Bottom Line Up Front: Federal agencies must actively monitor obligation balances to ensure they represent legitimate, definite commitments—or face audit findings and compliance issues under OMB A-123 assessments and financial statement audits.
Many federal agencies struggle with a common finding: inadequate monitoring of obligation balances. When auditors see undelivered orders (UDOs) sitting with no recent activity, they start asking questions about whether these represent legitimate definite commitments. This isn't just an accounting nuisance—it directly impacts the accuracy of your Statement of Budgetary Resources (SBR) and can signal broader internal control weaknesses.
What Makes an Obligation Valid?
An obligation is "a definite commitment that creates a legal liability of the government for the payment of goods and services ordered or received," according to both 31 U.S.C. § 1501 and GAO's Glossary of Terms. The keyword here is "definite"—not probable, not likely, but definite.
Under 31 U.S.C. § 1501, an amount can only be recorded as an obligation when supported by documentary evidence of "a binding agreement between an agency and another person...executed before the end of the period of availability for obligation." This happens when you sign a contract, place an order, or enter into any binding agreement that commits the government to pay.
Following the Money: A Real-World Example
Let's walk through a typical scenario using a single-year fund. Imagine your agency obligates $1 million from FY 25 funds (USSGL account 480100) for project management services for a small project. During the period of availability (all of FY 25), you can freely obligate, expend, and outlay funds.
By the end of FY 25, here's where your money stands:
- $250,000 remains in 480100 (Undelivered Orders - Obligations, Unpaid)
- $100,000 sits in 490100 (Delivered Orders - Obligations, Unpaid) waiting to be invoiced
- $650,000 moved to 490200 (Delivered Orders - Obligations, Paid) - work completed and paid
When Good Obligations Go Bad
Now we're in year two. The fund has expired, so you can't create new obligations, but you can still expend against existing ones. This is where obligation monitoring becomes critical.
Since this is an annual fund, auditors won't expect to see new obligations. Sure, there might be some upward adjustments for work that should have been recorded earlier. Still, the real question becomes: Is that $250,000 balance in 480100 honestly expected to be expended?
You might maintain some balance early in the next fiscal year due to timing, but what happens when you fast-forward to the end of the first year after expiration? If you still have significant balances in 480100, auditors will start digging. They're essentially asking: "You're saying this is a definite commitment, but it's been sitting on an expired fund with no activity—why should we believe it's still valid?"
The Audit Spotlight
This scrutiny intensifies over time. If you reach year five—the last year before cancellation—and still have 480100 balances with no recent activity, you're probably not looking at legitimate obligations anymore. At this point, auditors aren't just asking questions; they're issuing findings.
The problem isn't unique to any specific audit type. While DCAA audits or complex procurement types like cost-plus contracts may have valid reasons for maintaining balances longer, simply being eligible for a DCAA audit isn't a free pass to avoid monitoring. You still need to demonstrate that those balances represent definite commitments.
Building Your Monitoring Strategy
Effective obligation monitoring requires proactive outreach and systematic review. Here's what works:
Set Clear Thresholds: While every agency and procurement type differs, obligations with no activity for six months or more become susceptible to being considered stale or aged. Establish your own timeline based on your typical procurement patterns.
Regular Outreach: Periodically contact program managers, Contracting Officer Representatives (CORs), and contracting officers. Ask specific questions about their obligations:
- Are you expecting any invoices?
- Is there a valid reason this 480100 balance still exists?
- Do you have documentation supporting continued obligation status?
Focus on Problem Areas: Target contracts that haven't had activity in your established threshold period. Create standard procedures for this outreach and document responses.
Handle De-obligations Properly: When you determine an obligation from a prior year should be reduced, remember you're not actually reducing the 480100 balance on expired funds—you're likely recording to 487100 or "Downward Adjustments of Prior-Year Unpaid Undelivered Orders –Obligations, Recoveries". This distinction matters for your accounting and for potential reuse of funds in multi-year or no-year appropriations.
Why This Matters for A-123 Compliance
Stale obligations directly impact the accuracy of your 480100 balances, which appear on your Statement of Budgetary Resources. Under A-123, agencies must maintain effective monitoring activities over significant processes—and obligation management certainly qualifies.
When auditors find inadequate monitoring, they're identifying a control deficiency that could indicate broader problems with your financial management. The issue isn't just the stale obligations themselves; it's what they reveal about your agency's oversight capabilities.
Making It Work in Practice
The reality is that this monitoring usually happens at the accounting and finance level, not with program managers. Financial staff are the ones facing audit scrutiny and dealing with the compliance implications. While the ideal world would have program managers proactively managing their obligation balances, finance teams need robust procedures to identify and address potential issues.
Build relationships with your program offices, establish clear communication protocols, and document your monitoring activities. When auditors review your obligation management, they want to see systematic, ongoing oversight—not reactive scrambling during audit season.
The Path Forward
Obligation monitoring isn't glamorous work, but it's essential for maintaining clean audit opinions and demonstrating adequate internal controls. By implementing consistent monitoring procedures, establishing clear thresholds for review, and maintaining regular communication with program offices, you can turn a common audit finding into a strength.
Remember: if your undelivered orders represent definite commitments, prove it through documentation and regular validation. If they don't, take action to clean them up. Your auditors—and your agency's financial credibility—depend on getting this right. Learn more about Obligations in Budgetary Accounting at https://www.federalfinancecpe.com/course/budgetary-accounting-101
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