Mr. Chairman and Members of the Subcommittee:

First, let me thank you for the opportunity to discuss the Department's progress towards improving financial management and instituting an improved Culture of Accountability. I would also like to thank you and other committee members for your continued efforts to help us identify and address the Department's management problems, and guide us in the direction we need to go.

Today I would like to discuss four primary management activities we have undertaken to further management improvements at the Department. We:
(1) continued to implement outstanding audit improvement recommendations and Blueprint for Management Excellence action items;
(2) created the Executive Management Team, which consists of top political appointees and career senior managers who are overseeing our management improvement process;
(3) entered into partnerships with the National Academy for Public Administration, the Private Sector Council, and the Council for Excellence in Government to further our commitment to management excellence in the areas of human capital planning, restructuring and strategic outsourcing; and
(4) established a Culture of Accountability Team to help achieve a more ingrained Culture of Accountability across the Department. I will also summarize our recent financial statement audit results and pertinent management issues.

Audit Improvement/Blueprint Recommendations. I last testified before you in July 2001, and since then we have continued to work toward overcoming our management problems. At that time I testified that we had taken action on slightly more than 300 of the original 661 outstanding audit improvement recommendations that the Management Improvement Team was seeking to implement. Since then we have continued to implement corrective actions for these items, and I am pleased to report that we have acted on all but one of these items, having either closed or developed corrective action plans to address them. This includes acting on all the items we deemed to have the highest priority. Moreover, we have addressed an additional 93 OIG audit recommendations as well, either implementing or developing corrective action plans for them. We plan to continue working closely with both our OIG and the GAO to ensure that we address any lingering management concerns so that we may achieve accountability and truly become a high-performance organization.

In October the Management Improvement Team released its Blueprint, which contained 140 action improvement recommendations targeted toward addressing longer term and structural issues that hinder the efficient and effective performance of the Department. Since that date the Management Improvement Team has added another 36 action recommendations. These additional items align with both the President's Management Agenda and the Department's Strategic Plan. The Management Improvement Team actively tracks the Blueprint to ensure successful implementation of these management items. Since October we have completed approximately fifteen percent of the Blueprint Action Plan items, and are making significant progress toward completing many others. The Blueprint demonstrates our commitment to excellence and establishes a roadmap to realize further improvements and create mechanisms for achieving accountability and high performance throughout the Department. And with the implementation of our Strategic Plan, we intend to make performance the basis of every program decision.

Executive Management Team. We have further strengthened and institutionalized our successful process for resolving management deficiencies by creating and operationalizing the Executive Management Team, which consists of top political appointees and career senior managers. The Executive Management Team directs and oversees Strategic Plan execution, in addition to implementing the President's Management Agenda and our Blueprint. I chair the Executive Management Team and Bill Leidinger, our Assistant Secretary for Management, co-chairs. The Management Improvement Team serves as core staff assisting with specific responsibilities relating to Financial Integrity, Accountability for Results, Human Capital, SFA High Risk & Modernization and IT Management.

A Structure for Implementing the Blueprint for Management Excellence

OMB agrees with our aggressive management approach and has indicated they will rate our progress towards satisfying the President's Management Agenda based largely upon our success in meeting already-established Blueprint milestones. OMB has informed us, and I quote, that: "ED has developed robust plans to address longstanding problems pertaining to financial management, high-risk in student financial aid programs, and IT security."

Plans, of course, are not by themselves sufficient to ensure success. We must continually monitor their implementation, make adjustments as needed, and devote the necessary resources to ensure that we continue to make improvements and successfully address any lingering problems we have not yet overcome.

Public/Private Partnership. In keeping with the President's Management Agenda, the Department plans to publish a Five-Year Human Capital, Strategic Sourcing and Restructuring Plan in June 2002. Teams of employees are formulating plans working with the advice and assistance of the National Academy of Public Administration, the Private Sector Council, and the Council for Excellence in Government. We will tailor these plans to ensure the Department has sufficient human resources and contract support, as well as the appropriate structure to achieve the Department's Strategic Plan, Blueprint and Culture of Accountability goals. The Five-Year Human Capital, Strategic Sourcing and Restructuring Plan will address such issues as maximizing workforce performance, improving efficiencies and citizen access to our programs and services, and finding the right blend of Department employees and contractors to facilitate financial integrity and appropriate oversight of our programs and services. As a result, we can expect to achieve the results necessary to perform our mission with a greater degree of integrity.

Accountability Team. I testified in July that our biggest challenge was developing a Department culture that emphasized individual responsibility and accountability. We have taken significant steps in that direction. In December Secretary Paige established a team of career and political employees from across the Department who completed a set of specific actions with assigned ownership, clear timetables and performance measures that will establish a mature Culture of Accountability within our agency. The Team developed these actions based upon ideas and feedback obtained from employees across the Department, which will help promote buy-in from all our employees. The Executive Management Team and Management Improvement Team will ensure these actions become reality.

Additionally, we are close to implementing an employee appraisal process that emphasizes accountability. Every senior officer, including myself, will sign a performance contract with Secretary Paige that will hold us accountable for results. Every manager and employee will have a performance agreement that reflects the Department's goals and objectives, and establishes clear individual job performance expectations. Moreover, this process will incorporate specific President Management Agenda, Blueprint and Strategic Plan items, establishing accountability for all our employees to work together to ensure that No Child is Left Behind.

Financial Statements/Related Financial Management Issues

Financial Statements. We recently received a qualified opinion on our FY2001 Financial Statement audit. The results included one material weakness and three reportable conditions. These results reflect noticeable improvement and significant progress from last year's three material weaknesses and two reportable conditions. We are making steady progress toward Secretary Paige's stated goal of obtaining a clean audit opinion by FY2002 (for the FY2002 statements).

We received the qualified opinion due to two primary reasons: we provided insufficient evidence to support the accuracy or completeness of our general ledger adjustments, and did not provide adequate documentation to support certain amounts reported in our consolidated balance sheets. These adjustments were required to compensate for continued financial system and reporting weaknesses during previous fiscal years. Although we have vastly improved our account analysis and reconciliation processes, our auditor did not feel there was sufficient documentation to support the accuracy or completeness of our corrections.

During the current fiscal year, the Department has taken major steps to remedy our last material weakness in Financial Management Systems and Financial Reporting by implementing a new general ledger system—Oracle Federal Financials—on January 22, 2002. We expect our new accounting system to help correct many deficiencies that resulted primarily from the lack of a fully integrated financial management system. This improves our chances of getting a clean audit in FY2002 and will allow our managers to obtain timely information they can use to make more productive program decisions. We are currently reviewing our business procedures to ensure the integrity of our internal controls, reconciliation processes, and account analysis procedures to take advantage of the new system's capabilities. Once the system and accounting processes are stabilized, we can fully address any remaining problems with our older underlying data.

We have made other significant accounting improvements, including major upgrades to our Grants Administration and Payments System and Contract & Purchasing Support System. We are correcting accounting errors and our standard accounting transactions will be fully compliant with Federal Accounting Standards. We put extensive cross validation edits into place between Federal Student Aid and other Departmental systems that will greatly improve our data quality. We performed extensive analysis of our historical accounting data, and are identifying data integrity issues and developing a remedial plan to overcome them.

To further support our efforts toward obtaining a clean opinion, we have arranged to have a contractor provide a pilot internal Financial Management Certificate Program. This program is targeted toward specific Office of the Chief Financial Officer and Federal Student Aid employees. Participants will acquire additional financial management skills that will provide them with an improved understanding of federal budgeting, performance management, the U.S. Standard General Ledger, appropriations law, reconciliation, credit reform and process improvement techniques. This training program emphasizes financial standards and procedures, fiscal integrity and enhanced performance, and supports the Department's strategic direction in its efforts to improve its financial performance.

We will continue to address the reportable conditions—information technology, credit reform reporting, and property and equipment—reported in our recent Financial Statements audit by completing applicable Blueprint action items. I will now discuss these items.

Information System Controls. Our GISRA Plan of Action and Milestones addresses reportable conditions in our information systems controls, including an assessment of the recently identified worldwide Internet vulnerability. In light of this vulnerability and the enormous corresponding security actions we are undertaking to combat it, I have asked senior leadership to develop a new baseline plan balancing our resources while taking the new security actions into account. We expect to complete independent risk assessments on all our systems in the third quarter to identify missing or incomplete controls. We will remediate these weaknesses prior to certification. At the same time, we are developing a management process to ensure we include appropriate controls in any future information systems we acquire. We also are devising baseline security requirements for all our systems.

Inventory. To improve our asset management policies and procedures, we are centralizing inventory responsibility within our Office of Management and documenting our detailed property management procedures. We are also incorporating contractor recommendations into our property management procedures. We expect to issue these new policies and procedures in June 2002, and will hold our employees accountable for following them.

We are addressing specific issues that GAO raised, including recording our inventory when initially purchased, and appropriately securing and accounting for any items once received. We are increasing security to account for all our inventory storage areas. We are testing purchase orders in our principal offices to ensure that all received items are recorded as inventory. We are also taking appropriate steps to account for all the items that GAO was unable to locate during its recent review.

I would like to note that after recently completing our own reconciliation of physical inventory, we hired a contractor to conduct an independent inventory. The contractor sampled 819 physical inventory items representing 25 separate locations—a broader sample than GAO's and performed more recently. Once completely verified by the contractors and ourselves, we had accounted for 99%, or all but five of the items.

Credit Reform. Credit reform issues are extremely complex, and we have invested enormous resources in Federal Student Aid, the Office of the Chief Financial Officer, and our Budget Service to monitor credit program activity, implement systemic improvements in credit reform processes, and ensure that managers and staff from these offices are smoothly integrated in an effective and efficient overall process. These activities include improving account reconciliations and analysis and documenting final adjustments to address long-standing issues. We believe our efforts thus far have been successful, and we are committed to further improving our processes and management controls. In summary, regarding our financial statements, I believe we will realize our goal of obtaining a clean audit opinion by next year. This is one goal we must accomplish to restore the Congress' and American people's confidence in us.

Additional Internal Control/Accountability Issues

We constantly review the way we do business, and in particular we are seeking ways to improve the internal controls that govern our procurement process. Because this area has been subject to abuse, we want to make sure we minimize the chance of reoccurrences to the greatest degree possible, and take swift actions against any employee found violating appropriate Department policies and procedures. To ensure this occurs, we are updating internal policy directives, informing employees of these changes, and putting policies into place to hold managers accountable for their implementation. To date, we have updated six directives, including our purchase card and property management directives. We have moved as swiftly as processes will allow to take action against employees, contractors, or anyone who obtains government funds illegally or attempts to defraud the Department. Recently, nearly all the funds and property—including two luxury SUVS—obtained with $1.9 million in illegally obtained Impact Aid grant funds were seized and forfeited to the United States while approximately $1.7 million was returned to the Department. In December, three non-employees were indicted for conspiracy, money laundering, identity fraud and other charges and two of the three have been arrested. We are working with the FBI to locate and arrest the third individual.

An ongoing investigation of 19 individuals, including eight Department employees, who purchased and/or received electronic equipment paid for with federal funds for non-business related purposes, and billed the Department for overtime hours not worked, has resulted in 15 of the defendants pleading guilty, including seven of the eight Department employees. A sixteenth defendant also has been found guilty by a jury. Two of the three remaining defendants (including the last Department employee) are scheduled to go to trial in April 2002; the third is scheduled for trial in October 2002. The property was valued at more than $300,000, including computers and other electronic equipment, while there was an estimated $700,000 in false overtime charges.

We have also obtained guilty pleas from two private-sector furniture store employees for the theft of government property. These individuals were charged with acting in concert with Department employees to use the employees' government-issued credit card to purchase residential furniture for their personal use. The charging documents state that the furniture store employees then concealed these purchases by falsely invoicing the government for office furniture purchases.

In another example, seventeen individuals were indicted in Puerto Rico, including the former Puerto Rico Secretary of Education and former Associate Secretary of Education, for extorting and obtaining kickbacks totaling approximately $4.3 million from several contractors in return for awarding approximately $138 million in contracts. The indictment charged these individuals with extorting the money for the benefit of their political party and personal enrichment, and awarding contracts to companies they owned and controlled. Additionally, a contractor who was the sister-in-law of the former Puerto Rico Secretary of Education was accused of assisting in the extortion scheme by accepting and channeling extortion payments through a company known as National Consulting Group. National Consulting Group was a company owned by the former Secretary. All three individuals have pled guilty to various federal charges involving extortion, program fraud and money laundering. The plea agreements provide for a $2.9 million forfeiture to the government.

GAO Report. I would like to now address several internal control issues that GAO has recently highlighted.

Improper Payments. We agree with GAO's concern that Pell Grant and loan disbursements made to students aged 70 and over may indicate potential ineligible disbursements when there is a higher than normal concentration of such disbursements. The GAO's findings state four schools disbursed approximately $3.4 million in Pell Grants to ineligible students. I think it is important to emphasize that GAO reviewed FSA loan and grant disbursements totaling $78 billion at thousands of schools. The $3.4 million improperly disbursed was concentrated at four schools and represents only a small proportion of the overall disbursements GAO reviewed. While we can undoubtedly improve our systems and internal control processes, we believe our current controls are strong and provide reasonable assurance that we are meeting our objectives.

We have taken several steps to strengthen the integrity of these payments, even before GAO began its audit work. For example, we began a matching process with the Social Security Administration's death records, and we implemented our new Recipient Financial Management System, increasing controls over grant payments. In addition, we will implement an electronic edit to identify all applicants whose birth date indicates they are 75 years of age or older beginning in 2002-03. In such cases, the applicant must verify his or her birth date before we process their Free Application for Federal Student Aid (FAFSA). We will not disburse funds to an applicant until a FAFSA is completely processed by our Central Processing System and an estimated family contribution is calculated. As an interim process to address this sensitive issue, in December we analyzed National Student Loan Data system data to identify high concentrations of students older than 65, along with other criteria, to determine if student eligibility problems existed. With GAO and our OIG's assistance, we will refine our methodology for analyzing this information and conducting reviews at institutions to address the issues GAO identified.

We continue to work toward strengthening our internal controls further. We have begun to analyze our data in a more systematic manner to establish baselines and indicators to focus our resources more effectively and, as GAO noted, will implement a new Common Origination and Disbursement system to assist us in identifying unusual activity.

Purchase Cards. At the time of my July testimony, we were in the process of addressing our lack of internal controls in the purchase card program. We had reduced the spending limits on government purchase cards—some by more than 90 percent—and required all purchase cardholders and approving officials to go through mandatory training on appropriate card usage, and were taking steps to ensure that all approving officials review their cardholders' statements each month.

Since then, we have taken numerous measures to strengthen our Purchase Card controls further. We recently updated our Directive, which strengthens our policies and practices regarding appropriate purchase card use. Since January 2001, as required we have trained all cardholders and approving officials on appropriate policies and procedures. We released the Directive to all cardholders, approving officials, executive officers, and supervisors with an on-line self-test to emphasize key policy changes.

Additionally, the revised Directive and additional procedures provide detailed instruction on cardholder and approving official responsibilities for reviewing and approving purchase card transactions. With our new electronic reconciliation and payment approval process, the cardholder electronically provides reports to the approving official to document the cardholder's transaction activity for the billing period, automatically creating a record. This is in addition to the hard copy receipts submitted for the approving official's review. Further, the Office of the Chief Financial Officer distributes monthly management reports to each principal office to review their cardholder purchase card transaction activity.

We will also conduct quarterly internal control and quality reviews of sample purchase card transactions to: a) ensure purchases above the micro-purchase threshold are made only by warranted officials; b) review purchases to determine that individual purchases are appropriate, goods and services were properly received and accepted, and that payment was proper using merchant category codes and by examining the record; c) ensure appropriate separation of duties between the cardholder and the approving official; and d) ensure that procurements are not split into more than a single purchase to circumvent rules that apply to purchases exceeding the micro-purchase threshold or to circumvent purchase card limits.

The Department has blocked more than 300 transactions using merchant category codes as recommended by the GAO. The Office of the Chief Financial Officer will utilize this data to identify potential transactions subject to purchase card restrictions, or to identify additional codes that may track to improper purchases.

Regarding GAO's finding of unauthorized payment of tuition with a purchase card, we are following established debt procedures to recover questionable costs. We will also follow up on the $218,000 in questionable purchases to determine validity and propriety. In addition, we will continue to improve our ability to readily obtain supporting documentation. Our newly published Directive highlights this effort.

We have diminished the span of control for approving officials-fewer cardholders per approving official, to ensure direct knowledge of the cardholder's purchasing activity. We have developed sampling methodologies for reviewing purchase card transactions. We have learned from GAO's approach and begun to use data mining strategies to review monthly purchase card activity.

We must hold employees accountable for misuse of government credit cards and managers accountable for enforcing the controls over them. We have recently conducted our own internal review of employee purchase card usage and are in the process of taking action against employees and managers who did not follow appropriate policies and procedures.

Third Party Drafts. GAO has recommend that we pursue resolution for $1.7 million in third party draft payments for which we did not provide adequate supporting documentation. We abolished the use of third party drafts in May 2001. We have referred the $1.7 million in unresolved items to our Office of Inspector General for further investigation.

Travel Cards. Our internal reviews have indicated that we need to strengthen our travel card program internal controls. Since last summer we have implemented a new on-line travel card reporting tool, allowing cardholders and supervisors to get account information more quickly and easily. Cardholders and managers can examine individual accounts, transactional information, summaries and historical information on-line, monitoring accounts and reconciling statements. Managers use this information to check the status of outstanding balances and unauthorized usage. Because these on-line tools are new, the travel office is conducting training sessions for cardholders, supervisors and executive officers to demonstrate the tools available to them.

We are also conducting additional training for supervisors and Executive Officers, detailing the responsibilities supervisors have in overseeing travel activities. Managers are instructed how to monitor unauthorized charges and unpaid balances, and how to take corrective actions regarding any travel issues. Specific duties, responsibilities and actions are outlined.

As a result of the instruction and availability of new tools, we have taken more corrective actions against employees. The outstanding balance for travel cardholders has declined since October, and the number of disciplinary actions for improper travel card usage has increased. We have taken steps to pay off all outstanding balances, and to cancel or suspend accounts with outstanding balances.

We have also completed a top to bottom review of our Travel Card policy, and are now in the process of considering several recommendations for additional internal controls to strengthen the travel card program.

Internal Control Team. We have established an Internal Controls Team to help establish greater accountability for internal controls within the agency. Currently, the Team is focused on completing the first of regular reviews of internal controls that support our primary activities. They will implement recommendations and ensure that our employees understand and apply internal controls in Department operations. Team members will provide reports to management on their review findings and recommendations. The Team has also recently developed internal control training initiatives for all employees and separate training for managers. The Team Leader also chairs the Department's newly-formed Accounting Integrity Board.

Student Financial Assistance Programs

As you know, Secretary Paige has determined that removing the Student Financial Assistance programs from GAO's High Risk List by FY2003 is a top management priority. A key step to addressing this issue was his meeting with the Comptroller General who informed us about the major actions we need to complete in order for GAO to remove the Student Financial Assistance programs from the High Risk List. The issues center around:

• Strengthening financial management and internal controls;
• Implementing integrated information systems to efficiently manage and effectively control the programs while administering high quality services to customers; and
• Maintaining a balanced management approach that seeks to minimize noncompliance and default rates while still promoting widespread program use.

I believe you will find our efforts over the last year demonstrate our commitment to addressing these issues. Federal Student Aid's Performance and High Risk Plans identify key projects geared towards integrating its systems; improving customer service while maintaining accountability; demonstrating a balanced approach to school monitoring; providing a systematic income data match with IRS to improve student eligibility; partnering with guaranty agencies, lenders and schools to improve default prevention; and improving default collections.

Federal Student Aid and other Department managers meet weekly to track related management projects to ensure their success. Through our employee appraisal process, we are assuring that successful completion of these projects is critical to the success of every Federal Student Aid manager and employee. Although GAO has accurately stated that the Student Financial Assistance programs are inherently risky because of their nature (providing loans and grants through third parties to students without credit histories), I am confident these projects, along with our initiatives to improve financial management and internal controls and our human resource initiatives, will address GAO's concerns about Student Financial Assistance program risk.

I would like to close by saying that the management improvements I have discussed today will help enable the Department to move toward its goal of becoming a model agency of management and program excellence.

That concludes my testimony, and I would be happy to answer any questions you may have.

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