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Almost exactly a decade ago, in February 1985, GAO issued a two-volume report entitled Managing the Cost of Government Building an Effective Financial Management Structure. We pointed out that the federal government—then as now the largest financial operation in the world—was employing financial management concepts and practices that were weak, outdated, and grossly inefficient. The problem spanned the whole spectrum of federal agencies. It hampered the ability of federal managers to prevent waste, fraud, and abuse. denied policymakers the information they needed to make informed decisions. It undercut the public's perception of government, creating a loss of confidence that was largely deserved.

In response to this problem, we called for Congress to bring some order to the government's financial affairs. Our report outlined the need for firm commitment, clearly identified leadership responsibility, and continuity of purpose. It called for the preparation and audit of annual financial statements. It stressed the need for accountability and accurate reporting, improved planning and programming, systematic performance measurement, reliable information systems, and adequate accounting standards.

In the


that followed, we worked closely with Congress to pursue these goals, and our efforts have paid great dividends in the past 5 years. In 1990, the Chief Financial Officers (CFO) Act was passed, creating the federal

government's first pilot program for agencywide financial statements. Three years later, the Government Performance and Results Act (GPRA) made performance management che touchstone of government operations. And in 1994, the Government Management Reform Act expanded the provisions of the CFO Act and set the stage

for consolidated, governmentwide financial statements by 1998.



Taken together, the ideas we advanced in Managing the Cost of Government were really nothing more than the elements of modern, responsible business practice. And yet, logical as they may seem today, these ideas took a long time to gain a footing—not just among federal agencies, but among publicly owned corporations and state and local governments as well. Simply put, the ingredients needed for sound financial management tend not to capture the public's imagination until things get out of handor near to it.

There was a time, for example, when publicly owned corporations were under no requirement to have audited financial statements. It took a dual calamity-the stock market crash of 1929 and the Great Depression--to bring about the creation of the Securities and Exchange Commission and comprehensive financial reporting requirements for publicly owned firms. That was in 1934.

Forty years later, no corresponding requirements existed for state and local governments. Then, New York City nearly went bankrupt. The city overestimated its revenues, underestimated its expenses, never knew how much cash it had on hand, and borrowed repeatedly to finance its deficit spending. Poor accounting practices were common among state and local governments, but New York City's financial crisis pur these problems in the spotlight.

Sensitive now to the implications of financial management deficiencies at the state and local levels, Congress focused on an issue directly affecting federal interests: the states' and localities' widespread lack of accountability for the financial aid the federal government provided them. That aid had expanded from 132 programs costing $7 billion in 1960 to over 500 programs costing nearly $95 billion in 1981. Considering the lack of comprehensive audits done of state and local governments, no one could be sure of the extent to which all this money was subject to waste or misuse. With the stakes grown so high, and with the signs of trouble so apparent, Congress passed the Single Audit Act of 1984.

The act required every state or local entity receiving $100,000 or more in federal financial assistance in any fiscal year to undergo a comprehensive, “single” audit of its financial operations by an independent auditor on an annual basis. The objeccive was to replace separate granc-by-grant audits with comprehensive audits of the encicies receiving these grants, eliminating both the duplication that comes from having several different audits of the same entity and gaps in audit coverage created by haphazard audit schedules.

Last June, we completed a study of the effects of the Single Audit Act and reported that over 21,000 state and local entities had audited financial statements under the act. State and local officials told us the single audit process has contributed to improving their financial management practices. They have installed new accounting systems, begun having annual comprehensive financial statement audits, adopted or accelerated the adoption of generally accepted accounting principles,

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improved systems for tracking federal funds, strengthened administrative controls over federal

programs, and increased oversight of entities to whom they distributed federal funds. Systems are now in place not just to detect problems after they have occurred, but to prevent them before they happen.


The Single Audit Act passed in 1984—50 years after Congress made financial reporting the rule for public corporations. With passage of the CFO Act in 1990, Congress moved at last to have federal agencies meet the same sort of financial statement reporting requirements as public corporations and state and local governments. Under the CFO Act, the scope of these requirements among federal agencies was limited but considerable. First, all U.S. government agencies were to prepare financial statements for all trust funds, revolving funds, and commercial activities. In essence, this meant that financial statements would be prepared whenever the federal government conducted activities similar to those of private businesses. Second, the act required that 10 cabinet departments and large agencies participate in a 3-year pilot program to test the usefulness of agencywide financial statements. Would the preparation of financial statements tell decisionmakers things they need to know? Would they help managers direct their organizations more effectively?

To both questions, the answer was yes. As GAO reported more than once during
1994, financial statement audits have provided a much clearer picture than has
ever existed of the government's financial condition, including massive problems of
uncollected revenues and unrecognized liabilities. Financial statement audits have
also brought discipline to federal agencies' efforts to pinpoint waste, mismanage-
ment, and possible illegal acts and have revealed the gaps in their efforts to safe-
guard the government's assets. Audits have also identified actual and potential
savings of hundreds of millions of dollars. Moreover, they have confirmed just
how little confidence Congress and program managers can place in the information
they now receive: our audits of the Internal Revenue Service, the Customs Service,
the Department of the Air Force, and the Department of the Army identified
accounting errors amounting to billions of dollars—mistakes and omissions that
can render financial information virtually useless.

"Financial statement audits now provide a clearer picture than has ever existed of the government's financial condition."

The findings were sobering, of course, but they were also crucial to Congress's decision to take the requirements of the CFO Act one critical step

further. The audited financial statements required under the CFO Act covered only about 60 percent of the government's budget authority and relatively few agencies on an overall basis. Medicare and Medicaid, for instance, were excluded to the tune of $200 billion a year. So was almost cwo-thirds, or $16 billion, of the Department of Energy's annual obligations to integrated contractors. So was the Navy's $90 billion yearly appropriation. But with the value of audited financial statements now fully demonstrated, Congress extended the CFO Act requirements to 24 major departments and agencies, accounting for virtually the entire federal

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