Creating Value through World-class Financial Management.

• Author: Jacobson, Lisa G.

What enables an organization to achieve an excellent level of financial management? In order to answer that question, the General Accounting Office conducted a study of nine leading public and private-sector finance organizations to identify the success factors, practices, and outcomes associated with world-class financial management. The results of that study can help governments at all levels improve their financial management.

To help promote effective implementation of federal financial management reform, the General Accounting Office (GAO) studied the financial management practices and improvement efforts of nine leading private and public-sector finance organizations to identify the success factors, practices, and outcomes associated with world-class financial management. The six private-sector and three state organizations GAO studied have been recognized by their peers and other independent researchers for their outstanding financial management practices and successful finance reengineering efforts.

At one time, all of these organizations found themselves in an environment in which they were called upon to improve financial management while simultaneously reducing costs. This article discusses the goals, success factors, and practices associated with building a world-class finance organization. Specifically, GAO has identified four overall goals common to these leading organizations along with 11 practices that were critical to their ability to meet these goals.

World-class Finance Organizations

A world-class finance organization can best be defined in terms of the business outcomes it produces--outcomes such as improved business analysis, innovative solutions to business problems, reduced operating costs, increased capability to perform ad hoc analysis, and improved overall business performance. To build a world-class finance organization and help achieve better business outcomes, each of the organizations GAO examined set an agenda for transforming the finance organization by defining a "shared vision "--i.e., a mission, a vision for the future, core values, goals, and strategies--geared toward making the finance organization a value-creating, customer-focused partner in business results. Although the techniques used varied depending on the organization s size and culture and some efforts were more mature than others, the goals, practices, and success factors outlined in Exhibit 2 were instrumental in the organization achieving its vision.

Goal: Prioritizing

Making financial management a priority involves changing the organizational culture of a business or government. Although the views about how an organization can change its culture vary considerably, the organizations studied identified leadership as the most important factor in successfully making cultural changes. Top management must be totally committed in both words and actions to changing the culture, and this commitment must be sustained and demonstrated to staff.

The leading organizations studied made financial management improvement an entitywide priority by building a foundation of control and accountability that supports external reporting and performance management, providing clear strong executive leadership, and using training .to change the organizational culture and engage line management.

Practice 1. Build a Foundation of Control and Accountability that Supports External Reporting and Performance Management. Key characteristics of this practice are:

* the financial reporting and audit process is a basic management and oversight tool,

* accountability is part of the organizational culture and goes well beyond receiving an unqualified audit opinion, and

* internal controls meet both external financial reporting and performance management control objectives without significantly impacting efficiency.

A solid foundation of control and accountability requires a system of checks and balances that provides reasonable assurance that the entity's transactions are appropriately recorded and reported, its assets protected, its established policies followed, and its resources used economically and efficiently for the purposes intended. The private sector and state organizations visited built and maintained this foundation largely through the discipline of preparing routine periodic financial statements and annually subjecting them to an independent audit. However, senior executives at leading organizations recognize that the financial information demanded by decision makers to measure and manage performance requires greater precision and more timely access than that required to receive an unqualified opinion on the entity's financial statements. To ensure that decision makers have useful, relevant, timely, and reliable information, leading finance organizations establish accountability goals that extend well beyo nd receiving an unqualified audit opinion. In addition, the internal controls at these organizations are designed to efficiently meet the control objectives necessary for performance measurement and management as well as external financial reporting.

Strategies to Consider. To build a foundation of control and accountability, senior executives could:

* leverage audit resources and the financial statement audit process to improve data reliability and increase accountability,

* increase accountability by establishing goals for 1) producing financial and performance reports for major programs and/or business segments and 2) moving the organization toward more frequent financial reporting (e.g., quarterly, monthly),

* establish efficiency criteria that measure the cost associated with program outcomes, and develop an approach for assessing and improving internal controls over finance-related efficiency measures, and

* use accounting and operational performance data to support budget formulation and strategic planning.

Practice 2. Provide Clear, Strong Executive Leadership. Key characteristics:

* the chief executive recognizes the important role the finance organization can play in improving overall business performance and involves key business/line managers in financial management improvement initiatives,

* the CFO is a member of the top management team, and

* top executives' sustained commitment to improving financial management is reinforced through both their words and actions.

A powerful, visionary leader can change the direction, culture, and perceptions of the finance organization. The chief executive officers (CEO) of leading organizations understand the important role the CFO and the finance organization play in improving the entity's overall business performance. Consequently, the CFO is a central figure on the top management team and heavily involved in strategic planning and decision making.

Strategies to Consider. To demonstrate and reinforce commitment to improving financial management, heads of agencies and senior executives could:

* form an executive management team (heads of component organizations and those reporting directly to the agency head) to establish a vision and fundamental goals and provide sponsorship for each major financial management improvement project,

* involve key program/business managers in driving financial improvement initiatives,

* develop a plan to ensure that all key constituents visibly support financial management improvement initiatives, and

* establish an expectation that top financial executives, as part of the top management team, provide forward looking analysis that creates a link between accounting...