Nearly 23 years after the seminal CFO Act became law, agencies have met its spirit and intent, experts say. CFOs today quickly are becoming more than just number...
wfedstaff | April 17, 2015 4:51 pm
(This story is part of Federal News Radio’s special report, Rise of the Money People.)
Federal chief financial officers were responsible for $1.2 trillion in federal spending in 1990. Now it’s $3.8 trillion. CFOs today not only face a larger budget, but one that is more complex.
Does that mean the law that created the position of federal chief financial officers 23 years ago, needs to be updated? Has the CFO Act fallen behind the times? And, have agencies met the spirit and intent of the law?
The answers almost across the board from experts in and out of government are: No. No. And, yes.
As part of Federal News Radio’s week-long on-air and online special report, “ Rise of the Money People: Financial management moves front and center as agencies make the final assault on wasted billions,” we explore just how well the CFO Act has survived over the last two-plus decades, and how federal CFOs have morphed from number crunchers to master analyzers of data to help agencies make better decisions.
“I think there is an opportunity to evolve our financial management model and compliance framework in a way that we are moving beyond the basics of financial statements, and moving directly into a space where the CFO sees across government significant discipline and consistency in how we are tackling some of the other elements of the bottom line of government,” said Danny Werfel, the controller in the Office of Management and Budget, a position akin to that of the federal CFO.
“We have to be branching out in to more areas of discipline that get at that citizens’ bottom line and get more in the areas of financial performance. What happens is CFOs are branching out today in many, many different ways. The issue is whether the framework which they operate under, how they are audited, how they are capturing that information and reporting it publicly, is that following suit and being aligned with CFOs emerging responsibilities around these bottom line issues of citizens’ trust in government, program and financial performance, fraud, error and waste.”
The framework Werfel is referring to is the CFO Act.
Congress passed it and President George H.W. Bush signed it into law in 1990. It created the position of CFO in the major agencies and instituted the requirement for strong internal controls.
Evolution of CFOs continues
Twenty-three years later, experts in and out of government say agencies have met both the spirit and intent of the law. And now, CFOs are evolving beyond the initial requirements of the law. Part of the expanded role CFOs play is derived from several of the administration’s priorities, such as reducing improper payments and better managing real property.
But the factor that will influence most how CFOs affect federal agency performance is enabled by the growing use of financial data to make better decisions.
“We now have managers of financial information versus processors of financial information in our CFO community,” said Doug Davidson, vice president of TFC Consulting and publisher of the financial management blog, FedCFO.com. “And agencies are able to act upon the information they have in front of them versus looking back strictly for auditability.”
Davidson said the evolution has been slow, mostly taking place in the last five- to-seven years. But now, financial managers have a much better grasp on where their agency is spending money, and the impact that spending is having on performance and services.
Werfel said the ability of CFOs to impact agency decision making is more important than ever in today’s budget climate.
“We have this tension where government agencies should and want to modernize. They want to improve operational efficiency and they want to deliver better services for the taxpayers. They want to improve on almost every metric,” he said. “Yet, they need to do that in a period where there isn’t as much funds as there once were to invest in capital improvements or infrastructure improvements. It requires us to balance that tension, to be innovative, to look differently at the way we do our operations, to look differently in the way technology can help meet our mission, to be collaborative across different sectors of government, and work with our CIOs and chief acquisition officers in new and collaborative ways.”
Breaking the tension
Werfel said a good example of this change comes at the CFO Council’s monthly meetings. The agenda includes more than just internal controls and processes, but how best to use technology and acquisition to meet mission, and how to realign spending to address priorities.
He said CFOs focused on the internal controls and processes piece for the last decade, and now it’s time to work some of the other financial management muscles.
“Now, as times change and there are new emerging risks in the financial management sphere, our new emerging risks surround this tension around budgetary pressures combined with the need to be better at government, to be innovative and to improve every aspect of our performance from programs to operations,” Werfel said. “That’s where CFOs are playing a very significant role today in managing their agency’s budgets, and working across different aspects of their agency leadership in order to coordinate and figure out how we will continue to improve meeting our agency’s mission and serving the taxpayer.”
But this muscle, as Werfel puts it, was pretty limp before 1990 when Congress passed the CFO Act.
There were no CFOs — only operational and policy experts in the budget office. Agencies had weak internal controls and serious financial management problems, including the inability to balance their checkbooks and close their books in 45 days.
Ed Mazur, now a senior advisor in the public sector services office of CliftonLarsonAllen and OMB’s first controller, a position created in 1990 by the CFO Act, said the CFO Act’s requirement for agencies to use generally accepted accounting principles is one major reason for the improvement across government.
“At the end of the long day, whether it’s an individual department or agency, or the government as a whole, you can be assured that when they have financial reports in their hands you are getting a complete picture,” he said. “The controls over transactions and day-to-day workings of the government are solid enough so that you can rely on the information.”
Now 23 of the 25 major agencies can close their books in 45 days and have received clean audit opinions. Only the departments of Defense and Homeland Security continue to have financial management material weaknesses and can’t get a clean audit.
The lack of DoD’s ability to get a clean audit keeps the Government Accountability Office from rendering a financial opinion for the entire federal government. DoD’s goal is to be auditable by 2017.
Feds needed to get financial house in order
The data issue as well as the professionalization of the CFO role and staff were two major reasons why Joe DioGuardi originally authored the initial version of the CFO Act in 1986.
DioGuardi is a former congressman from New York and now runs an organization focused on better financial transparency in government, called Truth in Government.
He introduced the CFO Act in 1986 with one sponsor, himself, and got nowhere. By 1987, when he tried again, he had 57 sponsors.
DioGuardi said he introduced the bill just as the country was coming to the tail end of the savings and loan crisis when hundreds of S&Ls failed, forcing the government to bail them out.
DioGuardi said several key pieces of his original bill didn’t make it through into the final version, but the CFO Act still was worthwhile.
“The one positive thing is that it focused people’s attention on the inadequacies of government as it existed prior to 1990 in terms of financial management,” he said. “We do have, at least, people looking at numbers in a different way.”
DioGuardi lost his reelection bid in 1988 and didn’t get a chance to see the bill become law as a member of Congress.
But, 23 years later, DioGuardi’s passion hasn’t waned for improved federal financial management. He said there are several changes he’d like to see to the CFO Act.
“We should’ve had an independent office of a chief financial officer,” DioGuardi said. “We should have had a chief financial officer council that is joined with assistant secretaries of financial management, and you can’t divorce that from the accounting principles that we use.”
He said general accounting principles have been well defined for decades, going as far back as the Hoover Commission in 1947. He said the commission suggested and Congress mandated the government use these standards, including accrual basis of accounting to report “off-the-book” liabilities. DioGuardi said the “off-the-book” liabilities include Social Security and Medicare programs, for example. He said today agencies are not using the standards properly in part because of the makeup influence of the Federal Accounting Standards Advisory Board (FASAB). He said that may be the biggest issue that needs to be resolved.
DioGuardi said the advisory board is a revolving door of government and former government experts who decide on standards and do not have enough independence.
“I think they are listening too much to the Treasury, the Congressional Budget Office and the Comptroller General. Now, why do I say that? Guess who funds the Federal Accounting Standards Advisory Board — the Treasury Department, the CBO and the Comptroller General’s Office, 100 percent,” he said. “Not like the Financial Accounting Standards Board that gets funded by outside, independent people, contributions to a foundation, and that foundation even appoints people on the FASB. It’s a different situation, and I don’t know why we didn’t go back to that same model for the federal government.”
Mazur, however, disagreed that the board needs to be changed.
“I think some of the earlier questions about its independence have been successfully addressed to the satisfaction of the American Institute of CPAs, which sets the ruling as to whether or not standards created by FASAB represent independent standards setting, which for people like me, is a little more than just the theoretical,” Mazur said.
He added the board has a due process to create standards, which are not slanted politically or otherwise.
OMB’s Werfel said the CFO Act still meets the needs of the government. The skills CFOs need may be changing, but that’s part of the evolution of the position and not because the law is out of date.
“What we want in a CFO in the government space is a leader. Someone who can help set the strategic vision for not only the CFO shop within an agency but help be integral to the agency leadership in setting that strategic vision,” he said. “It’s someone who can understand the balance between making sure the nuts and bolts accounting are in place, while also dedicating time and energy to performance issues surrounding financial management.”
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