By Joseph J. DioGuardi, CPA

The Credit Card Mentality

Some people get very excited about their fist American Express Gold Card because it gives them a $10,000 credit limit. Others need to obtain a Platinum Card and its $100,000 credit limit to feel powerful. As a Member of the US House of Congress DissectsRepresentatives, however, I hold a plastic card that puts those two to shame – my Congressional voting card. In an instant, I can whip out my card, insert it in the computer terminal at the end of a row of seats, and vote in favor of spending $5 million on a water project in Mississippi, $30 million on an Air Force jet or $100 million on a Federal honey program, whether or not we have the money. Simply put, my voting card is the most expensive credit card in the world.

Many of the economic problems facing our country today stem from the unlimited abuse of the congressional voting card on spending measures. A “credit card mentality” has prevailed in Congress for years, and is well illustrated by my colleagues Newt Gingrich and Duncan Hunter in the two previous chapters of this book. By discussing “spendaholism,” however, they have only scratched the surface of the problem of excessive federal spending. Having spent 22 years in the private sector as a certified public accountant, I believe that the horror story known as the annual Congressional process stems from the fact that the United States government is not run in a businesslike way; we are missing fiscal discipline and meaningful financial information to measure the real cost of programs before we vote.

Congress as a Board of Directors

When I first ran for Congress, I thought that I was campaigning for a seat on the Board of Directors of Government much like a board of directors of major business corporation. I envisioned that as a member of Congress, I would be presented reliable information with which I would make decisions and then report back to the public, our taxpaying shareholders. What I have experienced thus far couldn’t be farther from this setting. Accountability is key to a board of directors; we have none in the federal government. Consider the now-famous Grace Commission report, which uncovered an estimated $424 billion dollars of mismanagement and waste in the federal government. Needless to say, if the federal government were really a publicly-held corporation, the blatant mismanagement of its resources described in this chapter would lead to an immediate investigation by the Securities and Exchange Commission and probably prison terms for those responsible.

The Problem: Poor Accounting Leads to Fiscal Mismanagement

One need not be a CPA to see that our current budget process has serious deficiencies. Congress stumbles from budget to budget and deficit to deficit, conscientiously proclaiming its commitment to Federal deficit reduction yet consistently neglecting to pay attention to the underlying problems of budget policy.

As Connie Mack explains in the next chapter, the time squeeze associated with existing budget procedures forces Congress to appropriate without proper oversight of the previous year’s authorization — in other words, we commit to spending more money without knowing what happened with the funds we allocated the year before. The net result of this process is that quantitative thinking replaces qualitative analysis, and the bottom line becomes more important than the relative success of a program. Thus, the fate of a budget item will more often rest upon political considerations than upon a sound economic analysis.

Meanwhile, our federal government operates on a Mickey Mouse, cash basis of accounting, does no strategic planning whatsoever with respect to spending and, as a result, wastes billions of dollars a year of taxpayer dollars. For example, when Congressional committees work towards developing a budget, they only ask how much money was spent during the previous fiscal year on a particular program, rather than ask how it was spent. This is tantamount to building a home from the fifth floor down, rather than from the ground floor up. The current system of superficial, quantitative, year to year comparative budgets has conditioned everyone in Washington to spend, not save.

What should concern us is that the current accounting system is exactly the same accounting system which contributed to the financial collapse of New York City in the mid-1970’s. As a precondition for economic assistance, the federal government required the City to cease using a cash basis of accounting. Why, then, do we still use it ourselves? Furthermore, New York had the federal government to bail it out, but who will bail out the federal government if its own budget crisis becomes worse than it already is? The Japanese?

One Hand Doesn’t Know What the Other is Doing

As if the use of a cash basis accounting system weren’t problem enough, there is enough variety among the numerous systems used by the federal departments and agencies that even the most practiced CPA would be confused. There is nothing new about this state of affairs. For year, the General Accounting Office of Congress (GAO) has reported that these government entities are a jungle of special purpose, incompatible, antiquated accounting systems that produce unreliable and often irrelevant financial information. One of the latest GAO studies, moreover, reported that the federal government now uses more than 425 different accounting systems and more than 150 different payroll systems. Of these, more than half do not even conform to GAO-approved standards, let alone generally accepted accounting principles.

Other voices besides the GAO have called attention to the inadequacy of federal accounting systems and the lack of accountability resulting from inadequate federal financial management systems. For example, President Reagan’s Council on Management Improvement released a study in September, 1985 concerning a “Strategic Plan for Federal Financial Management.” This study was unique in that it did not depend on the assessments of outside critics. Instead, its results came from those on the firing line: financial management executives in Federal departments and agencies.

Notably, those interviewed for the study regarded less than 50 percent of governmental accounting and financial reporting systems as capable of producing timely, accurate and relevant information for management decision-making. In addition, 61 percent of the systems cannot provide the data necessary for assessing management performance, 35 percent of the systems were considered incapable of providing sufficient data to support the allocation of funds, and 33 percent do not provide effective control over, and accountability for, assets.

Didn’t Anyone Here Take Accounting 101?

The extent to which the government as a whole departs from basic accounting textbook requirements — to say nothing of common sense — defies logic. And earlier GAO study, “Managing the Cost of Government,” for example, illustrated that agencies budget and account for costs on different bases. Budgets are requested and justified in terms of programs and projects, such as infant health care or dams for flood control. Accounting reports, however, often focus on actual appropriations and categories of expenses such as personnel, without relating them to the particular programs for which the money was requested and approved. Further complicating the budget process, as Connie Mack explains in the next chapter, is the division of labor between authorizing and appropriations committees in the House, which often leaves us with a situation in which one hand doesn’t know what the other is doing.

In assessing the lack of internal controls and compliance with proper accounting techniques, the GAO has cited the failure of the Office of Management and Budget (OMB is part of the Executive Branch) to develop adequate financial management guidelines as a principal cause. But something more fundamental is at issue; to the detriment of all involved, OMB has generally been charged with focusing primarily on the bottom line of the budget and not on examining how it gets there. As a result, despite OMB’s best intentions, the development of such guidelines may require more time, resources and expertise — and the actual process more leadership — than OMB is able to provide.

The Solution: The Federal Financial Improvement Act of 1987

Given these obstacles, how can we as legislators make effective financial decisions when most of the numbers we receive are untimely, questionable or meaningless? Over the past 30-35 years, some attempts have been made to bring some sense to the shambles of an accounting system that is used by our federal government. Inexplicably, none was fully implemented. Though there has been some recent movement at OMB to give financial management the attention it richly deserves, there hasn’t been enough.

In light of the need for radical change in our present accounting and financial management systems, I have utilized my background as a CPA to propose legislation that would fill the void in financial management leadership in the federal government: the Federal Financial Management Improvement Act of 1987.

When enacted, my bill (H.R. 1241) would address the inconsistencies, overlap and duplication that are prevalent in our federal government’s crude attempt to manage itself financially. Currently, the federal financial management functions are divided among three central agencies in the Executive Branch — OMB, the Office of Personnel Management (OPM) and the Treasury Department — the various Executive Branch agencies and the General Accounting Office. None of these entities has clear-cut responsibility for oversight and direction of the Federal government’s financial management operations and activities. In addition, financial management responsibilities have frequently been shifted from one central agency to another and have been relegated to a secondary role behind other policy concerns. (All this at a time when we are spending 1 trillion dollars a year, on a cash basis.)

The legislative remedy I have recommended comes in three parts:

1. The establishment of an independent Office of the Chief Financial Officer of the United States (CFO) within the Executive Office of the President for the purpose of providing government-wide direction and coordination of financial management activities;
2. The establishment of an office of the Assistant Secretary for Financial Management within each executive agency; and
3. The creation of a Federal Financial Management Council chaired by the CFO and composed of the Assistant Secretaries of each executive agency.

Essentially, the CFO would provide strategic planning and leadership while actively coordinating and monitoring the executive agencies in their financial management and reporting functions. Working closely with the persons appointed to the newly-created Assistant Secretary positions, the CFO would primarily provide the Executive Branch with centralized guidance on financial management that is not currently available.

Furthermore, the improved coordination among the agencies of the federal government that one could expect from a system utilizing a CFO would have a very positive effect on the annual budget deliberations in Congress. By creating a much clearer picture of the needs of the federal government, the accurate data that the CFO would provide to Congress would help us allocate resources more efficiently, eliminating much of the wasteful federal spending that occurs under the current budget process. Implementing appropriate accounting principles and systems would become a top priority.

Conclusion: The CFO — An Idea Whose Time has Come

Gramm-Rudman was called a bad idea whose time had come. A Chief Financial Officer for the federal government is a good idea whose time is long overdue. Sound financial management practices are not just accountants’ issues. It is not a Republican issue and it is not a Democrat issue. Colleagues on both sides of the aisle in Congress have agreed on the clear need for action in the area of fiscal discipline. But without a foundation of accurate financial information and proper management practices, the entire structure is capable of collapsing around us.

By adopting the provisions in the Federal Financial Management Improvement Act in 1987 and by combining them with reforms such as a two-year budget cycle, creation of a capital budget and enhanced Presidential impoundment authority, we would create a sense of order and direction during the Congressional budget process. This, in turn, would finally place a limit on the Congressional “credit card” that I discussed earlier in this chapter — the electronic voting card — and would assure the American taxpayer full accountability for the way we spend his or her money.