The Real Property Connection to Clean Federal Audits

Failed government audits. Tighter rein on budgets. Demand for better controls over financial and asset-related data. That's the environment in which today's real property professionals are being asked to do their job.

As a real property professional, you have a tremendous obligation to support your organization's budgeting demands. You can do so by proving that real property asset management is critical to a clean financial audit - not just a line item among other expenses.

Let's take a closer look at today's economic pressures. The Federal government is operating under a Continuing Resolution for budget authorization in FY 2007. While this resolution is set to expire before the end of February, some observers suggest that another such resolution will be adopted afterwards.

That means it may be well into the summer - perhaps even later - before new funding is released. With the end of the fiscal year coming only a scant few months later, in September, that means that the government may likely operate at the previous year's budget levels for the entire year.

What's the conventional wisdom about program funding during these difficult financial times? Industry observers say you should watch for three trends to emerge:

• New programs are more likely to be at risk (especially with the new 110th Congress) than established programs
• Mission programs are more likely to be funded over headquarters or administrative initiatives
• Tying administrative program work to return on investment is the best or most likely way to maintain visibility for program funding

So, in this time of increasing budget austerity, well-established programs that can be logically sustained - and are important to an organization's mission - will be. Others are likely to be postponed until more funding is released.

On the surface, real property may seem to be an easy choice for postponement. And yet, the OMB is not relaxing its requirements for better, more comprehensive data. In fact, with new legislation such as HR 3699, the OMB is now legally bound to push harder still to identify and place a value on surplus real property for disposal. Real property is now finding itself front and center in the Federal government's struggle to balance its books, and to gain a clean rating from government auditors.

Being unable to give a clean rating to the government books, auditors this year noted that many agencies simply lack the internal controls required by OMB Circular A-123 to track financial performance. Agencies lack the ability to explain adequately which of their programs or initiatives have a material consequence to completing their audits.

Simply put, the notion of materiality in auditing boils down to: Does it matter, and to what extent? To answer the question of whether real property matters for an agency's financial operations, we need to establish whether statistical sampling of inventory data proves the validity of that data. If it does, and it demonstrates that some of that inventory is either mission-critical or surplus, that alone may be sufficient to prove that real property asset management is material to completing a clean financial audit.

From there, if we establish materiality of real property and the consequences of sufficiency of data through sampling, then we are in the position of imposing controls on that data. And imposing controls on asset data demonstrates the mission significance of real property asset management as a defendable budget requirement. Real property will be more likely to be funded at useful levels, rather than making do with whatever's left after budgets are cut.

Right now, we know that many government agencies are using nonvalidated real property data to make their budgeting decisions. To determine the validity of your data, you'll need to try to fund your real property asset management efforts innovatively from your current operating accounts.

You're likely to find that a relatively minimal investment in creating verifiable, auditable real property data will provide an order of magnitude return on investment. And tying this administrative work to a potential return on investment gives it a greater chance of being funded - now and in the future.


David Baxa
President and CEO
VISTA