<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:22901.wais]
THE EVOLUTION OF FEDERAL FINANCIAL MANAGEMENT: A REVIEW OF THE NEED TO
CONSOLIDATE, SIMPLIFY, AND STREAMLINE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
FINANCE, AND ACCOUNTABILITY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 22, 2005
__________
Serial No. 109-53
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
22-901 WASHINGTON : 2005
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government
Printing Office Internet: bookstore.gpo.gov Phone: toll free
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Government Management, Finance, and Accountability
TODD RUSSELL PLATTS, Pennsylvania, Chairman
VIRGINIA FOXX, North Carolina EDOLPHUS TOWNS, New York
TOM DAVIS, Virginia MAJOR R. OWENS, New York
GIL GUTKNECHT, Minnesota PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
JOHN J. DUNCAN, Jr., Tennessee
Ex Officio
HENRY A. WAXMAN, California
Mike Hettinger, Staff Director
Tabetha Mueller, Professional Staff Member
Nathaniel Berry, Clerk
Adam Bordes, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 22, 2005.................................... 1
Statement of:
DeSeve, G. Edward, vice chairman, Board of Directors,
National Academy of Public Administration.................. 16
Kearney, Edward F., managing partner, accompanied by
Cornelius E. Tierney, Kearney & Co......................... 25
Kinghorn, Morgan, president, National Academy of Public
Administration............................................. 5
Letters, statements, etc., submitted for the record by:
DeSeve, G. Edward, vice chairman, Board of Directors,
National Academy of Public Administration, prepared
statement of............................................... 19
Kearney, Edward F., managing partner, accompanied by
Cornelius E. Tierney, Kearney & Co., prepared statement of. 28
Kinghorn, Morgan, president, National Academy of Public
Administration, prepared statement of...................... 8
Platts, Hon. Todd Russell, a Representative in Congress from
the State of Pennsylvania, prepared statement of........... 3
Towns, Hon. Edolphus, a Representative in Congress from the
State of New York, prepared statement of................... 52
THE EVOLUTION OF FEDERAL FINANCIAL MANAGEMENT: A REVIEW OF THE NEED TO
CONSOLIDATE, SIMPLIFY, AND STREAMLINE
----------
WEDNESDAY, JUNE 22, 2005
House of Representatives,
Subcommittee on Government Management, Finance, and
Accountability,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:44 p.m., in
room 2247, Rayburn House Office Building, Hon. Todd Russell
Platts (chairman of the subcommittee) presiding.
Present: Representatives Platts, Gutknecht, and Maloney.
Staff present: Mike Hettinger, staff director; Dan Daly,
counsel; Tabetha Mueller, professional staff member; Jessica
Friedman, legislative assistant; Nathaniel Berry, clerk; Adam
Bordes and Mark Stephenson, minority professional staff
members; and Jean Gosa, minority assistant clerk.
Mr. Platts. The hearing of the Government Reform
Subcommittee on Government Management, Finance, and
Accountability will come to order.
We are going to dispense with full opening statements. But
we are delighted to have our witnesses with us and apologize
for keeping both them and our other guests here today waiting
while the votes were proceeding on the House floor.
This hearing is the first in what will be a series of
discussions on how best to consolidate, simplify and streamline
the laws that govern financial management for the agencies of
the U.S. Federal Government. Currently, there are more than 800
statutory pages that govern financial management, some dating
back to the 1920's, and a pretty complex and challenging
collection of laws over those many decades for our Federal
financial managers to interpret and implicate as they go
forward with their assigned responsibilities.
We have been delighted in having some discussions, and now
here today with us are representatives from the National
Academy of Public Administration. We appreciate this advisory
panel that has come together and begun to do some research on
behalf of the subcommittee and in conjunction with the
subcommittee members and staff, in looking at the Federal
financial management practices and how we can better
streamline, eliminate duplications, eliminate things that are
no longer necessary, that are really make-work, as opposed to
substantive and useful information. And we certainly are glad
to have our witnesses here, the information you have already
shared with us, and to continue this dialog as we go forward.
I think what we will do is go forward into our opening
statements. We are also, as part of this hearing, announcing
the formation of the Congressional Management Caucus. That will
be a bipartisan, bicameral effort focusing on financial
management in the Federal Government to try to be a
clearinghouse for efforts to keep this issue, or these issues,
in the public limelight and emphasize the importance of these
efforts to assure that we have a more efficiently run Federal
Government.
We are delighted to have several witnesses with us here who
have extensive experience in financial management. Representing
the National Academy of Public Administration we are going to
hear from Morgan Kinghorn, the Academy's president, and Mr. Ed
DeSeve, vice chairman of the Academy's board of directors.
Mr. Kinghorn and Mr. DeSeve, we appreciate your being here
and again appreciate your willingness to help lead the effort
in this partnership as we go forward.
We are also going to hear from Ed Kearney, a certified
public accountant and managing partner of Kearney & Co., and we
look forward to all of your testimonies.
We will begin with roughly 5-minute opening statements and
apologize again because of the time. We will try to stick to
that and perhaps we can get to a good discussion.
Mr. Tierney, you are joining Mr. Kearney. I think I didn't
mention that. We are glad to have you, as well, as part of our
panel here today.
So with that, Mr. Gutknecht, did you have anything you
wanted to say to begin? Otherwise, we are going to go right to
our opening statements.
[The prepared statement of Hon. Todd Russell Platts
follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMATION]
Mr. Platts. And, Mr. Kinghorn, if you would like to begin.
STATEMENT OF MORGAN KINGHORN, PRESIDENT, NATIONAL ACADEMY OF
PUBLIC ADMINISTRATION
Mr. Kinghorn. Thank you, Mr. Chairman and members of the
committee. As President of the National Academy of Public
Administration, an independent, nonpartisan organization
chartered by the Congress to give trusted advice, I am pleased
to appear before you to provide some interim perspectives on
the Academy's review concerning how we believe financial
management can be approved in the Federal Government. The views
presented today are my own, and not necessarily those of the
Academy as an institution.
We are doing this review really in response to your request
in March to the Academy, where you asked us to reflect on the
current set of financial laws, regulations, procedures, and
current practices, and consider how best to improve our current
financial environment and, perhaps more importantly, develop a
set of recommendations that would be helpful to the committee
in strengthening further the financial management of the
Federal Government as we move forward in the 21st century.
In your charge to us, you directed us to be wide ranging in
our thinking and to include such diverse topics as benefits
from consolidating the myriad of laws and regulations to
methods to enhance the strategic focus of financial managers as
well as nonfinancial managers. The Academy is really excited
about this opportunity because after 15 years of significant
progress in financial reform, we believe it is time to assess
how the Federal Government can best build on the successes of
the past and avoid the pitfalls.
We have developed a working group of our Academy Fellows
who are thoroughly familiar with financial management practices
of the Federal Government, as well as industry best practices.
These Fellows have extensive hands-on experience, as well as
academic acumen, and will form the core of our working group.
In addition, we can draw on a great number of the other 550
Fellows of the Academy.
One of our Fellows, who is also the vice chair of the
Academy's Board, Ed DeSeve, is here with me today to give you
his own feedback and perspective on our discussions to date.
We have established a work plan whereby our Fellows and I
will meet with a series of experts across the Federal
Government to receive their input on how best to improve the
elements of financial management. We will hold these
informational gathering sessions at the Academy and will
solicit input from entities such as the CFO Council and the CIO
Council, as well as its members, the program management and
program performance community, the budget community and key
representatives from the private sector, including the
accounting consulting professionals who are also involved in
these financial improvement processes.
To date, we have held two sessions with a variety of
members of the CFO community and really received a wide-ranging
series of comments and suggestions from both political
appointees as well as members of the Senior Executive Service.
Based on the comments from these two sessions and input from
other Fellows, I can share with you a few of the more
significant themes that have emerged.
First, we have focused exclusively on financial accounting
systems and accounting process improvements to the exclusion
and detriment of better budget and program and financial
performance systems. There is no doubt that financial
management and reporting of the financial information has
dramatically improved since the initiation of the CFO Act and
three or four--several acts that are related to that act that
expanded the authorities.
Most Federal agencies now receive an unqualified audit
opinion, and many agencies have improved their systems so as to
facilitate the preparation of financial statements and provide
some better information to decisionmakers. But we have not paid
similar attention to systems and processes that would bring
about improved integration between the budget formulation
systems and the financial accounting systems.
Similarly, the linkages between budget, cost and
performance management systems have been slow to materialize as
agencies have tended to put their investment moneys primarily
into improving their accounting systems.
Second, in looking to the future, since the gathering of
data about program performance has recently become a much more
important element of government management, the linkages
between program performance and budget development and
accounting and cost systems need to be much clearer to
government managers, both financial and nonfinancial.
With the evolution of GPRA, the creation and now the
implementation of the management and program performance rating
system, we have seen an increasing interest by Federal program
managers that they are now more conscious of the need to stress
strategic planning, the linkage between plans and budgets and
the overall linkage back to actual program performance. And it
is clear in many of our discussions to date that government
managers, financial and nonfinancial, need to become better
aware of the necessary linkage between accounting, cost
information and program performance.
Third, the streamlining and consolidation of Federal
management laws and regulations would be beneficial. Several
CFOs observed that there are many different statutes,
regulations, and OMB circulars that address the same
requirements which have evolved over a period of time to
address very specific problems and issues. And I think the
consensus so far would be extremely beneficial to examine these
requirements and consider consolidation of the directives in a
more comprehensive form, perhaps a single statute and a single
comprehensive circular.
Fourth, organizational placement of the CFO and other
offices involved in broad financial management implementation
is handled differently in each agency. There is no clear
consensus yet among our group on this issue. Some argue that
the management function should be responsible to one senior
departmental official since there is clearly linkage among them
in both program and system design and, most importantly,
process implementation. One cannot develop a comprehensive
budget, for example, without information and data from the
budget world, the world of accounting and cost data, and the
world of strategic planning and performance management. Others,
however, argue that just because there is an operational
linkage, organizational responsibility and performance is
better achieved by having separate, focused areas of
responsibility.
Others argue that all finance-related functions should be
under the CFO--budget formulation and execution, as well as
accounting and reporting--but that other related activities
such as performance and strategic planning are best achieved
and implemented separately.
The importance of Senate confirmation of departmental CFOs
was discussed among our participants and the consensus to date
suggests strongly that the Presidential appointment and Senate
confirmation of departmental CFOs, for example, is important
unless there is a governmentwide decision made to reduce the
overall number of Senate-confirmed positions.
The related issue of a Chief Management Officer was
discussed with one scenario being that the CMO be Senate
confirmed and all other management positions reporting to the
CMO would not be. Obviously, there is a wide range of
organizational options available, and just as obvious, very
passionate feelings about this issue; and we will have
additional information and recommendations available for you
when we complete the process.
Mr. Chairman, the Academy welcomes the opportunity to
really review and work with you on this important subject over
the next several months, and we feel confident we can provide
you some value-added for the committee and bring to you some
sound recommendations.
The Academy also appreciates your leadership on these
issues. I know everyone at this panel. We have worked together
at different times, and it is nice to have serious people
interested in serious issues. And we are particularly excited
about the establishment of the Congressional Management Caucus.
Thank you, Mr. Chairman.
Mr. Platts. Thank you, Mr. Kinghorn.
[The prepared statement of Mr. Kinghorn follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMATION]
Mr. Platts. Mr. DeSeve. And actually I apologize. My staff
is making sure I am following the proper procedures. I forgot
to ask all of you to stand to be sworn in for your testimony.
So Mr. Kinghorn it will be after the fact for Q and A. But I
would appreciate if you raise your right hands.
[Witnesses sworn.]
Mr. Platts. Thank you. The clerk will note that all the
witnesses affirmed the oath.
And now we will continue with Mr. DeSeve.
STATEMENT OF G. EDWARD DeSEVE, VICE CHAIRMAN, BOARD OF
DIRECTORS, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION
Mr. DeSeve. Thank you, Mr. Chairman. I am pleased to be
here today to discuss my perspective on how the Academy thinks
financial management can be improved in the Federal Government.
As Mr. Kinghorn noted, I am the vice chairman of the Board of
Directors of the National Academy and a professor and director
of the Management Finance and Leadership Program at the
University of Maryland School of Public Policy.
For many years I have been a senior executive at State,
local and Federal levels of government. My service in the
Federal Government included being the Chief Financial Officer,
at the Department of Housing and Urban Development, Controller
at OMB and Deputy Director at OMB.
The views presented today are my own and not necessarily
those of the Academy as an institution.
Mr. Kinghorn has discussed with you how we at the Academy
have organized our work plan to review your charge to the
Academy, and he has given a general framework under which we
will do the work. We believe our work will lead to
recommendations that will be extremely useful to your
committee.
What I'd like to do today is to spend a few more minutes
giving you some comments from the meetings that we have had so
far. And these are some headlines. We are sure there will be
more to follow.
First, generally in financial management we have managed to
downplay or overlook the Department of Treasury as a major
player in the financial management world. Treasury, we think,
can provide strong leadership if given the opportunity.
I am told--this is an aside--I am told that there was a
turf battle around the time of the CFO Act within the
administration, and the decision was made to give OMB the
function and not to give the Treasury the function of chairing
the Chief Financial Officers Council. So there is some history
here that perhaps could be revisited if legislatively you
decide to open up the issue of overall organization within the
Federal Government.
The discussions in our meetings have centered on several
elements such as the need for the Treasury Department to
provide timely data, their need to perform cash reconciliation,
the need for more modern systems to facilitate the transmission
of data and often, most cited, the need for the Department to
operate in close coordination with OMB. It is a structural
thing we think needs to be looked at.
Well within the scope of this committee is the coordination
between the CFO Act and the ITMRA, also known as Clinger-Cohen.
Several executives have suggested that the two acts need to be
harmonized to ensure that the objectives of Congress are being
met by those two laws, particularly given the CFO
responsibility for financial systems. I think, again
parenthetically, that people were worried that the CFO has the
responsibility for implementing financial management systems
and the CIO has the responsibility for implementing information
systems, and if the two of them aren't working together well,
that there is a potential for a problem. So there may need to
be some ironing out of the demarcations of the boundaries
between those two actions.
Third, the organization of financial and budget data and
related information has not been uniformly useful to successful
program management. Here again, I think around the time of the
CFO Act, we decided to start, and almost in the way I believe
Chinese writing is interpreted--that is, from the right to the
left--in a sense we started at the back end of process with an
audit and moved forward to the budget process itself.
We think that needs to be revisited, that the almost
exclusive focus, or very heavy focus, on audited financial
statements and timely audited financial statements needs to be
looked at in the context of what is needed by the program
managers on the front line every day.
We think that information should be useful, useful and
useful--useful to the people who use it each day, useful to the
people who oversee that function and, finally, useful to the
Congress as they go about their business. And it may be that
the information we have now does not fill that bill.
Fourth, the linkage between enhanced internal controls and
performance management has greatly improved the public
stewardship of government programs, but more needs to be done.
Internal controls are extremely important to make sure that
funds are spent wisely, that malfeasance, misfeasance and
nonfeasance is avoided. But at the same time, the effectiveness
of the program needs to be similarly demonstrated.
The consolidation now into performance and accountability
reports is a good step forward. I believe, and either Mr.
Kearney or Mr. Tierney tell me that I am wrong, but we
currently have at least FFMIA, FMFIA, GPRA, the CFO Act, the IG
Act and GMRA all being dealt with and perhaps well dealt within
the context of performance and accountability reports.
It may be that Congress wants to look at those reports and
specify the contents of these reports in general so that we
have gone back and made honest people of those who have done
something very creative, trying to blend all of those items.
We also feel that the role of the inspector general in the
21st century needs to be reconsidered. The IG was given audit
responsibility in the CFO Act and expanded in the Government
Management Reform Act, and many IGs have done a very good job.
Others were not well prepared for that function. They can be
good partners, especially as the audit of performance
information or at least the examination of performance
information becomes important along the way.
As I mentioned earlier, I am pleased to be with you here
today, and financial management has been my profession for more
than three decades. I have functioned at various levels, and I
am now teaching students who will be the financial managers of
the future. So I would like to assist you in any way I can, and
certainly the Academy is at your disposal in this matter.
Thank you.
Mr. Platts. I thank you, Mr. DeSeve.
[The prepared statement of Mr. DeSeve follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMATION]
Mr. Platts. Mr. Kearney.
STATEMENT OF EDWARD F. KEARNEY, MANAGING PARTNER, ACCOMPANIED
BY CORNELIUS E. TIERNEY, KEARNEY & CO.
Mr. Kearney. Mr. Chairman, thank you. I am the managing
partner of Kearney & Co., a CPA firm. We provide audit,
accounting and consulting services exclusively to Federal
Government agencies.
Joining me today is Neil Tierney on my left. Neil is the
author of almost every single book that has been written on
Federal auditing and Federal accounting in the past 30 years.
We are pleased to have the opportunity to appear before the
committee today. We think that the efforts to consolidate,
streamline and promote efficiency in all of these laws are
certainly needed and very, very timely.
Rather than read my testimony, I would like to just hit on
a few of the high points in the interest of time.
What we see today is 23 years' worth of layered laws and
directives. Each law has a unique emphasis, and despite good
intentions, we believe that the stewardship reporting has
lagged somewhat. If you look at the number of laws themselves
and the timing of the laws over the past 23 years, we think it
creates confusion in agency financial managers. We have
multiple laws requiring financial audits. We have multiple laws
covering systems control.
As an auditor and an accountant, we see both sides, both
from the review perspective and from the side of those people
that are actually performing the functions; and what we see is
an uneven application of the laws and requirements varying by
agency budgets and skill levels of the financial managers.
Implementation of each one of the requirements associated
with the laws takes many years, and given the fact it takes
many years--and very often we see agency administration turning
over in as few as 12 to 18 months--it is quite possible that
some of the initiatives passed in earlier years never reached
fruition, or are never completed because a new administration
might be emphasizing something slightly different or something
new. That is one of the risks that we have seen to the layering
of these initiatives over the years.
We also find that staggering the requirements over the
years sometimes also creates a problem in agency officials. If
we look at the Defense Department, for example, today, the
Defense Department was excluded from the application of the CFO
Act when it passed in 1990. But today they are working
diligently to prepare auditable financial statements, and they
are still several years away from completion of that effort.
That is almost 15 years before they began the effort, and we
are still looking at several more after that.
With the mobility of the work force, what we see as a
problem moving between the civil and defense side of the
businesses are just different skill levels and different
understandings of the requirements as they apply to the
government.
We believe the CFO Act probably had the largest impact on
financial management. The audit concept is trust, but verify,
and that requires each agency, once a year, to have their
financial statements prepared and audited by an independent
organization.
In the years following the passage of the CFO Act, what we
found in the early opinions of each one of the Cabinet-level
agencies was that despite FMFIA being passed in 1982, which
mandated strong structures of internal control, the reality
was, many agencies had not achieved the goal; and until we
attempted to verify it through audit, we just didn't see that.
The gap between the private sector and the Federal sector,
we believe, is narrowing, and we think that is a good thing.
The agencies are being required to prepare financial statements
and have them independently audited. That is what we do in the
private sector to ensure that people are honest. And there is a
joke that people are basically honest, and they are even more
honest if you watch them like a hawk. I am not suggesting that
we have a problem everywhere, but having somebody look at
things after the fact, we think, is helpful.
The Federal Government has adopted recently the internal
control structure used by the private sector in the latest
publication of OMB A-123. It has adopted the COSO framework,
which really says that everything in internal controls in the
Federal Government is what is expected in the--or what is in
the private sector is what is expected in the Federal
Government as well.
There still are differences between the two sectors. It is
important that legislation reflect those differences. By way of
example, when you pass laws that suggest, for example, that the
financial statements of the Defense Department include plant
property and equipment be valued in the same manner that you do
in the private sector, that may not be practical. It may not be
cost efficient. So we need to find other ways to get around
that so it is a good common-sense application.
Correcting the systems and all of the difficulties
identified during the audit process has a price, and that price
is not always included in agency budgets because of the way
that they are structured today. Most of the cost of financial
management is really in the budget of either the IG or the CFO.
It may be time to consider a levy on appropriations or major
programs that makes sure that when problems are identified
during the audit cycle they can be cured in a very timely
manner, because today, with the way the budget structure works,
it may be a year before anybody gets a chance to work on
solving those problems.
The final point that I think I would like to highlight is
that Federal financial managers must be homegrown. Although we
are fortunate to have Mr. DeSeve on the right, who is currently
teaching people in Federal financial management, at the
University of Maryland, and on my left, Professor Tierney had
taught, many years, government financial management, most
universities do not do that. And since you don't have programs
in Federal accounting and Federal auditing, we don't groom the
people that we need. Everybody needs to be homegrown.
More importantly, there is no incentive for research. And
since there is very little research being done in this area,
with the exception of research that is done on a voluntary
basis, it may be time to look at demonstration projects where
we encourage agencies to attempt to do things differently. I
don't know what the vetting process would be for that, but
nonetheless, it may be time to look at doing something like
that.
Mr. Chairman, that is all I have to say in my opening
remarks. We look forward to working with the committee. Again,
we are pleased to be here. We think the efforts of this
organization are very timely and very much needed. Thank you.
Mr. Platts. Thank you, Mr. Kearney.
[The prepared statement of Mr. Kearney follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMATION]
Mr. Platts. I understand, Mr. Tierney, you don't have an
opening statement, but you are going to be available for
questions.
Again, we appreciate the four of you being here, and
especially the wealth of experience that each of you brings to
this discussion, and not just here today, but in the months to
come, and your willingness to be point persons for us on the
private side in gathering information, narrowing sights and the
real-world impact of some of these laws in the last several
decades and what would be achieved by some of the
consolidation.
Mr. Kearney, I think you just referenced in your statement,
and it might have been Mr. DeSeve, about over the years all of
these laws are passed, with great attention, the result is a
pretty confusing myriad of laws. And if you are a new financial
manager out there, not even new, but in a new position, a new
level, the ability to accurately comply with all of these laws
in an effective manner is going to be a little challenging.
That is certainly what this hearing is about, and this
dialog that we have begun is about, is to try to streamline it
to allow a more efficient process to happen and allow Federal
managers to do what they are trained to do and want to do,
which is to be good managers, good stewards of financial tax
dollars, and help their departments and agencies to be well
run.
I have a number of issues I would like to touch on. I will
start with Mr. DeSeve.
In your comments and one of the items you highlighted was
just the focus of managers and financial community often is
about that clean audit, getting an unqualified opinion. And you
specifically referenced not the daily information benefits and
that if we really have at DOD a more efficient financial
management system so that every day of the year the
decisionmakers over there know what moneys are in what accounts
and what their supplies are and what they need, that they are
going to be able to more effectively fight battles and win
wars.
Do you want to expand on that issue and what you--feedback
you have gotten and how you think we can better get everyone to
buy into not just getting that unqualified opinion, but to
truly get useful information in a timely fashion?
Mr. DeSeve. The CIA talks about actionable information. I
understand I am not on the Intelligence Committee, and the
Representatives here may be; but we don't have actionable
information in the Federal Government for program managers. So
setting a standard for financial managers that says that on a
real-time basis both cost and revenue information should be
made available to the agency and to the people in oversight
capacity.
Now, one of the things we have seen is that some agencies
are starting to close their books every month or close their
books every quarter, which is a good thing. Certainly, closing
their books in a timely fashion, it used to be the standard,
was somewhere between 4 and 6 months in order to be finished;
it is now down to between 30 and 60 days for the audited
financial statements to be finished. If that is possible, then
real-time financial information for managers on the cost of
their programs, the availability of appropriations in their
accounts, and the revenues that they are generating, if it is a
revenue-generating activity, is certainly a standard that we
can seek. I think that program managers will warm to that
standard, will come to that standard.
My friend John Hamre, who was the--at the time, the
Controller of the Department of Defense, used to tell me how
useless most of the information he was getting was and how
practical he felt certain other information was. So the
question is, ``How do we involve the program managers in
understanding the practicality, the usefulness of that
information to them?''
It is harder to put that in a statute than it is to put in
the standard of auditing because there are groups that have
spent time--the Federal Accounting Standards Advisory Board and
others, that spent time setting audit standards. So it is a bit
more difficult, but a congressional piece of legislation that
set the goal in trying to integrate this information, make it
available on a continuing basis.
When I was at the city of Philadelphia I had a daily cost
report on my desk. It was broken down by major activity. It was
broken down by major spending category, a daily revenue report
on my desk. And I used those every day in managing the number
of full-time equivalents I could allow, the ceilings and
contract spending that I could allow in that circumstance. So
that is what we are really talking about.
Mr. Kinghorn. Could I quickly add, I think--I mentioned
before that I think the investments we have made in accounting
systems--and I put one in at EPA in the Dark Ages and then one
at IRS when I went there in 1990, both, I guess, successfully
because they worked and gave us data.
The question is really--most of these systems, including
mine, were designed for and by accountants and primarily used
to, first of all, be able to develop financial statements
relatively easily and efficiently with accurate data; and
second, if it was a problem, to make better payments more
accurately and quicker.
What we then tried to turn to, though, was, what does that
mean for a program manager running a compliance program at IRS
or running an air quality program at EPA? And essentially doing
that part of it really meant nothing to them. They had no
better information for the program than they did before. They
might have had a better belief the data was accurate, but they
really didn't have any better program information.
So I think what we are hearing here is that for the next 10
years we have really got to turn this focus around to involving
program managers, first, in developing the reports that come
out of these systems. Most of the reports that are generated by
these new accounting systems were, again, designed by the
accountants so they could make payments quicker, more
accurately; and if they are lucky, for the budget shops who may
not have been so much involved to at least have better budget
information at a very gross level. But the program managers
were rarely, if ever, involved.
And so, until you involve a program manager, running CMS or
running Social Security, sit down with the people designing
these systems and say, ``Here are the six reports as the head
of this program that I would like to see, they will never be
built into that system.'' I think our focus really has to turn
this around, not to lose accounting interest, but in effect,
turn it around to the program manager.
Mr. Platts. And your comments open up a number of avenues I
would like to explore, and maybe first, and I want to get to
Mr. Gutknecht with questions too.
But, Mr. Kearney, you referenced that one of proposals
about getting a buy-in of the program managers to this big
picture--and in the levying of the expense of doing the cost of
internal controls, does that get to some of what the other
gentlemen have just talked about, getting program managers, if
they are having to pay for it out of their own funds--that is,
naturally they are going to be a little more in tune with what
is being done and the benefits of it if it is coming out of
their budget.
Is that the type of thing you had in mind from your
testimony?
Mr. Kearney. It is to a point.
One of the things that I think it does, it reinforces the
fact that everybody's responsible for the controls and
financial management of an agency, and Sarbanes-Oxley has
really reinforced that in the private sector today. So
reinforcing that in the Federal sector, I think, works very
very well.
But the points that were made about involving the program
managers a little bit more, I also think, carry a lot of merit,
especially when you look at the fact that we are implementing
COTS packages today, the commercial off-the-shelf software
packages that frankly need significant modification to work in
the Federal arena. That may be indicative of the fact that we
are doing things a little too differently from the private
sector. We might need to rein it back in with the help of the
program people, who are also not being satisfied with the
information needs they have.
Mr. Platts. OK. Thank you.
Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
Thank you very much for coming today. And some of the stuff
that you have presented to us, including the alphabet soup of
various management agencies, some of that blew past me like a
Nolan Ryan fast ball.
Mr. DeSeve. That was my purpose, sir, to confuse you.
Mr. Gutknecht. I do mean, seriously, thank you.
It strikes me from a management perspective there are
several things at play and I think you have touched on this,
and I am going to put some of it in language that at least I
understand. And let me give you a specific example.
I think part of the problem we have, and not just at the
Federal Government, but the Federal Government is such a large
bureaucracy, I think in some respects it is endemic in every
bureaucracy. But part of the problem we have is an attitudinal
problem, and I will illustrate that.
I would suspect that the people at the Social Security
Administration are doing a marvelous job of getting the checks
out. I don't know how many checks they mail out every month,
but it is a lot of checks. And I think they do a very good job
of making certain that the debits and the credits all match,
and that we know exactly how much money is going into or coming
out of the Social Security trust fund.
But a little over a year ago, well over a year ago now, I
had an inspector general from Social Security come to my
office, and he told me that it was his estimate that we are
paying over $1 billion a month--well, I'm sorry--potentially up
to $1 billion a month in Social Security benefits to dead
people. And when I raised that issue with some of the other
people at Social Security, well, again, they gave me some
bureaucratic-speak. But at the end of it all, it really boiled
down to, well, that is not our problem.
And I don't know how you change the attitudes in some of
the agencies. I don't know how you give them a sense of
mission, a sense of purpose or a sense of urgency. And I am not
sure you can do that with accounting controls.
We had an inspector general come back this year and his
estimate was--he said, well, it is significant, but it is less
than $1 billion a month. But either way it is real money. And
in the ensuing year, Social Security has done nothing that I
know of to see if we can't rein in on the money that is going
out to dead people.
Would any of you care to comment on that?
You know, this goes beyond accounting controls and auditing
procedures. I mean, this attitude that it's not really our
money is one that we have to fight all the time. And we have to
figure out ways to do a better job of that. I think that's a
big enough piece to chew on. Go ahead.
Mr. DeSeve. Let me try.
We went through a very similar problem with the Medicare
program, and the problem is still there. The first audit of the
Medicare program showed--and I am doing this from memory, and I
apologize--that it was about $30 billion a year of improper
payments, or unmatched payments, where you couldn't quite
figure out the service that was being paid or it was too high
or too low. So you would have to net some of that out.
The Secretary at that time, along with the Inspector
General, worked very hard to make it everybody's problem. And I
think the role that this committee can play there is to ask
them to come back with a plan for doing whatever they think is
right and proper, to solve as much of the problem as possible.
In the old food stamp program, when we had paper food
stamps, we used to think that States did a good job if the
improper issuance was less than 5 percent. I don't know what it
is in the electronic area. And everybody in the oversight
community agreed that a State under 5 percent was doing the
best it could, that there was some breakage in the system.
So I think if you could engage with Social Security, have
them develop a plan for eliminating these erroneous payments,
bring it back to the committee, along with the IG, and engage a
conversation.
What I tell my students is, ``look, lay a plan out that you
think is appropriate and then get people to agree to it. If
they won't agree to it, then you've got to go back and fix the
plan.''
So I think in that instance, for erroneous payments,
getting all the usual suspects together and having you provide
the leadership and the oversight, having the IG do the work,
having the CFO at Social Security--who will probably hate me in
the morning for having suggested this--is very good.
But we certainly did that at HUD when we had some terrible
problems in mortgages. I remember sitting with Mrs. Mikulski's
staff at the time and laying out the plan for dealing with some
of the loans that had gone terribly wrong. So I would suggest
that would work well here.
Mr. Kinghorn. Giving a little perspective on that, 15 or 20
years ago, before the CFO Act was passed, there were a lot of
agencies, and still are some of them, who had real trouble with
collections process. Education was one of them. Other agencies
were involved, Social Security, Medicare and Medicaid.
And with the passage of the CFO Act and the fact that
agencies took heat for not getting clean opinions, which all of
those agencies had problems with in the beginning, the light
was shined on those issues because they were clearly in IG
reports years before. In trying to get a clean opinion, you
really had to look at your financial processes and realize the
reasons why you had a billion a month in certain programs.
Fast forward now 20 years later, at least my reading of the
people that are on the line responsible for this, I doubt--I
mean, I was very shocked that someone would say openly or tell
the IG or the IG would say, they don't care. I sense they do
care now.
And I would agree with Ed. I think they have better tools.
They have better financial information to know not only where
their problems are, but hopefully why they have problems. And I
would agree. A light shined on issues constantly tends to get
things improved.
And the sense is, in government, that they can wait us out.
I think you can make it pretty uncomfortable to wait out on
those big issues. But I would bet because of the last 10 or 15
years, Education certainly now is much more interested and has
its act together on that issue, whereas 15 years ago I think
they did say, it's not my problem; my job is to get money out
to students and to schools. Now they say, ``My job is to do
that, but I realize if I am wasting a billion a month, that's a
billion that could go toward those customers.''
So I would really recommend shining the light on it. And
through these innovations they have a better idea of the
problem and what causes the problem, which they didn't have 8
to 10 years ago.
Mr. Gutknecht. If I could just say that--Mr. Chairman, my
apologies. We are going to have a series of votes, right?
Mr. Platts. Apparently it's just going to be one. Previous
question is what we're being told. We are checking.
Mr. Gutknecht. OK. But that was lots of bells.
But let me just add to that point. We, the Congress, have
become enablers because when we hear about departments or
agencies that can't pass their audit, that can't account for
literally hundreds of millions, if not billions, of dollars.
The remedy which our appropriators usually serve up the next
year is, well, I guess we'll just have to give them more money.
And in some respects, we do.
I think that attitude, that sometimes is fostered by us in
Congress, perpetuates the problem because I have seen agency
after agency that couldn't pass an audit, that had serious
financial problems, and the next year their budget went up. And
the law teaches. And the Congress teaches.
So, again, thank you. And this is--but I do, I think the
suggestion that somehow we send a clear message that it is the
responsibility of the people in whatever agency to develop a
plan; and it is our job to make certain that plan is
implemented and reviewed. Thank you.
Mr. Platts. Thank you, Mr. Gutknecht.
And apparently it is the previous question, and now
apparently they are going to do a roll call on the rule, not
voice it, so there will be two votes.
I think we will go and get in as many questions as we can
and see where we are, whether we try to have me sprint over and
back, or see if we can get far enough along.
Mr. Kearney, one of your comments was, one of the
challenges of the public sector is because we do things so
differently and we basically have to have everybody homegrown
for financial management in the Federal Government.
And you touched on, maybe we have gone too far away from
the private sector and should be looking at trying to get back.
And our hearing, our dialog, has begun with--about
streamlining, consolidating. But by your comment, it may be
that we all should be more serious about also refining not just
consolidating what we have, but looking at what we should be
doing differently, meaning similar to the Federal or the
private sector, as opposed to the way the Federal Government's
done it.
Are there examples of that you would want to highlight that
we should be looking at, things that jump out that maybe--20
years ago maybe were justifiable, but today we need to rethink?
Mr. Kearney. Well, the concern that I was really trying to
express was that there hasn't been a lot of new initiatives.
There have not been a lot of changes. We still do accounting
with the budgetary and the proprietary accounts, the way that
we always did. And it is probably a good time to encourage some
agencies to possibly work toward something simpler.
Maybe we don't need the same complexity in the budgetary
and proprietary accounting accounts that we have today, and by
selecting an agency or two that could be a demonstration
project, maybe we could find out if there are better ways to do
things.
And I mention--I mean, even in light of Mr. DeSeve's
comment about the report he received every morning in the city
of Philadelphia, it had basic management information that he
needed to do his business that day.
We punish financial managers in the Federal Government that
deviate too far from whatever the rules are. Today, we have a
rules-based system that probably could lend itself to being a
little more principles based, and by identifying opportunities
for change, or that might foster change or new or creative
original thinking, then we can go a long way to making things
better.
And my comment on moving toward the private sector model is
really a practical observation that would probably increase the
number of financial people that we have, so they don't all have
to be completely homegrown.
Mr. Platts. On the one hand, trying to incentivize for
managers to think outside the box and be more creative: The
other side of that is that in the sense of when they do things
that maybe we don't want, or are not appropriate, what are the
consequences for not following the various financial management
laws for the last 20-some years. In the private sector there
are more direct consequences--firings, demotions, stock options
that aren't given, whatever it may be.
But one of the things we keep hearing in regular hearings
here--and it is really a question maybe for all four of you--
is, how do we convey? And a little bit of what Mr. Gutknecht
said is that if you don't follow these Federal laws as internal
controls under the Integrity Act, whatever the requirements
are, there are consequences.
Sarbanes-Oxley is very much about consequences in the
private sector. But--and an example right now is, we passed new
legislation last fall that the President signed regarding the
new Department of Homeland Security regarding financial
accountability, that they will have an audit of their internal
controls after the 2005 fiscal year and basically a 2-year
lead-in--and they would like to push that back, even though the
President just signed that bill, and say, well, we are not
going to be able to comply; if we don't, so be it, in essence,
is the way I read their response because there is not
necessarily any spelled-out consequence for the Secretary or
the CFO over there, if you don't do this, your pay is docked or
whatever.
Is there a way to have more accountability across the board
that should be part of this look of consolidation,
streamlining, and that whatever our end result is that you
comply or pay the consequence?
Mr. DeSeve. I am still waiting for the first person to be
criminally sanctioned under the Anti-Deficiency Act. Each year
I would get half a dozen anti-deficiency cases which I have
thought, on their face, some of them were potentially
sanctionable, and I couldn't get the Justice Department to
pursue them. Now there is a sanction that is in place.
Mr. Platts. And we see that probably a month ago, I think
it was, was it DOD and the computer, $130 million was spent.
And I said, well, has anyone been demoted? Have we sought
recoupment of the money that was paid for something that
doesn't do what it's supposed to do?
And the answer was, not to the best of our knowledge.
I think it was actually Justice, in fact. It was not DOD;
it was Justice. They said, no, not to best of our knowledge, no
one's suffered any consequences for the failure to really look
out for the taxpayers.
Mr. DeSeve. I think the--one way to approach it, when I was
a political appointee in the Department of Housing and Urban
Development, I actually had as an object lesson Judge Arlen
Adams, who was sitting in Philadelphia. And there were dozens
of HUD employees who were indicted by that grand jury, and
several who went to prison as an object lesson. The rest of us
in HUD were fairly focused at that point. That focused our
attention because Judge Adams continued to sit.
I think the issue is to let the political appointees within
the departments, as opposed to the career staff, know that you
will be asking them to come and explain the problems that
existed.
Obviously, Mr. Mueller, I am sure, explained what went on
with the FBI system, but letting him know that the Assistant
Secretary--that the Deputy Director of the FBI, the Assistant
Director of the FBI should be similarly culpable. And almost
like putting a letter in their files, if you will, not quite
the same thing, but having this committee have hearings and
make findings that something went wrong: ``it was your watch,
and we want you to come and explain what happened and we are
going to make that a matter of record.''
That scared the hell out of me. I mean, it really did. I
worried each day that there would be something in the
Washington Post.
Again, it was Mrs. Mikulski at the time, and she had a
clerk who was a pain in the neck, who I would name but he is a
friend of mine now. And I was just terrified that they would
come down and open something up and try to embarrass the
Secretary.
Now they were the same party, so there wasn't quite as much
incentive for that embarrassment. But I think holding people up
to the light of day and asking them to explain why they didn't,
on their watch--I teach the 9/11 Commission report as a case
study. There's a lot of careers in the 9/11 report that are
never going to be the same as a result of the findings in that
report.
So that is where I would go with it, and I think only this
committee or committees like it can do that.
Mr. Platts. Mr. Tierney.
Mr. Tierney. Mr. Chairman, I guess I am the only one at the
table to say I am older than Ed DeSeve.
Mr. DeSeve. Excuse me. May I stipulate that Mr. Kinghorn is
older than I am.
Mr. Kinghorn. I am not speaking.
Mr. Tierney. But this question--I chaired many years ago a
Government Accounting Association committee and also one by the
American Association of CPAs. Both of those led to reports that
were basically a major piece of--the CFO Act came out of those
reports. Both government officials and executives and people
with the--at that time, it was called the Financial Executives
Institute, of the private sector, Fortune 500, many of whom
spent time in the Federal service. They left their careers in
the private sector, did time in the Federal service.
They had the same conclusion, and it was in both of these
reports that the laws, as written, made no one responsible for
doing something. It was like ``the head of the agency shall,''
and then, of course, the head of the agency changed three or
four times in 3 years. And then when something went wrong, no
one to blame, so there is nobody accountable either way.
So people weren't made responsible by--well, certainly not
name, but by a specific position; and to hold the head of the
agency responsible when they are 5,000 feet above the problem
that occurred, was made almost unenforceable.
The other thing is that I appreciate what the committee is
attempting to do because in preparing for this session, I took
quite an interest in it, and just curiosity, looked it up; in
the 1990's, the decade of the 1990's, more financial management
legislation was passed than in any 10 years in the history of
the country. A lot of well-meaning people, your colleagues and
predecessors, tried to do things. I think what we ended up with
was an overwhelming number of laws that we haven't fully
digested.
So I did some other research and found that every so often,
or at least once before, predecessors in Congress had faced
that same thing. In fact, I speak of the Budget and Accounting
Procedures Act of 1950. That law, I found, changed 106 laws
that went before it over the past 40 years. The 1921 act set up
GAO, the FBI Bureau, the budget; those laws were on the books
and a lot of others. And in 1950 that act cleaned out 106 laws
and parts of many other laws too.
So this is a challenge, but I think it is needed. I think
most of what has to be said in laws has been said. It is a case
of refinement, picking out the things. Ed mentioned--Ed DeSeve,
Ed Kearney--about the need for audits, and trust and verify. I
think that is fine. I think we need that because when you look
at the CFO Act, and people point to the success of the CFO Act,
the only things that have succeeded are the things that were
audited.
At last count, there was about 20, maybe a couple of dozen
items, in the CFO Act, financial management, that should have
been done, but basically the things that were done were the
things that were audited. So you can't--you know, you can't
really knock the trust and verify, because the things that were
done are the ones we verified.
Mr. Platts. Mr. Tierney, I don't want to cut you off, but
if you can hold the thought, I am going to run over and get two
votes in. I think I can be back in about 7 minutes, if you will
bear with me. You can time me.
So we are going to stand in recess, hopefully for no more
than 7 minutes.
[Recess.]
Mr. Platts. And for the record, if they hadn't kept the
vote open for an extra 8 minutes on the first one, I would have
made my 7 minutes. But politicians, promises, promises. Right?
So my apologies for having you wait.
Mr. Tierney, as I ran out the door, in your comments you
touched on the breadth of new laws in the 1990's and the
substantive nature of those, and we are in a sense still
digesting and moving forward with some of those. Is our effort
at all premature because we haven't allowed the work of those
new laws to be fleshed out and moved forward in a positive way?
Or is it here we are in 2005, this is a good time to see, well,
they are all in place, and they are starting to be implemented
and better understood, so it is a good time to be looking at
this from how to streamline or consolidate?
Mr. Tierney. No. I think the timing is just right. I think
it is just right. In fact, we see--as you have heard at the
table this afternoon, we have heard that if things are not
followed up and that, they don't happen. A few things that
happened to the CFO Act where the ones that were--the things
that were audited. We have some agencies 15 years later that
after a while you figure, well, maybe they just don't want to
do it. Because we are not talking rocket science here, we are
talking about transactions that happen every day, money is
spent every day, and it is recorded somewhere. I mean, it is
not that difficult.
Mr. Platts. Expanding on that to you and to, again, all of
our witnesses. One of the specific issues--and we are getting
into some more specifics as opposed to the broad big picture,
but the idea that the CFO Act, because of requiring audits,
requiring a specific act forced the Department's agencies to
actually respond because it was more delineated. In that bill
that I referenced earlier with DHS and the internal control
audit requirement that is specifically to that Department, the
rest of the departments are now governed by the new regs put
out by OMB where they have to review their internal controls
and make an assessment and perhaps do more depending on their
assessment.
Should we be maybe leaning more toward that internal
control audit being more pervasive across the Federal
departments and agencies, or at least the larger departments
and agencies, or should we let the OMB reg circular run its
course and see how that comes back?
Mr. Tierney. Well, I think the OMB at this point has tried
to pull together the essence of the legislation. I do think
that controls are a big piece of the answer, the emphasis on
controls. But that gets you immediately into the details. And I
say controls from a couple of standpoints.
In many agencies I will describe what I characterize what
they call the fiscal controls where somebody signs a piece of
paper authorizing. But historically, as we look at the Federal
agencies, sad to say, many of the Federal agencies are still
running with what we in the trade call the legacy systems, the
old system. And with innovation, improvement and that, I think
data computerization has changed the whole equation that--and I
am not sure, I don't have any evidence to back it up, some
evidence, but not a perfect case to make, that we haven't
changed the controls to meet the automation. So I think you get
into the details.
I think it is a case of controls and as well as the audit.
A lot of people are trying very diligently to bring together
these pieces of legislation. OMB with the 123 has basically
adopted Sarbanes-Oxley except for the audit.
Mr. Platts. And we are delighted with OMB, I mean, in
essence, that a cooperative effort, that while we would only
request the mandatory internal control audit for DHS in return,
in essence, for OMB being maybe more diligent through the
circular approach of having this review conducted and then
identifying whether any additional departments or agencies
should have an actual audit done of their internal controls. I
would be interested if--Mr. Kinghorn.
Mr. Kinghorn. Mr. Chairman, I think what revisions to A-123
really were is really trying to bring in this COSO approach
that was mentioned, the Committee on Sponsoring Organizations,
which came out actually of the Coopers & Lybrand firm that I
was a partner of a long time ago. I wasn't involved in that.
But the idea there is that everything an organization does is
internal control. It is not just the finance piece, not just
accounting, it is how you as CEO operate and what kind of
culture you establish, etc. So I think we should give them a
lot of credit to do that.
My guess is in their heart of hearts, many of the folks
over there where several of us used to work probably would have
liked to have gone further. I think if you probably scratch the
surface, they might like to consolidate statutes, but my guess
is from their perspective they don't see that as a short-term
objective, nor is it something perhaps they want to do.
I think the value--if you look at the OMB circular 123, I
think in one of the sections they themselves mention 14
incredibly broad sources where you as an organization in
management can go to all the information on all the problems
you have. And those 14 sources--these are broad categories--
then fall back to the 20 or 30 acts.
So there is no shortage of information where you find your
problems. If you go to sort of a performance report, you go to
SSA, Social Security, who has a certificate of excellence from
AGA--and I was actually involved in the review of the first
time they got their certificate years ago--it comes out at 12
megs on the Internet to download and 240 pages. It is
telephone-book-like. And it represents this enormity and
complexity of what statute, what function you go to. And I
think that creates enormous waste in terms of just the ability
to understand.
So I think the OMB approach here was--I think what really
was--consolidate some things, I think, very helpfully and
really try to reemphasize, which was very popular 20 years ago.
Twenty years ago when I came into this business, that is all we
did was internal control reviews. We had management reviews on
program. Then the CFO Act came in, and it went back to an
accounting focus and financial statement focus. So this is
really a return to the past. And I think if done well, with the
consolidation of statutes so it is not so confusing, I think
could be a good start.
Mr. Platts. It is, in essence, trying to reaffirm the
merits of the Integrity Act of 1982 and the internal control
requirements of that act 23 years later.
Mr. Kearney, did you have something else you wanted to add?
Mr. Kearney. I might add on the A-123, you had asked
earlier about is there any penalty for not conforming to
whatever the laws might call for. A-123's approach prior to
doing the audit opinion on internal controls, I like what they
are doing at OMB. And they are saying as long as there is not
systemic or consistent problems, an audit opinion wouldn't be
required. So you really are imposing a bit of a penalty on the
agencies. As long as they do what they are supposed to, the
audit opinion isn't required. To the extent there are recurring
problems, there will be an opinion. So I think that is an
approach worth----
Mr. Platts. So if you stay on top of it, you don't have to
go through the effort and spend the money on that internal
control audit incentive not to get that problematic.
Mr. Kearney. Correct.
Mr. Platts. A number of times throughout your testimonies,
a number of you have mentioned, and Mr. Kearney just did, about
legacy systems and technology and ability to modernize and
really have the benefit of today's technology that gives us
what we are looking for in information and relates to the
conflict that was referenced earlier, the CIOs, CFOs, and how
to better mesh those two positions. And is that something that
we should be taking a close look at as part of this
streamlining is to have better coordination between those two
positions?
Mr. Kinghorn. I will speak for myself, because we have
talked a little bit about the group, a group we have. And we
haven't gotten into this, but it is one of the areas we are
going to get into. But from my experience--I was at IRS from
1990 to 1995; I was brought in from the outside to really
create a controller CFO function, and it was in their second
stage of failing on their major systems. And it was not for
lack of trying, it was a very long-term project, but there were
two systems. There was one system in 5 years that I was there
that was successful in being brought up, and it was the
financial system that was brought up just as the CFO Act was
passing. It is not because I brought it up; it is because of
the structure which we used. I was in charge of that system and
funded that system in conjunction with the CIO operation, but
everyone knew who was responsible. And I think that is the key.
Many of these systems have very confused management
structures internally and in organizations, as some of the
fellows in our group have asked, who is in charge, the CFO or
the CIO? It is not an organizational issue. Someone has to be
in charge and responsible that if it fails, Kinghorn is out of
here. The problem--you don't see Kinghorn out of here--it is
unclear even to the heads of agencies of who was in charge. So
I think clarity of responsibility is key.
Second, the funding is key. And I think that was crucial.
And the final thing is that we don't give enough interest
to the project management aspects of these large systems. We
tend to overmanage contractors by layering upon the contractors
an additional management oversight. And then I think agencies
fail to manage what they should manage, which is the very high-
level oversight and quality control of the contractors. So it
would be an area we really should get in with you.
But I think you have to have responsibility of who is in
charge. It is not an organizational issue, although I think in
most cases, if it is a financial system, the CFO should be in
charge of overall working with the CIO. If it is a new system
for Medicare and Medicaid, the program manager of that program
should be in charge and responsible, not the CIO, but it has to
be in conjunction with the CIO.
Mr. Platts. Mr. Kearney.
Mr. Kearney. I might add that we have a similar problem in
the private sector as well. And whenever you are undertaking a
large systems effort, as we are going to suggest it, you do
need one throat to grab. And if it is the CFO that is
ultimately responsible, that is the person that should have a
greater role in what is being done even though the CIO might be
providing the technical expertise.
I think it is definitely a good area to get into just
simply because of the size of the projects. And I am not sure
that there is an easy solution. Many years ago when I ran
Sallie Mae's Loan Accounting operations, the only way I was
able to solve my systems dilemma was to have the CIO staff come
to work for me until 6 or 12 months went by and I had my
systems up and running, because ultimately it was me that was
on the hook, and those systems supported my operations. My
ledgers used to be under my desk; today they are on somebody's
data base someplace, but it is still me that is responsible for
the function. So I do think that it is definitely within the
scope of what you are doing, and I do think you have a tiger by
the tail.
Mr. Platts. An encouraging send-off. Well, we are glad to
have you guys helping to grab hold of that tail with us.
Did Mr. DeSeve--Mr. Tierney, did you have anything on that?
Mr. Tierney. Not on that point.
Mr. Platts. OK. Mr. DeSeve, one of your points you
highlighted was with the IG position and what was envisioned,
and maybe the challenge of that position today, the kind of
conflicting roles. And I spoke to a good number of the IGs at
their annual convention this year about a month back or so in
Philadelphia, and one of the things I said to them I thought
was appropriate, their guy there in the place of our Founding
Fathers in Philadelphia, and also in the time we are in with
men and women in harm's way as we are gathered there in Iraq
and Afghanistan, and, to me, the importance of IGs being
courageous as our Founding Fathers were courageous, because IGs
to me are--their budgets are basically handled by who they are
actually supposed to be watching and the secretary and whoever
their agency head is. And it is a position that if you find
your wrongdoing and follow that wrongdoing in an appropriate
way, you are not going to be a very popular individual within
your department or agency, and all the more they need to be
courageous.
One of the things you touched on was term-limiting IGs, and
I was wondering if you want to expand on anything with that of
how we can lessen the confusion, the confliction, the
conflicting responsibilities of IGs, and really empower them as
was originally envisioned by the IG Act.
Mr. DeSeve. One of my great pleasures was serving as
chairman of the President's Council on Integrity and Efficiency
and the agency councils below that, the PCIA as well as ECIA.
And I got to know IGs pretty well, and their functions are
severalfold. First, in some agencies there is a real law
enforcement function, where the IG will go in and create
sanctions against an individual or group who are taking money
from the Federal Government. The Labor Department has a great
deal of that kind of activity. That needs to be bolstered, it
needs to be recognized, it needs to be understood, but it can't
dominate the rest of the agency along the way.
The second thing they have or were given in the CFO Act is
audit responsibility. So here we have a guy who is--or a gal
who spends a lot of time worrying about who should be able to
carry a gun--that is one of the things they can do, they have
delegated authority to allow firearms to be used by their
individuals and on the other hand is worrying about, gee, what
are the new accounting standards coming out of what used to be
JFMIP--I have to get that in--and the Federal Accounting
Standards Advisory Board. Those are conflicting roles.
Then there is the third role, the role in the middle, where
mismanagement, nonfeasance, misfeasance as opposed to
malfeasance comes in.
So I think that a relook and recognizing those three roles,
having this committee reauthorize almost the IG statute to go
back and look at it, to open it up, and to give them a set of
responsibilities that provides clarity among their roles is
thing one.
Mr. Platts. Not necessarily separating out any of those
roles anywhere else, but just better delineating within.
Mr. DeSeve. I think they are quite appropriate. The CFO
can't be the auditor; he can't audit himself. If we create a
separate law enforcement function, it is going to get confused,
I think. And somebody has to be the overseer of good
management, and so I think that the independence of the IGs is
absolutely essential. And I think that, by and large--and I had
to handle complaints against IGs when I was in the government.
By and large the IGs have done a spectacular job of bringing
integrity to the agencies, but some of them haven't had to
recognize the multiple hats they were wearing; or, if they did,
they didn't have an institutional sanction, they didn't have a
law that said you are in the program management business,
buddy; or here is the way in which you will execute the audits
along the way. So I think that is No. 1.
No. 2, there is good news and bad news. President Reagan,
as I understand it, fired all the IGs when he arrived in the
Federal Government, then he reappointed the ones that he cared
about. That certainly was an interesting precedent. The IGs
still talk about it, that everybody got fired, and then some
people got rehired and some people didn't.
On the other hand, other IGs believe that they have a right
to the office perpetually; that to fire an IG is tantamount to
firing a bishop or a cardinal. You can't do that.
So I think that the idea of term limits, if the head of the
FBI can have a term limit, if the head of the FAA can have a
term limit, or the head of Social Security can have a term
limit, putting a term limit that overlaps a potential of the
administration, it allows for reappointment for a period, makes
a lot of sense because there is then an expectation that there
will be turnover at some point. That there will be an
evaluation, there will be either a reappointment or a
termination, one or the other--they simply won't be reappointed
or they will--gives a new administration some discretion across
the pool of IGs so that during their 4 years they can replace
some IGs who have perhaps run out of gas. That happens
occasionally.
So I do favor some kind of term limit, but within the
context of the delineated institutional responsibility and
clarification, and engaging the IGs as to what they think about
that. That is what we are really proposing is to bring the IGs
in and have them talk to us about what they think their roles
are.
Mr. Platts. Hand in hand with the term limit would be that
it is also a positive affixed term, meaning you are appointed
for 5 years, and so you know are there and don't have to worry
about, well, if I do something the administration doesn't like.
Mr. DeSeve. That is right. Jane Garvey was the FAA
Administrator for the first 2 years of the Bush administration
and had been appointed by President Clinton. Greg Woods was the
head of the Student Financial Assistance Program, had been
appointed by President Clinton and so on. So, yes.
Mr. Platts. And my understanding, that is something as part
of the work of the Academy and your advisory committee you have
put together is to reach out to IGs and to further explore some
of their ideas.
Mr. DeSeve. Yes.
Mr. Kinghorn. Let me share, if I may, I think another
consideration, which would be sort of another level, is 20
years ago, 25 years ago, if you looked at the makeup and
qualifications of most of the IGs, it goes a little bit to this
point in a way. Most of them would be sort of like the neo-
attorneys of the world: professional CPAs, accountants, really
focused on the accounting function, internal control function.
If you fast-forward it now, I haven't quite kept up with all
they are, but I think most of them now are probably law
enforcement types or of predominantly that world. And I think
like any organization, neither one is right or wrong, but if
you look at qualifications for Inspectors General, I think we
could give some thought to what we want in that leadership.
If you have an accountant type, you are going to get an
interest in accounting and internal control. If you have a law
enforcement type, you are going to get that with accounting
below that level. And I think some thought needs to be given,
given all the other controls in government, which of those two
or others that you would like to have laid out, if any, because
leadership does change the focus of an organization.
Mr. Platts. That actually relates to a specific question.
We talked a lot about the CFO Act and the qualifications or the
background of individuals. Deputy CFOs have a requirement for 6
years with specific experience, and there is no such
requirement for the CFO themselves. Is that something we should
be looking at to--we have the Senate confirmation requirement,
which hopefully then ensures more scrutiny of their
qualifications and is going to lead to that, but should there
be some statutory as far as what the qualifications are?
Mr. DeSeve. I seem to remember there were some more general
guidelines in the CFO Act. When it was passed, there was a
fairly huge debate on how specific the act should be in terms
of requirements, and I think rightly so. It probably came down
at the time on a more generic you had to have something in your
background that looked like financial management. There were
several CFOs, not to be named at the table, that came in at the
very beginning who were, in my mind, less than qualified, who
had something in their background about financial management,
but probably weren't of a sufficient stature.
I think, since the last 10 years, 11 years, really starting
probably in depth with the Clinton administration, to give them
credit, the CFO quality, I think, is incredibly high. And if
you look at their backgrounds--I think it would be very
difficult to get through someone who did not have something
that looked and smelled like a CFO background.
Well, I am sure this will come up, and it has come up a
little bit in our discussion so far. I think we will have
recommendations for you that, if you chose to strengthen those
words, here is what might be appropriate. I would be very wary,
frankly, of having an accounting requirement, because some of
the best CFOs don't know anything about accounting, and some of
the best ones do. So it is really more about management and
structure. If you look at the CHCOs, the Chief Human Capital
Officers, trying to organize now around their world just like
the CFOs did, they are struggling because they think they need
CHCO expertise at the most senior leadership level. And my
sense would be they really need management and leadership
expertise. And if you can get them combined with your
functional expertise, great. If not, I mean, my best
controllers in IRS in the field were former compliance
officers, who, because they went after people on taxes, they
were CPAs, so it worked. But they knew the program, so they
really related well.
So I would be a little wary of making it look and smell
like an accounting function per se, but I think some of the
qualifications will certainly have some comments from CFOs on
that.
Mr. Platts. Mr. Tierney, and if I remember, you were
involved in the work that led up to the CFO Act.
Mr. Tierney. Right. I might add that the--I would like you
to pursue it. But having said that, I want to let you know a
failure last time. Tenure for the CFOs, just like we were
talking some kind of a tenure of office for the inspector
generals, it honestly failed last time. You will see that in
the record of the CFO Act. But it goes to something Ed
mentioned with respect to systems. These are big systems. It
takes a year or two to issue the contract, another 2 or 3 years
to do it, 5 years or more, and Morgan's organization says 18
months is the most we get out of an appointed official,
executive, senior executives who might be very qualified. But
in that time span you could have three or four. There is no
corporate memory. Industry--that is one thing that industry
doesn't suffer as much as the government. That turnover is just
enormous. And it is just difficult to get corporate memory
except with the career civil servants or maybe a CFO that has
agreed to do 4 years, or we were talking about 4 to 6 years in
some of the proposals to Congress, the testimony. But it did
not happen. It did not happen.
I think, with some of the systems and putting in the
controls in place, those are long-term projects. And it is just
difficult to lose the leader that had an interest and get the
people energized with the next leader and the next one and the
next one.
Mr. Platts. I have seen that as a newer subcommittee
chairman in just a little over 2 years now here and in my time
with a number of departments where we started working very
closely with CFOs, and the turnover happens, and you are
starting over. And you have a good initiative and good
progress, and then you start anew, and you really lose that
momentum. And I took note of that, that average turnover every
18 months is one of the challenges, is having that consistency.
Mr. Kinghorn, with the Academy's review, is there a general
timeframe that you envision your efforts as you seek comments
from the various individuals in the community that you think
you will be ready to come back with some more detail?
Mr. Kinghorn. I think we planned with staff that we are
looking at September and October as sort of the first real
output. But what we would like to do is, like today's hearing,
as we roll this out, share with you and your staff some of the
findings. But I think what we would plan to do, the ultimate
work plan was in September, October to come up with sort of the
10 or 11, whatever the number is, areas that really deserve
your focus of the 500 things you could do with some
specificity. And then we will have other information in
addition to that, but perhaps work with you on an ongoing basis
to flesh that out more specifically; you will say the first
three aren't of interest to us, and we will focus on these
four.
So September, October. But I think what we would try to do
is to try to do this on an ongoing basis.
Mr. Platts. And that is the timeframe we internally have
looked at of trying to, I will say, narrow the scope, because
one of the challenges here is going to be how big this effort
could be and what is manageable and feasible, given some of the
history of some of these different acts, what was tried in the
past, and are we going to fight those same battles again, or
are we likely to take the approach that, well, we are not going
to put the effort over there because we are unlikely to
succeed, and it is more appropriate to use our resources on
another part of the effort. So we certainly welcome that
feedback throughout the process and then as we get more
detailed in the fall.
Mr. DeSeve. Mr. Chairman, while we are doing that, may I
ask you to do something for us? Would you think about the role
of the appropriators as consumers of financial information, not
as people who give money or withhold money? Because one of the
frustrations that many CFOs have is that the process, for
example, of budget preparation involves preparing the
President's executive branch budget and turning around and
preparing a different set of information for the appropriators,
often using a different account structure. Structure is
terribly difficult to do a crosswalk from the President's
budget back to account structure the way the appropriators
would like to have it.
The other thing that I learned--so if you could help us by
thinking and maybe having some of the staff talk with some
appropriations staff about how important information coming up
to the appropriators could be rationalized and made a byproduct
of financial management systems.
At the same time, I will tell a very quick story. The most
uncomfortable testimony I ever gave in my life, I think, was
before Mr. LaFalce, who had been chairing the Small Business
Committee of the House, and he was an appropriator. And I
learned more about credit reform in that committee than I had
ever known before. I figured, why am I being called before an
appropriations committee to testify about credit scoring?
Well, it was very simple. Credit scoring affected the
number of small business loans that could be given out
throughout America. The way we had structured our financial
management process around thinking about the nature of the cost
of a loan was perfectly linked to the appropriations process
and the way loans were given out. Once that happened, the Small
Business Administration immediately changed their procedures,
changed their processes for tracking loans, tracking loan
cohorts, tracking loan performance, because the industry groups
were beating them up about we don't have enough loans to give
out.
Mr. LaFalce--I used him only as an example--obviously was
very engaged. So when the appropriators become consumers of
financial information, it changes the behavior of the agencies
as well, which is not to suggest that the oversight committees
aren't important. You are, because you are our window to the
appropriators. Often they don't listen to agencies; they have
their own institutional memory which is different than anybody
else's institutional memory. So if there is a way for you to
help us----
Mr. Platts. We are certainly glad to try to share that
insight and facilitate some of that dialog with the
appropriator staff, especially to really get into the nitty-
gritty of that data.
Mr. DeSeve. We are not trying to change anything. Although
I want to applaud Mr. DeLay; we are of different parties. I
thought the bold move that he and others took this year in
looking at the rationalization of the appropriation committee
structure was very important. I may be out of the Democratic
Party for saying something nice in public about Mr. DeLay, but
it was a bold move, and it is the kind of thinking that will
itself improve financial management. When it is easier to
present information in a rational way to a rational group, I
mean by that a rationalized group, it just helps everybody.
Mr. Platts. Any other comments that any of you want to
share before we wrap up?
I want to again thank each of you for being here as we
publicly begin a process that we have had some dialogs about
and look forward to continue the discussion, and having your
insights is going to be very important and very helpful to this
effort, and those who described trying to grab this tiger by
the tail. The more assistance we have, the more likely of any
success we will achieve. So we welcome your input and
appreciate your patience here today in getting started later
than planned, and then also having a break for the votes.
So we will keep the record open for 2 weeks for any of my
colleagues for statements or any other information you want to
share.
This hearing stands adjourned.
[Whereupon, at 4:28 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Edolphus Towns follows:]
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
<all>