Management's Discussion & Analysis

Financial Management

Grants and Cooperative Agreements

In FY 2023, the federal government obligated approximately $1.2 trillion for grants and cooperative agreements, according to USAspending.gov. This figure does not include obligations for other types of financial assistance, such as loans or direct appropriations. A large portion of grant funding was provided under the Bipartisan Infrastructure Law and the IRA of 2022 while additional funding continued to support the nation’s response to the pandemic through the ARP, the CARES Act, and other COVID-19 funding. Improving access to key financial assistance data continues to be a priority for OMB.

In 2023, OMB undertook an initiative to update the Guidance on Grants and Agreements published in 2 CFR to reduce the administrative burden for federal agencies and recipients, as well as to clarify the guidance and make it more accessible. These updates will represent the most substantial changes to the guidance since its release in December 2013 and will reduce unnecessary compliance requirements and ensure that assistance is delivered in a more effective and impactful way and to the communities that most need it.

On August 19, 2023, OMB issued M-23-19 Establishment of the COFFA. This council created a leadership body in the federal government for oversight and management of federal financial assistance. The COFFA launched a partnership among federal grant-making agencies, providing a single forum to inform federal financial assistance policy, oversight, and technology activities. The COFFA is also responsible for providing strategic direction, policy recommendations, and priority-setting for other government-wide grant-related activities.

Payment Integrity

Preventing improper payments in the federal government continues to be a management priority. To be successful in preventing improper payments, there must be a focus on systemic enhancements intended to make payments correctly the first time with an emphasis on minimizing monetary loss. An improper payment is any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirement. The term “improper payment” consists of two main components: 1) improper payments resulting in a monetary loss to the government; and 2) improper payments that do not result in a monetary loss to the government. Monetary loss occurs when payments are made to the wrong recipient and/or in the wrong amount. Improper payments that do not result in a monetary loss include under payments and payments made to the right recipient for the right amount, but the payment was not made in accordance with statute or regulation. The federal government, through the CFO community, continues to develop strategies to better analyze and prevent monetary loss.

Agencies with programs reporting more than $100.0 million in monetary loss provide a quarterly scorecard at 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 federal government. Details, including FY 2023 improper payment data, for programs with at least $100.0 million in monetary loss can also be found at PaymentAccuracy.gov. This website also includes payment integrity information that had previously been reported in agency financial reports, such as information about program compliance, corrective actions, and accountability mechanisms.

OMB will continue to work with agencies, the CFO Council, and other stakeholders to improve the identification of the root causes of improper payments that result in monetary loss and to prevent improper payments from occurring.

Agency Financial Report Audits

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 FY 2023, 19 of the 24 CFO Act agencies obtained an unmodified opinion from the independent auditors on their financial statements.²⁹ In addition, 52 auditor-identified material weaknesses were identified for FY 2023, two more than in FY 2022. Twenty-eight of these are associated with DOD. The other 24 material weaknesses are associated with non-DOD agencies. Although virtually all federal agencies have adopted and maintained disciplined financial reporting operations, implemented effective internal controls over financial reporting, and integrated transaction processing with accounting records, weaknesses in financial management practices continue to prevent the government as a whole from achieving an audit opinion.

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 seven in FY 2023, and the number of auditors reporting lack of substantial compliance with one or more of the three Section 803(a) FFMIA requirements remained at eight in FY 2023.

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. Treasury works closely with agencies to manage 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.

Treasury was designated as the Financial Management Systems QSMO in 2020 and continues to pursue financial management improvement strategies that have government-wide implications. These strategies include standing up a financial management systems marketplace and developing system standards, standardized processes, system requirements, and system interfaces. These efforts are providing a path to the decommissioning of legacy systems and migration to updated systems, leveraging modernized technologies. In addition, agencies continue to coordinate with the Treasury QSMO to improve their financial management and financial reporting systems as described in their financial reports, congressional budget justifications, and performance plans. DOD continues 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.

HHS was designated as the Grants QSMO in 2021 and continues working to modernize and streamline the government’s vast and aging legacy grants management systems. The goal of this effort is to allow agencies to successfully manage grants through the entire award cycle and allow grants management systems to interface with agency financial management systems.

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 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 CFO Act agencies was 52 for FY 2023, two more than in FY 2022. Effective internal controls are a challenge at the agency level and at the government-wide level, with GAO reporting that at the government-wide 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.

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 government-wide 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.

Conclusion

The federal government has seen significant progress in financial management since the passage of the CFO Act more than 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. Together with Treasury and OMB, agencies are building on tools and capabilities to improve financial accountability and transparency.

Footnotes

²⁹ The 19 entities include HHS, which received an unmodified (“clean”) opinion on all statements except the SOSI and the SCSIA. (Back to Content)