Commentary: Top-down review ensures internal controls are in place

The arrival of a new, far-reaching Office of Management and Budget circular in an agency’s inbox is usually a wake-up call. Such was the case in December 2004, when OMB released a revised Circular A-123. Since then, agencies have been hopping to meet new internal control requirements.

We know the alphabet soup of efforts that have come our way over the past 25 years related to financial management reform, from 1982’s Federal Managers Financial Integrity Act (FMFIA) to 2002’s Improper Payments Act, and a host of others in between. OMB’s most recent revision to A-123 adds a requirement that agency heads provide a separate assurance on the effectiveness of the agency’s internal control over financial reporting — the so-called Appendix A.

Like many federal agencies, the National Science Foundation had in place a “bottoms-up” internal control review process and a Management Controls Committee to comply with FMFIA. Over time, the weaknesses of a bottoms-up approach became apparent: If scrupulously followed, virtually all internal controls will be identified, tested and evaluated regardless of their importance; and if not scrupulously followed, key internal controls can be overlooked or incorrectly assessed, leaving potentially serious risks unidentified or unmitigated. The bottoms-up approach resulted in reduced efficiency and the risk of diminished effectiveness.

Appendix A prescribes a “top-down” approach, starting with financial statements, for the evaluation of internal controls over financial reporting. The top-down approach allows an agency to focus only on those internal controls that satisfy the financial reporting assertions and to assure reliable financial reporting.

[In FY2006] NSF set a three-year course to identify and document business processes and the controls over those processes, assess their risk and test the key controls in those processes.

In fiscal 2008, NSF expects to have an internal control system that meets all the requirements of the revised A-123 guidance. But the task doesn’t end there. Agencies must continually examine their internal control structure to ensure they stay updated with changing conditions. So, in the end, while A-123 may have a familiar ring, we all need to see it as a wake-up call.

-Thomas N. Cooley, FederalTimes.com

Thomas N. Cooley is director of the Office of Budget, Finance and Award Management and the chief financial officer at the National Science Foundation. In March, he was awarded the Donald L. Scantlebury Memorial Award for distinguished leadership in federal financial management.

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