IMPROVEMENT OF FINANCIAL MANAGEMENT IN THE FEDERAL 1 GOVERNMENT 1 In recent years, the financial management practices of the Federal Government have been given increasing attention and study by the executive agencies and the three central agencies the General Accounting Office, the Bureau of the Budget, and the Treasury Departmentunder the joint program for improving accounting. In addition, the recent (Hoover) Commission on Organization of the Executive Branch of the Government conducted a critical appraisal of existing practices that resulted in a series of recommendations for further development of financial management in Government. Those recommendations were contained in the Budget and Accounting Report submitted to the Congress by the Commission in June 1955. Major proposals in that report suggested strengthening the managerial and budgeting functions of the Bureau of the Budget, placing additional emphasis on the accounting functions of the Bureau and the executive agencies, and broadening the development and use of costs in the financial affairs of Government. Other recommendations were directed toward related improvements in budgeting, accounting, and reporting practices. A complete list of the Commission's recommendations in the Budget and Accounting Report is provided in the appendixes. The proposals of this second Hoover Commission, in effect, represented a broad endorsement of the objectives and activities of the joint accounting program. Presented against a background of the progress made in recent years, they identified problems which should be given priority attention at this time. The central agencies in the joint accounting program are now taking steps in accordance wth those proposals. Of these central agencies, the Bureau of the Budget is most directly affected by the recommendations of the second Hoover Commission. Since those proposals were made, the Bureau has taken positive action toward implementation of the recommendations. It is the purpose of this pamphlet to relate these actions to existing practices, and discuss plans for further development and improvement as they affect agencies throughout the Government. Background Basic legislation pertaining to the Bureau of the Budget is contained in the Budget and Accounting Act, 1921. This act established the Bureau and identified its basic budget and management functions. In relation to those assigned functions, the act of 1921 placed responsibility in the Bureau, when directed by the President, for making detailed studies of agency organization, activities, and business methods that would enable more efficient and economical operations. Executive Order No. 8248 of September 8, 1939, outlined the continuing responsibilities of the Bureau of the Budget in these fields. With the advent of the joint accounting program in 1948, the Bureau established a staff unit to carry out the responsibilities of the Director of the Bureau of the Budget under the joint program. This was a relatively small operation in which primary emphasis was placed on coordinating the Bureau's budget and management activities with developments in the improvement of accounting and financial reporting under the joint accounting program. The Budget and Accounting Procedures Act of 1950 more specifically identified the accounting role of the Bureau of the Budget. That act expressed the intent of Congress that maintenance of accounting systems and development of financial reports were the responsibility of the executive branch; that emphasis should be placed on effecting orderly improvements toward more effective financial management practices; and that the Treasury Department, the General Accounting Office, and the Bureau of the Budget should conduct a continuous program for the improvement of accounting and financial reporting. It specified that the accounting of the Government provide *** adequate financial information needed in **the formulation and execution of the budget 1 From the pamphlet, Improvement of Financial Management in the Federal Government, issued by the Bureau of the Budget, October 1956. agencies should be designed to provide― reliable accounting results to serve as and that the central financial reports of the Government to be prepared by the Treasury Department should include such financial data as the Director of In addition, the Budget and Accounting Procedures Act of 1950 authorized and directed the President, through the Bureau of the Budget, to evaluate and develop improved plans for the organization, coordination, and management of the executive branch of the Government with a view to efficient and economical service. Current developments The Budget and Accounting Report of the second Hoover Commission gave recognition to the value of the joint accounting program and the improvements that had been made by the executive agencies in the conduct of their financial affairs. It recognized the cooperative assistance furnished by the General Acccounting Office to the agencies, and stressed the need for greater stimulation of agency improvements within the executive branch. In this connection, it noted the comparatively limited participation of the Bureau of the Budget in this joint effort, and emphasized this need by recommending a strengthening of the Bureau's participation and the establishment of a new staff Office of Accounting to provide the leadership required. The latter proposal was intended to emphasize the accounting role of the Bureau of the Budget, to establish responsibility for accounting improvements in close proximity to existing responsibilities for budgetary improvements, and to give the accounting function increased stature in the executive branch. To insure the desired results, the Commission proposed that the new Office of Accounting be headed by an Assistant Director for Accounting, who would be given responsibility for developing and carrying out a comprehensive plan for accounting and reporting, and for assisting executive agencies in the introduction of modern account accounting and auditing organizations. After extensive evaluation and consideration of the Commission's budget and accounting proposals throughout the executive branch, the Director of the Bureau of the Budget developed plans for putting those recommendations into effect. As a first step, the accounting improvement staff in the Bureau were placed in an Office of Accounting under an Assistant Director, who was given responsibility for providing the desired leadership in this effort. The President approved these plans, as reflected in his correspondence, with the Director of the Bureau on this subject. On May 10, 1956, the President transmitted to the Speaker of the House of Representatives a request for a supplemental appropriation to enable the Bureau of the Budget to carry out the recommendations of the second Hoover Commission for further improvement in executive branch budgeting, accounting, and management generally. In recognition of his responsibilities under section 104 of the Budget and Accounting Procedures Act of 1950, the President stated: Expansion of the staff resources of the Bureau of the Budget is needed in order that the Bureau may provide, on my behalf, more active central leadership in the advancement of administration in the executive agencies. With the supplemental funds appropriated, additional staff have been obtained for the Office of Accounting, to make a start toward the type of program visualized by the second Hoover Commission. Experience accumulated in the initial phase of this program will be used as the basis for further development according to the identified need. The accounting staff of the Bureau will continue to work closely with the staff of the Bureau of the Budget that are responsible for the budget and management functions. This will serve to insure appropriate coordination of related requirements and the development of properly integrated budget and accounting sys The additional staff facilities of the Bureau of the Budget will enable increased emphasis on working with the executive agencies in their developmental efforts. Financial management improvement efforts will continue to be carried out within the framework of the joint accounting program. This program was initiated originally to give recognition to the need for joint action in the accounting field by the executive and legislative branches, and to avoid the jurisdictional conflicts that had arisen in previous attempts to has been made in this cooperative effort in recent years, and the additional staff facilities in the Bureau of the Budget are intended to provide greater executive branch participation and thus enable more rapid accomplishment of the stated objectives of the joint program. Improvement objectives Financial management objectives have been identified and defined as a result of cooperative efforts in recent years toward the use of improved budgeting, accounting, and reporting practices. They are reflected in the funda mental concepts of the joint accounting program, in the principles and standards prescribed by the Comptroller General, and in the instructions of the Bureau of the Budget and the Treasury Department. These principles, standards, and instructions, which may be restated from time to time as experience indicates, will be used as guides by the Bureau of the Budget in carrying out its assigned functions. The second Hoover Commission's Budget and Accounting Report endorsed these objectives by presenting recommendations that were consistent with current improvement efforts. The evaluation and analysis of these proposals in the executive branch resulted in the general acceptance of most of the recommendations or their objectives, with the recognition, however, that complete implementation of these recommendations necessitated a long-range program because of the basic nature of many of the changes to be made. Based on this analysis, the President recognized this report as a document of great public significance. In his letter to the Director of the Bureau of the Budget on April 26, 1956, the President expressed his desire that the executive agencies intensify their efforts along these lines. In this and his related message to the Congress on May 10, 1956, the President noted that executive branch efforts on many of these proposals would require close coordination with the legislative branch, and urged early congressional enactment of appropriate legislative proposals. Congressional action The Congress gave evidence of its interest in these recommendations by the many bills that were introduced and the full hearings that were held on the subject of budget and accounting improvements. Early in the 2d session of the 84th Congress, identical bills were introduced in each House covering the Commission's recommendations which were considered to need legislation for effective implementation. These bills covered 16 of the recommendations-those 101 and reporting, accounting and budgeting on a cost basis, allotment and accounting improvements, consistent financial and organization classification, internal auditing, and the location of Bureau personnel in the agencies. The hearings made clear the need for administrative flexibility on some of the recommendations involved, with the result that the initial legislative proposals were superseded by revised bills which would provide legislation consistent with the implementation plans of the executive branch. At the hearings on one of the revised bills (S. 3897, subsequently Public Law 863), the Comptroller General and the Director of the Bureau of the Budget strongly endorsed the proposed legislation in their testimony and urged its speedy enactment. They indicated that improved financial administration could not be accomplished solely by legislation, but that the proposed bill would be helpful in establishing congressional policy, and in creating a framework for more rapid progress in Governmentwide improvement efforts. The Secretary of the Treasury submitted a letter that indicated his complete support of the objectives of the Commission's recommendations, and pointed out that the bill would enable agencies to move forward in a vigorous improvement program. As a result of these legislative considerations, two public laws related to the proposals of the second Hoover Commission were enacted. The first of these-Public Law 798-was signed by the President on July 25, 1956. As originally introduced, it would have implemented two of the Commission's proposals those providing for merger of the unliquidated obligations of appropriations made for the same general purpose, and agency payment of claims. As enacted, Public Law 798 continues the requirement of separate appropriation accounts for 2 fiscal years after the fiscal year for which the appropriation was made, but provides for improvement of the claim procedures. Implementing regulations have been developed and issued by the General Accounting Office to effectuate certain provisions of this law; others will be issued subsequently by the central agencies involved. The second bill enacted by the 84th Congress-Public Law 863-was signed by the President on August 1, 1956. This was the major legislative proposal on the budget and accounting recommendations of the second Hoover Commission. As introduced, it covered nine of those recommendations, including provisions for gradual conversion to a procedure under which the Congress would appropriate funds in terms of "accrued expenditures," the use of costs in accounting and budgeting in the executive agencies, the improvement of agency allotment practices, and the development of consistency in financial and organization classifications. During consideration of this bill by the Congress the provision for appropriating funds on the "accrued expenditure" basis was deleted. A statement issued by the President when he signed this bill is included as appendix VII. Public Law 863 constitutes an important keystone of this financial improvement effort. It establishes in law a basic principle for Government budgeting and accounting the development and use of cost information. It provides an expression of intent on the part of the legislative branch which, together with the President's statement on policies of the executive branch, provides a firm basis for moving forward in the improvement of financial management as rapidly as available resources permit. PATTERN OF IMPROVEMENT EFFORT Public Law 863 provides the broad outline of the immediate objectives of the Bureau of the Budget in its work with the operating agencies under the joint accounting program to improve financial management of the executive branch. As indicated above, the various sections of the law as enacted cover the following: 1. Accounting on an accrual and cost basis 2. Budgeting on a cost basis (sec. 1). 4. Justification data by organization (sec. 5. Simplification of allotment structure (sec. 3). The more detailed discussion of each of these, as set forth below, provides guides for agency use in the development of needed improvement plans. Accounting on an accrual and cost basis Public Law 863 provides that the head of each executive agency shall take steps as soon as practicable to convert the agency accounting system to the accrual basis, including the installation of adequate monetary property accounting records as an integral part of the system. It further provides that such action shall be taken in accordance with principles and standards prescribed by the Comptroller General, with a view to facilitating the preparation of cost-based budgets. An accrual accounting system is one which gives recognition to the receipt of goods and services and the consumption or use of re sources, and reflects the assets and liabilities. In addition, to facilitate the preparation of cost-based budgets, such a system records these transactions on a basis that is integrated with records of obligations incurred as well as disbursements made. Thus, an accrual accounting system in a Government agency develops information as needed on costs of goods and services used, accrued expenditures, disbursements, and obligations. It incorporates financial controls that are consistent with management responsibilities generally providing for broad fund controls in terms of limitations on obligations at a fairly high level of agency operations, and more detailed controls in terms of estimates of specific costs attributable to each of the agency programs. In contrast to the traditional accounting system in Government, an accrual accounting system provides additional and more useful information, since it reflects not only the availability of funds, but also furnishes data on resources on hand in an agency, and the actual use of such available resources. Cost data on the use of resources are essential to agency management for effective budgeting practices. The costs of a given operation must be known to enable the most accurate determination of funds needed to finance a planned program. Similarly, in carrying out a program, cost information is needed so that these data can be related to work accomplishments and the operating officials may be advised of the progress actually being made on the job, in addition to the rate at which available funds are being used. In accordance with the principles and standards issued by the Comptroller General, the degree to which the accrual basis will be applied in individual agencies will vary with the kind of operations conducted. The accounting provisions of Public Law 863 mean at a minimum that all agency systems which currently develop only obligation and disbursement data should be refined to produce also at appropriate time intervals information on accrued expenditures the cost of goods and services received. Depending on the type of program conducted by the agency, this change in the agency accounting system may involve further refinement to produce information on the cost of goods and services used, the cost of items procured or produced, or the cost of work in place. The accrual basis should be applied in each case to the extent that the additional information obtained will be more useful to agency management in the conduct of operations, and provide for more complete and accurate disclosure of financial status cases, accounting on an accrual and cost basis must be integrated with such other accounting records as are needed to provide for control and information on obligations and to provide for information on disbursements. Budgeting on a cost basis Public Law 863 provides that agency appropriation requests submitted to the Bureau of the Budget shall be developed from cost-based budgets in such manner and at such times as may be determined by the President, and that the Budget transmitted to the Congress shall contain information on program costs and accomplishments at such times as may be practicable. It also directs agencies to use such costbased budgets internally for administration and operation, and as the basis for making allot ments. Budgeting practices such as these are currently in use in a number of agencies, including four for which cost-based appropriation presentations were made in the 1957 budget document. While Public Law 863 was under consideration by the Congress, the Appropriations Committee of the House of Representatives commented, in House Report No. 2638, July 7, 1956, on the further extension of this practice. The committee said in part: *** There has been a gradual increase, over the past 5 years, in the number of activities of the Government whose accounts and/or budgets are on a cost basis. It was testified that the current recommendation [of the second Hoover Commission] does not require implementing legislation, and can be accomplished without any basic change in the present method of appropriating funds. Continuation of this evolution, as to significant appropriation items, is recommended and approved by the committee. Accordingly, additional cost based appropriation presentations will be made in the 1958 budget, and this expansion will continue in future years consistent with agency progress in improving existing budget and accounting systems in accordance with Public Law 863. The four presentations of this type in the 1957 budget, and illustrations of the different forms of cost-based appropriation presentations are shown in Bureau of the Budget Circular No. A-11. As indicated by the Circular No. A-11 illustrations, a cost-based budget relates accomplishments and future work plans to costs in terms of resources consumed, work in place, or, in cured or produced. Such a budget also identifies the resources on hand which are available for application to the program financed by the appropriation, the value of goods and services that have been ordered but have not been received, and the total obligations required to finance the program. An effective budget system depends on the accurate forecasting of requirements for a planned program. The estimates should be based on past experience as recorded in the accounts and should take into consideration all factors that have a bearing on the financing and conduct of the program under consideration. In the final analysis, despite the other pertinent considerations, an estimate of requirements can only be as good as the basis used. A budget developed through use of cost data obtained from an accrual accounting system provides the most accurate measure of past experience and brings into consideration the use of obligating authority and other pertinent financing factors. It therefore furnishes the most complete disclosure and is of major benefit for review and analysis of a budget request. The significance of a cost-based budget varies with the type of program conducted by the agency. When inventories and long lead-time programs are involved, the cost-based budget provides its greatest benefit because of the identification of carryovers of available resources from one year to another. In addition, the evaluation of long-range programs can more effectively be made because the accrual basis of accounting identifies the use of resources in relation to the time period involved. In agencies where the carryover of resources is not substantial, the change in presentation resulting from use of a cost-based budget may be relatively minor. In such cases, however, benefits are derived in terms of the more precise budget and accounting practices required for this purpose. In view of the benefits to be derived, costbased budgets will be used throughout the Government to the fullest extent practicable. This will be accomplished on a gradual basis in accordance with the pertinent provisions in Bureau of the Budget Circular No. A-11, i. e., at such time as the agency involved employs an accrual accounting system that will support such a presentation and provides data useful for its operating purposes and for analysis of budget requirements. Plans in each agency for improvement of financial management should therefore include appropriate provisions for the development of cost-based budgeting procedures, and should give priority attention to |