Management Accountability and Control

OFFICE OF MANAGEMENT AND BUDGET

Management Accountability and Control

AGENCY: Office of Management and Budget.

ACTION: Final Revision of OMB Circular No. A-123.

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SUMMARY: This Notice revises Office of Management and Budget (OMB)

Circular No. A-123, ``Management Accountability and Control.'' The

Circular, which was previously titled ``Internal Control Systems,''

implements the Federal Managers' Financial Integrity Act of 1982

(FMFIA).

FOR FURTHER INFORMATION CONTACT: Office of Management and Budget,

Office of Federal Financial Management, Management Integrity Branch,

Room 6025, New Executive Office Building, Washington, DC 20503,

telephone (202) 395-6911 and fax (202) 395-3952. For a copy of the

revised Circular, contact Office of Administration, Publications

Office, room 2200, New Executive Office Building, Washington, DC 20503,

or telephone (202) 395-7332.

ELECTRONIC ACCESS: This Circular is also accessible on the U.S.

Department of Commerce's FedWorld Network under the OMB Library of

Files.

The Telnet address for FedWorld via Internet is

``fedworld.gov''.

The World Wide Web address is ``http://www.fedworld.gov/

ftp.htm#omb''.

For file transfer protocol (FTP) access, the address is

``ftp://fwux.fedworld.gov/pub/omb/omb.htm''.

The telephone number for the FedWorld help desk is (703) 487-4608.

SUPPLEMENTARY INFORMATION:

A. Background

Circular No. A-123 was last issued on August 4, 1986. On March 13,

1995 the Office of Management and Budget requested public comments on a

revised version of the Circular (60 FR 13484).

The revision announced here alters requirements for executive

agencies on evaluating management controls, consistent with

recommendations made by the National Performance Review. The Circular

now integrates many policy issuances on management control into a

single document, and provides a framework for integrating management

control assessments with other work now being performed by agency

managers, auditors and evaluators.

The Circular emphasizes that management controls should benefit

rather than encumber management, and should make sense for each

agency's operating structure and environment. By giving agencies the

discretion to determine which tools to use in arriving at the annual

assurance statement to the President and the Congress, the Circular

represents an important step toward a streamlined management control

program that incorporates the reinvention principles of this

Administration.

B. Analysis of Comments

Thirty-three responses were received from 23 Federal agencies and

the

[[Page 33877]]

American Institute of Certified Public Accountants (AICPA). Of the 33

responses, 14 simply agreed with the proposed revision and made no

comments on the document, although some had minor comments on a

proposal by the Chief Financial Officers' Council to streamline

reporting. Almost all of the remaining 19 responses were also in favor

of the revision, but made some specific suggestions.

A summary of the transmittal memorandum and the five sections of

the Circular follows. Each section indicates which comments were

accepted and which were not accepted.

Transmittal Memorandum. This memorandum, signed by the OMB

Director, summarizes the purpose, authority, and policy reflected in

the Circular, the actions required, and related administrative

information. Four agencies made comments relating to the memorandum.

Comments Accepted: The statement describing management

accountability is now repeated in Section I of the Circular. The

definition of management controls (which appears in both the memorandum

and Section II) has been amended to state that controls should ensure

reliable ``and timely'' information. The requirement that agencies

report annually on management controls is now explicitly stated in the

memorandum. In addition, OMB has added instructions on accessing the

Circular electronically.

Comment Not Accepted: One agency suggested that performance

appraisals be used to hold managers accountable for management control

responsibilities. OMB supports this concept but prefers that the

specific content of appraisals be left to each agency.

Section I. Introduction. This section describes a framework for

agency management control programs that integrates management control

activities with other management requirements and policies, such as the

Government Performance and Results Act (GPRA), the Chief Financial

Officers (CFOs) Act, the Inspector General (IG) Act, and other

congressional and Executive Branch requirements. The foundation of this

policy is that management control activities are not stand-alone

management practices, but rather are woven into the day-to-day

operational responsibilities of agency managers.

Agencies are encouraged to plan for how the requirements of the

Circular will be implemented. Agencies are also encouraged to establish

senior level management councils to address management accountability

and related issues within the broad context of agency operations.

Comments Accepted: At the suggestion of three agencies, the

language illustrating how controls can be integrated into the overall

management process has been clarified. The text now indicates more

clearly that the examples used to make this point are in fact examples,

not new Circular requirements. Because the Act encompasses agency

operations, as well as program and administrative areas, appropriate

language has been included in the Circular. In addition, the Circular

states that 24 agencies are covered by the CFOs Act, which reflects the

legislation last year that made the Social Security Administration an

independent agency from the Department of Health and Human Services.

Comments Not Accepted: Two agencies questioned elimination of the

Management Control Plan. The importance of planning has not been

diminished in the new Circular, but OMB will no longer dictate the

scope and content of an agency's planning document. An agency may

choose, for example, to meet the Circular's planning requirement by

addressing management controls in a broader strategic plan for agency

management.

Section II. Establishing Management Controls. This section defines

management controls, and requires agency managers to develop and

implement appropriate management controls. Included in this section are

general and specific management control standards, drawn in large part

from the standards issued by the General Accounting Office (GAO). By

including these standards in the Circular, OMB is continuing its

efforts to integrate various management control policies into a single

document to make it easier for Federal managers to implement good

management controls.

Comments Accepted: Four agencies questioned whether the definition

of internal controls as a subset of management controls should be

limited to conditions ``that could have a material effect on [the

entity's] financial statements.'' One agency pointed out that

deficiencies in internal controls related to events that have less than

a major impact on financial statements, like security weaknesses or

conflict of interest problems, could be reportable under the Integrity

Act. OMB agrees and has deleted the restrictive phrase.

In response to one agency's comment, language on developing

management controls has been expanded to emphasize that controls must

be developed as programs are initially implemented, as well as

reengineered. At another agency's suggestion, a statement has been

included on the value of drawing on the expertise of the CFO and IG as

controls are developed.

Responding to two agencies' comments on the standards for

management controls, the standard on compliance with law has been

expanded to included compliance with regulations, and the standard on

delegation of authority now clearly states that managers should ensure

that authority, responsibility and accountability are defined and

delegated.

Comments Not Accepted: The AICPA recommended that the Circular

adopt the framework and definitions of internal controls developed by

the Committee of Sponsoring Organizations of the Treadway Commission

(the COSO framework). OMB has carefully reviewed the COSO approach and

feels confident that the Circular incorporates virtually all of the

concepts underlying the COSO framework. It is critical, however, for

the Circular to present these concepts in language that is meaningful

to Federal program managers as well as financial managers. Therefore,

OMB has decided to retain the Circular's broader terminology.

One agency questioned OMB's authority to (i) include management

control standards in the Circular and (ii) modify the language of GAO's

Standards for Internal Control. OMB has included GAO in discussions

about the Circular's revision since the beginning of the effort, and

has provided GAO with the opportunity to comment on numerous drafts of

the document. GAO has not objected to inclusion of the standards in the

Circular, nor has GAO questioned the document's specific language. OMB

believes that the Circular accurately incorporates the GAO standards,

and appropriately updates the language to reflect developments in this

area since GAO issued its standards in 1983.

Two agencies recommended more flexibility in the standard relating

to separation of duties, arguing that the principle may be overly rigid

in an era of downsizing. One agency described the difficulty of

applying this standard in small field offices, and suggested that

alternative controls based on advanced technology, such as systems

access controls and automated audit trails, may be appropriate. While

OMB believes that separation of duties is a key management control

standard, it recognizes the validity of these examples. The standard

has not been modified because appropriate flexibility is already

provided; the language states that key duties ``should'' be separated

among individuals.

One agency questioned whether the Circular adequately emphasizes

the

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concept of reasonable assurance. OMB recognizes the importance of this

concept, and believes that its inclusion as one of the general

management control standards is sufficient.

Section III. Assessing and Improving Management Controls. This

section states that agency managers should continuously monitor and

improve the effectiveness of management controls. This continuous

monitoring, and other periodic evaluations, should provide the basis

for the agency head's annual assessment of and report on management

controls. Agencies are encouraged to use a variety of information

sources to arrive at the annual assurance statement to the President

and the Congress. Several examples of sources of information are

included in this section. The role of the agency's senior management

council in making recommendations on the annual assurance statement and

on which deficiencies in management controls should be considered

material is also addressed.

Comments Accepted: OMB recognizes the need to clarify how the term

``material weakness'' as used in the Circular differs from the same

term as used by Federal auditors. This issue was raised by one agency

in its written comments, and by other parties in discussions of earlier

drafts. The Circular now recognizes that Federal auditors are required

to identify and report weaknesses that, in their opinion, pose a risk

or threat to the internal control systems of an entity (such as a

program or operation) even if the management of that entity would not

report the weakness outside the agency.

Comments Not Accepted: Two agencies found the Circular's

requirements on assessing and documenting the sufficiency of management

controls to be inadequate, and suggested that the Circular provide more

specific guidance in these areas. In keeping with the philosophy behind

the Circular, OMB prefers to give agencies the latitude to expand upon

the Circular's requirements in these areas, if they believe it is

necessary, rather than to impose uniform criteria for determining, for

example, what should be reported as a material weakness.

Along those lines, OMB has chosen not to adopt the definitions used

by Federal auditors of a reportable condition and material weakness, as

advocated by one agency and the AICPA. Those definitions are weighted

heavily toward technical, financially-oriented terms that are probably

not meaningful to Federal program managers. They also focus on

financial statements as the primary end-product of an internal control

structure. While financial statements are important tools for the

agency head in arriving at an assurance statement on management

controls, they are not the only source of information for making this

determination. Therefore, it is important that the Circular use

language that accurately reflects the broad nature of agency management

controls.

Two agencies felt that the Circular should require that agencies

test their management controls. OMB agrees that testing is an important

method for determining whether controls actually work, and encourages

agencies to use some form of testing. Because testing is already

implicit in several of the information sources to be used to assess

controls, and is less feasible for other information sources, it is not

included as a blanket requirement.

Three agencies commented on the composition of an agency's senior

management council; two felt that the Circular should be more specific

in discussing membership, while one found this section too

prescriptive. OMB believes that the current language adequately

addresses the importance of including both line and staff management

and involving the IG, without infringing on the agency's ability to

determine the council's membership.

Section IV. Correcting Management Control Deficiencies. This

section states that agency management is responsible for taking timely

and effective action to correct management control deficiencies.

Correcting these deficiencies is an integral part of management's

responsibilities and must be considered a priority by the agency.

The only comment received on this section reflected a

misunderstanding of the Circular's requirements on corrective action

plans. Plans must be developed, tracked, and reported for all material

weaknesses (weaknesses included in the Integrity Act report). For

weaknesses that are not included in the report, plans should be

developed and tracked at a level deemed appropriate by the agency.

Section V. Reporting on Management Controls. This section describes

the required components of the agency's annual Integrity Act report and

its distribution to the President and the Congress. This section also

describes a initiative to streamline reporting by consolidating

Integrity Act information with other performance-related reporting into

a broader ``Accountability Report'' to be issued annually by the agency

head. Lastly, this section presents Integrity Act requirements as they

pertain to government corporations pursuant to the CFOs Act.

Comments Accepted: At the suggestion of two commenters, agencies

are now encouraged to make their Integrity Act reports available

electronically. The reference to a House committee has been changed to

reflect the nomenclature of the 104th Congress.

This section also describes an new approach towards financial

management reporting that could help integrate management initiatives.

This approach is being pilot-tested by several agencies for FY 1995.

Further information on the implications of this initiative for other

agencies will be issued by OMB after the pilot reports have been

evaluated.

Comments Not Accepted: One agency questioned the wisdom of

permitting agencies to provide a qualified statement of assurance. OMB

expects agencies to provide the most direct possible statement of

assurance. The option of a qualified statement recognizes that in some

cases, the most accurate statement of assurance is one that is

qualified by exceptions that are explicitly noted.

The same agency suggested new language in the reporting section to

recognize that the Circular broadens the scope of internal control

accountability beyond the requirements of the Integrity Act. OMB

disagrees with the premise that the link between management controls

and program performance is a new one. While the Integrity Act uses

financially oriented terminology, the Act ``clearly encompasses program

and administrative areas, as well as the more traditional accounting

and financial management areas'' (House Report 98-937, ``First-Year

Implementation of the Federal Managers' Financial Integrity Act,''

Committee on Government Operations, August 2, 1984, p. 1).

General Issues. Some comments were not limited to specific sections

of the Circular.

Comments Accepted: In response to one agency's suggestion, the

acronym ``FMFIA'' has been replaced throughout the Circular by the term

``Integrity Act'' to better emphasize the purpose and scope of the law.

OMB has also modified the term ``should'' in several instances where

specific agency action is required.

Comments Not Accepted: Two agencies proposed that the Circular

broaden the linkage between management controls and other management

initiatives, particularly performance measurement and implementation of

GPRA. OMB encourages agencies to integrate their efforts to evaluate

management controls and program performance, but is not

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prepared at this time to include policy guidance on performance

measurement in this Circular.

One agency proposed inclusion of language describing the

applicability of the Circular to discretionary policy matters, as had

been done in the 1986 version. OMB does not believe that this language

is necessary because it is clear that the President and agency head

have full discretion over policymaking functions, including determining

and interpreting policy, determining program need, making resource

allocation decisions, and pursuing rulemaking.

Two agencies suggested that the Circular specifically address OMB's

High Risk Program. OMB has chosen not to do so because implementation

of the management control program outlined in the Circular will likely

eliminate the need for separate tracking of high risk areas. If

agencies report their most serious management deficiencies to the

President and the Congress as envisioned by the Circular, the Integrity

Act reports will essentially reflect the highest risk areas in

government, and a separate High Risk Program may no longer be

necessary.

John B. Arthur,

Associate Director for Administration.

EXECUTIVE OFFICE OF THE PRESIDENT

Office of Management and Budget

[Circular No. A-123, Revised]

June 21, 1995.

To the Heads of Executive Departments and Establishments

From: Alice M. Rivlin, Director

Subject: Management Accountability and Control

1. Purpose and Authority. As Federal employees develop and

implement strategies for reengineering agency programs and

operations, they should design management structures that help

ensure accountability for results, and include appropriate, cost-

effective controls. This Circular provides guidance to Federal

managers on improving the accountability and effectiveness of

Federal programs and operations by establishing, assessing,

correcting, and reporting on management controls.

The Circular is issued under the authority of the Federal

Managers' Financial Integrity Act of 1982 as codified in 31 U.S.C.

3512.

The Circular replaces Circular No. A-123, ``Internal Control

Systems,'' revised, dated August 4, 1986, and OMB's 1982 ``Internal

Controls Guidelines'' and associated ``Questions and Answers''

document, which are hereby rescinded.

2. Policy. Management accountability is the expectation that

managers are responsible for the quality and timeliness of program

performance, increasing productivity, controlling costs and

mitigating adverse aspects of agency operations, and assuring that

programs are managed with integrity and in compliance with

applicable law.

Management controls are the organization, policies, and

procedures used to reasonably ensure that (i) programs achieve their

intended results; (ii) resources are used consistent with agency

mission; (iii) programs and resources are protected from waste,

fraud, and mismanagement; (iv) laws and regulations are followed;

and (v) reliable and timely information is obtained, maintained,

reported and used for decision making.

3. Actions Required. Agencies and individual Federal managers

must take systematic and proactive measures to (i) develop and

implement appropriate, cost-effective management controls for

results-oriented management; (ii) assess the adequacy of management

controls in Federal programs and operations; (iii) identify needed

improvements; (iv) take corresponding corrective action; and (v)

report annually on management controls.

4. Effective Date. This Circular is effective upon issuance.

5. Inquiries. Further information concerning this Circular may

be obtained from the Management Integrity Branch, Office of Federal

Financial Management, Office of Management and Budget, Washington,

DC 20503, 202/395-6911.

6. Copies. Copies of this Circular may be obtained by

telephoning the Executive Office of the President, Publication

Services, at 202/395-7332.

7. Electronic Access. This document is also accessible on the

U.S. Department of Commerce's FedWorld Network under the OMB Library

of Files.

The Telnet address for FedWorld via Internet is

``fedworld.gov''.

The World Wide Web address is ``http://

www.fedworld.gov/ftp.htm#omb''.

For file transfer protocol (FTP) access, the address is

``ftp://fwux.fedworld.gov/pub/omb/omb.htm''.

The telephone number for the FedWorld help desk is 703/487-4608.

Attachment.

Attachment

I. Introduction

The proper stewardship of Federal resources is a fundamental

responsibility of agency managers and staff. Federal employees must

ensure that government resources are used efficiently and

effectively to achieve intended program results. Resources must be

used consistent with agency mission, in compliance with law and

regulation, and with minimal potential for waste, fraud, and

mismanagement.

To support results-oriented management, the Government

Performance and Results Act (GPRA, P.L. 103-62) requires agencies to

develop strategic plans, set performance goals, and report annually

on actual performance compared to goals. As the Federal government

implements this legislation, these plans and goals should be

integrated into (i) the budget process, (ii) the operational

management of agencies and programs, and (iii) accountability

reporting to the public on performance results, and on the

integrity, efficiency, and effectiveness with which they are

achieved.

Management accountability is the expectation that managers are

responsible for the quality and timeliness of program performance,

increasing productivity, controlling costs and mitigating adverse

aspects of agency operations, and assuring that programs are managed

with integrity and in compliance with applicable law.

Management controls--organization, policies, and procedures--are

tools to help program and financial managers achieve results and

safeguard the integrity of their programs. This Circular provides

guidance on using the range of tools at the disposal of agency

managers to achieve desired program results and meet the

requirements of the Federal Managers' Financial Integrity Act

(FMFIA, referred to as the Integrity Act throughout this document).

Framework. The importance of management controls is addressed,

both explicitly and implicitly, in many statutes and executive

documents. The Federal Managers' Financial Integrity Act (P.L. 97-

255) establishes specific requirements with regard to management

controls. The agency head must establish controls that reasonably

ensure that: (i) obligations and costs comply with applicable law;

(ii) assets are safeguarded against waste, loss, unauthorized use or

misappropriation; and (iii) revenues and expenditures are properly

recorded and accounted for. 31 U.S.C. 3512(c)(1). In addition, the

agency head annually must evaluate and report on the control and

financial systems that protect the integrity of Federal programs. 31

U.S.C. 3512(d)(2).

The Act encompasses program, operational, and administrative

areas as well as accounting and financial management.

Instead of considering controls as an isolated management tool,

agencies should integrate their efforts to meet the requirements of

the Integrity Act with other efforts to improve effectiveness and

accountability. Thus, management controls should be an integral part

of the entire cycle of planning, budgeting, management, accounting,

and auditing. They should support the effectiveness and the

integrity of every step of the process and provide continual

feedback to management.

For instance, good management controls can assure that

performance measures are complete and accurate. As another example,

the management control standard of organization would align staff

and authority with the program responsibilities to be carried out,

improving both effectiveness and accountability. Similarly,

accountability for resources could be improved by more closely

aligning budget accounts with programs and charging them with all

significant resources used to produce the program's outputs and

outcomes.

Meeting the requirements of the Chief Financial Officers Act

(P.L. 101-576, as amended) should help agencies both establish and

evaluate management controls. The Act requires the preparation and

audit of financial statements for 24 Federal agencies. 31 U.S.C.

901(b), 3515. In this process, auditors report on internal controls

and

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compliance with laws and regulations. Therefore, the agencies covered

by the Act have a clear opportunity both to improve controls over

their financial activities, and to evaluate the controls that are in

place.

The Inspector General Act (P.L. 95-452, as amended) provides for

independent reviews of agency programs and operations. Offices of

Inspectors General (OIGs) and other external audit organizations

frequently cite specific deficiencies in management controls and

recommend opportunities for improvements. Agency managers, who are

required by the Act to follow up on audit recommendations, should

use these reviews to identify and correct problems resulting from

inadequate, excessive, or poorly designed controls, and to build

appropriate controls into new programs.

Federal managers must carefully consider the appropriate balance

of controls in their programs and operations. Fulfilling

requirements to eliminate regulations (``Elimination of One-Half of

Executive Branch Internal Regulations,'' Executive Order 12861)

should reinforce to agency managers that too many controls can

result in inefficient and ineffective government, and therefore that

they must ensure an appropriate balance between too many controls

and too few controls. Managers should benefit from controls, not be

encumbered by them.

Agency Implementation. Appropriate management controls should be

integrated into each system established by agency management to

direct and guide its operations. A separate management control

process need not be instituted, particularly if its sole purpose is

to satisfy the Integrity Act's reporting requirements.

Agencies need to plan for how the requirements of this Circular

will be implemented. Developing a written strategy for internal

agency use may help ensure that appropriate action is taken

throughout the year to meet the objectives of the Integrity Act. The

absence of such a strategy may itself be a serious management

control deficiency.

Identifying and implementing the specific procedures necessary

to ensure good management controls, and determining how to evaluate

the effectiveness of those controls, is left to the discretion of

the agency head. However, agencies should implement and evaluate

controls without creating unnecessary processes, consistent with

recommendations made by the National Performance Review.

The President's Management Council, composed of the major

agencies' chief operating officers, has been established to foster

governmentwide management changes (``Implementing Management Reform

in the Executive Branch,'' October 1, 1993). Many agencies are

establishing their own senior management council, often chaired by

the agency's chief operating officer, to address management

accountability and related issues within the broader context of

agency operations. Relevant issues for such a council include

ensuring the agency's commitment to an appropriate system of

management controls; recommending to the agency head which control

deficiencies are sufficiently serious to report in the annual

Integrity Act report; and providing input for the level and priority

of resource needs to correct these deficiencies. (See also Section

III of this Circular.)

II. Establishing Management Controls

Definition of Management Controls. Management controls are the

organization, policies, and procedures used by agencies to

reasonably ensure that (i) programs achieve their intended results;

(ii) resources are used consistent with agency mission; (iii)

programs and resources are protected from waste, fraud, and

mismanagement; (iv) laws and regulations are followed; and (v)

reliable and timely information is obtained, maintained, reported

and used for decision making.

Management controls, in the broadest sense, include the plan of

organization, methods and procedures adopted by management to ensure

that its goals are met. Management controls include processes for

planning, organizing, directing, and controlling program operations.

A subset of management controls are the internal controls used to

assure that there is prevention or timely detection of unauthorized

acquisition, use, or disposition of the entity's assets.

Developing Management Controls. As Federal employees develop and

execute strategies for implementing or reengineering agency programs

and operations, they should design management structures that help

ensure accountability for results. As part of this process, agencies

and individual Federal managers must take systematic and proactive

measures to develop and implement appropriate, cost-effective

management controls. The expertise of the agency CFO and IG can be

valuable in developing appropriate controls.

Management controls guarantee neither the success of agency

programs, nor the absence of waste, fraud, and mismanagement, but

they are a means of managing the risk associated with Federal

programs and operations. To help ensure that controls are

appropriate and cost-effective, agencies should consider the extent

and cost of controls relative to the importance and risk associated

with a given program.

Standards. Agency managers shall incorporate basic management

controls in the strategies, plans, guidance and procedures that

govern their programs and operations. Controls shall be consistent

with the following standards, which are drawn in large part from the

``Standards for Internal Control in the Federal Government,'' issued

by the General Accounting Office (GAO).

General management control standards are:

Compliance With Law. All program operations,

obligations and costs must comply with applicable law and

regulation. Resources should be efficiently and effectively

allocated for duly authorized purposes.

Reasonable Assurance and Safeguards. Management

controls must provide reasonable assurance that assets are

safeguarded against waste, loss, unauthorized use, and

misappropriation. Management controls developed for agency programs

should be logical, applicable, reasonably complete, and effective

and efficient in accomplishing management objectives.

Integrity, Competence, and Attitude. Managers and

employees must have personal integrity and are obligated to support

the ethics programs in their agencies. The spirit of the Standards

of Ethical Conduct requires that they develop and implement

effective management controls and maintain a level of competence

that allows them to accomplish their assigned duties. Effective

communication within and between offices should be encouraged.

Specific management control standards are:

Delegation of Authority and Organization. Managers

should ensure that appropriate authority, responsibility and

accountability are defined and delegated to accomplish the mission

of the organization, and that an appropriate organizational

structure is established to effectively carry out program

responsibilities. To the extent possible, controls and related

decision-making authority should be in the hands of line managers

and staff.

Separation of Duties and Supervision. Key duties and

responsibilities in authorizing, processing, recording, and

reviewing official agency transactions should be separated among

individuals. Managers should exercise appropriate oversight to

ensure individuals do not exceed or abuse their assigned

authorities.

Access to and Accountability for Resources. Access to

resources and records should be limited to authorized individuals,

and accountability for the custody and use of resources should be

assigned and maintained.

Recording and Documentation. Transactions should be

promptly recorded, properly classified and accounted for in order to

prepare timely accounts and reliable financial and other reports.

The documentation for transactions, management controls, and other

significant events must be clear and readily available for

examination.

Resolution of Audit Findings and Other Deficiencies.

Managers should promptly evaluate and determine proper actions in

response to known deficiencies, reported audit and other findings,

and related recommendations. Managers should complete, within

established timeframes, all actions that correct or otherwise

resolve the appropriate matters brought to management's attention.

Other policy documents may describe additional specific

standards for particular functional or program activities. For

example, OMB Circular No. A-127, ``Financial Management Systems,''

describes government-wide requirements for financial systems. The

Federal Acquisition Regulations define requirements for agency

procurement activities.

III. Assessing and Improving Management Controls

Agency managers should continuously monitor and improve the

effectiveness of management controls associated with their programs.

This continuous monitoring, and other periodic evaluations, should

provide the basis for the agency head's annual

[[Page 33881]]

assessment of and report on management controls, as required by the

Integrity Act. Agency management should determine the appropriate

level of documentation needed to support this assessment.

Sources of Information. The agency head's assessment of

management controls can be performed using a variety of information

sources. Management has primary responsibility for monitoring and

assessing controls, and should use other sources as a supplement

to--not a replacement for--its own judgment. Sources of information

include:

Management knowledge gained from the daily operation of

agency programs and systems.

Management reviews conducted (i) expressly for the

purpose of assessing management controls, or (ii) for other purposes

with an assessment of management controls as a by-product of the

review.

IG and GAO reports, including audits, inspections,

reviews, investigations, outcome of hotline complaints, or other

products.

Program evaluations.

Audits of financial statements conducted pursuant to

the Chief Financial Officers Act, as amended, including: information

revealed in preparing the financial statements; the auditor's

reports on the financial statements, internal controls, and

compliance with laws and regulations; and any other materials

prepared relating to the statements.

Reviews of financial systems which consider whether the

requirements of OMB Circular No. A-127 are being met.

Reviews of systems and applications conducted pursuant

to the Computer Security Act of 1987 (40 U.S.C. 759 note) and OMB

Circular No. A-130, ``Management of Federal Information Resources.''

Annual performance plans and reports pursuant to the

Government Performance and Results Act.

Reports and other information provided by the

Congressional committees of jurisdiction.

Other reviews or reports relating to agency operations,

e.g. for the Department of Health and Human Services, quality

control reviews of the Medicaid and Aid to Families with Dependent

Children programs.

Use of a source of information should take into consideration

whether the process included an evaluation of management controls.

Agency management should avoid duplicating reviews which assess

management controls, and should coordinate their efforts with other

evaluations to the extent practicable.

If a Federal manager determines that there is insufficient

information available upon which to base an assessment of management

controls, then appropriate reviews should be conducted which will

provide such a basis.

Identification of Deficiencies. Agency managers and employees

should identify deficiencies in management controls from the sources

of information described above. A deficiency should be reported if

it is or should be of interest to the next level of management.

Agency employees and managers generally report deficiencies to the

next supervisory level, which allows the chain of command structure

to determine the relative importance of each deficiency.

A deficiency that the agency head determines to be significant

enough to be reported outside the agency (i.e. included in the

annual Integrity Act report to the President and the Congress) shall

be considered a ``material weakness.'' \1\ This designation requires

a judgment by agency managers as to the relative risk and

significance of deficiencies. Agencies may wish to use a different

term to describe less significant deficiencies, which are reported

only internally in an agency. In identifying and assessing the

relative importance of deficiencies, particular attention should be

paid to the views of the agency's IG.

\1\ This Circular's use of the term ``material weakness'' should

not be confused with use of the same term by government auditors to

identify management control weaknesses which, in their opinion, pose

a risk or a threat to the internal control systems of an audited

entity, such as a program or operation. Auditors are required to

identify and report those types of weaknesses at any level of

operation or organization, even if the management of the audited

entity would not report the weaknesses outside the agency.

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Agencies should carefully consider whether systemic problems

exist that adversely affect management controls across

organizational or program lines. The Chief Financial Officer, the

Senior Procurement Executive, the Senior IRM Official, and the

managers of other functional offices should be involved in

identifying and ensuring correction of systemic deficiencies

relating to their respective functions.

Agency managers and staff should be encouraged to identify and

report deficiencies, as this reflects positively on the agency's

commitment to recognizing and addressing management problems.

Failing to report a known deficiency would reflect adversely on the

agency.

Role of A Senior Management Council. Many agencies have found

that a senior management council is a useful forum for assessing and

monitoring deficiencies in management controls. The membership of

such councils generally includes both line and staff management;

consideration should be given to involving the IG. Such councils

generally recommend to the agency head which deficiencies are deemed

to be material to the agency as a whole, and should therefore be

included in the annual Integrity Act report to the President and the

Congress. (Such a council need not be exclusively devoted to

management control issues.) This process will help identify

deficiencies that although minor individually, may constitute a

material weakness in the aggregate. Such a council may also be

useful in determining when sufficient action has been taken to

declare that a deficiency has been corrected.

IV. Correcting Management Control Deficiencies

Agency managers are responsible for taking timely and effective

action to correct deficiencies identified by the variety of sources

discussed in Section III. Correcting deficiencies is an integral

part of management accountability and must be considered a priority

by the agency.

The extent to which corrective actions are tracked by the agency

should be commensurate with the severity of the deficiency.

Corrective action plans should be developed for all material

weaknesses, and progress against plans should be periodically

assessed and reported to agency management. Management should track

progress to ensure timely and effective results. For deficiencies

that are not included in the Integrity Act report, corrective action

plans should be developed and tracked internally at the appropriate

level.

A determination that a deficiency has been corrected should be

made only when sufficient corrective actions have been taken and the

desired results achieved. This determination should be in writing,

and along with other appropriate documentation, should be available

for review by appropriate officials. (See also role of senior

management council in Section III.)

As managers consider IG and GAO audit reports in identifying and

correcting management control deficiencies, they must be mindful of

the statutory requirements for audit followup included in the IG

Act, as amended. Under this law, management has a responsibility to

complete action, in a timely manner, on audit recommendations on

which agreement with the IG has been reached. 5 U.S.C. Appendix 3.

(Management must make a decision regarding IG audit recommendations

within a six month period and implementation of management's

decision should be completed within one year to the extent

practicable.) Agency managers and the IG share responsibility for

ensuring that IG Act requirements are met.

V. Reporting on Management Controls

Reporting Pursuant to Section 2. 31 U.S.C. 3512(d)(2) (commonly

referred to as Section 2 of the Integrity Act) requires that

annually by December 31, the head of each executive agency submit to

the President and the Congress (i) a statement on whether there is

reasonable assurance that the agency's controls are achieving their

intended objectives; and (ii) a report on material weaknesses in the

agency's controls. OMB may provide guidance on the composition of

the annual report.

Statement of Assurance. The statement on reasonable

assurance represents the agency head's informed judgment as to the

overall adequacy and effectiveness of management controls within the

agency. The statement must take one of the following forms:

statement of assurance; qualified statement of assurance,

considering the exceptions explicitly noted; or statement of no

assurance.

In deciding on the type of assurance to provide, the agency head

should consider information from the sources described in Section

III of this Circular, with input from senior program and

administrative officials and the IG. The agency head must describe

the analytical basis for the type of assurance being provided, and

the extent to which agency activities were assessed. The statement

of assurance must be signed by the agency head.

Report on Material Weaknesses. The Integrity Act report

must include agency plans to correct the material weaknesses and

progress against those plans.

[[Page 33882]]

Reporting Pursuant to Section 4. 31 U.S.C. 3512(d)(2)(B)

(commonly referred to as Section 4 of the Integrity Act) requires an

annual statement on whether the agency's financial management

systems conform with government-wide requirements. These financial

systems requirements are presented in OMB Circular No. A-127,

``Financial Management Systems,'' section 7. If the agency does not

conform with financial systems requirements, the statement must

discuss the agency's plans for bringing its systems into compliance.

If the agency head judges a deficiency in financial management

systems and/or operations to be material when weighed against other

agency deficiencies, the issue must be included in the annual

Integrity Act report in the same manner as other material

weaknesses.

Distribution of Integrity Act Report. The assurance statements

and information related to both Sections 2 and 4 should be provided

in a single Integrity Act report. Copies of the report are to be

transmitted to the President; the President of the Senate; the

Speaker of the House of Representatives; the Director of OMB; and

the Chairpersons and Ranking Members of the Senate Committee on

Governmental Affairs, the House Committee on Government Reform and

Oversight, and the relevant authorizing and appropriations

committees and subcommittees. In addition, 10 copies of the report

are to be provided to OMB's Office of Federal Financial Management,

Management Integrity Branch. Agencies are also encouraged to make

their reports available electronically.

Streamlined Reporting. The Government Management Reform Act

(GMRA) of 1994 (P.L. 103-356) permits OMB for fiscal years 1995

through 1997 to consolidate or adjust the frequency and due dates of

certain statutory financial management reports after consultation

with the Congress. GMRA prompted the CFO Council to recommend to OMB

a new approach towards financial management reporting which could

help integrate management initiatives. This proposal is being pilot-

tested by several agencies for FY 1995. Further information on the

implications of this initiative for other agencies will be issued by

OMB after the pilot reports have been evaluated. In the meantime,

the reporting requirements outlined in this Circular remain valid

except for those agencies identified as pilots by OMB.

Under the CFO Council approach, agencies would consolidate

Integrity Act information with other performance-related reporting

into a broader ``Accountability Report'' to be issued annually by

the agency head. This report would be issued as soon as possible

after the end of the fiscal year, but no later than March 31 for

agencies producing audited financial statements and December 31 for

all other agencies. The proposed ``Accountability Report'' would

integrate the following information: the Integrity Act report,

management's Report on Final Action as required by the IG Act, the

CFOs Act Annual Report (including audited financial statements),

Civil Monetary Penalty and Prompt Payment Act reports, and available

information on agency performance compared to its stated goals and

objectives, in preparation for implementation of the GPRA.

Government Corporations. Section 306 of the Chief Financial

Officers Act established a reporting requirement related to

management controls for corporations covered by the Government

Corporation and Control Act. 31 U.S.C. 9106. These corporations must

submit an annual management report to the Congress not later than

180 days after the end of the corporation's fiscal year.

This report must include, among other items, a statement on

control systems by the head of the management of the corporation

consistent with the requirements of the Integrity Act.

The corporation is required to provide the President, the

Director of OMB, and the Comptroller General a copy of the

management report when it is submitted to Congress.

[FR Doc. 95-15828 Filed 6-28-95; 8:45 am]

BILLING CODE 3110-01-P