OMB Circular A-123
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OMB Circular A-123

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Philip J. Giza. FMS Senior Accountant Financial Management ServicesProgram Support CenterDepartment of Health
OMB Circular A-123

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1. ?OMB Circular A-123 How Does EVERY Manager Get Involved??

2. Philip J. Giza FMS Senior Accountant Financial Management Services Program Support Center Department of Health & Human Services

3. Association of Government Accountants Richmond Chapter Henrico Training Center, Richmond, VA OMB Circular A-123 - How Does EVERY Manager Get Involved? Wednesday, May 16th, 2007 8:45 am to 9:35 am Philip J. Giza phil.giza@psc.hhs.gov 301-443-3499

4. 4 SOX SOX or Sarbanes-Oxley or Sarbanes-Oxley of 2002 or section 404 of the Sarbanes-Oxley Act of 2002 was enacted in response to corporate accountability failures of the past several years and contains a provision calling for management?s assessment of internal control over financial reporting similar to the long-standing requirements for executive branch agencies in 31 U.S.C. ? 3512 (c),(d), commonly referred to as the Federal Managers? Financial Integrity Act (FMFIA), to issue annual statements of assurance over internal control in the agency. Opinions on internal control over financial reporting as required by the Sarbanes-Oxley Act for publicly traded companies are important to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. Regulators, public companies, audit firms, and investors generally agree that the Sarbanes-Oxley Act of 2002 has had a positive and significant impact on investor protection and confidence. At the same time, the costs associated with the Sarbanes-Oxley Act have been significant and additional steps should be taken to improve the efficiency and cost-effectiveness of its implementation.

5. 5 SOX to A-123 In initiating the revisions to Circular No. A-123, OMB cited the new internal control requirements for publicly traded companies that are contained in section 404 of the Sarbanes-Oxley Act of 2002. Federal agencies also have a duty to attain and maintain the public?s trust and confidence. Specifically, federal agencies have a stewardship obligation to prevent fraud, waste, and abuse; to use tax dollars appropriately; and to ensure financial accountability to the President, the Congress, and the American people. In the broadest context, internal control represents an organization?s plans, methods, and procedures used to meet its missions, goals, and objectives and serves as the first line of defense in safeguarding assets and preventing and detecting errors, fraud, waste, abuse, and mismanagement.

6. 6 Circular A-123: Background Federal Managers? Financial Integrity Act (FMFIA) of 1982 and its implementing regulation, OMB Circular A-123 Rigorous Implementation of the 1980s - -> - - > Focus shifted to CFO Act Audits in 1990s Corporate Scandals led to Sarbanes-Oxley Act of 2002 (SOX) and Revised OMB Circular A-123 (December 2004) Revised Circular A-123 Requires Management to Assess, Test, Document, and Report on Internal Controls Over Financial Reporting (ICOFR) by using prescribed methodology included in Appendix A

7. 7 A-123 New & Improved The Office of Management and Budget (OMB) revised its Circular Number A-123, in December 2004 (effective beginning with fiscal year 2006) to: strengthen the requirements for conducting management?s assessment of internal control over financial reporting. Major revisions contained in Appendix A of the circular: include requiring CFO Act agency management to annually assess the adequacy of internal control over financial reporting, provide a report on identified material weaknesses and corrective actions, and provide separate assurance on the agency?s internal control over financial reporting.

8. 8 Federal Legislative History: Integration and Coordination with Other Control Activities Federal Agencies = 15 Departments and ~ 86 Independent Agencies are subject to numerous legislative and regulatory requirements that promote and support an effective internal control structure. Management should coordinate and integrate the Internal Control over Financial Reports (ICOFR) assessment with these reviews, including FMFIA and other existing internal reviews to leverage the benefit of work already being performed and avoid duplication of effort.

9. 9 Examples of existing control-related activities include those listed below. Federal Managers? Financial Integrity Act of 1982 (FMFIA); Federal Financial Management Improvement Act of 1996 (FFMIA); Chief Financial Officers Act of 1990, as amended (CFO Act); Improper Payments Information Act of 2002 (IPIA); Section 831 of the Defense Authorization Act of 2002 (Recovery Auditing); Single Audit Act, as amended; Inspector General Act of 1978 (IG Act); Federal Information Security Management Act of 2002 (FISMA); Information Technology Management Reform Act of 1996 (Clinger Cohen Act) Enterprise Architecture Documentation; and Financial Management Systems Documentation.

10. 10 OMB A-123 Related Legislation & Regulatory Requirements Integration and Coordination with Other Control Activities (another view) Accounting and Auditing Act of 1950 The Grandfather of legislation for Internal Controls Federal Financial Management Improvement Act of 1996 (FFMIA) An Act to amend the Accounting and Auditing Act of 1950 to require ongoing evaluations and reports on the adequacy of the systems of internal accounting and administrative control of each executive and others are: Chief Financial Officers Act of 1990, as amended (CFO Act); Improper Payments Information Act of 2002 (IPIA); Section 831 of the Defense Authorization Act of 2002 (Recovery Auditing); Single Audit Act, as amended; Inspector General Act of 1978 (IG Act); Federal Information Security Management Act of 2002 (FISMA); Information Technology Management Reform Act of 1996 (Clinger Cohen Act) Enterprise Architecture Documentation; and Financial Management Systems Documentation.

11. 11 An Agency?s FMFIA assessment should ? Consider the work done to comply with these various statutes, as well as the laws and regulations identified in the ICOFR Process. Use that information to determine the extent to which such work contributes to the overall assessment and whether any deficiencies identified should be included in the FMFIA report.

12. 12 Assessment of Internal Controls Administrative and Program Compliance The assessment of internal controls over operations (administrative and program) reports whether those controls are operating effectively. The assessment is based: on general management knowledge gained from daily operations of agency programs and systems, management reviews to assess internal controls, and other available sources.

13. 13 General Management knowledge for a Federal Agency can and should include the following: Audits of financial statements under the Chief Financial Officers Act of 1990, as amended (CFO Act); IG and GAO reports; Reviews of financial systems under Federal Financial Management Improvement Act of 1996 (FFMIA) or OMB Circular A-127, Financial Systems; Annual evaluations under Federal Information Security Management Act of 2002 (FISMA) and OMB Circular A-130, Management of Federal Information Resources; Government Performance and Results Act (GPRA) annual performance plans and reports;

14. 14 And also the following sources: Program Assessment Rating Tool (PART) Assessments; Improper Payments Information Act of 2002 (IPIA) risk assessments and reports; Single audit reports; Management reviews with internal control assessment as a by-product; Reports and other information provided by Congressional committees; Program evaluations; Other reviews or reports related to Federal Agency operations; and Results from tests of key controls performed as part of the ICOFR assessment under Appendix A.?

15. 15 The content and source of survey tools, testing instruments, etc. used by the program manager should be coordinated through an Internal Control Officer. For FMFIA, A-123 requires that agency managers and employees identify deficiencies in internal controls from the sources listed above and the results of their internal control assessment process and report the control deficiencies. Management must document the findings/conclusions of all Internal Control Reviews and ensure that such evaluations/self-assessments are adequately planned and coordinated. All reports, work papers, correspondence, and related memoranda are to be maintained by the sub-organization and readily available for inspection by the Agency.

16. 16 Congress recognized the importance of internal controls. 57 years ago, the Budget and Accounting Procedures Act of 1950 became the first major act to place primary responsibility for establishing and maintaining internal control squarely on the shoulders of MANAGEMENT.


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