AGA Montgomery Chapter CGFM Exam ReviewPresented By

Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

Exam 3 . Section V . Chapter 7Financial Management Systems

Financial Management System

Information SystemOrganized collection, processing, transmission and

dissemination of information in accordance with defined procedures, whether automated or manual.

Financial SystemInformation system, comprised of one or more

applications, that is used for any of the following:Collecting, processing, maintaining, transmitting and

reporting data about financial eventsSupporting financial planning or budgeting activitiesAccumulating and reporting cost informationSupporting the preparation of financial statements

OMB Circular A-127

Information system that supports both financial and nonfinancial functions.

Mixed System

The financial systems and the financial portions of mixed systems necessary to support financial management.

Financial Management System

The Financial Systems Integration Office (FSIO) is the successor to the Joint Financial Management Improvement Program of the Federal Government (JFMIP).

The FSIO financial management system requirementsCollect accurate, timely, complete, reliable and consistent

informationProvide for adequate agency management reportingSupport policy decisionsSupport the preparation and execution of agency budgetsFacilitate the preparation of financial statements, and other

financial reports in accordance with accounting and reporting standards

Provide information for budgeting, analysis and reporting, including consolidated financial statements

Provide a complete audit trail to facilitate audits

Financial Systems Integration Office

Maintaining the chart of accounts of the entityMaintaining the integrity of the accounting and

reporting systemsAccounting for all financial transactions of the entityAccounts payableTravel reimbursementReporting on the financial results and the financial

condition of the entityMonitoring budget executionMonitoring operating performanceManaging financial assets, especially cashMaintaining financial controls

Government Financial Management

Budget formulationPayrollCredit managementDebt collectionCost analysisPerformance measurementFinancial system development and operation

Other Functions That May Be Included:

Overall system management, consisting of accounting classification management and transaction control

General ledger management, consisting of general ledger account definition, accruals, closing and consolidation, general ledger analysis and reconciliation

Funds management, consisting of budget preparation, funds allocation, budget execution and funds control

Receivables management, consisting of customer information maintenance, receivable establishment, debt management and collections and offsets

Payables management, consisting of payee information maintenance, payment warehousing, execution, confirmation and follow-up

Cost management, consisting of cost setup and accumulation, cost recognition, cost distribution and working capital revolving fund

Reporting, consisting of general reporting, external reporting, internal reporting and ad hoc query

Minimum Components of a Government Financial System:

Acquiring Financial Management Systems:An existing system may rely on computing

technology or software that is no longer supported by its producer

The organization may have outgrown its existing system(s) either in volume of transactions or in number of activities

New requirements may be imposed on the organization that require different processes

The organization may conclude that newer applications will be more cost effective than older ones

Gain an understanding both within and outside the financial management organization that it (finance) is the user of the system and what that entails

Develop and strengthen the interface between the system developer and the user activities

Define user requirementsCommunicate and monitor user requirements

Developing Financial Management Systems:

It is vital that the financial manager communicate to the software developer the needs of a financial management software system. Items such as:Chart of accounts requirementsBudgetary control

EncumbranceCommitmentObligationVoucher

Ideally, both the requirements group and the development group need to be made up of accounting and IT personnel.

IT vs Accounting

The same as in developing financial management systems.Gaining an understanding both within and

outside the financial management organization that it (finance) is the user of the system and what that entails

Developing and strengthening the interface among the IT department, the purchasing function and other user activities

Defining user requirementsCommunicating and monitoring user

requirements

Purchasing Financial Management Systems

No COTS product will exactly meet all of the identified requirements of a government

Any COTS designed for the level of government of interest will support the accomplishment of the financial manager’s high-level objectives

COTS will be successful only if the financial manager adapts to the COTS system, which may require process redesign or reengineering.

Commercial Off-The Shelf Software (COTS)

Some governments decide to augment their COTS system with additional software or interfaces. This should be avoided due to:Augmenting the COTS tends to increase the

cost of the projectCOTS vendors will not provide support for

the augmented software or interfacesSubsequent releases or updates to the

software will require updates to the augmented systems which will add additional costs to the total project

Mixed Acquisitions

OutsourcingWithin the federal government certain

agencies offer “cross-servicing” to other agencies on a fee-for-service basis

Private sector businesses offer processing services to federal, state and local government agencies

Benefits include:Avoidance of developmental and operational

staffAssurance that hardware and software will

remain current as technology changes

A concern is lack of flexibilityPurchasers must accept the product provided

by the vendorMost cases do not have the ability to modify

operations

Outsourcing - continued

Many companies implemented Business Process Reengineering (BPR) in the 1990s due to a spate of publications including an article in the Harvard Business Review by Michael Hammer

BPR presents the concept that organizations should eliminate functions that do not add valueBPR should be properly implemented by starting at

a clean slateOrganizations should not assume any process is

mandatoryOrganizations should envision the most effective and

efficient way to achieve the organization’s goals

Business Process Reengineering

BPR lost some of its luster because critics accused it of trying to increase productivity to maximum while disregarding aspects such as work environment and employee satisfaction

BPR was also accused of being a technique for downsizing

Many very large organizations have adopted the concepts of BPR, but they may not use the phrase “BPR” in their organization

BPR - continued

Account Cleanup and Data ConversionAccount Cleanup

Requires research and analysis of all accounts that have not been active to determine if they should be discontinued

Balances of discontinued accounts should be transferred to another account or written off

Non-valid accounts should not be carried into the new system

Data ConversionRe-formatting data from the old system to the newA computer program can accomplish thisNew attributes may have to be entered manually

Implementing New Financial Management Systems

Business Process RedesignThe replacement or major modification of financial

management systems offers the opportunity to re-think and re-design business processes

In order to be successful, the redesigned business processes must be implemented in parallel with system changes

In simplest terms, business process redesign:Mapping all activities in a processIdentifying activities that do not create value for

eliminationRe-ordering of activities to a more logical streamA computer may replace human intervention

Implementing New Financial Management Systems - continued

Change Management“Sometimes it’s easier to change people than it is to change people”

Changing staff is usually not an option and instead staff must be made comfortable and productive in the new environment

Include all affected parties in the decision processPeople tend to buy into change in which they participatePeople who do the work tend to know more about the work

Constant communication is importantMost people do not react well to surprisesRejection at the worker level can undermine the best

planned and most expensive applications

Implementing New Financial Management Systems - continued

Work Force PlanningSuccessful implementation of a new financial

management system will require a total rethinking of what is required of the work force

Senior management must assess what skills will be required, the number of people with those skills and how the organization will get to implementation of the new system

The U.S. Office of Personnel Management (OPM) has developed a model that has components that may not be appropriate to all organizations but provides a useful checklist

Implementing New Financial Management Systems - continued

OPM Model ChecklistSet strategic direction

Organize and mobilize strategic partnersSet vision/mission/values/objectivesReview organizational structureConduct business process reengineeringSet measures for organizational performance

Supply, demand and discrepanciesAnalyze permanent work force demographicsDescribe nonpermanent work forceConduct skills assessment and analysis

Implementing New Financial Management Systems - continued

OPM Model Checklist – continuedDevelop action plan

Design a work force restructuring planDevelop ways to address skills gapsSet specific goals

Implement action planCommunicate the planConduct recruitment and trainingImplement retention strategiesRestructure where neededConduct organizational assessments

Monitor, evaluate and reviseAssess effectivenessAdjust plan as neededAddress new work force and organizational issues

Implementing New Financial Management Systems - continued

Verification and ValidationVerification that the system contains all of the

processes and outputs that are expectedValidation that the computations and outputs and

reports are accurate and correctFor small entities verification and validation would

most likely be done by the financial manager who is both the sponsor of the project and the person responsible for the outputs of the system

For large projects a third party may perform the verification and validation and this may be referred to as “Independent Verification and Validation”

Implementing New Financial Management Systems - continued

Ownership of SystemsIn very small and very large organizations the entire

financial management systems are likely to be within the financial management organization and the question of who “owns” the system does not come up

In many organizations the IT department owns the hardware and provides a computing service to financial managementThe finance department believes it owns the software and

can make modifications at willThe IT department believes the software is its property

Ownership should be made clear in the IT policy of the organization

Operating New Financial Management Systems

Ownership of Data If IT happens to own both the hardware and software, IT should never

own the financial data Financial management must maintain stewardship over the data Stewardship of the data includes:

Data integrity – the quality, timeliness and reliability of data in the system Data collection synchronization – how data collection cycles are timed and

cutoff dates and times set so that necessary data-feeds between systems can occur

Reduced data redundancy – eliminating multiple occurrences of the same data. This is best accomplished by entering the data at the point where the transaction is initiated

Data accessibility – ensuring that only authorized users can access the data Data availability – managing the data that needs to be transferred or

exchanged between systems Flexibility – ensuring that data collected by the system has enough inherent

flexibility so the system can adapt to change over time to meet new information requirements and adopt new financial performance reporting measures

Operating New Financial Management Systems - continued

Ownership of Data – continuedStewardship functions fall into four categories

Data definition – defining what data requirements and characteristics will be contained within the system

Data creation and capture – defining how the data will be collected in the records and reports

Data usage – ensuring that data is being used in line with its definition or that the definition is changed to reflect the users’ needs through feedback to the data definition function

Data assurance – attesting to data integrity through feedback to the data creation and capture function

Operating New Financial Management Systems - continued

Operational IssuesMost critical operational issues between

finance and IT are scheduling and prioritiesOperational meetings should occur between

finance and IT to review and discuss past and future performance

The finance department must clearly communicate its schedule requirements and seek priority for use of computing resources

Operating New Financial Management Systems - continued

Internal Controls – consist of five components The control environment – organizational factors such as integrity, ethical values,

competence, management philosophy and operating style. Tone of the organization Risk assessment – identification and analysis of relevant risks and risk factors to the

organization and its objectives Control activities – general controls such as data center, software and access controls

and application controls such as authorization, approval and segregation of duties. These controls will be commensurate with the inherent nature of the information, the possible consequences of errors, needed degree of reliability, cost-benefit of the control and vulnerability of agency assets to loss or misuse

Information and communication – capturing pertinent information, financial and nonfinancial, from a variety of systems and other sources and communicating it to management on a regular basis

Monitoring – process of consistent and continuous monitoring of internal control systems by managers as well as separate evaluations by independent auditors and reviewers

The establishment of internal controls is the responsibility of management Internal controls are subject to review by independent auditors Internal controls are an integrated part of the overall management process to

promote efficiency, reduce risk of asset loss and ensure reliability of financial information

Operating New Financial Management Systems - continued

EvaluationOrganizations should conduct a cost-benefit

analysis for each financial management system to ensure:Alignment of system with organization’s mission

needsAcceptability of information (internally and

externally)Accessibility of information (internally and

externally)Realization of projected benefits. Quantify

improvements in performance results through measurement of program outputs

Operating New Financial Management Systems - continued

Evaluation – continuedOrganizations should perform post-implementation

reviews and should address the following questions:How effective is the system in supporting the meeting of

stated program objectives and performance targets?How satisfied are the “customers” or “users” of the financial

system and its information – the needs assessment?How efficiently does the system operate (in terms of

resources such as time, dollars and other resources) to minimize resource consumption?

Does the system’s accomplishment of its objectives and benefits outweigh cost and risk considerations?

How well does the system maintain its integrity throughout the management cycle in terms of avoiding fraud and abuse?

Operating New Financial Management Systems - continued

Historically administrative support systems have been developed or acquired separately and then attempted to “bridge” these separate systems together

This “best of breed” approach has the advantage of providing each component of the organization with the best system for that component’s individual needs

Financial Management Systems vs Enterprise Resource Planning Systems

Enterprise Resource Planning systems or ERPs have recently been developed to offer large-scale integrated administrative support systemsERPs have the advantage of universal

compatibility and end-to-end processingFlexibility is lacking and while the ERP will not

fulfill anybody’s wish list, the enterprise-wide benefits may drive the separate components of the organization to alter their business processes to accommodate the ERP

FMS vs ERP - continued

Questions?

Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

P.O. Box 834Helena, AL 35080

(205) 807-4466(205) 449-8666 (Fax)steve@shecpa.comwww.shecpa.com