budget; and

  ensuring that the government has a highly qualified cadre of
     financial management professionals. 

The CFO Act also establishes a new Office of Federal Financial
Management in OMB to carry out these governmentwide financial
management responsibilities.  To head this office, the act
establishes the position of Controller, an individual who is to
possess "demonstrated ability and practical experience in accounting,
financial management, and financial systems." This individual will
handle day-to-day operations to ensure that financial operations are
being properly carried out governmentwide. 

Both the Deputy Director for Management and the Controller are to be
appointed by the President with the advice and consent of the Senate. 

============================================================ Chapter 2

Influential financial management leadership is as important at the
agency level as it is at OMB.  For this reason, an agency CFO must be
a key figure in an agency's top management team. 

To provide a sound leadership structure linked to OMB's financial
management responsibilities, the CFO Act creates chief financial
officer positions in 23 major agencies.  For most of the agencies,
the CFO is to be a presidential appointee and is to be assisted by a
deputy chief financial officer.  Both are to have extensive financial
management experience. 

The CFO Act specifies that OMB's Deputy Director for Management is to
develop and maintain qualification standards for agency CFOs and
their deputies.  On June 6, 1991, OMB issued interim standards, which
provide guidance to agencies on the types of experience, knowledge,
skills, and abilities needed by agency CFOs. 

An agency CFO is to report directly to the agency head on financial
management matters.  The CFO's responsibilities are to include the

  developing and maintaining integrated accounting and financial
     management systems;

  directing, managing, and providing policy guidance and oversight of
     all agency financial management personnel, activities, and

  approving and managing financial management systems design and
     enhancement projects;

  developing budgets for financial management operations and

  overseeing the recruitment, selection, and training of personnel to
     carry out agency financial management functions;

  implementing agency asset management systems, including systems for
     cash management, credit management, debt collection, and
     property and inventory management and control; and

  monitoring the financial execution of the agency budget in relation
     to actual expenditures. 

On February 27, 1991, OMB issued guidance (M-91-07) for preparing
organization plans required by the CFO Act.  That guidance details
the authorities, functions, and responsibilities that a CFO is to
have for compliance with the act. 

============================================================ Chapter 3

The responsibility for developing and operating financial management
systems is often fragmented between accounting organizations and
program components.  This leads to costly systems development
failures and poorly controlled systems that are unresponsive to the
needs of agency managers. 

To consolidate responsibility for an agency's financial management,
the CFO Act requires that

     "an agency Chief Financial Officer shall oversee all financial
     management activities relating to the programs and operations of
     the agency."

Under the act, an agency CFO's responsibility will extend to every
aspect of financial management related to operating agency programs. 
Governmentwide organizational change is needed to vest the CFOs with
authority related to accounting, budget execution, and other
financial management operations.  This will ensure that one person
who is part of top management has overall responsibility for
establishing and implementing effective financial management
policies, internal controls, and financial management systems. 

============================================================ Chapter 4

For years, serious financial management system problems have been
reported by audits and by agencies themselves under the Federal
Managers' Financial Integrity Act (31 U.S.C.  3512 (b), (c)).  These
reports paint a bleak picture of a government with antiquated
financial systems that do not satisfy today's financial information

To correct this situation, the CFO Act mandates that agency CFOs are
to develop and maintain agency financial management systems that
comply with

  applicable accounting principles, standards, and requirements;

  internal control standards; and

  requirements of OMB, the Department of the Treasury, and others. 

Agency financial management systems are to provide complete,
reliable, consistent, and timely information.  Financial data are to
be prepared on a uniform basis and be responsive to the financial
information needs of agency management.  To upgrade agency financial
management systems, the act calls for agency CFOs to approve and
manage agency financial management systems design or enhancement

OMB's February 27, 1991, guidance to agencies for preparing
organization plans under the act specifies that a CFO should have
authority to

     "manage directly, and/or monitor, evaluate, and approve, the
     design, budget, development, implementation, operation, and
     enhancement of agencywide and agency component accounting,
     financial and asset management systems."

Further, the OMB guidance states that CFOs should be full
participants in agency information resources management decisions. 

============================================================ Chapter 5

A structured approach to planning and developing financial systems
projects is critical to their success.\1

For example, this approach to financial management systems
development could specify (1) goals for resolving financial systems
problems, (2) policies and strategies for accomplishing these goals,
and (3) milestones for plan implementation.  By using this approach,
systems can be designed, maintained, and revised from an agencywide

The CFO Act requires OMB to prepare and submit to the Congress a
governmentwide 5-year financial management plan.  The plan, which is
to be updated annually, is to describe planned OMB and agency
activities for the next 5 fiscal years to improve the financial
management of the federal government.  It should be a vision of how
financial management reform will be carried out--a blueprint for
change with a set of clear expectations.  Further, the act requires
agency CFOs to prepare and annually revise agency plans to implement
OMB's 5-year financial management plan. 

Each 5-year plan submitted by OMB is to include information such as
the following: 

  a description of the existing financial management structure and
     any changes needed to establish an integrated financial
     management system;

  a strategy for developing and integrating individual agency
     accounting, financial information, and other financial
     management systems;

  proposals to eliminate duplicate and other unnecessary systems and
     projects to bring existing systems into compliance with
     applicable standards and requirements;

  milestones for equipment acquisitions and other actions necessary
     to implement the 5-year plan;

  financial management personnel needs and actions to ensure those
     needs are met;

  a plan for ensuring the annual audit of financial statements of
     executive agencies pursuant to the act;

  cost estimates for implementing the governmentwide 5-year plan; and

  a report on executive branch implementation of the plan during the
     preceding fiscal year. 

The comprehensive governmentwide and agency plans called for in the
act should enable top managers to monitor major financial management
systems development efforts and operations.  Thus, these plans will
help ensure that financial management systems and internal control
improvement efforts are completed on schedule, correct problems, and
comply with applicable requirements. 

Improved planning should help ensure that financial reporting
provides for complete, reliable, consistent, and timely information
that responds to managers' financial information needs.  Over time,
these plans will help to bring about continuity in systems
development projects and facilitate a unified approach to setting
priorities and allocating resources. 

The Department of the Treasury has issued guidelines for examining
financial management systems improvement plans.\2

These guidelines, which were developed in cooperation with OMB and
other agencies, would be useful in devising agency systems
improvement plans under the CFO Act, as well as in assessing their

\1 GAO's Critical Factors in Developing Automated Accounting and
Financial Management Systems (January 1987). 

\2 Financial Management Systems Plan Review Methodology, Department
of the Treasury, Financial Management Services, December 1990. 

---------------------------------------------------------- Chapter 5:1

The lack of useful financial information impedes the federal
government's efforts to build an effective financial management

Better management information (such as reports of performance
indicators) can be an early warning measure which identifies
developing problems before they reach critical proportions.  Also,
decisionmakers need reliable financial information to assess the
implications of alternatives and improve the economy and efficiency
of government operations. 

Several of the CFO Act's requirements aim to improve the financial
information available to agency managers, the Congress, and others. 
One of them requires that agency CFOs develop and maintain accounting
and financial management systems which report cost information. 

Another calls for the integration of accounting and budgeting
information.  Thus, principles used in accounting for program costs
are to be consistent with those used in developing program budgets. 
This clear linking of budgeting and accounting information can
benefit both management control and planning. 

The act also specifies that agency financial management systems must
provide for the systematic measurement of performance.  Therefore,
agency CFOs will have an important responsibility to see that
financial management systems are designed to report cost trends and
other performance indicators. 

Most importantly, the act requires that financial statements be
prepared and audited.  This requirement is further discussed in the
following section.  Together, these features of the CFO Act will
improve the reliability and usefulness of agency financial

Analyses of financial statements can also provide managers with
valuable information on trends and the financial viability of
programs.  To assist agencies in analyzing financial statements, GAO
issued a guide entitled, Financial Reporting:  Framework for
Analyzing Federal Agency Financial Statements (GAO/AFMD-91-19, March
1991).  As an example, the guide includes an analysis of the
financial statements issued by the Department of Veterans Affairs for
fiscal years 1986 through 1989; applies the attributes, measures, and
techniques set forth in the framework; and discusses the results of
the analysis. 

\3 Managing the Cost of Government:  Building An Effective Financial
Management Structure (GAO/AFMD-85-35 and 35-A, February 1985). 

============================================================ Chapter 6

Since 1984, GAO has audited the financial statements for various
federal agencies, including the General Services Administration and
the Departments of Agriculture, the Air Force, Housing and Urban
Development, and Veterans Affairs.  These audits improved the quality
of agency financial information and identified significant problems
in agency financial operations and reporting. 

The CFO Act requires that financial statements be prepared for trust
and revolving fund operations and for agency programs that are
substantially commercial functions.  For example, this would include
programs for providing (1) insurance, (2) loans and loan guarantees,
and (3) a service or thing of value for which a fee, royalty, or rent
is charged.  The act also establishes a pilot project whereby certain
agencies, listed in table 1, are to prepare agencywide financial
statements for specific years. 

                           Table 1
           Agencies Included in Financial Statement
                        Pilot Project

Agency                                  1990    1991    1992
------------------------------------  ------  ------  ------
Agriculture                                X       X       X
Labor                                      X       X       X
Veterans Affairs                           X       X       X
General Services Administration            X       X       X
Social Security Administration             X       X       X
Housing and Urban Development                      X       X
Army                                               X       X
Air Force                                                  X
Internal Revenue Service                                   X
Customs Service                                            X
The CFO Act requires that the financial statements be audited.  These
audits are the responsibility of the inspectors general but may be
conducted by, and at the discretion of, the Comptroller General, in
lieu of an inspector general. 

Inspectors general may contract with independent public accountants
to conduct financial statement audits.  GAO's Guide to Federal
Agencies' Procurement of Audit Services From Independent Public
Accountants (GAO/AFMD-12.19.3, April 1991) provides advice in this

Reports of audits conducted under the CFO Act must be completed by
June 30 of the year following the close of the fiscal year for which
the financial statements were prepared.  Further, OMB is required to
report to the Congress by June30, 1993, on the benefits,
difficulties, and costs associated with preparing these financial
statements and having them audited. 

============================================================ Chapter 7

To heighten accountability and make the financial results of programs
clearly visible, agency CFOs are responsible under the act for
preparing annual reports and transmitting them to agency heads and
OMB.  These reports are due within 60 days of the submission of the
auditor's report on its audit of the annual financial statements
(approximately August31 of each year) and are to include the
following information: 

  a description and analysis of the status of agency financial

  the annual financial statements and audit reports prepared under
     the CFO Act, where applicable;

  a summary of the reports on internal accounting and administrative
     control systems submitted to the President and the Congress
     under the Federal Managers' Financial Integrity Act; and

  other information the agency head considers appropriate concerning
     agency financial management. 

GAO's November 1990 report on the Department of Veterans Affairs\4

is an example of a report that contains this information.  This type
of report shows accountability for government programs and resources
and can be used for oversight and decision-making when assessing
department programs and determining public policy. 

In addition to these agency reports, the CFO Act calls for OMB to
annually submit to the Congress a governmentwide financial management
status report at the time of the President's budget submission.  This
report is to include a description and analysis of the status of
financial management in the executive branch from a governmentwide
perspective and a summary of the information contained in agency CFO
annual financial status reports. 

\4 Financial Audit:  Department of Veterans Affairs Financial
Statements for Fiscal Years 1989 and 1988 (GAO/AFMD-91-6,
November14, 1990). 

============================================================ Chapter 8

The lack of a cadre of highly qualified financial management
professionals has long hampered effective federal financial
management operations.  The CFO Act addresses the need for such
professionals to fill CFO and Deputy CFO positions and to adequately
staff financial management operations. 

For example, the act requires OMB's Deputy Director for Management to
develop and maintain qualification standards for agency CFOs and
their deputies and to advise agency heads on selecting people to fill
these positions.  Also, the Deputy Director for Management is
responsible for (1) providing advice to agencies on the
qualifications, recruitment, performance, and retention of financial
management personnel, (2) assessing the overall adequacy of the
professional qualifications and capabilities of financial management
staffs throughout the government, and (3) making recommendations on
ways to improve the quality of those staffs. 

The act specifically places with the agency CFOs responsibility for
recruiting, selecting, and training personnel to carry out agency
financial management functions.  OMB's February27, 1991, guidance
for implementing the act (M-91-07) states that agency CFOs should
have authority to provide agencywide policy advice on financial
management staffing matters. 

Many agencies have major components that perform financial management
operations.  OMB's guidance states that agency CFOs are responsible
for (1)approving job descriptions and skill requirements for those
who head these components' financial management activities and
operations and (2)participating in their annual performance

Overall, the government faces a major challenge in attracting and
retaining an adequate number of people with the skills needed to
staff financial management operations.  The 5-year financial
management plans called for by the act will provide a basis for
identifying and addressing potential staffing resource problems. 

A continuing education policy for financial managers is also
important in maintaining a well-trained and high-caliber financial
management work force.  Such a policy is recommended by the Joint
Financial Management Improvement Program\5

in its December 1990 report, Continuing Professional Education: 
Federal GS-510 Accountants. 

\5 The Joint Financial Management Improvement Program is a
cooperative undertaking of OMB, the Department of the Treasury, GAO,
and the Office of Personnel Management to improve financial
management practices throughout government. 

============================================================ Chapter 9

In November 1987, the CFOs that had been administratively named by
agencies formed an advisory body on governmentwide accounting and
financial management policy.  This body provided a forum to exchange
ideas and consider issues of common interest, such as modernizing
financial systems and improving the quality of financial information. 

To continue these efforts, the CFO Act established a Chief Financial
Officers Council.  The act specifies that the Council will be chaired
by OMB's Deputy Director for Management.  Other members will be OMB's
Controller, Treasury's Fiscal Assistant Secretary, and the agency
CFOs appointed under the act. 

As specified in the act, the CFO Council's functions are to advise
agencies and coordinate their activities on financial management
matters, such as (1) consolidating and modernizing financial systems,
(2) improving the quality of financial data and information
standards, (3) strengthening internal controls, and (4) developing
legislation affecting financial operations and organizations. 

=========================================================== Chapter 10

The CFO Act institutes changes in the financial management of
government corporations, such as the Resolution Trust Corporation and
the Federal Deposit Insurance Corporation. 

First, government corporations are required to annually prepare a
report on their internal accounting and administrative controls,
consistent with the Federal Managers' Financial Integrity Act
requirement for reports by executive agencies.  These reports should
be based on annual reviews of the corporation's controls.  Whenever
the reviews detect significant problems, the corporations should
develop specific corrective action plans. 

Prior to enactment of the CFO Act, the Government Corporation Control
Act (31 U.S.C.  9105) required GAO to perform a financial statement
audit of covered corporations at least once every 3 years.  The CFO
Act changes the timing and responsibility for these audits.  Each
corporation is now required to have its financial statements audited
annually by the inspector general or by an independent public
accountant.  The Comptroller General retains the discretionary
authority to conduct the audit. 

The CFO Act also requires the head of the corporation to submit an
annual management report to the President and the Congress no later
than 180 days after the end of the corporation's fiscal year.  To
inform the Congress about the corporation's operations and financial
condition, these reports are to include information such as the
corporation's audited financial statements and report on internal

=========================================================== Chapter 11

Relevant accounting and auditing standards are critical to the CFO
Act's financial statement and audit initiatives.  The act calls for
agency financial systems to comply with applicable accounting
principles, standards, and requirements.  Also, audits of financial
statements prepared under the act are to be done in accordance with
generally accepted government auditing standards. 

The Budget and Accounting Procedures Act of 1950 (31 U.S.C.  3511
(a)) directs the Comptroller General, in consultation with OMB and
Treasury, to prescribe accounting principles, standards, and related
requirements for executive agencies to follow.  The CFO Act provides
that OMB's Deputy Director for Management is to establish
governmentwide financial management policies and requirements for
executive agencies. 

To ensure the relevancy of federal accounting standards, the
Comptroller General, the Director of OMB, and the Secretary of the
Treasury have agreed to a cooperative approach to the
standard-setting process by establishing the Federal Accounting
Standards Advisory Board.  This nine-member advisory board of
knowledgeable individuals from government and the private sector will
make recommendations to the heads of GAO, OMB, and Treasury on
proposed accounting standards designed to meet the needs of federal
agencies and other users of federal financial information. 

The Board is studying a wide range of accounting standards.  In March
1991, the Board recommended that agencies continue to use, on an
interim basis, the applicable accounting standards contained in
agency accounting policies, procedures manuals, and/or related
guidance to prepare their financial statements under the CFO Act. 
Where these applicable standards differ from those of GAO's Policy
and Procedures Manual for Guidance of Federal Agencies (Title 2),
agencies are to fully disclose the differences and the alternative
accounting basis used in preparing their statements.  On June 11,
1991, OMB adopted this recommendation (M-91-11). 

Generally accepted government auditing standards are issued by the
Comptroller General in GAO's Government Auditing Standards (1988
Revision), the "Yellow Book." Updates to the standards will consider
recommendations from the newly established Government Auditing
Standards Advisory Council.  The Council will advise the Comptroller
General on auditing standards issues throughout the standard-setting
process.  It will be involved in the identification, development, and
issuance of revisions to Government Auditing Standards as well as
interpretations of and guidance on the standards.