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Financial Report of the United States Government

Management's Discussion & Analysis

Financial Management

Enterprise Risk Management

The Administration is committed to promoting and facilitating a risk-aware culture across the federal government by developing a federal ERM framework and ERM strategies for adoption by federal agencies. ERM is a tool used by agencies to systematically identify, assess, mitigate, manage, and prepare for risks that could interfere with an agency’s ability to achieve its mission and goals. ERM promotes risk-informed decision making that allows resources to be prioritized and allocated based on risk. It encourages agencies to target their limited resources to activities likely to produce the greatest improvement in program performance.

Using ERM techniques, federal agencies establish internal controls to address management challenges that cut across multiple agencies’ functions and reduce associated risk to an acceptable level. In this way, ERM integrates risk management and internal control processes. The 2016 update to OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, stresses the importance of applying ERM to all financial management activities, including charge cards and payment integrity. In 2019, the updated OMB Circular A-11, Part 6, integrated ERM into agency strategic planning and performance measurement processes. Also in 2019, the CFOC established an ERM Executive Steering Committee to identify and share ERM best practices, develop a federal ERM maturity model (a self-assessment tool used to assist in ERM implementation), promote ERM integration with mission and mission support functions, and facilitate constructive coordination with oversight entities

Results-Oriented Accountability for Grants

Approximately $700 billion is spent annually on grants and cooperative agreements. Grants managers, both internal and external to the government, report that approximately 40 percent of their time is spent using antiquated processes to monitor compliance with grant requirements rather than using data analytics to monitor grant results. The PMA29 CAP Goal #8, Results-Oriented Accountability for Grants, provides a comprehensive roadmap for improving grants management and reducing grant recipient reporting burden. Increased efficiencies in the grant-making process will provide recipients more time to devote to delivering intended results of the grant, rather than managing compliance with the process, thereby helping agencies30 more effectively achieve their missions.

The Grants CAP Goal will be achieved by: standardizing the grants management business process and data, building shared information technology (IT) infrastructure, establishing a standard risk management framework across grant programs, and ensuring that new grant programs are designed to reflect measurable goals. To support the standardization of the business process and data and the building of shared IT infrastructure, OMB issued M 18-24, “Strategies to Reduce Grant Recipient Reporting Burden” in 2018.

M-18-24 requires agencies to evaluate all systems and methods used to collect information from grant recipients to determine if the same data are being collected by the agency more than once. In addition, M-18-24 requires agencies to prepare for the adoption of grants management standards and complete a readiness assessment using the Grants Management Federal Integrated Business Framework.

Since the issuance of M-18-24, OMB released an initial set of draft grants management data elements that were developed by an inter-agency work group. From November 2018 to February 2019, the draft grants management data elements were made available for public comment and more than 1,100 comments were received and reviewed, resulting in the issuance by OMB of Version 1.0 of Grants Management Standards in the fall of 2019. In accordance with OMB memo M-19-16, “Centralized Mission Support Capabilities for the Federal Government,” once the initial set of standards are finalized, agencies will be required to ensure that ongoing and future grants management system investments follow the standards available at https://ussm.gsa.gov/. Future implementation of the standards will promote interoperability of systems using consistent data, reduce the number of grants management systems, and promote a risk-based, data-driven approach to managing federal grants.

In addition, under the Grants CAP Goal, OMB worked with agencies during 2019 to reduce the maximum number of audit areas (e.g., allowable costs, eligibility, and cash management) from twelve to seven in the Compliance Supplement. Although grantees will still be required to comply with all twelve requirements for the management of federal programs, the areas to be audited will be limited to those seven that pose the greatest risk or that produced the greatest number of audit findings in the past. The 2019 Single Audit Compliance Supplement specifies the areas of review that are required for individual grant programs.

Getting Payments Right

Preventing improper payments in the federal government is a priority for the Administration and in March 2018, the PMA CAP Goal #9, Getting Payments Right, was established with an emphasis on reducing monetary loss and making payments correctly the first time. In addition to the historical focus on identifying and addressing improper payment issues after they occur, the CAP goal has a renewed focus on systemic enhancements intended to prevent improper payments from occurring. This CAP Goal has resulted in exceptional collaboration across the CFO community to reduce monetary loss and prevent improper payments through five strategies. The strategies are: (1) Clarifying and Streamlining Requirements, (2) Identify Monetary Loss Root Causes, (3) Strategic Data Use (using data to prevent improper payments), (4) Mitigation Strategies (using non-data methods to prevent improper payments), and (5) Strengthen State Partnerships. Details on current progress and future actions under the CAP goal can be found at: https://www.performance.gov/CAP/getting-payments-right/.

Starting in fiscal year 2018, agencies with programs reporting more than $100 million in monetary loss began providing a quarterly scorecard on PaymentAccuracy.gov. These scorecards provide information on the actions taken and progress made on preventing improper payments that would result in monetary loss to the government. Additional details on the programs’ fiscal year 2019 improper payment data can be found at https://paymentaccuracy.gov/

In fiscal year 2020, OMB will continue to work with agencies, the CFOC, and other stakeholders, as part of the Getting Payments Right CAP Goal, to improve the identification of the root causes of improper payments that result in monetary loss and to promote data analytic methods that take a comprehensive view of an agency’s payment lifecycle.

Leveraging Data as a Strategic Asset

The DATA Act amended the Federal Funding Accountability and Transparency Act of 2006 by linking federal government contract, loan, and grant spending to federal programs and requiring that all federal spending be displayed on a website in searchable, downloadable, and machine-readable formats.

The USAspending.gov website, which Treasury launched in April 2018 in accordance with the DATA Act, allows users to examine more than $4 trillion in federal spending and identify communities, businesses and non-profit entities that have received federal funding. The data are provided by more than 100 federal agencies and is compiled by Treasury on a quarterly basis. The site allows users to explore the data and download reports that are tailored to their specific interests. The site also includes the Data Lab, which provides use cases, data visualizations, and analyses of federal spending and trends. The data are searchable in a machine-readable format and open application programming interface.

In June 2018, OMB issued guidance to improve data quality, M-18-16, Management of Reporting Data Integrity Risk, Appendix A to OMB Circular A-123. The guidance required agencies to develop and implement a data quality plan for fiscal years 2019 and requires a plan for fiscal years 2020 and 2021. The guidance also requires agencies to consider in their assurance statements all internal controls (including controls over DATA Act reporting). In November 2019, GAO noted (in GAO-20-75) that agencies had made significant progress in improving DATA Act data quality.

In June 2019, OMB issued revised guidance related to the Federal Program Inventory in OMB Circular A-11 sections 210.11 and 210.12. The guidance reflects an effort by OMB and agencies to simultaneously satisfy, where possible, the reporting requirements of the DATA Act and the Government Performance and Results Act Modernization Act, thereby minimizing agency reporting burden.

Also in June 2019, OMB updated Circular A-11 section 22.6 to require agencies to include machine-readable summary tables in their congressional budget justifications and post their congressional budget justifications to a web address entitled [Agency Name].gov/cj. Congressional budget justifications where such web addresses are linked to the agency spending data found on USASpending.gov.

As the quality of this data in USASpending.gov improves, OMB will work with Treasury and agencies to find additional data sources that could be linked to the site for informational and analytic purposes.

Sharing Quality Financial Management Services

The federal financial management infrastructure (which includes grants) exists in a complex environment of legacy information technology, customized tools built to unique requirements, lack of harmonized standards, and business processes that do not fully leverage modern technology. The sharing of financial technology and services has been successful for smaller agencies but has not met expectations for larger agencies. Specifically, agencies that provide financial management services to other agencies have done so efficiently and effectively for agencies with more limited financial systems requirements. However, when the service providers have attempted to provide similar services to or share technology with agencies that have more complex requirements, the result has often been cost over-runs and the need for systems upgrades or customization. This is largely due to the greater number of and more complex systems requirements of the larger agencies. A cross-agency subgroup of the CFOC developed the core business framework for financial management that was used in the fall of 2017 to explore industry capabilities for smarter use of technology in federal financial management. This information has been used to develop and implement recommendations to improve financial management across the government. Results of ongoing efforts to support PMA CAP Goal #5, Sharing Quality Services, can be found at https://www.performance.gov/CAP/sharing-quality-services/.

Financial Management Workforce

The Administration is committed to redefining the role of the federal government by prioritizing activities that advance the federal government financial workforce. The workforce for the 21st Century must enable senior leaders and front-line managers to align staff skills with evolving mission needs. This will require more nimble and agile management of the workforce, including reskilling and redeploying existing workers to keep pace with the current pace of change.

Under the CFOC, a cross-agency “Shape the Workforce” work group has been established. The group was formed to align CFOC efforts with the human capital strategy in the PMA, which is focused on developing a workforce for the 21st century. The group is working to establish a systematic process for identifying and addressing gaps between the financial management workforce of today and the workforce needs of tomorrow. Through this process, CFO leadership will be able to identify the personnel required to meet organizational goals, conduct analyses to determine and close competency and skills gaps, develop strategies to address human capital needs, and assess the effectiveness of CFO office structures. In addition, the cross-agency work group is exploring options for consolidating recruitment efforts and streamlining the hiring process, leveraging technology to improve the financial management workforce, and developing new tools for retention and staff development.

Also, under the CFOC, a cross-agency “Fiscal Management” work group has been established to explore opportunities to automate financial management processes and functions. As a part of this, the National Science Foundation is conducting a pilot focused on intragovernmental payments and collections, seeking to make the payment and collection processes more efficient. Automation of financial management work will consequently allow the financial management workforce to be more efficient and focus on higher-value work.

Audit

Since the passage of the CFO Act, the federal financial community has made significant progress in financial accounting and reporting. As shown in Table 10, for fiscal year 2019, 22 of the 24 CFO Act agencies obtained an unmodified opinion from the independent auditors on their financial statements.31 In addition, 41 auditor-identified material weaknesses were reported at the end of fiscal year 2019 compared to 40 for 2018. For 2019, 25 of these are associated with DOD, which completed its second full-scope financial statement audit. The other 16 material weaknesses are associated with non-DOD agencies, which represents an improvement from 20 reported in 2018. These results demonstrate that an increasing number of federal agencies have adopted and maintained disciplined financial reporting operations, implemented effective internal controls over financial reporting, and integrated transaction processing with accounting records. However, weaknesses in financial management practices continue to prevent the government as a whole from achieving an audit opinion.

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Table 10: Agency Audit Results: FY 2019
  Audit Auditor-Reported Material Weaknesses
Agency Opinion Beginning New Resolved Consolidated Ending
Department of Agriculture (USDA) Unmodified 2 0 0 0 2
Department of Commerce (DOC) Unmodified 2 0 2 0 0
Department of Defense (DOD) Disclaimer 20 9 1 3 25
Department of Education (Education) Unmodified 1 0 0 0 1
Department of Energy (DOE) Unmodified 0 0 0 0 0
Department of Health and Human Services (HHS)* Unmodified 0 0 0 0 0
Department of Homeland Security (DHS) Unmodified 2 0 0 0 2
Department of Housing & Urban Development (HUD)** Qualified 5 0 3 1 1
Department of the Interior (DOI) Unmodified 0 1 0 0 1
Department of Justice (DOJ) Unmodified 0 1 0 0 1
Department of Labor (DOL) Unmodified 0 0 0 0 0
Department of State (State) Unmodified 0 0 0 0 0
Department of Transportation (DOT) Unmodified 0 0 0 0 0
Department of the Treasury (Treasury) Unmodified 0 0 0 0 0
Department of Veterans Affairs (VA) Unmodified 5 0 0 0 5
Agency for International Development (USAID) Unmodified 1 0 1 0 0
Environmental Protection Agency (EPA) Unmodified 1 1 1 0 1
General Services Administration (GSA) Unmodified 0 0 0 0 0
National Aeronautics & Space Administration (NASA) Unmodified 0 0 0 0 0
National Science Foundation (NSF) Unmodified 0 0 0 0 0
Nuclear Regulatory Commission (NRC) Unmodified 0 0 0 0 0
Office of Personnel Management (OPM) Unmodified 1 0 0 0 1
Small Business Administration (SBA) Unmodified 0 1 0 0 1
Social Security Administration (SSA) Unmodified 0 0 0 0 0
Totals   40 13 8 4 41
* Unmodified opinion on all statements except SOSI and SCSIA, which received a disclaimer.
** HUD's FY 2019 statement and notes contain FY 2019 data only; FY 2018 data are not provided in the statement or notes

Agency Financial Management Systems

Federal agencies improved, but continue to face challenges, in implementing financial management systems that meet federal requirements. The number of CFO Act agencies reporting lack of substantial compliance with one or more of the three Section 803(a) requirements of the FFMIA remained at 7 in fiscal year 2019, and the number of auditors reporting lack of substantial compliance with one or more of the three Section 803(a) FFMIA requirements fell to 8 in fiscal year 2019 from nine in fiscal year 2018.

As suggested in the “Sharing Quality Financial Management Services” section above, because of the federal government’s size and diversity, its financial management infrastructure consists of both legacy and modernized systems and standardized and customized systems. As the government’s fiscal agent, Treasury has systems for collecting and disbursing the government’s cash and financing disbursements when necessary, recording and reporting on those collections and disbursements, and reporting on all government revenues, expenses, assets, and liabilities.

The first four sections above32 summarize what OMB and agencies have been doing and plan to do to improve financial management, including financial management systems. Additionally, Treasury has financial management improvements plans that have governmentwide implications. These plans include standardizing processes, system requirements, and system interfaces. These efforts will allow legacy technology to be decommissioned and reduce the need for manual processes. Also, agencies other than Treasury have plans to improve their financial management and financial reporting systems described in their financial reports, budget requests, and performance plans. Most significantly, DOD has plans to address its material weaknesses in financial reporting, and is bringing its financial systems into compliance with federal financial management systems requirements, including the FFMIA; these plans can be found in the AFR. In addition, DOD’s audit remediation efforts include issues related to real property, inventory, OM&S, government property in the possession of contractors, information technology, and reconciling the Department’s fund balance with Treasury.

Agency Internal Controls

Federal managers are responsible for developing and maintaining effective internal controls. Internal controls help to ensure effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. Safeguarding assets is a goal of each of these three objectives.

OMB Circular No. A-123 implements the requirements of 31 U.S.C. 3512 (c) and (d) (commonly known as the Federal Managers’ Financial Integrity Act) by providing agencies a framework for assessing and managing risks strategically and tactically. The Circular reflects in GAO’s Standards for Internal Control in the Federal Government and contains multiple appendices that address one or more of the objectives of effective internal control. 

  • Appendix A provides for agencies to use a risk-based approach to assess, document, test, and report on internal controls over reporting and data integrity; 
  • Appendix B requires agencies to maintain internal controls that reduce the risk of fraud, waste, and error in government charge card programs; 
  • Appendix C implements the requirements for effective estimation and remediation of improper payments; and 
  • Appendix D defines requirements for determining compliance with the FFMIA that are intended to reduce the cost, risk, and complexity of financial system modernizations.

As noted above, the total number of reported material weaknesses for the CFO Act agencies as of the issuance of this Financial Report was 41 for fiscal year 2019 and 40 for fiscal year 2018. Effective internal controls are a challenge at the agency level and at the governmentwide level, with GAO reporting that at the governmentwide level, material weaknesses resulted in ineffective internal control over financial reporting. While progress is being made at many agencies and across the government in identifying and resolving internal control deficiencies, additional work is needed.

Agency Legal Compliance

Federal agencies are required to comply with a wide range of laws and regulations, including appropriations, employment and, health and safety, among others. Responsibility for compliance rests with agency management and compliance is addressed as part of agency financial statement audits. Agency auditors test for compliance with selected laws and regulations related to financial reporting and certain individual agency audit reports contain instances of noncompliance. None of these instances were material to the governmentwide financial statements; however, GAO reported that its work on compliance with laws and regulations was limited by the material weaknesses and scope limitations discussed in its report.

Efficient Use of Real Property Assets

The federal government owns a significant amount of real property assets worldwide, with a majority of its holdings located in the U.S. These real property holdings include assets that are classified by property type in the FRPP as: land, buildings, and structures. The FRPP defines land as acreage and a building as a constructed asset that is enclosed with walls and a roof that provides space for agencies to perform activities, store materials, or provide space for people to live or work. A structure is defined as any constructed asset that does not meet the building definition above (i.e., fence, tower, parking structure). Further information can be found in the FRPP Data Dictionary available at https://www.gsa.gov/policy-regulations/policy/real-property-policy/asset-management/federal-real-property-council-frpc/frpc-guidance-library.

Land

The federal government owns roughly 640 million acres, which represents about 28 percent, of all U.S. land. Four major federal land management agencies administer 610.1 million acres, or 95 percent, of this land. They are the BLM, Fish and Wildlife Service, and National Park Service in DOI; and the Forest Service in USDA. These lands are managed for many purposes, primarily related to conservation, preservation, recreation, and the extraction of natural resources such as timber, minerals, oil, and gas. Much of the land managed by DOI and USDA is public domain land and is generally intended to be retained by the government for use by future generations. This and other land that qualifies as stewardship land is not valued on the governmentwide Balance Sheet but is discussed in Note 24 and in AFRs. In addition, DOD (excluding the Army Corps of Engineers) uses stewardship land for military bases, training ranges, and other military related functions.

Structures

The government owns structures that are affixed to the land and in many instances cannot easily be physically separated from the land; these include parking structures, power plants, power generating stations, dams, and space exploration structures. These structures are managed by agencies such as DOE, the Army Corps of Engineers, and NASA. The federal government charges fees for the use of some of these structures, which defray some of the costs of the assets. The receipt of such user fees (e.g., sales of electrical power) is recorded as revenue. Structures are generally reflected on the Balance Sheet at cost, net of depreciation, and any environmental or other liabilities associated with structures are reflected on the Balance Sheet in accordance with generally accepted accounting principles.

Buildings

A large portion of the government’s real property inventory includes federally owned buildings, with the majority in the custodial care of DOD. In general, agencies hold and manage buildings for administrative use to achieve their mission. The government does not hold buildings or any real property assets for investment or land banking purposes. Buildings owned by the government (and the land associated with the buildings) are generally reflected on the Balance Sheet at cost, net of depreciation. As noted above with structures, any environmental or other liabilities associated with buildings (and the land underneath the buildings) are also reflected on the Balance Sheet in accordance with generally accepted accounting principles. Any buildings (or structures, including the land underneath the buildings or structures) that are not in service are included on the Balance Sheet at net realizable value. After the government identifies buildings or other real property for disposal, it carries out public or negotiated sales, demolitions, public benefit conveyances, and, on occasion, property exchanges.

The federal domestic building inventory is diverse and contains 252,000 buildings reflecting 2.6 billion square feet of space as of 2016 (which is the most recent year for which reliable data are available). Several current real property initiatives being pursued are discussed below.

Transformation Efforts to Optimize the Use of Federal Real Property

On July 12, 2018, OMB issued Memorandum M-18-21 to require all federal entities to designate senior real property officers to coordinate all aspects of their real property programs and to serve on the FRPC. The FRPC seeks to provide comprehensive governmentwide strategic direction to help optimize the federal real property portfolio to achieve statutory missions while managing costs over the short, mid, and long-term. The FRPC will address current challenges such as the lack of a comprehensive strategic approach to asset management, funding challenges, poor data quality, and legislative requirements by creating a governance structure, to include an Executive Steering Committee and working groups. Led by direction from the Executive Steering Committee, the working groups will map their outputs to the FRPC strategic direction to revise the national strategy’s policy framework, standardize the business processes and data, and diagnose and address root causes.

On November 6, 2019, OMB issued Memorandum M-20-03, providing detailed guidance to agencies to implement the Capital Programming Guide in OMB Circular A-11. The goal of the guidance is to ensure that an agency’s real property portfolio helps it efficiently achieve its mission. The Memo provides standards for agencies to use to develop a consistent methodology for allocating resources to real property. This resource allocation will occur as a part of the annual budget formulation process, with agencies systematically identifying their real property needs and assessing their existing real property assets. This process of reviewing real property holdings, acquisitions, and dispositions and linking clearly articulated long-term real property requirements to options that consider the life-cycle of real property is intended to allow agencies and policymakers to have the information necessary to optimize the federal real property portfolio. This should lead to the elimination of excess capacity, cost-effective long-term investments in real property, and annually updated information about the condition of existing property.

The new strategic direction reflected in Memorandum 20-03 will build on the results of the RTF policy, which was issued in 2015 and requires the CFO Act agencies to reduce the size of their federal real property portfolios by improving the use of government-owned buildings and by reducing the amount of leased space and the number of excess and underutilized properties. In addition, under the RTF policy, the CFO Act agencies developed and annually update five-year Real Property Efficiency Plans to identify reductions to their portfolios over a five-year time-period. In fiscal years 2016 through 2018, the CFO Act agencies reduced their fiscal year 2015 RTF baselines (which is the amount of space the CFO Act agencies held or occupied in 2015) by 16.2 million square feet. Under the RTF policy, the CFO Act agencies will validate square footage and operations and maintenance costs in their AFRs to show that they are continuing to reduce their real property footprint over time.

Additionally, governmentwide real property management will be improved by implementation of the Federal Assets Sale and Transfer Act of 2016 (FASTA) and the FPMRA. To date, OMB has met, by the required deadlines, all of its responsibilities under FASTA (with a yearly data call to all federal agencies for recommendations to the to-be-established Real Property Reform Board) and under FPMRA (with the establishment of the FRPC and the issuance of a yearly report).

Together with the newly constituted FRPC, OMB will continue to work to optimize its use of federal real property throughout 2020.

Conclusion

The federal government has seen significant progress in financial management since the passage of the CFO Act nearly 30 years ago, but significant challenges remain to realizing the intended financial management reforms of the Act. The issues that the federal government faces today require financial managers to improve both the efficiency and effectiveness of financial management activities, which includes moving toward integrated government operations with standardized business processes, systems, and data. The steps outlined above build on tools and capabilities that are in place today and refocus energies on critical and emerging priorities – cutting wasteful spending, improving the efficiency and effectiveness of operations and information technology, and laying a foundation for improved data quality and collaboration.

Footnotes

29 For further information about the PMA and CAP Goals, see https://www.whitehouse.gov/omb/management/pma/ (Back to Content)

30 The term “agency” is used in the Financial Management section of the Management’s Discussion and Analysis rather than the term “entity,” which is used throughout the rest of the Financial Report. SFFAS No. 47, Reporting Entity, defines the term “entity” for federal financial reporting purposes and addresses both component and  governmentwide financial reporting. The term entity is generally broader than “agency” because it refers to agencies, components of agencies, and the federal government as a whole. The term “agency” is used in this section because the laws, policies, and plans discussed in this section apply to “agencies” as defined in particular laws or policy guidance documents and because the laws, policies, and plans discussed in this section do not generally define the term “entity.” (Back to Content)

31 The 22 entities include HHS, which received an unmodified (“clean”) opinion on all statements except the SOSI and the SCSIA. (Back to Content)

32 These sections are “Results-Oriented Accountability for Grants,” “Getting Payments Right,” “Leveraging Data as a Strategic Asset,” and “Sharing Quality Financial Management Services.” (Back to Content)

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Last modified 04/17/20