Background Prior to the enactment of the CFO Act, government reports found that agencies lost billions of dollars through fraud, waste, abuse, and mismanagement. These reports painted the picture of a government unable to properly manage its programs, protect its assets, or provide taxpayers with the effective and economical services they expected. Reported financial management problems included (1) unreliable financial information driven by widespread weaknesses in agency internal controls over financial reporting and obsolete and inefficient agency financial management systems and (2) financial reporting practices that did not accurately disclose the current and probable future cost of operating, permit adequate comparison of actual costs among executive branch agencies, or provide the timely information required for efficient program management. For example, in 1988, we reported on internal control problems such as the Department of Defense being unable to account for hundreds of millions of dollars in advances paid by foreign customers for equipment, weak controls permitting things such as over $50 million in undetected fraudulent insurance claims paid by the Federal Crop Insurance Corporation, millions of dollars in interest penalties because agencies paid 25 percent of their bills late, and over $350 million in lost interest because agencies paid their bills too soon. In 1990, Congress mandated financial management reform through enactment of the CFO Act. The CFO Act was the most comprehensive and far-reaching financial management improvement legislation enacted since the Budget and Accounting Procedures Act of 1950. The CFO Act established a Controller position at the government-wide level and a CFO position for each of the agencies identified in the act (referred to as the CFO Act agencies), provided for long-range planning, and began the process of preparing and independently auditing federal agency financial statements. The act aimed to strengthen internal controls, integration of agency accounting and financial management systems, financial reporting practices, and the financial management workforce. The act also called for systematic performance measurement and cost information. As figure 1 shows, a number of other financial management reforms were subsequently enacted to help improve federal financial management, some of which I will briefly discuss in my statement today. A chronological list of statutes cited in this report and selected additional financial management reforms is included in appendix II. Substantial Progress Has Been Made toward Achieving the Purposes of the CFO Act The federal government has made substantial progress toward improving financial management and achieving the purposes of the CFO Act. Table 1 highlights some of the progress that has been made. Leadership: OMB, Agency CFOs, and Treasury Have Provided Notable Financial Management Leadership The centralized leadership structures envisioned by the CFO Act—a Controller position at the government-wide level and a CFO position at each CFO Act agency—have been established. OMB’s Deputy Director for Management and Office of Federal Financial Management, headed by the Controller and Deputy Controller, have led reform efforts by developing and periodically updating guidance and initiatives in areas such as financial management systems, auditing, financial reporting, internal control, and grants management. The CFO Act also required OMB to submit to Congress, annually, a 5- year plan for improving financial management—mirrored in corresponding CFO Act agency plans. Among other things, the plan required a description of the existing financial management structure and changes needed; a strategy for developing adequate, consistent, and timely financial information; proposals for eliminating unneeded systems; identification of workforce needs and actions to ensure that those needs are met; a plan for the audit of financial statements of executive branch agencies; and an estimate of the costs for implementing the plan. The CFO Act also required annual financial management status reports government-wide and for executive branch agencies. From 1992 to 2009, OMB annually prepared comprehensive 5-year government-wide financial management plans. Agency CFOs have significantly contributed to improvements in financial management. According to the survey we issued to CFOs and deputy CFOs, some of these improvements include advising executive leadership on financial management matters and direction for agency financial operations and professional financial management personnel; taking steps to develop and maintain financial management systems; reducing duplicative financial management systems; resolving audit findings; supporting audits of the agency’s financial statements; helping to ensure the quality of financial information, and preparing the agency financial report and other financial reports. In addition, the CFO Council periodically met to advise and coordinate activities and initiatives, including those related to internal controls, financial management systems, and enterprise risk management. OMB stated that the CFO Council is also working on a workforce plan. In addition, the Department of the Treasury (Treasury) made contributions to improving federal financial management. Among other things, Treasury has developed and periodically updated government-wide guidance and tools to support federal financial reporting; issued, in coordination with OMB, the Financial Report of the U.S. Government since fiscal year 1997, which includes the government-wide consolidated financial statements; and developed a long-term vision for improving federal financial management. In 2010, Treasury established the Office of Financial Innovation and Transformation, which identifies and facilitates the implementation of innovative solutions to help agencies become more efficient and transparent, and Treasury also issues an annual message to agency CFOs to set the direction and goals of federal financial management. Financial Reporting: The Preparation and Audit of Financial Statements Have Provided Much- Needed Accountability and Transparency In 1990, OMB, Treasury, and GAO jointly established the Federal Accounting Standards Advisory Board (FASAB) to develop and promulgate accounting standards and principles for financial reporting in the federal government. In 1999, FASAB was recognized by the American Institute of Certified Public Accountants as the standard setter for generally accepted accounting principles for federal government entities. FASAB has issued 57 statements of federal financial accounting standards (SFFAS) that provide greater transparency and accountability over the federal government’s operations and financial condition, including SFFAS 36, Comprehensive Long-Term Projections for the U.S. Government, which requires the Statement of Long-Term Fiscal Projections as part of the government-wide consolidated financial statements. In addition, OMB, Treasury, and GAO have regularly provided guidance to agencies that improves transparency, consistency, and usefulness of financial reporting. Agencies have significantly improved the quality and timeliness of their financial reporting since the enactment of the CFO Act. As expanded by the Government Management Reform Act of 1994 (GMRA) and the Accountability of Tax Dollars Act of 2002 (ATDA), federal law now requires every CFO Act agency and most other executive agencies to annually prepare audited financial statements no later than March 1—5 months after the end of the federal fiscal year. However, OMB has accelerated this due date for audited financial statements. For the first time, for fiscal year 2005, all CFO Act agencies completed their audited financial statements by November 15, approximately 45 days after the close of the fiscal year, compared to the 60–90 day requirement for public companies filing with the Securities and Exchange Commission. For fiscal year 1996, the first year that all CFO Act agencies were required to prepare audited financial statements, six CFO Act agencies received an unmodified (“clean”) audit opinion on their respective entities’ financial statements, compared with 22 CFO Act agencies that received clean audit opinions for fiscal year 2018. Today, to demonstrate transparency and accountability to Congress and citizens, the CFO Act agencies make their annual performance reports and annual financial reports, which include audited financial statements, available on their websites. In addition, since fiscal year 1997, Treasury, in coordination with OMB, has annually prepared government-wide consolidated financial statements, which are available on Treasury’s website. Substantial benefits have been achieved as a result of the preparation and audit of financial statements, which provide useful and necessary insight into government operations, including federal agency accountability to Congress and citizens, including independent assurance about the reliability of reported financial information; greater confidence to stakeholders (governance officials, taxpayers, consumers, or regulated entities) that federal funds are being properly accounted for and assets are properly safeguarded; an assessment of the reliability and effectiveness of systems and related internal controls, including identifying control deficiencies that could lead to fraud, waste, and abuse; a focus on information security; early warnings of emerging financial management issues; and identification of noncompliance with laws and regulations, which can present challenges to agency operations. Our CFO survey respondents (18 of 23) agreed that preparation and audit of financial statements are greatly or moderately beneficial to federal agencies, noting that the financial audit process helped identify and eliminate material weaknesses in internal control, greatly strengthened internal control processes, and led to more discipline and integrity in federal accounting. Continuation of annual agency financial statement audits is critical to maintaining accountability and sustaining financial management improvements. Also, independent assurance that financial management information included in agency financial statements is fairly stated is an important element of accountability and provides agency management, OMB, Treasury, Congress, and citizens with assurances that the information is reliable and properly accounted for. Internal Control: Significant Improvements Have Been Made A key goal of the CFO Act was to improve internal control to reasonably assure that the federal government’s financial management information is reliable, useful, and timely. Compared with 1990, internal control is markedly stronger. The number of material weaknesses in internal control over financial reporting—significant issues that create the potential for inaccurate financial information that would change or influence the judgment of a reasonable financial report user relying on the information—reported as part of financial statement audits has been significantly reduced. For fiscal year 2005, financial statement auditors reported no identified material weaknesses for only seven of 24 CFO Act agencies, based on their financial statement audits; by 2018, that number had doubled to 14. In addition, auditors identified and agencies fixed thousands of internal control problems over the past 3 decades. Further, Treasury and OMB have addressed many of the internal control problems related to the processes used to prepare the U.S. government’s consolidated financial statements. However, some internal control problems are long-standing, complex, and not quickly resolved, such as accounting for transactions between federal agencies. Annual financial statement audits also uncovered the significance of improper payments and prompted legislation to strengthen controls over improper payments. Agencies have made progress in estimating the amount of improper payments and implementing efforts to reduce them, but this remains an area of concern. We have reported improper payments as a material deficiency or weakness since the fiscal year 1997 initial audit of the U.S. government’s consolidated financial statements. For fiscal year 2018, 79 programs across 20 agencies reported estimated improper payments totaling about $151 billion. Since fiscal year 2003— when certain agencies were required to begin reporting estimated improper payments—cumulative improper payment estimates have totaled about $1.5 trillion. The annual financial statement audits, which include an assessment of information systems controls, surfaced widespread information security weaknesses. Since fiscal year 1997, we have reported information security as a material weakness in the audit of the U.S. government’s consolidated financial statements. We have also reported information security as a government-wide high-risk area since 1997. To address information security challenges surfaced by federal agency audits, Congress enacted the Federal Information Security Management Act of 2002 and its successor, the Federal Information Security Modernization Act of 2014. These laws require agencies to develop, document, and implement programs to provide security for the information and information systems that support agency operations and assets. Financial Management Systems: Steps Have Been Taken to Improve the Government’s Systems One key purpose of the CFO Act and of the Federal Financial Management Improvement Act of 1996 (FFMIA) that followed was to improve federal agencies’ financial management systems. FFMIA requires CFO Act agencies to maintain financial management systems that substantially comply with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S. Government Standard General Ledger at the transaction level. Agencies have improved their compliance with FFMIA requirements. For fiscal year 2018, auditors reported that 16 of 24 CFO Act agencies’ financial systems substantially comply with FFMIA’s systems requirements for fiscal year 2018, up from four agencies in fiscal year 1997. Federal agencies have taken steps to implement new financial systems. While progress has been made in modernizing financial management systems, we have previously reported that efforts to modernize financial management systems have often exceeded budgeted cost, resulted in delays in delivery dates, and did not provide the anticipated system functionality and performance. For example, one-half (12 of 24) of the CFOs and deputy CFOs who responded to our survey indicated that they still use old systems and use obsolete software or hardware to perform financial management responsibilities. Some agencies have used migration of financial systems to external providers as part of their system modernization efforts, but others have experienced challenges in using shared services. For example, some CFO Act agencies have had difficulty in finding a provider with sufficient capacity and decided to modernize their financial system internally. Others that have attempted to move their financial system to a shared service provider failed to meet their cost, schedule, and performance goals. The federal government also has taken action aimed at reducing duplicative efforts by increasing agencies’ use of shared services for commonly used computer applications—such as payroll or travel. Over the past 15 years, there have been some notable shared services successes. For example, consolidating payroll services resulted in more than $1 billion in cost savings and cost avoidance over 10 years, according to Office of Personnel Management (OPM) estimates. In April 2019, OMB issued Memorandum M-19-16 on shared services, which among other things described the process and desired outcomes for shared services and established a governance and accountability model for achieving them. Workforce: Steps Have Been Taken to Strengthen the Federal Financial Management Workforce To help achieve the CFO Act’s purposes, the federal government established a financial management workforce structure, improving the quality of the federal workforce. Since then, steps have been taken to strengthen the federal financial management workforce, including the following: In 2000, the CFO Council and OPM worked together to align qualifications standards for accounting, auditing, and budget competencies with emerging financial management position requirements. In 2002, Congress and the President enacted legislation to empower OPM to provide agencies with additional authorities and flexibilities to manage the federal workforce and created the chief human capital officer (CHCO) positions and the CHCO Council to advise and assist agency leaders in their human capital efforts. In 2011, OPM and the CHCO Council created a working group that identified critical skills gaps in six government-wide, mission-critical occupations, including that of auditor. In 2017, OPM published a regulation requiring each CFO Act agency to develop a human capital operating plan describing agency-specific skills and competency gaps that are selected for closure and the strategies that will be implemented. Preliminary Observations on Opportunities for Enhancements to Fulfill the Purposes of the CFO Act While substantial progress has been made, additional attention is needed in several areas to help fully achieve the vision of the CFO Act and, in doing so, improve and modernize federal financial management. Based on the preliminary results from our ongoing review, we have identified several opportunities for enhancements that could help ensure that the CFO Act reaches its full potential. 1. To help ensure uniform responsibility, enhance strategic decision- making, and correct inconsistencies across government, amend agency CFO’s statutory responsibilities to ensure that they include all of the responsibilities necessary to effectively carry out financial management activities. Currently, responsibilities vary across agencies and do not include all key responsibilities that CFOs should possess. 2. To help ensure continuity in agency financial management operations when CFO vacancies occur, establish appropriate statutory responsibilities for deputy CFOs. This would minimize the effects of inevitable turnover in CFO positions. 3. Based on the maturity of federal financial management, extend the reporting frequency of the government-wide and agency-level financial management plans from annually to at least every 4 years (with timing to match the Government Performance and Results Act reporting requirements). In addition to the current government-wide financial management plan requirements, the plans should include actions for improving financial management systems, strengthening the federal financial management workforce, and better linking performance and cost information for decision-making. The government-wide plan should also include key selected financial management performance-based metrics. It is our view that OMB and Treasury should consult with the CFO Council, the Chief Information Officer Council, the Council of the Inspectors General on Integrity and Efficiency, GAO, and other appropriate financial management experts in preparing the government-wide plan. 4. To provide more complete and consistent measurement of the quality of agencies’ financial management, require OMB to develop, in consultation with the CFO Council, key selected performance-based metrics to assess the quality of an agency’s financial management, and changes therein. Examples of potential metrics include the number of internal control deficiencies, the number of internal control deficiencies corrected during the year, and the number of Antideficiency Act violations.The metrics should be included in the government-wide and agency-level financial management plans discussed above and agencies’ performance against the metrics reported in the annual status reports. Also, consider requiring auditor testing and reporting on the reliability of each agency’s reported performance against the metrics. 5. To reasonably assure that key financial management information that an agency uses is reliable, require agency management to (1) identify key financial management information, in addition to financial statements, needed for effective financial management and decision- making and (2) annually assess and report on the effectiveness of internal control over financial reporting and other key financial management information. Also, consider requiring auditor testing and reporting on internal control over financial reporting and other key financial management information. We provided a draft of the progress and opportunities for enhancements to OMB, Treasury, and OPM. OPM provided technical comments. OMB and Treasury generally agreed with enhancements 1 and 2, regarding CFOs’ and deputy CFOs’ statutory responsibilities. OMB generally disagreed with enhancement 3, regarding preparation of government- wide and agency-level financial management plans, stating that developing government-wide plans poses an administrative burden and is no longer relevant in light of the current state of financial management. However, we believe that a complete and integrated government-wide plan could help to ensure continuity in direction and a comprehensive understanding of the status and financial management challenges across government. Eight of the 10 financial experts we interviewed stated that without a government-wide financial management plan, the government lacks a clear strategic direction and agency improvement efforts may not appropriately address government-wide priorities. For enhancement 4, regarding performance metrics for agencies’ financial management, OMB generally disagreed, stating that it would be difficult to develop additional metrics that would apply to all agencies. We recognize the challenges in developing the metrics but continue to believe that a limited number of key metrics can be developed to effectively assess the quality of agencies’ financial management. For enhancement 5, regarding identifying key financial management information and assessing, reporting, and auditing internal control, Treasury generally agreed and OMB generally disagreed, noting that no action is needed and these controls are adequately addressed under existing initiatives and the enterprise risk management program contained in OMB guidance. We believe that a separate assessment is needed to reasonably assure that key agency financial management information used by the agency is reliable. Chairman Enzi, Ranking Member Sanders, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. GAO Contacts and Staff Acknowledgments If you or your staff have any questions about this testimony, please contact Dawn B. Simpson, Director, Financial Management and Assurance, at (202) 512-3406 or simpsondb@gao.gov or Robert F. Dacey, Chief Accountant, at (202) 512-3406 or daceyr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Phyllis Anderson (Assistant Director), LaDonna Towler (Assistant Director), Beryl Davis (Director), David Ballard, Jeremy Choi, Anthony Clark, Patrick Frey, Ryan Guthrie, Isabella Hur, Jason Kelly, Jason Kirwan, Chris Klemmer, Michael LaForge, Jill Lacey, Diana Lee, Christy Ley, Keegan Maguigan, Lisa Motley, Heena Patel, Matthew Valenta, Walter Vance, and William Ye. Appendix I: Objectives, Scope, and Methodology This testimony highlights some of the most significant achievements in federal government financial management since enactment of the Chief Financial Officers Act of 1990 (CFO Act) and some preliminary observations on how federal financial management can be enhanced. The information in this testimony is based on our ongoing review and analysis of relevant legislation; federal financial management guidance, such as Office of Management and Budget (OMB) circulars; reports on financial management issued by the Government Accountability Office (GAO), agency offices of inspector general, and others; summarization of interviews and a panel discussion with experts in federal financial management; and summarization of results of GAO surveys to federal chief financial officers (CFO), inspectors general (IG), and independent public accountants (IPA). To obtain perspectives of agency personnel on federal financial management, we developed and administered two web-based surveys from May 22, 2019, through August 5, 2019. We administered one survey to 47 individuals from the CFO offices of the CFO Act agencies and included individuals holding the position of CFO, acting CFO, deputy CFO, or equivalent at these agencies as of May 1, 2019. Of the 47 individuals we surveyed, 24 individuals responded, which resulted in a 51 percent response rate. We administered the other survey to 53 individuals holding the position of IG, deputy IG, or counsel to the IG at the CFO Act agencies as of May 1, 2019, and an additional 24 IPAs who have performed financial statement audits for these agencies since fiscal year 2014. Of the 77 individuals we surveyed, 29 individuals responded, which resulted in a 38 percent response rate. Results of both surveys only represent the views of those individuals who responded to the surveys and may not be representative of all individuals from the CFO offices, IG offices, or IPA offices of the CFO Act agencies. In May 2019, we hosted an expert meeting with the theme “CFO Act - Progress and Challenges.” When planning the meeting, we considered experts with a broad array of expertise. We had a total of eight experts participate, representing both the federal and private sectors. They included individuals who had served in auditing capacities and individuals who had represented federal entities being audited. Some experts were currently serving in their roles, and others had retired. Including experts with both present and past experiences helped to ensure an examination and discussion of the history of the CFO Act from its inception to the present. Topics for discussion included progress and challenges since enactment of the CFO Act, the role of the Department of the Treasury (Treasury) and OMB with regard to the act, and suggestions for improvements to financial management processes and systems. The meeting transcript was categorized by key points, including progress, challenges, OMB’s and Treasury’s roles, government-wide plans, financial management systems, shared services, leading practices, and proposed reforms or suggestions for improvements. Appendix II: Selected Statutes Governing Federal Entity Financial Management and Reporting, Including Related Systems and Personnel Budget and Accounting Procedures Act of 1950, ch. 946 §§ 110-118, 64 Stat. 834 (Sept. 12, 1950). Federal Managers’ Financial Integrity Act of 1982, Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982), codified at 31 U.S.C. § 3512(c), (d). Chief Financial Officers Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15, 1990). Government Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 287 (Aug. 3, 1993). Government Management Reform Act of 1994, Pub. L. No. 103-356, title IV, § 405, 108 Stat. 3410, 3415 (Oct. 13, 1994). Clinger-Cohen Act of 1996, Pub. L. No. 104-106, div. D & E, 110 Stat. 642 (Feb. 10, 1996), codified as amended at 40 U.S.C. § 11101, et seq. Federal Financial Management Improvement Act of 1996, Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 3009-389 (Sept. 30, 1996), codified at 31 U.S.C. § 3512 note. Reports Consolidation Act of 2000, Pub. L. No. 106-531, 114 Stat. 2537 (Nov. 22, 2000), codified as amended at 31 U.S.C. § 3516. Accountability of Tax Dollars Act of 2002, Pub. L. No. 107-289, 116 Stat. 2049 (Nov. 7, 2002). Chief Human Capital Officers Act of 2002, Pub. L. No. 107-296, title XIII, subtitle A, 116 Stat. 2135, 2287 (Nov. 25, 2002). Improper Payments Information Act of 2002, Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002), codified as amended at 31 U.S.C. § 3321 note. Federal Information Security Management Act of 2002, Pub. L. No. 107- 347, title III, 116 Stat. 2899, 2946 (Dec. 17, 2002), codified as amended at 44 U.S.C. §§ 3551-3558. Department of Homeland Security Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004). Federal Funding Accountability and Transparency Act of 2006, Pub. L. No. 109-282, 120 Stat. 1186 (Sept. 26, 2006), codified as amended at 31 U.S.C. § 6101 note. Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111-204, 124 Stat. 2224 (July 22, 2010), codified as amended at 31 U.S.C. § 3321 note. GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 3866 (Jan. 4, 2011). Improper Payments Elimination and Recovery Improvement Act of 2012, Pub. L. No. 112-248, 126 Stat. 2390 (Jan. 10, 2013), codified as amended at 31 U.S.C. § 3321 note. Digital Accountability and Transparency Act of 2014, Pub. L. No. 113-101, 128 Stat. 1146 (May 9, 2014), codified at 31 U.S.C. § 6101 note. Federal Information Security Modernization Act of 2014, Pub. L. No. 113- 283, (Dec. 18, 2014), codified at 44 U.S.C. §§ 3551-3558. Carl Levin and Howard P. ‘Buck’ McKeon National Defense Authorization Act for Fiscal Year 2015, Pub. L. No. 113-291, div. A, title VIII, subtitle D, 128 Stat. 3292, 3438-3450 (Dec. 19, 2014) (commonly referred to as the Federal Information Technology Acquisition Reform Act). Federal Improper Payments Coordination Act of 2015, Pub. L. No. 114- 109, 129 Stat. 2225 (Dec. 18, 2015). Fraud Reduction and Data Analytics Act of 2015, Pub. L. No. 114-186, 130 Stat. 546 (June 30, 2016). National Defense Authorization Act for Fiscal Year 2018, Pub. L. No. 115- 91, div. A, title X, subtitle G, 131 Stat. 1283, 1586 (Dec. 12, 2017), codified at 40 U.S.C. § 11301 note (commonly referred to as the Modernizing Government Technology Act). Foundations for Evidence-Based Policymaking Act of 2018, Pub. L. No. 115-435, 132 Stat. 5529 (Jan. 14, 2019). Appendix III: Opportunities for Enhancements to Fulfill the Purposes of the CFO Act Standardize CFO and Deputy CFO Responsibilities across Government The CFO Act provided agency CFOs with broad responsibilities for all financial management activities of their respective agencies, including financial management systems (including financial reporting and internal controls); agency financial management personnel, activities, and operations; preparation of financial statements; and monitoring of budget execution. The specific responsibilities assigned to CFOs vary among agencies and are inconsistent government-wide. We previously reported that CFO Act agencies need to ensure that CFOs possess the necessary authorities within their agencies to achieve change. For instance, because of the interdependency of the budget and accounting functions, some agencies have included both budget formulation and execution functions under the CFO’s authority while others have not. Most financial experts we interviewed agreed and the CFO Council and the Council of the Inspectors General on Integrity and Efficiency (CIGIE) reported that to allow for better strategic decision-making, CFO responsibilities should include budget formulation and execution, planning and performance, risk management and internal controls, financial systems, and accounting. Most experts agreed that standardizing the CFO portfolio across agencies would promote standardized financial management training and education and consistent skill sets across agencies, both at the executive and staff levels. The CFO Council and CIGIE have identified turnover of agency CFOs, even during the same administration, as a significant challenge. They also stated that major financial management improvement initiatives can take years to fully implement and realize, often outlasting the average tenure of a political appointee to a CFO position. With frequent CFO turnover and potentially lengthy intervals between official appointments, long-term planning and leadership continuity can be affected because career deputy CFOs, who frequently serve as acting CFOs during CFO vacancies, do not always have the same breadth of responsibilities as CFOs. Deputy CFOs can be better prepared to act for CFOs when there are vacancies if appropriate responsibilities are established for deputy CFOs. In our survey to CFOs and deputy CFOs, 17 of 24 respondents stated that the deputy CFO position should include all, most, or many of the same responsibilities as the CFO position. Additionally, some respondents to our survey replied that it is important for the deputy CFO to be able to step into the CFO position should there be a vacancy. CIGIE also said that deputy CFOs should be sufficiently empowered with more standard responsibilities to ensure effective succession planning. Prepare Government- Wide and Agency-Level Financial Management Plans The CFO Act called for annual comprehensive government-wide 5-year plans for improving federal financial management. It also called for each agency CFO to annually prepare a plan to implement the government- wide plan prepared by the Office of Management and Budget (OMB). Moreover, it required annual government-wide and agency-level status reports. The OMB plans and status reports were to be submitted to Congress to enable comprehensive congressional oversight. Since it issued the 2009 report, OMB has neither prepared nor submitted to Congress the annual 5-year government-wide plans as required by the CFO Act. Instead, OMB stated that it is meeting the intent of the requirement by providing information in the President’s Management Agenda (PMA), in the annual government-wide consolidated financial statements, and in documents placed on Performance.gov and the CFO Council’s website. For the consolidated financial statements, the information is included in a section in the Management’s Discussion and Analysis (MD&A) entitled Financial Management. This section discusses several of the priorities and accomplishments in financial management for the prior and current fiscal years and in some cases discusses goals for the next fiscal year. In addition, according to OMB, financial management elements are being considered in implementing the 2018 PMA. The CFO Council, in coordination with OMB, has identified six financial management cross- agency priorities and is developing detailed plans for each. Two of these plans, results-oriented accountability for grants and getting payments right, have been completed and posted on Performance.gov. The others are being managed by executive steering committees comprising CFO Council–approved members. While the various MD&A Financial Management sections, the PMA, and other OMB documents contain relevant information about improvements in financial management, these documents do not provide a complete and integrated financial management strategy for making continued improvements and for reporting on the administration’s accomplishments in a comprehensive manner. In 2019, OMB proposed eliminating the CFO Act requirement for a separate comprehensive plan, arguing that this change would provide it with flexibility to report information that is most relevant to financial management in a manner that is most efficient. However, having a complete and integrated financial management plan would help to address long-standing, costly, and challenging concerns in financial management in a strategic, comprehensive, efficient, and cost-effective manner. Eight of the 10 financial experts we interviewed stated that without a government-wide financial management plan, the government lacks a clear strategic direction and agency improvement efforts may not appropriately address government-wide priorities. To hold people accountable and facilitate congressional oversight, a complete and integrated financial management plan should include the resources required and measure progress through interim milestones with completion dates. Several experts also stated that they believe that a government-wide plan should be done every few years instead of annually, but that the status report could continue to be prepared annually. A complete and integrated government-wide financial management plan and supporting agency plans, prepared every few years, could help ensure continuity in direction and a more comprehensive understanding of gauging progress toward addressing financial management challenges across government. Better Link Performance and Cost Information for Decision-making The CFO Act calls for agencies to (1) develop and maintain integrated accounting and financial management systems that provide for, among other things, systematic measurement of performance and (2) develop and report cost information. While the Government Performance and Results Act of 1993 (GPRA) laid a foundation for results-oriented management, we found that agencies’ reported use of performance data to make decisions has generally not improved. While agencies have made efforts in this direction, opportunity exists to enhance the availability and reliability of performance and cost information, and better link this information for decision-making. One example of this is linking program performance to program cost. A number of agencies have implemented activity-based costing, which creates a cost model of an organization by identifying the activities performed, the resources consumed, and the outputs (products and services) that an organization produces. However, linking cost and performance information for effective decision-making has been challenging. Respondents to our CFO survey noted that agencies face challenges in (1) developing and maintaining an integrated agency accounting and financial management system (19 of 24 respondents), (2) developing and reporting cost information (19 of 24 respondents), and (3) having financial management systems that produce the needed financial data to help address agency performance goals (21 of 24 respondents). Agencies that lack readily available, reliable, and linked performance and cost information may not be able to effectively make financial management decisions that are based on dollars allocated and results achieved and thus may miss opportunities to reduce costs or enhance mission effectiveness. Develop a Broader Set of Key Selected Financial Management Performance-Based Metrics Agencies have limited financial management performance-based metrics (e.g., financial statement audit opinion and number of reported material weaknesses in internal control over financial reporting) to help them assess the quality of their financial management. A broader set of key selected financial management performance-based metrics can provide more complete analysis across the breadth of financial management functions. Examples of potential metrics include the number of internal control deficiencies, the number of internal control deficiencies corrected during the year, and the number of Antideficiency Act violations. Key selected financial management performance-based metrics, including identifying metrics in the government-wide and agency-level plans discussed above and reporting of agency performance against the metrics in the annual status reports, can help ensure that the federal government better manages and uses the resources entrusted to it. Also, auditor testing and reporting on each agency’s reported performance against the metrics can provide assurance that such information is reliable. Rectify Internal Control Issues in Certain Areas The CFO Act required CFOs to develop and maintain an integrated agency accounting and financial management system that provides for complete, reliable, consistent, and timely information prepared on a uniform basis and that responds to agency management’s financial information needs. To ensure the reliability of financial information, agencies need effective internal controls. While agencies have made important progress in strengthening internal control, as noted earlier, the federal government faces many internal control problems. The following discusses three areas: assessing internal control over key financial management information, government-wide improper payments, and material weaknesses preventing an opinion on the U.S. government’s consolidated financial statements. Assessing Internal Control over Key Financial Management Information Management may not have reasonable assurance that internal control over financial reporting and other key financial management information that the agency uses is reliable. Since fiscal year 1997, agency auditors’ assessments of the effectiveness of internal control over financial reporting have identified long-standing, as well as new, material weaknesses. As a result of new material weaknesses, a number of agencies have not been able to sustain “clean” audit opinions on their financial statements. In addition, continuing material weaknesses have hindered two CFO Act agencies, the Departments of Defense and Housing and Urban Development, and the government as a whole, from achieving clean audit opinions. For fiscal year 2018, auditors of CFO Act agencies reported a total of 41 material weaknesses. One key to strengthening internal control over financial reporting at federal entities has been OMB Circular No. A-123, which carries out OMB’s responsibility to provide guidelines for agencies to follow in evaluating their systems of internal control. In December 2004, OMB issued A-123, Appendix A, Internal Controls over Financial Reporting, which provided a methodology with which agency management could assess, document, and report on internal control over financial reporting. It emphasized management’s responsibility for establishing and maintaining effective internal control over financial reporting. Appendix A required 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 effectiveness of the agency’s internal control over financial reporting. The CFO Council subsequently issued the Implementation Guide for Appendix A in 2005. In 2018, OMB reported that since the issuance of OMB Circular No. A- 123’s Appendix A, federal agencies have made substantial progress in improving their internal controls over financial reporting. OMB referred to this as a rigorous process for agencies to separately assess internal control over financial reporting. Beginning in fiscal year 2018, however, OMB no longer requires such a process. On June 6, 2018, OMB issued an updated Appendix A, Management of Reporting and Data Integrity Risk. The revised Appendix A integrates internal control over reporting, along with internal controls over operations and compliance, in an overall assessment of the agency’s internal control. This reporting guidance includes internal control over financial reporting as well as over other financial and nonfinancial information. It also requires that agencies develop and maintain a data quality plan that considers the risks to data quality in federal spending data required by the Digital Accountability and Transparency Act of 2014 (DATA Act) and any controls that would manage such risks in accordance with OMB Circular No. A-123. Further, agency senior accountable officials are required to certify each quarter, among other things, that their data submissions under the DATA Act are valid and reliable. However, the appendix does not require a separate management assessment of internal controls over the reliability of federal spending data. As we previously reported, there are significant data quality problems related to the completeness and accuracy of DATA Act data. In addition, the Federal Financial Management Improvement Act of 1996 (FFMIA) requires CFO Act agencies and their auditors to determine whether agency financial management systems comply substantially with federal financial management systems requirements. However, such systems requirements are focused on preparing agency financial statements and do not generally include system requirements related to other key financial management information (e.g., performance information and cost information) needed for management decision- making. We have expressed concerns about the adequacy of financial management systems requirements contained in the Treasury Financial Manual. In our survey of CFOs and deputy CFOs, most (20 of 24) respondents said that ensuring data quality of financial information was somewhat, very, or extremely challenging. Without (1) identifying all key financial management information needed for effective financial management and decision-making, (2) separately assessing and reporting on the effectiveness of internal control over financial reporting and other key financial management information, and (3) independently assessing such controls, management may lack reasonable assurance of the reliability of such information. Government-Wide Improper Payments Improper payments have consistently been a government-wide issue, despite efforts to reduce them. Since fiscal year 2003, cumulative improper payment estimates have totaled about $1.5 trillion. Although agencies have made progress identifying and reducing improper payments, more work needs to be done to address this government-wide material weakness in internal control. We continue to report, as a government-wide material weakness in internal control, that the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce them. OMB stopped reporting a government-wide improper payment estimate in fiscal year 2017. According to OMB, it stopped reporting a government-wide estimate because program-by-program improper payment data were more useful. However, we believe that the aggregation of improper payment estimates is essential for transparency as without such the extent and magnitude of the government-wide improper payments is not readily available to key decision makers. As such, we support a key provision in the Payment Integrity Information Act of 2019—a bill which has passed the Senate— to require OMB to report a government-wide improper payment estimate amount. Implementing this provision would be a positive step in determining the overall progress the federal government is making in the improper payment area. The federal government also needs to reasonably assure that agencies take appropriate actions to reduce improper payments. For example, in supplemental appropriations acts providing disaster relief funds in 2017 and 2018, Congress mandated an oversight framework for these funds by requiring federal agencies to submit internal control plans to Congress, based on OMB guidance. However, in June 2019, we reported that OMB lacked a strategy for ensuring that federal agencies provide sufficient, useful plans in a timely manner for oversight of disaster relief funds. As a result, we found that selected agencies did not submit their disaster aid internal control plans timely. The plans also lacked necessary information, such as how the selected agencies plan to meet OMB guidance and federal internal control standards. Such a strategy could help provide Congress some assurance that agencies will establish effective and efficient controls over disaster aid. The federal government also needs to reasonably assure that states, local governments, and nonprofit organizations take appropriate actions to reduce their improper payments of federal funds. For example, OMB recently revised its compliance supplement for Medicaid to enable auditors, as part of the single audit of all federal financial assistance that a state received or administered, to test beneficiaries for eligibility for the program. If this expansion of the compliance supplement is successful for Medicaid, other federal programs that states, local governments, and nonprofit organizations administer may also benefit from such revisions. Material Weaknesses Preventing an Opinion on the U.S. Government’s Consolidated Financial Statements Since the federal government began preparing consolidated financial statements over 20 years ago, three major impediments have continued to prevent us from rendering an opinion on the federal government’s accrual-based consolidated financial statements over this period. 1. Serious financial management problems at the Department of Defense (DOD) have prevented its financial statements from being auditable. DOD’s strategy for achieving a clean opinion on its financial statements and improving overall financial management has shifted from preparing for audit readiness to undergoing financial statement audits and remediating audit findings. In a positive development, DOD underwent an audit of its entity-wide fiscal year 2018 financial statements, which resulted in a disclaimer of opinion issued by the DOD Office of Inspector General (OIG). The DOD OIG also reported 20 material weaknesses in internal control over financial reporting, contributing to its disclaimer of opinion. DOD has acknowledged that achieving a clean audit opinion will take time. However, it stated that over the next several years, the resolution of audit findings will serve as an objective measure of progress toward that goal. DOD will need to develop and effectively monitor corrective action plans to appropriately address audit findings in a timely manner. Partially in response to our recommendations, DOD recently developed a centralized database for tracking the audit findings, recommendations, and related corrective action plans. 2. While significant progress has been made over the past few years, the federal government continues to be unable to adequately account for intragovernmental activity and balances between federal entities. Federal entities are responsible for properly accounting for and reporting their intragovernmental activity and balances in their entity financial statements. When preparing the consolidated financial statements, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated, from the financial statements. OMB and the Department of the Treasury (Treasury) have issued guidance directing component entities to reconcile intragovernmental activity and balances with their trading partners and resolve identified differences. In addition, the guidance directs the CFOs of significant component entities to report to Treasury, their respective inspectors general, and GAO on the extent and results of intragovernmental activity and balance reconciliation efforts as of the end of the fiscal year. 3. The federal government has an ineffective process for preparing the consolidated financial statements. Treasury, in coordination with OMB, has implemented several corrective actions during the past few years related to preparing the consolidated financial statements. Corrective actions included improving systems used for compiling the consolidated financial statements, enhancing guidance for collecting data from component entities, and implementing procedures to address certain internal control deficiencies. However, the federal government’s systems, controls, and procedures were not adequate to reasonably assure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in accordance with U.S. generally accepted accounting principles. Further, significant uncertainties, primarily related to achieving projected reductions in Medicare cost growth, and a material weakness in internal control prevented us from expressing an opinion on the sustainability financial statements. We, in connection with our audits, and agency auditors, in connection with their audits, have identified numerous deficiencies underlying the above weaknesses and have provided recommendations for corrective action. Improve Financial Management Systems The federal government has made unsuccessful efforts to implement new financial management systems, most notably at DOD, the Internal Revenue Service, the Department of Homeland Security, and the Department of Housing and Urban Development—which have spent billions of dollars on failed systems. We have reported that the executive branch has undertaken numerous initiatives to better manage the more than $90 billion that the federal government annually invests in information technology (IT). However, we reported that federal IT investments too frequently fail or incur cost overruns and schedule slippages, while contributing little to mission-related outcomes. These investments often suffered from a lack of disciplined and effective management, including inadequate project planning, clearly defined requirements, and program oversight and governance. In 2015, we added the government’s management of IT acquisitions and operations to our High-Risk List, where it remains in 2019. In fiscal year 2018, eight of 24 CFO Act agencies’ financial management systems still did not substantially comply with FFMIA’s systems requirements. Moreover, a number of agencies rely on critical legacy systems that use outdated languages, have unsupported hardware and software, and are operating with known security vulnerabilities. We previously reported that some agencies have not established complete modernization plans and face an increased risk of cost overruns, schedule delays, and project failure. In addition, most respondents to our CFO survey (15 of 24) stated that it has been extremely, very, or somewhat challenging to work with financial management systems that are old and use obsolete software or hardware. Efforts to promote greater use of shared services in certain areas, such as human resources and financial management activities, resulted in some cost savings and efficiency gains, but challenges (e.g., implementation weaknesses, project scheduling, and project management and costs) impede widespread adoption. Almost all respondents to our CFO survey (22 of 24) indicated that they currently use or plan to use shared services. Most of those respondents (16 of 24) believed that use of shared services could help reduce costs. As noted above, in April 2019, OMB issued Memorandum M-19-16 on shared services, which among other things described the process and desired outcomes for shared services and established a governance and accountability model for achieving them. Also, OMB stated that, building off of OMB’s and Treasury’s efforts to create a Quality Service Management Office for Financial Management, they are establishing a more centralized approach to standardize, consolidate, and automate agency financial systems. A government-wide plan for improving federal financial management systems, including shared services, that is incorporated into the government-wide and agency-level plans discussed above could help ensure, among other things, that financial management system problems are addressed. Strengthen the Federal Financial Management Workforce Insufficient numbers of staff, inadequate workforce planning, and a lack of training in critical areas create gaps between what the federal government needs and the skills federal employees have. We have made a number of recommendations toward achieving a federal workforce with the necessary skills, including in financial management. In a 2007 testimony, we reported that one key challenge to strong federal financial management is building a financial management workforce for the future. This holds true today. Our CFO survey respondents (14 of 24) noted that CFO Act agencies do not have all of the staff with the professional qualifications, capabilities, and expertise needed to effectively support financial management operations and practices. With rapid changes, such as emerging technologies and growing availability of data, it is critical for the government to identify and strategically plan for the future workforce to achieve effective financial management. A comprehensive, long-term plan to address the challenges in the federal financial management workforce that is incorporated into the government-wide and agency-level plans discussed above could help ensure that agencies are held accountable for a long-term vision of attracting and retaining a workforce that maintains the professional qualifications, capabilities, and expertise that will meet current and future needs. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.


Background Priority and Standard Review For a priority review, the Food and Drug Administration (FDA) directs its resources to applications for new drugs that prevent, diagnose, or treat a serious condition and, if approved, would provide significant improvements in safety or effectiveness compared to available drugs. A drug may also receive priority review if the drug sponsor redeems a priority review voucher, among other things. FDA’s goal is to complete the review of a priority application within 6 months. Drugs that do not receive priority review receive standard review. FDA’s goal is to complete the review of a standard application within 10 months. FDA, an agency within the Department of Health and Human Services (HHS), is responsible for overseeing the safety and efficacy of drugs and biological products, such as vaccines, sold in the United States. Before a drug sponsor can market a new drug, it generally must submit evidence of the drug’s safety and effectiveness to FDA in a new drug application or biologics license application. While FDA reviews most drug applications using its standard review process, FDA’s priority review designation is intended to reduce the review time needed to bring a drug to market for certain drugs that treat serious conditions. A drug application typically receives a priority review designation if the drug would provide a significant improvement in the safety or effectiveness of the prevention, diagnosis, or treatment of a serious condition when compared to available drugs, among other things (see sidebar). FDA reviews all applications to determine if they qualify for priority review. FDA is also responsible for the implementation of the three PRV programs, which are intended to encourage development of drugs for tropical diseases, rare pediatric diseases, and medical countermeasures. Qualifying diseases and conditions for the tropical disease PRV program and criteria for the rare pediatric disease PRV program are set forth in statute—though the list of eligible tropical diseases can be updated by order of the Secretary of HHS. For the medical countermeasure PRV program, HHS publishes a list of high- priority threats that qualify for a PRV, including those that the Department of Homeland Security determines to pose a material threat sufficient to affect national security. (See table 1 for the types of drugs eligible for a PRV.) In order to be awarded a PRV, drug applications must meet additional criteria. For example, for all three PRV programs, the drug application must be eligible for priority review and a drug may be disqualified if its active ingredient has been previously approved by FDA in another drug application. If a drug application meets the eligibility criteria for one of the PRV programs, the drug sponsor can include a request for a PRV in its application, including supporting documentation demonstrating how the application meets the PRV eligibility criteria. Once FDA receives a sponsor’s drug application and PRV request, it reviews the information and considers whether the drug should be approved. If FDA approves the drug application, it includes its decision regarding whether to award a PRV in its approval letter. Once FDA awards a PRV to a drug sponsor, the sponsor can redeem the PRV with the submission of a future drug application for a drug intended to treat any disease or condition, shortening FDA’s targeted review time from the 10-month standard review to 6 months, even if the drug in that future application would not qualify for priority review on its own merits. The drug sponsor also has the option of selling or transferring the PRV to another drug sponsor, which may then choose to use it or similarly sell or transfer it. PRVs may be transferred any number of times before they are used. When the drug sponsor possessing the PRV ultimately decides to redeem it, the sponsor must notify FDA at least 90 days in advance of submitting its drug application that is using the PRV. Figure 1 provides a general overview of the PRV programs. The drug sponsor redeeming a PRV must also pay a PRV user fee (about $2.5 million in fiscal year 2019), in addition to other user fees required for all drug applications. Because drug applications submitted to FDA with a PRV would not otherwise qualify for priority review, PRV user fees are intended to cover FDA’s additional costs incurred when reviewing new drug applications with a PRV. When a drug sponsor notifies FDA of its intent to redeem a PRV, its notification serves as a legally binding commitment to pay the PRV user fee. Of the three PRV programs, two—the rare pediatric disease and the medical countermeasure PRV programs—are set to expire in the coming years, unless they are reauthorized by Congress. The rare pediatric disease PRV program will begin to expire on September 30, 2020, and the program will end in September 2022. The medical countermeasure PRV program will expire on October 1, 2023. After these end dates, FDA could no longer award a PRV for a rare pediatric disease or a medical countermeasure; however, the expiration dates do not affect PRV redemptions, as drug sponsors may redeem PRVs earned at any point in the future. Most of the 31 PRVs Awarded by FDA Were for Drugs to Treat Rare Pediatric Diseases As of September 30, 2019, FDA awarded 31 PRVs across the three PRV programs, with the majority being awarded through the rare pediatric disease PRV program (see fig. 2). According to FDA, all PRVs were awarded for drugs that met unmet medical needs. The 31 PRVs were awarded to 26 different drug sponsors; three sponsors were awarded two PRVs each and one sponsor was awarded three PRVs. FDA awarded the 31 PRVs for drugs that treat 27 different diseases. For five diseases— malaria, tuberculosis, smallpox, spinal muscular atrophy, and Duchenne muscular dystrophy—FDA awarded PRVs to two different drugs for their treatment, and FDA awarded one PRV for a drug that prevents two different diseases. (See appendix I for more information about the drugs for which FDA awarded PRVs.) The first PRV was awarded in fiscal year 2009, 2 years after the start of the tropical disease PRV program, and none were awarded in fiscal years 2010 through 2012. The first rare pediatric disease PRV was awarded in fiscal year 2014—about 2 years after that PRV program was authorized— and, beginning in fiscal year 2015, the majority of PRVs awarded were for rare pediatric diseases. In fiscal year 2018, FDA awarded eight PRVs, including the first medical countermeasure PRV, the most awarded in a single fiscal year (see fig. 3). Of the 31 PRVs that FDA awarded to drug sponsors, available data indicate 17 PRVs were subsequently sold to another drug sponsor, providing revenue to the sponsor selling the PRV. For 14 of these 17 PRVs, we were able to determine a sales price, which ranged from $67.5 million for a PRV sold in fiscal year 2014 to $350 million for a PRV sold in fiscal year 2015. However, the available sales prices of the PRVs sold since February 2017 have varied less than those sold previously, ranging from $80 to $130 million (see fig. 4). Because drug sponsors are only required to notify FDA of sales of rare pediatric disease PRVs at the time the sale occurs, additional transfers or sales of PRVs may have occurred. The drug sponsors, stakeholders, and researchers we interviewed noted that several factors could influence whether a drug sponsor keeps a PRV for future use, sells the PRV to another drug sponsor, or purchases a PRV to use on a drug that would not otherwise qualify for priority review. The PRV programs allow PRVs to be transferred multiple times, and according to stakeholders and drug sponsors we spoke with, the revenue gained from such sales may be a motivating factor for drug sponsors to sell them. For example, three stakeholders we interviewed said they believe drug sponsors consider the drugs in their development pipeline when deciding to keep, sell, or purchase a PRV, and one stated that drug sponsors need to determine if they would benefit more from using the PRV or the money they could make from selling it. One researcher commented that price variation for PRVs can affect how a drug sponsor perceives the incentive and that low prices for PRVs may signify the need for additional incentives for drug development. However, two drug sponsors told us that they would continue to pursue PRVs as long as they were available and useful for a particular drug in their pipeline. More than Half of the PRVs Awarded Have Been Redeemed for Drugs Treating a Variety of Conditions As of September 30, 2019, drug sponsors redeemed 16 of the 31 PRVs— that is, they submitted the PRV to obtain priority review for a drug application for a drug that would not otherwise qualify for a priority review. The drugs for which the PRVs were redeemed treat or prevent a variety of conditions and diseases, including human immunodeficiency virus (HIV), type 2 diabetes, and different forms of arthritis. (See appendix II for a complete list of PRV redemptions.) The first PRV was redeemed in fiscal year 2011, about 2 years after the first PRV was awarded, and the second PRV was redeemed in fiscal year 2015. Since 2017, drug sponsors have redeemed between three and six PRVs each year (see fig. 5). The 16 PRVs were redeemed by 10 different drug sponsors. Twelve of the 16 redeemed PRVs were purchased and redeemed by a drug sponsor different from the original PRV awardee. All 16 redeemed PRVs were redeemed within 4 years of FDA awarding them (see fig. 6). Of the 15 PRVs that were not redeemed as of September 30, 2019, 12 were awarded in fiscal years 2018 or 2019, and one was awarded in early fiscal year 2016. (See fig. 7.) Drug sponsors we contacted told us that decisions on when to redeem PRVs are largely strategic and take into consideration their drug development pipeline and market competition. For example, three of the drug sponsors told us they might choose to redeem a PRV to help a drug reach the market faster than a competitor’s drug, and two drug sponsors told us they may hold a PRV to use to obtain priority review for a particular drug that is in development. Another drug sponsor told us it considers the likelihood of a drug receiving approval from FDA when deciding when to use a PRV (since the PRV only affects the time frames for FDA’s review and does not guarantee approval), and if a drug in its pipeline could receive priority review from FDA on its own merit. Almost half of the awarded PRVs had not been redeemed as of the end of fiscal year 2019, which may affect FDA’s ability to forecast resources needed in the future. In 2016, we reported that FDA told us that the rare pediatric disease PRV program placed a substantial strain on its workload, explaining that performing a priority review on a drug that would otherwise merit a standard review requires the agency to conduct significant work in a compressed time frame. Between fiscal years 2011 and 2018, PRV redemptions have accounted for less than 1 percent of FDA’s reviews in any given year, according to FDA. While FDA receives 90 days’ notice of a PRV redemption, the notice period may not be enough time to ensure the appropriate staff are available to review a drug application that the agency does not consider to be a public health priority, according to FDA. However, one researcher noted that this uncertainty exists for all drug applications, as FDA cannot know in a given year how many drug applications will be submitted in any particular therapeutic area or how many of these applications will qualify for priority review. Furthermore, two drug sponsors, one researcher, and one stakeholder we spoke with noted that FDA collects additional user fees for PRV redemptions specifically to support the priority review for a drug that would not normally qualify for one. Since fiscal year 2011, FDA has collected almost $44 million in PRV user fees for the 16 redeemed PRVs. FDA does not track the resources it uses specifically for the PRV programs, so the agency cannot determine if the PRV user fees paid when PRVs are redeemed cover the associated costs. According to FDA, the agency cannot anticipate the therapeutic area for which a PRV will be redeemed, so PRV user fees may not ameliorate the effect of PRV redemptions on the review divisions or provide for rapid hiring of additional review staff with relevant experience and technical expertise. FDA officials told us that each new PRV program—and changes made to existing PRV programs—requires additional resources to implement. The agency reports that the services of over 11 offices within FDA are required to work on some aspect of the PRV programs, which may at times require FDA to shift resources from its public health priorities. According to FDA, the PRV programs also expend and divert agency resources to draft and revise PRV-related guidance; update webpages; research, draft, and publish notices and orders to add or decline to add diseases to the list of eligible tropical diseases; respond to inquiries from sponsors, potential sponsors, investors, attorneys, and other interested individuals; and respond to requests for a rare pediatric disease designation. The Few Studies That Examined PRV Programs Found Little or No Effect on Drug Development; Improvements and Alternatives Were Suggested The Few Studies Examining PRV Programs Found Little or No Effect on Drug Development and Views of the Programs Are Mixed Our literature review found three studies—one for each of the PRV programs—that examined and drew conclusions about how PRV programs affect drug development; of these, one study found evidence of an effect of a PRV program on drug development. Specifically, it found that drugs to treat rare pediatric diseases, which could be eligible for a rare pediatric disease PRV, were more likely to advance from phase I to phase II clinical trials when compared to rare adult disease drugs. The studies examining the other two PRV programs did not find an effect on drug development. Rare pediatric disease PRV program. A 2019 study found that the rare pediatric disease PRV program was not associated with an increase in the number or rate of new pediatric disease drugs that started or completed clinical trials. However, the study found that, after the creation of the rare pediatric disease PRV program, drugs the study authors determined could be eligible for a rare pediatric disease PRV were more likely to advance from phase I to phase II clinical trials compared to rare adult disease drugs, which are not eligible for a PRV under this program. Additionally, the study found the time it took for drugs to progress to the next stage of development was shorter among drugs eligible for a rare pediatric disease PRV compared to drugs for rare adult diseases, across all three phases of clinical development. Tropical diseases PRV program. A 2017 study found that this PRV program was not associated with an increase in tropical disease drugs starting clinical testing. The study found the proportion of tropical disease drugs among all drugs in development decreased slightly after the PRV program was created. Study authors suggested the relatively small number of approved tropical disease products in the last decade indicates the PRV program did not serve as a stimulus for completing late-stage drug development. Medical countermeasure PRV program. A 2018 study reported that 25 of 26 medical countermeasures undergoing clinical trials received direct or indirect public support, such as funding from the Department of Defense. Authors stated that, given the extent to which development of medical countermeasures already occurs via direct or indirect federal funding, alternatives other than the PRV program could better stimulate development of medical countermeasures. While the few studies of the PRV program found little to no effect on drug development, the seven drug sponsors we contacted told us the PRV programs were an incentive—that is, a factor in their decisionmaking—for drug development. In contrast, the seven researchers and seven stakeholders we contacted reported mixed views of the PRV programs as an incentive for drug development. Drug sponsors. All seven drug sponsors told us the PRV programs were a factor in drug development decisions—six sponsors said it was one of a number of factors, and one sponsor said it was pivotal in its development of a drug. For example, three drug sponsors told us PRVs were important to help fund drug development and one of these drug sponsors told us the PRV program supported its decision to move a drug already under development to market. Four drug sponsors told us PRV programs may be a more significant incentive for small drug sponsors, with one small, nonprofit drug sponsor noting that it entirely relied on the profits from the sale of its PRV to ensure its drug would become available to those who need it. Additional factors drug sponsors reported considering included whether the sponsor has a drug in their development pipeline that could particularly benefit from a PRV, and whether its drug development program has public financial support, such as direct federal funding. Researchers. The seven researchers reported mixed views of the PRV programs as an incentive for drug development, and their perceptions of the three programs varied. For example, when asked to describe the incentive for drug development provided by the tropical disease PRV program, two researchers described it as “not significant,” and two researchers described it as “somewhat significant.” However, one of these researchers told us the tropical disease PRV program encouraged drug development, particularly for diseases such as tuberculosis and malaria for which a drug is potentially more commercially viable. Regarding the rare pediatric disease PRV program, three researchers told us they have heard anecdotally that the program is an incentive to develop or continue development of rare pediatric disease drugs. In contrast, one researcher told us many drug sponsors have received a rare pediatric disease PRV for drugs they would have produced anyway, and another told us he did not believe the rare pediatric disease PRV provided an adequate incentive for adding new drugs into a drug sponsor’s pipeline. Finally, four researchers told us it was too early to evaluate the medical countermeasure PRV program as an incentive. Stakeholders. The seven stakeholders also reported mixed views on the PRV programs as an incentive for drug development. For example, one stakeholder told us that drug sponsors have entered particular drug development areas because of the PRV programs, and the PRV program has been pivotal to the financial planning of small drug sponsors working in the medical countermeasures and rare pediatric disease spaces. In contrast, two other stakeholders told us the PRV programs are an incentive to obtain FDA approval for a drug that has already been developed and marketed outside of the United States but are not an incentive for developing new drugs. One of these stakeholders and an additional stakeholder also noted that PRVs are often a source of additional revenue to drug sponsors that would have developed their PRV drug anyway and did not need the PRV to finance drug development. The number of PRVs awarded by FDA could influence the effectiveness of the PRV programs as incentives, according to several drug sponsors, researchers, and stakeholders we contacted. Specifically, some indicated that the potential revenue from the sale of a PRV could decline if more PRVs are awarded, and there is an increased supply of PRVs available for sale. Specific comments included the following: One drug sponsor told us that, while the number of PRVs on the market was a concern, they have remained valuable. Another drug sponsor told us it was not concerned with the relative value of PRVs, because it did not plan to sell its remaining PRVs and would purchase more in the future if PRVs would benefit drugs in its pipeline. One researcher told us lower prices for PRVs merited concern, because the PRV alone might not be sufficient to motivate drug development. The researcher indicated that a drug would also need either sufficient sales or additional government incentives. Two stakeholders told us the sales prices of PRVs (and potential revenue from selling them) might be more of a concern for small drug sponsors than large drug sponsors, as these stakeholders told us small drug sponsors are more likely to sell their PRV instead of using it for another drug in their portfolio. Drug sponsors, researchers, and stakeholders we contacted also reported mixed views on whether the rare pediatric disease and medical countermeasure PRV programs—set to expire by 2022 and 2023, respectively—should be reauthorized. While FDA officials reported that, as of April 2019, the agency does not have a position on the reauthorization of these two PRV programs, drug sponsors generally indicated support for their reauthorizations, with some noting that PRV program expirations may negatively affect overall drug development and the willingness of drug sponsors to work in these areas. The researchers we contacted offered mixed opinions on reauthorization. For example, one recommended reauthorizing both PRV programs, but indicated that his opinion could change if a better incentive was developed. In contrast, another researcher supported the expiration of these two programs, noting that their expiration could ultimately raise the potential revenue from the sale of an available PRV and could also make the tropical disease PRV program, which does not require reauthorization, more popular to encourage drug development. Most stakeholders we contacted did not offer a clear opinion on reauthorization; those that did generally supported reauthorization. Drug Sponsors, Researchers, and Stakeholders Suggested Improvements and Alternatives to the PRV Programs Drug sponsors, researchers, and stakeholders we contacted suggested several improvements to the PRV programs, including those described below. Require innovation for PRV-eligible drugs. Two researchers and two stakeholders noted that the PRV programs, particularly the tropical disease PRV program, have been criticized for not providing incentives for innovation and suggested PRV awards be limited to drugs new to the global market. Currently, drug sponsors can receive a PRV for a drug that has already been developed and marketed outside of the United States, but which qualifies for a PRV because the drug has not been approved for marketing in the United States. One researcher suggested the federal government should not provide an incentive, like a PRV, for drugs already in existence outside of the United States, for which most research and development was already completed. However, one drug sponsor told us that requiring a tropical disease drug to be approved first in the United States to qualify for a PRV would delay entry of the drug into the international markets that need it the most. Additionally, two stakeholders told us that drugs that have already been developed may have significant benefits to patients when combined or used to treat other diseases. Require drug sponsors to guarantee access to PRV-eligible drugs. One researcher and two stakeholders suggested drug sponsors submit an access plan to help ensure the drug reaches the populations in need of the treatment, and one drug sponsor suggested they supply at cost the drugs for which the PRV was awarded. One of these stakeholders noted that a weakness of the PRV program is that drug sponsors awarded a PRV have no obligation to make the approved drug available at an affordable price. It suggested that requiring an access plan may result in drugs for which a PRV was awarded being more available and accessible to the populations that need them. However, three stakeholders noted that FDA may not have the resources or authority to enforce such access commitments. Limit PRVs to drug sponsors with financial need. One drug sponsor and one researcher suggested awarding a PRV only to drug sponsors that financially require it to develop their drug, such as a nonprofit organization that must leverage potential revenue from the PRV to help offset drug development costs. Make administrative changes. One drug sponsor told us FDA’s process for determining the list of tropical diseases eligible for a PRV was not transparent and wanted clarification on FDA’s timeline for editing this list. Another drug sponsor told us it wanted clarification on whether a drug would merit priority review on its own, so the sponsor could determine whether to redeem a PRV for that drug. In addition to suggesting improvements to the PRV programs, drug sponsors, researchers, and stakeholders we contacted, as well as our literature review, identified potential alternatives to the PRV programs that provide incentives for drug development (see table 2). Agency Comments We provided a draft of this report to HHS for review and comment. HHS provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Health and Human Services, and other interested parties. In addition, the report is available at no charge on GAO’s website at http://www.gao.gov/. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix IV. Appendix I: Priority Review Vouchers (PRV) Awarded by the Food and Drug Administration Sales price (dollars in millions) Gilead Sciences, Inc. Gilead Sciences, Inc. Novartis Pharmaceuticals Corporation Dengvaxia Sanofi Pretomanid The Global Alliance for TB Drug Development (TB Alliance) BioMarin Pharmaceutical Inc. Treatment of mucopolysaccharidosis type IVA (MPS IVA; Morquio A syndrome) PRV Sale date purchaser August 2015 AbbVie Inc. Drug name Drug sponsor Unituxin United Therapeutics Corporation Cholbam Asklepion Pharmaceuticals, LLC Xuriden Wellstat Therapeutics Corporation Strensiq Alexion Pharmaceuticals Inc. Kanuma Alexion Pharmaceuticals Inc. Exondys 51 Sarepta Therapeutics, Inc. Teva Pharmaceutical USA, Inc. Treatment of hypophosphatasia (HPP) Spinraza Biogen, Inc. Gilead Sciences, Inc. Treatment of Duchenne muscular dystrophy (DMD) Treatment of tripeptidyl peptidase 1 (TPP1) deficiency (Batten disease) Marathon Pharmaceuticals, LLC Brineura BioMarin Pharmaceutical Inc. Kymriah Novartis Pharmaceuticals Corporation Mepsevii Ultragenyx Pharmaceutical Inc. Luxturna Spark Therapeutics, Inc. Sales price (dollars in millions) Vertex Pharmaceuticals Inc. Crysvita Ultragenyx Pharmaceutical Inc. Epidiolex GW Research, Ltd. Treatment of X-linked hypophosphatemia (XLH) Inc. Biohaven Pharmaceuticals, Inc. Leadiant Biosciences, Inc. Gamifant Novimmune S.A. Zolgensma Avexis, Inc. Treatment of seizures associated with Lennox Gastaut-Syndrome and Dravet syndrome Treatment of adenosine deaminase-severe combined immunodeficiency (ADA- SCID) Treatment of primary hemophagocytic lymphohistiocytosis (HLH) Treatment of pediatric patients with spinal muscular atrophy (SMA) Legend: ✓ = transferred from original drug sponsor; ✗ = no public announcement of transfer; — = not applicable. Appendix II: Redeemed Priority Review Vouchers (PRV) Appendix II: Redeemed Priority Review Vouchers (PRV) Appendix III: Key Milestones of the Priority Review Voucher Programs Appendix III: Key Milestones of the Priority Review Voucher Programs FDA may not award any rare pediatric disease priority review vouchers after September 30, 2020, unless the drug has received a rare pediatric disease designation by that date, and FDA has approved the drug application by September 30, 2022. Appendix IV: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Kim Yamane (Assistant Director), Erin C. Henderson (Analyst-in-Charge), Kaitlin Farquharson, Laurie Pachter, Vikki Porter, Helen Sauer, Meghan Shrewsbury, and Merrile Sing made key contributions to this report. Also contributing were Leia Dickerson, Hayden Huang, and Yesook Merrill.